5 Reasons for Optimism

5 Reasons for Optimism

The Malthusian Pessimist vs. the Cornucopian Optimist

The Best Stock to Buy Now

For my first column of the New Year, I want to lead with a quick broad reminder of why, despite all the problems the media bombard you with daily, there are great reasons for optimism.

1.  Americans are beginning to understand the enormity of the problem posed by our high levels of debt—a problem recognized is a problem half-solved—and they’re beginning to take steps to solve it.  On the individual level, people are saving for major purchases, instead of just buying them on credit.  At the state level, even the governors of both New York and Massachusetts—typically tax-and-spend Democrats—are planning to freeze the pay of state workers this year.  And at the Federal level—the biggest and therefore slowest—there’s growing resistance to raising the federal debt ceiling, as well as increasing talk about austerity.

2.  The move to reform our education system is well under way, as people realize that we’re not getting our money’s worth; we spend more per pupil than any other country but one (tiny Luxembourg), yet our students rank nowhere near the top in achievement.  Key to this reform is the one metric that has long worked in business—accountability—combined with a growing awareness that education should serve the students first and the teachers second.

3.  The Internet continues to change everything, above all by enabling the rapid exchange of information.  Until now, the biggest beneficiaries have been visionary corporations—Apple, Amazon.com, eBay, Google, Yahoo— that have profited from the revolution, as well as all the customers who buy from them.  In the years ahead, I’m hopeful that entities like Facebook and WikiLeaks can use the Internet to contribute to the cause of better understanding, reduce the divisive effects of religion and keep politicians honest.

4.  Obesity has become increasingly recognized as a major factor in numerous other health conditions from diabetes to heart disease to arthritis, and by extension, a key contributor to our irrationally high health care costs.  Happily, the movement to reverse our national trend toward obesity is gaining momentum, and the beneficiaries of this reversal will include all of us.

5.  The prohibition against marijuana has burdened our legal system, crowded our jails and funded criminal enterprises on both sides of our southern border, while exacerbating the problem of illegal immigration as well.  Happily, the trend toward decriminalization/legalization/regulation and finally taxation is well under way, and as this trend continues, I believe benefits will accrue to numerous parties, not least the deeply troubled budget of the State of California.

You may have noticed that my list included nothing about high gas prices or alternative energy or global warming.  For that, read on.

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Last week’s New York Times had an interesting column by John Tierney, recounting the result of a five-year bet with Mathew R. Simmons, author of the book Twilight in the Desert; The Coming Saudi Oil Shock and the World Economy.

In brief, five years ago, Mr. Simmons bet Mr. Tierney that over the course of 2010, oil prices would average at least $200 a barrel in 2005 dollars … up from $65 a barrel in 2005. Mr. Tierney took the other side of the bet, not because he had any particular knowledge of the oil industry, but because he had confidence in the record of economist Julian Simon, who as leader of the Cornucopians, was always willing to bet on optimism over doomsday predictions.

Well, the bet’s five-year period ended this past weekend, and I’m happy to report that Mr. Simmons lost.  The average price for a barrel of oil in 2010 was just under $80, which is the equivalent of about $71 in 2005 dollars—a little higher than the $65 at the time of the bet, but far below the $200 expected by Mr. Simmons.

Unfortunately, Mr. Simmons passed away in August at the age of 67, but the colleagues handling his affairs agreed the bet was lost and would be paid.

So what’s the point?

Not that Mr. Simmons was wrong, but that the theories of Julian Simon have been proved right again.

Julian Simon was the economist who in 1980 famously bet Paul Ehrlich, author of The Population Bomb, that the prices of any five commodity metals would decline over the following decade.  Ehrlich chose chromium, copper, nickel, tin, and tungsten, and sure enough, 10 years later, the prices of three of the metals were lower in nominal terms, while all five were lower in inflation-adjusted terms.

