Posts tagged ‘alternative energy’

Get Out of Stocks!*


Get out of stocks!* Why the asterisk mark (*)? The short answer is there is a certain population of people who are looking at alluring record equity prices, but are better off not touching stocks – I like to call these individuals the “sideliners”. The sideliners are a group of investors who may have owned stocks during the 2006-2008 timeframe, but due to the subsequent recession, capitulated out of stocks into gold, cash, and/or bonds.

The risk for the sideliners getting back into stocks now is straightforward. Sideliners have a history of being too emotional (see Controlling the Investment Lizard Brain), which leads to disastrous financial decisions. So, even if stocks outperform in the coming months and years, the sideliners will most likely be slow in getting back in, and wrongfully knee-jerk sell at the hint of an accelerated taper, rate-hike, or geopolitical sneeze. Rather than chase a stock market at all-time record highs, the sideliners would be better served by clipping coupons, saving, and/or finish that bunker digging project.

The fact is, if you can’t stomach a -20% decline in the stock market, you shouldn’t be investing in stocks. In a recent presentation, Barry Ritholtz, editor of The Big Picture and CIO of Ritholtz Wealth Management, beautifully displayed the 20 times over the last 85 years that the stocks have declined -20% or more (see chart below). This equates to a large decline every four or so years.

20 Percent Corrections 1928 - 2008

Strategist Dr. Ed Yardeni hammers home a similar point over a shorter duration (2008-2014) by also highlighting the inherent volatility of stocks (see chart below).

Corrections 2008-2014

Stated differently, if you can’t handle the heat in the stock kitchen, it’s probably best to keep out.

It’s a Balancing Act

For the rest of us, the vast majority of investors, the question should not be whether to get out of stocks, it should revolve around what percentage of your portfolio allocation should remain in stocks. Despite record low yields and record high bond prices (see Bubblicious Bonds and Weak Competition, it is perfectly rational for a Baby-Boomer or retiree to periodically ring their stock-profit cash register, and reallocate more dollars toward bonds. Even if you forget about the 30%+ stock return achieved last year and the ~6% return this year, becoming more conservative in (or near) retirement with a larger bond allocation still makes sense.  For some of our clients, buying and holding individual bonds until maturity reduces the risky outcome associated with a potential of interest rates spiking.

With all of that said, our current stance at Sidoxia doesn’t mean stocks don’t offer good value today (see Buy in May). For those readers who have followed Investing Caffeine for a while, they will understand I have been relatively sanguine about the prospects of equities for some time, even through a host of scary periods. Whether it was my attack of bears Peter Schiff, Nouriel Roubini, or John Mauldin in 2009-2010, or optimistic articles written during the summer crash of 2011 when the S&P 500 index declined -22% (see Stocks Get No Respect or Rubber Band Stretching), our positioning did not waver. However, as stock values have virtually tripled in value from the 2009 lows, more recently I have consistently stated the game has gotten a lot tougher with the low-hanging fruit having already been picked (earnings have recovered from the recession and P/E multiples have expanded). In other words, the trajectory of the last five years is unsustainable.

Fortunately for us, at Sidoxia we’re not hostage to the upward or downward direction of a narrow universe of large cap U.S. domestic stock market indices. We can scour the globe across geographies and capital structure. What does that mean? That means we are investing client assets (and my personal assets) into innovative companies covering various growth themes (robotics, alternative energy, mobile devices, nanotechnology, oil sands, electric cars, medical devices, e-commerce, 3-D printing, smart grid, obesity, globalization, and others) along with various other asset classes and capital structures, including real estate, MLPs, municipal bonds, commodities, emerging markets, high-yield, preferred securities, convertible bonds, private equity, floating rate bonds, and TIPs as well. Therefore, if various markets are imploding, we have the nimble ability to mitigate or avoid that volatility by identifying appropriate individual companies and alternative asset classes.

