Save Bryce Canyon National Park from Coal Mining!

Bryce Canyon is an amazing place!   The shapes, colors and striations are simply awe-inspiring.  Interestingly enough, Bryce isn’t an actual canyon, but the place is a national treasure all the same.  Bryce also happens to be one of the single best locations in the Continental U.S. for stargazing and anything astronomy-related.  This is due to the Park’s location far away from any major light pollution sources, and its impeccably clean and dry air quality.  Unfortunately, much of what is impressive about Bryce could be jeopardized by an unnecessary venture to allow a 3,500 acre coal mine within 10 miles of the park’s boundaries.  Sign this petition demanding that the Bureau of Land Management to stop this mine!  (and enjoy some pictures from a recent visit below)

Power-One (PWER), One Powered Business

This is just a heads up to my readers over here that we at AustinWeston Asset Management will now be writing occasional blogs at our own domain.  Our first post is included here below.

One Powered Business

Over the past month, the solar sector has been pummeled by a trifecta of adverse events.  The month of September kicked off with the controversial and headline-riddled bankruptcy of Solyndra, as the macroeconomic storm continued to barrage European markets (the world’s largest solar market) with a spate of pain and uncertainty, and several Chinese players suffered from questions of fraud and/or pollution coupled with a government funded oversupply of solar panels.  Now, at month end, this triumvirate continues to hinder the sector, as none of these negative catalysts have subsided from the public’s concern.

Consequently, any player with exposure to the solar sector, whether large or small, at risk or sustainable, has been thrown out the proverbial door by investors.  In such a situation, especially amidst volatile, downward moving markets, investors quickly sell first and think later. They do this without dissociating the good from the bad.  In light of this, the prudent investor can distill the relevant information in order to identify companies with an ample margin of safety to not only survive, but also to thrive.

Last year at this time, pontificators wondered whether solar panels would ever reach grid-parity with carbon-based energy and whether that very fact would ultimately lead to the demise of solar as an energy alternative.  Fast-forward to this year, and those very same pontificators question whether the sharp drop in system pricing ultimately will destroy the industry.  As is often the case, the truth lies somewhere in the middle.  The rapid drop in pricing will certainly kill some industry players (and has already), while setting the stage for others to prosper longer-term.  Inevitably there will be winners in this industry, but for now we are simply in the “shakeout” phase.

We believe one such company that will be a winner is Power-One, Inc (PWER).  PWER designs and manufactures power conversion and power management solutions for the renewable energy industry as well as for data centers (servers, networks, storage, etc…). The company builds and sells power inverters that convert DC power to AC power for solar panels and wind turbines, and AC to DC or DC to DC for data center demands. These devices are required in the vast majority of renewable energy generation projects and in data center/industrial projects where superior computing performance and power efficiency is desired by the system architects.

Power-One’s History

PWER entered the renewable energy space in 2006. In 2008 they restructured their management team and in 2009 their capital structure, in order to harness their technological advantages, protect current value, and scale into a market orders of magnitude larger than when they first entered, and which grows every year.  Competition in this industry is high, given the applications and technologies have been around for decades now.  Competitors include multinational engineering firms, electrical supply conglomerates, and other smaller niche manufacturers. However, PWER owns the best technology in the industry – its converters are more efficient (meaning less energy is lost in the conversion process), and they operate at this high efficiency over larger power generation ranges than any of their competitors.

It’s not difficult to find reviews of the company’s products by searching the web, and on PWER’s investor relations page (in a few presentations), they identify “blue chip” customers in their portfolio including: Wirsol, Suntech Power, Donauer Solar Systems, SunEdison, BP Solar, Google, Facebook, Cisco, IBM, Siemens, Lockheed Martin, Electrolux, Motorola, Ericsson, and many others. In the renewable energy space in particular, PWER has transitioned from a new entrant to a dominant player. They’ve become second in market share in a matter of a few years, and this share should continue to improve as explained below.

