Music in the background: The Black Keys “Have Love Will Travel”. I’ll pull no punches I love listening to the Black Keys especially at the gym. But, for all their appeal has there been a band that has borrowed from more artists? Bo Diddley should be collecting some of their royalties.
Frequently, we have to tell clients to ignore the noise of the media which will bombard the investor with combinations of fear or euphoria bordering on the manic. Frequently those opinions are jaded with political or investment biases which make their statements virtually worthless. Even more frustrating are the multi-handed economists who never appear to make a decisive stance “On one hand, then on the other hand etc.)
Its essential to tune out the noise and find sources of information that are purely data driven without biases and one very good source is Recessionalert.com (RA)
This morning RA released their Long Leading Index (USLLGI) and I’ll use their own words to describe the USLLGI:
“The USLLGI takes a far-reaching forward view of U.S economic growth by tracking 8 reliable indicators which have consistently peaked 12-18 months before the onset of NBER defined recessions since the early 1950?s. The growths of these indicators, together with their diffusion index, are combined into a 9-factor composite to give a generalized view of future overall U.S economic growth. When the USLLGI falls below 0 for 2 consecutive months you have a signal that recession will occur in 12-18 months.”
This is an economic timing method not a stock market timing system. The lead times are long, for example in the 2007-2008 “Great Recession” the LLI tipped its hand in early 2006 by crossing over the 0 level. In 2011 it made a near miss by approaching 0 but it never broke through. At present its at a healthy reading of .1 which largely eliminates the chances of recession in 2014. Its too early to say for 2015 but we’ll have an idea by the end of this year.
In the meantime, ignore the fear and noise. The potential for a new secular bull market has some real potential.
Be careful out there
Brad Pappas
Investing in Solar and other alternative energies has been a hazardous experience for investors for several reasons:
- Too much competition which results in price cutting and profit margin pressure which results in volatile earnings and significant stock volatility.
- Reliance on government subsidies in an era of budget restraints.
But these issues are the primary problems associated with investing in solar cell manufacturers.
What about investing in Solar Farms that have their infrastructure in place and long term selling agreements with credible utilities? This is an entirely different enterprise than just selling solar panels since this is really an issue of cash flow.
Warren Buffett’s MidAmerican Energy Holdings Co. agreed to buy the Topaz Solar Farm in California from First Solar Inc. on Dec. 7. The project’s development budget is estimated at $2.4 billion and it may generate a 16.3 percent return on investment by selling power to PG&E Corp. at about $150 a megawatt-hour, through a 25-year contract, according to New Energy Finance calculations.
“After tax, you’re looking at returns in the 10 percent to 15 percent range” for solar projects, said Dan Reicher, executive director of Stanford University’s center for energy policy and finance in California. “The beauty of solar is once you make the capital investment, you’ve got free fuel and very low operating costs.”
With Treasury yields in the 2% to 3% range solar farms offer a viable alternative to bonds. In my opinion its only a matter of time before solar farms are offered in either a REIT or MLP structure to the public, where the cash flow generated is passed on to shareholders with special tax considerations. Best of all, the cash flow comes without the risks and headaches of solar panel manufacturing and sales.
Now we’re finally getting somewhere.
Brad
No positions
The market as measured by the S&P 500 finished the month ahead +4.4%. Since 1950 there have been 18 Januarys in which the S&P 500 gained in excess of 4%, as it did this year. The S&P posted gains for the rest of the year on 17 out of the 18 occasions. The only failure was 1987 when the S&P gained 13.2% in January but ended up losing -9.8% between February and the end of the year. The last time there was a 4% plus January was in 1999 and the S&P 500 gained another 14.8% over the next 11 months.
Whether history will repeat remains to be seen, but there is no denying the prior history of 4% plus Januarys has been remarkable. Another positive today by our interpretation, was a “Golden Cross” buy signal. A buy signal is generated when the 50 day moving average of the S&P 500 closes above its 200 day moving average. There have been 5 previous “Golden Cross” buy signals since 2003. All of them were successful with the S&P 500 gaining an average of 8.6%, 12.9%, and 17.1% over the next 3, 6, and 9 months.
This may be premature but I’ve noticed that our portfolios have been outperforming for the past three days. That may not sound like much but I believe its an indication that the breadth of the market is improving and that the major indices are masking underlying strength.
When underlying market strength is weak, the major indexes that you can own via ETF’s or Index mutual funds tend to do relatively well. However, when underlying strength is weak there is a strong tendency for individual equities and small caps to outperform. This could be the case now, time will tell. It has been 10 months since we last outperformed so the tide may be turning.
We continue to hold Appliance Recycling Centers of America ARCI Green Plains Renewable Energy GPRE and have a small position in Perma Fix Environmental Solutions PESI.
Severe sell off in solar play First Solar FSLR a former high flying darling of the solar energy industry. FSLR came out with a statement that 2012 earnings will be roughly half of analysts expectations. We have no position in FSLR but I must say the price is getting interesting.
FSLR share price is $33.90
The balance sheet is solid: Book value is $46 which includes $8 in cash and the equivalent of approximately $7 in debt.
But the market cap is now below revenues, which indicates very good value.
Its probably too early to buy as the stock needs to stabilize and the source of the earnings weakness must be determined. Stating again for the umpteenth time: Europe is the primary source of Alt Energy revenues and Europe is cutting back severely through austerity programs to curb their debt. Alt Energy will be sacrificed in the meantime as for most countries its a discretionary expense.
Long ARCI, PESI and GPRE
Top of the list for a Green company – ARCI
Micro Cap stock with all the ingredients we love to see:
Price/Sales: .27
Price/Earnings: 7
Quarterly Earnings Growth: 30%
12 mos. Trailing EPS Growth: 87%
Earnings Yield: 10.7%
With better than average trading momentum
We are long ARCI for client accounts
