Money and Investing Thoughts

U.S. economy contracted in fourth quarter – MarketWatch.

Revised figures show the U.S. economy had negative growth in the 4th quarter of 2007, signaling the start of a recession. If this is the case we are now into the 4th quarter since the start of the recession and approaching the average 10 month post WWII recession length. Note: the longest recession of the modern era is 16 months (twice).

Growth in the 1st quarter of 2008 was 0.9% and the second quarter is now quoted at 1.9% growth. It seems the U.S. economy is clawing out of the lows of late 2007 and early 2008. Let us see if the 2nd half of 2008 show enough growth to signal the recession’s end.

It appears this will be a modest pull back by historical standards but the pschological impact has hit the national psyche very hard. I think this recession has been rooted in the housing pull back which literally hits people where they live. Also, the current nature of the Internet feeds into the fears and negativity of many.

At this point both the stock and housing markets will be well on their way to recovery by the time many of the “it’s different this time” crowd give up on their pessimism. But isn’t is always so?

Silver Wheaton (SLW: 35.96 -0.69 -1.88%) has released their 2nd quarter results and they look a lot like the first quarter, flat earnings! When I wrote about the Q1 results I noted the company had been level at 9¢ to 11¢ per share earnings for several quarters and this quarter they made a field goal at 10¢ per share.

Listening to the conference call gave me a little more of a warm fuzzy about SLW. A non-cash charge reduced the net income by $5 million or about 5¢ per share. This charge, as I understand it, is against future income tax benefits and will never affect the actual cash flow of the company. Actual silver sales were also flat from 2007 and Q1 at 2.9 million oz. As silver sales so far this year have totaled 5.7 million oz. company management has reduced their guidance for 2008 sales from 15 million oz. down to 13 million oz. This is still 7.3 million oz. for the remaining two quarters of 2008, a 28% improvement on the first half of the year. From what I read and hear, I am a little skeptical they will hit the new lower number.

There are some positives for the slightly more distant future. Silver Wheaton inked 8 new contracts for future silver streams durning the second quarter, a couple of which will start shipping silver immediately. Also, Goldcorp’s (GG: 47.61 -1.09 -2.24%) Peñasquito mine is just starting to ship silver. This mine is expected to reach 8.5 million oz. of annual sales for SLW (someday!). SLW management is projecting 25 million oz. of silver sales in 2010.

My conclusion is: Silver Wheaton has a unique business model that should yield tremendous cash flow at some point in the future. The prospects for higher silver prices is just a silver lining to their model. At this time I am looking for the quarterly silver sales to bust out of the 3 million oz. per quarter range they have been in for the last 6 quarters. Until then this will be a trading range stock based on silver prices and market rumors. I would be very interested in the stock if it settles down to around $12 or lower, LEAP options could be an aggressive option.

Note: I currently have no position in SLW.

Each week I provide a review of the previous week’s performance of the WilderHill New Energy Global Innovation Index, symbol NEX. This information is provided by New Energy Finance. The NEX is the bogey for the PowerShares Global Clean Energy Fund (PBD: 25.709 +0.2514 +0.99%). These results are for the week ending on Friday.

For last week the NEX lost 5.2%, significantly worse than the NASDAQ and S&P500, off 0.7% and 2.0%. AMEX oil was down a similar 4.5%. The solar sector led the way down, retreating 9.3%. Three of the bottom five stocks were from the solar sector. Hydrogen and fuel cells was the only sector in positive territory, gaining 2.5%. Fuel cell maker Ballard Systems jumped 11.8% after signing a 2-year service agreement with Daimler for bus mounted fuel cell systems.

Here are the top and bottom stocks from the NEX for last week:

NEX top gainers since 22/07/08
GS Yuasa 6674 + 18.5%
Zhejiang Yankon Group 600261 + 17.7%
Verenium VRNM + 13.9%
Ballard Power Systems BLD + 11.8%
Meidensha 6508 + 11.0%

NEX top losers since 22/07/08
Solaria Energia y Medio Ambiente SLR - 27.6%
EnerNOC ENOC - 21.6%
Comverge COMV - 20.6%
MEMC Electronic Materials WFR – 16.1%
Roth & Rau R8R - 15.9%

Note: I have no position in any security listed.

Headwaters Inc. (HW: 2.81 +0.07 +2.55%) released 3rd quarter earnings this morning and their reorganization and new business growth appear to be on track. The company shut down their Section 45 renewable energy program on Dec 31, 2007 and have been entering some new business lines to replace the loss of the companies major revenue and profit generator. Headwater’s secondary business of building products has also taken a serious hit with the decline in housing construction over the last 2-3 years. I became interested in the company when I learned how they are attempting to take their renewable fuel (coal gasification) expertise into new areas to rebuild the company’s revenues and profits.

Any comparison with 2007 results does not give a good picture of where the company is going since a significant portion of the 2007 business no longer exists. I will pull a few figures from Q2 2008 for comparison to Q3.

• Total revenues: Q2: $172 million, Q3: $230 million, +33%
• Net income: Q2: -$9.2 million, Q3: $13.7 million, loss to gain
• Net per share: Q2: -22¢, Q3: 31¢, ditto

Thing are definitely going in the right direction and meeting the company’s guidelines that they will earn 60¢-75¢ per share for 2008. At this time, Headwaters is generating revenues from 3 business areas with a couple of others in the development stage.

Building Products: Q3 revenues of $129.3 million, up from $93.6 million in Q2, but down 11% from Q3, 2007. Gains Q over Q due to seasonality and not a turn around from the current building slowdown. New products are performing well in spite of the slowdown and gross margin was 27.3%.

Coal Combustion Products: Fly ash is a strengthening additive for concrete and concrete building materials. Q3 revenues of $83.2 million, essentially the same as 2007, and compared th $61 million in Q2, which was also level with 2007. Extremely environmentally friendly fly ash sales are staying level in spite of construction down turn and should be a future growth engine.

Coal Cleaning: Q3 revenues of $13.1 million, up 111% from Q2. 358,000 tons of coal sold compared to 192,000 in Q2. Average price of $48 per ton up from $40 in Q2. Headwaters now has 8 facilities in various stages from start up to full operation and is on track to have at least 10 operating by the end of 2008.

The next revenue source to come on line will be a recently completed, joint venture, hydrogen peroxide facility in South Korea.  Headwaters is working on several other technologies, primarily in energy utilization, that could produce future revenue streams.

Headwaters appears to be on track to achieve the goals that prompted me to add them to this site’s Special Opportunities Portfolio in January 2008. The share price has dropped about 14% since then but has traded as high as $15 this year. I am looking for a share price in the $20′s in the next couple of years.

Note: I have a long position in HW.

While reading through the WSJ coverage of the recently passed housing bill (not yet signed by the President), this line caught my eye. Should definitely push the demand side.

First-time homebuyers purchasing a home between April of this year and through June of next year would receive a tax credit for 10% of the value of their home, up to $7,500,

Congress Passes Housing Bill – WSJ.com.