Friday, December 23, 2005


Natural gas and interest rate declines are setting the table for a good, possibly great 2006. After Katrina hit, the US temporarily had 8 Billion Cubic Feet of natural gas production shut-in. By December the number was down to 2 Billion while supplies on hand were higher than average. Another 300,000 feet came on line this week and by January the shut-in supply will be less than 1 Billion Feet. (Data provided by James Williams.)

In recent weeks the price of gas pushed $15 and it will soon be pushing down on $10. There are indications that fuel oil has been substituted for gas as much as possible for the past couple of months. There are also indications that fuel oil is being used carefully. Airlines, which burn a mixture that is very close to fuel oil, have done a terrific job of conserving fuel while by combining all reasonable flights possible. American reported lower fuel costs of 61 cents per gallon during the 4th quarter. These lower costs are only possible because the current price of fuel is destroying demand. Consumers are using hundreds of methods daily to reduce demand. My Mother just insulated a new room addition to an r-48 level.

In the meantime, mortgage rates are down five weeks in a row. The real estate "bubble bust crowd" sees the decline in mortgage rates as the end of the housing boom. This crowd simply does not appreciate the power of compound interest or the size of several population cohorts. Compound interest, according to Einstein, is the most powerful force in the universe. The cost of a home today at 6% interest is dramatically lower than the cost of a home 5 years ago at 9% interest. Lock in a 30 year mortgage at 6%, an after tax rate of about 4.2%, and you can enjoy living in a nice home for free! The value of the home is likely to go up as much or more than the cost of the mortgage. Americans will be jumping on homes again as soon as the FOMC lets up on the brakes. Variable rate loans will reduce prices by thousands of dollars when the yield curve reverts to its normal slope.

Americans, wealthier than ever before, average the prime age to buy a first home, move up to a larger home or to buy a vacation home. Those folks who are between 59 and 65 years of age have historically bought the most expensive homes of their lives including the most expensive ocean front properties. For the next 10 years, the US will set higher and higher record numbers of folks in this age cohort. Those predicting a housing bust are about 5 to 10 years early. The younger baby boomers are between 48 and 54 years of age; the prime earning and spending ages. Those who worry about consumer spending have not seen many doting first time grand parents. Marilyn and I are expecting our first grand child and can not resist buying for this yet to be born child.

Inflation hawks have been squawking up a storm for the past several months. However, number after number shows that inflation is well contained. With lower interest rates, low inflation, consumer spending, business expansion and lower fuel prices, the concerns about 2006 are over done. 2006 is shaping up to be a beautiful year!