One might question how a company of this limited size controls such technological might, but the real question is why haven’t the bigger electrical/power supply companies been able to engineer a decent competitor to go after the $20 billion+ markets (and growing) in which PWER competes? That’s a valid question, but the answer merely reaffirms the company’s dominant position. With PWER’s power conversion efficiencies in excess of 98% in its larger scale applications, they have achieved 4% greater efficiencies than their closest competitor.  When talking about renewable energy, it’s particularly important to note that these high-level efficiencies are further improving the cost efficacy of the technology. For a larger competitor, it would cost too much money to develop a technology that can compete or beat PWER’s on this front.

A better question would be: why hasn’t a large electrical or power supply company bought this business, harnessing its technology, market share, and recently scaled footprint? A large business with the distribution channels and relationships could stand to gain market share even quicker than their current pace. Further, with the former founder of SunPower Corporation now a member of PWER’s board, alongside a couple Silver Lake Managing Directors, PWER has certainly grabbed the interests of a few discerning technologists and successful investors able to appreciate the dominant product and opportunity this company possesses.

Sizing up the Valuation

Next, on the topic of valuation, what has drawn us to this investment most is you don’t need much to go right for your investment to earn substantial upside. First, at a price below $5 per share right now, the market cap of this business is below $550 million. With 2011 earnings expected in excess of $115 million, the business is currently priced at less than 5x forward earnings, and a mere 1.59x EBITDA. Considering the business is active in two markets that benefit from secular tailwinds and is expected to grow world-wide at a 20%+ CAGR for the next five years or more, this multiple seems a bit low. While we don’t need the growth to justify our valuation interest, it certainly doesn’t dampen our enthusiasm for the business.

The renewables business represents approximately 94% of PWER’s current operating earnings (though the mix has evolved over the last year to be less dependent on renewable), and as of 2Q 2011, 82% of that segment comes from Europe. Italy makes up the bulk, or about 47% of PWER’s total current operating earnings, and the rest of Europe represents approximately 38% of PWER’s operating earnings. In all, Europe accounts for about 84% of PWER’s current operating income. That said, we have already seen a massive decline in European solar demand – on the order of 40% in total GWs installed in Italy, 50% in Germany, and 20% in the rest of Europe – and according to the company’s most recent earnings transcripts, they expect to see a second half improvement in the Euro area relative to the first half. Even through this significant market contraction, PWER’s top and bottom lines have stayed generally intact. Seasonality also has a role in the first half sluggishness, but most of the last two quarters’ relative decline in top and bottom line has certainly come from the weakness in Europe. Despite these challenges, over that time period, PWER’s global market share has risen from 13% to 15% (or a 15% increase) of the global inverter market.  Perhaps more importantly US/Canada/Asia have grown significantly – growing from approximately 4% of PWER’s renewables revenues to 18%, and earning 17% of PWER’s operating income.  Similarly, the company’s data center/industrial segment, representing 30% of the top-line and 6% in bottom-line, has grown by approximately 50% over the last year (this time last year it wasn’t yet operating earnings positive).

The main takeaway here is as follows: even though PWER expects improvement into the second-half of the year, Europe has given this business a black eye. So, let’s think about a few scenarios: if earnings deteriorate by another 30% from current company expectations for full year 2011, meaning we see Europe hit by another 50% decline in gross demand, PWER’s net income should register somewhere around $90 million for FY 2011. This assumes NO growth in the US/Canada/Asia renewables markets, and no growth in the data center business. If we take that as trough net income, and run this business out for four years from today with the $90m figure, add in net-debt, add the impact of the company’s deferred tax assets on net-income over that period, and use a 15% WACC, we’re looking at today’s stock price. What this means is quite simple: you can own PWER today at a valuation that assumes the business is DEAD in four years (liquidated at its net-debt value) and discounted using a very conservative cost of capital in present value terms, leaving a 15% IRR.

It’s tough for us to think a business with the technological advantage of PWER, involved in business areas that are about to, or have reached, substantial efficiencies in pricing relative to other electricity sources, and which has just begun scaling into markets such as the US and Asia (markets expected to grow at substantial rates over the next decade) to be priced at a valuation comparable to a dying run-off with nothing more than its net current asset value realizable at the end of its life.

