An American Industrial Renaissance

In our last column we offered a positive outlook for equities, based in part on comments made by Joseph Zidle, Portfolio Strategist for Richard Bernstein Advisors, LLC. Speaking  June 7, 2014, to a gathering of financial services professionals at a meeting sponsored by the clearing and custodial giant, Pershing, Zidle declared that we are in the midst of a long-term bull market in stocks comparable to the 1982-1999 bull market.

 Zidle’s case for U.S. equities rests on what he sees as an American industrial renaissance—the “decade of the U.S.” Despite a constant stream of bad news and global turmoil, we acknowledge that optimistic forecasts fly in the face of skepticism and worry. Money has been moving to safer havens in bonds and money market funds. That caution suggests opportunity for investors with longer time horizons. Yes, the man behind the curtain or in front of the green screen on television may huff and puff, exuding worrisome hysteria. But pull back the curtain, and peer through a different lens. What do you see? 

          Take energy. In October 1973, members of Organization of Arab Petroleum Exporting Countries (OAPEC) plus Egypt, Syria, and Tunisia declared an oil embargo. By March 1974 oil prices increased four-fold from $3 a barrel to nearly $12. In August 1990 Iraq invaded Kuwait and by October oil prices more than doubled, from $21 a barrel to $46.

          In 2010 revolutionary turmoil in the Middle East pushed oil prices  from $85 to $113 per barrel in five months. With surging Islamic militants now threatening Iraq’s daily exports of 2.7 million barrels, the New York Mercantile Exchange U.S. crude benchmark price closed at $107.26 on June 20, the highest price since last fall. Prices are up but we are not experiencing price and supply shocks comparable to the past. Why not?  In a word, technology!

          An August 21, 2013 report from market research firm Lux Research indicated that established and emerging enhanced oil recovery techniques may expand global oil reserves six fold, adding decades to global supplies. The U.S. is a leader in technology. Geophysical tools and seismic technologies improve drill bit aim and make wells cheaper to drill. Hydraulic fracturing (fracking) and horizontal drilling unlocks oil and  gas deposits previously unreachable. New techniques have boosted U.S. crude production by 47% since 2010. Domestic oil production now exceeds imports. Canada’s production is up for similar reasons. We now import more oil from our neighbor than we do from the unstable Middle East. Mexico is making moves to boost oil output. Also, vehicles are more fuel efficient than in the past.

 This does not mean that prices based on worldwide supply and demand factors will not rise further. Nevertheless, we are less prone to shocks and  supply disruptions. Technological applications of all kinds plus reliable energy supplies are attractive to industry. Notes Zidle, America now is the second lowest cost producer in the world behind China. Per capita income, wages, and costs are rising in Tier 1 Chinese coastal cities.

To capture the effects of an American industrial renaissance, Zidle recommends avoiding big manufacturers like Caterpillar or Deere that export into markets where the U.S. dollar has been appreciating. Global turmoil makes the American dollar more attractive, one factor in keeping interest rates down. The portfolio managers at Richard Bernstein Advisors look for domestic companies that derive at least 75% of revenues from U.S. manufacturing or services. Targeting companies that are privately held, they look for smaller banks that provide local credit.

  Do not eschew global opportunities, however. The European Central Bank (ECB) recently moved to bolster the euro zone. Europe is three years behind the U.S. in the recovery from recession. “Early cycle” opportunities may be a play. Early in a recovery cycle as corporate profits bottom and start to recover, you want to own lower quality, activity-sensitive stocks, especially small- to mid-cap names in discretionary, financial, and technology sectors. That’s a job for professional money managers.

  In Zidle’s opinion developed markets currently are a better bet than emerging markets, where fundamentals are deteriorating. " USA, USA!” may be a chant for farsighted investors, not just sports fans! 

Walker Capital Management, LLC, Lewis Walker is President of Walker Capital Management, LLC.  Certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC.  lewisw@theinvestmentcoach.com