Tales From The Road: Oil And Gas Boom Return West Texas Town To Former Glory


by Dr Joe Duarte
October 31, 2012

Full Parking Lots Tell The Tale Of A Town In Boom Mode

Anyone who reads this column regularly is familiar with the notion that small towns, especially those with a well established university, and a regional health care hub have done better than other cities in the U.S. since the subprime mortgage nuclear bomb was detonated. Now, a year to the day in which we visited Midland, TX, it's almost as if we are in a different planet.

Last year, after this trip, we reported on Michael Lewis's book Boomerang. You can find the book in our bookstore.

The analysis is all about the subprime mortgage crisis and its aftermath, and it was fueled by the audio book which we listened to on the way to Midland for a tennis tournament. The reason the article mentioned little about Midland is because there was so little to mention at the time. Restaurants were empty. Department stores, even discounters, were empty. And there was little traffic on the streets.

This year, the picture is totally different. Restaurants all have wait times. And even during off hours, they are much more full than similar places in Dallas and other places we've been to lately.

The reason is oil, and the positive consequences of the resurgence of the U.S. energy industry is clearly visible here. West Texas is rocking. People are working. And they are showing the signs of a "no worries" attitude, something we haven't seen in this part of the country for a long time. The place is relaxed. The troubles etched in the faces of people elsewhere are not to be seen here.

We spoke to a waitress who confirmed our observations. She told us that there are no really slow times for the restaurant, an outlet for a regional casual dining chain called "The Cotton Patch," which caters to the same crowd as Chili's but with a more down home flavor, and a better menu, in our opinion. We checked it out three times. One at lunch, one in mid-afternoon, and one at dinner. It was always full. For lunch we had to wait 15 minutes. Traffic never stopped coming in. The parking lot was just as full when we left each time as it was when we got there.

The scene was even more dramatic at Darden's Olive Garden located accross Loop 250 on the North side of town. The wait there was 50 minutes on Friday night. We left. There were people outside waiting to get in line to wait some more. There were no places to sit. The bar was full of diners and other people waiting to dine.

Marriott has built a multi-hotel complex on the West Side of town, near Midland Road. The traffic in that area was robust. And all of the hotels had plenty of cars in the parking lot. We stayed at the Downtown Double Tree. Last year it was dead. This year, it was packed. The bar was full every night as we lugged our tennis gear and our worn out selves up to our room.

We spoke to an emergency room doctor from College Station, TX, home of Texas A & M. He told us a similar story, reversing our June 2012 analysis of that city. He says that the oil boom has reached College Station and it's generating business for every one in town, including him. He told us about the increased number of trauma cases he is seeing now, as oil field accidents are being added to his menu of work. You can find the June 2012 analysis here, and the highly contrasting June 2011 analysis here.

In fact, anywhere you see oil derricks pumping, or the high rise platforms that extract natural gas from shale rock, you can bet that there is a better economy in that place than there might have been a few years ago. It's becoming quite prevalent now and has been the case in several places we've visited over the past few months.

The real question is whether this rebirth of the oil industry is going to truly become the basis for a new economic rebirth in America. Much of that has to do with who wins the White House and what comes out of Congress.

It's clear that when there is an industrial boom of some sort, the entire economy wins. That was evident in the boom years of the Internet, and it's becoming increasingly clear in the smaller cities we've visited over the past few months where oil and natural gas have recovered.

The fact that oil derricks in West Texas are pumping hard even at $85 oil tells us that either these producers don't know what they're doing, which is unlikely, or that the mainstream analysts aren't getting it right. Demand destruction is a frequently cited reason for oil prices to fall. Yet, what we see is stable demand. What is most likely is that demand has plateaued at a high enough level to keep even small mature fields in West Texas pumping.

Another interesting observation is that of casual dining in Midland. The restaurants that we visited, or were able to survey the parking lots for, were packed. Many of them during "off" hours. That's a sign of both disposable income and a busy schedule, where eating at off hours may be the best anyone can do because they are working hard.

Hotel traffic is clearly up in Midland. In fact, on the way to Midland, there is one small town with two Comfort Inn hotels accross the highway from one another. Next to one of them is an oil derrick. No kidding.

Even more interesting is the combination of wind turbines interspersed within the nearly fully bloomed cotton fields, creating a surreal landscape. At night, the hundreds of wind turbines on both sides of I-20 create an alien vision, as their red airplane warning lights on the sides of the columns that hold up the turbines cut through the otherwise dark desert. The scene was more reminiscent of a George Lucas movie than of a West Texas highway.

What's our point? Natural resources and farming are once again the bedrock of a fair number of economies. Natural resource booms do not happen without demand and are not without follow up developments in the rest of the economy. Beyond the service sector, there is some source of demand for energy that we are not fully accounting for. It's that unaccounted for demand that is not being factored in by the markets, at least not yet.

