Wait A Second - An American Boom?

Includes: DHI, GE, HOV, MWA
by: Arne Alsin

Investors, take note: Two powerful catalysts have been unleashed that will power the economy in 2013 and for several years beyond. Even though the catalysts are easy to recognize, the stock market has yet to price in their reality. The investor imperative: Buy stocks now, in front of economic prosperity that's right around the corner. So, what exactly are those two powerful catalysts?

An emerging energy boom, for one.

As someone who remembers the gas lines in 1973 and 1974, back when the OPEC cartel squeezed a powerless U.S., it's hard to believe that in the not-too-distant future the U.S. will be the No. 1 oil producer in the world, eclipsing the output of Saudi Arabia. American oil production is growing so quickly -- due to technological advances in fracking and horizontal drilling -- and our shale resources are so vast that we can plan on a reversal of our old economic paradigm, as we'll be importing cash and exporting oil at some point in the future.

A snapshot: In just the last year, we've gone from 5.9 million barrels of oil per day in production to over 7 million. We'll reach 8 million barrels a day next year, on our way to passing the Saudi's 9.6 million rate in 24-30 months. North Dakota, of all places, is now outproducing OPEC-member Qatar in oil output, pumping over 750,000 barrels a day, an increase of 40% over last year -- and production is accelerating.

Don't make the mistake of underestimating the ultimate impact of the American energy boom. When they handed out shale deposits way back when, the U.S. got a disproportionate share, far more than anyone else. On federal land in Colorado, Utah, and Wyoming, for example, experts estimate there are over 3 trillion barrels of recoverable oil (more than 10 times the reserves of all the Middle Eastern countries combined). Memo to fear-mongers: We have too much debt, no doubt about it, but there are substantial assets on the left side of the federal ledger.

You don't have to be a trained economist to grasp the wealth-building, economy-stimulating implications of our emerging energy boom or why, as Jack Welch recently stated, it could be bigger than the Internet. It's as if the oil resources of OPEC -- times 10 -- were magically uprooted and deposited in North Dakota, Colorado, and elsewhere in the middle of America. Because of that -- and because of the next catalyst that I'll discuss -- you'll see the economy heat up this year, with the promise of much more to come over the next several years. Stocks are the winners in this type of environment, while bonds and cash are losers.

For specific stock ideas, see my Top 10 list for 2013. It's already up 18% and, like last year's list, all 10 picks are showing green. One of the ideas from the list, General Electric (NYSE:GE), is a conservative way to invest in energy development, and it'll be a beneficiary of an economic upswing as well.

The second catalyst is the housing "boom" that's already under way.

The cool thing about the housing boom is that it's not really a boom, technically speaking. It's just a return to normalcy. But what a return it will be, given the depression-level base from which we started. From about 550,000 annual housing starts, the industry picked up steam in 2012, producing homes at over an 800,000 annual pace.

Only thing is, to get back to normal we'll need to double 2012's pace. According to a Harvard study, because of pent-up demand and the creation of new households, we'll need to produce 1.6 million new homes each year for 10 consecutive years (the long-term average is 1.5 million). It'll take two years of eye-popping growth in housing starts just to come within reach of that target.

That's one reason why I included three housing-related picks in my latest Top 10 list (see link above): Hovnanian (NYSE:HOV), D.R. Horton (NYSE:DHI), and Mueller Water (NYSE:MWA). Even after their recent strong performance, each stock is still a compelling value at their current respective quote.

As with the emerging energy boom, investors shouldn't make the mistake underestimating the power of the move in housing. Despite recent increases in house prices, affordability is off the charts because prices overcorrected and interest rates are so low. The rent vs. buy comparison isn't even close, especially when you adjust for an average marginal tax rate. Housing will likely be an economic tailwind to 2020 and beyond. Note that the real estate cycle is wholly unlike the stock market cycle. Once real estate turns (either way), it moves steadily over a period of several years, with virtually no oscillation.

In sum, the economic pickup we're about to enjoy is due to cyclical forces (housing), to luck (shale -- woo-hoo!), and to American ingenuity (technology). The takeaway for investors: After six years of subpar economic growth following the credit crisis, things are about to get better. A lot better.

Disclosure: I am long GE, HOV, DHI, MWA. 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.