To Simon, scarcity was a human construct, and any temporary scarcity or rise in price was certain to eventually be solved by the ingenuity of people and markets, which adapt to the challenge with continuing innovation.

I said the same back in April, 2008, when I wrote, “Personally, I’m convinced the problem of Peak Oil is real.  But being an optimist, and a person who’s spent decades watching the market solve problems and fill needs, I believe the market, helped by engineers and scientists, will solve this problem, too.”

And my readers tended to agree.  In fact:

73% of you acknowledged the problem of Peak Oil and believed a solution would be found, generally through development of alternative energy sources.

20% of you denied that Peak Oil was a problem.  You claimed that further exploration and extraction would yield plenty of oil.

7% of you acknowledged the problem of Peak Oil and saw no solution.

Since then, we’ve had a global economic slowdown, which slightly dampened demand.  More importantly, huge new oil fields have been discovered off the coasts of Africa and Brazil.  New oil sands projects in Canada now provide more oil to the U.S. than Saudi Arabia does! And we’ve seen the discovery of unprecedented amounts of natural gas, which is now selling for less than half its price of five years ago.

This natural gas is so plentiful that the Energy Department is predicting low prices for gas and electricity for the next quarter-century.  Furthermore, it’s predicting that as this far cleaner fuel gains market share, the rise in greenhouse gas emissions will ease.

In short, in less than three years, the market, with the help of engineers and scientists has helped solve the problem, such as it was.

Now, it remains true that the earth is a finite reservoir, and thus the supply of fossil fuels is—strictly speaking—limited.  But lack of knowledge about the specifics of the solution to that challenge does not mean there will be no solution.

We do know that no new coal burning plants will be built in the U.S. in the years ahead, but nuclear power plants will blossom, both in the U.S. and all over the world.  Machines—particularly automobiles—will continue to gain in efficiency.  Alternative sources of energy—particularly non-polluting renewable sources like solar and wind—will be harnessed in increasingly efficient manner.  And there will be plenty of energy.

Yet there will continue to be doomsayers.

But Mr. Simon reminded people that history was full of doomsayers who’d predicted that the shortage of this or that commodity would spell the end of progress, if not civilization, and that in every case, they’d been proven wrong.  Thus even if you could not reason out exactly how a current shortage would be solved, you should still have confidence that the ingenuity of men and markets would solve it.

Simon wrote, “The material conditions of life will continue to get better for most people, in most countries, most of the time, indefinitely. Within a century or two, all nations and most of humanity will be at or above today’s Western living standards. I also speculate, however, that many people will continue to think and say that the conditions of life are getting worse.”

Which brings me to this issue’s recommendation.  It’s Oil States International (OIS), a stock that’s been strong since September and shows no sign of slowing down as we enter the New Year.

Oil States International was recommended in Cabot Top Ten Weekly back on December 20, and here’s what editor Michael Cintolo wrote:

“Oil States International has been making headlines recently with its acquisition of The MAC, an Australian company that provides “mixed-use villages” for workers in key natural resource regions. The acquisition fits perfectly with Oil States’ business, which centers on providing housing, rental tools, piping, land drilling and products for deepwater oil and natural gas production and pipelines. Oil States is a global company, but 69% of last year’s revenues came from the U.S. and 22% from Canada. That’s why the Australian acquisition is a significant one, widening the company’s reach. The company has been on a solid roll in the last two quarters, with earnings growth of 69% and 66%, on revenue growth of 30% and 29%, respectively. With oil prices on the rise, and a broad service offering, Oil States International looks like a solid player.”

The stock was trading at 63 when that was published, and it’s now at 65, still base-building in what promises to be an eventual breakout toward 70.  On the downside, there’s support at 58, so if you’re lucky enough to get the chance to buy on a correction, I recommend you grab it.

You could buy OIS here and hope for the best or you could subscribe to Cabot Top Ten Weekly to get Mike’s latest thoughts on this leading stock and others. Get started today!

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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