Forecast: Partly Cloudy
The Daily Reckoning PRESENTS: Without billions of dollars invested in new electricity resources right now, imagine brownouts, blackouts, shutdowns, and worse on a scale 10 times greater than anything we’re seeing today. That’s why, asserts Kevin Kerr, one of the best places to have your money right now is – electricity. Read on…
FORECAST: PARTLY CLOUDY
Opportunities abound for investors in the energy market right now, just looking at what’s being set in motion globally. The end of the age of oil will not be a disaster if we are prepared for it as investors and consumers. Acceptance is the first step.
Aside from water, the world is most thirsty for oil. Since the last major oil crisis in the 1980s, there’s been tremendous population growth, with no less than one-third of that population beginning to industrialize their economies. Look at China, home to 1.3 billion people, and India, with more than another billion. Both these economies are growing fast, and they must have oil.
Then add the United States’s oil addiction to the mix, with our everlarger gas guzzlers and our seemingly insatiable desire for bigger and better, whether it’s cars, boats, houses, amusement parks, shopping malls, or whatever.
Combine this demand with dwindling global supply, the ongoing threat of terrorist attacks, the fact that there has not been a major oil find in more than 36 years, natural disasters such as last year’s hurricanes along the Gulf Coast, and continued geopolitical tensions, and don’t be surprised if oil reaches $150 a barrel, or more. How can you capitalize on this?
It’s always important to have vision, to see beyond the short-term outlook and predict what can and may happen in the future. It’s essential to know which seasonal and geopolitical factors will drive demand. Do your homework! Learn to decipher and understand industry reports such as the Energy Information Agency weekly inventory report.
By using spread trades and options in the energy markets, traders can maximize profit potential while limiting downside risk. (Spread trades are exactly what they sound like. The most common spreads are those between the different trading months, such as December/January spreads or, as we call them, DEC/JAN spreads. Basically, you are simply trying to trade a price differential between the months. There are many different types of spreads but this kind is the most common.)
Oil is the lifeblood that moves things, that keeps the whole world functioning and growing. In the last 100 years we have become very spoiled – we’ve been used to easily obtained, easily moved, and easily processed petroleum, crude oil, and natural gas. We have simply come to expect that they will be there forever, or at least for our lifetime. Oil, among other things, spurred the development of the internalcombustion engine, which does the work of a thousand people. Oil essentially constitutes a major workforce throughout the world.
This virtually invisible workforce has allowed the world’s population to grow to over 6 billion. Not only that, it has allowed us to plow millions of acres of land, to produce fertilizers, to transport people and goods, even to wage global wars and to set up global communication systems. Our dependence on oil, and energy as we know it, is similar to an addict’s powerful affliction. The world’s craving for oil is just as debilitating.
At this moment the United States doesn’t have an energy source that would be as easy to produce and transport as oil. Nuclear power can produce electricity, but the remaining rich uranium ore will last for decades, not for centuries. Renewable energy can probably never cover the current levels of global energy consumption or even U.S. consumption.
So what is a practical solution right now?
Recovery from oil addiction is possible, and the long-term, easy-to-reach answer may be in a fuel source that is right under our feet – coal. Coal is cheap and reliable and much cleaner-burning than it use to be. As the world goes through painful withdrawal from oil dependence, coal may help. It seems that the market feels this way, to Coal prices have been soaring over the past year.
Clean coal technology (CCT) is employed when coal arriving at a power plant contains other by-products that need to be taken out before it can be used. A facility like this uses a number of processes to remove unwanted minerals, which makes the coal burn cleaner and more efficiently.
Coal has often been stereotyped as a dirty and less desirable product of the energy industry, but not anymore. As the world searches for energy solutions, coal is at the forefront, and new, clean-burning coal technology means it’s highly likely that coal will be around for some time to come.
It turns our turbines and runs our assembly lines; . . . it powers the Internet, our databases, and company networks. When we read in bed, turn on the air-conditioning, look at the nighttime skyline, it’s there.
