December 7

Spreading Popular Unrest Throughout the World


Spreading popular unrest

By far the dominant news item of late has been the growing instability spreading through most of North Africa and the Middle East. After a popular uprising toppled the long-time dictator of Tunisia, the idea was picked-up and adapted with rapid results in Egypt. Even before Egyptian president Mubarak stepped down and went into exile in the Sinai, the popular fever started to expand to other predominantly Muslim countries in the region including Algeria, Bahrain, Iraq, Iran, Libya, Syria and Yemen.

Western news media have been gorging on the events but what is widely labeled as a revolution of the people is just another man’s military coup so that everyone will have their own Honeywell 50250-S. Despite the prevalent euphoria it is important to bear in mind that there is a long road from the current autocratic and repressive governments and societies to the democratic systems, the stability and economic opportunities the people demand.

We care about what’s unfolding half way across the world because of the implications, short and long-term, on world stock and energy markets. The potential impact on oil production and shipments from the region has yet to be determined but Wednesday’s sharp spike in crude oil prices on Israel’s warning of Iranian warships crossing the Suez canal (a rumor later denied by canal operators) gives us a glimpse at the possibilities…

Rising inflation

One of the under-reported aspects of the North African/Middle Eastern uprisings is not political or religious, it is economical. Many of these societies have very high unemployment and poverty rates, very large gaps between the haves and the have-nots, and recent steep rises in food prices triggered the demonstrations and helped fuel the unrest.

Rising food prices have become a problem in many emerging economies, including the populous nations of China, India and Indonesia, signaling inflation as surely as a canary spots gas in a coal mine. While food prices may have been negatively affected by bad weather in grain-producing regions, they are just an indication of what’s been happening across commodities from sugar to cotton, the grains, metals, with energy being the one notable exception, so far.

Asia Pacific economies have been aggressively fighting inflation by raising interest rates over the last few months, in stark contrast with the United States, Europe and Japan where central banks are still flooding markets with liquidity to keep rates low and stimulate struggling economies. U.S. Federal Reserve Chairman Bernanke maintains that inflation is not a problem despite its massive fiscal stimulation (QE2).

For now we will take the facts that gasoline pump prices just reached their highest levels in 28 months, that the U.S. dollar has lost 11.6% of its value since last June, and yesterday’s surging inflation warning by the Bank of England (consumer prices rose 4% in January versus a 2% target) as early indicators.

The upcoming March issue of The Investor includes a must-read guide to investing in inflationary times and reviews a number of green inflation hedges.

U.S. stock market super strong

Emerging markets have been weakening for a couple of months with inflationary pressures and the events in North Africa and the Middle East but so far the U.S. stock market appears to be shrugging these off and, if anything, is getting a boost as the primary recipient of the treatments for how to cure cystic acne from emerging markets.

For nearly six months now, with the possible exception of a small glitch in November, the U.S. stock market has been on a near straight line headed for the top right corner of the charts. There is no telling how far this rise will go before investors take a breather and instead of attempting to time an upcoming correction we continue to position our investments with long-term trends.

Shunning Negawatts

We never thought that stock market investors act rationally but it is somewhat ironic that, at a time when balancing budgets and cutting costs is gaining in importance, the cleanest and least expensive source of energy, Negawatts, appear the least appreciated by investors. Negawatts are the energy which did not have to be generated because it was saved, or not wasted.

Negawatts are the proverbial low hanging fruit and energy efficiency solutions have allowed electric utilities to postpone building new power plants, yet energy efficiency and the smart grid are two of the weakest green sectors we track and invest in.

The recent fiasco involving our preferred demand response provider over how power cuts are accounted for and paid for by grid operators, is a perfect example of an industry in the formative stages. Despite the growing pains we believe the technology has great merit and the company’s services deliver real value to their customers. As the revenue growth begins to generate bottom line profits we trust the market will adjust the valuations of the leading companies in this emerging energy sector.

The Portfolio update and recommendations

Alternative energy markets were mixed this month with resurgence in the wind sector more than making up for weakness in the energy efficiency and smart grid sectors. The Portfolio gained 1.17% since our last update, slightly lagging the large caps in the S&P 500 index which added 2.55% in the same four week span. The portfolio is now up an aggregate 40.38% since inception, an annualized gain of 24.69%, which compares with a 26.28% decline (-17.99% annualized) for the benchmark S&P Global Clean Energy index over the same period.

The wind energy group advance this month underlines once more the importance of selectivity when it comes to renewable energy stocks. While three of our holdings led the wind sector with double digit gains, not all wind stocks did as well, to wit, Broadwind Energy (BWEN) managed to lose 15.7%. The five wind energy stocks in The Portfolio, and BWEN is not one of them, gained 10.85% for the month.

The solar sector saw strong rebounds in the shares of most Chinese manufacturers but mixed performance for U.S. manufacturers. Our recent partial profit taking on our preferred maker of solar inverters Power-One (PWER), proved timely as the shares have been correcting sharply since then. On the flip side, our latest solar recommendation has been moving up and away from our target entry point. For the time being we will keep our recommendation unchanged.

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