Irrespective of my shaky short-term forecasting abilities, I am confident people will continue to ask me my opinion about the direction of the stock market. My best advice remains to get out of stocks*…for the “sideliners”. However, the asterisk still signifies there are plenty of opportunities for attractive returns to be had for the rest of us investors, as long as you can stomach the inevitable volatility.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 7, 2014 at 9:40 pm 3 comments

Investing, Housing, and Speculating

House Dollar Sign

We all know there was a lot of speculation going on in the housing market during 2005-2007 as risk-loving adventurists loaded up on NINJA loans (No Income, No Job, and No Assets) and subprime CDS (Credit Default Swap) securities. But there is a different kind of speculation going on now, and it isn’t tied directly to housing. Instead of buying a house with no down payment and a no interest loan, speculators are leaping into other hazardous areas of danger. Like a frog jumping from lily pad to lily pad, speculators are now hopping around onto money-chasing industries, including biotech, social media, Bitcoin, and alternative energy.

As French novelist Jean-Baptise Alphonse Karr noted, “The more things change, the more they stay the same.” Irrespective of the painful consequences of the bubble-bursting aftermaths, human behavior and psychology addictively succumb to the ever-seductive emotion of greed. Over the last 15 years, massive fortunes have been gained and lost while chasing frothy financial dreams in areas like technology, housing, and gold.

Most get-rich-quick dream chasers have no idea of how to invest in or value a stock, but they sure know a good story when they hear one. Chasing top performing stocks is lot like jumping off a bridge – anyone can do it, and it feels exhilarating until you hit the ground. However, there is a better way to create wealth. Despite rampant speculation, most individuals understand the principles behind buying a house, which if applied to stocks, can make you a superior investor, and assist you in avoiding dangerous, speculative investments.

Here are some valuable housing insights to improve your stock buying:

#1.) Price is the Almighty Variable: Successful real estate investors don’t make their fortunes by chasing properties that double or triple in value. Buying a rusty tool shed for $1 million makes about as much sense as Facebook paying $19 billion (1,000 x’s the estimated 2013 annual revenues) for a money-losing company, WhatsApp. Better to buy real estate when there is blood in the street. Like the stock market, housing is cyclical. Many traders believe that price patterns are more important than the actual price. If squiggly, technical price moving averages (see Technical Analysis article) make so much money for stock-renting speculators, then how come day traders haven’t used their same crossing-lines and Point & Figure software in the housing market? Yes, it’s true that the real estate transactions costs and illiquidity can be costly for real estate buyers, but 6% load fees, lockup periods, 20% hedge fund fees, and 9% margin rates haven’t stopped stock speculators either.

#2). Cash is King: It doesn’t take a genius to purchase a rental property – I know because practically half the people I know in Southern California own rental properties. For example, if I buy a rental property for $1 million cash, is it a good purchase? Well, it depends on how much after-tax cash I can collect by renting it out? If I can only net $3,000 per month (3.6% annualized return), and be responsible for replacing roofs, fixing toilets, and evicting tenants, then perhaps I would be better off by collecting 6.5% from a low-cost, tax-efficient exchange traded real estate fund, without having to suffer from all the headaches that physical real estate investing brings. Forecasting future asset price appreciation is tougher, but the point is, understanding the underlying cash flow dynamics of a company is just as important as it is for housing purchases.

#3). Debt/Leverage Cuts in Both Directions: Adding debt (or leverage) to a housing or stock investment can be fantastic if prices go up, and disastrous if prices go down. Putting a 20% down payment on a $1 million house works out wonderfully, if the price of the house increases to $1.2 million. My $200,000 down payment is now worth $400,000, or up +100%. The same math works in reverse. If the price of the home drops to $800,000, then my $200,000 down payment is now worth $0, or down -100% (ouch). Margin debt on an equity brokerage account works in a similar fashion, but usually a 50% down payment is needed (less risky than real estate). That’s why I always chuckle when many real estate investors tell me they steer clear of stocks because they are “too risky”.

#4). Growth Matters: If you buy a home for $1 million, is it likely to be worth more if you add a kitchen, tennis court, swimming pull, third floor, and putting green? In short, the answer is yes. The same principle applies to stocks. All else equal, if a company based in Los Angeles, establishes new offices in New York, London, Beijing, and Rio de Janeiro, and then acquires a profitable competitor at a discounted price, chances are the company will be much more valuable after the additions. The key concept here is that asset values are not static. Asset valuations are impacted in both directions, whether we are talking about positive growth opportunities or negative disruptions.

