By David Nelson, CFA
For the last several months, I’ve been writing about the U.S. transitioning from a cyclical to a secular bull market. You’ve seen me on your favorite news channel talk about it, while imploring viewers to buy into it.
The singular most important part of my thesis is that the United States is on a path to energy independence by the end of this decade.
In an exclusive interview with CNBC’s Sri Jegarajah, Rex Tillerson, CEO of Exxon (XOM), the world’s largest publicly traded energy company said; “I think it is realistic that the U.S. could be energy self-sufficient by the end of this decade,” He went on to say, “We’re already the world’s largest natural gas producer (and) last year crude oil production surpassed levels not seen since the 1980s.” Ok, you don’t have to believe me but I think a Chief Executive Officer with detailed information of energy production and supplies from every corner of the globe, knows a little bit about the subject.
Alright alright, he didn’t say we’re in a bull market, I did. You’re reading this aren’t you? I had to get your attention.
Fracking
Think about it. Energy independence offers enormous advantages for our economy and society as a whole. The contribution to jobs has enormous potential. If I didn’t have a gig right now, I would be on a bus to North Dakota where companies are hiring. You don’t have to be a roughneck. When an industry takes off, all sorts of support jobs need to be filled. Perhaps, the key to our unemployment issues is for us as a society to be more mobile. Staying locked into a location because this is where you grew up and worked, is no longer an option. However, I digress.
S&P 500 Estimates
I’ve said in earlier posts, my base case for the S&P is to close the year up 7%, which would track earnings growth. Current consensus for S&P earnings this year is $117. We haven’t reported the 4th quarter but it looks like 2013 earnings will come in just over $109. Seven percent growth gets us to about 1980 in the SPX by the end of this year.
I’ve also said we have an outside shot at getting to 2100. For that to happen, we obviously need multiple expansion. A big part of the bull market of 2013 was based on multiple expansion, so where do I come off expecting more.
It’s staring us right in the face. If we don’t blow it, energy independence could end up acting as a peace dividend. As we shed our dependency on foreign oil, I believe investors will pay higher multiples for risk assets.
We’ve all seen movies that show far flung plots where renegade CIA or NSA operatives have plans to invade other countries. I suspect most spy agencies have all sorts of plans deep in the archives, where the U.S invades Saudi Arabia, Venezuela and maybe even China. They are War Games and nothing more. They cover what if scenarios, never to be used.
In the 1975 movie 3 Days of the Condor, J. Higgins (Cliff Robertson) tells young CIA analyst Joe Turner (Robert Redford) that we play games and the other side does to. I have to believe one of the games we play is; what if we run out of energy or OPEC regains its power and squeezes the United States? Trust me, we at least think about it.
As the father of a son serving in the military, the thought that our sons and daughters won’t go to war over oil has enormous appeal. With the threat of out of control energy prices diminishing over time, national confidence should build. I think we are in the early innings of this story. If my call is wrong, I believe it will be on the timing, not the direction.
Summing it up, the benefits of energy independence go well beyond markets and our economy. All energy platforms should be on the table. Oil, natural gas, fracking, wind, solar, coal etc. need to be explored and maximized to meet this goal. As a nation, we are more polarized than at any time since the Civil War. This singular goal should be something we can all stand behind.
