Wednesday, July 15, 2009

Surge, Surge, Surge -- Stock Prices Rise

The animal (stock share) spirits are out and about. They are being summoned forth by surges in earnings at companies such as Goldman Sachs and Intel, by a refinancing surge in the housing market, by the clunker car program, by the continuing surge in Internet usage and by a new China surge. Even the stimulus spending of the government is going to have a temporary effect over the next several months.

Markets are surging in response to projected future profits. Share prices, along with Doctor Copper and Professor Yield curve are the most accurate forecasters of economic growth. Despite wonderful low cost substitutes for copper, all three are predicting a strong economy. My guesstimate is that our economy will grow by better than a 3.5% average annual rate over then next 24 months! While more than half the people are busy worrying over the damage that Obama will do if he is successful in installing very expensive and wasteful health care and cap and trade legislation, the market is busy healing itself. The market, like water that always finds a way to flow down hill, always finds a way around impediments. Raise the cost of health care in the USA and prices of goods to the consumer will restore profits to businesses. Government programs that shift the cost of individual goods to others can be called income distribution programs or socialism.

For more than thirty years, "environmentalist" have fought to restrict energy development in the USA. Drilling for oil, building oil refineries and building power plants have all been made expensive or difficult. The irony is that many of these same folk have tried to restrict importation of low cost goods from around the globe. Meanwhile, the market continues to find its way around the environmental bottle-neck.

The most recent announcement about a new oil refinery comes from South Korea, which will spend 10 Billion Dollars to construct a modern and clean oil "cooker". China, which has been approaching completion of two coal fired power plants per week, is at work increasing production of nuclear power generation at an even faster pace. In America the most significant energy development has been hydro cracking of natural gas fields. In Canada, the "in ground cooking of tar pit oil" holds great promise for producing huge supplies of relatively clean burning oil.

One current surge is the holdings of foreign currency by China. This is a good thing, not a bad thing. It represents the purchase of low cost goods from China and pent up demand in China for foreign goods and services. The more goods that China exports, the more money China has to purchase goods, services or assets from the USA. The refinancing surge that is currently taking place in America is directly linked to the investment of huge amounts of Chinese owned US currency into the US financial markets. Again, like water that must eventually find its way down hill, all but a few lost or destroyed US dollars must eventually find their way back to the USA. Low cost money invested by China is making low cost mortgages available to home owners.

In many areas, the USA has a comparative advantage over China. One example is in the area of computing. IBM is a major builder of what has become known as cloud computing centers. This week, Microsoft finally announced pricing for the cloud computing service that it announced more than a year ago. Obviously, the construction of a network of cloud computers takes time and Microsoft surely started construction long before it announce the coming service.

The cost of providing computing service continues to fall rapidly, however, the amount of computing being done continues to rise at exponential growth rates. The cost per calculation is approaching zero at an ever increasing rate but the sum total of resources being used is rising rapidly. Data centers use large amounts of electricity. Digital computing (including digital communications) is being substituted for the physical movement of goods. The market is reducing total energy consumption by using ever larger amounts of low cost electricity.

Microsoft will charge about 12 cents per hour for doing calculations, about 15 cents per gigabyte for storage and about 10 cents per 10,000 retrievals of data. It is hard to get ones mind around how big a business this is because 12 cents per hour sounds so cheap. We pay a Chinese worker 33 cents per hour to assemble desk top computers for us while we buy only the processors in bulk and charge the Chinese 12 cents per hour for calculating. The thing is that one data center can do calculations for who knows how many customers all at the same time. Another way to look at this is the continuing drive toward lower costs goods through automation.

The cost of computing is so cheap that computing can be offered to consumers "free", in exchange for an occasional look at advertising. Facebook provides computing service for more than 200 million users but does not charge fees. Based on the Microsoft numbers posted above (I believe I got these from a posting by Om Malik), Facebook needs around 15 cents in advertising revenues per hour of consumer use.

The biggest expense of operating computers is the electrical expense. The great news is that the latest computer chips compared to the chips of 2007 do double the work while using half the electricity. The value of holding "virtual meetings" continues to soar, but, uh oh!, did I mention that China has built an assembly line to produce nuclear power plants! Did I mention that there is once again a surge in the construction of massive, high speed, fibre optic data networks? No less than 4 transatlantic massive data cables are in progress!

If the USA does not wake up, even IMB, Microsoft, Amazon, Apple, HP, and Google (to name a few) will move their cloud data centers overseas, to where the power costs are cheap. If IBM places a data center in India and makes profits there, the owners of IBM shares will benefit, however, the jobs required to run that data center will be located in India.

The current BOOM in wireless traffic is un-abating. The latest US numbers I can find are that wireless data transmission generated 23.2 Billion Dollars in revenue in 2007 and 32 Billion Dollars in revenue in 2008. Thirty-eight percent growth during a "recession"! The numbers are small relative to all voice and data transmission but such growth rates will double and redouble revenues in less than 4 years.

Again, most Americans are worried about the recession or about the massive deficit the Obama administration is growing while being totally unaware that there is an economic surge in progress. This past Sunday a local preacher said to his congregation that the economy is bad and likely to get worst before it gets better. I think this was a personal opinion and not an insight offered by God.

Public opinion is "group think opinion". We are all influenced by "news sellers", politicians, big businesses and the wealthiest of investors. Even our preachers sometimes hear enough "bad news" to become believers in it.

How about you? Are you an independent thinker? Can you look at the world and see that there is a communications revolution in progress? One that is leading to a massive investment cycle! The ups and downs of the economy are the result of uneven investment. During the past three years, housing construction (investment) has virtually died, auto production has dropped precipitously and the consumer savings rate has soared. Savings are a necessary thing but too much saving is a very bad thing. Few appreciate the reality that there has been too much savings, particularly early this year. Obama excessive spending has been more than offset by excessive saving around the world.

The good news is that pent up demand is being released. Cars are being bought and housing inventories are declining. Housing related shares, such as Whirlpool, have double in price from the recession lows. The second phase of the surge ready for takeoff.

Believe it or not, the congress is about to fail at making a massive reform to our health care system. There is likely to be a bill but not nearly as onerous one as Obama would like. This failure will be a relief to the market place. The current surge, will not be smooth but it will continue. Retail sales are rising again. A consumer lead buying spree is developing. Hand held communications devices (the ones that cost over $3,000 over a 24 month service contract) are at the top of many a consumers spending list.