Investing in Obama's Infrastructure Boom Profits
Companies / Investing 2009 Jan 24, 2009 - 11:08 AM GMT
Larry Edelson writes: I wish President Obama the best of luck. He's going to need it. The U.S. — and indeed the entire globe — is in the thick of the worst financial crisis since the Great Depression.
Ultimately, the economy and the markets will prevail, healing themselves according to their own timetable.
And you know my view: We're already in a depression … that it's going to get worse before it gets better … and that the outcome is going to be hyperinflationary, for a variety of reasons that I've discussed in previous Money and Markets columns.
But as dire as it all is, that doesn't mean there's no money to be made.
Indeed, in addition to natural resources and tangible assets, there's another sector I'm long-term bullish on due to massive unprecedented government spending, and it's …
Infrastructure!
Let me first answer the question as to whether or not infrastructure spending helps an economy …
In my opinion, by itself, it does not. And, it can even backfire if pork-barrel spending and pet projects aren't meticulously monitored.
But there is ample evidence that infrastructure spending can help …
During the Great Depression, for example, Roosevelt's New Deal put 7 million people back to work between 1933 and 1937, building highways, dams, and bridges.
Meanwhile, the Federal Reserve's Index of Industrial Production hit its lowest point of 52.8 in July 1932, just before the New Deal. And by 1937 it surpassed the highs of the late 1920s.
Certainly, I don't want to sound like every other eternal bull out there. And to be sure, all over the world governments are going to make wasteful decisions and build “bridges to nowhere” trying to stimulate their economies and create jobs.
Nonetheless, there are undoubtedly going to be many successful infrastructure projects and huge profits made via the hundreds of billions of dollars in infrastructure spending that's about to be thrown at economies worldwide.
Here in the U.S., President Obama is proposing at least $150 billion be committed to the following three main infrastructure categories …
Category #1: Physical Property
Roads, railways, bridges, airports, water mains
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| According to the Army Corps of Engineers, 122 of our nation's levees need maintenance and repair. |
By far the largest sector, and for good reason …
- According to the U.S. Department of Transportation, an estimated 56% of the nation's roads are in need of serious updates … while 26.7% of the country's bridges are “structurally deficient” and 13.6% are “functionally obsolete.”
- The U.S. railroad network is just 94,942 miles, under half of what it was in 1970, but hauls 137% more freight, requiring nearly $200 billion in investment over the next 20 years.
- The U.S. public transit system needs even more money, an estimated $250 billion annually, to improve its D+ rating from the American Society of Civil Engineers. Mass transit investments would need to increase by $3.2 billion a year just to keep pace with existing needs.
- In 11 short years, 80% of the locks on the nation's waterways will be functionally obsolete, according to the Army Corps of Engineers. And 122 levees need maintenance and repair.
- The country's airports and air navigation systems are desperately in need of updates. Costs attributed to airline delays could triple to $30 billion a year if traffic control and navigation systems based on GPS aren't updated almost immediately.
- By 2020, every major U.S. container port is projected to be handling at least double the volume it was originally designed to handle, requiring an almost immediate $10 billion to jump start updating the shipping infrastructure.
Clearly, the $90 billion that has been earmarked for this infrastructure category is just a drop in the bucket compared to what's needed.
Category #2: Digital Infrastructure
Internet, fiber optics, broadband, VOIP
Call it “the invisible infrastructure” if you will, but the digital highways of today are critical to the economy. So critical, in fact, that President Obama will appoint the nation's first-ever “chief technology officer.”
Between 1995 and 2002, for instance, Information Technology (IT) was responsible for two-thirds of the growth in U.S. labor productivity, a huge boost to the country's GDP.
And while the U.S. has some of the best digital infrastructure in the world, it lags well behind countries like Japan, Singapore, South Korea, and in 3G cellular networks, even behind China.
Meanwhile, digital traffic in the U.S. is expected to increase 500% by the year 2020 as demand for multimedia applications increases. Just downloading a single 30-minute video consumes more bandwidth than does receiving 200 e-mails a day for a full year.
