An interesting piece yesterday in POLITICO on how carbon prices on the Chicago Climate Exchange (CCX) have been trending up in recent months, mostly since it's become clear that all three remaining presidential hopefuls will likely regulate CO2 emissions at the federal level.

In fact, as per the chart above, prices for the right to emit a metric ton of CO2 have been on a tear, recovering from a pretty significant slump in the preceding months. Last week, the World Bank Carbon Finance Unit released its annual update on the state of global carbon market (PDF document), and, as expected, that market continued to grow appreciably.

But is the latest hype around the CCX contracts justified? After all, should there be federally-mandated carbon caps, no one yet knows what the rules will be and what will count as a valid carbon credit. The CCX currently has its own rules for certifying a tradable emission reduction, and it's unclear whether these reductions will be worth anything at all in the eyes of US environmental regulators. For instance, the RGGI, the first regulated carbon market in the US, engaged a small firm called World Energy Solutions (WEGY.OB or XWE.TO) to write the auction software that will be used for the trades.

A safer play would therefore be to buy the exchange because ANY contract can be traded on it, so revenue would spike with volumes. It appears as though the marketplace has picked up on that one as well, pushing up the price of Climate Exchange (CXCHF.PK), the CCX' parent company, by upwards of 90% in the last three months. Mind you, this increase is probably due in large part to the fact that Climate Exchange's 2007 annual figures (PDF document) looked strong, with a 1,164% increase in revenue on 2006 and a loss per share of GBP0.0953, up from a loss per share of GBP0.3168 in '06. However, the current stock price certainly includes a significant future growth premium, and a good chunk of that premium is linked to CCX's positioning in US carbon markets.

But is this a reasonable bet? A few months ago, NYMEX, a much bigger rival, announced the creation of The Green Exchange to directly compete in the environmental commodities space. The Green Exchange is currently awaiting regulatory approval to introduce a carbon contract for the RGGI. Regulation-driven carbon trading will dwarf the voluntary market, which is CCX' current stronghold.

The main question now is: will there be enough room in the US carbon market to accommodate multiple players, or will a dominant exchange outcompete everyone else? Can a pure-play carbon exchange survive in an era of increasing exchange consolidation? There is a lot of growth currently built in Climate Exchange's share price...is it too much?

DISCLOSURE: The author does not have a position in any of the stocks discussed in this article

Posted by Charles Morand at 11:10 PM | Permalink | Comments (0)

Timminco (TIMNF.PK or TIM.TO) was, without a doubt, one of the great solar plays of 2007. The Toronto-based company, which has yet to turn a profit, claims it has come up with a process to produce solar-grade metallurgical silicon with cell efficiencies of about 14%. Metallurgical silicon allows for important energy cost savings in the production process (~70%), so being able to approach cell efficiencies reached by conventional solar-grade silicon processes could mean an important cost advantage for metallurgical silicon producers when measured on a per watt basis.

Eventually, certain people began publicly doubting Timminco's claim, partially because no hard evidence had been put forth (besides a few positive client testimonials), and partially because some were eager to cover short positions probably taken while the stock was shooting up. As a result, the stock came under pressure.

Finally, last week, Timminco silenced its critics by announcing that a third-party had verified and lauded its technology, and by upgrading a major contract. The third-party is Photon Consulting, a solar market research agency with a strong reputation.

But, while the Photon folks seem to have nothing but good things to say about the Timminco process, others are doubting whether Photon have sufficient technology and production process expertise to make a call on the veracity of Timminco's claims (from what I could gather, these "others" are mainly competitors). Judging by the stock's moves since the announcement, it seems as though investors are siding with management for now.

The full results of Photon's analysis won't be known until the close of markets tomorrow. Seeing as the Photon principal in charge of this project said that Timminco had the potential to "reshap[e] the silicon industry," it will certainly be interesting to hear the full details of what he has to say. Interested in finding out more about what could be a breakthrough in solar cell manufacturing? Be sure to tune in to the call on Wednesday at EST4:30pm. All details are available here (PDF document).

