By Ben Dickey
Last year was a bifurcated year for investors. The market was up substantially while the economy had fits and starts. Estimates for first quarter growth in GDP are in the 1.75% range for the first quarter of 2014.
Underneath the headline numbers there is data pointing to an increase in GDP output. A pickup in business investment and healthy new home sales are indicators of a stronger economy.
Expectations are being raised for stronger output in 2014 after manufacturing and construction data showed increases in December. Factory output remained very close to the November highs as Americans are buying more automobiles, homes, appliances, furniture and other manufactured goods.
The Institute for Supply Management (ISM) released its December index which stood at 57, down from a very high 57.3 in November. Anything above 50 shows an increase in manufacturing activity. Inside this index, a measure of new orders rose to 63.6. This is the largest increase since April of 2011. Hours worked in manufacturing also increased to 42 per week.
Overseas economies are showing improvement. For the first time in over four years, Europe is showing a slight gain in output, Japan is growing and China is maintaining its approximate 7.5% growth rate.
Energy consumption is also increasing around the world. This is causing an increase in demand for U.S. exports of gasoline, distillate, coal, and natural gas liquids (NGL).
U.S. refiners are exporting over 3¾ million barrels of refined product per day. Some of the plant expansion I have been mentioning in past comments will grow our ability to export butane, propane and even ethane.
This should increase the profitability of our domestic midstream companies as well as the second tier energy and production companies we follow.
Kinder Morgan Partners (KMP) and Enterprise Products Partners (EPD) are adding to their ability to transport, store and separate liquids, and their export of these products is expanding into international markets.
There have been several joint ventures to combine the ability to export natural gas liquids (NGL), primarily butane and propane with the mid-stream companies who separate and transport this product. In my opinion, the next year or so there will be a very large increase in our ability to export NGL liquids.
Over the last year, I have mentioned the large competitive advantage that lower energy prices have given U. S. manufacturers. The low natural gas prices have turned the U.S. into a magnet for methanol production because the primary feedstock for the manufacture of methanol is natural gas.
Over the last ten years, most methanol production had moved overseas. In my opinion, that situation may be starting to reverse since there are currently numerous major plant expansions under way in the U.S.
One of the companies I follow, LyondellBasell (LYB) has restarted a plant that had been mothballed for over nine years. Celanese (CE) has just received federal approval to add a large methanol plant in its current chemical facility in the Houston area.
German and Dutch companies are moving production from Europe to the Gulf Coast due to much lower raw material cost and electricity costs. This activity in methanol is in addition to the tremendous advantage cheap ethane prices are giving to the more traditional chemical manufacturers.
As we enter 2014 there are several sectors of the domestic economy that should have an advantage over the rest of the world. As worldwide economic demand increases, American industries should have an advantage. In my opinion, one of the largest areas for growth should be the chemical industry.
In my opinion, based on current energy prices for oil and natural gas, I believe that energy producers, energy infrastructure companies, and industrial manufacturing companies are the place to be.
For the energy infrastructure arena we currently like deep-water drillers with new fleets which are seeing gains in their day rates as well as new long term contracts.
I'm emphasizing investments in companies with good cash flow, good cash distributions and companies that operate in areas where they have a competitive advantage due to much lower energy costs and raw material input costs.
I prefer companies that generate good after tax returns. With interest rates at historic lows, even as dividend taxes go up, the after tax returns are still higher than most investment grade debt. There is a growing shift from very low yield bonds into equity.
BSG&L is a long term investor and in my opinion if you are patient, build cash and buy good companies on pull- backs, your portfolio may perform well.
DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. 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. Past performance is no guarantee of future results.
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