Overall, speculatively chasing performance is tempting, but if you don’t want your financial foundation to crumble, then build your successful investment future by sticking to the fundamentals and financial basics.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct discretionary position in FB, Bitcoin, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

March 15, 2014 at 10:00 am 1 comment

Nuclear Knee-Jerk Reaction

It’s amazing how quickly the long-term secular growth winds can reverse themselves. Just a week ago, nuclear energy was thought of as a safe, clean, green technology that would assist the gasoline pump pain in our wallets and purses. Now, given the events occurring in Japan, “nuclear” has become a dirty word equated to a life-threatening game of Russian roulette. 

Despite the spotty information filtering in from the Dai-Ichi plant in Japan, we are already absorbing knee-jerk responses out of industrial heavyweight countries like Germany and China. Germany has temporarily closed seven nuclear power centers generating about a quarter of its nuclear capacity, and China has instituted a moratorium on all new facilities being built. How big a deal is this? Well, China is one country, and it alone currently accounts for 44% of the 62 global nuclear reactor projects presently under construction (see chart below).

Source: World Nuclear Association (URRE Presentation)

As a result of the damaged Fukushima reactors, coupled with various governmental announcements around the globe, Uranium prices have dropped a whopping -30% within a month – plunging from about $70 per pound to around $50 per pound today.

Where does U.S. Nuclear Go from Here?

As you can see from the chart below, the U.S. is the largest producer of nuclear energy in the world, but since our small population is such power hogs, this relatively large nuclear capability only accounts for roughly 20% of our country’s total electricity needs. France, on the other hand, manages about half the reactors as we do, but the French derive a whopping 75% of their total electricity needs from nuclear power.  According to the Nuclear Energy Institute, Japanese reliance on nuclear power falls somewhere in between – 29% of their electricity demand is filled by nuclear energy. Like Japan, the U.S. imports most of its energy needs, so if nuclear development slows, guess what, other resources will need to make up the difference. OPEC and various other oil-rich, dictators in the Middle East are licking their chops over the future prospects for oil prices, if a cost-effective alternative like nuclear ends up getting kicked to the curb.

Source: The Economist

As I alluded to above, there is, however, a silver lining. As long as oil prices remain elevated, any void created by a knee-jerk nuclear backlash will only create heightened demand for alternative energy sources, including natural gas, solar, wind, biomass, clean coal, and other creative substitutes. While we Americans may be addicted to oil, we also are inventive, greedy capitalists that will continually look for more cost-efficient alternatives to solve our energy problems (see also Electrifying Profits). Unlike other countries around the world, it looks like the private sector will have to do the heavy lifting to solve these resources on their own dime. Limited subsidies have been introduced, but overall our government has lacked a cohesive energy plan to kick-start some of these innovative energy alternatives.

Déjà Vu All Over Again

We saw what happened on our soil in March 1979 when the Three Mile Island nuclear accident in Pennsylvania consumed the hearts and minds of the country. Pure unadulterated panic set in and new nuclear production ground to a virtual halt. When the subsequent Chernobyl incident happened in April 1986 insult was added to injury. As you can see from the chart below, nuclear reactor capacity has plateaued for some twenty years now.

Source: Wikipedia

The driving force behind the plateauing nuclear facilities is the NIMBY (Not In My Back Yard) phenomenon. The Three Mile Island incident is still fresh in people’s minds, which explains why only one nuclear plant is currently under construction in our country, on top of a base of 104 U.S. reactors in 31 states. I point this out as an ambivalent NIMBY-er since I work 30 miles away from one of the riskiest, 30-year-old nuclear plants in the country (San Onofre).

Unintended Consequences

The Sendai disaster is home to the worst Japanese earthquake in 140 years, by some estimates, but history will prove once again what unintended consequences can occur when impulsive knee-jerk decisions are made. Just consider what has happened to oil prices since the moratorium on offshore drilling (post-BP disaster) was instituted. Sure we have witnessed a dictator or two topple in the Middle East, and there currently is adequate supply to meet demand, but I would make the case that we should be increasing domestic oil supplies (along with alternative energy sources), not decreasing supplies because it is politically safe.

