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While much of America’s future economic dynamism has been riveted on the overdue upgrading of the nation’s infrastructure (pipelines, bridges, dams, railroads and highways), little has been heard lately regarding commercial and industrial construction.
The commercial building infrastructure seems to have been left far behind for decades in the wake of the financial crisis, the focus on intensive energy development and increasing interest in exports. With a population that has almost doubled since the mid-1950s, high-rise apartment buildings, shopping centers, restaurants, office complexes, warehouses, religious and educational institutions — even health-care and elder-care facilities — have been lagging. Much of this was due to the high borrowing interest rates that preceded the 2008-10 Great Recession.
Recently contributing to such lagging commitment has been the intense concern with America’s economic future as Congress and the president can’t come to terms with a balanced approach to economic growth. This is affecting most of the U.S. population, employed by hundreds of thousands of independent retailers, contractors and service providers, not to mention hotels, motels and transportation hubs to manage America’s fast-growing inbound tourism.
Although health care is approaching 20% of the nation’s $16 trillion gross domestic product of goods and services, what’s still unknown is the extent of the physical plant that will be necessary to service the millions who will have access to the universal health care promised by the Obama administration.
With more than half the pre-Great Recession construction workers still unemployed, the anticipated upsurge in commercial construction should find no dearth of willing and able personnel. It’s no exaggeration to claim that the current, realistic low double-digit unemployment rate could be cut in half if economic dynamics, rather than contrived government agency directives, points the way to prosperous expansion. This would benefit our nation of incredible natural wealth and indigenous resources, unmatched in any other part of the globe.
The monetary wherewithal, festering on the balance sheets of many industrial/commercial enterprises as well as banks, presents no problem. In fact, trillions of dollars are being withheld from projects, onsite expansion and acquisitions, which all are awaiting “Washington Beltway clarification.”
In any case, watch the forthcoming commercial/industrial construction sector take its turn at growth in 2014. As happened unexpectedly with this year’s automotive boom, next year’s surprising construction surge may be just as formidable.
Automotive’s unexpected comeback
Of all the great technology innovations rightfully attributed to the United States, the automobile perennially has been at the head of the class.
From the original mass-produced Ford sedan to today’s somewhat controversial electric cars, the motor vehicle has become synonymous with American ingenuity and global mechanical leadership. This forward step in civilized history was made especially significant due to the gigantic scope of U.S. acreage and expanding population. This has been true whether referring to military vehicles such as the Jeep or brand names such as Chevrolet, Ford, Buick and Cadillac.
America has reversed the tide of automakers’ employment outflow with its major competitors — Japan, Germany and South Korea — establishing factories primarily in the “right-to-work” states of the South and Midwest. But in light of all the negative turbulence emanating from the post-financial crisis of 2008-10, the comeback of the auto industry is the most encouraging indicator of a future rebound, second only to housing.
Although sales of new cars had reached 16 million in 2007 (the last pre-recession year), the drop to 9 million in 2009 had been mitigated by a volume of 12 million to 13 million vehicles in 2012. In addition, the automotive parts industry has reached new levels of importance, as 120 million American drivers are lengthening their holding period before revisiting their favorite auto showroom.
Possibly the most optimistic indicator of America’s automotive future is the renaissance of Chrysler, practically given up for dead even before the worldwide financial recession. With the combination of a successful government bailout and a majority interest by Italy’s Fiat, Chrysler posted exceptional results for 2012 — both in revenues and profitability.
With Fiat’s preliminary decision to buy out the rest of Chrysler, the Chrysler brand name and its future in the United States could be secured when combined with an initial public offering on the New York Stock Exchange. It would be a bonanza for the 41.5% share of Chrysler now owned by the United Auto Workers’ retiree medical benefits trust, which was part of the original government deal to save Chrysler from extinction.
The rebirth of the indispensable sectors of housing and automotive could go a long way toward returning the overall U.S. economy to the health necessary to secure its future well-being. Together with the amazing development of energy opportunities, it will be up to U.S. governmental prudence not to lay further obstacles in the way of a potentially bright American economic future.
Master Limited Partnerships flourish
The term “Master Limited Partnerships” is not exactly a household term to the average investor. This dynamic financial factor, however, buried for years in the innards of professional investment advisers, has recently come to the fore. In fact, MLPs only recently surfaced “big time” enough to warrant a Barron’s front cover feature story, with experts discussing the pros and cons.
The genesis of this esoteric investment sector goes back to a 1986 Reagan administration-inspired legislative initiative to encourage broad interest among investors, focusing on U.S.-based energy development. During this period, domestic oil production was faltering and OPEC, with its pricing monopoly, was riding high. This situation gave birth to MLPs, which were technically partnerships, sheltered from corporate taxes plus enjoying such corporate write-offs as depreciation.
MLPs are required to distribute their resultant profit liquidity to their stockholding partners, which in turn pay the consequent income taxes. Often, these partners further are advantaged by return of investment capital distributions, which are tax-free.
Although relegated to the shadows by minimal publicity and complex understanding, the roughly 100 MLP entities, primarily listed on the New York Stock Exchange, have benefitted by superior results, exceeding that of the Standard & Poor’s 500 by a substantial margin over the past decade. It may be only a technicality, but participants get distributions rather than dividends. The distributions are not reported on tax form 1040, but on the business-wise K-l.
What has suddenly brought the concept of MLPs to prominence has been the explosive outburst of the U.S. energy development programs emerging from their embryonic genesis and promising to shift America’s oil and natural gas potential into a world-leading position.
With an analysis of Barron’s article, it became obvious that the handful of recommendations from experts practically all relate to the America’s newfound hydraulic fracturing (“fracking”) technology, its buildup of pipeline infrastructure, and the future of its energy products and revenues.
Warnings issued by the experts in the Barron’s article relate to the financial viability of these investments, especially those of recent origin, listed only this year on the NYSE. These include:
- Due to the mandated cash distribution, these MLP units are dependent on large amounts of debt, which has to be constantly renewed. As interest rates start rising, which is now happening, the MLPs’ cost bases are increasing accordingly. This will impinge on their payout abilities.
- Since the current cadre of new issues are overwhelmingly based on the fortunes of America’s fracking technology as well as the expansion of the nation’s pipeline development, federal government policy (i.e., the EPA) can yet throw a monkey wrench into what seems like a trillion-dollar energy development expansion.
Like all interesting opportunities, MLPs have their potential pitfalls, but they are worth consideration. The investor’s financial adviser is best equipped to provide relevant information.
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