And we take for granted that it will always be there, every time. But when more and more people, in more and more countries, start making that assumption, you have a situation. Right now, one in every three people doesn’t even have electricity. And already, our electrical grids are overtaxed and electricity demand is higher than it’s ever been.
What happens when the rest of China and India hop onto the power grid?
In China alone, electricity demand is 150 percent higher right now than it was when China first started to boom, back in 1980. Worldwide electricity demand is expected to explode by another 85 percent before the year 2020, faster than demand for any other kind of energy.
What happens when the world population hits 7 billion? How about 8 billion? Or 9 billion, as the United Nations is predicting? Hospitals without life-support machines. Grocery stores without refrigerators. Shopping malls, office towers, and neon gone dark. Printers and fax machines that don’t hum. Trains that don’t run, phones that don’t ring, computers that don’t blip or announce new e-mail. . . . because there is no e-mail; there is no Internet. The global grid is down. And where it’s still up and running, it’s pockmarked with dead zones that have made the whole network slow to a crawl. Even the electronic stock tickers on Wall Street have flickered out.
Without billions of dollars invested in new electricity resources right now, imagine brownouts, blackouts, shutdowns, and worse on a scale 10 times greater than anything we’re seeing today.
This all sounds scary and not quite real. It doesn’t have to be real if the biggest and most ambitious economies in the world kick in right now with several hundred billion dollars to jump-start a whole new era of electricity investing.
The good news is that the total $16 trillion headed for all the energy markets – including the $10 trillion that will go into electricity – is still just a fraction of the total global gross domestic product (GDP) – only about 1 percent. So making the investment is not only very possible, it’s nearly certain.
The electricity markets are still in their infancy in the commodities world. As with so many other up-and-coming opportunities, you just have to be ready to seize those chances when they come. Speaking of opportunities, alternative energy is another area investors are focusing on, and one of the biggest is solar power.
The idea of using the sun to solve the earth’s energy needs is hardly new; it’s been used since the dawn of time. What is new is the technology and research money that are breathing life into the industry. The rallying cry for quick and easy solutions to our nation’s oil addiction spurred immediate interest in alternative energy, from nuclear to ethanol. Solar power faces some challenges, to be sure, but there are some solid players who certainly bloom in this sector. Just add sunshine and a little ingenuity, and watch the profits grow.
Since the 1970s, the solar power industry has come a long way. We’ve reached a point where solar power is no longer a gimmicky, peculiar energy source; it’s now more of a necessity.
The solar energy industry has made enormous progress in the past 20 years, finding new solutions to the ongoing problems of high costs and massive regulatory barriers – but there are still roadblocks. Solar technology has become more affordable, due mainly to higher demand and the goal of eliminating dependence on foreign oil.
Manufacturing processes have been streamlined and continue to become more cost-efficient with the help of government subsidies, consumer rebates, and tax credits. As oil prices continue to increase exponentially, it seems inevitable that a convergence of the cost of conventional and alternative energy costs will occur. Many companies in the solar sector seem to be focused on the development of improved solar efficiency through broadbased applications that can be put to practical, immediate use.
Now, one thing that is very important to investors in any sector is the fact that every trade has flaws. In the case of solar power, there are several.
Although there is so much good news for solar power, there are challenges, too. For example, there’s the lack of silicon, which is needed for making solar panels. A silicon shortage has limited the supply of the panels and frustrated potential buyers. Orders take several months to complete, and prices, after years of floundering, have increased by as much as 15 percent.
The real winners are those companies that benefit from the lack of silicon, primarily producers of less efficient, yet available, thin-film solar panels. Of course, other beneficiaries include companies that have emerging technologies, such as plastic solar cells.
Worldwide, the solar market has exploded, growing by 40 percent annually in just the last five years. Germany and Japan alone use 39 percent and 30 percent, respectively, of the global solar panel stockpile. The United States is a distant third, at only 9 percent of the global solar panel supply, according to various energy information sites. California is likely to drive that stat much higher as demand grows exponentially in that state and others, too.
for The Daily Reckoning
March 13, 2007
Editor’s Note: Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.
