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Yesterday’s decline reversed the rally we enjoyed to start the week. The S&P 500 is now below support at 1071. Is that a death knell? No. But it’s not good, either.
Mounting debt problems in Greece, Spain and Portugal are spooking investors. Oil prices are lower as investors worry the global recovery isn’t gaining momentum.
The Labor Department reported that companies cut 20,000 in January. New unemployment claims also rose. But somehow, the unemployment rate fell to 9.7%. I’m not going to call that a “damn lie”, but statistics don’t always tell the whole truth.
We’ve noted frequently in Daily Profit that we can expect to see some pretty wild swings in the data as the housing market and unemployment rate bottom. One month’s positive data gets revised lower, and then the next month’s negative data gets revised higher.
There’s no doubt the economy is improving, but is it happening fast enough? And perhaps more importantly, where will the base-line be?
An unemployment rate around 4%-5% used to be the norm. We’re certainly looking at a higher base for unemployment over the next few years. GDP growth will be lower. Investors will probably support lower P/E ratios and levels for the major indices.
That’s not a disaster, but it does mean you’ll need to be focused on value and not afraid to take profits when you have them.
» Reader Mail
Thanks for all the feedback about yesterday’s letter about the difficulties of transitioning the U.S. economy to use more renewable energy. I’m going to include a few of your letters…
First off though, I must acknowledge a typo. I reported that the minimum wage in the U.S. worked out to $1,320 a week. One reader noted that’s $33 an hour! My apologies, the figure $1,320 is a monthly number, not weekly. Still the point remains that the standard of the living in the U.S. impairs the manufacturing sector.
Jim S. writes:
Your premise about sun and wind sound very utopian but you are absolutely correct on coal and natural gas. We have enough coal and natural gas in this country to last for centuries. The problem is the government and the environmental lobby. We also have oil in Anwar and off the East and West coasts of the United States that would give us energy independence if the government would get out of the way and let the oil companies do what they do best, drill for oil and refine crude.
It has never made sense to me to burn coal or gas to generate electricity to then plug in a hybrid car to charge batteries which produce electricity to power the car. Nonsense. Shouldn’t we just be using natural gas to power the car. Or better yet, use something plentiful like gasoline.
Wind and solar will never replace hydrocarbons as a power source.
The U.S. produces around 7.5 million barrels a day. Our consumption is around 22 million barrels a day. The world’s biggest oil producer, Saudi Arabia, pumps just over 10 million barrels a day.
While ANWAR and possible reserves off the California and Florida coast could boost U.S. production, there’s no way the U.S. can pump all the oil we use. Still, I get Jim’s point about doing everything possible to achieve energy independence.
I also appreciate the nod to the Pickens’ Plan about using natural gas as a transition fuel. I always thought Mr. Pickens made a lot of sense. It’s unfortunate that the financial crisis crushed his hedge fund, and took him out of the limelight.
Jim writes –
Ian, how about the case for combined technologies? There’s been some exciting news in the auto industry, turbine engines combined with the electric vehicle technologies to significantly improve overall efficiencies of current fuels, and breaking the mile restrictions associated with current battery storage deficiencies. ‘Velozzi, a Los Angeles-based car designer and manufacturer, will become the first auto company to integrate Capstone’s ultra-clean C65 and C30 micro-turbines into an electric supercar and a crossover vehicle’. These guys have already done a lot to move this technology forward, and I realize more challenges will crop up, but it’s time to take this off beta and start applying it to real world applications. The big three (whoever that is nowadays) and big ‘G’ should get in the game soon, other counties will suck this up and we will once again loose out on manufacturing jobs.
I always thought that if the renewable energy industry (battery, wind, solar, etc.) got a “man on the moon” directive (and the resources) like the one Kennedy gave NASA, these technologies would be more advanced.
For better or worse, development is largely in the hands of the private sector. And that means consumer demand is a critical factor for bringing new technologies to market. Clearly, U.S. automakers have much of the technology. I’d say the response to $147 a barrel oil was pretty swift by Ford (NYSE:F), especially.
But the main thrust of yesterday’s letter was that the economics of renewable energy make the transition process slow. My friend, energy economist Gregor Macdonald at Energy World Profits, constantly bemoans the lack of a unified energy policy for the U.S. He has (rightly, in my opinion) noted that the stimulus plans in the wake of the financial crisis were a great opportunity to attack the energy transition. Instead, the government chose to sink more money into fossil fuel infrastructure (roads and bridges and such) and offer only token amounts to improving the power grid and pushing transition fuels like natural gas.
One thing is for sure, though – there are a lot of exciting investment opportunities in both renewable energy and domestic oil and gas exploration.
Sidney Y. writes:
Hey Ian, Two things:
Thing One: I bought XXXX @ $7.38, I guess I jumped the gun.
Thing Two: The US minimum wage is not $1320/week it is $1320/month.
Thanks Sydney, I’ve addressed the minimum wage one. And we hold that stock (indicated as XXX) at $7.60 in the Energy World Profits model portfolio. Of course, I don’t like sitting on a loss, but I think the stock will be fine. It is nearly impossible to time every investment perfectly. And at the current price around $5, this stock looks even more attractive. For more, click HERE.
Jerry M. writes:
Like you, I have bemoaned the money spent to import oil. I have been advocating that the US put a tariff on imported oil and its byproducts so that the landed price is a constant $80 a barrel of oil or $2.50 for a gallon of gas. This is not significantly higher than we are paying today so it would not work a big hardship on the economy. The cost is well below what they pay in Europe. The money raised could pay off the solar conversion and other subsidies that Congress has already approved. This guaranteed price level would give everyone a floor on which to make long term conversion plans.
While this idea might make some sense, it’s just not how the U.S. does business. We like to maintain the idea that we’re a “free market”, and even though similar taxes have been imposed on other industries, the oil companies carry a ton of political weight.
Also, the government would be up a creek if oil went above $80 a barrel, which is inevitable, in my opinion.
Still, a more proactive and coherent energy policy from the government is clearly needed. I would advocate that leverages all of America’s assets – oil reserves, natural gas, renewable energy, etc.