Harry Newton's In Search of The Perfect Investment
Newton's In Search Of The Perfect Investment. Technology Investor.
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.
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.
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 antecedentsand more important, the necessityfor 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 technologyand the infrastructure
to support itis 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:
chart implies ample supply in 2008, a possibility of pinched supply in 2009,
a squeeze in 2010, and a serious shortfall thereafter. Lets see how
it gets there.
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 Charlies
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.
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.
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.
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.
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.
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.
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
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
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.
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.
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 casinoyou 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.
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.
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
That's absolutely the case. Any stock you love you can buy this year at
a much better bargain. And that's why peopleindividual investors, institutional
investors, and corporate investorsare holding on to so much cash, because
they're waiting for the opportunity. And there are going to be great buying
seen the worst?
Citigroup, because there's nowhere for Citi to hide.
will make all grandpas feel warm and cozy.
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
Grandpa," he said excitedly, "as soon as Grandma comes into the room,
make a noise like a frog!"
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.