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.

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, stop back tomorrow.

Thus Ford became the only U.S. President who was elected neither President nor Vice President, while Nixon, who was (and remains) the only person to be elected twice to both offices, became (and remains) the only President to resign!

But at least one of Nixon’s greatest achievements has born wonderful fruit.  When Sino-Soviet relations began to deteriorate, Nixon saw the opportunity to get China on our side, and in 1972 he visited Mao Zedong in Beijing.  Thirty-eight years later, China is a key trading partner of the U.S. as well as the second-largest economy on earth!

Thirty-eight years ago, no one imagined this state of affairs was possible.
Similarly, none of us can know what’s coming 38 years down the road.  But I think it will be good!

Editor’s Note: One effect of Nixon’s visit and the booming Chinese economy is that Cabot China & Emerging Markets Report remains the top-performing investment advisory of the past five years, with a compound annual return of 17.9%

For more details, click here.

—

When I was in eighth grade, I took third place in the school science fair with an exhibit on Bernoulli’s principle.  Named for Daniel Bernoulli (1700-1782) the principle states that as the speed of a fluid increases, pressure decreases … and thus explains how airplanes fly.  My exhibit included a model airplane wing that lifted when a fan was turned on.  (My father was trained as an aeronautical engineer, so he was a valuable “resource.”)  And my prize was a hardcover copy of the book, The Way Things Work, which was chock full of two-color illustrations and explanations about how things worked.  These things included refrigerators, magnets, sewing machines, forklifts, televisions, X-rays, deadbolts, AM radios, machine guns, submarines, etc.

I loved that book … and I still have it.

But that book is useless at explaining how all the new stuff in my house works, from the Comcast router I have to restart at least once a week, to the Moxi DVR that enables me to avoid watching commercials, to the iPhone that’s much more than a phone.  Happily, the answers to all my questions about them are on the Internet.

And these days I’m less interested in how machines work, and more interested in how people work (or don’t), and in how the institutions made up of people work (or don’t).

So today I present my personal list of five programs that aren’t working, followed by five good things.

Five Programs That Aren’t Working

1. Our national balance sheet is a mess, and destined to get worse unless politicians make some hard choices.  My suggestions include progressively raising the retirement age, as well as the age at which people qualify for Social Security and Medicare; simplifying the tax code; putting the responsibility for health care back on the individual; and reducing spending on foreign military entanglements.  And why can’t our politicians do these things?  Because they care too much about being re-elected, and about pandering to the constituents of their home state.  Thus the country suffers.

2. We continue to consume excessive amounts of oil, both domestic and imported, clinging to the habits of an idealized past while reluctantly being dragged to a future that promises limitless non-polluting energy from the sun and wind.  The impediments to progress include lobbyists from our massive oil and gas complex as well as all who benefit in the short term from their money.

3. Obesity rates are still rising in this country, costing us untold billions in healthcare dollars, yet we’ve been unable to halt the trend.  Why?  Because the power of the corn industry, the soft drink industry, the processed food industry, the fast-food industry and all their lobbyists in Washington are too influential in Congress.  There’s much more wrong with our health care/insurance system but curing the obesity problem would provide the greatest benefit.

4. I’ve been delayed by a lot of stimulus-funded road projects over the past year, but the stimulus isn’t working as promised.  Why?  It’s not simply because those projects themselves have caused untold millions of hours of delays.  It’s because baby boomers have passed their point of peak consumption—not coincidentally at the same time housing prices peaked—and now they’re preparing for retirement.  It’s because the lingering recession and stubbornly high unemployment have increased the sense of uncertainty among consumers, and thus increased their reluctance to spend.  And it’s because businesses recognize this slowing demand—as well as increasingly costly and restrictive regulations—and conserve cash to get through the hard times.  Implementing the suggestions I made in #1 would help.

5. For far too long we’ve allowed our public education system to be controlled by the interests of the employees (the teachers), not the customers, and the results has been substandard achievement compared to other developed countries.  Happily, the Democratic establishment, heretofore the biggest beneficiary of the unions’ money, has begun to recognize the problem, and to see the gains that can be achieved through implementing systems of accountability, but we have along way to go.

Criticizing is easy, and I don’t want to be labeled a crank.  So I’m going to finish today with five good things.

1. Apple (AAPL) makes great products that make our lives both more productive and more enjoyable.  And that’s great progress.  The stock has been building a base around 260 for nearly four months, which is a positive technical pattern.  Furthermore, editor Roy Ward of Cabot Benjamin Graham Value Letter wrote this last week:  “CEO Steve Jobs and company have a unique ability to identify what customers want, produce easy-to-use products and launch huge marketing campaigns to create demand.  The iPad helped sales soar 88% and EPS more than double in the latest quarter. In addition to gaining market share in the computer, smart phone and tablet sectors, we believe Apple will launch a new subscription-based TV service and a new multi-task mini-computer. We expect Apple’s earnings to grow at a rapid 24% pace during the next five years. At 14.7 times our one-year forward EPS estimate, AAPL shares are clearly undervalued.”

For more, click here.

2. Momentum to undo our national prohibition of marijuana is growing, fueled in part by the hunt by cash-strapped governments for new sources of revenue.  Taxes on the sales of marijuana fit the bill, and as production chains are institutionalized, I look forward to a growing standardization of quality as well as diminished funding of criminal gangs, which will bring marvelous unanticipated benefits in both the U.S. and Mexico.