Conversely, if we assume a trough net-income figure around the $90 million value mentioned above (again being pretty conservative), and using a 12x multiple, you can easily come up with a $1 billion business. There are about 36 million shares that will dilute the current shareholders (now at 104 million shares outstanding), but these are through convertible debt and preferred offerings with in-the-money exercise prices in the $11+ range. Therefore, at these prices, we’ll have to at least double before being concerned with dilution pressures. If the business is valued just a bit more rationally, using a $120m forward net income value at a 12x multiple, PWER should be worth at least $10.50 per share (assuming full dilution from the 36 million shares above), or a 100% upside investment. Finally, if we factor in a bit of growth into this business by assuming a 4% growth rate in the bottom line over the next 10 years, with fully diluted shares outstanding of 140.3 million, the DCF value yields a pretty attractive 25% IRR at today’s prices over that 10 year horizon.

PWER’s Place in The Solar Landscape

There are obviously a few headlines impacting this business’ valuation, most of which are temporary issues or viewed irrationally by sellers. Given that PWER’s business is heavily reliant on the solar industry currently, it is being treated as a solar business. However, PWER doesn’t have to deal with the same fundamental issues facing a panel manufacturer. Solar panel prices continue to suffer given the oversupply out of China and due to older technologies being eclipsed by higher efficiency, longer-term options. PWER’s product is a component in a solar project and is separate from the cost of panels. In current solar panel systems, power inverters typically represent around 10% of the total system’s cost – while the major cost (around 60% of the total system) is driven by the panel prices. PWER’s pricing should not be affected materially by the decline in unit costs of panels, as their product isn’t hindered by oversupply and is a separate technology from the panels themselves.

Most importantly, PWER benefits from a superior technology from that of its competitors, lending it pricing power if need be.  This is clearly evident by the fact that as PWER has emerged as a dominant player in the renewable power inverter industry, SMA Solar (the number one by market share) has seen its gross margins contract by over 9%, and watched its market-share deteriorate as PWER grabbed 15% of the global inverter market by the end of 2Q 2011. This chart of shipments and ASPs is demonstrative of PWER’s superiority: (http://www.greentechmedia.com/content/images/articles/Inverter-Price-Stifel.jpg).  One can see how PWER’s rise in shipments has come along with a significant deterioration in pricing for SMA Solar, while PWER’s own pricing has remained relatively stable. Most importantly, SMA Solar has ASPs approximately 20% higher than those of PWER’s while their efficiencies are far less. Quite simply, PWER has a better technology at a much cheaper price, and their pricing power will only get better as they bring more capacity online – this started just last quarter. If SMA Solar is going to compete outside of Germany, it will have to at least match PWER on pricing; the problem is: if SMA Solar prices their ASPs at PWER’s current levels, they’ll be net income NEGATIVE on those units. The fact is, SMA Solar, in its current form, can’t compete with PWER. Thus, PWER has another upside catalyst: tremendous market-share grab potential from the largest player in the space; PWER’s pitch: better pricing, better technology, and localized customer service.

Further, PWER benefits from the fact less power loss means greater revenues for the generation projects (utility scale, or in areas with feed-in-tariffs), so their efficiency dominance results in a faster IRR on a total project level than any other competitor. This can’t be priced away by competition because any one-time price differential isn’t worth the loss in efficiency over the life of a panel installation. Collectively, the margin advantage and industry-leading efficiency should help PWER continue to increase its market at the expense of SMA Solar and provide further upside to earnings over time.

It is well known and firmly established that the solar industry in Europe will contract this year, and as discussed above, PWER derives a significant portion of its revenues from the European Zone.  What is less well known is PWER’s management has been ahead of the curve in anticipating the changing dynamics of the solar industry.  In the first quarter of 2011, the company completed construction and commenced shipments from its Arizona and China-based manufacturing facilities. The timing could not have been more appropriate, as it coincided with the initial decline in European orders and a substantial increase in North American and Asian based orders—the fastest growing solar regions.  PWER’s new manufacturing zones, coupled with the surge in demand helped push non-Eurozone revenues from 4% of PWER’s earnings to 18%.  Look for this trend to continue over the coming quarters.

