The Bad News Is Good News

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The stock market was buffeted on Friday by what looked like bad news.

Wholesale prices rose sharply in June on the strength of higher gas prices.  The spread between the “world” price of oil, the “Brent North Sea” price, and the U.S. price of oil, the “West Texas Intermediate” price, has been cut to just $4, from about $22 last December.

As gas prices have risen, consumer confidence has fallen. The July consumer confidence number, tracked by the University of Michigan, ticked down a fraction. 

The reaction of the markets has been the correct one. The S&P Index actually rose. So did the Dow Jones.

What do the pros know that you don't? Why should you bet on rising stock prices in the face of all this "bad" news?

Here's why. 

High oil prices are good

When oil prices rose in 2009 it was bad for the stock market. Now it's good, because the U.S. supply situation has changed radically. Even OPEC has been forced to take notice, expecting its demand to slip by 300,000 barrels/day next year.

U.S. production was 1.83 million barrels in 2008, but that rose to 2.38 million barrels/day by 2012. The production rate has actually ticked up from there through 2013.  The same thing has been happening to natural gas, to the point where the U.S. is now self-sufficient, with many drillers flaring vast amounts of the stuff in North Dakota's Bakken when they can't get it to market.

The oil industry has responded to this increased supply by dramatically increasing its ability to transport and export the stuff. Pipelines are now reaching more suppliers of both oil and gas, and stretching on the other side to export-oriented refineries.

Thus, oil and natural gas prices are both rising, thanks to refiners' ability to export refined product and take as much as drillers can supply. Natural gas prices are still low, but should rise from $4/mcf, as more truck fleets convert to the fuel and electric utilities commit to it.

But this is all good news for the U.S. economy. Instead of sending $100 out of the country for each barrel of oil produced, and $4 out for each mcf of natural gas, we're keeping that money here. The pipeline and rail assets being built to move the new supply means capital expenditures for U.S. companies, and jobs for U.S. workers.

Money stays here

You can see this clearly in the action on small Exploration & Production (E&P) companies like Sanchez Energy (NYSE: SN), run by a one-time Democratic candidate for Texas Governor named Tony Sanchez. Sanchez Energy has been very active in the “Eagle Ford Shale” play, a long line of rock deep underground that is brittle enough to produce well when crushed or “fracked” by a combination of sand and water. The Eagle Ford play extends from South Texas in an arc to North Texas. In some areas it intersects a deeper, gas-only play known as the Austin Chalk. 

When Sanchez drills on a rancher's land, he pays a leasing fee that can amount to a few thousand dollars an acre, and a royalty of about 20% on the production. The result is easy to see on the streets of San Antonio, which was derided as “Podunk” in the last decade, but now has freeways filled with brand-new SUVs and pick-up trucks, many still sporting dealer tags.

This is also big news for banks in the area of the play, like Prosperity Bank (NYSE: PB), which had been buying small Texas banks for decades before the oil came in. Just since switching to the New York Stock Exchange in February, the stock is up 23%.

Since the play began in 2009 the stock has nearly doubled. In just the last year its assets are up 50%. The company's biggest problem is finding profitable places to stash the depositors' cash, as most no longer even need loans. 

Incentives remain

Money paid for gas and oil now stays here, but because prices have recovered it also means that there remains plenty of incentive for renewable energy in all its forms.

The cheapest form of renewable energy, of course, is efficiency. Car makers, appliance makers, and makers of industrial goods can now justify their own prices based solely on the energy they save. The new units also create less pollution. This keeps a lid on future prices as well.

The recovery in U.S. oil and gas prices is also great news for suppliers of solar panels, like SunPower (NASDAQ: SPWR) and First Solar. I've written about the latter before, let's focus on the former.

SunPower sold a majority stake to France's Total during the worst of the solar panel price war, but there remain shares on the public market, and they have risen 464% in price over the last year. The company is now operating on a break-even basis, and is likely to beat last year's $2.4 billion in sales. The balance sheet is also reasonably healthy, with the debt-to-assets ratio down to about 25% and enough cash in the bank to pay off half that debt at a stroke.

SunPower, which announces its results at the end of this month, is also becoming a more-aggressive marketer, arguing that cheap Chinese panel prices with 15% efficiency aren't a good value against his panels with 24% efficiency.

A panel only represents 20% of the cost of a solar installation. The rest comes from installation, from system integration, and from permitting. In the U.S. these costs are much higher than they are in Europe, thus U.S. buyers need the 30% tax credit they get from the investment. Still, with the credit, 10 U.S. states have now reached “grid parity,” according to SunRun CEO Ed Fenster, whom I interviewed this week, meaning you'll pay less for solar energy than you will pay your utility company to deliver energy to you.

The recovery has legs

Combine the gains in higher oil and gas production with those from renewable energy – in all its forms – and you have a recovery that finally has legs, and that can deal effectively with $4/gallon gas. Factory production will continue to increase, the wealth effect will continue to grow in the oil-patch, and good-paying jobs are being created all over.

That's called an economic recovery, and that spells higher stock prices going forward. Whether you're betting on the narrow Dow Jones average, the broader S&P, or just select banking and oil stocks, you're in a pretty sweet spot. 

Dana Blankenhorn owns shares of Prosperity Bancshares. Members of the author's family have done business with Sanchez Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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