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
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,
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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
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
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
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
7% of you acknowledged the problem of Peak Oil and saw no
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
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
of the solution to that challenge does not mean there will be no
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
how a current shortage would be solved, you should still have
confidence that the ingenuity of men and markets
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 (
, 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
"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,
Cabot Wealth Advisory