But it's not just limited to entertainment. Improving the nation's invisible infrastructure can go a long way toward increasing productivity in every industry, from health care to manufacturing to service industries and education.
And two areas stand out the most …
1. Increasing wired high-speed broadband service now used by big business, smaller companies, and consumers across America.
2. Increasing the transmission speed and reach of wireless service to nearly every nook and cranny of the country.
Total estimated investment needed over the next five years: At least $30 billion.
Obama's current budget for this category: At least $6 billion. Not enough, but it's a start.
Category #3: Energy
This is a no-brainer. But just to review …
- Not one single refinery or nuclear reactor has been built in the United States since the 1970s.
In 1981, the U.S. had 324 refineries with a total capacity of 18.6 million barrels of refined oil per day. By 2005, there were just 132 oil refineries with a capacity of 16.8 million barrels per day.
- While electricity demand in the U.S. has increased by about 25% since 1990, construction of transmission facilities has fallen about 30%.
- Right now, the nation's 20th-century electrical grid is already struggling to keep pace with demand — many U.S. regions see generation shortages on the 10-year horizon.
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| President Obama has proposed spending an unprecedented $54 billion on the U.S. energy infrastructure. |
The grid's infrastructure is woefully out-of-date, unreliable and inefficient. In fact, about 7% of power generated in the U.S. goes to waste because of defective transmission lines and other mechanical problems, or theft.
Moreover, the current grid can't transmit renewable power sources, such as wind and solar energy, without what's called a “smart grid” infrastructure.
Rebuilding and modernizing the electrical grid is essential to creating a smarter, better, more reliable distribution of power, and is vital as we move in the direction of alternative energy.
Bottom line: I don't think you can dispute the fact that under Obama, for the first time ever, the U.S. energy infrastructure — including alternative energy — has a real shot at getting major government support. $54 billion in spending has been proposed.
Expect biofuels, nuclear energy, refineries, clean coal technology, utility construction and more — to get a major boost.
How To Make An Infrastructure Play …
Making money on infrastructure plays is not as easy as it sounds.
Timing is everything.
And let me make this perfectly clear:
Right now is not the time to aggressively buy infrastructure plays .
Although I have previously forecasted that the Dow is in a bottoming out phase, more confirmation is needed before getting aggressive in anything but gold and key natural resource stocks that I have recommended in my Real Wealth Report .
Plus, infrastructure plays should be viewed as long-term holds, companies whose shares you plan on holding for three years plus.
With that said, I have several companies on my radar screens that I am watching closely, including …
Fluor Corporation (FLR)
Fluor is one of the world's largest and best engineering, procurement, construction and project management companies. It serves industries worldwide, including oil and gas, chemical and petrochemicals, transportation, mining and metals, power, life sciences and manufacturing.
MasTec (MTZ)
One of the largest construction companies in the U.S. specializing in the telecommunications sector, MTZ builds, installs and maintains aerial, buried copper, fiber optic cable, underground conduits, and manhole systems related to the telephone and telecommunications industry.
URS Corporation (URS)
A provider of construction and technical management services for infrastructure projects ranging from roads, bridges, mass transit and airports to power generation and transmission.
Astec Industries (ASTE)
This construction company specializes in products and services related to highways, bridges, roadways, water pipes and wind towers.
Astec is also involved in natural gas pipelines, a segment of the construction industry that has been growing despite the economic downturn. Among its numerous products, Astec also has a “green” product lineup that includes recycled asphalt.
Headwaters (HW)
HW specializes in products that increase the energy efficiency of buildings.
Other names I like: Caterpillar (CAT), Granite Construction (GVA), Sterling Construction (STRL), and AECOM Technology (ACM) .
There are also ETFs to take advantage of infrastructure plays, as well as mutual funds, like my favorite: U.S. Global Investors Global MegaTrends Fund (MEGAX) .
Best,
Larry
P.S. For my specific buy signals and recommendations to profit from natural resources and the soon-to-begin infrastructure boom, be sure to subscribe to Real Wealth Report .
Cost: An annual membership is a mere $99, less than $9 a month for a world of profit opportunities .
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