Is It Real Estate Or Energy. It appears that energy prices have replaced real estate as the main concern for consumers. No doubt, residential real estate has dropped drastically in many areas; however, real estate recessions generally create their own recovery as builders quit producing new product and the excess inventory is absorbed. Of course, you can say its different this time and you would be right but it's different every time. The real question is how is it different? I have been watching builder production and the amount of new homes produced has slowed to a crawl as builders are more concerned about disposing of spec inventory than they are about opening new projects. As of March, year-to-date single family building permits were down 43% from last year. Condo and townhouse permits were down almost 70% from last year. Considering the fact that 2007 was also a down year, this could be highly significant. Land values are also dropping as a result of these changes. It may take awhile to start, but I believe residential prices will be recovering over the next two years.
What About Energy? While I doubt the dire predictions about the effects of "global climate change," I can't say I'm not concerned. My position is that there is little we can do about it. Even the most pessimistic of scientists, admit that we are in a position to control less than a third of these changes. What I am more concerned about is the fact that we are sending billions of dollars to the middle east where most people hate Americans and their way of life. Sending our president to beg OPEC leaders to increase oil production is futile when we do nothing to exploit our own energy reserves. Those opposed to exploiting these reserves have little input as to how we can control our own destiny without huge effects on our way of life. Those of you who believe in government regulation to reduce fuel consumption have only to look at some of the things they have tried in the past to get an idea of how effect these regulations are. Consider the 55 mile per hour speed limit that we imposed during the 70's crisis: On a 1000 mile trip, driving 55 instead of 70 increases travel time by 3.9 hours. If we assume that gas mileage increases from 20 miles per gallon to 25, we save 10 gallons of gas, $40 dollars at $4.00 per gallon. This amounts to slightly over $10 per hour. If there are two people in the vehicle, that is $5 per hour each. Very few of us work that cheap. Other maneuvers include going to daylight saving time year round. I fail to see how that saved any energy at all. Then we have ethanol, which has received the benefit of thousands of dollars of government subsidies. When we consider the energy it takes to produce ethanol and it's reduced fuel efficiency, we realize that the overall effect is negative. All we have done is driven corn prices out the roof and decreased the world's food supply.
Potential Solutions. 1. Consume less energy. Higher fuel prices will cause this to occur naturally, not only in the energy markets but in numerous other markets as well. While some reduction in consumption is a good idea, the real question is what will it do to our economy? It could be devastating if reduced consumption is the only answer. 2. Drill for more oil and natural gas. The majority of Americans are in favor of this but face stiff opposition from those who believe it will harm the environment. The most effective argument I have heard against opening up new areas for exploration (Anwar and offshore) is that oil companies aren't utilizing many of the areas available to them now. Instead of exploiting these fields, the oil companies are repurchasing their own stock. Those who wonder why this is happening need only to think back to the late 80's when OPEC flooded the market with oil in order to eliminate marginal producers. Oil prices dropped by 80% and oil companies, who had invested billions in new fields, could not utilize that production because it cost them more to get the oil out of the ground than it was worth in the marketplace. That could happen again since middle eastern oil costs $6-10 per barrel to produce. This is a fraction of what it costs for our domestic reserves. 3. Utilize nuclear energy. That could be a tremendous benefit but many environmentalists are opposed to this idea. 4. Use more coal. Again, we have a tremendous opposition from environmentalists but we have a lot of coal and wider usage could reduce our dependence on foreign oil by a large amount. Which of these paths should we take. My opinion is that the only correct answer is all of them. Our current dependence imported oil is too dangerous to be allowed to continue. We have to do every thing we can to reverse these trends or our way of life will disappear.
How Do These Trends Affect Our Investments. I am wary of the stock and bond markets and am sitting on more cash than ever. Of those investments I hold, most are high dividend stocks which have been hammered in the current downturn; however, dividends remain solid at this point. I am investing in the energy markets. Companies such as Marathon Oil are heavily involved in exploration in the Bakken Field which is touted by some as having huge potential. I still want some exposure to the oil service industry. Companies in this area aren't cheap but they can profit heavily from increased drilling activity when, and if, it occurs.
June Has Been A Busy Month. I have been heavily involved in things like my daughter's wedding, selling a long-held real estate investment, and concern over serious illness of a family member. I have not posted on this site as much as I would have liked. I am still available to visit with any of our clients who need extra help.
