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MARKET COMMENTARY JANUARY 2016

MARKET COMMENTARY
JANUARY 2016

The last few months have been extremely difficult for investors. Our economy has slowed in the fourth quarter to about 1.5% GDP growth. The Federal Reserve finally started their long anticipated “Normalization” of interest rates by raising Fed Funds 25 basis points. The U.S. Dollar is continuing its move higher, driving oil prices lower as well as exports of manufactured goods. The consumer is doing well as evidenced last year in which automobile manufacturers produced over 17 million cars. Also, the December employment report came in with a robust 292,000 new jobs, higher than anticipated. This brought the total for all of 2015 to 2.6 million new jobs.

All of this positive activity could not offset the fact that most industrial companies and the oil and gas sectors are in a recession. In the short run, these economic tremors can inflict a lot of pain in the financial markets, but historically this is a short term phenomena. If you go back to the depths of the 2008 financial crisis, within two years we were closing back to long-term trend lines in both the oil markets as well as in the equity markets. We believe we are close to starting this process again. Having said this, how do these historic lows affect BSG&L’s and BFA’s investment philosophy? Engineers are taught that “for every action there is an equal and offsetting reaction”. As oil and natural gas prices have fallen, the producers have been hurt. On the other hand, we as consumers have benefited greatly. Gasoline is at levels not seen for over a decade. This helps consumers as these low prices boosts their household cash flow.

In the same manor, refineries and chemical manufacturers have seen a boost in their profits. In the chemical industry, natural gas is both a fuel and a raw material. The boom in shale gas and an abundant supply of natural gas liquids has enabled them to have a strong competitive advantage over other producers around the world. Over the last few years major chemical producers have spent over $147 Billion dollars on new plants to take advantage of inexpensive Natural Gas Liquids (NGLs) and these projects are coming on line now. For this reason, we are adding to our positions in Westlake Chemicals (WLK) and LyondellBasell (LYB). LyondellBasell added 800 million pounds of ethylene capacity last year and just recently completed a major ethylene expansion at its Channelview plant and is continuing expansion work at their other plants. The Gulf Coast has become the largest producer of plastic resins and later this year, when the enlarged Panama Canal opens, it will be able to satisfy increased demand from Asia. It is estimated that the exports of these products over the next two years will increase over 50%. We believe the pullback of these stocks is a buying opportunity for long-term investors.

Another “downstream” sector that is having good margins due to the collapse in oil is the refining sector. Oil is their raw material and they manufacture gasoline, diesel, jet fuel, lubricants as well as other products. In this sector we hold Phillips Petroleum (PEX), Northern Tier (NTI), and Alon USA Partners (ALDW). The entire sector is performing well.

Many companies that derive income from overseas have been hurt by the strong dollar. However, companies that are domestically orientated have done well. For this reason we are adding to our positions in several companies that are showing good growth in the consumer sector. The names we like are Kroger (KR), Walt Disney (DIS), Home Depot (HD) and Tractor Supply Company (TSCO). These are companies that should benefit as the consumer starts to reaccelerate their spending after having paid down their debt balances. Other companies we like are Wells Fargo (WFC) and JP Morgan (JPM) in the financial sector, as well as several pharmaceutical companies such as, Eli Lilly (LLY), Bristol-Meyers Squibb (BMY), and Steris PLC (STE).

We are not adding new money to our industrials positions at this time, but we are not selling out of them either. These companies are holding up fairly well in spite of the strong dollar. We will continue to watch the dollar and to listen to the next quarterly reports of Honeywell (HON), United Technologies (UTX), Emerson Electric (EMR) and Rockwell Automation (ROK). These companies have been selling off, and it has been increasing their yield based on their current dividend. This will increase the likelihood that we will began adding to our positions in the future.

The fixed income sector has sold off as well. As interest rates rise, the value of a fixed income security will fall. The market will reduce the price until the Yield to Maturity is very close to other securities in their sector. However, the coupon is still fixed at the rate when purchased and the bond will pay par at maturity. Unless you are afraid of default, the falling value of a fixed income security only creates a realized loss if you sell. If you own individual securities, not bond mutual funds, continue to clip your coupon and hold the principal until maturity.

We are monitoring the strength of the dollar, employment gains and the ability of Iran to begin exporting more oil. As the world’s economy grows, we believe the imbalance in oil will reverse and prices will return to more normal levels. Stay invested in companies with good cash flow, good cash distributions and companies that operate in areas where they have a competitive advantage due to much lower energy costs and raw material input costs. We prefer companies with price/earnings ratios at levels that are attractive compared to the low-interest rates on investment grade bonds. BSG&L and BFA are long-term investors and we believe that if you are patient, build cash and buy good companies on pull backs, your portfolio will have good growth over the long term. Author: Ben Dickey, CFP/MBA/CHFC, Chairman of the Investment Committee, BSG&L Financial Services LLC.

Respectfully,

William C. Heath, CFP®
Chairman & CEO