Money and Investing Thoughts

I have a couple of positive topics I am interested in writing about today or over the next few days. However, the severe negativity surrounding the stock and real estate markets and now consumer confidence makes writing positive stories feel Pollyannaish. In my opinion, irrationality abounds, first entire sectors of the market were being driven down, now it appears that entire stock markets in most countries are feeding on the fear of a massive global economic slowdown. Yet oil prices keep going up as though a massive global economic slowdown would not reduce energy consumption! At this point, I am going th throw out a few random thoughts and get back to more specific topics later.

First, I do truly get entertained with the comments on articles concerning bad economic news. MarketWatch allows comments, and the disaster whiners (DW’s) just love a negative story. You got to wonder if any of them ever owned or will own a stock, mutual fund or home. My favorites are the ones predicting a multi-decade economic disaster. If you really believe that why are you even reading financial news?

On bubbles:

• Tulips were a investment bubble. (If you do not understand the reference, stay away from investing)
• Japanese stocks were an investment bubble.
• The Dot.com stocks were a investment bubble.
• Housing prices were a bubble.
• Fertilizer is not a bubble and prices and stocks will keep rising at 100% per year for at least 5 more years!

I find the stocks I own to be better values now than when I bought them, so at this point I see no option besides sitting tight. The up coming earnings reports should reveal whether these companies are truly in a slow down scenario (which I doubt) or the market has over reacted and many companies are still doing fine in regards to revenues and profits (my hope and belief).

Finally my favorite reason, or maybe its a pair of reasons, the markets are “collapsing” is either the mismanagement of 8 years of Republican leadership or the pending election of a Democrat President and his desires to raise taxes. So it is both the Republicans and the Democrats fault! I guess there really is no hope.

Obama Camp Closely Linked With Ethanol – NYTimes.com

The New York Times article linked above gives some interesting background on Barack Obama’s support of ethanol policies and some of his advisors, like former South Dakota Senator Tom Daschle, who are from the farm belt and are strong ethanol supporters.

With Mr. Obama as the current leading contender for the U.S. Presidency, this is good news for ethanol producers. The article also highlights the marked difference between what Senator Obama and Senator McCain have said about renewable fuels. Also, remember Senator Obama is from Illinois, one of the major corn producing states.

Senator Obama voiced his support for the recently passed Farm Bill and his election would probably continue current government support for corn ethanol production.

The power and the glory | Economist.com

I found some interesting reading over the weekend, and much of it was directed towards the renewable energy. The longish article (read it all) linked above hypothesized the next boom in investments will be in the energy field, specifically renewables. I found the short history of economic booms to be revealing and I will attempt to give a quick outline here.

The modern industrial age was driven by the increasing availability and use of different energy sources. Coal to power factories and trains, oil increased the efficiency of ship, trains and gave us the personal mobility of cars and trucks. Electricity allowed us to light and power our homes and business efficiently. Natural gas provided a clean, inexpensive source of electricity and heat.

These low cost energy sources lead to the recent technological booms: Computing in the 1980′s and the Internet in the 1990′s. Now, however, the rising cost of energy has become a cost too big to ignore and threatens global economic growth.

The point of the article is we will see a boom in renewable energy to compare with the economic booms of the past. They make a very good point on how huge the prospects for future energy needs are:

A prize beyond the dreams of avarice

The market for energy is huge. At present, the world’s population consumes about 15 terawatts of power. (A terawatt is 1,000 gigawatts, and a gigawatt is the capacity of the largest sort of coal-fired power station.) That translates into a business worth $6 trillion a year—about a tenth of the world’s economic output—according to John Doerr, a venture capitalist who is heavily involved in the industry. And by 2050, power consumption is likely to have risen to 30 terawatts.