3. Momentum behind the solar power movement is picking up again, driven not so much by government action as by the actions of forward-looking individuals and institutions who don’t mind paying extra right now to get a clean source of power that will be insulated from higher oil prices in the future.  While there are many attractive companies in the solar cell business, I think one of the smartest plays is a company that makes the electric inverters that efficiently process that power so it’s suitable for the home, business and/or the electric grid.  The company is Power-One (PWER), and here’s what editor Michael Cintolo wrote in a recent issue of Cabot Top Ten Weekly.  “Not long ago, the bulk of its business involved manufacturing AC/DC and DC/AC converters for companies in the telecom, computer and office equipment markets.  But between competition and the great slowdown of 2008, 2009, the company was getting killed.  Then the booming market for alternative energy presented a market opportunity, and management took aim at that market and hit a bull’s-eye!  A year ago, 18% of the company’s business involved making inverters for solar power farms and wind power farms, so that their energy could be distributed to the grid.  Now that percentage is 66%, and rising!  Revenue growth is accelerating, analysts’ earnings estimates are being raised and investors are climbing on board.”

When Power-One was first recommended in Cabot Top Ten Weekly in mid-July, the stock was trading at 9.  Now it’s at 13, but still attractive on normal pullbacks.

For details on Power-One and other top stocks, click here.

4. It took a near-death experience, but the auto industry in this country is finally taking the search for the successor to the internal combustion engine seriously.  And one interesting aspect of this movement is that the Europeans couldn’t do it, even when motivated by years of high gas prices.  Now, good old American Ingenuity is bringing us Tesla, the Chevy Volt, and numerous companies involved in designing and manufacturing batteries and control systems.

One of these young, fast-growing companies is Polypore International (PPO), which is an expert at designing and manufacturing membranes that allow very small particles like ions, gas molecules and fluid components to pass through in a controlled way. These membranes are used to electrically insulate the two sides of batteries (both lead-acid and lithium), and battery-makers are lining up for Polypore’s material.

The stock (PPO) was recommended by editor Brendan Coffey of Cabot Green Investor back on June 18, when it was trading at 22.  Now it’s at 28.

Details here.

5. Finally, eBay is well known as one of the greatest online retailers, a great resource for both institutional and individual buyers and sellers of everything from old baseballs to new cars.  Far less well known, and with far greater investment potential, is the eBay of Latin America, MercadoLibre (MELI) (the name means free market).

Paul Goodwin, editor of Cabot China & Emerging Markets Report, recently wrote, “MercadoLibre is an Argentinean company that provides the same kind of e-commerce transactions as eBay, including fixed-price and auction sales, dedicated marketplaces for cars, boats, planes, real estate and services, and an online payment platform. The company was founded in 1999 and it’s the largest online trading platform in Latin America. It has operations in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Portugal, Uruguay and Venezuela, with recent expansions bringing Costa Rica, the Dominican Republic and Panama into the mix.  The Marketplace has nearly 43 million registered users and sales are expedited by a very efficient search engine, leading to gross merchandise sales of $2.7 billion in 2009.  MercadoPago, the company’s online payment system, processed over three million payments in 2009 and the division contributed 26% of revenues for the year.  The drivers for future growth are expected to be 1) increasing penetration of Internet access in Latin America as the area’s telecom infrastructure builds out, 2) strong GDP growth in the region, which will increase disposable income for its large population, and 3) the introduction of MercadoShops that offer sellers their own online sales channels, and MercadoClics, a search platform that uses sales of display ads and a program like Google’s AdWords to generate income.”

When Paul recommended the stock, MELI was selling at 64.  Now it’s 68.

Click here for details.

When we review the decade past,
Since Y2K came storming through,
We see 10 years of trouble, which
Boils still, like a witch’s brew.

Truth, the decade’s been so rife
With scams and major market troubles
History should face the facts
And call it just “The Age of Bubbles.”

Bubble One (The Rise of Tech)
Was bursting at the Decade’s birth
With dot.com billionaires brought low
As soaring stocks crashed back to earth.

Bubble Two (The Housing Craze)
Grabbed home investors like a fever.
Buy ‘em! Flip ‘em! Buy some more!
It’s safe–they’ll go up forever!

Decade One has also featured
Folks whose greed offends our senses.
Some of them have time to ponder
Behind walls and barbed-wire fences.

Some investors kept on thriving.
‘Gainst the odds they were all paid off,
Till the day they saw the perp walk,
Cops escorting Bernie Madoff.

Companies we’ve known and loved have
Disappeared like mists in summer
Lehman Brothers? Just a memory.
G.M.’s bankrupt? What a bummer!

Bright spots?  Sure there were aplenty:
Ugly shoes made Crocs a treasure,
iPod polished up the Apple,
Taser profits shocked with pleasure.

We’ve swapped Greenspan for Bernanke,
Put in “O” for “W,”
Watched emerging markets rising-
Now what will investors do?

We’re as blind as anybody
Can’t see through the future’s fog.
Yet we know this brand new decade’s
Stocks will leave us all agog.

Farewell to the Naughty Noughties.
Welcome the second decade’s reign!
We at Cabot wish our readers
Health and Happiness (and Gain!).

P.S.
Those who rated mortgage bonds
By any mark have dropped a rock.
I hope a wad of worthless bonds
Shows up with coal in their Christmas sock.