Resource Companies Will Benefit from Global Government Spending

We know our economy is in trouble. Depending on how you look at it, bad things usually turn into good things if we handle them correctly. The US economy shrank 0.3% in Q3, better than the expected 0.5%. However, don't be afraid of recession, we went through this before and came back strong. All we need is a new government that puts the economy as the first priority.

Look around, the world has actually started to tackle the crisis. On Wednesday, Germany said to boost government spending by $32B in building infrastructure. Japan also issued a statement to increase government spending by $25B on domestic infrastructure. Two weeks ago, China announced $2T Yuan (eq. US$310B) on railway and other infrastructure spending in the next 5 years to boost domestic growth. There will be more countries to follow as this is a most efficient way to create jobs and prevent economy to further slide into recession.

The biggest economy in the world, the US, is also going to roll out huge fiscal spending when Obama or McCain takes office, and many analysts are predicting over $300B in 2009 that the government will use to boost the economy. The money will be used to build infrastructure, from roads to bridges to power grid upgrades. If this is true, we may see a short recession (2-3 quarters), and Americans will come back with a strong economy again. Of course the rest of the economy will need more time to recover but confidence recovers quickly.

With such a massive spending on infrastructure, a few groups of companies will benefit the most and earliest. Among them are raw material companies and internet infrastructure companies. To name a few, Cliffs Natural Resources (CLF), United States Steel (X), Google (GOOG), and Verizon (VZ). These companies will have significant roles in the global infrastructure play.

Cliffs Natural Resources, Inc. produces iron ore pellets and supplies metallurgical coal to the steelmaking industry primarily in North America and worldwide. The compan. The company also owns Portman Limited, an iron ore mining company in Australia. In addition, it has a 30% interest in the Amapa Project, a Brazilian iron ore project; and a 45% economic interest in the Sonoma Project, an Australian coking and thermal coal project. Most importantly, CLF has a strong position in China's market as well. According to CEO Joseph Carrabba in the Q3 conference call, Chinese business will come out quicker from the economic slowdown in 2009. I do see CLF as benefitting from China's US$300B infrastructure spending as early as 2009. In recent quarter, CLF profit tripled compared to a year ago, yet the stock price is trading merely at a 70% discount from the 52 week high (thanks to the credit crisis).

United States Steel produces steel products. It operates through three segments: Flat-rolled Products, U.S. Steel Europe, and Tubular Product. Apparently steel is a necessasity for infrastructure. The company also has exposure to chinese market.

Google and Verizon are two companies that can help the US build the next generation high speed internet infrastructure. Internet speeds in the US are slow compared to Asia, such as Japan and China. Both countries have the high speed backbone that runs 5 times faster than US. If Obama or McCain want to upgrade our next generation internet in this country, Google and Verizon will play important roles in this market.

Stock position: None.

Comments

[sammysmith:]

Tell us what products US Steel makes that are "a necessasity for infrastructure."

Ga' head tell us.

2008 Oct 31 08:56 AM

[muley101:]

I am a laid off steelworker. Our government has destroyed the steel industry by giving it away to the far east. We have lost virtually all of the US mini-mills, like Atlantic Steel Co (Dixie Steel). There are only a few steeel producing companies left.

US Steel produces wire products (nails), channels, angles, flats, I beams, and in particular concrete reinforcement bar (rebar). One of the initiatives which will be required in the near future will be a huge investment in rebuilding our highways and bridges. US Steel should benefit greatly form this.

2008 Nov 04 10:06 AM