DISCLOSURE: The author does not have a position in Timminco.

Posted by Charles Morand at 12:04 AM | Permalink | Comments (0)

On Sunday, Jim Fraser at Energy Blog reported a claim by Sungri that it can produce 5-7 cents per kWh CSP. This is quite the claim, and if true, would represent nothing short of big bang for the solar space. Nevertheless, I remain wholly unconvinced.

On Sunday, John Laumer at TreeHugger told us that Waste Management was going to fuel Altamont (CA) area trucks with landfill-harvested liquid natural gas. Landfill gas (LFG) can be used for both power generation and for liquid fuel production. I did a bit of research into this a few months ago and, with the right kind of incentive, LFG could become a valuable asset for firms and municipalities with the right to it. This is an area to keep an eye on.

On Tuesday, Jozef Winter at ecogeek discussed Xcel Energy's announcement of a $100 million investment for 'Smart Grid' initiatives. This is good news for the energy efficiency space, especially as smart grid/efficiency stocks have been struggling over the past while (see COMV and ENOC). I see energy efficiency as a low-hanging fruit with plenty of potential, but unfortunately there aren't sufficient incentives yet to drive massive investments in this space. It is therefore encouraging to see a mainstream utility make a large capital commitment to the concept.

On Friday, Keith Johnson at the WSJ's Environmental Capital wondered why pricey oil wasn't helping cleantech stocks more. Sure, alt energy stocks are decoupled from the price of oil on the upside, but it's still unclear whether this decoupling would hold on the downside. The broader point from this story: alt energy earnings remain volatile and so alt energy stock prices are volatile.

On Friday, Eric Savitz at Barron's Tech Trader Daily told us that Citi sees a solar glut in 2009 and 2010. So the solar-cell makers with low cost structures will get a competitive edge in a situation of general oversupply - no big surprise here. But who will have an edge in consolidating the industry?

Posted by Charles Morand at 12:39 PM | Permalink | Comments (0)

For those who attened my presentation yesterday, thank you for all the great questions.

I'm having trouble uploading the presentation (it's too large for my server.) However, it should soon appear on NREL's presentation's page. As usual, I own most of the stocks mentioned in the presentation (too many to list,) and the Guiness Atkinson Alternative Energy fund (also mentioned) is an advertiser on AltEnergyStocks.com.

Although I had to cut it off because of time, if you have more followup, please leave a comment here.

Also, a note to the woman who asked me about career development opportunities in Colorado for a financial analyst interested in Energy, there were some openings at the Colorado PUC... "Rate Financial Analyst energy/Demand Side Management" looks especially interesting.

The application deadline was May 9, but I got the feeling that there is a dearth of qualified candidates, so it's probably worth inquiring.

Posted by Tom Konrad at 12:03 PM | Permalink | Comments (0)

Some of you may remember an article I wrote last March about a small Canadian wind turbine maker called AAER Inc (AAERF.PK or AAE.V). In fact, I got a few emails from readers informing me that they'd bought the stock following my article and that they were happy with its performance. The following chart traces the stock's performance between the date of the article (March 7, 2007) and last Friday (May 2, 2008):

Since I wrote this article many things have changed with AAER. The Katabatic contract, which is what attracted my attention initially, is no longer in effect. AAER has nonetheless forged ahead and entered into a number of supply agreements to get its hands on turbine components, not the least of which is with American Superconductor (NASDAQ:AMSC), a stock many wind investors have on their radars (or in their portfolio). SkyPower, a Canadian wind heavyweight and affiliate of Lehman Brothers, bought about 20% of AAER's equity in the fall of '07. In fact, it is formally Lehman Brothers Inc. that owns the stake. Then, only a few weeks ago, the company announced another round of equity financing through a bought deal at C$1.20/shr, for a total of C$7.5m (US$7.82m). Finally, the company managed to sell a few of its turbines in Canada, the US and France.

