as part of our
Author: Ben Dickey,
Financial Services LLC
The first quarter of 2012 came in with fairly good growth, both
in GDP and employment gains. However, the second quarter
results stumbled to 1.5% growth. The latest revision moved second
quarter growth up to 1.7%. We have now seen GDP output decline from
3% growth in the fourth quarter of last year to 1.9% in the first
quarter of this year and now down to 1.7% growth in the second
quarter. Estimates for July and August are for approximately a 1.3%
growth rate on average.
Our economy is still being impacted by several factors, with the
European debt troubles being one of them. The world is waiting on
Mario Draghi to decide what the European Central Bank is going to
propose. (One plan under consideration involves unlimited purchases
of government bonds, reports Bloomberg.)
The price of sovereign debt rises and falls on every news story
about the crisis. Capital outflows from Europe are high,
adding to the flood of foreign capital coming into the United
States. To compound Europe's problems, Finland, Germany and Belgium
are beginning to have doubts about supporting southern Europe.
Another critical factor causing the slowdown in the U. S.
economy is the massive fiscal cliff that the economy is facing at
the end of the year. The expiration of the "Bush-era" tax
cuts, the temporary reduction of the payroll tax cuts, and the
extended level of unemployment benefits will all expire on December
Compounding the problem is the "Sequestration" of government
spending, due to the failure of the Super Committee, is also
scheduled to take effect in January, 2013. Not knowing
whether or not the economy is going to actually go over the cliff
at year end has many businesses in a wait and see mode of
A whole lot of spending and expansion plans are on hold until a
clearer picture unfolds. As a result of the economic
slowdown, the overall market sentiment has turned extremely
pessimistic. I believe that businesses will not have a clear
understanding of the resolution to the fiscal cliff scenario until
after the election in November.
However, amidst all the doom and gloom with the U.S. economy are
several areas of bright sunshine. A byproduct of the
weakening world economies is falling commodity prices, at least in
the near term. Overall, even with all of the negativity, our
economy does continue to expand, albeit at a slower rate. The U.S.
Purchasing Managers Index (PMI) has shown growth in the
manufacturing sector every month from August 2009 until May of this
year. Although, June and July have turned negative, the
manufacturing segment has shown slow but steady growth.
There are several other market segments doing well. Major
technological advances in the oil & gas industry have allowed
the U.S. to increase their oil production for the first time in
over 20 years. As companies learn more about drilling in shale
formations, they are decreasing the space between wells and pad
drilling, meaning they can drill four or more wells from one
location. Both of these items reduce the cost of drilling
wells. There is also a move to lessen the use of ceramic
proppant and replace it with sand which is cheaper. This will
increase the profitability of companies drilling in the shale
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. 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.
Several chemical producers we follow have shown nice price gains
recently. New pipelines are under construction.
The lower leg of the Keystone XL pipeline from Cushing OK to the
Texas gulf coast refineries has finally received the last approval.
This should be finished by mid-2013. The new pipelines will
lower transportation cost from the Eagle Ford, Permian Basin and
Marcellus shale's to the refineries.
The lower transportation cost provided by the new pipelines
delivering natural gas liquids will make the U.S. chemical industry
even more competitive. The Keystone will bring more crude oil
to the refineries, allowing us to lower the amount of imported oil
and allowing the refineries to improve their profits.
Throughout the world, emerging market economies have slowed
down, but still have a growth rate of mid to upper single digits.
China and India have slowed as export demand for goods going to
Europe have slowed. However, an increasing middle class in these
markets is beginning to make these countries less dependent on
exports. In addition, Mexico, Indonesia, South Korea and Central
America are growing at faster rates than the BRIC countries
Despite all the negative news, the market has improved over the
last few weeks. There is a lot of anticipation of further
Quantified Easing from the Federal Reserve which has helped the
market move higher. However, over the last few days, some
selling has been evident. At present, it is hard to tell if this is
profit taking or the slow down is beginning to take a toll on the
BSG&L has a long term investment horizon. This belief causes
us to stay with an overweighting in our basic portfolio allocation
to industrials in our Growth Portfolio. We like Caterpillar (
) as the best choice for heavy industrials. 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 (
), Honeywell International (
), United Technologies (
), Emerson Electric (
), and Cummins (CMI) in the industrial sector as well.
Several of these stocks are dramatically over sold. As
the market settles down we will add to our positions.
In the energy service sector we like Helmerich & Payne (HP),
Cameron International (CAM), Halliburton (HAL), Mitcham Industries
(MIND) and Schlumberger (SLB). 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). 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 company's share prices down. Our belief is you should
be building your cash position for now and let the markets settle
down. I believe you will be able to purchase these companies at
good value prices before the end of the year for another good
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 Plus Income portfolio we continue to
add Kinder Morgan Energy Partners (KMP), Linn Energy (LINE),
Enterprise Products Partners (EPD), SandRidge Mississippian Trust
(SDT) and SeaDrill Limited (SDRL).
These companies have good dividend rates and I believe that
there is big demand for new pipeline construction. 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.
Just to restate, I believe the European debt problem and the
upcoming U.S. elections have us concerned about market activity for
the rest of this year. Hedging this volatility, in my opinion, will
be hard. Gold last year was as volatile as the stock markets. I
believe copper and oil will be the inflation hedges going
Central Banks around the world have injected so much liquidity
into markets, that when it is put to work, 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
pullbacks, your portfolio will have good growth over the long
Covestor models: Pure Growth and
Growth Plus Income
Disclosure: Long all stocks mentioned
Disclosure: The investments discussed are held in client
accounts as of August 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 that investment decisions
we make in the future will be profitable.
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