June 2015 Market Commentary

The last revision for first quarter GDP has been released.  The first quarter GDP growth came in at a negative 0.2%.  The economy seems to be back on tract for a modest 2% to 2.5% growth rate currently.  As I have mentioned before, the U.S. is “the cleanest dirty shirt in the laundry”.  There are a lot of head winds keeping the U.S. economy from growing at a more robust rate. With the turmoil in Greece, bond problems in Puerto Rico, a slow down in China, and a very strong U.S. currency, our economy is having trouble breaking out. Trade has been a drag on the U.S. economy in four of the last five quarters. We are importing more and exporting less which reduces our GDP. .The economy has failed to grow much more than a 2% annual rate since the recovery began.  Earlier in the year the Federal Reserve projected a growth rate of 1.8% to 2.0% for 2015.However, as usual, if you look hard enough there are a few flickers of hope.


Currently the equity markets and the bond markets are in turmoil over the Greek election.  I believe this will pass; Greece is a very small economy and international buffers are strong enough to prevent contagion. China is a different story.  Their stock market is having a strong correction.  Chinese regulators allow more margin than we do and the bubble is bursting.  However their economy is still growing at a reasonable rate of about 7%. Last but not least is the strength of our currency.  The dollar has appreciated against just about all major currencies as the Greek /Euro stalemate has developed.  This has cause oil prices to retreat from the $58 to $62 range it traded in for about three months to the $52 range in the last week or so.  Copper and all other commodities have fallen as well due to the strength in the dollar.  This will slow the return of hiring in the oil patch as drillers who could make  money at $60, but cannot at $52.Now lets look at some positive signs.


The World Bank is projecting a 4.4% growth rate in Emerging markets this year. They stated for the first time in 15 years India will grow faster than China. Also recently at the Wall Street Journal CFO Network in New York, the CFO’s concluded that there are signs of improvement.  They stated they are beginning to see increased competition in the labor market.  This is a good sign as wages have been very slow to rise in the recovery, barely keeping pace with inflation.  This was confirmed by the strong hiring in June as the economy added 223,000 jobs.  Also factories finished the quarter on a broad upswing.  U.S. factories reported a strong inflow of orders in June.  Last week the Institute for Supply Management (ISM) stated its purchasing manager’s index crept up to 53.5 from 52.8 in May.  The ISM stated that factory orders and employment was at its highest level since December 2014.Another good sign is that consumers spent freely in May, the last month figures are available.  After the sluggish first quarter consumers have regained some of their spending ways.  Since 70% of our economy is consumer spending this is a good sign. If the CFO’s belief that wages may be starting to rise more significantly becomes true this would be a major boost to our economy.



In the mid-stream sector of the Energy space several more applications have been approved for the export of condensate.  This will help the drillers as well as the companies who build and operate the “Upgraders” which take the condensate and remove other liquids which enable them to export the fuel. Several mid stream companies we follow are building capacity to take advantage of the domestic expansion in production and demand in the NGL space.  Our two favorite names in this space are Enterprise Products Partners (EPD) and Kinder Morgan (KMI).  Enterprise Products has expanded its presence in the EagleFord by acquiring EFS midstream.  They have joined Kinder Morgan in acquiring high-quality mid-stream companies at very reasonable prices.   These companies are also adding pipelines to export natural gas to Mexico.


Earlier in past Market Comment I mentioned companies that derive income from overseas have been hurt by the strong dollar.  However, companies that are domestically orientated have done well.  For this reason we are adding to our positions in several companies that are showing good growth in the consumer sector.  The names we like are Kroger (KR), Walt Disney (DIS), Home Depot (HD) and Whirlpool (WHR).  These are companies that will benefit as the consumer starts to reaccelerate their spending after having paid down their debt balances.  We are also starting to acquire small positions in Skyworks Solutions (SWKS), a technology company and Wells Fargo (WFC) in the financial sector.


We are not adding new money to our industrials positions at this time, but we are not selling out of them either.  These companies are holding up fairly well in spite of the strong dollar.  We will continue to watch the dollar and to listen to their next quarterly reports.  Honeywell (HON), United Technologies (UTX), Emerson Electric (EMR) and Rockwell Automation (ROK) are the ones we like. 


The U.S. chemical industry reported a 4% gain in chemical production in May, year over year.  The American Chemistry Council (ACC) is projecting a year over year gain of 3.2% in 2015 and 3.0% in 2016.This is a highly cyclical industry but the ACC sees signs of gradual strengthening as the over all world economy improves.  There is a lot of chemical usage in the automotive and construction industries. Westlake Chemicals (WLK) and LyondellBasell (LYB) are showing good profit gains on a year over year basis.  Their capital expansion projects are beginning to come on line allowing them to further reduce their unit costs.  We are beginning to add to these positions.  LyondellBasell has beaten earnings forecast for the fourth straight quarter.  They are finishing up a large Ethylene expansion which will lower their cost using inexpensive ethane from our shale plays.  


We are monitoring the strength of the dollar, employment gains and the ability of Iran to begin exporting more oil.  As the world’s economy grows, the imbalance in oil will reverse and prices will return to more normal levels.  Stay invested 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.   We prefer companies with price earnings ratios that are at levels that are attractive compared to the low interest rates on investment grade bonds.  BSG&L is a long term investor and we believe that if you are patient, build cash and buy good companies on pull backs, your portfolio will have good growth over the long term.



BSG&L Financial Services LLC