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)

A common complaint about investment writers is that we are always willing to tell you the next stock to buy, but we don't always get around to telling you when to sell.  I'm as guilty of this as most: generally, I write about the stocks I'm interested in... which are the ones I'm buying, not selling.  And, although I write the occasional negative article (Petrosun Drilling most recently, but also US Sustainable Energy and Global Resource Corporation), these were more stocks to avoid, rather than stocks which had seen their run.

This is unlikely to change.  For a start, I'm not selling many alternative energy stocks... I'm using the downturn to add to my holdings, and intend to continue doing so even if the downturn becomes a full-blown bear market, as it well may.  What I am selling are stocks I bought in 2001-2004, mostly precious metals mining stocks, and I have not researched any of them for 3 years.  I don't have a lot to say about them, nor would an article fit the Alternative Energy Stocks theme.

In the absence of specific "sell" articles, I thought I'd outline a few rules of thumb I use to know when to sell.

Rule #1: Rebalancing

I have target percentages for both stocks and asset classes, above which I will sell part of my holdings.   For the mining stocks mentioned above, whenever they appreciate to more than 11% of my total portfolio, I sell some to bring the percentage back down.  For individual stocks, the target depends on how risky I believe the stock is.  For large, stable companies this is around 3-5% of my portfolio each, while for more speculative companies, this is less than 1% of my portfolio for any single stock.

Rule #2: Sell Half on a Double

For particularly speculative companies, especially one with negative earnings, I'll typically sell half of my holdings if the stock doubles from where I bought it.  This rule served me well last year with Composite Technology Corporation (CPTC), allowing me to take some gains, but then buy more recently when the stock fell back.  I failed to follow this rule with Electro Energy (EEEI) this January, and optimistically put in an order to sell 40% of my holdings at 2.5 times my purchase price ($1.30), but the stock peaked in intraday trading at almost exactly twice my purchase ($1.05.)

Both these tocks have since fallen back, but I was able to buy more of CPTC with part of the gains from my sale, while I have my original position in EEEI.

Rule #3: Capture Short Term Losses

Come tax time, I want all my capital gains to be long term ones, taxed at only 15%.  To that end, if I'm sitting on a good sized loss in a stock I bought 9-11 months earlier, I seriously consider selling so that I can use the loss to offset short term capital gains in the coming year.  If I'm very bullish about the stock, I will usually buy more, wait a month to avoid a wash sale, and sell the original position.  If I'm just neutral on the stock, I sell without buying more first.

Rule #4: Get Paid for Your Decisions

If I plan to sell some of my holdings because of one of the above rules, I often do so using covered calls.  For instance, if 4% of my portfolio is currently General Electric (GE) at $37, it would be over 5% if the stock goes to $50, and I would want to sell some because of Rule #1.  I can currently sell GE Jan 2010 $50 Calls for around $1.  If I sell calls covering half of my position, I make an immediate 1.3% (=1/37 x 1/2) gain on my holdings, and only if the stock goes up to $50 before January 2010 do I have to sell half my holdings... something would do anyway because of Rule #1.

This strategy is very similar to how I often buy stocks, using cash covered puts.

Rule #5: If You Need the Money

If you need the money for something else, it's quite likely that you will be forced to sell something at precisely the wrong time.   Because of that, I always try to keep enough cash around to cover several months of normal or anticipated expenses, and I never buy stocks on margin (because of margin calls).  If I need small amounts of cash anyway, I often sell covered calls or cash covered puts, as described in rule #4.  Try to plan ahead as far as possible in advance, and keep enough cash that you never have to sell on short notice..  

Conclusion

I often think that knowing when to buy and sell is often more important than knowing what to buy and sell.  All these rules are simple, but it's easy to lose track of them chasing the next hot stock tip.  These rules are especially valuable in the volatile world of alternative energy stocks, as the examples in Rule #2 show.  If you normally come to this blog for stock tips, remember that knowing when as what to sell is at least as important as knowing when and what to buy.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CPTC, EEEI, and GE.

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 03:50 PM | Permalink | Comments (1) | TrackBacks (0)

by Tom Konrad

Lifestyle Risks from Peak Oil

In the US, we all have a large exposure to the risk of rising energy prices.  In addition to the cost of gasoline, the whole US economy runs on oil, so a rise in the oil price is likely to affect our jobs, and the prices of all our assets, including our homes.  If other people have less money to spend and invest because of high oil prices, there will be a fall in demand for anything they were buying or investing in.

House prices in exurbs and suburbs where the car is the only available transport option are likely to be most affected because living there entails relatively high car use.  If you live far from where you work, your expenses will not only go up with the price of oil, but the value of your home is likely to fall, leaving you doubly exposed.  In contrast, real estate which is centrally located or which is well-served by mass transit may show positive correlation with the price of gas, and hence serve as a against the gas price.  

This oil price exposure can be (imperfectly) hedged with investments in clean energy or oil price futures, but a more effective way to reduce your risk is to live close to your work.  If you already live far away from most jobs and own your home, you can reduce your personal expenses by finding ways to telecommute or use mass transit, but the value of your home is still linked to the oil price.  Since this is a long term trend, you may be able to protect the value of your home by advocating for better public transit in your area, but given the time and effort this entails, a large allocation of your portfolio to clean energy stocks or oil futures is probably the best you can do.  In addition to my own blog, Jim Kingsdale's Energy Investment Strategies is an excellent place to learn about investments available to the retail investor.

However, you should not underestimate the magnitude of oil's direct impact on your expenses.  If you drive 30 miles round trip, five days a week, that's about 300 gallons a year, even in a 30 MPG vehicle.  Each $1 increase in the price of gas requires $300 of extra income a year to hedge your exposure.  

