Macro Musings on Earth Day and Green Energy

April 22, 2009 at 11:29 am
Contributed by: Chris

For my Energy and Capital column this week, I celebrate Earth Day by finding many reasons for optimism in the wave of green initiatives sweeping the nation, but also find a market still staggering under the weight of a broken financial system.

Macro Musings on Earth Day and Green Energy

The Market Still Follows the Financials

By Chris Nelder
Wednesday, April 22nd, 2009

I love Earth Day. I have celebrated it for decades, by planting my garden or going for a hike or attending an event. (This year I’ll be spending it as I have spent the last 10 days, staying put and nursing a nice case of poison oak I picked up while getting up close and personal with nature the weekend before last.)

This year it seems to have achieved a whole new level of popularity with a flourish of local celebrations. Everywhere I turn, I see messages encouraging people to plant a vegetable garden, reduce their energy and water consumption, install a solar system, buy “green” stuff…even offering “five ways to green up your sex life.”

The media are saturated with ads applying a fresh coat of green paint to corporate images and logos, and the news has never been greener.

As I write, the FORTUNE Brainstorm: Green 2009 conference is under way, featuring an impressive lineup of business leaders and visionaries who are working on everything from electric cars to energy to emissions control to green business strategy. (Check out the Twitter feed from the conference.) The best and brightest in the tech and environment worlds, bringing a wide array of ideas and technologies, are finally engaging directly with business to make progress on the most important challenges of our time.

Simultaneously, at the Dow Jones Alternative Energy Innovations south of San Francisco, startups are pitching their inventions to investors, including new technologies in efficiency, solar, electrical storage and water.

Putting an end to a long-fought battle, the EPA finally agreed last week that “greenhouse gas pollution is a serious problem now and for future generations,” threatening public health and triggering climate change. This paves the way for policy action and significantly clears up the investing horizon for clean energy technologies.

In the House, debate commenced yesterday on the “American Clean Energy and Security Act,” a bill submitted by House Energy and Commerce Committee Chairman Henry Waxman and Edward Markey (D-MA) that would cut greenhouse gases more than 80% by 2050 through a cap-and-trade mechanism, and propose new standards for energy generation and use. It would be the most sweeping climate change legislation ever attempted.

A slew of great news from the renewable energy world also crossed my desk this week.

Sempra Energy announced plans to build a 48 megawatt (MW) expansion of its existing photovoltaic (PV) power plant in Nevada. When completed, the 58 MW installation will be the largest PV solar plant in North America.

First Solar (NASDAQ: FLSR) secured financing for a 53 MW solar power plant, which would be the largest in Germany and provide enough power to run 14,000 homes.

The Vatican announced plans to build a 100 MW, $660 million solar plant that would generate six times as much power as the tiny nation uses, with the excess exported to Italy. It’s a great investment under Italy’s generous feed-in tariff program, which pays up to €0.49 per kilowatt hour for the clean power when the retail price of grid electricity is about €0.16.

Most exciting to me was a new $1 billion, 200 MW solar project announced for Arizona, the sunshine-blessed state where I grew up. This plant would be in addition to a 280 MW CSP plant now being built near Phoenix by Spanish energy technology giant Abengoa SA (MCE: ABG). Together, the two plants will provide enough power for 130,000 homes.

Other impressive, utility-scale solar projects have been securing approvals and production agreements, including a planned 600 MW solar thermal project in Nevada, and a 1,300 MW plant in Southern California, both built by BrightSource Energy.

Geothermal power is also finally taking off. A new report from Emerging Energy Research identified over 9,000 MW of new geothermal generating capacity now in the global pipeline, which would nearly double the current 10,500 MW of global geothermal capacity. Of the new capacity, 4,400 MW are from US projects.

The news has been equally encouraging on the demand side. Electric car manufacturers are racing to bring their products to market, and engineers are making fast strides in obtaining a 60 to 100 mile range on a charge. Within the next two years, consumers should have an exciting array of choices for electric and plug-in cars. 

