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8:30 AM EST Friday, February 15, 2008: The message today is simple: Buy energy (oil and alternative). Sell financials. I watched Cramer pound the table last night for First Solar and I thought the next bubble is really beginning.

First Solar designs and manufactures solar modules using a thin film semiconductor technology. Its solar modules use a thin layer of cadmium telluride semiconductor material to convert sunlight into electricity. This company is the "100 pound gorilla" of this business and is now actually making money (unlike most others). It's not cheap. It sports a P/E ratio of 109. But is growing fast. Sales in 2003 were $3.2 million. Sales in 2007 were $504 million.

The imperative of alternative energy is obvious: peaking oil, reliance on our non-friends for oil and oil's refusal to slump in price, despite a slumping economy. Go to Europe, you'll find the imperative in full swing, as governments provide one incentive after another -- from huge taxes on gasoline to mandated high prices for selling solar and wind-derived electricity back to the grid. Europe is light years ahead of us. Which is obviously why First Solar is building a tour line 100 megawatt plant in Germany and concentrating much of its business in Europe.

Go to the newsstand and pick up a copy of the latest issue of Harper's magazine. The next bubble, Eric Jansen argues coherently is alternative energy.

Janszen concludes his article:

The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations. . To create these valuations, I first examined the necessary market capitalization of existing companies; then, using the technology and housing bubbles as precedents, I estimated the number of companies needed to support the bubble. The model assumes the existence of nascent credit products that will eventually be deployed to fund the hyperinflation. While the range of error in this prediction is obviously huge, the antecedents—and more important, the necessity—for the bubble remain. The gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE (finance, insurance and real estate), meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.

I like bubbles. They're profitable and fun. Just remember to take your original investment out early on and let your profits mount with the bank's money. And don't forget stop loss rules. Here's a list of alternative energy companies:

And while you're at it, read my oil guru, Jim Kingsdale's latest posting on his web site, Energy Investment Strategies. He starts it:

I suppose this post should be titled, "Why you want to own long term oil futures." The following graph of "all liquids" supply and demand going forward five years gives us an basis to compare recent observations on peak oil by Matt Simmons, Charlie Maxwell and Chris Skrebowski, three very astute oil observers, and draw some conclusions. The graph represents recent IEA estimates of supply and demand. I found it in a discussion posted on HoweStreet.com. Here it is:

Jim continues:

Overall, the chart implies ample supply in 2008, a possibility of pinched supply in 2009, a squeeze in 2010, and a serious shortfall thereafter. Let’s see how it gets there.

First, non-OPEC oil production is expected to grow about 700kb/d in 2008 and by lesser but still positive amounts thereafter. Charlie Maxwell, on the other hand, has predicted that non-OPEC supply will peak in 2008. Compared with Charlie’s vision, this chart is extremely optimistic for 2009, a bit less so for 2010, and still optimistic for 2011 and 2012 by about 500,000 b/d. Charlie believes non-OPEC crude will decline on a net basis after 2008.

Second, biofuels growth is expected to be fairly minimal in 2008, about 300 kb/d, and then decline to almost nothing. This estimate is consistent with observations that I recently posted that were first published in Oil and Gas Journal, the thrust of which is that we have already seen the easy growth of ethanol, substituting for MBTE. The argument is that future ethanol growth will be contained by limitations on ethanol distribution and mixture capacities.

Third, natural gas liquids: these are oil-like deposits found in a form like natural gas when the pressure of an old field is declining. They have been a major source of oil-like liquids in the past two or three years and are projected in this graph to grow strongly in 2008 and 2009, but to become a negligible factor thereafter. Matt Simmons has written that natural gas liquids cannot continue to grow. The graph may be especially optimistic about 2009.

The final supply category is "OPEC Capacity Growth". This category does not forecast actual production but assumes OPEC is the swing producer and forecasts only its capacity to produce. That number increases 1 mb/d in 2008 and 2010, about 500 kb/d in 2009, 700 kb/d in 2011, and 350 kb/d in 2012 for a total of 3.5 mb/d over the five years. This number seems quite optimistic unless Iraq and Nigeria settle their political disputes and channel peace into oil production improvement. Saudi Arabia has indicated it will increase supply by 2.5 mb/d over this time frame, but that claim is not universally respected.

The Most Outspoken Analyst on the Street. This is a fascinating interview by Maria Bartiromo in the February 18 issue of BusinessWeek.