Driving an alternative fuel vehicle is not a hedge for oil price risk, since the prices of alternative fuels are highly correlated with the prices of petroleum based fuels, although a more efficient vehicle is a partial hedge.

Investments as a Peak Oil Hedge

For investments to hedge that expense, you will need investments that increase $6,000 to $8,000 for each $1 increase in the price of gasoline to produce $300 of extra income annually.  Assuming you have found a portfolio which increases 10% for every $1 increase in the price of gas, you will need approximately $70,000 invested to hedge your commuting costs, and possibly as much again to hedge the price of your home.

Even with $70,000 to invest, most stocks or portfolios of stocks are an imperfect hedge against the price of gas.  The best hedge in terms of correlation with gas prices are oil or gasoline futures, but trading futures is considerably less accessible than trading stocks, and does not produce income.  Trading oil futures is a zero-sum game: for everyone who makes money, a counterparty loses money.  In stockmarket investing, the internal profits of companies can provide a basis for a positive net return for all investors.  That extra benefit and the opportunity to invest with my beliefs, make me willing to accept the much weaker correlation clean energy stocks have with energy prices.

Better Than a Hedge, Reduce Your Risk

If you don't have $70,000 in your portfolio to neutralize your gas-price risk, or are uncertain of your portfolio's correlation to the gas price (most stocks will actually fall as the price of gas goes up,) it makes sense to find less gas-intensive options to your normal commute.  Then, if fuel rises to a painful level, it will be easier for you to switch quickly to less fuel-intensive options. 

Even though I live near my work, I've been doing just that, ever since I became convinced that better cars are not an effective solution (or investment response) to peak oil.

An EV You Can Carry in One Hand

A couple weeks ago I mentioned that I was cutting my driving with a Motorboard.  The motorboard is an electric scooter which is so compact that you can fold it up in a few seconds and carry it in one hand (it weighs about 16 lbs.)  I think of it as a much cheaper and cooler Segway which I can carry.  Since it has a low range, it is best seen as a supplement to mass transit, not a stand-alone transit option.  The combination of motorboard plus transit allows distance travel without the limitation of start and end points within walking distance of transit stops.

I wrote a review of the Motorboard for Carectomy.com, which you can read here.

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 05:59 PM | Permalink | Comments (0) | TrackBacks (0)

Electricity too cheap to meter.  For many renewable energy advocates, that is the holy grail… new technology which will not only solve the problem of carbon emissions, but be so transformative that we no longer have to worry about turning off the lights when we leave the room.

We could argue for days about the viability of any such technology, be it cold fusion, hydrogen, or photovoltaic nanodots.  I personally have strong opinions about the likelihood of any technology to produce energy so cheaply that it would not make sense to use some mechanism like price to ensure that it is used productively.

We could argue about that, but it would be the wrong argument.  The time we have to act to confront Climate Change is much shorter than the time it takes to develop and implement new technologies.  Even if photovoltaic nanodots achieve their early promise, they will take decades to reach large scale availability.

New technology will be too late to save us from Climate Change.  The longer we wait to make real reductions in carbon emissions, the more drastic those cuts will have to be.

Marshalling our Energy

Much more (and sooner) than we need new technology, we need to implement the technology we have today.  The good news for all of us is it is much easier to pick well-run companies in established industries than it is to decide which new technology will produce the promised manna from heaven.  Rather than politicians and investors trying to pick which hot new technology we should back, we should look at existing technology 

If we're truly serious about tackling Climate Change today, we will let next year's technology take care of itself, and spend our efforts implementing the very effective technologies we have today.

Many Renewable Energy advocates and scientists are calling for a new energy Manhattan Project.  That's the wrong metaphor.  Instead, we need a Marshall Plan for Energy.  Much more than new scientific resources, we need to leverage our financial and organizational resources to get the needed projects on the ground today.

Here is what we can do with current technology in North America today to fight climate change: 

1. Build a continent-wide High Voltage DC grid along the interstate corridors to bring Concentrating Solar Power from the Southwest and Wind Power from the Great Plains to the rest of the country, and balance demand across the continent, lowering the need for new peak capacity.

2. Never build another building that does not include all economic energy efficiency upgrades.

3. Change the incentive structure to reward everyone for driving less, not more.

4. Invest in our public transit systems.

5. Implement continent-wide smart grid and metering to better manage the fluctuations of renewable energy sources, give people information about the energy they are using, and time-based pricing to better align supply and demand.

6. Never build another exurb.  Encourage infill and denser growth that allow people more travel options.

That's my Marshall Plan.  Every one of those items will save more money for society than it will cost.  Some are complete win-wins, others will produce more winners than losers.

When we've done those six things, we'll have technology which can take us the rest of the way.  Those technologies (Wind Power, CSP, PV, Biomass electricity, Plug-in hybrids or Electric vehicles) already exist, and require only incremental improvement and deployment.  We'll have a lot less far to go, and the improved infrastructure will make any new technology easier to implement.

Posted by Tom Konrad at 03:42 PM | Permalink | Comments (1) | TrackBacks (0)

I got a call from my broker this morning asking me if I'd be willing to loan out my shares of Cree, Inc. (NASD:CREE) to a short seller.  Since the only cost to me is that I will not be able to vote my shares, and I will earn 2.5% per annum on the value, I said "yes." 

Normally, brokerages get the shares they lend out to shorts from margin accounts with a margin balance.  Since I never carry a balance (although I do have a margin account in order to trade options) they must ask my permission and pay me interest in order to borrow my shares.  I'm planning on holding these shares for the long term, so I'm happy to earn an extra 2.5% on my money.  (I could still sell them, in which case the short seller would have to find shares to borrow from someone else, or cover his position.)

