The Smoke Stacks Are Back

07/18/2012 10:30 am EST

Focus: MARKETS

Jack Ablin

CIO & Executive Vice President, BMO Private Bank

The manufacturing sector is resurging in the US, says Jack Ablin, who explains why and also shares his favorite ways to profit on the trend.

The smoke stacks are back? We're here with Jack Ablin, who's going to talk to us about what's happening with US manufacturing.

Thanks Greg, yeah. Remarkable. We've been tracking this now for probably the last two years, but we are seeing a lift in US manufacturing, precipitated really by I'm going to say three separate factors.

First is wages. As we all know, US wages haven't really gone anywhere since 2000, and so every year wages don't go up and productivity gains and effective hiring here improves that much. Since 2000, I'm going to say it's probably now 20% cheaper to hire a US manufacturing worker than it was in 2000.

Second, currency. Over the last ten years or so, the US dollar has dropped roughly 35% relative to our trading partners, making the US a more attractive place to be.

Third, the secret ingredient is natural gas. At $2 an MCF, we've got a huge competitive advantage for a very important energy source for manufacturing. That compares to $8 to $9 an MCF in Europe and $15 an MCF in Japan. Putting it all together, we're starting to see a tailwind for manufacturing here at home.

I guess that that also means that the workers are now bringing jobs back from home. From what I've heard, there's a lot of the manufacturing jobs that have become more attractive where big industry is pulling back from overseas operations because it has become such an attractive place to build and develop manufacturing over here again.

Right, right. In fact, I've talked to a couple of business leaders over the last several months who are actually in a position now to bring jobs—bring manufacturing that they originally outsourced several years ago to China—actually back to the United States. That's encouraging news.

We're not cheaper to manufacture than China, but there are some big impediments in doing business in China. Obviously, the rising labor costs there, and the currency, plus transportation is important. If you're dealing in a high-value product that's heavy, like an automobile, I'm going to say all arrows are pointing to the United States right now.

Wow, that's interesting. Are there any particular winners that you see, stocks in particular that you like in this space?

Umm, no. We're macro investors, so we want to invest in the industrials. We want to invest in technology. It's really just these elements.

Commodities not so much, maybe a little bit on the chemical side because of the natural gas advantage. All in all, really just basic industrials are really positioned to do pretty well.

Do you see natural gas prices staying this low? I know that there's been talk that some people have taken their hedges off. Chesapeake took their hedges off a lot of their positions, expecting prices to go up in the next six months or so.

Yeah. I don't see it. In fact, I was just at an energy conference of one of our clients last week and it's almost like consensus that gas prices are going to stay low for a while. But there are an interesting couple of divergences, as I mentioned, between countries.

Also, remarkably, I think I was quoted at something like the natural equivalent of gasoline is like $1.50 a gallon, or something like that, if you use natural gas. Huge opportunities, particularly in trucking and some of the other areas of the industrials.

Absolutely.

You pick up some big cost advantages.

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