Thursday, July 17, 2008

Yes, We Can -- We Already Have -- What a Turn! -- Super Strong Buy Signals!

Nancy Pelosi and other left leaning politicians like to repeat the phrase, "We can't drill our way out of this mess". We can't because we already have. "We" have added production in South Dakota, Saudi Arabia, Brazil, Kazakhstan, Iraq, Montana, Gulf of Mexico, Canada, the North Sea and from many other places. Americans tend to over emphasis the importance of where the oil comes from. Most of the oil America uses for transportation is produced in North America. Common sense tells us to, to maintain strategic reserves while trading or drilling for additional cheap supplies. With 700 million barrels in reserve, we must trust sellers to do what is in their own best interest, which is to sell to us at the market price. Common sense tells us to collect the low hanging fruit in ANWR. I don't think it has sunk into the consciousness of the nation that the value of the oil in ANWR is 1,000 , 2,000 or even 3,000 Billion Dollars!

India produces more bananas than any country in the world; it certainly makes sense for India to sell bananas and for the rest of the world to buy bananas from India. Of course, it makes sense for America to buy bananas from suppliers that are closer to us, but it makes no sense for us to try to become "banana or oil independent". Food is a more strategically important commodity than is oil. Should our enemies or competitors refuse to buy corn from us? Of course not. Should Iran try to become self sufficient in the production of corn? Of course, not. Iran is one of the most inhospitable places on the planet. Most of Iran is covered with mountains or desert, really high mountains and really nasty and crusty deserts where one can break though the top layer of dry sand to find oneself in something akin to quick sand. It would be absolutely foolish for Iran to spend its resources trying to grow corn. Iranians and Americans understand how it made great sense for Joseph to store 7 years worth of grain in Egypt. Doing so did not prevent Egypt from buying cedars from Lebanon, but instead it lowered the relative price of fine wood. All American children should be taught Ricardo's concept of comparative advantage. Children should explore their talents but at some point they should choose to work in the field where they have the most talent. The US should grow corn and produce Intel computer chips and trade these for other goods, including oil. Neither should we tax our oil firms to death. Our oil firms are the best at what they do but they cannot produce oil unless allowed. None of this prevents us from researching or developing other energy sources.

US states should have the freedom to permit environmentally safe drilling, but Americans should not stop buying "cheap oil" on the world markets. Drilling 200 million dollar or even one billion dollar wells in ultra deep waters only makes sense if other options have been exhausted. Those willing to invest the money should decide. Nancy Pelosi has no business trying to speculate on the price of oil by promoting the release of oil from our SPR; she should not try to set the price of bananas; She should not try to choose the winners between solar energy, natural gas or any other energy sources. The proper roll of government is set rules that provide a level playing field, it should be left up to the buyers and the sellers to select which source will win.

In the Gulf of Mexico, Thunder Horse is now on line (500,000 barrels per day by year end). In Saudi Arabia a number of projects have already resulted in increased production by a million barrels per day over last year and the Khursariyah field will start up in August. It will produce 500,000 barrels per day. The Khurais field will start up next June. It will produce 1.2 million barrels per day. Brazil has already drilled deep to discover several monster fields. These fields will be developed over the next 10 years with some production starting in 2 years. Brazil will soon be be a major oil exporter. This is a great thing for Americans. The markets are responding!

What A Turn!

Yesterday, several bank, consumer discretionary, and airline stocks were up 30% or more. "Big Problems" are being "solved". Last Sunday, when Hank Paulson proposed legislation in regard to Fannie Mae and Freddie Mac, he in effect signaled that the administration is ready to finally sign the housing bail out bill that has been banging around between the house and the senate for at least 6 months. Paulson will get what he wants by the attachment of the Fannie and Freddie stuff to the housing bill. A couple of old political tricks are being played. Pork will be included to gain votes and the congress will pass and the president will sign the housing bail out bill just as the market is making its turn.

