The 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 (T), Verizon (VZ), Sprint (S), Google (GOOG), Apple (AAPL), Amazon (AMZN) 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 (CLWR) 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.

Comments

[captainccs:]

>>>Oil will continue to trend down for about 18 more years, at which time it will sell for less than half its current price. <<<

You and I wish but not very likely, the cost of extraction of the new finds is going to be very high. A more likely scenario is the cost of alternative fuels made from waste keeping the lid on hydrocarbon prices.

Sep 27 07:28 AM

[Chaser12:]

You must be smoking something really good to think for a second the oil money in the world including the USA is going to let there oil profits slip away.

Sep 27 08:30 AM

[a. palmer jr.:]

It'd be nice to see some of the oil barons of the middle east have to work a nine-to-five like the rest of us!

Sep 27 10:20 AM

[CLH:]

Good article. Esp. the long term downtrend of energy. Of couse this means our govt. which always does the wrong thing will add on taxes.

Sep 27 01:29 PM

[jerrydd:]

Dam good stuff the author has been smoking!!

Several details, much of the homes for sale have been kept off the market so don't show in statistics and the millions that will be foreclosed on soon will be on it too for yrs.

The few new homes being built are smaller, cheaper and the $8k tax credit and extremely low mortgage rates are about to expire will put an end to that.

While they have discovered some big oil finds, they are small potato's compared to how much used every yr, not even 50%. That's at the high rate of exploring too which is now far lower. And that doesn't include increased demand which will easily soak up any that might be extra.

Sep 27 02:55 PM

[conceptwizard:]

Julian Robertson, founder of Tiger Mgt. told CNBC, if the Chinese and Japanese do not buy our debt inflation could go to 15% to 20%. “It is a question of who would lend us the money if they don’t. They really control our destiny. They own almost exclusively short-term debt, because we cannot sell long-term debt. Americans need to start saving and we have to grow out of the problem.”

Sep 27 03:49 PM

[Old Trader:]

"there have been more than 200 significant discoveries of oil."

True, but unfortunately, none have been the "elephants" of decades past. In addition, most, if not all, will be expensive to develop, because they're either very deep water finds, or are in very harsh environments
(the Arctic/Siberia, etc.), or both.

Sep 27 05:46 PM

[ebworthen:]

Dude, pass the hookah, it must have some good stuff in the bowl!

You said:

"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."

The low end is being bought by either those who really can't afford it but make the deal for 3% down with FHA backing, or those who are downsizing to something cheaper.

Also, the shadow inventory at that level is huge; forestalled bankruptcies to the tune of millions of homes that will come on the market in the Fall/Winter.

Combine that with Alt-A and ARM resets next year and 2011, and this Summer blip up is due to artificially low rates, FHA backing loans they shouldn't, and the expiring tax credit.

Thinking positive is great, but being delusional is dangerous.

Sep 27 06:55 PM

[Denis Gould:]

Hm that's an interesting argument - high oil prices drive investment in data networks so we all stay at home and talk by computer rather than travelling to work? Sounds very sci-fi but not much in touch with what actually happens. China and India represent 2.5 billion people growing at 8% p.a. At the current stage of their development this involves a big consumption of resources, more cars, building, aircon etc.

Surely this is going to drive up the price of oil before these new supplies (which anyway only offset declining production from mature fields) and nuclear capacity come on stream. Oil at $350 a barrel might give sufficient impetus to get off our dependancy on it.

Sep 27 11:49 PM

[Michael Clark:]

As deflation becomes the norm, globally, demand for commodities will sink. Our way of life will change. So will demand for oil.

Sep 28 01:50 AM

[Troyhector:]

I think before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles…
"Rebound Obstacle #1: Inventory Glut. Nearly 10% of all homes built this decade are sitting vacant, compared to a historical average of 2.2%. In total, we’re sitting on almost 10 months worth of inventory versus a historical average of four months.

Rebound Obstacle #2: Loan Resets. Forget subprime. We’ve already worked through 80% of those resets and written down $1.47 trillion in the process. Now we’re facing a $2.5 trillion mountain of Alt-A loan resets. The first big wave hits mid-2011, with the peak expected to come in early 2013.
Rebound Obstacle #3: Foreclosures. One in four homeowners are now underwater. If we break it out by loan type the picture gets worse – 25% of prime loans, 45% of Alt-A loans, 50% of subprime loans are severely underwater. Add in the 6.5 million Americans out of work since the recession began and it doesn’t take an Einstein to predict where foreclosures are heading.”

www.housingnewslive.co...

Sep 28 02:18 PM

[Russ Wetherill:]

Good points, but, I think the recasts may have more impact than the resets though. Resets are when the option arm resets to current market rates. With rates at historic lows this is not as much of a concern as when the loan recasts to a 25yr fully amortized mortgage for the negatively amortized principal. The resets are still a concern since many of these loans were at 1-2% initial teaser rates for less than the interest rate of the loan. The resets will cause some payment shock and decrease discretionary spending, but the recasts will cause default.


On Sep 28 02:18 PM Troyhector wrote:

> I think before any meaningful recovery in real estate prices can
> take root, we need to overcome three major obstacles…
> "Rebound Obstacle #1: Inventory Glut. Nearly 10% of all homes built
> this decade are sitting vacant, compared to a historical average
> of 2.2%. In total, we’re sitting on almost 10 months worth of inventory
> versus a historical average of four months.
>
> Rebound Obstacle #2: Loan Resets. Forget subprime. We’ve already
> worked through 80% of those resets and written down $1.47 trillion
> in the process. Now we’re facing a $2.5 trillion mountain of Alt-A
> loan resets. The first big wave hits mid-2011, with the peak expected
> to come in early 2013.
> Rebound Obstacle #3: Foreclosures. One in four homeowners are now
> underwater. If we break it out by loan type the picture gets worse
> – 25% of prime loans, 45% of Alt-A loans, 50% of subprime loans are
> severely underwater. Add in the 6.5 million Americans out of work
> since the recession began and it doesn’t take an Einstein to predict
> where foreclosures are heading.”
>
> www.housingnewslive.co...

Sep 29 04:13 PM