Gue Goes for Global Growth
08/27/2004 12:00 am EST
"Commodities may seem boring, admits Elliott Gue. However, the editor of Wall Street Winners and Trading Floor Pro sees long term value in energy—particularly refining—and industrial metals due to supply-demand imbalances and economic growth in Asia.
"Where do you go in times of uncertainty? One area is energy. I don’t think the energy stocks will run into any trouble no matter who is elected. I think the markets are still ignoring some of the fundamental supply and demand factors that are causing higher oil and gas prices. We’re seeing a huge boom in demand for basic energy products from Asia from both their economic growth and the increase in autos in China. We are also seeing increased demand from an improving economy here. The other side is the supply side. It is getting harder and harder to garner additional supplies of oil from existing wells and finding new well able to produce at the same level. So you have a dwindling in production at the same time that you have a major increase in demand. That’s really the fundamental factors that are behind energy price gains this year.
"There is very little the government can do to influence prices for natural gas or oil. One area that I think is very interesting is the refining industry. We simply haven’t built any new refineries in the United States—or anywhere in the world—i n the last two decades. As you know, you can’t run your car with crude oil. Obviously, crude oil has to be broken apart into a number of different types of products, such as gasoline, diesel fuel, propane, etc. It is the refiners that do this.I think companies in the refining sector, like Marathon Oil (MRO NYSE), Valero Energy (VLO NYSE), Premcor (PCO NYSE) are in pretty good shape for the next couple of years. No matter what happens, the government is unlikely to do too much to relax environmental regulations, and as a result, it will take a long time for us to build out refining capacity. These refiners are enjoying the fattest profit margins that they have ever had.
"Another area that garnered a lot of attention is foreign trade. From a purely economic standpoint, outsourcing is good for the United States. One of the reasons you are able to buy things at Wal-Mart so cheaply is because we can make them much cheaper abroad and sell them here in the US, which indirectly puts more money in your pocket because you are able to buy more products at a much reduced price. One of the other important things about the whole trade issue is the growth of Asia as an important force within the world economy. And one of the important themes is the rising growth in commodity prices.
"It sounds kind of boring, but if you look at charts of things like soybeans, copper, tin, lead, and pretty much any basic agricultural or metal product, they have all seen huge price increases over the last year and a half. And if you look at the import-export numbers, China has been importing a lot of these products, for obvious reasons. Copper is used in electrical wiring, and China needs to electrify the country if they are going to build factories and have a growing economy. Also, tin and lead are used in buildings and in construction. A lot of those items must be imported from abroad, and one of the main beneficiaries of that is the United States.
"So even though trade has been dragged through the press as something bad for the country, a lot of American companies are benefiting from increased trade with China, in the sense that we are exporting a lot of basic commodities to China. Look at a company like Phelps Dodge (PD NYSE), one of the largest copper producers in the world. Another company we like that is benefiting from increased trade is Vale de Rio Doce (RIO NYSE), a Brazilian company that produces steel and iron ore. The stock is in our model portfolio. The company has shown humongous increases in actual exports to China. No matter who gets elected president, we are not going to cut off our foreign trade. That would be a very negative thing for our country and nobody is going to do that, as the US does benefit a lot from that trade."