I also had the idea of creating some synthetic cash-covered short puts (a combination of the long position in the stock with short calls) to give me more shares to loan out, but the relative prices of calls and puts on Cree make this unattractive.  Most likely, other arbitrageurs who are able to earn higher interest on their loaned shares have already pursued this route to the point where it is no longer attractive to me (my return on capital would only be about 8%; I can do better with a plain-vanilla cash-covered puts.)

What to Make of the High Short Ratio?

Cree's short ratio (the ratio between the number of shares short to the company's float, or shares available for trade) is an extremely high 26.9%, and has risen over the last month.  This is why my broker was calling me to borrow shares.  But, other than my opportunity to make an incremental profit on my shares, what does this mean for the future of the stock?

On its face, a high short ratio means that a lot of investors are bearish about Cree's prospects.  This can be good or bad news, depending on how likely the shorts are to be right.  The contrarian position (and I usually lean towards the contrarian) is that most investors are usually wrong, meaning that a high short ratio is a bullish indicator.  We also know, since I'm getting calls from my broker, that few new investors will be able to short.  Finally, there is the potential of a short squeeze, which could be triggered by positive news such as another buyout rumor.  Short squeezes can lead to radical price increases over short periods.

I'm taking the call from my broker as another moderately bullish sign.

DISCLOSURE: Tom Konrad and/or his clients have long positions in CREE.

DISCLAIMER: The information and trades provided here and in the comments 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 03:09 PM | Permalink | Comments (0)

It's that time of year again.  I've started studying for the third (and final) CFA® exam, and my readers are "treated" to my theories of the market and trading.  No stock picks today; put your thinking caps on! 

CAPM: Nice Theory, Too Bad About the Market

In Level II of the exam, we studied efficient-market theories, such as CAPM and APT.  I actually like an elegant theory (I spent nearly decade of my life studying mathematics), but as a market practitioner, I know the market doesn't work that way.  I learned this lesson the hard way.  

Early in my investing career, I would short overpriced stocks.  For instance, I twice shorted Amazon (NASD:AMZN) in 1999.  At the time, Amazon was bouncing up and down between $50 and $100 (split adjusted), and, looking back 8 years later, it was clearly overpriced even at $50.  After all, it's only at $88 today, meaning the annualized return from buying the stock in 1999 at $50 has been about 7%, while the expected return under CAPM for a stock with a Beta of 3.02 would be around 18% per annum.  (Assuming a 6% risk-free rate equal to the ten year Treasury note yield at the time, and a very low equity risk premium of 4%.)

Put another way, if Amazon had been fairly valued according to CAPM at $50 in 1999, it should have been around $190 in 2007, when in fact it mostly traded below $100.  It should never have fallen below $6 in 2001.

Looking back at my records, I actually made money on those two shorts (I made $4,661 on the first and lost $3,045 on the second), but it's the loss that stuck in my mind and prompted me to use this example.  After I closed out the first short near $50, the stock rebounded to $59 and I shorted again.  It kept on rising, and I got cold feet and took my loss at $65 (I also needed a tax loss, but that didn't make it hurt any less.)  

Although I didn't know it when I sold, if I'd tried to wait for the stock to start falling again, as it did in 2000, I would have had to ride through a paper loss of $24,000 before the stock fell to where I was in the black again.  Even people who have the margin balance to ride through a reversal like that find it very hard to do emotionally.

Lessons Learned

The lesson I took away from that (and a couple of other painful shorting episodes), is that CAPM alone is a lousy theoretical basis for investing or trading.  I still do occasionally short, as I am currently doing with First Solar (Nasdaq:FSLR), but I generally take smaller positions and do not rely solely on valuation.

My primary investment framework is Behavioral Finance, actually a grab-bag of theories which focus on investor psychology to explain market behavior that cannot be explained by traditional theories such as CAPM which assume market efficiency.  To my pleasure, Level III of the CFA® exam contains considerable material on Behavioral Finance, which I am reading now.

The Winner-Loser Effect

One of the most widely documented market behaviors which cannot be explained in an efficient market is the Winner-Loser effect.  Put simply, stocks which have performed badly over a period of a few years tend to outperform stocks which have performed well over the same period in subsequent periods.  I take this to mean that, all else being equal, I should prefer to buy stocks which have performed badly over the last couple years to stocks which have recently done well.

This is harder than it sounds.  I think the easiest way to demonstrate this is through introspection.  Compare this chart,

from my original article about Electro Energy (NASD: EEEI) to this more recent chart of the same company:

Looking at the charts, which of these stocks would be easier to buy?  If you can honestly tell yourself that the first would be easier to buy, you're very unusual.  I personally would have a much easier time getting myself to buy the second chart, and was only buying the first chart and the dip that followed because I know that I have face my fear to make good trades.

People who bought EEEI at $0.50 when I first recommended it (and managed to hold not sell when the stock dropped as low as $0.30) are now sitting on a 70% gain in just a few months, and can look forward to participating in the same gains that someone who bought it in response to my Top Ten Picks for 2008 article.  (I'm almost certain that the reason the stock jumped 40% on December 31st was because of that article... there was no other news relating to the stock that day, and most of the move was due to a single large purchase a few minutes before the close.  If you were that buyer, I strongly suggest using limit orders when trading a thinly traded stock like EEEI.)

Cash-Covered Puts

With small cap stocks like Electro-Energy, the only way I have to make sure I buy them when they're down is keeping a tight rein on my emotions, but with larger capitalization stocks which have exchange-traded options available, I have a trick that makes it much easier.  Consider another pick from the same article, FuelCell Energy (NASD:FCEL.)  Part of the reason I chose to include it in the list is that its five year performance has been lackluster, especially when compared with other alternative energy stocks.  Unlike EEEI, I had not been following it closely and only had a small position before I wrote the article.  However, I convinced myself that the company has excellent prospects while doing my research, and so I wanted to buy more.  

Rather than putting in an order for the stock, I looked at the longest dated options available, in this case options expiring in July 2008. 

