Economic Recovery Continues

Home sales fell 2.7% in August; not great news but not unusual. Home buyers have always liked getting settled well before the start of the school year. Home sales August 2009 were up 3.4% over home sales August 2008, so, while the headlines say there was a decline, the rebound continues. The rebound can be seen in the depletion of inventories. New home inventories are at the lowest level in...

more than 7 years and total home supply of 8.4 months is the lowest since April 2007. It would not take much of a pick up in sales rate for inventories to drop to the healthy level of 6 months supply.

What is lost in the aggregate figures is that the recent sales have been concentrated at the low end, which means inventories in the below $200,000 category are especially depleted. New construction starts are rising because there are pockets of no inventory. A community in San Diego actually has 250 buyers on a waiting list.

The chart above (produced by the good folk at bespoke.com), shows that the tech sector is the first stock market sector to have totally rebounded to the pre-Lehman Brothers collapse level.  Investors should keep the energy-tech see-saw in mind! The high price of oil has ignited a major high tech investment cycle.  

This morning, petroleum prices are falling again. Drilling picked-up in 2002, 7 years ago. It takes years for drilling to produce net new oil supplies. In the past year, there have been more than 200 significant discoveries of oil. We have been drilling in California for almost 140 years, yet, a 150 to 250 million barrel pool was recently found. At $60 per barrel, this oil is worth as much as 15 billion dollars. This find is nothing compared to the BP discovery in the Gulf of Mexico, 3 billion barrels, valued at 180 billion. The BP discovery in the Gulf of Mexico is nothing compared to the 30 Billion barrels discovered in Brazil. The value of the oil is Brazil is upwards of 2 trillion dollars!  

By hydro-cracking shale rocks, the US is producing bountiful supplies of natural gas at the equivalent of $7 per barrel of oil and Venezuela reports the discovery of their larges natural gas field ever! Numerous discoveries have been made off the west coast of Africa. The number of microbes on planet earth that constantly produce methane are numbered in the nonillions (one nonillion is one trillion trillion, 30 zeros). Our planet is producing natural gas as fast as we use it!

The sharp rise in oil price from $12 per barrel in 1999 to today's price of $67 per barrel has been the fuel for massive investments in high speed data networks by AT&T, Verizon, Sprint, Google, Apple, Amazon and others.  The high price of oil is also responsible for the nuclear power assembly line that has been constructed in China.  Over the next 10 years, China will put in place more nuclear power generation than currently exist in the largest producer of nuclear power, the USA.

The big jump in oil prices is also the incentive for consumers to pay the extra $30 or so per month for mobile computer data plans. High fuel prices have made it easy to achieve savings through the use of mobile computers. AT&T, VZ, Clearwire and many others are each prepared to spend billions more over the next several years. Over the next 10 years, several billion pocket computers will be produced. Each of these computers will be more powerful than the ones used by NASA to put man on the moon in 1969.

A major investment cycle is in the works because it will take the construction of many more nuclear power plants and the construction of many more server farms and high speed networks to bring the price of oil back to parity with electronic communications. Because the price of electronic equipment and service is falling rapidly, the next equilibrium will not be reached until both the post office and the newspaper delivery boy are virtually history. Indeed, lower prices will exert extreme pressure on Iran to buckle under the weight of economic sanctions. My off the wall prediction is that several nuclear power plants will be built in oil rich Middle Eastern Countries over the next 15 years. It makes no sense to use oil that can be sold for $67 per barrel to power air conditioning units that can be run at the equivalent of less than $30 per barrel.

Of course, the market will ultimately over shoot. Oil will continue to trend down for about 18 more years, at which time it will sell for less than half its current price. We have entered the long up phase in the real estate market and the long down phase in the oil market. The long up phase in tech stocks and the long difficult phase for oil supported tyrannies. Nations that depend on oil for the bulk of their revenues will suffer, but most of the world will enjoy this long phase of prosperity.