The stock market registered gains in 2013 not seen
since the late 1990s. Investors have cause to be
thankful. Looking forward, the question is, "Can we do
There is precedent for multiple years of double-digit
returns. Starting with 1995, the market registered
returns in excess of 20% for six straight years. Much of
the excitement was in the exploding field of technology.
The Internet was young but coming of age. Companies like
Microsoft, Oracle and Intel were growing rapidly,
reshaping the economy by developing technological tools
that were previously unimaginable. The supply of new
technology created its own demand. Products became
available that people didn't realize they needed until
they were available. It was a heady time.
Government policy was conducive to a bull market.
Congress and the Executive Branch worked together in a
bi-partisan manner, notably reforming welfare. Also, the
fiscal condition of the nation was rapidly improving to
the extent that the federal government was recording
budget surpluses. With the exception of a wobble in
1998, brought on by a Russian sovereign debt default,
the crisis of the Asian Tigers, and the demise of Long
Term Credit, a large hedge fund, it was a time of
optimism and prosperity.
Bulls say that there are parallels today with the years
approaching the turn of the century. Technology
continues to advance with social media leading the way.
Google, Facebook and Twitter impact the lives of
billions of people, letting them interact as never
before, enabled by powerful smart phones and tablets. We
would say, however, that the real game changer today is
the revolution in the domestic energy business. The
development of cheap shale oil and gas production and
reserves using horizontal drilling and hydraulic
fracturing is radically changing the cost structure of
Cheap, abundant shale oil and gas is transforming the
Unites States into one of the most competitive countries
in the world in which to invest and operate a business.
• The price of natural gas in the US is a third to a
quarter the price in international markets. As a result,
billions are being invested in export facilities that
well ship domestic gas overseas in order to capture the
• US based chemical companies which use natural gas
extensively as a key input, are now amongst the most
competitive producers internationally. This opens the
door to exporting production while also inviting foreign
capital investment in US capacity.
• Natural gas is a key component in the production of
fertilizer. Cheap gas has lowered prices to farmers
while at the same time enticing foreign companies to
invest in US capacity.
• Infrastructure spending is booming, responding to the
demand for pipelines and rail cars to move shale oil and
gas to market.
• The low relative price of natural gas versus oil
incentivizes the build-out of a fueling network to allow
cars and trucks to run on natural gas. We note that
transportation is the major user of oil in the US.
Switching to natural gas would lower costs, creating
savings for consumers nationwide. Not incidentally,
harmful emissions would be reduced, as gas burns cleaner
than gasoline or diesel.
• Foreign investment in the US is accelerating due to
lower operating costs, which increases competitive
advantage. According to The Financial Times (1/21/14),
the cost of electricity in the US, much of it generated
by natural gas, is half that of the European Union.
• Less dependence on foreign oil increases energy
security and helps lower the trade deficit. This should
support the value of the US dollar, mitigating
• Jobs, good paying jobs, will be created as the shale
The above developments, and others we have no doubt left
out, should be transformational to the US economy. This
could help underpin a bull market in stocks for the
foreseeable future. The combination of abundant oil and
cheap natural gas promises to lower operational costs,
spur capital expenditures and bolster corporate earnings
and jobs growth to an extent that the market has not yet
Despite the promise of the shale revolution, we point
out that unlike the 1990s, there is little comity in
Washington. The federal government is running
unsustainable deficits. Barring a change in spending
habits, long-term entitlement obligations are a serious
threat to the well being of the country, a situation
that could send shivers of fear down the spines of
investors at some point. Short-term, Congress needs to
approve a rise in the ceiling on government borrowing by
February 7. There might be a fight yet.
In the near term, bears point out that after a five-year
bull market, stocks are not cheap, that by being
forward-looking, markets have discounted what appears to
be a strengthening economy. We are sympathetic with this
point of view. However, we note that it was 1996 when
then Fed Chairman Greenspan scolded investors about
"irrational exuberance"; the markets rallied into 2000.
The lesson: markets, both bull and bear, go to extremes
on the up side and down.
So, while we would not be surprised by a meaningful
correction in the short-term, we remain optimistic as we
look further into the future. An encore is not out of
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