Energy Independence = Strong Economy = Strong Equity Markets

by: Russ Fischer

Equity markets are likely to continue a long positive run from here and I will try to explain why with a little history of the past 6-8 years.

The equity markets have been on a run since March 2009, coming up on 5 years of advances, only occasionally interrupted by small corrections. The S&P 500 has risen from 682 on March 2, 2009 to 1841 on December 23, 2013, up 170%.

Based on the above, some make the argument that the equity markets are overdue for a major correction. I think they are wrong and that we will be surprised with multi-year strength in stock markets.

The history making Great Recession, which was largely caused by the greed and stupidity of the banking/political complex, was still in a deep trough in March of 2009. Fortunately we had Ben Bernanke as the Federal Reserve Chairmen to nurse the economy over that dangerous period.

The beginning of the end of the Great Recession and the beginning of this bull market began in March of 2009. On March 3, 2009, President Obama suggested that it might be a good time to buy stocks. Very unusual for a sitting president to make a comment like that.

Six days later, on March 9, 2009, the stock market bottom was in. The bottom was actually called that day by the late Mark Haines on CNBC. Pretty amazing. The general stock market began the move up and has never looked except for a few minor speed bumps.

These are just a couple of interesting anecdotal observations that really had nothing to do with the ensuing long climb out of recession.

There were a couple of other things that were going on about the same time, that in my opinion, were much more important for the recovery than is generally understood.

During 2008, natural gas prices began to collapse due to the glut produced by American energy companies finding, and extracting huge new supplies of natural gas. While the low prices hurt the very companies that produced those low prices, it was a shot in the arm to the weak economy and any commercial or individual user of natural gas.

The other thing that bottomed, other than the stock market, in March of 2009 was US domestic oil production. Beginning in March-April 2009, domestic oil production began an increase that continues, and is actually accelerating today (scroll down to the monthly data.)

The drilling techniques that produced the natural gas glut and associated low price were turned from natural gas targets to liquid oil targets. By March-April of 2009 that effort had stopped the decline of domestic oil production and turned the curve up.

Baker Hughes data shows the count of rigs targeting oil grew from less than 200 in early 2009 to over 1400 in Mid December 2013.

The result of the increase in rigs and the new technology has set in motion a growth in domestic oil production that is remarkable.

This huge and innovative industry has reconfigured itself to solve one of the most intractable problems of our nation; the energy deficit, and the economic instability that was associated with that deficit.

We only have data for nine months of 2013, so let's compare the same nine months for each year going back to 2009 to see what has happened to the daily domestic oil production.

Year Beginning Daily Production Jan mil bbls Ending Daily Production Sept. mil bbls Change in mil bbls per day
2009 5.142 5.381 +.239
2010 5.402 5.589 +.187
2011 5.482 5.594 +.112
2012 6.135 6.569 +.434
2013 7.043 7.794 +.751
Click to enlarge

During the one-year period of September 2012 to September 2013 has seen a 1.2 million barrel per day increase in production. We have every reason to believe that this increase in production will continue. Five years of this kind of increase will have US daily production at just under 14 million barrels per day and virtual energy self sufficiency.

Don't look for this five year number in government published data; it has been good in compiling historical data and terrible at forecasting future production. The industry itself has no interest in forecasting accurate figures for competitive reasons. So we are left to do our own arithmetic.

This accomplishment is an example of private enterprise at its finest. The energy miracle had nothing to do with government. Government had actually failed to produce an effective energy policy for nearly 40 years.

A relatively small number of energy exploration and production companies, using innovative techniques pulled it off by themselves in about a decade. Good for them.

Some of the pioneers in the Bakken field of North Dakota are:

Continental Resources (NYSE:CLR), EOG (NYSE:EOG), and Whiting Petroleum (NYSE:WLL).

Others like Chesapeake energy (NYSE:CHK) and Anadarko (NYSE:APC) are developing the Eagle Ford shale in Texas.

The point of this article is that the economy spins and expands on SAFE AVAILABLE energy. Oil imports had sucked a billion dollars out of the US economy every single day and was an enormous headwind for economic stability let alone growth. There was a pervasive feeling of national decline due to this vulnerability and dependence on imported oil.

It should come as no surprise that the stock market tracks a healthy and growing economy.

I think the average person really underestimates the importance of energy, both energy security and low cost energy to a vibrant economy. We are seeing manufacturing in-sourcing for the first time in decades. Chemical companies are returning to the US to take advantage of the low cost natural gas that is their feedstock.

For the first time in a long time, there is a lot going right in the US economy and, therefore, the equity markets should track the improving economy.

With energy driving the economy and the economy driving the stock market, we could have years of rising equity values. Certainly there will be Wall Street generated speed bumps in the market along the way. Of course, you will still need to have strategies and discipline in stock picking because there is no fix for investing in bad companies, but the economy should stay strong as long as we continue to become more energy independent.

Be wary of those who call an imminent market crash; oftentimes these opinions are not backed by facts and are no better than a coin flip.

Invest with intelligence and confidence; the US is on the ascendancy again.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CHK, over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.