PRELIMINARY MACROECONOMIC ANALYSIS
Those who follow my writing know that I believe the way out of this labor market recession is through export growth and slight import reduction. Namely, I think the US needs to and will once again become a net exporter.
Because of the massive GDP growth in China from their currency manipulation, inflation is finally forcing real labor costs up in China. China has a national policy to raise the average and minimum wage rate by 100% over the next five years.
This should result in the spillover effect needed for a US export boom, or at least recovery. The yuan has been slowly rising in value against the dollar, and the US economic data is demonstrating a massive amount of export pressure building. It hasn't been enough to really boost the economy yet, but it is certainly building a foundation for growth, and at an increasing rate as the yuan rises further and further.
The chart below shows US nonfarm payrolls compared to payrolls in various industries.
click to enlarge images
You can see above that job growth in the US since the financial crisis indeed has begun, but it has clearly been very muted growth and only in select industries. For example, below you can see oil and gas sector jobs.
Not since the early 80s when the US was experiencing double digit inflation has there been significant job growth in the oil and gas sector. If you follow the US dollar, you'll find a strong negative relationship between the dollar and oil and gas sector jobs. The next chart shows mining job growth.
The next chart shows that manufacturing jobs have begun to improve, but not nearly as much as oil and gas sector jobs or mining and lumber jobs on a percentage basis. Of note, manufacturing jobs greatly outnumber mining and logging jobs, so even small moves in the chart below represent huge growth in the overall job market, as can be seen in the y axis of each chart.
Next we see that export production has had very little effect in health care and education jobs but a huge effect in financial activities. Health care jobs have been plentiful, but financial jobs have taken a major beating. It appears from the charts below that financial jobs may have finally just reached bottom and begun some mild growth, or at least stability. It also appears that the financial sector at its core grows in a delayed fashion, well after basic materials growth.
What all of this data displays is that this recovery is without a doubt an export led recovery. It is being fueled by exports of mining, lumber, and manufacturing goods. The largest area of growth is exports to China.
All of the export growth is well correlated with the strength of the yuan shown below. You can see just as the yuan began strengthening around 2006, US export jobs have also grown, but with some delay for changes in industries.
PLAYING FOR AN EXPORT BOOM
Now, since it is very clear to everyone paying attention that exports are leading the recovery, how can one invest to take advantage of this to improve returns and reduce risk in a portfolio?
Obviously, valuations are a key component, but gradually observing where demand is and will be is the first step. There is no guarantee, but in my eyes because the economy is so tough, companies are not willing to invest in labor unless there is certain growth on the horizon. From the charts above, it can be seen that the finanial sector is not confident about growth but that the mining and logging, oil and gas, and even the manufacturing sectors all have identified steady, growing markets and have begun investing in themselves with extensive labor growth. In other words, I think at the most basic levels, for analysts to identify revenue growth they need to essentially chase labor growth in the search.
This is of course before reaching the micro level which concerns valuation, but for the average investor, allocating into general sectors with significant growth will be pinpoint enough of an allocation decision. To gain access to these general commodity-based sectors, one should look to ETFs and the occasional mutual fund which focuses on revenues earned in the US from mining, logging, oil and gas production, and farming.
It can be difficult to find funds which focus on US rather than world equities, but here is a list with some of the most basic funds to gain exposure to US export growth: SPY, DIA, CUT, IEO, IEZ, OIH, DIG, DBA, JJG, MOO.
At a more specific level, there are companies which are more highly pinpoint with their revenue. Some companies are undiversified and are targeting nothing but exports in the highest growth industries, such as mining. A brief sample includes US companies such as BTU, WY, PCL, and ACI.
But for most investors, especially those which have a very infrequently managed/rebalanced approach, it is best to increase exposure to the export industry only mildly and in very liquid indexes such as those offered by the Select Sector SPDRs. The energy sector, XLE, the industrial sector, XLI, and the materials sector, XLB, should be overweight in most portfolios.
So, after a fairly lengthy discussion and analysis, my recommendation is for most investors to increase exposure to XLE, XLI, and XLB for the next several years at the least. They are US based companies in the sectors most likely to grow. The duration of this macroeconomic spillover could last for a decade or more, so these positions are some of the best there are for the long haul.
In my next article, I will examine industry specific relative equity valuation to search for US exporters destined to blow away the market.