The 300 billion dollars to be spent by the government is being largely offset by fees to be collected. The net effect of this government program will be a lot like spending $10 worth of resources to produce $9 worth of ethanol, only a little damage to the US in exchange for a tidy sum of bought votes by incumbents. Of course, there will be some big winners in the deal. A pork barrel portion, about 30 million dollars worth f memory serves, will be doled out in community grants. In other words local politicians will win a $30 million dollar slush fund. Local banks will lobby these politicians and they will in turn buy foreclosed properties as a pay off to their "best friends". The turn in housing is big because it influences the price of everything, including bank stocks.

The Iran Deal Moves Forward

"Secret discussions" between Iran and the US are coming close to bearing fruit. The UN coalition has basically held off on tighter Iranian sanctions for about a month while progress has been stop and start. Democrats have supported keeping pressure on Iran. Obama says that he will do what ever it takes to prevent Iran from developing nuclear bombs. At the same time, Senate committees have introduced legislation to add sanctions and they have appropriated money that can be used to encourage regime change. All sorts of little games are being played but progress is being made. As a way to lower expectations and hide the progress being made, Iran has test fired a few missiles and both sides have encouraged speculation about the possibility of war. Photos of the Iranian rocket test were doctored. Just to have a little fun, hucksters have "returned fire" by doctoring photos of Ahmadenijhad.
In the mean time, the counter proposal made by Iran is now close enough to the proposal made by the UN for direct talks to take place. When President Bush ended the executive ban on OCS drilling, he signaled that Iran and investors had better get on board this moving train. Take a look at sector statistics and you will see that the momentum went out of energy stocks weeks ago and the relative performance in the past few days has been very bad indeed. There will be more dips but the bottom has held.

Yesterday, a lot of people who believed the world was close to coming to an end, were greatly surprised by reports from Wells Fargo and Intel. Wells Fargo made a lot of money and INTC is increasing sales and profits by making ever smaller, faster and energy efficient computer chips. In some ways, the world of the Internet is about to go from the horse and buggy days to the days of high speed Interstate Highway. Worker productivity continues to climb using current connections and high speed, highly sophisticated connections are just around the corner. All of this relates to the pending deal with Iran because the driver of the deal is all about nuclear power. Huge new supplies of electricity are needed to support the dramatic increase coming in electricity consumed. This is a trend in place for more than 100 years. The price of electricity falls and falls (the upward bumps are relatively temporary) and the use goes up and up. It is reasonable to expect that electricity is going to be used to power vehicles in one way or another.

Telephone Lines, Cell Phones and Electric Bikes.

In the old days, a reliable measure of economic development was available in the miles of telephone lines per capita. This measure no longer works. Places like China and India have gone directly from no phones to cell phones. Relatively few miles of telephone lines are required when individuals use their cell phones as their home phones. When alarmist say that China is going to push the price of oil to $250 per barrel they assume that China development is going to follow the US model. Guess what? It will not.

In 2005 there were 10 million electric bicycles purchased in China. In 2007 there were 21 million electric bicycles purchased in China. Twenty-four of twenty-five bicycles purchased in America were made in China. The Chinese are buying cars and Americans are replacing home phones with cell phones. The two economies are growing to be more and more alike every day, but so far electric bikes are not very present in America. Yes, at the right price, a number of Americans will give up their cars.

Super Strong Buy Signals.

Back in January and again in March, both short and long term buy signals were very strong. Since March, long term buy signals have remained strong but some of the short term buy signals went all the way to sell, sell, sell. I don't like short signals but then I missed a few strong long term sell signals a couple of years ago and am still paying the price. No need to cry over spilt milk. Both short and long term buy signals have been super strong in recent days. Feeling burned, like the boy who cried wolf to often, I have not emphasized these strong buy signals in recent weeks. Part of the reason has been that the international situation and the mortgage situation have each trumped the buy signals in more than a few instances in recent months. Yesterday, everything was working. The face to face talks with Iran show that progress has been made; the moves by the treasury show that the housing turn is underway; and, the short and long term indicators are screaming, BUY, BUY, BUY!

The long term sock market average is better than 11% but the S&P is up only 2.53% over the past 10 years. Over time, the averages revert to the mean. Even the 20 year average, which includes the Internet boom of the late 90's has catching up to do. It is going to take several years of high returns to get us back to "normal". The best returns will be in the new leadership as the market turn progresses.