The above was taken from Kevin’s soon-to-be-released book, A Maniac Commodity Trader’s Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider’s view of what he calls “the last bastion of pure capitalism on Earth.” Whether you’re a novice or an experienced trader, Kevin’s down-to-earth, clear-cut guidance will make you more savvy, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you. The book is available for pre-sale here:
Bad things happen to good people who do stupid things.
That’s what the good people at New Century Financial – and the good people who lent them money – found out yesterday. After losing 78% of its value last week, the New York Stock Exchange halted trading in New Century stock, as America’s second largest subprime mortgage company “teetered on the edge of bankruptcy,” according to the Financial Times.
Whenever we see something teetering on the edge of disaster, we have an almost irresistible urge to give it a little push. But it is not within our power to destroy New Century or to save it. All we can do is get out some popcorn and watch.
“Subprime lending problems escalate,” is the headline on the Financial Times piece. It explains that when the subprime industry tumbles into the abyss, it could drag the whole U.S. mortgage industry – which it puts at $8 trillion – along with it.
Will that happen? No one knows. But the investment banking stocks are headed down, too – generally off more than 10% from their highs. They are the companies that own the stock in New Century and much of the debt that it and its subprime borrowers can’t pay.
Together, Morgan Stanley, Goldman Sachs and Citigroup all hold a big part of the subprime bag.
Poor Goldman! No company made more out of the liquidity bubble…and no company is better placed to protect itself. Goldman’s man, Paulson, is now the head of the U.S. Treasury. In theory, no one stands to lose more when the liquidity whooshes out. But when the bubble finally deflates, we’ll see how good the wizards of Wall Street really are. Have they laid off all the risky debts and dubious assets onto widows and orphans? Or are they still stuck with a lot of it themselves? We note, for example, that someone sold the New York State Teachers Retirement System a 3.6% stake in New Century Financial. That salesman should get a special bonus.
Bloomberg News tells us, “the deepest U.S. housing decline in 16 years is about to get worse.”
“A year of pain ahead as American housing dream sours,” trumpets the headline.
“Lenders may foreclose on as many as 15 million more American homes, another 100,000 people in housing-related industries could be laid off, and another 100 mortgage companies that lend money to people with bad or limited credit may go under, according to real estate experts, economists, analysts and a Federal Reserve governor.”
The article tells us “the spring season, when more than half of all U.S. homes sales are made, has been disappointing…”
But wait a minute. Spring hasn’t even begun yet. Bloomberg is getting ahead of itself.
“The correction will last another year,” says Mark Zandi.
“If this slump follows the same pattern as the last one in 1991, it will persist for at least another year and may fuel a recession. Sales of new homes declined 45 percent from July 1989 to January 1991 and about 1 percent of all U.S. jobs, or 1.1 million, were lost in that recession…”
Recession? Alan Greenpan puts the odds of recession at one in three. Bloomberg notes the inverted yield curve; it says the odds are higher – one in two.
Delinquencies are rising. Foreclosures too. CreditSights, a N.Y. bond research firm, predicts that defaults will dump more than a half a million more houses on the market. Ken Rosen, an economist at U.C. Berkeley adds that 1.5 million houses, out of a total of 80 million, will be foreclosed.
Many of these houses were sold to people who were not asked to prove their income nor their work history. “Liars loans,” they were called in the industry. The epithet was unflattering to the mortgagees. But now it’s the mortgagors’ turn for ridicule and abuse. For if the borrower was a liar, the lender was surely an idiot.
Chuck Butler, reporting from the EverBank world currency trading desk in St. Louis…
“This is a little different way to think about it, but the way it works is that, as jobs are created and not filled, it creates a vacancy. So, to think about it further, it means the Australian economy is creating jobs faster than they can be filled!”
For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig
And more thoughts and opinions…
*** Subprime may be suffering, but speculators still think they can make good money buying and selling houses. Apparently, a group of investors has made a tour of Jackson, Mississippi, buying up distressed properties:
“On February 16 & 17th we made history with the first ever TWO-DAY Mississippi Magic Bus Tour. During those two days, more than 28 houses were sold to investors from all corners of the United States. The prices were so low that most participants bought [two] or [three] houses.
