America Set to Fuel the Great Recovery

            Five years following the Great Recession, many people here in America are still uncertain about where to invest their money.  Sadly, those that have been too cautious or uncertain have missed out on the gains of the last five years.  However, the reversal in the global economic cycle is just starting, and America and its equity market are testaments to who the leader in the world’s economic recovery will be.   Behind the scenes, three key factors will be buttressing America’s growth in the near future: exposure of American technology to developing markets, a rising dollar due to the Fed monetary tightening, with the latter factor being supported by lower energy prices and lower unemployment.

            Some of us hate having to deal with our smart phones and some of simply could not live without one.  Whether you regard today’s phones as a go-to tool for everything or as a nuisance, these products will slowly become available to the billions of people scattered throughout the far corners of the world.  By 2017, 1.7 billion smart phones are expected to ship to stores across the world, averaging an expected annual growth rate of 24.9 percent from 2011-2017.  And while that’s a good number year after year, a small correction is expected for the early part of 2014. According to analysts at research firm Ovum, Android (Google; GOOG) systems are expected to lead the market, comprising almost half of market share, while Apple (AAPL) will take more than a quarter.1 Exposure to smart phone technology in these markets will have extraordinary effects.  One, these companies will make a fortune from sales and subscriptions, the latter being a positive for the phone carries; and two, these products should usher in more spending and other software based services.  As of 2011, there were more than a million mobile apps, many of which are money-making sources.  Domino’s Pizza (DPZ) is a great example of how a company can take advantage of mobile apps.  As of the middle of 2012, thirty percent of Domino’s sales were made through mobile web applications, reaching $1 billion by April of the same year.2  Also, smart phones and tablets are typically more affordable and mobile than its PC counterparts, which should also benefit emerging market economies.

            In case you never watched CNBC at any time during 2013, the Federal Reserve has been expected to cut down, or “taper,” it’s monthly premiums of $85 billion of Treasury bonds to the banks, thus restricting the amount of cash the banks hold in capital and the amount of dollars being injected into the American economy.  Now that the quantitative easing process is starting to scale back this easy money, many believe this reduction will cause emerging markets to experience hyper currency inflation.  I don’t think they’re entirely wrong.  By cutting the supply of dollars in the global market, the value of the dollar should rise, in turn decreasing the value of emerging currencies.  When this happens, it will be easier for the banks in these countries to acquire their respective currencies in relation to the dollar.  If these economies are managed carefully, accompanied by healthy corrections in interest rates to contain the expected inflation, then the Fed taper and its maturity should only boost global economic growth, especially in the credit arena.  Once American technology products and energy prices undergo further deflation overseas, interest rate fluctuations will tend to be less volatile.  Energy prices continue to drop relative to inflation and are even struggling to achieve price parity in places like Brazil.  Lower gas prices, as seen in America, also contribute to overall economic growth.  Furthermore, if the Fed continues to taper, then that means America’s labor market is improving, and one byproduct of a growing American labor market historically translates to higher exports and faster growth rates for the importing countries.

           Mentioned earlier, energy prices are just now enabling growth in the American economy.  Solar and wind power has eased demand pressure from more conventional sources of energy, and it has stabilized the price of gasoline simultaneously.  Besides alternative energy technology, another technology has emerged in recent years to leverage gasoline prices down: fracking.  Not only has the fracking technology revolution strengthened the housing market, especially in the Dakotas and Texas, but it saved the inflation of gas prices many economists were expecting not more than two years ago.  Find any one-hour news segment from April 2012, and there will be commentators predicting the price for a gallon of gas at five dollars.  Suffice it to say, that didn’t happen, because of hydraulic fracking.  Especially as long as Iranian oil is not in the market, selectively investing in American and Canadian oil companies will pay dividends.  Last week on CNBC, hedge fund manager Jamie Dinan went on to recommend two stocks outside the drilling sector that have already benefited from American and Canadian oil: Scorpio Tankers (STNG) and Costamare (CMRE).  Citing “fundamental issues in an upturn,” Dinan’s investing in these two companies in expectations the value of the ships will go up due to rates.  However, these shipping companies are the ones transporting all the moving parts that has made and will continue to grow the oil industry as well as bolster the American and European recoveries.

1.      Reisinger, Don, “Smartphone units to hit 1.7B in 2017; Android to dominate,” CNET, accessed December 22, 2013, http://news.cnet.com/8301-1035_3-57427196-94/smartphone-units-to-hit-1.7b-in-2017-android-to-dominate/.

2.      Davis, Scott, “Getting Apps Right: How Domino’s is Beating the Odds,” CMO Network, Forbes, accessed December 23, 2013, http://www.forbes.com/sites/scottdavis/2012/06/21/getting-apps-right-how-dominos-is-beating-the-odds/.

                                                                                                                              

Disclaimer: Trading stocks has extremely high risks, and should not be taken to lightly without a thorough understanding. This is written from a purely commentary point of view and is not meant to suggest buying, selling, or holding a stock. All traders must do their own research prior to investing. We (Kennouth Investments) are long STNG and unaffiliated with all of the other companies that are mentioned in this article, and can't be held responsible for any losses that may occur. Invest at your own risk.