In Sum:

On the surface, the rapid drop in system pricing sounds like a major negative for any solar player; however, we view this as an extreme positive for PWER. While total system install prices are being driven down, power efficiencies are being driven higher (with more efficient panels), solar has already achieved grid parity with carbon energy in certain parts of the world. As a result, lower pricing should actually boost unit sales. This will merely increase the demand for PWER’s inverter units as more systems are built. Secondarily, many competitors in the inverter space rely on a few key customers for their business – PWER’s top 10 customers represent less than 25% of their business. And more favorably, the bulk of PWER’s primary customers are not solar panel manufacturers, but distributors and power generation customers directly. Thus, PWER has a grip on the area of the market that will benefit the most from consolidation in the industry as many panel manufactures go out of business.

On the topic of bankruptcies, it is clear the Solyndra bankruptcy has brought a cloud over the entire solar space. Unfortunately, Solyndra is perhaps indicative of the pain panel manufacturers may have to endure over the near term. Thus, while solar manufacturers are sold heavily, PWER is also indiscriminately swept up in the selling; all the while their business possesses the competitive advantages that are unaffected by the panel manufacturers’ problems. This is another example where the market has thrown out a gem due to a clear lack of understanding of the business’ fundamentals, and thus tacks on to it the outrageous valuation discount even if in a tough cycle. It’s to the point where these prices just don’t make any sense.

The unfortunate fact of PWER being so steeply discounted is that it’s quickly becoming a very attractive acquisition target. Everyone from solar manufacturers looking to stabilize their businesses with PWER’s consistent cash flow potential as well as the obvious synergies of offering the inverters alongside the panels in vertically integrated system offerings, to large electrical services and engineering conglomerates who could purchase a cheap, but dominant player in a high growth space, could be looking at PWER as a target.  To us, this would be an unfortunate, albeit profitable outcome, as the future growth would fall into the hands of the purchaser. While such a result may reward the investor in the short term, this business has the upside potential to make it a very lucrative investment over many years to come.

Risks:

The primary risks to our thesis on Power-One are the continued decline in European orders, improved technology from large conglomerates that can more readily withstand losses to establish an industry entry-point, and a further deterioration in pricing and margins.

Disclaimer: By viewing this web site, you acknowledge that you have read our Disclaimer and that you accept and will be bound by the terms thereof.

Disclosure: We are long shares of PWER.

How to Appease the Deficit Hawks Without Hurting the Economy

The Deficit Paradox

So despite the fact that Treasury markets are showing no signs of impending doom, many argue that we need to act in order to preempt a buyer’s strike of US government debt.  Deficit cutting is a dangerous path for our country to head down right now, as doing so leads to the shrinking of aggregate demand/GDP.  I went through this in my recent post on a Different Shade of Political Risk:

As Bill Gross astutely observed, “Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator.  In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!” [emphasis Gross']  While conventional wisdom may hold that reducing spending will close a deficit gap, reality has consistently demonstrated that reducing spending ultimately increases deficits.  Aggregate demand is equal to the sum of consumer expenditures + investment + government expenditures +/- the balance of trade (at the same time, ΔAD=ΔC+ΔI+ΔG+ΔBalance of Trade).  A drop in government spending triggers a drop in aggregate demand, which resultingly triggers a further drop in consumption and investment.

There are two ways for a country to make the deficit shrink as a percentage of GDP: one is to cut the deficit, the other is to increase the rate of GDP growth.  The quote from Bill Gross above is particularly apt, as Gross is a huge owner of US Treasuries, and as such, his words give us insight and perspective into what market participants really think.  Cutting deficits is a difficult paradox, in that doing so can lead to a drop in GDP and subsequently INCREASE the government’s deficit as a percentage of GDP.  I am utterly baffled at how many are calling for the immediate cutting of US government spending, while simultaneously calling for tax cuts, as if that is a solution to this problem (I’m looking at YOU Larry Kudlow…I can’t listen to the guy anymore).  This is especially true considering the budgetary troubles on the state level.