I sold (or "wrote") a number of July 2008 $5 FCEL Puts for $0.25 each when the stock's price fell on January 2nd.  For each contract, I was paid $25 by the purchaser, and I am obligated to buy 100 shares of FCEL at any time between now and July 19th for $500, or $5 each.  Keeping the necessary cash available until then, I not only earn interest on the $475 of my money, but also the $25 I've already been paid.  If FCEL does not fall below $5, that put will never be exercised, and my $475 has earned me about $36 in six months, or a 15% annualized return (actually a little less because I had to pay a commission, but it's still over 12%.)

If the stock price has fallen to $4 (a situation I find emotionally hard to believe now, but one which I intellectually know is a real possibility) then the put will be exercised, and I will have bought FCEL for about $4.75 a share, even though it's trading around $10 now.  The irony is that, although I'd be jumping for joy at the prospect of buying FCEL for $4.75 a share today, experience tells me that if the option is exercised next July, I won't feel happy about it at the time.

Here's what might happen: some bad news will come out about the stock in the next four months, and the stock will fall to $4.  I'll then be sitting on a 16% loss on my $4.75 per share investment in a "loser" stock.  If all that happens, and someone asks me if I want to buy more at $4 (16% less than I feel would be the deal of the century if I could have it today), I'd almost certainly say no.  In other words, when I wrote those Puts on January second, I tricked my future self into buying a loser.

Losers, in the long term, tend to out-perform winners, and this is a loser I like for all the reasons I outlined, even if I may not be feeling so happy about it in July.  In order to get in that position, all I have to do is to not sell the stock for a loss.  Not selling a loser you already own is actually easier emotionally than selling and taking the loss.

That's what I mean by "tricking myself."

Getting Started Writing Cash-Covered Puts

If you'd like to try the above strategy yourself, I have some bad news.  While selling cash-covered puts and covered calls are actually lower risk strategies than buying and selling equivalent amounts of the underlying stocks, there are a lot of other things you can do with options that are much, much riskier.  For instance, you could sell the puts above, but decide you have better uses for the $500 cash than leaving it in a money-market fund... until the stock falls precipitously and you have to come up with the cash.

Regulators know about these risks, and they make investors jump though a lot of hoops to get option trading permission.  The procedure varies from broker to broker, but there is usually a net worth requirement (as if money made people smarter) and you also have to claim that you understand the risks involved.  Don't take short-cuts on this; just reading this article is not enough!  Get yourself a good book on options trading , or spend a few days learning about them online (you may have to do some searching... I had trouble finding a free option information resource that I would recommend.  But I can tell you what to avoid: anything that talks about getting rich quick.  I don't actually know that the linked book is bad, but why waste your time?)

Check with your broker to see if your net worth qualifies you to trade options.  Study up on them if you need to, and then fill out your broker's options trading permission.  

My own broker was a day trader in the late 90's.  Like most day traders, he lost his money and had to go back to a real job.  He says that the only traders he knew who made money were the ones who wrote puts on stocks they liked.

DISCLOSURE: Tom Konrad and/or his clients have long positions in EEEI, FCEL, and a short position in FSLR.

DISCLAIMER: The information and trades provided here and in the commetns 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 11:37 PM | Permalink | Comments (2) | TrackBacks (0)

On Monday, we learned about big coal companies pushing back against the major US corporations of the US Climate Action Partnership (USCAP,) which advocates for mandatory regulation of greenhouse gas with their own lobbyists.  

Since I have advocated buying companies that take a proactive stance on climate change, I thought it might be instructive to compare the returns of the original ten members of US-CAP with the returns of the big coal coal companies (more companies have since joined,) over the six months since the Climate Action Partnership issued their Call for Action on Climate Change.  

The Payoff

So far, shareholders of the big coal companies have done much better than shareholders of the US Climate Action Partnership companies.  The former have received a year to date total return (including dividends) of 24.7%, which easily exceeds not only the return on the market as a whole, but also is slightly higher than my proxy for the energy sector, XLE, the iShares energy sector SPDR, which returned 22%.  In marked contrast, the original partnership companies returned only 7.7%, which was below the total return on the S&P500 for the same period.  

On a more optimistic note, the four companies that I have actually been buying for my own and client accounts (shown in gray) have returned a much more respectable 11.7% over the period, although naturally our returns varied from this because we did not purchase an equal-weighted portfolio of these 4 companies on January first.   These selections are based on my subjective analysis of how much these companies actually stand to benefit from climate change, as well as traditional valuation and governance factors.

Conclusion

Despite the record of the last six months, we should not conclude that climate advocacy is bad for a company's share price.  Political action on climate change is a process that has only begun.  If there is a payoff for climate advocacy, it will be seen over a period of years or decades, not months.  

In addition, the coal companies must think that carbon regulation will hurt their bottom lines, or they would be unlikely to fight it.  An investor who thinks mandatory carbon regulation is coming will therefore want to avoid owning those companies when such regulation comes to pass.  Likewise, companies which self-select by joining the partnership probably expect to gain from carbon regulation.

Finally, most of us want not only to achieve our financial goals, but also to live in a world where we can enjoy them.  Several recent studies have shown that the costs of dealing with climate change are far smaller than the costs of doing nothing.  While we may have to give up a fraction of a percent of GDP growth in the near term , we have to balance that sacrifice against losing a large fraction of our GDP if we are confronted with the droughts, flooding and erratic weather predicted as a consequences of climate change.  These effects will also be felt by your whole portfolio, including by companies that have stayed out of the debate entirely.

In the end, we want not only a nice income in retirement, we want a nice planet to retire on.

DISCLOSURE: Tom Konrad and/or his clients have positions in these companies mentioned here: FPL, CAT, GE, and DD.

