Setting aside the debt crisis in Washington, investors continue to see stability in the Middle East -- and its effect on oil prices -- as a long-term concern.
WTI prices topped $114 a barrel one day late last month, while Brent crude went over $120 a barrel. The political unrest and high oil prices caused a slowing in demand, which allowed prices to pull back.
However, I still believe that due to overall world demand and the slowing of drilling permits in deep water, oil prices are going to average $110 a barrel in the second half of 2011.
Even at these elevated prices, we still think that the demand for oil will continue.
Several investment ideas related to that demand include SeaDrill Ltd. (SDRL), the Norwegian deep-water driller that has a current dividend rate of over 8%, and Knightsbridge Tankers (VLCCF), which transports oil and currently has a dividend yield in excess of 8% as well.
Caterpillar and Joy Global
Worldwide recovery in industrial production also should lead to an increase in demand for coal, iron ore and liquefied natural gas.
We're buying stocks that should benefit from this increased demand.
We're buying companies such as Caterpillar (CAT) and Joy Global (JOYG), which are both deeply involved in mining operations.
We're also buying Teekay LNG Partners (TGP), which has a 6.6% dividend but also should benefit from the worldwide demand to reposition LNG product.
Because of the anticipated increases in shipments of coal, copper and iron ore to meet the higher demand, we're recommending:
- Peabody Energy Corp. (BTU)
- Southern Copper (SCCO)
- Freeport McMoran (FCX)
- Cliffs Natural Resources (CLF)
- Penn Virginia Resources (PVR)
- Linn Energy (LINE)
- Kinder Morgan Partners (KPM)
Bullish on Honeywell, United Technologies
The manufacturing sector of the economy is expanding. The latest ISM purchasing managers index exceeded expectations, increasing from 53.5 to 55.3. As you know, numbers above 50 indicate expansion.
Also, the "New Orders" section of the index expanded.
Manufacturing output has increased dramatically over the last few years, but employment has not. Our over-burdening regulation and high corporate taxes have caused corporations to apply capital instead of personnel.
The lower dollar has also increased sales to the emerging markets for companies manufacturing capital goods. That's why, in addition to Caterpillar, we like:
- Honeywell (HON)
- United Technologies (UT)
- Emerson Electric (EMR)
- Cummings Inc. (CMI)
Think Long-Term
Investors should not let a market correction deter them from staying with producers that supply the developing world.
I believe we're in a secular growth period for both hard and soft commodities. Developing economies are consuming large quantities of better food and materials for economic expansion.
In the last 10 years, 2 billion people worldwide have doubled their income. They seem to be steady in their demand for better housing, better food and a better life.
Investors should try not to look at short-term indications, which we feel will only confuse them and lead them to make incorrect decisions about their investment holdings.
We believe we're on the right track by having a longer-term perspective.
Ben Dickey, CFP, MBA, RIA, is founding principal of BSG&L Financial Services LLC. Based in New York City, he is a model manager for Covestor, an investment tool that enables individual investors to mirror the trades of professional investors.
