Sector Boom - Energy!

Over the next few years, the energy landscape will be changing dramatically. North America is on its way to energy independence which will have not only implications for America, but the world. For example, at Germany’s upcoming Munich security conference, fracking and America’s energy boom will be at the top of the agenda. The boom is having a major impact on a few states. The unemployment rate in North Dakota is 1% and Wal Mart is now offering jobs at $17 an hour! In Ohio, the energy boom added 39,000 jobs last year. What is encouraging is that these are high paying jobs. We at THOR are not espousing fossil fuels over alternatives. We are just stating the facts and believe this sector will produce higher returns to investors over the next several years than most other sectors.

Conflicting Signals

The way the stock market is rising this year, it appears that all is well with the world and the economy. This flies in the face of 4th quarter negative GDP growth of -0.1%, 6 months of manufacturing contraction as measured by The Empire Index, and collapsing retail chain store sales – see the below chart that shows retail sales have plummeted since the beginning of the year. The drop in retail sales is easily explained – consumers are making 2% less in take home pay because of resumption of the social security tax when the American tax payer relief act was passed. Even with retail sales falling, retailers bought more merchandise in January, thus increasing inventories, ahead of a possible longshoreman strike that might shut down ports on the east coast next week. We believe these purchases are causing a short term boost for the economy, but will be a drag as orders fall as stores try to reduce inventory.

Europe Soap Opera (Bunga, Bunga Party – Part II) In Full Force In February

Europe will once again come to the forefront this month because of the Italian election. A state bailout of Monte Dei Pashi Di Siena, the world’s oldest bank, has totally turned the election on its head as the leading political party (the Democrat party) is blamed for the collapse due to their close ties to the bank. This is setting the stage for Berlusconi to return. Berlusconi will certainly put the euro back in the spotlight as he is running on an anti-euro, anti-German platform. Spanish leaders are also caught in their own web of political scandal. This scandal is hard to stomach by the populace as they deal with 26.1% unemployment. Just as in the US, the euro zone kicked the can down the road. That road might get very bumpy this month. We believe we are in the eye of the storm and the calm serenity we have experienced in Europe over the past few months may end shortly.

In conclusion, with personal consumption representing 70% of US GDP and retail sales showing softness, it is wise to be cautious about this recent move. Overweighting higher future performing sectors, like energy, makes more sense to us in this environment.

Sincerely,

Your THOR Team