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 05:27 PM | Permalink | Comments (0) | TrackBacks (0)

Last week, I looked at how a small investor could gain an advantage in the market by understanding the other players.  The most important other players are institutional investors such as hedge funds, pension funds, mutual funds, and investment banks who have considerably more resources and valuation skills than the individual investor, and so trying to take them on directly to beat them at their own is likely to be an expensive exercise in futility.

Two Exploitable Weaknesses

On the other hand, I argued that institutional investors have certain handicaps and biases which do allow small investors to enter the market on our own terms, and not compete directly with the institutions.  These include:

1. Too much money.
2. A focus on quantitative as opposed to qualitative analysis, which leads to a focus on the past.

I listed several other weaknesses last week, but these are the two I focus on when doing my own investing.  While the overall returns of some money managers are hurt by the agency problem (looking out for their jobs rather than their client's returns) and the like, I have not come up with methods of taking advantage of these weaknesses.  In fact, I think that there are a bunch of other traders and hedge fund managers out there doing just that, and the last thing I want to do is go up against hedge funds.

I'll deal with just these two, and point to some tactics a small investor can adopt in the pursuit of an edge in beating the market.  The underlying theme is always the same: in order to beat the market, we have to identify mispricings: instances in which the value most market participants place on a security differ from its true value. Small investors, with far fewer resources than institutional investors, should focus on securities that institutional investors are ignoring, or analyze securities in ways institutional investors do not.  If you can think of other ways to exploit weaknesses of institutional money managers, all the better: you won't be in competition with me, either.

Too Much Money

To a small investor whose biggest financial decision in life so far has probably been the purchase of a house, the idea of having too much money may seem laughable.  Nevertheless, too much money is a very serious handicap for institutional money mangers, and the only handicap they all share.  If you have $50 million dollars to invest (the size of a small mutual or hedge fund), and you're looking for a stock that will add 0.1% to your returns if its price doubles, you are going to have to invest $50,000 in that stock.  That won't be a problem if you want to buy Archers Daniels Midland (NYSE: ADM) for exposure to ethanol and biodiesel, because your trade will barely be a drop in the daily volume of stock traded.  On the other hand, if you want to buy $50,000 of Earth Biofuels [OTCBB: EBOF],  which has a market capitalization of less than $100,000, you could easily wind up doubling the price of the stock in the process, greatly reducing or even eliminating any potential gains.

In other words, in order to make any profit on a stock, that stock must have some degree of market capitalization, and trade enough volume to make a substantial investment at a reasonable price.  In other words, institutional investors are compelled by their size to invest only in companies that are (at least to some degree) reasonably large and liquid.  There are no particular cut-offs on what makes a stock large or liquid enough for institutions, since institutions come in all sizes.  

Because large investors can buy them, shares in highly liquid securities often trade at a higher price than they would otherwise (called a liquidity premium), and hence illiquid securities have, on average,  higher long term returns.  More importantly for our discussion, there are few or no analysts trying to asses the value of illiquid securities, and so a diligent individual investor is more likely to be able to identify an under priced security. If you want to find a rare coin, you have a much better chance if you look through a jar of pennies found in the attic than if you look in your loose change jar.

With a liquidity premium comes liquidity risk: the risk that, should you want to sell an illiquid security, you will not be able to sell at a reasonable price, or, on occasion, at any price.  I have a personal rule not to put more than 1% of a portfolio into an illiquid stock, especially ones that trade off the regulated exchanges, and even then, I'll also limit the fraction of the portfolio devoted to these sorts of stocks.  Nevertheless, given the low professional interest in illiquid stocks, most of them are mispriced: the trick lies in finding the ones which are substantially undervalued rather than overvalued.  It's not uncommon to see a stock go up many times in a single year.  On the other hand, it's not uncommon to see them plummet to nothing in the same period.

Given the prevalence of over the counter stocks that are little more than an excuse to part investors with their money, I only look at companies that I read about in the non-financial press.  I think of it this way: if a company's purpose is to sound good to investors, they will target investors with their public relations.  On the other hand, if they are out in the world solving real problems or providing necessary services for paying customers, then I'm much more interested.  A company that's talking about its great business plan to solve a problem I had not thought of on my own is much less appealing.  Worse yet are companies setting out to solve a problem that everybody is talking about, which I take as a sign that a company is trying to hop onto a bubble bandwagon. Companies which are actually out making news (as opposed to generating PR news releases) are much more likely in my mind to have something customers want, and these are the companies which deserve further research.

If you're considering investing in small, illiquid companies, no matter what sort of analysis you intend to do, I suggest you limit yourself to investing in no more than one third to a half of the companies you analyze.  This will discipline you into making hard choices, and prevent you from putting money into a company simply because you feel that all the hard work you did researching it deserves to be rewarded.  The market does not reward hard work: it rewards good judgment (a much rarer commodity).

Quantitative Analysis, and a Historic Bias

Much of my article last week was devoted to making the case that institutional money managers focus too much on quantitative analysis rather than qualitative analysis, and I won't repeat that argument here.  When considering the same companies that large investors analyze, we should not spend much time doing traditional valuation: it's already been done by many other people who spend days analyzing one company, and poring though the footnotes.  

When looking at big companies, the small investor's potential advantage is lateral thinking, leaps of intuition that become less and less likely the more analysts delve down into the footnotes of a financial statement.  

The stock market, and history as a whole, is prone to breaks and sudden reversals.  When everything is going well, it becomes harder to see dangers lurking in the corner.  When the roof seems to be caving in, it becomes hard to see the light at the end of the tunnel. Aggravating this is the fact that financial statements are historical documents.  Typically, when an analyst wants to project the future of the firm, he will start with this historical data, and see how all the factors he can identify have interacted in the past, try to guess what these factors will be in the future (often by extrapolating existing trends), and see what comes out.

