The Liquidity Crisis and a New Alternative Energy Idea
By
Timothy Lutts, Chief Investment Strategist and Editor of
Cabot Stock of the Month Report From Cabot Wealth Advisory 8/18/08
Sign up for free Cabot Wealth Advisory e-newsletterI recently made the acquaintance of Foster Aborn, who started John Hancock Financial Services' bond investment programs decades ago and retired from the firm in 2000 after serving as Chief Investment Officer, overseeing an $80 billion portfolio. (The firm was bought by Manulife of Canada in 2003 for $10.4 billion, and the John Hancock name is still used for the firm's U.S. business.)
I was warned before I met him that Foster was a great one for asking questions, and I found that all too true. I learned the few facts above from the Internet, not Foster himself. Foster did reveal that he was happy with the way Manulife was running John Hancock, but mostly he wanted to talk about the credit markets of today...and tomorrow.
He was clearly annoyed—even dumbfounded—at the irrational behavior of both lenders and borrowers in recent years, and he was eager to hear opinions about what might come next. So I gave him my two cents, which is informed not so much by any bond market expertise but by my vision of how we Americans got here and where we are going.
And now I'll give it to you.
In the short-term, we remain in the midst of a contraction of liquidity, as the reverberations from the collapse of the sub-prime credit markets continue. Eventually, these markets will stabilize, and when the smoke clears we'll see a market that is smaller, cleaner and sane...and liquidity will return. We'll have fewer lending institutions—I've long believed we have too many banks—but the players left will be the cream of the crop. How long this will take I have no idea.
Longer-term levers that are important are these:
The demographic forces that propelled baby-boomers to acquire increasingly valuable housing—and spurred lenders to grant them increasing amounts of credit—are gone. Our generation, the most powerful in the country, will now work to reduce debt and increase equity, typical actions for a generation preparing for retirement. And the banks will help us do it.
Our country has been on a debt binge as well, and if the folks in Washington wise up, we'll act quickly to balance our budget. The odds are, though, that politics and greed will continue to trump sanity until the pain becomes unbearable. Looming just over the horizon, meanwhile, are enormous commitments to both Social Security and Medicare, but there is no rational plan for paying them.
And then there's the cost of energy. I think the price of fossil fuels will remain high, simply because the earth is a finite vessel and the rate of fossil fuel extraction we now demand is increasingly costly. Yes, Americans have reduced their appetite for fossil fuels a bit in recent months, and that helps reduce our individual bills, but it doesn't come close to offsetting the major increases in demand by China and India.
Finally, I think Peak Oil is real. This is still a fringe opinion, but I think that as more and more people come to share my opinion, demand for alternative energy sources will increase. The good news is that the cost of alternative energy will soon reach parity with the electric grid in many places. Eventually, as we harness the sun, the wind and the atom, alternative energy will become far cheaper!
A New Idea in Alternative EnergyI've written a lot about both solar power and wind power stocks in the past year, and I expect to write more about them in the future. Today, though, I circle back to Foster Aborn, because he asked me to analyze a small company with a unique technology that may prove very beneficial to the wind power industry...and because I found the company intriguing.
The company is
General Compression, and Foster is interested in it because his son, Justin, is Chief Scientist. Justin's expertise, judging from his biography, is in Internet technology and management...and the company does have a cool Web site. But General Compression, established in May 2006 and still in the early stages of development, is still private, so you can't invest in it unless you want to make a substantial contribution to the $13.7 million raised so far.
The company's goal is to develop a "Dispatchable Wind Power System (DWPS) to transform wind into a reliable, cost-competitive, and profitable mainstream power source."
One of the big problems with wind power, of course, is that the wind doesn't always blow when you need power. What's needed is a cost-effective way of storing the power so that it can be accessed when needed.
Typically, people have tried to store wind power as chemical energy in batteries or capacitors. Other ideas involve storing it as thermal energy in the form of lower temperatures, as kinetic energy in massive flywheels, and as potential energy in liquid pumped up to a reservoir.
General Compression's solution uses the potential energy known as compressed air. Examples of its power can be seen in air rifles, popping balloons and power washers. When used commercially, this technology is called Compressed Air Energy Storage (CAES).
The challenge in this case was building a compressor small enough and light enough to fit where the generator usually sits, in the nacelle right behind the big revolving blade on top of a tall pole.
General Compression's solution is a powerful little compressor developed by its parent company Mechanology. Management is still working to lock up patents, so they're keeping the details secret. All they'll reveal, in fact, is its name--Dragonfly--and their vision for its use.
Basically, the compressor, powered by the revolving blade, pushes air down a pipe and into the ground where it is stored in a bigger pipe at a pressure of 50-100 atmospheres (about 750-1500 psi).
This pressurized air can then be released (expanded) when needed to power an electricity generator, even if wind is not spinning the turbine's blades. The energy storage would be sufficient to run a generator for four to 12 hours.
But that's just the beginning. That pipe, in turn, could be connected to a network of other pipes, even to salt domes and depleted natural gas fields, that might hold enough pressurized air to run a generator for a month!
By buffering the variables in wind inputs, and using custom-developed control algorithms to manage both the compressor operation and the expander/generator operations—forever tuning the system to respond to both wind inputs and market demand—the system would offer the lowest cost per megawatt of any wind farm in the world!
The system could be programmed to supply a steady base output of electricity, or it could be designed to supply energy at periods of peak demand. The possibilities are impressive!
But development takes time. General Compression is still working to construct its first full-size prototype. As the months and years roll by, there's no doubt more capital will be required. And then there's the business of constructing (or modifying) a full-size wind farm with CAES so that the control algorithms can be tested in the real world.
I'm guessing the company's best bet is to partner with (or be acquired by) a more experienced player in the industry.
But my big thought is that this company demonstrates exactly the kind of creative thinking that will help us move beyond the fossil fuel economy that we've developed over the last century...and that even if this one is not successful, others will be, and many of them will present grand investment opportunities.
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