Thinking Ahead: Ten Years Out

One of the themes I've tried to engage readers in here, is that by playing some fairly obvious trends, and coupling those with reasonable valuations, is a relatively easy way to outperform the market.

One theme I've pounded on over the past one-and-a-half years is the emerging market theme. It doesn't take too much heavy lifting in the thinking department to realize that with soaring GDP growth rates of 8-12% annually in some of these countries, expecting their stock valuations to follow isn't much too much of a mental stretch, even for weak thinkers like me.

So, thinking ahead, and about 10 years out is a good target, it becomes much easier to think that an overweighted emerging markets position is likely to be both prudent, and very profitable. Now, the graphic above showing firestroms in California (currently displacing one million people) obviously suggests that this posting isn't about emerging markets.

That's correct - this is about alternative energy production. While climate change and global warming have been warned about and was easily readable in the popular media 20 years ago(Time Magazine, for instance, awarded Planet Earth as "Man of the Year" in 1989, due primarily to concerns about global warming), it's only recently that most people are finally waking up to the severity of the problem.

As the problem continues to grow in the public mind, so too will the demand for solutions. These will be invoked on a political and individual basis. As the negative consequences of inaction become more and more and more visible and the predictions more dire, many will begin making personal change AND demanding societal change. This is inevitable.

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What is also inevitable is major changes to our type of energy consumption and to the pattern of use. For instance, emerging economies will begin to use far more energy than in the past. This is good for them, but not good for the planet. The energy hogs of the planet - that's us in the western world - will finally begin to reduce consumption outright - not just on GDP weighted basis. Since we were "first in" to this pattern of inefficient energy use, it also is right that we strive to be "first out" of the pattern.

This brings us to our investment opportunity. Looking ten years, does anyone see a world in which the general populace isn't pressuring the politicians to fund alternative energy, to create incentives/disincentives to change energy use, and possibly even to restrict certain types of energy use? Perhaps rationing, a popular method for "spreading the pain" and acknowledging that we're all in this together, will become popular.

In any case, I personally cannot envision a world in 10 years where alternative energy isn't a significantly larger economic sector than it is today.

Of course, my much beloved ETFs provide a way to play this trend while avoiding single company risk. The recent launch of three ETFs targeting this sector might lead some to utter the usual cliques and say that this is a clear sign that this market segment has "topped". Yet the reasonable valuations, societal trends, and my common sense, tell me "no", that is not the case at all. And that is why I am willing to significantly overweight my portfolio to this segment.

While I do not pretend this is a comprehensive list, here are three ETF names in this sector:

Market Vectors Global Alternative Energy ETF (GEX) started trading on the New York Stock exchange. The fund, tracks the Ardour Global index (Extra Liquid), which is comprised of stocks in 30 publicly traded companies engaged in alternative energy production. These stocks are selected from a stable of 250 companies in this space. At least 30% of the names are not US-domiciled companies, and may therefore be attractive to those wishing some diversification out of the US currency. It is however, a relatively concentrated ETF, with 60% of the value being held in the top ten positions. Yahoo Finance shows the current PE as ~30.

Power Shares Global Clean Energy Fund (PBD) is based on the WilderHill New Energy Global Innovation Index. The Index seeks to deliver capital appreciation and is composed of companies that focus on greener and generally renewable sources of energy and technologies facilitating cleaner energy. The modified equal weighted portfolio is rebalanced and reconstituted quarterly. It currently holds 84 positions. It also has limited exposure to US companies, with only 26% of the ETF having US domiciled companies. Yahoo Finance shows the current PE as ~26, while information from PowerShares says the PE is ~42.

Finally, an all US domiciled companies is the First Trust NASDAQ Clean Edge ETF (QCLN)which started trading in February, covers five sub-sectors of the alternative energy industry: renewable power generation, renewable fuels, energy storage and conversion, energy intelligence, and advanced energy-related materials. The investment has above average concentration, with the top ten positions holding 55% of the value. It seeks to track the NASDAQ Clean Edge U.S. Liquid Series Index. Yahoo Finance reports the PE as ~25.

One caution with all of these ETFs is that they are presently quite small, none having assets of more than $100 million. But I predict that will change dramatically by the time 2017 has rolled around. Clean energy - a future whose time is now for the investor.



JW

The Confused Capitalist

Global Energy Demand and China

An interesting story in the New York Times magazine last weekend, regarding the growth in China of the car culture. It points to a growth like that in the early car years of America:

• Total miles of highway, now some 23,000, more than doubling what existed just six years ago;
• Year over year growth of car sales of 54%;
• Passenger cars on the road, now 20 million, compared to about 6 million in 2000;
• Government announced target of 56,000 miles of freeway by 2035 (the US has 46,000 miles of interstate highways);
• and by 2030 carbon dioxide emissions are projected to exceed those of the US.

Anyone who thinks that the demand for global fossil fuels will abate anytime soon, should also consider that the average American uses about 25 barrels of oil annually, versus 1.8 barrels in China and 0.8 in India. Those latter two figures are obviously going to move upwards at a rapid rate, considering those countries recent growth rates in the 7-10% range annually and the apparent embedding of the car culture in China particularly.

Which of course provides a long tailwind to investing in the fossil fuel industry.



JW

The Confused Capitalist

Energy Demand: Nuclear Renaissance?

As investors, it pays to be ahead of the rest of the investing crowd. Nuclear energy may offer one such option. While the focus of the Wall Street crowd today is oil and gas, future gains in uranium may vastly outstrip those remaining in the oil and gas field.

Today, it's estimated that, in addition to the 440 operational nuclear plants around the world, there'll be another 60 on-line to serve the growing world-wide energy demand, by 2020. Additionally, some environmentalists, such as James Lovelock, Ph.D., now embrace nuclear power as the only way to avoid complete environmental catastrophe. Add to that the obvious demand that will continue to occur as China's and India's 2.2 billion citizens become part of industrialized societies and the demand side of the equation is obvious.

What is less obvious is that the uranium industry has been undermining for years, perhaps even decades now. This deficit, currently estimated, at about 25 million pounds annually (of a total demand of 150 million pounds), has been met by the over-stockpiling of uranium from the 1950s-1970s, and by the decommissioning of Soviet nuclear weapons in this decade and the 1990s.

However, the "well is running dry", so to speak as these sources are themselves being drained. All of which leads us to a long-term investment thesis, of uranium producers experiencing very good gains for a lengthy time period, perhaps as long as ten years. Uranium mine approvals, world-wide, are subject to obvious governmental red-tape and this is only overcome at considerable time and expense.

In the interim, sit tight and enjoy what I believe will be superior medium to long term investment gains. The largest global producer of uranium is Cameco, on the NYSE as "CCJ".


JW

The Confused Capitalist