18 Apr 2012 Heartland Funds - Q1 2012 Commentary ( Portfolio )
March 30th marked the 26th consecutive week of stronger US economic data. Consumer confidence, housing, and employment have all improved, and so has the outlook of business leaders. In addition, the world’s central banks have been accommodating: the combined balance sheets of leading central banks have nearly tripled since 2006. We believe these factors have conspired to drive prices of real assets and equities higher, supporting the cyclical rally we have seen year-to-date.

While cyclical improvements are evident, we believe there are structural developments taking place in the US economy that will reinvigorate America’s industrial base.

Most labor intensive US manufacturing has long since left our shores for low-wage centers in developing economies. American manufacturers that have survived have been capital intensive and have become highly efficient, allowing the U.S. to remain the second largest exporter of merchandise in the world1, behind China, despite significantly higher labor costs. Certainly other developed and emerging economies have taken some US share, but we believe that US manufacturing is poised to enjoy
significant cost advantages of its own.

Cheap energy is the lifeblood of industry, and American innovation in drilling techniques has unlocked huge energy reserves that were formerly untouchable. As these charts reveal, US sourced crude oil (WTI) has become significantly cheaper than the global equivalent (Brent). Note the striking differences in natural gas prices across the U.S., Europe and Japan. We believe the cost advantages enjoyed by the U.S. will persist for some time, and, apparently, so do many manufacturers that are choosing to expand production here – and not just in US energy exploration and production, such as with Royal Dutch Shell2, but across US industry. At the margin, many plants are choosing to locate in the U.S. versus overseas. Foreign automakers such as Toyota and Honda have announced plans to increase production in the U.S. within the past year alone.

An improving industrial base is beneficial for all economic sectors, and we believe that most investors have yet to recognize the implications of this game-changing development. Judging by the S&P 500’s modest multiple of 14 times estimated forward earnings, we suspect that broad market valuations remain reasonable, and in some sectors, they are downright attractive. We are positioning the Funds for this mega-trend and for the potentially compelling investment opportunities that it may spawn.