Recent Carbon Mandates Around the World
Chrysler, Italy and a Great Stock to Buy Now
Looking back at each of the past four decades, there was one sector that would have been the "home run" sector to be invested in. Other areas provided good returns to be sure, but these were the most profitable:
1970s: Gold, up 1,250%. The price of gold was fixed until 1971. Once it was left to float, it proceeded to run from around $50 an ounce to $681 just after the start of 1980 as inflation reared its ugly head.
1980s: Nikkei Index, up 1,000%. The decade of the Japanese market turned out to be largely a bubble, but not before the smart money got very, very rich.
1990s: Nasdaq, up 1,000%. A proxy for technology stocks, the Nasdaq Composite started the decade just over 400 and finished the go-go '90s just over 4,000.
2000s. Real Estate, up 200%. Even with real estate cratering the past few years, REITs have still doubled this decade, far outpacing every other asset class.
So that begs the question: What will be the home run in the coming decade?
This was one of the more interesting topics being knocked around by hedge fund managers and Wall Street executives at the Global Financial Leadership Conference, a Davos-like confab I attended at the start of the month in Naples, Florida.
I give credit to University of Notre Dame chief investment officer Scott Malpass for pointing out this run of big winning sectors listed above. As the investment strategist for the $8 billion Notre Dame endowment, Malpass has posted annualized 14% returns during the past 10 years. One of his priorities for the fund now, he told the GFLC conference, is making sure he gets Notre Dame good exposure to the home run sector of the 2010s. Malpass is focusing on three areas to find the next big winning sector: gold, real estate and Green.
Gold could be it if you believe inflation and a weak dollar are in the offing. Place your bets on real estate if you believe the fundamentals that sparked the original bull market are still basically in place and that the sell-off of the past few years is overdone. Go for Green if you recognize the dual need to respond to the global warming crisis along with the energy crunch. Both are converging to create a very firm fundamental push for alternative energy and energy efficiency stocks.
Now, as a student of the market, I know history shows bull moves rarely repeat themselves in specific stocks or sectors, so I'd say odds are against gold and real estate posting triple-digit gains again. Plus, with tighter individual and corporate credit, easy capital won't be the norm for real estate like it was in the past. I also believe the Fed sees inflation as its worst enemy and will fight it tooth and nail for the long-term, damping widespread desire for gold. That leaves Green as the logical candidate to be the home run sector of 2010 and beyond.
But don't just take my word for it. The International Energy Agency, the analysts paid by Western oil-consuming nations to provide accurate pictures of energy needs and outlook, believes that $2 trillion could be spent globally between 2010 and 2020 on end-use and power plant efficiency measures to help the world reach a stable carbon output level. Yes that's trillion, with a T.
It's worth noting, too, that President Barack Obama's advisor Paul Volcker (the stagflation-slaying former Fed president) said at the GFLC that the president seems focused on energy efficiency and Green technology as the basis of U.S. economic growth, in contrast to the past 25 years of administrations that focused on boosting consumer spending for growth.
The world shift to Green is already starting, of course. China is mandating that 120 gigawatts of energy come from renewable resources like wind and solar by 2020, while here in the U.S. we are working toward our own carbon reduction program that will target reductions of between 17% and 25% by 2020, depending on how the Senate and House reconcile their bills on the matter.
Deutsche Banc Asset Management in October compiled a list of recent Green mandates implemented by major world governments since July and I thought it would be beneficial to reproduce them here:
Brazil: 54 GW new grid capacity including 1.1 GW wind, 3.3 GW biomass and 3.9 GW small
China: Reduce energy intensity by a notable margin by 2020
India: 20 GW solar by 2020
Indonesia: 26% reduction in emissions by 2020
Mexico: 8% emissions below 2009 levels by 2012; Increase renewable energy capacity from 3.3% in 2008 to 7.6% in 2012
New Zealand: 10% emissions below 1990 levels by 2020 and 50% below 1990 levels by 2050
Norway: 40% reduction in emissions from 1990 levels by 2020
Russia: 10% reduction in emissions below 1990 levels by 2020 and 50% by 2050
Scotland: 42% cut in emissions by 2020 from 1990 levels
South Korea: 4% reduction in emissions from 2005 levels by 2020
Switzerland: 20% reduction in emissions by 2020 from 1990 levels
Ukraine: 20% reduction in emissions by 2020 from 1990 levels
United States: 20% reduction in emissions by 2020 and 80% by 2050 from 2005 levels (Clean Energy Jobs and American Power Act, still pending final passage).
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Shifting gears a little, I was mulling the desire to reduce our carbon footprint as a nation and the part-ownership we all have in two of Detroit's Big Three. Specifically, I was thinking about Chrysler and why it just ended its electric car program ENVI.
Technically, the program was absorbed into mainstream vehicle development being run by Fiat, the Italian automaker that owns a large minority chunk and controls the management of Chrysler.
I don't suspect that Chrysler is walking away from electric as a possible vehicle platform, but I can speculate as to where I think Chrysler, led by Fiat, is heading: compressed natural gas or CNG.
Now, I don't believe CNG will replace gasoline, but I think it could be the major alternative vehicle option for Chrysler.
Why do I think this?
For one, Italians love natural gas powered vehicles. One recent report estimated that 25% of the vehicles sold in Italy last quarter run on compressed natural gas (or methane).
That's an astonishing amount. And that doesn't include the large number of after-market CNG conversions that are done to cars in Italy, too. As the largest automaker in Italy, Fiat is sending CNG-powered cars into the market. This spring, it announced six models for the Italian market that are able to run on either gasoline or natural gas. Here is a quote from a statement Fiat gave to AutoChannel.com at the time:
"Fiat believes that methane propulsion systems are currently the most appropriate and readily-available technology for resolving pollution problems in urban areas. This is because the use of methane has positive implications in terms of environmental benefits (reduction of approximately 23% in CO2 emissions and reduction of PM emissions to practically zero). Furthermore, methane proves itself to be a valid financial alternative to traditional fuels (diesel and petrol), which are increasingly subject to rising prices."
Pretty straightforward commitment, right? CNG at the nation's 800 filling stations is also as low as half the price of petrol in Italy.
Now consider this: the U.S. has the world's largest reserves of natural gas.
U.S. compressed natural gas filling station company Clean Energy Fuels (CLNE) can bring the gasoline gallon-equivalent to a filling station for $2.50 a gallon wholesale.
The U.S. government is mandating automakers get cleaner vehicles on the road and is a near lock by mid-2010--if not sooner--to pass a law extending significant tax credits to build CNG filling stations and convert gas engines in trucks and cars to use CNG.
The final piece of the puzzle? The leading engine conversion company, both for automakers fitting the conversions on the assembly line and for the aftermarket, is an American company, Fuel Systems Solutions (FSYS). Fuel Systems' U.S. arm is called Impco and it's based in California. Fuel Systems also has a major arm called BRC, which is based in Milan and supplies conversion kits to, among others, Fiat.
As I said, this is speculation on my part about the direction of Chrysler. And regardless, FSYS is proving to be a big winner in the market: I got Cabot Green Investor subscribers into the stock in August at 31 and shares have already climbed 55% to 48 thanks to strong European conversion business and an EPA regulation on truck emissions going into effect in 2010 that will make using CNG for truck engines much more attractive.
Consider how well FSYS could perform when gasoline prices inevitably push well over $3 as the economy improves (and as the dollar, in which oil is priced on the international market, remains weak). If Chrysler takes what I see as the logical path to producing a low-emissions car in the near-future, Fuel Systems could be an early leader in the home run sector of the decade before us.
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