But what if the key to the future is not contained in the past?  The millennium bug was a disaster that everyone saw coming, and because of that, they took the necessary steps to deal with it, and when 2000 rolled around, the whole thing was a fizzle.  On the other hand, Long Term Capital Management failed because their sophisticated mathematical models of the complex relations between a wide variety of different financial assets failed when those relationships broke down during the Russian default in 1998.

Such Black Swan events are, by their nature hard to predict.  But, to beat the market, we don't have to predict the unpredictable, but only to make a prediction that most other people have not yet made.  Some events defy prediction by their very nature, but more defy prediction because of our psychological biases.  Put simply, few people predict things that should be obvious because they don't want to see them coming.  For instance, you probably know someone who was in a doomed relationship, but absolutely refused to acknowledge the relationship was ending until long after it was over.  That happens all the time in the stock market.  People did not believe that the stock market was overvalued in 2000 (despite repeated warnings) because they were too attached to making 15-20% a year on their investments.  They were flipping condos up until a year ago despite the fact that both the ratios of home prices to rents and home prices to median income were at historic highs.  These were predictable changes in the market, which people did not see because they didn't want to see them.

I spend a lot of time trying to think about the unthinkable.  What could happen that would totally change the rules of the game?  What is the disaster that no analyst is building into their projections because it's too difficult to contemplate or quantify?  What are the chances that these things might happen anyway?

To beat the market, we need to "think outside the box."  It's a cliché, but it's still a lot easier to talk about than do.  And there's no instruction manual.

Conclusion

Neither of these tactics is simple or easy to implement.  If beating the market were an easy task, everyone would do it.  Before you even try, you should first ask yourself if there is some reason you may be better than anyone else, because if you're not better than most people who try, your results won't be any better either, and you'll end up losing money.   Last year, I put together a quiz, with a very serious purpose: to help people self-assess if they might actually have an investing edge (or at least if they don't have many of the traits that cause people to fail.)  It's not very scientific, but I like to think that it will help someone who shouldn't be trying to beat the market to decide to index their portfolio, or at least persuade someone who is bound to try any way to dip their toe in rather than diving in head first.

I believe it's possible for a small investor to beat the market over the long run, but I don't think that most, or even many, small investors have much of a chance.  It's human nature to believe that we're the exception to the rule, and in some ways it's rather ridiculous for me to be telling you to take a hard look at yourself before you try: I wouldn't have taken that advice.  

What we need to decide for ourselves is how much of our confidence is actually overconfidence.  Most of us who try to beat the market will fail, but I like to think that I've helped a few small investors along the way to success.

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: ADM.
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 05:05 PM | Permalink | Comments (0) | TrackBacks (0)

Because I'm currently studying for the second (of three) CFA® exam, I'm going to take a break from my usual article analyzing some aspect of alternative energy.  This week and next, I'll take a step back and try to answer an existential question: How can I possibly hope to beat the market, when "the market" consists of professional money managers with resources far exceeding my own?  Every active investor should ask themselves this question: the answer will either make you a better investor, or save you a lot of time and money if you are humble enough to realize that you're like the majority of mutual fund managers who would be better off not trying, and should be indexing their portfolios instead.

Beating the Market

Is it possible to beat the market?  The unequivocal answer is "Yes:" no matter how many economists say "the market is efficient" it's only the existence of smart money managers out there who find mispricings and exploit them that keep the market as nearly efficient as it is.  Market efficiency requires that there be money managers who can detect mispricings and take advantage of them.  The abnormal returns (or Alpha) they make by so doing are their wages for making the market more efficient for everyone else.  

Because of the thousands of highly trained analysts out there, constantly looking for and exploiting mispricings ("capturing Alpha") in the stock market, I know that if I buy an index fund and keep my costs low, I'll probably outperform a majority of actively managed mutual funds, after fees.  

Unfortunately, the fact that some managers do consistently outperform over the long term is of little comfort to the small investor who is hoping to beat the market himself.  After all, institutional money managers (mutual funds, investment banks, hedge funds, etc.) possess resources that the individual investor can only dream of: teams of analysts to read through the footnotes of GE's 10-K's and annual reports line-by-line, who understand the difference between a capitalized lease and the Capital Asset Pricing Model (CAPM).  Quant hedge funds have supercomputers which can do technical analysis of 5,000 stocks in the blink of an eye, and recognize a head-and-shoulders top formation faster than you can say "dead-cat bounce."

Can a small investor or money manager who can't pay a team of analysts or computer programmers to do market analysis have a chance of finding some mispricings?  It's generally accepted that, at any given time, there is only a finite amount of profit to be made by identifying and exploiting mispricings in the market.  Put another way, there is only a finite amount of Alpha to go around in any one market.  On the other hand, there must be some Alpha available in any financial market: according to the Arbitrage Pricing Theory (a much more general and realistic version of CAPM), it is the successful active managers who make markets efficient, and they make profits by doing it.  

It's my belief that small investors and money managers can beat the market, and institutional managers.  We can do this by understanding the competition, and exploiting their weaknesses, or just avoiding the competition altogether.  Active portfolio management is a game that can be played as many ways as there are active portfolio managers, but large portfolio managers are shaped by who they are and the nature of the money they manage.  

Number Crunchers and Alchemists

We are primarily concerned with big, actively managed pools of money.  They could be actively managed mutual funds, pension funds, endowments, or hedge funds.  By definition, index investors do not trying to capture Alpha, and so they do not reduce the amount available for other investors.

