A growing number of market analysts are predicting that the US economy is heading for recession and that stocks have begun a new bear market. Despite all the doom & gloom however, the energy sector still looks attractive and holds some decent opportunities for investors.
A perfect economic storm
Among the most bearish analysts is market technician Alan Newman. Speaking about the outlook for the US economy and financial markets last week, Mr Newman said “I’m as bearish as I’ve ever been”. Mr Newman, who is editor of respected stock market newsletter, Crosscurrents, believes that we are still in the secular bear market that began in early 2000 and that the US economy will return to recession soon.
Among his concerns are that we are in a secular phase during which investors are getting out of the stock market. “We had a very long period from post-WWII where money came into the market, and that peaked out with the tech mania in 2000 and now we are going to have a very long period where money comes out of stocks.”
As evidence of this Mr Newman points out that, “Sixteen out of the past seventeen months there have been outflows from mutual funds… and the outflows from mutual funds exceed what comes in to ETFs by a very wide margin… inflows have been negative since the summer of 2004”.
Mr Newman describes the negative factors facing the US economy as a “perfect storm” and he sees no reason for stocks to rise in the short-term. He also predicts that the US economy “will be in recession soon” and he sees little reason for optimism.
Another thing that he finds alarming is the large and growing number of American’s that are employed by the government. According to numbers from the US Bureau of Labor Statistics, Federal, state and local government now employs 22.2 million workers nationwide, or 16.7% of the total US workforce.
Although he is bearish on stocks he is bullish on gold and sees the Dow to gold ratio dropping to at least 5:1, however he says that it could drop to 1:1.
A 12 year chart of the Dow to gold ratio (Click on the chart for a larger version)
Charts courtesy of stockcharts.com
Mr Newman has an excellent track record having made some impressive market calls. For example, on 9 July 1982 he wrote to his clients telling them, “I still believe the birth of a new Bull market is imminent. The most likely scenario, in my estimation, is that the new Bull market will begin before the end of July” and he wasn’t far off. On 13 August 1982 the longest running bull market in history began.
Those looking for further evidence of economic duress could point to the fact that median real house incomes in the US are now back at 1988 levels.
One bright spot is the Thomson Reuters/University of Michigan consumer sentiment index which rose to 84.9 in November, the highest level since July 2007. However Morgan Stanley continues to report a negative trend for business confidence. The investment bank’s proprietary Business Conditions Index dropped 6 points to 35% in November, which follows a 14 point drop last month.
Rising uncertainty over the future of US fiscal policy is undoubtedly having a negative impact on business activity as businesses focus their attention on the looming fiscal cliff, whereas consumer confidence is undoubtedly being buoyed by the rebound in US home prices.
Opportunities for investors
Despite all the negativity surrounding the outlook for the US economy and financial markets, there are still some decent opportunities for investors, and one sector that looks particularly attractive is energy.
In a recent interview renowned investor and billionaire Wilbur L. Ross, revealed that he is “very heavily invested in shale gas” and that he sees investment opportunities for those with a long-term outlook.
When asked about shale gas, Mr Ross, who is listed among the 400 richest American’s, said, “What excites us about shale gas it the sheer quantity of it in the US. It’s enough for decades and decades of supply for all of the US needs” and that it is “much less pollutive than coal, and cheaper”.
Mr Ross notes that natural gas, which used to account for around 25% of electrical power generation now accounts for around one third and he expects its growth to continue. “Between now and 2017 we (the US) could reduce our imports (of foreign oil) by 4.5 mbpd (million barrels per day)” he added.
He also points out that the Seaway pipeline, which historically has taken crude oil imported into the Gulf Coast up to the refineries in the mid-west, has now (on 17 May) reversed its flow of oil and is now beginning to carry oil back down to the refineries in the Gulf Coast, much of which comes from the Bakken field in North Dakota.
Mr Ross is invested in EXCO Resources Inc. (NYSE: XCO), a company engaged in the exploration, development and production of natural gas and oil properties in the United States. Based in Texas and incorporated in October 1955, EXCO Resources has operations in East Texas, North Louisiana, Appalachia and the Permian.
Another company that is benefitting from the boom in North American natural gas production is Golar LNG (NASDAQ: GLNG). Golar is a shipping company based in London that is dedicated to the transportation and storage of liquefied natural gas (LNG), a compressed form of natural gas that is easy to store and transport.
The company is one of the world’s largest independent owners and operators of LNG carriers and operates a fleet of 13 ships. It has also developed the world’s first Floating Storage and Regasification Unit (FSRU) which is based on the conversion of existing LNG carriers. Golar also pays a 3.5% dividend.
Those looking for even greater income could consider looking at Royal Dutch Shell (LON: RDSA), an independent oil and gas company with a current dividend yield of 5.1%. The company has a price/ earnings ratio of just 6.4 and it also recently purchased 342,162 of its own shares indicating that management believe them to be undervalued.