Monday, November 17, 2008
(Cont'd from above)...

Jim (cont'd):   

Everything alternative energy is inextricably linked to oil prices... By the third green week, though, of April 21st, 2008, oil was at $117, still going higher, okay... but that was about the peak. We were up 76.6% from the original call. The S&P was down 5.5%.

If you sold them, you would have made a lot of money. In fact, the green basket is Exhibit A against buy and hold... and in favor of "bulls make money, bears make money and hogs get slaughtered." And you were slaughtered, if you didn't take a quick 65% or 76% gain...

Since then, the green thesis has collapsed, along with oil and natural gas prices... With crude now trading at $55 a barrel, our green stocks are now down 37% since I recommended them in April of 2007, and outperforming the S&P, but still losing you a lot of money.

Green works as a philosophy... it works as a trading philosophy... when energy is heading lower, but not an investing philosophy. We're about making money, not about making cleaner skies... as much as we do have a predilection for clean air.

But when you look at how our green stocks have done since we last went over them this April, they're down 58%, when you exclude the three stocks removed from the green basket... BorgWarner (BWA), OM Group (OMG) and MEMC (WFR)... where the S&P is down 38% in the same period... those stocks have done even worse than the market. Unbelievable.

Alright, what the heck happened here to these once-green stocks...

Okay, well two things...

Lower oil prices and, indeed... hedge funds gone wild!...

Some of this is history repeating itself. The Carter administration began all kinds of green initiatives that eventually went nowhere when oil prices came back under Ronald Reagan. Way back in 1977, Carter set a goal of getting 20% of America's energy needs from renewable sources by the year 2000. But today, our use of renewable fuels remains at 6%, the same levels as when Carter took office. Carter set up generous tax incentives for solar energy, and that fuel we love to hate, ethanol... He insisted that U.S. automakers build more fuel-efficient cars, with the goal of getting 27.5 miles per gallon over the following decade.

Instead, look... we fell in love with the SUV, the V-8... which are classified as light trucks, and don't need to meet the same fuel efficiency standards as cars...

Carter's 1979 energy package included a $20 billion program for federally-subsidized synthetic fuel plants. Remember syn-fuels?... Plus, close to $6 billion in related energy spending... and billions of dollars more could have been spent if all of Carter's plans, and all of the green legislation, passed when he was president, had it come to fruition... $3 billion for subsidized conservation loans, tax credits for individuals who installed insulation, another $2 billion for unsubsidized loans for the same purpose, to be issued to all borrowers at the discretion of the Secretary of Housing and Urban Development... and that's back when billions weren't just chump change for hedge fund managers... Carter wanted to start a three-year, $100 million program to install solar heating and cooling units in government offices. He could have spent another $98 million for the purchase of photovoltaic cells.

By the time Carter left office, oil imports had fallen from 9 million barrels to 7 million a day. Now, they're back up to 12...

Part of the push for green energy fell apart when oil prices declined, but also, Ronald Reagan gutted funding for solar research when he took office... So, the collapse of the green thesis is nothing we haven't seen before. But the speed and depth of the declines in green stocks is something new.

Take, for example, natural gas... which is one of our green ideas... It's much cleaner than oil or coal. It's plentiful in the U.S., and we can use it to run cars, but the natural gas thesis completely and utterly blew up right in our faces... and natural gas stocks dived... Some of this is just because of supply and demand. And the pullback in energy demand has hit natural gas prices really hard.

Some of it was congress not putting a natural gas string on the $25 billion loan package to the oil companies. In fact, everything but natural gas got endorsed. Oh, and then we were counting on the Pickens Plan to create new demand... but Proposition 10 in California - which would have provided a big boost in natural gas fuels - of course was defeated.

Natural gas turned out to be a big, smelly loser and, while our stocks... well, you can see where they went.... wow, that is low (pointing from the screen chart all the way down to the floor)...

The natural gas companies were highly leveraged. Many of them had raised tons of debt to buy up land to drill on. That works when the commodity price is high. But, when it pulled back to here, it left the natural gas companies overexposed. Plus, the natural gas companies for the most part don't pay dividends, which has allowed them to be slaughtered in the market. There is no cushion... there is no cushion for the group. The political support just isn't there. Obama doesn't view natural gas as a cleaner fuel. In fact, he probably doesn't care for it at all. He's never really mentioned it. He's an ethanol guy through and through.

And then there's the fact that most of the easy-to-reach natural gas has already been found. So the drilling costs are much higher. We'd much rather own natural gas pipeline plays with big dividends, like Kinder Morgan Energy Partners (KMP)... than E&P companies... exploration and production...

Worst of all, hedge funds crowded into these stocks. And, once they started falling, the forced selling by hedge funds faced with big redemptions has been brutal. I mean, some of these hedge funds, you can just see... Then there are a lot of hedge funds that will still short a stock, and an ETF that contains the stock, and the short sellers create a free fire zone, where it's nearly impossible for the buyers to come in and support the stocks.

It's literally the kind of interlocking fire that allows for... like in World War I... World War I machine guns mowing people... the shorts have machine guns and tanks... the longs have Calvary and single-shot rifles...

The fact that our pro-short selling SEC loves these ETFs, as do the exchanges, because they're the only new listings in town for them, only makes things worse.

Here's the bottom line...

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The Bottom Line!:     Now that oil prices have collapsed, and so many hedge funds got caught with their pants down... that's right, they got pants'd in natural gas and alternative energy stocks... it isn't easy being green. Good for the soul... not good for the wallet.

[verbatim recap]

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