“This could be you!”
Of course, dear reader, we have more faith in you than that. If you’ve been paying close enough attention, you’ll realize that this one significant sign of impending doom.
And this ‘not-so-magic’ bus tour’s next stop…Baltimore! Oh, what fun this will be! We’ll keep you posted.
*** “In four days,” begins an invitation from colleague Bruce Robertson “our esteemed team of experts will share their answers to today’s biggest investment questions:
“Stocks: What will the Dow and the S&P 500 do next? Are any foreign markets set to eclipse the American exchanges? And are there any easy ways into these emerging foreign markets? Our experts will tell you what to buy, what to avoid… and where to expect your biggest profits.
“Precious Metals: Was $700 the top for gold… or will Asian demand finally push it to $1,000? Will 2007 be another great year for silver? Are the Chinese secretly securing other key metals that the mainstream is overlooking? And what’s the best way to play what’s ahead? Our commodities experts have a pretty good idea. And you’ll learn how to cash in – no matter which way prices go!
“Energy: The world has seen skyrocketing energy prices as India, China and other booming populations demand an ever-greater share of the world’s remaining oil. But governments are quickly figuring out that the spigots can’t run forever. Which countries are the closest to initiating radical alternative energies? And what companies will provide the raw materials for this technological revolution? Some of the best energy commentators will be in Vancouver to share their findings.
“Geopolitics: Who’s getting rich as more and more jobs go to India and China? Can the dollar stand up to Asia’s strength? Is China’s dominance directly tied to its unbalanced American trade… or does it have other countries ready to buy its goods? The answers will effect where you put your money for the next decade. That’s why we’re flying in some masters of international investing to help fill you in…
“‘Rim of Fire: Crisis & Opportunity in the New Asian Era’ will be Basic Training for global investing. You’ll get a complete perspective on how a rare confluence of politics, business, globalization, and the age-old forces of supply and demand…”
Hope you can join us…
[Ed. Note: Where? Vancouver, BC,… When? July 24-27th, 2007. To secure your seat on the Rim of Fire, call Barb at Agora Travel at 800-926-6575.]
*** In America, aspirants need lots of money if they are going to challenge entrenched politicians. In Zimbabwe, they need medical attention.
One wonders why Americans are so besotted by modern, degenerate capitalism and democracy. They believe in the two without question…as people used to believe in the yellow peril or the red menace.
“Freedom and prosperity,” they say…as if the two were indissolubly linked, like Laurel and Hardy…or pancakes and syrup. Yet, the major country with the highest growth rate is neither free nor democratic – China. And among the world’s worst economies are some of its greatest vote getters. Zimbabwe, for instance.
Robert Mugabe, 83-years old, bears a good deal of the blame for transforming Rhodesia into a disastrous democracy with failing industries, hungry people, and inflation running at 1,700%. Yesterday, after arresting his main opponents and beating them up, he asked the electorate for another six-year term.
*** Meanwhile, in the United States of America, the big financial houses are not taking any chances. Democracy is all very well, but what do the voters know of high finance? Alpha hedge fund, Goldman, has hedged its bets by placing its man at the U.S. Treasury. And in case Madame Clinton should win, the firm paid her husband $650,000 for four speeches. Citigroup paid him a quarter of a million for a single speech.
*** But so great is Americans’ unquestioning faith in unalloyed profit making that they are ready to try it everywhere. A non-profit group, The National Math and Science Initiative Inc., with funding from ExxonMobil, made a $250 million offer last Friday, dangling $250 each for every passing score on Advanced Placement math, science and English tests in selected schools. Colleague Porter Stansberry comments:
“Noble intentions. But I recall cheating being rampant during these and other tests back when I was a junior and senior in high school. If you begin to pay students and teachers for grades, you’re creating a situation where teachers will make money by looking the other way. My prediction: Grades go up, learning goes down.”