Time will tell if the Japanese earthquake/tsunami-induced nuclear disaster will create additional unintended consequences, but I am hopeful the recent events will at a minimum create a serious dialogue about a comprehensive energy policy. If the comfortable, knee-jerk reaction of significantly diminishing nuclear production is broadly adopted around the world, then an urgent alternative supply response needs to occur. Otherwise, you may just need to enjoy that bike ride to work in the morning, along with that nice, romantic candle-lit dinner at night.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and alternative energy securities, but at the time of publishing SCM had no direct position in BP, URRE, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

March 18, 2011 at 12:57 am Leave a comment

Electrifying Profits from Car Prophet

Some people can talk the talk, and others can walk the walk. Well, Shai Agassi is a walker, and this 42 year old wunderkind has a modest goal:  change the world radically by 2020. For a youngster who moved to California in 1995 to partner with Apple Inc. (AAPL), and who subsequently sold a company for $110 million before becoming first in line as next CEO at software giant SAP, no idea is too big for Agassi.

Electrifying Idea

When faced with the challenge to crush the world’s polluted addiction to oil powered cars, it didn’t take long for Israeli President Shimon Peres to convince Agassi there actually is a way to convert the world’s 600 million carbon-dirty, gas guzzling cars to electric vehicles (EVs). In 2007 Agassi quit his job at SAP and formed his new electric vehicle company, Better Place.

Better Place’s first challenge is converting two million cars to electric in Israel to get the ball rolling. Before executing this electrifying idea, Agassi needed to raise capital and secure a major auto manufacturing partner. In 2008, after knocking on all the major car makers’ doors at the World Economic Forum in Davos, the only person to answer was Carlos Ghosn, CEO Renault-Nissan Alliance. Not only was Ghosn committed to becoming a partner with Agassi, but Renault-Nissan was willing to pony up over $1.5 billion in capital to see the vision turn to reality.

If you haven’t heard of Shai Agassi or have not heard him speak, do yourself a favor and listen to this must see recent interview with Charlie Rose (approximately 28 minutes).

The Problem

The problem is fairly obvious. The U.S. imports about 2/3 of its oil, which translates into about $1 billion per day. Even if you are not a tree-hugger and do not care about the 33% of the country’s CO2 spewed into the air by cars and trucks, our ballooning trade deficits and our financing of countries harboring terrorists are reasons enough to move towards oil independence. So far, the introduction of hybrids has been a feeble attempt of denting the 98% of transportation vehicles powered by oil. The Toyota Prius has been around for about 15 years and hybrids have gained less than 2% of the overall automobile market share. For the electric car market to really take off, electric cars must cost $5,000 less than a comparable gas guzzler and also be just as, if not more, convenient and fast according to Agassi. What makes this oil addiction even scarier is the finite nature of this depleting resource. Fortunately the same cannot be said about alternative energy – we have virtually endless amounts of wind, solar and other biofuels.

The Solution

When it comes to politics, it was James Carville who famously quoted “It’s the economy, stupid” when referring to the 1992 Presidential election between George H.W. Bush and Bill Clinton. In other words, citizens vote with their wallets. Agassi feels the same way about consumers when it comes to car purchases. At the end of the day, car buyers vote with their wallets too and will not pay more for a car just because it is environmentally designed.

Better Place believes electric cars need to be $5,000 cheaper, faster, and more convenient. In forming the company, Agassi took a page from the cell phone industry in order to make his dream become a reality. Rather than sell a traditional hybrid car to consumers for a premium (like $35,000-$40,000 for a Prius), Better Place is subsidizing the hardware (i.e., phone or car) to attract the mass market buyers and then charge for the usage (i.e., collect for the minutes used or miles driven). If Agassi can execute this cell phone-like subsidization model, he is confident that 98% of car buyers will move to electric vehicles – predominantly for the reason of saving money (not altruism).

Logistically, a Better Place will design a network of “charge spots” that are placed across the country at workplaces, in public parking lots, and along urban streets so that EV drivers have convenient access to energy in addition to their homes. In addition to the charge spots, Better Place will also be installing “switching stations” that resemble car washes. At the switching stations, EV owners drive in and have drained batteries automatically replaced with fresh ones.

Besides environmental benefits, how would Agassi’s Better Place technology stack up on cost, speed, and convenience?