Overall, AAER looks it is getting the right things done. However, the stock's latest run was tied to one event in particular.

The Hydro-Quebec Bid

AAER's partnership with SkyPower as well as another partnership with TransCanada Energy Ltd appeared to position AAER very well for the much-awaited Hydro-Quebec request for proposal (RFP) for wind power. This RFP, calling for the installation of 2,000 MW of wind power in the Canadian province of Quebec, represents the single largest block of wind power contracts to be awarded anywhere in North America to date. Under these contracts, Hydro-Quebec, the state-controlled power utility, buys the electricity under a 20-year agreement from private sector projects at a rate of C$0.087/kWh. Consortia of developers and turbine makers were invited to bid projects into RFP.The call attracted a fair deal of attention with 66 bids totaling 7722.2 MW - significantly more than the 2,000 needed.

Through its partnerships with SkyPower and TransCanada, both of which submitted bids into the RFP, AAER believed it had a serious shot at jumpstarting its business. AAER is headquartered in the province of Quebec, and local assembly of the turbines as well as local economic development considerations more generally were key criteria in judging the bids (along with factors such as costs, reliability of turbines, ability to manage community relations, etc). Moreover, both partners have strong reputations in the Canadian wind market and SkyPower is already active in Quebec. In both cases, the consortia appeared very well positioned to be selected and AAER (and many of its shareholders) saw this as: a) an opportunity to fill the order book in the near-term and b) a chance to establish its reputation in the North American marketplace for the long run by getting a few hundred MWs of turbines going in the real world. If this was successful, it could bolster AAER's assault on a North American marketplace in dire need of turbines and that is currently being underserved by the incumbents.

The winners were announced on Monday (May 5) at 11:15 am and the AAER consortia were not a part of them. The stock immediately collapsed, so much so that Canadian market regulators suspended trading and expunged a bunch of trades because the news conference was in French only and the info was not disseminated to American and English Canadian investors at the same time as to French Canadian ones. When trading reopened on Tuesday morning, the share price immediately tumbled and found resistance for most of the day at around $0.60.

In the end, two turbine makers were selected to provide all of the 2,000 MW: Enercon and REPower (RPWSF.PK)

What's Next?

As pointed out in the article linked to initially, I entered my positions in AAER at C$0.39 and C$0.38. In early January, I got the majority of the dollar value of my initial investment out at C$1.15. On the morning of the announcement, I wrestled with getting another chunk of my position out at C$1.80, but ultimately decided not to budge - this was a gamble and I lost it. However, at around $0.39 with the information that was available in March 2007, this looked to me more like a high-risk value play than like a gamble.

Reading through an AAER investor discussion board Tuesday afternoon, I came across the usual mix of anger and amazement. One fellow claimed he and his family had lost $70,000 (not sure whether it has been realized or not). Others, who had pulled the trigger right on time after the announcement and had still been able to get out with a fat profit, saw their trades expunged by the regulator and were later forced to accept significantly lower bids.

This episode speaks to the risks of investing based on a story alone. The AAER story sounded too good to pass to many people, and few folks bothered to figure out what the firm was worth without those Hydro-Quebec contracts. Beyond just a story, generally upward movements in this stock in recent weeks were driven by a single high-probability event, and this is where gambling instincts take over rational analysis.

For me, the main lesson from something like this is that it reinforced the importance of risk management. Risk is inherent to investing, and it is important to take at least some steps toward managing it. In this case, I applied the simplest possible form of risk management: I pulled my initial money out. The only cost of doing so, unlike using derivatives, is the opportunity cost of potential future capital gains - so it's in effect free. This was mentally difficult to do in this case, as it often is, and I am actually guilty of not pulling any money out the first time the stock peaked in October and November 2007. Like many other people, when I did a rough mental computation of what I believed to be the probability of AAER getting at least one of the contracts, I felt I would be surrendering a lot of upside by pulling out too early.