Smart grid technology appears to be the hottest area for investment capital and media attention, and was reportedly the subject of the only over-capacity session at the FORTUNE conference.

Efficiency projects are likewise popping up, like wildflowers in spring.

As an energy analyst keenly interested in renewable energy and sustainability, I have never been more encouraged about the progress being made in both the business and political spheres. These announcements are particularly impressive in light of the fact that the world is still suffering from a serious credit crunch.

But as an individual investor, the outlook is somewhat less rosy.

It’s (Still) All About the Financials

As I worked over some charts this week, looking for profitable investments in a market that remains chaotic, I had a stunning realization: Every chart had basically the same line!

Consider this six-month chart of ETFs for the real estate, financial, oil, Dow Jones industrial, and retail sectors:

4-22-09 eac nelder chart

While some sectors have clearly performed better than others, it’s basically the same line in every sector, plus or minus 20%. Year-to-date, the correlation is even clearer.

Within the energy sector, the correlation is stronger still, with coal, oil, natural gas, solar, wind, and geothermal stocks all moving together in a tight-knit group.

Try it yourself. Plot a few of your favorite sectors together and play with the time frames. I think you’ll find largely the same patterns since the market meltdown began last summer. Only traditional hedges like gold, tobacco and food plays run counter to the overall market trends.

That told me one thing: The markets are still all about the financials, which in turn have been all about real estate.

That was a sobering thought, because I don’t believe the market rally of the last six weeks for a minute. It was led by the financials, and frankly they have cooked the books.

I have nearly lost track of all the ways that the Fed, Treasury, and SEC have attempted to stave off the inevitable realization that the banks are insolvent. TARP. TALF. PPIP. (Collectively, they mean “printing of trillions of dollars out of thin air.”) Refusing to disclose who received those trillions. Suspending mark-to-market. Taking the banks’ word at the result of their self-administered “stress tests,” and then forbidding them to share those results with the public until May. And so on.

Only in a game that has been rigged and re-rigged repeatedly could the banks pull off the hallucination that they were profitable in Q1, especially to the point of claiming record quarterly profits! But that’s exactly what they did, and the market followed their rally.

Let me be unequivocal about this: What we have witnessed in these vain attempts to sustain a fundamentally unsustainable financial system is a sham, an insult to our intelligence, and the biggest heist in history.

When this flood of taxpayer money recedes, the truth will be known, just as graveyard corpses float up to the surface after a New Orleans flood.

I don’t know when that will happen; after all, that is the entire point of these games, isn’t it? To give the big money just enough time to get away clean before the house of cards falls on the taxpayers’ heads?

But I have little doubt that eventually, it will. It could happen in three weeks, when the stress test results are made public. Perhaps it could happen this summer, when scuttlebutt has it that a number of damning insiders will blow their whistles. Perhaps we will have to wait until China starts dumping dollars. I just can’t say.

When it does though, the market will undergo another bone-shuddering meltdown, and everything will fall again—potentially marking the true bottom of the recession.

The lesson here is clear: traditional fundamental analysis is useless. It’s been useless since real estate started dragging down the financials and took the whole market with them nine months ago. Even technical analysis is useless for long-term investors (although it remains the bread and butter of day traders). So you can stop looking at the financial statements and evaluating sectors and drawing lines on your charts.

Until the financial mess is finally washed up and hung out to dry, you can throw a dart at a dartboard to pick your long term investments, and get roughly the same returns.

Energy investments are, unfortunately, no exception. Renewable energy simply can’t continue to attract the large amounts of capital needed to sustain unprecedented growth until the banks are straightened out. Fossil fuel producers can’t keep drilling and mining into progressively marginal deposits until the prices of their commodities recover, which can’t happen until the economy recovers (for signs of the recovery, watch Asia).

So by all means, get your reusable shopping bag, swear off bottled water forever, turn off anything that isn’t in use, install a solar system, and plant your vegetable garden. With my sincere blessing.

Just don’t let a rigged market make a chump out of you.

Until next time,

chris nelder



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