That red glow you see on Wall Street is the hot hand of Meredith Whitney, a banking analyst for CIBC World Markets who is fast making a name for straight talk amid the credit crisis infecting the financial markets. In late October of last year, Whitney predicted that Citigroup (C) would have to sell assets or cut its dividend. She also downgraded the stock to essentially a "sell." That report peeled $15 billion off Citi's market value in one day and, some say, helped usher then CEO Chuck Prince into an unceremonious retirement. On Jan. 15, Citi slashed its dividend by 41%. When I talked with Whitney on Feb. 6, she had just downgraded Goldman Sachs (GS) even though she's a big fan. And Whitney was expecting losses in the following week when major European banks report earnings.

Meredith Whitney

Another wild week for the markets. What's upsetting investors so much?

I think it gets tiring for investors to have bad news thrown at them for seven consecutive months. And so people a few weeks ago started to get optimistic, started buying stocks again. Then the bad ISM number came out. [The Institute for Supply Management's index fell on Feb. 5, registering a significant slowdown in services.] And also the massive disruption in the debt markets clearly is signaling that things are worse than people wanted to believe.

How tight is the credit market right now?
A major structured deal has not gotten done in seven months. People are afraid to do business because they're afraid to catch a falling knife. The receptivity of investors to buy anything that's not plain-vanilla high-grade debt is as bad as I've ever seen it.

What could turn this around?
The big disconnect is that there's no agreement between buyer and seller on any level. So sellers are holding on to aspirational valuations on securities. What we need to see is a true purging to get the system back to a state of restored liquidity. Because at this point there's no faith in prices because the financial institutions that hold most of these assets are in absolute denial.

In other words, they think there's a market and there really isn't?
Let's say people are holding on to a CDO they're carrying at anywhere between 30 cents and 50 cents on the dollar. But they're holding on to it and not selling it because they believe it's worth 60 cents or 70 cents on the dollar. To paraphrase [BlackRock's (BLK)] Larry Fink: An asset is only worth what you can sell it for. The fact that banks are not selling these assets and the fact that they have raised such dilutive capital to hold on to these assets at aspirational values shows how in denial they are. I mean, Merrill (MER), UBS (UBS), and Citi raised 20% in dilutive capital in the last three months.

Was it the right move for Bank of America (BAC) to acquire Countrywide?
On a longer-term basis, there's some franchise value there. On a short-term basis, it's less than ideal.

You called the dividend cut at Citi. What other dividends are in jeopardy?
You can't take anyone off the table because the loss curves have accelerated at such a pace from the third quarter to the fourth quarter that people's earnings are going to be in serious jeopardy this year. It's likely that many banks will have to take another round of capital raises, and Citi is certainly one of them. Wachovia (WB) just raised $3 1/2 billion last night. Bank of America raised over $13 billion last week. And at a certain point people might start to think, well, maybe it will simply be cheaper to cut our dividend.

Which firm has handled this crisis the best?
Without a doubt, Goldman Sachs. They started selling down their CDO positions in the second quarter of last year. Goldman was one of the top five originators of CDOs, and you'd never know it today because they have only $400 million in gross exposure. That compares with gross exposures of $30 billion and $40 billion for Citi and UBS. It's like being at a casino—you cut your losses. That's discipline. And superior execution is the single most impressive thing about Goldman. Are they so much smarter? I don't think so. I just think their execution is so much better.

But you've downgraded them.
I downgraded Goldman because it was my top pick for two years. And because it had so many richer opportunities than its peer group, it absolutely deserved the premium it commanded. Let's say it did close to 30% return on capital last year. In the first quarter of this year, it's going to probably do mid-teens ROE, and so the comedown is going to be significant for investors, and they may not choose to pay the premium they paid last year for the stock. Goldman will look more like its peers this year, and as a result I think it'll trade more like its peers.

Is it fair to say when you look at Bear Stearns, Lehman, and Merrill, investors are going to be able to buy these stocks at some point in '08 at much lower prices?
That's absolutely the case. Any stock you love you can buy this year at a much better bargain. And that's why people—individual investors, institutional investors, and corporate investors—are holding on to so much cash, because they're waiting for the opportunity. And there are going to be great buying opportunities.

Who hasn't seen the worst?
Citigroup, because there's nowhere for Citi to hide.

Favorite billboard:

This will make all grandpas feel warm and cozy.
A six year old went to the hospital with his grandma to visit his grandpa. When they got to the hospital, he ran ahead of his grandma and burst into his grandpa's room.

"Grandpa, Grandpa," he said excitedly, "as soon as Grandma comes into the room, make a noise like a frog!"

"What?" said his grandpa.

"Make a noise like a frog because grandma said that as soon as you croak, we're going to Disneyland!"

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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