Many pure play alt energy stocks are either unprofitable or are profitable but trade at very high multiples. Like AAER, many of them also receive rich valuations based on nothing more than a good story. There is therefore a good chance that pure-play alt energy stocks will add at least some risk to a portfolio. If calls and puts aren't for you, a good idea is to set targets at which to exit part of a position to protect gain. The more something looks like a gamble rather than an investment, the more disciplined one needs to be about this and the lower the threshold should be.

As for AAER, I'm hanging in there for now. I like some of the progress that's been made to date, and I think their strategy of targeting community-based projects under 50MW, which are the projects that are having the toughest time getting any attention at all from the turbine majors, could pay off. There is no doubt that this firm's prospects look a lot less bright than they did a few days ago, and the C$7.5 m financing discussed above could be in jeopardy (or at least may be renegotiated). With the momentum crowd now gone, I don't expect this stock to shoot up again for an appreciable period of time. If you're still holding AAER and are not sure what to do, the question you have to ask yourself is: do I really want to own this business or was I just gambling? In the latter case, better get out.

DISCLOSURE: The author is long AAER

Posted by Charles Morand at 07:58 PM | Permalink | Comments (0)

Taking a study break, I happened to see an article in the Denver Post bringing together two of my favorite clean energy themes: Efficient transport, and wind power. Rail transport has become essential to delivering windpower across the country.

The full article is here: Rolling With the Wind.

Posted by Tom Konrad at 04:53 PM | Permalink | Comments (0)

On Tuesday, Jennifer Kho at Greentech Media informed us that LDK's CEO was starting up a thin-film solar firm. Given thin-film's potential and the stock market successes of one thin-film maker in particular, the emergence of competition doesn't come as much of a surprise. And who else to do better than an already-successful solar entrepreneur.

On Wednesday, Craig Rubens at earth2tech featured an interview where the CEO of PG&E painted the future of utilities for us. An interesting interview on the potential and challenges of plug-in hybrids and net metering.

On Wednesday, Scott Krisner at Innovation Economy suggested that battery-maker A123 Systems had signed, sealed but not yet delivered on an IPO. Cleantech investors have been yearning for battery pure-plays for some time, so if this is indeed an accurate report it is sure to draw a lot of attention. The question is, will capital markets be ready for something like this in the fall?

On Thursday, Felicity Barringer and Andrew Ross Sorkin at the NYT told us that a prominent green group was helping an equally-prominent buyout firm becoming greener. KKR certainly raised eyebrows last year when, as part of the TXU deal, it decided to cancel a number of coal power plants on grounds that they represented a potential future liability. This week's announcement will, once again, re-ignite the debate as to whether shareholder value can be created (or at least material risks averted) by managing environmental matters in the same systematic way other areas of the firm such as HR or accounting are handled. PR or good business...what do you think?

In yet another indication that solar is slowly moving toward the mature industry status, Good Clean Tech informed us on Thursday that OptiSolar was planning on building the largest solar farm in the world. 550 MW of PV solar panels is a big deal, and at that scale the economies make the returns on projects like these very attractive.

Posted by Charles Morand at 01:05 PM | Permalink | Comments (0)

On Monday, Michael Kanellos at CNET's Green Tech Blog told us that cellulosic ethanol was to surpass corn...in 14 years. Turns out he got that info from one of the leaders in making enzymes to break down cellulose. So if it takes about 14 years for cellulosic ethanol to scale up production levels to about 15 billion gallons annually, or roughly 10% of current liquid fuel consumption in the US, could there be a risk that cellulosic misses the boat altogether? Most of the estimates thrown out there for the cost of cellulosic to be competitive with corn are in the neighborhood of four to eight years, but once costs come down will the industry be able to scale up fast enough to even stay relevant in the race for alternatives to gasoline?

On Tuesday, Toby Shute at The Motley Fool argued that Google's gigawatt was gaining steam. What gives Google an edge in renewable energy, according to the author? The firm's expertise in scalable solutions. I've never been a big fan of launching into things in which you don't have a competitive advantage or even expertise, so I'm somewhat skeptical of Google's forays into wireless and especially clean power . Nevertheless, the folks at Google can certainly tell a strong business model from a bad one, and I'm sure they know a thing or two about execution. Maybe one day I, too, will be silenced.

