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Tuesday, September 21, 2010

That's The Way America Crumbles..

There is an old saying, “the trend is your friend”.  To survive in today’s market you need to identify the trends in place or ones that are gathering steam. One  trend that is becoming apparent is the infrastructure theme. Look around the United States and you find all infrastructure, from water systems to electrical capacity, are in disrepair due to neglect. At this point in time two forces are coming together to power this trend going forward, 1) is a growing recognition that the infrastructure across the US is shall we say less than adequate for the 21st century and 2) the current administration has begun to target this sector.

The first driver is absolutely needed in order for the US to compete in the world market as well as get our economy back on track. The infrastructure theme is very palatable to the administration since it accomplishes several goals at once. Renewed infrastructure projects can give a boost to the economy in the short run by providing new construction jobs. Longer term the projects assuming they are properly targeted will help America remain competitive in many areas by either: reducing waste, improving productivity, containing costs and insuring that the capacity(of all utilities, transport and economic essentials) is both adequate and reliable.

Many of our rivals around the world have embraced new technologies and their infrastructure is decades younger. Their infrastructure makes the state of our infrastructure look what you would find in the best banana republic. Our country has gotten in to this pickle because for decades we have not invested nearly enough in improving all flavors of infrastructure. The lack of investment stems from the fact that it is not sexy and does not garner votes for politicians. If you think about it Dear Reader, is a better campaign point to tout the fact that your administration spent $1 million to upgrade a town water pipe preventing water leakage and potential disruption or that same money is spent on a new community center for Friday night bingo that the townspeople will see and use often. Infrastructure is not sexy because we take it for granted. When you come in your house you flip the switch to turn on the light and it comes on instantly (well provided you use a soon to be banned incandescent light), so we never give a thought about the power grid unless there is a power failure; the same is true about your water etc…

The Congress and Administration appear to have caught on to this theme as there has been more and more of a push to fund infrastructure, which I believe would be a beneficial use of public money to provide a foundation for revitalization. On Labor Day President Obama proposed to invest $50 billion in infrastructure projects, which I applaud as long as they are logical and targeted to address shortcomings. Additionally, I came across an article published today entitled “Senate panel to consider infrastructure bank” that appeared today on forconstructionpros.com. Moreover, the house has a similar bill that was proposed in 2009, H.R. 2521. So clearly the “trial ballons” have been launched and the move is afoot to get funding.

The need to replace, upgrade or build new infrastructure is not only vital to our future growth, but will be also quite costly. In December of 2009 the American Public Works Association (www.apwa.net) produced a report on some of the infrastructure of the US. The report includes some startling numbers that are required for infrastructure. According to the report the transportation sector will require $225 Billion of investment annually for the next 50 years and each billion dollars spent would produce 34,700 jobs. The report also looked at the water\waste water sector which will require $23billion annually for the next 20 years.  So as you can see we are talking some big bucks here regardless of what the economy does, in fact it could be argued that these sectors could be used to stimulate the economy.

There are various ETFs that invest in infrastructure, for example : PowerShares Water resources ETF (NYSE: PHO), iShares Infrastructure Fund (IGF), PowerShares "CleanTech" (PZD) and Market Vectors Nuclear Energy (NLR). Additionally, one could investigate companies that play in the infrastructure space such as: Shaw group NYSE:SHAW, Flour Corp NYSE:FLR, Jacobs Engineering(NYSE:JEC), or Foster Wheeler (NASDAQ:FLWT). Another angle on this is to look at companies that make equipment that are utilized in infrastructure building like : Caterpillar (NYSE:CAT) , Bucyrus( NASDAQ:BUCY) or Joy Global (NASDAQ:JOYG). There are many more companies that make equipment, materials, provide construction management or engineering than can be listed here.

The purpose of this post is to provide food for thought in identifying where the economic activity and spending will be going. I view this sector as one to watch and invest in when the specific issues are cheap to reap the long term gains.
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