DON'T MESS WITH TEXAS--OIL

West Texas Oil (click on graph to enlarge)

Texas Oil is running low. The price is running high. Trends keep trending until they don't. What is a fellow to do? (I cheated a little, the saying is that history repeats itself until it doesn't, but what is a fellow to do?)

On November 4th I wrote that one should consider buying heavy construction companies like Fluor (FLR). The idea was that someone other than Bechtel will build some power plants. The stock is up from $46 to $62.

On November 9th I suggest one should consider Cameco (CCJ). The idea was that uranium mines are set-up for a good run. The stock is up from $32 to $44; up big time in the past couple of years.

Now everybody is getting into the act; the act of building nuclear power plants. Russia is about to sign a deal with Iran. New Zealand is negotiating with farmers for land. Australia is digging coal like crazy but talking nuclear. And, Duke Power is looking for building sites in the Carolinas.

Twenty percent of all US electricity is nuclear electricity. It is cheap. At the current price of oil, nuclear is very cheap. The race is on to build nuclear plants.

China has taken the lead. China has completed several plants and is planning to construct many more (see earlier articles for details).

There are two competing technologies in this race. The new technology plants are about one fifth the size and can be built fast and cheap. The savings are a function of fewer safety systems. These type plants are being built in China. American engineers prefer the big models. They cost much more and take much longer to build. It will take years for American plants to be approved.

Now a days, we live in a global market. China is out front and the sooner they reduce their oil needs the sooner we will get price relief in America. China can't solve the energy problem alone. New coal plants which are being built in America will give us a little slack but the next then years could be rough on the energy pocket book. America is digging more coal than ever before (shipping a lot of it to Europe) and a few companies are getting serious about going after the massive tar pits of Canada. The oil drilling rig counts are high world wide. So far the faster we pedal the further behind we get.

The good news is that we are not nearly as deep in the hole as we were in the early 70's. Miles driven in SUV's is starting to decline and high mileage cars are back in vogue. We are a wealthy people and can live through a temporary price shock. Germany and Italy are in recession and Japan has probably dropped back into recession after just a short recovery. OPEC has lost much of its pricing power and does not want the world to go into recession. Gradually new supplies are coming on line. Conoco Phillips (COP) just made another deal with Venezuela.

THE MISSING LINK

In several retirement accounts reviewed recently, I was surprised by how much money is invested in bond funds. Even many of the stock funds in 401-K accounts are half breeds! Many of them have fancy names such as "life style accounts" or "asset allocation accounts". These are men dressed up in women's clothes or vice versa.

These "life" accounts often are forced to buy more bonds as the age of workers increases. It does not matter how expensive the bonds get, the managers have to buy! Greenspan said he simply cannot understand the the conundrum of low long-term bond yields. One part of the missing link is that investors are foolishly putting too many of their retirement assets into bonds. The accounts have held up well and not caused a "run-out" because there has in effect been a mini-bond bubble. Speculators were jumping on bonds big time a couple of weeks back, "borrowing short to lend long".

One of the things I know is that it will not matter if little nuclear plants or big nuclear plants are built, a lot of bonds will be issued to finance the plants. If Duke Power needs to borrow a few 100 billion or if China needs to borrow a trillion, they will pay the rate (lower the price) to what ever it takes. In the last nuclear building cycle, it took 14% or better. This time the rate peak may be only 8% or so a bond currently yielding 4.2% is going to get ripped in half. When rates take off, there will be a scramble to buy something else. A lot of folks are going to wonder what happened to their retirement accounts.

DON'T MESS WITH TEXAS BUT PLEASE DON'T MESS WITH MY RETIREMENT ACCOUNT!