On Thursday, Matthew Hougan at Seeking Alpha shone light on solar ETFs. This piece provides a detailed overview of two solar ETFs launched recently. ETFs are a great way to balance concentrated exposure to a sector with a healthy amount of firm-level diversification, at a cost that makes sense for retail investors. For solar, you have the choice: you can go pure play or solar light.

On Thursday, Katie Fehrenbacher at earth2tech asked if PG&E would own solar power plants. The argument made here is interesting, namely that large utilities can leverage their strong balance sheets to acquire cheap capital for the construction of large-scale renewable energy projects like a solar thermal plant. Given the nature of these projects, where there is long-term revenue certainty and costs is where big gains can be realized, the ability to come in with cheap capital can make a notable difference over time. In fact, as the solar industry follows wind and consolidates, there is where you should expect the big players to have a significant advantage.

On Friday, Dan Lewis at AEI wondered whether Brazil's latest oil find would undermine its booming ethanol industry. Broadly speaking, he is wondering whether whatever oil can be found and economically extracted from unconventional sources is enough to put a dent in the current supply-demand imbalance, if indeed there currently is an imbalance, and therefore shift political and investor attention and resources away from the search for alternatives. This is every alt energy company's CEO's greatest fear, as there is no doubt that expensive oil has increased their access to, and lowered their cost of, capital. It has also provided some of the political justification for the generous subsidies alt energy has enjoyed in many jurisdictions. So the question begs asking: given the lengths to which certain governments have gone to promote alt energy, would a sharp drop in the price of oil be as much of a shock to the system today as it may have been five years ago? I think not, although alt energy stocks would take a serious beating for a time.

Posted by Charles Morand at 09:53 AM | Permalink | Comments (0)

Readers have probably noticed my less than consistent posting for the last couple of weeks.  I'm afraid that this is only going to get worse for the next month and a half... I'm currently studying for the third CFA® Exam, and I have much more to do than I had hoped I would at this point.   I may or may not post again before the exam (June 7th,) and if I do it will probably be short.  Charles has agreed to pick up most of the slack in May, as he did last week.

To those of you who have emailed me looking for advice or networking, I'm never very good responding to email (When it comes to advice, I try to respond to comments on the blog rather than email... people who want free advice should be willing to share.)  If I have not gotten back to anyone, it's not personal.

NREL Presentation

A couple months ago, I agreed (against my better judgment) to do an investing presentation as part of an event at the National Renewable Energy Laboratory.  So if you have a burning question (and live near Golden), I plan to leave a good amount of time for Q&A.  The event will be May 10 from 9am to 1pm, "Consumer Power for the 21st Century."  Details are available on NREL's Events page.  I'll present a version of my Investing in Renewable Energy presentation, with updates for current market conditions and some of my more recent thinking on peak oil.  Also presenting will be Wade O. Troxell, Ph.D, on smart grid applications.  Since smart grid is one of my favorite investing themes, I'll be interested to hear what he has to say.

DISCLAIMER: Although the CFA® charter is a well respected designation, you have to wonder about the sanity of someone who voluntarily decides to go through the process, and even enjoys it.  Therefore, everything Tom Konrad says or writes should be taken with a grain of salt: He's obviously nuts (and probably sleep-deprived, to boot.)

Posted by Tom Konrad at 12:19 PM | Permalink | Comments (3)

Investing in clean energy is both an economic and a moral decision.  From an economic perspective, I believe that constrained supplies of fossil fuels (not just Peak Oil, but also Peak Coal and Natural Gas) are leading to a permanent rise in the value of all forms of energy.  From a moral perspective, I know that we and the vast majority of our children are limited to this one planet for generations to come, so we should abuse it as little as possible, so, of all the possible forms of energy to invest in, clean energy (Renewable and Energy Efficiency) is my moral choices.