My interest and research into renewable energy started in earnest about a year ago, and I believe this industry is still in a very early stage. The initial investing excitement has passed for sector, but the true breakthroughs are still ahead of us. In comparison, the largest oil ETF (XLE: 73.64 0.00 0.00%) has $5.5 billion in assets, the largest renewable energy ETF, (PBW: 6.19 0.00 0.00%) has $1.6 billion. Of the stocks in the respective indexes, the median market cap in XLE is $48 billion, for PBW it is $3.7 billion, putting the value of renewable stocks at a fraction of the oil companies.

I believe we do not yet know where the true renewable energy breakthroughs will come. I am referring to those technologies that will let us replace a significant portion of our carbon based energy, as the Internet has replaced the TV and newspaper as sources of news. As an investor, I currently would go with an ETF like the PowerShares Global Clean Energy Fund (PBD: 9.70 0.00 0.00%). This will be a boom that takes decades to fulfil it’s destiny.

CSPresentationJune2008Final.pdf (application/pdf Object)

A couple of days ago Aircastle Ltd. (AYR: 14.14 0.00 0.00%) gave a presentation at the Credit Suisse Capital Goods Finance Symposium and they have posted the slide show to their website. The link above is a PDF presentation of the slide show.

Going through the slides, it is apparent that Aircastle is in fine shape with their leased aircraft. From what information I could find about the recent share price drop, there are two fears driving investors away from AYR. First, the general profitability problems for airlines with the recent fuel price increases and indication by many airlines to reduce flights. Second, a specific claim by one of Aircastle’s customers, US Airways, to turn in some leased aircraft. From the presentation it appears that the company will not have a problem keeping their aircraft leased and the US Airways jets are on noncancelable leases.

The financials for Aircastle appear strong. Their debt load is less than 75% of the book value of their jets and the book value understates the market value. They are able to get their aircraft that are coming off lease released at higher rates and already have over half of the jets coming off in 2009 committed with letters of intent. Finally, Aircastle is projected to earn over $4.00 in free cash flow per share (earnings + depreciation) in 2008, easily covering the $1.00 dividend. It looks like the company is conserving their cash, but I hope they start increasing the dividend soon.

I believe Aircastle has been hammered along with almost every stock I can think of that is in a financial business. At this time the market is not discriminating between companies in good shape and those that have problems. It is having a sell-off of all of them. I cannot predict when the carnage will end, but I added to my position in AYR yesterday.

Note: I have a long position in AYR.

Business – Home sales up for 2nd month – sacbee.com

I wrote on this subject last month, when the Sacramento real estate market had it’s first year-over-year (YoY) increase in houses sold in several years. I read and write about the Sacramento market for a couple of reasons. First, I lived there for about 5 years (until last fall) and I am very familiar with the market and area. Second, outside of possibly Las Vegas (lived there before moving to Sacramento!), the Sacramento region was one of the hottest markets before the recent melt down and may be a leader in the recovery.

For May, the Sacramento region had its 2nd month in a row of year-over-year home sales. Total sales of 3,420 were 6.3% higher than May 2007 and 8% higher than April 2008. The peak May sales occurred in 2004 with 6,761 homes sold. As would be expected, there are some positive and negative numbers in the month’s results. Here are a few of the more interesting facts:

• 51% of the closed sales represented previously foreclosed residences. 10,224 homes have been foreclosed on year to date and 5,448 repossessed homes have been sold.
• The for-sale inventory of 12,366 is the lowest in 14 months, representing a 4 month supply based on the May sales. Last month I reported 12,606 homes listed for sale.
• Median home prices were down, by county, 12% to 35%, directly proportional to the percentage of repos sold. Sacramento county, with 61% sales of foreclosed homes had the biggest median price drop.
• New home sales totaled 476 compared to 726 sold in May 2007.
• Investor purchases were 19% of sales, compared to 27% at the peak of the real estate boom.

It appears the region is working it’s way out of the real estate boom/mortgage meltdown hangover. I think the next step is getting to the point where repo sales are a small portion of total sales (maybe less than 25%) and find out where the “real” housing prices settle. I will close with this quote from a local real estate agent:

“There are so many investors and first-time buyers out there. … I don’t see that changing. I’m getting multiple offers on many of my good listings,” she said.