How do active managers go about finding mispricings to exploit?.   They are either highly trained analysts, such as CFA® Charterholders, or brilliant individuals or teams like Warren Buffett or George Soros who have the right combination of skills, insight, and emotional outlook to be one step ahead of the market most of the time.  Most CFA® Charterholders will try to beat the market by superior analysis: they patiently gather all the available information about a company, make adjustments to financial statements to make the information more meaningful, and use that information to project future earnings, cash flows, or dividends into the future to come up with a valuation of a company: that is what the curriculum teaches.  If the market price of the security is significantly under-(over-)priced, their fund will buy (or sell) the security in question.  Warren Buffett follows a similar procedure (I highly recommend Robert Hagstrom's book The Warren Buffett Way.)I consider this approach "number crunching": gather data, analyze carefully, and take action.  

Investors like George Soros, on the other hand, practices what he terms Alchemy of Finance (see link to his book of the same name).  He looks for the trends under the market that the numbers hide from us: the forest, rather than the trees.  More recently, this sort of financial alchemy is being explored by academics and market participants alike in the form of Behavioral Finance: the art of understanding how our emotions and ingrained biases lead us to make bad decisions in the market.  Investors and traders who, like Soros, can see those biases in themselves and others can capture entirely different forms of Alpha that simply are not visible to pure number crunchers.

I am only implicitly addressing the discipline of technical analysis (as opposed to fundamental analysis) but I feel that it also breaks down into number crunching and alchemy.  Number crunching technical analysis uses computers to analyze stock charts to detect and exploit formations as the evolve with sophisticated statistical analysis.  This approach has actually been statistically validated by Lo and MacKinlay in their cleverly-titled A Non-Random Walk Down Wall Street (I don't recommend this one unless you like reading statistics for fun; it's quite a tome... If you want to read more, start with this article on TraderFeed.)  The alchemists of technical analysis are people like Richard Russell, who look at a chart and have an instinct for how it will evolve.  I think this is the way most successful day traders operate; I expect that number-crunching technical analysis is dominated by hedge funds, who can afford the computing power and programmers it requires.

My classification of active managers into number crunchers and alchemists is not strict.  Successful investors most likely do some of both, and one skill set is invaluable in informing the other (which is why I'm studying for the CFA® exam.)  As the curriculum frequently emphasizes, good analysis requires judgment, and knowledge of the weaknesses of the method you are applying.  However, I believe that the number crunchers vastly outnumber the alchemists, and that the judgment that the CFA® curriculum attempts to instill is likely the hardest part of the curriculum to learn.  Judgment is also extremely hard to test, and while the CFA® exams are very comprehensive and require considerable study, most of what they test (in my experience so far) is numerical methods, not judgment.  Additionally, the Chartered Financial Analyst® designation is an elite designation (how many people have time for 200+ hours of study each year for a minimum of three years?), and I'm constantly impressed by the emphasis placed on individual judgment and the weaknesses inherent in the models taught.  The majority of people who describe themselves as "stock analysts" or "portfolio managers" do not have the CFA® designation, and probably have not had so much emphasis placed on the inherent weaknesses of analytical models. (I did a quick, unscientific check on the prevalence of the designation by searching LinkedIn: only about 10% of the people who have the words "stock analyst," "investment analyst," or "portfolio manager" in their profiles also mention the CFA® designation, and a good number of those, like myself, are CFA® candidates.)

I think the availability of enormous computing power compounds the number-crunching trend: when you have a hammer, every problem looks like a nail.  Add the fact that the skills of a number cruncher are much easier to evaluate and put on a resume, and large institutions with money to manage are more likely to hire people with these skills.  

If we wind up with far more money being managed by market number crunchers than by alchemists, it follows that there will be a lot more unexploited alchemy-exploitable Alpha than number-crunching exploitable Alpha. The small investor, with limited time and resources to hunt for Alpha, should hunt where there are fewer hunters, and exploit the weaknesses inherent in large pools of money managed by number crunchers.

Weaknesses of Large (number crunching) Money Managers

What are the weaknesses small investors should try to exploit?  Here are some I see:

• Too Much Money: Because they have so much money, the can only trade very liquid securities.
• Agency problem: A manager's strongest incentive is often to keep his job, not to make as much money as possible.
• Analysis paralysis: Too much modeling, not enough judgment.
• Historic bias: all data is historic data, but we are trying to predict the future.
• Benchmarking: the goal is often to beat a benchmark, not make money.
• Inflexible mandates: many managers don't have much choice about the type of securities they invest in.

Next week, I'll go into some detail about how I try to take advantage of them.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell 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 06:48 PM | Permalink | Comments (2) | TrackBacks (0)

A Worse[sic]-Case Scenario

I believe that a large part of global warming denial is fear: fear that if we acknowledge that global warming is happening, we will be morally obligated to do something about it, and that the problem is too large for us to do anything effective.  I also believe that denying the problem is certain to render us all ineffective in dealing with it.

But getting over our global warming denial is not the only obstacle in our way to dealing with it.  Global warming is already happening, and  future temperature rises are already inevitable given the continuing effects of global warming gasses already released in the atmosphere.  Depending upon our actions today and over the next decade, we will effectively choose between a planet that is uncomfortably warmer than it is today, and one which is much too toasty for even the Russians (who some economists predict will be net beneficiaries of global warming) to be happy about it.

That's my belief.  If it makes me sound like a raving lunatic, so be it.  As an investor and investment advisor, I see my job as having an opinion that differs from the consensus, being correct in that opinion, and investing in such a way that I will make money for myself and my clients if I am correct.  As long as I am correct more often than not (or realize my mistake before I've lost too much money), I'll actually make more money the fewer other market participants agree with me.

I gave an example of this when I discussed how to prepare your portfolio for Peak Coal, on the assumption that while the production of coal may not peak in the next decade or two, rising demand may nevertheless drive price spikes that create investment opportunities.  I'm personally not certain when peak coal will happen, but I'm fairly confident that most investors are too complacent about it, and that is reason enough change the allocations of a diversified portfolio.