A Short Walk Down Wall Street

The investing decision does not have to stop there.  In addition to buying stocks we like, we can also sell (short) the stocks we hate.  There's a lot of truth in the caricature that environmentalists are much clearer about what we don't like (cars, mining, coal, pollution) than what we do.  For instance, "organic" is typically defined by the processes which are not used (chemical fertilizers, GMOs, pesticides) rather than those that are.  Smart Growth means "avoiding urban sprawl."  Those of us worried about global climate change want to reduce Greenhouse Gas Emissions.

I may be exaggerating, I also believe there is more than a (sustainable, local, organic) grain of truth in the caricature of the environmentalist as the wild-eyed environmentalist who chains himself to a tree (or runs around naked) in an attempt to stop some blight on the face of the planet.  

Why not embrace the stereotype in our investing?  When even wind turbines can kill birds (if less so than skyscrapers and pollution from coal plants) and solar panels are awfully expensive, it can be hard to agree on the companies or technologies that are truly "green" and which ones are just greenwashing.  Many well-meaning people make the case that we need nuclear power and/or "Clean Coal" to fight global warming, but it's hard to get behind a power source that involves finding someplace underground to store hazardous waste for centuries or millennia at great expense.

If we can't agree on what we like, at least we can agree on what we hate.  So why not short the companies which do the things we hate?

That's a rhetorical question.  Shorting is extremely risky, and should only be done with a careful eye to risk management.  That said, I'm generally bearish on the outlook of the stock market, so in addition to giving some simple rules to help people decide to sell what they already own, here are some ideas for those of you with courage of your convictions wanting to strike a blow for what you believe in.

#5: Meat

It has been claimed that the biggest step you can take to reduce your carbon footprint is to eat less meat.  Some of these claims may be exaggerated, but it's certainly true that the way we currently raise and transport meat, it's extremely energy intensive (not to mention unhealthy for both the animals and ourselves.)

SHORT IDEA: The rush to ethanol (caused by peak oil) is most likely to harm the economics of pork and poultry, so the vegan investor might consider shorting meat products companies such as Tyson Foods (NYSE:TSN), despite their partnership with Conoco-Phillips for Green Diesel.  

#4: Globalization

As well as eating vegetarian, ethical eaters also look at the energy necessary to get their food onto the table, as well as the energy costs of transporting all those Chinese-made gee-gaws.  While the distance of transport is an extremely  poor proxy for the energy needed to get the item there (containerized shipping is so efficient that we're likely to burn more fuel driving to the grocery store and back than we're likely to save by buying local foods while we're there), growing herbs in your own garden is likely to be much more energy efficient than flying them in from South America... especially if it saves you a drive to the grocery store for a singe ingredient.

SHORT IDEAS: Investors might consider shorting country ETFs of highly energy intensive economies with little local energy resources.  China is the first country which comes to mind for me, although the thought of shorting China scares me almost as much as global warming.  A safer anti-globalization short might be airlines (although they seem to be declaring bankruptcy so fast that we may have missed the plane on this one.   Truckers are also feeling the pinch of high gas prices, so if you, like me, feel that there's more where that came from, take a look at long-haul truckers.

#3: Urban Sprawl

Urban sprawl is the unwanted child of our ill conceived love affair with the car, and keeping the brat happy is one of the major factors keeping us together.  The biggest investment many of us will make is a home, so living near where you work is probably more important than your financial investments.  But that doesn't mean you can't strike a blow against sprawl with your brokerage account. 

SHORT IDEAS: Housing developers who slap 'em up cheap in the suburbs and exurbs, and the road construction industry.

#2: Coal & Oil Cos.

I personally loathe the coal industry.  Devastation caused by mining adds injury to the insult of massive carbon emissions.  Some oil companies have been making moves towards biofuels, but it's small potatoes compared to their main business.  Nevertheless, I'd stay away from shorting these two industries no matter how much you hate them... the same rising energy prices that will benefit clean energy will benefit the old fossil fuels.  Although both will have considerably less to sell as time goes on, they should be able to command premium prices.  

