Submitted by
Covestor
as part of our
contributors
program
By Ben Dickey
The U.S. economy is stumbling toward the end of the year.
The first
release
of third quarter G.D.P. was 2%. This however is misleading.
September is the end of the government's fiscal year. Spending by
the federal government was up dramatically. Some estimates think
this added as much as 0.6% to G.D.P. for the quarter.
The portion of G.D.P. that shows corporate capital spending has
ground to a halt. The U.S. economy has slowed from 3% in the first
quarter of 2011; to 1.9% in the first quarter of 2012, 1.3% in the
second quarter and a misleading 2% in the third quarter. The fiscal
cliff, tax policies, Europe, and our election have slowed the
economy to a crawl. However, all is not lost. There are several
sectors that are experiencing good growth. Also, central
banks around the world are pouring liquidity into their
economies.
The European leaders flounder back and forth over how much
liquidity should be added to the economy. On the other hand,
several of the southern European countries are resisting further
belt tightening to reduce their deficits.
The European Union balances on the edge and so far has managed
to avert disaster. China seems to have slowed their inflation to
the point that they are adding liquidity and loosening lending
requirements to encourage growth. Their manufacturing seems to have
bottomed out and is showing a slight improvement.
Japan and Australia are also injecting funds to increase
economic growth. As I mentioned in the first paragraph, the
United States is slowing mostly from self inflicted wounds.
Hopefully, the fiscal cliff will be avoided and some compromises
can be achieved on taxes.
However, amidst all the doom and gloom with the U.S. economy are
several areas of bright sunshine. The technological developments in
the oil & gas industry are revolutionizing the economy. The
real stimulus has been the lower cost of natural gas and the
dramatic increase in oil production. This phenomenon is the
increase in shale oil production. The shale play has increased U.S.
oil production since 2008. The revolution is in the very beginning
and we believe has the ability to dramatically increase in the
future.
This, so far, has added 1.7 million jobs in an economy that
needs them. Not only are people working on drilling rigs, but
manufacturing jobs for hardware, pipe, pumps, compressors, controls
and other components have been created. This production increase
could add another two million or so jobs. The increase in oil
production also generates about $60 billion in taxes to federal,
state and local governments. It has also cut our balance of trade
deficit by $75 billion in 2012.
The low natural gas price is lowering operating costs for many
manufacturing companies. Utilities, where they are able, are
changing from burning coal to burning natural gas for electricity
production. For the first time, more kilo-watts are being produced
from burning natural gas than from coal. This should help lower
utility costs to both the commercial and residential user, helping
the U.S. economy.
In addition, the increased production of natural gas liquids
such as ethane, propane and butane has lowered the input costs for
the chemical industry. As a result, chemical companies are
moving production back to the U.S. from overseas which is causing
plants in the Gulf Coast to expand capacity at a strong clip.
The American Chemistry Council stated that as long as natural
gas liquids are poring out of wells, we will continue to have a
decisive competitive advantage. The chemical industry has responded
by announcing $40 billion in plant expansion. The lower prices are
helping any industry that uses natural gas or natural gas liquids
to be more competitive. In addition to the chemical industry
American fertilizer manufacturers are benefiting greatly.
The fertilizer business in the U.S. and Europe is mature and
only expands a few percent per year. However, Asian and Indian
farmers are major users of fertilizer. Most of the increase in
cereal production, that is grain used as food, was driven by the
increase in fertilizer consumption in India and Asia. We beileve
our manufacturers now have a much better chance of selling into
these markets.
October has been a terrible month in the market due to the
previously mentioned reasons. However BSG&L has a long term
investment horizon. We still believe industrials are a place to be,
however we are not adding to our positions until we see the market
resolves some of its problems.
We like Caterpillar (
CAT
) as the best choice for heavy industrials. They recently lowered
their forecast for 2015, but are increasing their earnings forecast
for the fourth quarter. The forecast for three years from now will
likely be revised several times before 2015 arrives. They are the
behemoth in this business. Their sales in China and India have
slowed, but their geographical diversity helps them. We still like
Deere & Company (
DE
), Honeywell International (
HON
), United Technologies (
UTX
), and Emerson Electric (
EMR
).
In our opinion, several of these stocks are dramatically over
sold. As the market settles down we expect to add to our positions.
When the U.S. economy improves, we believe these companies will
show large gains. In the energy service sector we like Helmerich
& Payne (HP), Cameron International (CAM), Halliburton (HAL),
Mitcham Industries (MIND) and Schlumberger (SLB).
Third quarter earnings slowed for several of these companies,
but we believe they should show marked improvement in the upcoming
earnings periods. Our commodities and energy holdings have changed
very little. We continue to like Continental Resources (CLR),
Anadarko Petroleum (APC) and EOG Resources (EOG) in energy.
EOG and Continental Resources have shown large increases in
production year over year. We are adding to our position in Oasis
Petroleum (OAS) and Whiting Petroleum (WLL). We still like
industrial commodity producers Peabody Energy (BTU),
Freeport-McMoRan Copper & Gold (FCX), Cliffs Natural Resources
(CLF), and Southern Copper (SCCO). Industrial commodity
prices have seen a large pull back, pulling these companies' share
prices down.
Our belief is that you should be building your cash position for
now and let the markets settle down. I think you will be able to
purchase these companies at good value prices before the end of the
year for another good upward move. We are adding several chemical
producers and fertilizer manufacturers. We like LyondellBasell
(LYB), E.I. du Pont de Nemours (DD) and Terra Nitrogen Company
(TNH). They also have a nice dividend, in our opinion.
As we have been saying for quite a few months now, the pipeline
companies and commodity Master Limited Partnerships are
experiencing tremendous growth although their stock prices have
been impacted by the drop in oil and natural gas prices. We
think this is an excellent time to add to these positions for the
long term increases in stock price and distribution amounts that we
think are coming.
As a result, in our Growth and Income Portfolio we continue to
add Kinder Morgan Energy Partners (KMP), Linn Energy (LINE),
Enterprise Products Partners (EPD), Sand Ridge Permian Trust
(PER) and SeaDrill Limited
(SDRL)
. These companies have good dividend rates of between 6% and 10%,
according to MarketWatch data.
As new technology increases the output of oil, natural gas and
natural gas liquids, this production will move through the new
pipelines. We believe the above companies will show
tremendous growth over the next ten years.
Gold last year was as volatile as the stock markets. I believe
copper and oil will be the inflation hedges going forward. Central
Banks around the world have injected so much liquidity into their
markets that, when it is put to work, we believe commodities will
move dramatically in price. BSG&L is a long term
investor. We believe if you are patient, build cash and buy
good companies on pull backs, your portfolio will have good growth
over the long term.
The investments discussed are held in client accounts as of
October 31, 2012. These investments may or may not be currently
held in client accounts. The reader should not assume that any
investments identified were or will be profitable or that any
investment recommendations or investment decisions we make in the
future will be profitable.
Certain investments discussed in this presentation are for
illustrative purposes only and there is no assurance that the
adviser will make any investments with the same or similar
characteristics as any investments presented. The investments are
presented for discussion purposes only and are not a reliable
indicator of the performance or investment profile of any
composite or client account. Further, the reader should not
assume that any investments identified were or will be profitable
or that any investment recommendations or investment decisions
made by model managers in the future will be profitable.
Certain information contained in this presentation is based
upon forward-looking statements, information and opinions,
including descriptions of anticipated market changes and
expectations of future activity. The manager believes that such
statements, information and opinions are based upon reasonable
estimates and assumptions. However, forward-looking statements,
information and opinions are inherently uncertain and actual
events or results may differ materially from those reflected in
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