Investors Believe What they Want to Believe

Since people tend to deny ideas that are just too scary, a consequence of global climate change that I expect most investors are under-prepared for is a massive (15+ foot rise) in sea level rise due to the melting of either the Greenland or West Antarctic ice sheet.  From casual conversations, I note that Al Gore got a lot of flack for even bringing up this possibility in "An Inconvenient Truth"... despite the fact that he was careful not to do more than raise the possibility, as opposed to predicting it.

We don't know if those ice caps will melt suddenly, or, if they do, when it will happen.  We do know that their melting has accelerated in recent years, and I believe that society has massively underestimated the danger, because a 15 foot sea level rise (let alone a 20 or 40 foot rise) is just too horrific for most people to think about.  Given our propensity towards psychological denial, I feel confident that the markets are underestimating the chances sea level rises large enough to seriously disrupt large coastal cities.  Note that I'm not saying we will see such a sea level rise in my lifetime; rather that the probability of such a rise is currently underestimated by most market participants, and that this complacency is likely to be reflected by a relative overvaluation of investments which stand to lose from such a rise, and an undervaluation of investments that might gain.

If we can identify the exposure of individual securities to the risk/opportunities of sea level rise, we should then underweight our portfolio to investments which stand to lose, and overweight towards investments which stand to gain. This begs the question: Other than coastal real estate, which investments are which?

One environmental activist friend of mine asked me about using the Chicago Mercantile Exchange's new housing futures or options to effectively short real estate prices in coastal cities.   While this may be a good strategy to hedge against further implosion of the current housing bubble, these derivatives all expire within one year, which even I feel is much too short a horizon to hedge the risk of rising sea levels.  In addition, given mass flooding from a rise of sea levels, there is no guarantee that the very indices that the futures are based on would not be changed to only reflect the values of real estate in higher lying areas, which would probably increase in value as people moved to higher ground.

Holding back the Flood

On Earth Day, Marc Gunther reported on an idea to come out of  a Goldman Sachs conference on the business of climate change: dikes.  If sea levels were to rise even a foot over the next couple years, that would require massive new barriers to protect existing structures from the ravages of the sea.  The companies who build those dikes are likely to profit handsomely as soon as the need is recognized.  I'm not an expert on the construction industry, but my impression is that it is fragmented and most of the companies are privately held.  However, makers of the equipment and materials necessary for shoreline reinforcement may be easier to find, such as companies in the cement industry such as Cemex (NYSE:CX.)  Another likely beneficiary a dike building boom would be Caterpillar (NYSE:CAT), given their leadership in earth-moving equipment.  CAT has the added benefit of being a company which is actively lobbying for meaningful greenhouse gas regulation, which I pointed out in my article on blue chip companies involved in alternative energy.

On the downside, one loser would be any owner or operator of seaside resorts, such as Club Med (CLBXF.PK.)  When considering an investment in any REIT, I would make sure to check their portfolio of properties, and avoid ones that have excess exposure to oceanfront or low-lying properties.  On the other hand, REITs and other real estate firms focused on areas where people are likely to flee (my own Denver, for instance) might stand to gain.

Conclusion

Given the massive uncertainties in predicting the probability and timing of large sea level rises due to melting ice caps, I don't advocate buying or selling any company solely because of the risks or rewards which would be a consequence of rapid sea level rise.  I do, however, advocate considering the possible effects of sea level rise on any investments you currently own or are considering buying.  Managing risk is essential to long term superior results, and ignoring a risks in the hope that that they will go away is an excellent way to lose your shirt.

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: CAT.
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 07:24 PM | Permalink | Comments (7) | TrackBacks (0)

So it came and went, the much anticipated State of the Union Address. While the pundits will inevitably focus the bulk of their attention and commentary on the Iraq question, there were undoubtedly some very interesting nuggets of alt energy info in that speech.

Above all things, one crucial variable has changed from a year ago: Congress is now controlled by the Democrats and already the slew of alt energy and climate change proposals brought forth by various senators leads one to believe that, as far as the federal government is concerned, 07' should see more than just hot air on the alt energy and clean tech fronts.

Sectors Of Focus

OK, so let's dive right into it (see a complete list of 2007 State of the Union Policy Initiatives here):

Automotive and Fuels

By far the category that got the most attention and the clearest targets. Key points are:

- Cut down gasoline consumption by 20% by 2017

- A mandatory Fuels Standard requiring 35 billion gallons of renewable and alternative fuels by 2017 (read: mostly corn-based ethanol for now with coal-to-liquids starting in the latter half of 2010 and cellulosic ethanol in about 2012)

- Tougher fuel economy standards via a "modernization" of CAFE standards

- Research into battery technology for hybrid cars and plug-in hybrids (this is worth noting)

- Focus on cellulosic ethanol (not entirely unexpected but noteworthy nonetheless)

- Doubling the current capacity of the Strategic Petroleum Reserve (SPR) to 1.5 billion barrels by 2027 (hhmmmm...indirectly constraining oil supply in light of the forecasted supply-demand environment of the next 2 decades...that can only mean good things for alt energy!)

Electricity Generation

- More solar and wind (yyaaaawwwnnnnn...)

- Clean coal technology (at least another few years away, but worth trying to spot early movers on the technology development side (rather than on the utility side))

- A renewed focus on nuclear power (this is interesting and something several people have been pushing for - one the best ways to play this from a growth angle is via exposure to uranium miners and exploration companies, but that is for another blog to discuss)

Climate Change

- 1st time, as far as I can tell, that this administration was so emphatic about the need to combat climate change

- The President's strategy "will help confront climate change by stopping the projected growth of carbon dioxide emissions from cars, light trucks, and SUVs within 10 years (read: Bush agreed to saying "climate" and "change" together in the same sentence as a gesture of good will but he is nowhere near ready for federally-mandated greenhouse gas caps and carbon trading, so probably forget '07...but I wouldn't exclude '08)

Stocks To Watch