Although I can see a scenario where massive carbon regulation actually depresses the price of coal, I don't expect lower coal prices anytime soon.

SHORT IDEA: Don't do it.

#1: Sport Utility Vehicles

I'm convinced that the personal car will never be green.  The most forward thinking car companies, like Toyota, realize this, and are already starting to plan for a day when the personal car is obsolete (at least according to a presentation I saw at a recent conference.)  But it's likely to be too little, too late, especially for companies which seem to believe that an SUV that burns ethanol and gets 22 MPG is the height of greenery.  They may even have to go head-to-head with Wal-Mart.  This is the one short idea here I feel strongly enough about to actually dabble in.  I just took small short positions (actually far out-of the money January 2010 short calls) in Ford (NYSE:F) and General Motors (NYSE:GM.)  Admittedly, these companies have many other problems besides peak oil and global warming, but those are well known, and likely to already be factored in to the stock prices.

SHORT IDEA: If you've ever been tempted to vandalize an SUV, here's a legal option.

DISCLOSURE: Tom Konrad has short positions in F, GM.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 03:04 AM | Permalink | Comments (1)

This week, IMF officials voiced strong concerns over current biofuels policies in the US and Europe. On Friday, the head of the IMF claimed that biofuels posed nothing short of a moral problem for the West, and that he would support a moratorium on biofuels made from foodstuffs. Also on Friday, the IMF's Chief Economist called biofuels "a new form of protectionism" that is "now front and center in global geopolitics." For anyone who's been reading the news over the past month, you can't help but agree with this assessment. With food prices now rising in real terms for the first time in 30 years, humanity faces something it has never experienced in its history: global tightness in food supplies. Under such a scenario, producer nations shut their borders to export to shield their populations from steep agflation, wealthy closed economies like Venezuela or Russia fix prices for foodstuffs and subsidize the difference, and the poorest of the poor get zip. For as long as I have written for this site, I have always claimed that this would be the single largest problem facing corn ethanol in the US - much more so than industry-specific concerns like oversupply. While the current administration can be expected to dig its heels in on this issue, pressure over the past two years has only been increasing and I am doubtful that, in the current context global food shortages and the lack of evidence that ethanol does anything at all to reduce foreign oil dependency, the US and European biofulel industries can expect enduring support from their politicians. The deal they have been getting is much too good to be true, and I expect reality will set in sooner rather than later.

On Tuesday, Ted Nace at Grist told us about the education of Warren Buffett. Interesting piece on how MidAmerican, a Berkshire Hathaway company, abandoned plans to build a number of coal plants. While Buffett typically adopts a hands-off approach with his managers, he does get involved in important capital spending decisions, so you can rest assured he had a say in this. Now for anyone who has been following what's been happening with coal power in the US, it's not exactly true to this decision went unnoticed at the time. Moreover, while Buffett does not have a track record of making high-profile pronouncements on the environment, MidAmerican has built a significant portfolio of wind generation assets and, again, you can bet the Oracle had a hand in making this happen. Were these decisions made because Buffett has suddenly turned environmentalist? Not a chance! Am I happy that the greatest visionary in US capitalism is seeing green in green? You bet!!

On Tuesday, the WJS's Environmental Capital about the latest large oil producer to throw the peak production towel. The May edition of Bloomberg Markets also featured an interesting article discussing declining production at Pemex, the Mexican oil giant (unfortunately this article isn't available free of charge). In both cases, it probably doesn't help that federal authorities have done everything in their power to discourage foreign investment. Nevertheless, given the opacity surrounding the state of global oil reserves generally, these tidbits of info can't help but lend further credence to the peak oil theory.

On Thursday, Chris Baltimore at Reuters told us about a certain billionaire Texas oil man who is making big bets on wind. Projects of this magnitude will do wonders for the economics of the sector by helping prices come down. I also like the idea of a north-south wind corridor and an east-west solar corridor. I'm not sure, however, that natural gas will ever power a significant portion of cars. It would appear illogical to me to switch out of a non-renewable fuel source at great costs to replace it with another.