  • EV is Faster: An electric car is two-times faster on acceleration versus a traditional combustible engine car equivalent. The electric car may not reach the top speeds of traditional gasoline cars, but out of the gate, EVs can leave traditional cars in the dust. Since EVs have no gears, instant acceleration is achieved.
  • Improving Battery Technology: The cost of lithium-ion batteries has come down by over 75% in the past decade, creating a cost-effective, high-performance solution for EVs. The batteries are expected to perform for over 8 years and 2,000 recharges. If each charge gets 100 miles, the battery is projected to last 200,000 miles.
  • Declining Cost Curve: Battery technology is improving at the pace of Moore’s Law, which means a doubling of battery performance every two years (i.e., speed, power, and battery life). For example, over the last 35 years battery life has traditionally doubled every 5-7 years. Now, the cost per unit of energy and number of cycles on a battery is doubling every two years. The consumer benefits because some of the cost savings are passed on to lower the cost of the car. On a total cost per mile basis, the cars built for Agassi can be 70% lower than a gas-powered vehicle in some markets, even after accounting for the amortized cost of the battery.
  • Convenient Networks: The most common type of charge spot will provide a standard charge, which will take anywhere from 4-8 hours to fully recharge a typical EV lithium-ion battery, depending on the amount of charge remaining in the existing battery. As far as battery switching, in many cases the process will take less than a minute. At a minimum, there will be no more trips to gas stations and since Better Place will be selling miles to the EV owner, there will not be the traditional volatility in gasoline prices.

As mentioned previously, Better Place is leaning on Renault-Nissan to make this vision become a reality. Better Place has chosen to use Renault’s larger Fluence model in the full-scale Israeli network rollout. In total, Renault-Nissan is committed to rolling out nine different car models and producing 100,000 electric vehicles in the first year.  

The Future

As stated earlier, Agassi walks the walk when it comes executing his vision. Besides Israel, Better Place has secured commitments from Denmark, Australia, Japan, Canada and the U.S. In the U.S., electric car networks will be built in Hawaii and California with further expansions in the works.

Agassi is not afraid to talk the talk either. Here are several bold predictions as it relates to the Israel network build out: 1) The nationwide Israeli network will be operational by January 1, 2012; 2) By 2015, more than 50% of new cars sold in Israel will be electric; and 3) By 2017 about 90% of new cars sold will be electric.

His bold predictions don’t stop there – he believes this technology will spread like wildfire. For instance, in 10 years he believes China will make and sell 40 million electric cars per year and the electricity for the car batteries will be generated from rings of solar power (not coal) surrounding various Chinese cities.

Shai Agassi has accomplished a lot in his young professional career, but his ambitions have grown even grander. So far he has been able to walk the talk, and if he is able to pull off this miraculous global electric vehicle conversion by 2020 as he plans, this is one electric prophet you do not want to ignore.

Vodpod videos no longer available.

Shai Agassi TED Conference, posted with vodpod


Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and AAPL, but at the time of publishing SCM had no direct position in SAP, Renault-Nissan, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

December 10, 2010 at 3:45 am 2 comments

Oil + Addiction = 50 Consecutive Day Price Hike in Gasoline

Oil AddictionGas Prices Rise for 50th Straight Day (CLICK HERE to read full article)

With 70% of our oil imported (much of it from countries with different human right beliefs), it is not very difficult to realize we are addicted to oil. Sure crude prices have declined dramatically from its peak of close to $150 per barrel to around $70 a barrel today, but nonetheless, gasoline prices have increased for 50 consecutive days (article above)!  The amazing streak can be chalked up to the incredible rise in crude oil prices in recent months from the low $30s per barrel. This 50 day streak would even make Pete Rose proud in light of his 44 consecutive Major League Baseball League game hitting-streak achieved in 1978. Next up, Joe DiMaggio’s 56 game streak (we’re almost there!).

Time will tell if currently more cost prohibitive energy alternatives can be efficiently implemented. However, if current gasoline price trends continue skyrocketing, then the economics and probability of realization becomes much more compelling. At this rate you may even see my pending hydrogen-solar hybrid car passing you on the highway fast lane!

June 19, 2009 at 5:30 am Leave a comment

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