The next economic boom from the Economist.com
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: 84.90 -1.27 -1.47%) has $5.5 billion in assets, the largest renewable energy ETF, (PBW: 18.02 -0.21 -1.15%) 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: 25.85 -0.288 -1.10%). This will be a boom that takes decades to fulfil it’s destiny.
Filed Under Commodities, GrowthAircastle fears appear unfounded
CSPresentationJune2008Final.pdf (application/pdf Object)
A couple of days ago Aircastle Ltd. (AYR: 8.65 +0.15 +1.76%) 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.
Filed Under Fear, Income, InternationalSacramento housing sales up again
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:
Filed Under Real Estate“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.
News items of conflicting interest
Managers most negative on stocks in a decade, survey says - MarketWatch
UCLA economists stick to no recession forecast - SacBee.com
Today’s news readings are bringing up some interesting predictions and forecasts. I have linked to a couple of these articles above and I have a few comments.
First, the UCLA economists article. They repeated their forecast that, although the U.S. and California economies are slowing, they do see an actual recession. For California, they stated the slow down had not spread beyond the housing sector. The tone of the article really gave the impression of the UCLA economist starting to hedge their bets. The article ends with this quote from UCLA’s Edward Leamer, direcctor of the forecast:
“I am holding on to what is now a shaky view: no recession this year,” Leamer wrote.
The MarketWatch article gives us a chance to decide how contrarian we really are. The survey of fund managers from Merrill Lynch first had me asking: What kind of fund managers? So I dug up this from the ML website:
The Global Fund Manager Survey is a monthly report that canvasses the views of 300+ institutional, retail, and hedge fund managers around the world.
Now I at least have an idea of where these “fund” manager come from. Next I am very impressed on how much there beliefs can change in the period of a single month. Here are a few figures from the MarketWatch article:
61% of fund managers believe that the global economy will weaken over the next year, up from 39% taking this view in May.
36% now expect higher short-term interest rates. This view contrasts with May, when a net 4% of managers believed that short-term interest rates would fall.
42% of managers are now overweight cash, compared to a net 31% holding this view last month.
The point of the report is that these fund managers are the most bearish they have been in a decade. Going back to June 1998, the S&P 500 ended that month at 1134, dropped to about 940 in Sept. 1998 and was at 1464, end of June 2000. If it has been an exact 10 years, their bearishness may be justified, but it looks like we will bottom this summer this time and start upwards. I know, know, the past does not the future predict, but I thought the numbers were interesting.
Remember, at least in mutual funds, less than half the of the managers manage to beat the market, so are these 300 in the top half, bottom half or evenly spread? With the large changes in their beliefs quoted above, I tend to believe they have capitulated (late) to current market beliefs and the turn towards the plus side is near.
Filed Under Fear, GrowthNew Energy Finance - NEX - Weekly Review
Each week I review the previous week’s performance of the WilderHill New Energy Global Innovation Index, the NEX. For investors, the NEX is tracked by the PowerShares Global Clean Energy Fund (PBD: 25.85 -0.288 -1.10%). The index consists of companies in the clean and renewable energy fields with a global perspective.
For the week ending on Friday, the NEX was down 0.2%. The S&P500 was off just 0.1% and the NASDAQ gained 0.6% in comparison.
Solar energy was the best performing sector, gaining 3.2%. The energy efficiency was also in positive territory, gaining 2%. The worst performing sector was hydrogen and fuel cell producers, dropping 4.9%. Wind power was also becalmed, losing 3.6%. Biofuels and biomass were also off 1.7%, with ethanol companies pulling down the sector. See VeraSun Energy (VSE: 4.21 -0.25 -5.61%) below and it’s 22% loss.
Here are the top and bottom stocks from the index for last week:
NEX top gainers since 16/06/08
American Superconductor AMSC + 17.9%
Energy Conversion Devices ENER + 17.6%
First Solar FSLR + 13.3%
Capstone Turbine CPST + 12.0%
Kingspan Group KSP + 9.8%
NEX top losers since 16/06/08
Power-One PWER - 22.5%
VeraSun Energy VSE - 22.4%
Zhejiang Yankon Group 600261 - 16.6%
Xingjiang Goldwind Science & Technology 2202 - 15.6%
Arima Optoelectronics 6289 - 13.9%
Note: I have a long position in VSE.
Never ending bad news put me in a good mood
On Friday, I was about to write that it appears the continuing bad news makes me want to just go sit in the sidelines and wait for better days. The housing down turn is turning into a 4 year odyssey of pain for homeowners. Gas prices are causing SUV owners to trade in for Vespas. The recession that has been forecast by many actually appears to be arriving. Every time the stock market makes a modest gain, it gives it up and then some over the next few sessions. Stocks I believe are good values lose 50% of that value. Finally, the floods in Iowa strike close to home both personally and in regards to some of my investment choices. So by market close on Friday I was ready to pack it in for a few months.
Then I started thinking about some the the stocks that have been so disappointing and realized that opportunities like we have now do not come along very often. Many stocks are priced like their entire sector or industry is going out of business.
First, off many energy companies are going to do very, very well in this environment. My exposure is probably a little light here, but some the stocks in my Income Portfolio should do very well over the next couple of years. Take a look at (PWE: 31.82 -1.24 -3.75%), (NRGY: 25.38 -0.383 -1.49%) and (APL: 38.75 -0.41 -1.05%) for growing earnings and dividends. On the growth side, Headwaters (HW: 10.25 -0.19 -1.82%) is rolling out technologies to clean waste coal and process oil sludge into extra energy sources.
The market is also acting like every airline will go bankrupt due to high fuel prices. A well run profitable, fuel efficient airline like Copa Holdings (CPA: 26.56 -0.65 -2.39%) should pick up market share and continue to be profitable. My big loser so far is the aircraft leasing company, Aircastle, Ltd. (AYR: 8.65 +0.15 +1.76%). The stock price has been cut in half on the fears that some of their leasing customers will be turning in aircraft. One is US Airways, which has indicated it will return some leased aircraft, however, it has not been disclosed who those aircraft are leased from. At this time AYR stock is trading at 4.5 times last years earnings and is yielding 11% on a dividend that is 55% of net income and 35% of free cash flow. Global air travel would have to have a severe meltdown to make Aircastle worth any less than it is today.
Then in financials you have a company like City Bank (CTBK: 9.21 +0.13 +1.43%) of Linnwood, WA. This is a bank with 30+ years of growing profits, is conservatively managed and is in a part of the country that has not been hit bad in the real estate down turn. There is almost no news besides quarterly earnings reports on this stock, yet it has fallen from the low $20s to $12. When was the last time you saw a quality company with a PE of 4 and a yield of 5%, just because of it’s industry?
I see stocks growing earnings and getting their share prices hammered because the market believes the numerous problems mentioned above will affect all companies the same. At this time it looks to me like we may not see stocks at these bargain prices for a long time.
Note: I have long positions in AYR, CTBK, PWE, NRGY and HW.
Filed Under Fear, Growth, Value-
Amazon gift card link
Subscriptions
RSS