On Thursday, Jim Fraser at the Energy Blog informed us that Trina Solar had canceled a $1 billion polysilicon plant. The reason? The poly supply shortage is easing and Trina can sourse all that it needs in the market place. Polysillicon has been the main enemy of margins in the solar PV industry over the past couple of years. Could it be time to start looking at some of the solar stocks that were particularly exposed to this?

Posted by Charles Morand at 09:28 AM | Permalink | Comments (1)

Tom couldn't attend to his usual Monday column this week so he asked me to step in. My own investing has been partially on hold over the past couple of months as I have been watching developments in the markets, so I figured I would open the week with something a little lighter albeit not entirely unrelated to alt energy and cleantech investing.

Deflating Valuations = Happy Value Investors

One of the good things about the current state of equity markets for alt energy investors is that several great company's stocks that had been trading at rich multiples for most of 2007 are now priced more reasonably. In fact, for value investors, markets such as these present wonderful opportunities to get in at acceptable levels on good stocks.

At its core, the value investing approach purports that, when buying a company's equity, you should only ever pay for one of two things: (a) the replacement value of the firm's assets (including intangibles like technology and client relationships) or (b) what is affectionately referred to as "the moat", meaning some form of strategic edge that competitors cannot replicate.

With regards to replacement value of the firm's assets, this effectively means that if a stock is trading much above its book value per share plus certain adjustments (say higher than 1.4x), value investors won't find it too interesting. This metric represents what it would cost a competitor to exactly replicate the business, and so adjustments to the balance sheet include intangible items like patents and customer relations. On the second point, the moat can be thought of as a market position that is nearly untouchable for one reason or another. For example, First Solar's (NASDAQ:FSLR) trailing PE of 132x can be partially explained by the company's unchallenged manufacturing and cost leadership in the thin film PV space - investors perceive a moat and implicit in this high multiple is a belief that earnings won't come under attack from competition any time soon.

Needless to say, certain alt energy sectors such as solar PV have seen PE ratios deflate appreciably since the fall of 2007. PE ratios of 15x and under are the ideal range for value investors and, while many alt e stocks still have PEs far above that, certain good opportunities have certainly emerged in the past few months.

Now I don't want to delve too far into this just yet as I intend on doing a full value analysis of a stock I'm considering buying in a few week's time. But for those who don't know a lot about the value investing philosophy, I would recommend familiarizing yourself with it. It can be a powerful, and, if you truly follow it, disciplined approach to investing that has had a very respectable track record over the past four decades, thanks in large part to...

Warren Buffett

Mr. Buffett, the world's richest man and the most famous disciple of value investing's inventor Benjamin Graham, generally needs no introduction.

A few of my classmates and I had the extreme pleasure and honor of traveling to Omaha, Nebraska, to spend the morning and lunchtime with Mr. Buffett a couple of weeks ago. It was a truly once-in-a-lifetime experience. While I admire the work and talent of many people, I don't often come across individuals that I find inspirational on a personal level. Warren Buffett's thinking on many issues related to investing and business has definitely influenced my own, and it turns out that his approach to life in general makes a lot of sense to me. His most memorable advice to us: "The number one thing you should look for in a spouse is not humor or smarts, but low expectations." I've tried to convince my wife of this since to no avail.

So, as a prelude to a post dedicated to the value investing approach to security analysis in a few weeks' time, I figured I would share a few thoughts and pictures with our readers on the man who has had the most impact on the field of value investing, and, truthfully, on investing in general.

Some Pics

This sign in medium-sized letters next to an innocuous-looking door is about the only thing in the building telling you where you actually are

Lunchtime at Piccolo's Steakhouse. Mr. Buffett loves a good steak for lunch and a rootbeer float for desert

Mr. Buffett and myself after lunch

Posted by Charles Morand at 10:21 PM | Permalink | Comments (2)