And our hunch is that unless what we saw in Midland is a very regional development, this is the phenomenon that may actually start to spread through the rest of the economy. It may still take some time to fully blossom. But under the right circumstances, politically, and dinamically, this could be an immense source of economic gains for the entire country at some point.

The S & P 500 (SPX) will hopefully start trading on Wednesday. The break from action of the next few days may or may not provide a new direction. The short term trading range is now between 1400 and 1422. The index is at least moderately oversold so a bounce is overdue. Wednesday and Thursday could well be up days of some sort. Friday, though, could be anything as the employment numbers are released.

Chart Courtesy of StockCharts.com

The S & P 500 (SPX) remained below its 50-day moving average, while small stocks also bounced back to some degree. Friday may be the first day when the market makes a big move toward 1422. But that remains to be seen, given big earnings misses from Apple and Amazon.com.

Chart Courtesy of StockCharts.com

The small stocks in the Russell 2000 index (RUT) will likely follow the S & P 500 in direction. As the election nears, it makes sense to watch what small stocks do. If there is a Romney victory, small stocks may be early clue providers as to what the market may be setting up as expectations for a Romney economy.

Chart Courtesy of StockCharts.com

The Nasdaq Advance Decline line (NAAD) remained weak. The lower high, lower low pattern did not reverse. This remains a negative for the market. Good rallies are built on good market breadth. That is just not happening right now.

Market momentum is still flat. The Nasdaq Hi-Lo line (NAHL) is in danger of breaking down. A failure of this indicator would be a clear signal that the market is in deep trouble.

Chart Courtesy of StockCharts.com


The price of oil and what we saw on the ground in West Texas don't jibe. Demand destruction does not seem to be registering in the oil fields. That means that either the energy industry is headed for a bust or that the market has it wrong.

The stock market is now on pins and needles. The effects of hurricane Sandy have to be factored into prices. This may be a non-event for stocks. But that is not certain by any means. The employment report, released on Friday, and the election will be the main events for the next few days.

Caution and a plan for whichever way things break will be needed here.

Trading Plan Review

Important: Please Read. Our special situation bond trade is now net short.

Our trading plan will focus on the present and the future. In the present we remain cautious. For the future, we are building a list of potential stocks to buy.

Currently we are hedged in stocks via the Short S & P 500 ETF. We have been raising cash, which has served us well. Things may change after the election, though, and we have to be ready for both an up or a down market.

Our energy portfolio is in cash. Our health care portfolio is in cash..

We are in cash in the gold market but have added a potential long entry. We are short bonds.

By the time the election rolls around, we would not be suprised if were 100% in cash.

Stock of The Day

U.S. Gasoline ETF (NYSE: UGA) and Darden Inc. (NYSE: DRI) Are At Crucial Points

by Dr Joe Duarte

Shares of the U.S. Gasoline ETF (NYSE: UGA) and Darden Inc. (NYSE: DRI) are in a stalemate, as the market tries to decide which way the economy will break.

Chart Courtesy of StockCharts.com

Gasoline and casual dining stocks are at opposite ends of consumer disposable income. When gasoline prices rise, people have less money to spend. One of the common things to be cut is going out to dinner.

That's why it's important to see how this relationship develops. Lately gasoline has fallen. But casual dining stocks have yet to rebound convincingly. Indeed, for Darden, it seems to be a very regional situation. On two occasions in the past three to four months we have reported that Darden's Olive Garden restaurants, one in San Antonio, and the other in Midland, both in Texas have been very busy.

Chart Courtesy of StockCharts.com

Last weekend, the wait to get a table at an Olive Garden in Midland was 50 minutes. In the summer, we had to wait a half hour to get a table in San Antonio.

In Dallas, we haven't seen much of a wait. Earlier in the summer, the action at Olive Garden in College Station, Texas was steady, but nothing like that in the previously mentioned two areas.

Gasoline prices have been falling of late. So we might be seeing some kind of rebound in traffic due to that. Although gasoline prices in Midland were at least 10 to 15 cents higher than what we've seen in Dallas lately.

There are several things to consider here. One is that Midland could be a unique situation. It is an oil, natural gas, and now clean energy, via wind turbines, boom town. This could account for much of the action at Olive Garden and other places.

We could be seeing the early response to lower gasoline prices and that has yet to register in the stock price of most casual dining stocks. The market has been worried about other things.

So that leaves us with the following. We have some interesting, on the ground, kick the tires observations. Traffic at Darden shops has been good for at least three to four months, at least in three cities in Texas. Over the past month, gasoline prices have been falling. That has not shown up in the price of casual restaurant stocks.

Based on our observations, we would expect some kind of bounce in casual dining stocks to start at some point. If there is no bounce, it's either because our observations are regional or if they are more widespread, then the market doesn't get it or it knows something that we don't.

Hurricane Sandy and the election could muddle this picture further in the short term as well. But the fact is that increased traffic is often the precursor to better earnings and higher stock prices. We'll be watching.

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Phone: 434 823-8181




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