September 15, 2009

Global Market Comments
September 15, 2009

Featured Trades: (GEOTHERMAL)

1)The dinosaurs of the market, like myself, are collectively being struck by the similarity of the current stock market and that of September 1987, just before the one day, 25% plunge in the Dow. That was when I tied to buy stock with the index down 300 from a payphone in Paris, only to have the trader at Morgan Stanley burst into tears and smash the phone down on the desk (remember that David G.?). My new guru is Gluskin Sheff's strategist David Rosenberg, who says that stocks have already discounted two years of recovery and now carry a lot of risk. It is priced for 40% EPS growth and a 'V' shaped recovery, which we have zero chance of getting. GDP this year will come in at negative 2.5%, and will claw back a listless 1-2% rate in 2010. Stocks are discounting a 4% GDP growth, compared to only 2% for bonds, so he'd much rather own those. With a deflation rate of minus 2% and high yield returns of 12%, junk now offers a 14% inflation adjusted yield, not bad. The secular 25 year bull market in credit expansion is over. Rent still accounts for a third of the CPI, and they are falling for the first time in 17 years. Sure, we'll see ephemeral sugar highs like those for cash-for-clunkers and the tax credit for first time home buyers. But at best, it will only add up to a series of small 'W''s, or what I refer to the as the 'square root' shaped recovery. With the price of everything stretched, you better start reeling in some of that risk.

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2) Until now, you had to live on the side of a volcano for geothermal energy to work profitably, as in Iceland, where lucky residents can sink a pipe a few hundred feet in their backyard to get a lifetime of free heat. Elsewhere, they had to be kept alive by massive dollops of subsidies in order to produce very high cost electricity for local utilities. But $350 million in new research funded by Obama's stimulus package is threatening to finally make it economic. The first oil crisis in the seventies spawned firms like Calpine, which exploited massive geyser fields in Northern California marked by hundreds of steam plumes. Unfortunately, low oil prices and technical difficulties, like constantly clogging pipes, starved the industry of new capital, and Calpine went bankrupt.  Now, a breakthrough technology called Enhanced Geothermal Systems (EGS), where water is pumped down through pipes to 16,000 feet and comes back as superheated steam to run a conventional turbine, is promising to drive costs down dramatically. These plants use minimal amounts of land, conserve water with their closed systems, and unlike solar and wind, operate 24/7. Once built, they produce power at 6.9 cents/kw, vs. 3 cents for coal, 12 cents for wind, and 15 cents for solar. The downside is that these plants are expensive to build, face permitting bottlenecks, need new transmission lines , and may cause earthquakes, so they can't be built near populated areas. The play here is that utilities in many states, like Pacific Gas & Electric (PGE) in California, are legally obligated to obtain high percentages of the power from renewable sources in the near future, whatever the cost. In PGE's case it is 20% by 2017. The Golden State already leads the world in geothermal output, and this will double from 2,605 MW by 2015.  A larger installed base will bring economies of scale and a further drop in costs. The recent excitement caused Magma Energy's (MGMXF.PK)  $87 million IPO to be oversubscribed. Better value can be found in Reno, NV based Ormat Technologies (ORA), which boasts operations in the US, Israel, the Philippines, Kenya, Nicaragua, and New Zealand. Check out their website by clicking here at

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3) It's another sign of the times when the weekend fruit picker population is doubled by people hard hit by the economy,  looking to save money on food costs. After driving through miles of undulating brown hills studded with oak trees, passing mile upon mile of horse ranches, rusted out cars, and abandoned mobile homes, you come to Brentwood, the fruit capital of Northern California. There, thousands of families harvested ripe bing cherries and peaches at the wholesale price of $1 a pound, fruit that normally costs $6 a pound at the supermarket. Anything you eat in the orchard is free. All a great deal if you don't mind having purple fingertips at the end of the day. Just watch out for the cars pulled over on the side of the road on the way home, their occupants puking out all their excess cherries. In a nod to the 21st century, growers in this Grapes of Wrath industry compile lists of email addresses, and notify their itinerant fruit pickers which crops are ready for harvest via the Internet. Also on the calendar this season are grapes, apples, apricots, plums, loquats, nectarines, mandarin oranges, and wheel chair accessible walnuts (?). At the end of each harvest, professional crews sweep through and pick up what's left, if the prices will bear it. If you wonder why we put up with the earthquakes, high taxes, gridlocked politics, and a non functioning state government, this is the reason. By the way, does anyone know what to do with 25 pounds of cherries? Send me your recipes.

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'Wall Street packages luck, and sells it as skill,' said Dan Solin, author of The Smartest Retirement Book You'll Ever Read.

salesman.jpg picture by madhedge