While cutting government spending would not be the best idea right now for the broader economy, there are two areas in which the government CAN cut spending without unleashing negative consequences on the economy at large, and possibly even helping the economy.  One such way is one of the most politically popular areas of the budget to cut (and something in which both Keynesians and Free-marketers alike agree should be cut) and the other is one which seems too politically taboo to even mention.  Let’s start with the popular–agricultural subsidies.

Agricultural Subsidies

As of 2009, agricultural subsidies in the US totaled $20 billion, or the rough equivalent of 0.5% of our entire federal budget.  While the percentage may sound small, that amount can have a major impact over the long run.   I propose to completely abolish agricultural subsides in this country altogether.

An Economist/YouGov poll from early April of 2010 found that aside for foreign aid (which is pathetically small in our country relative to other spending areas) and the environment (I guess people think we treat it well enough as is), agricultural subsidies were the component of our budget enjoying the most support for cuts (27% of Americans polled).  I am sure much of this has to do with the changing nature of agriculture in the country.  When these subsidies first began, we were largely an agrarian nation in which much of the population earned their livelihood via farming.  Today things are completely different.  In Making Globalization Work, Joseph Stiglitz offers the following statistical breakdown of the state of agricultural subsides in the US today:

…the vast bulk of the money goes to large farms , often corporate ones.  These subsidies have become simply another form of corporate welfare.  Looking across all crops, some 30,000 farms (1% of the total) receive almost 25% of the total amount spent, with an average of more than $1 million per farm.  Eighty-seven percent of the money goes to the top 20 percent of the farmers, each of whom receives on average almost $200,000.  By contrast, the 2,440,184 small farmers at the bottom–the true family farmers–get 13 percent of the total, less than $7,000 each.  The huge subsidies…actually drive out the small farmer.

Additionally, 90% of these subsidies are for staple crops, such as corn, wheat, soybeans and rice.  It is neither in our economic nor nutritional interest to focus so extensively on grain subsidization.  Besides, a large portion of the corn in this country isn’t even grown for food consumption purposes.  Ten million hectacres of arable land are used to grow corn for ethanol, adding up to a subsidy of $0.45 per gallon.  Ethanol is demonstrated to have only a marginal improvement in environmental efficiency at best, and this subsidization is leading to an economic inefficiency in our agricultural markets.  More land than would otherwise be used for corn is used for corn solely because of these subsidies. This cheapens corn relative to alternative edibles and drives up the price of other food staples, such as fruits and vegetables.

We hear many deficit hawks talk about the stimulus as “socialist” , deficit spending crowding out the private sector, and the inefficient allocation of capital from the public sector, yet very rarely do we hear anyone lambaste agricultural subsides.  Somehow health insurance for Americans is evil and un-American while agricultural subsidies are what exactly?

The Politically Unmentionable

Let’s end the wars in Iraq and Afghanistan.  Forget about the past debate.  With the benefit of hindsight, we know we went into Iraq for the wrong reasons and we still know of no “end-game” through which a “victory” can be achieved.  Not much more needs to be said here; however, one thing that is particularly interesting is that most people do not even realize that the wars in Iraq and Afghanistan are not accounted for in our regular budget.  Rather, wars receive special budgetary treatment.

Despite not being included in the regular budget, these wars have a major impact on our fiscal balance.  It would go a long way towards quelling any potential bond market jitters to make clear that an end is in site for these wars and that US dollars will stop going down this completely unrewarding sinkhole of simultaneous foreign quagmires.

Conclusion

If we cut both of these areas of our fiscal spending, not only can we appease deficit hawks, but as a country we might even have some more wiggle room for more stimulus.  Speaking of stimulus, should China actually let the Yuan rise relative to the dollar, they would be doing the US a major favor in stimulating the economy.  That is why market futures went up so much ahead over the weekend following the announcement.  It works like this: through all this time in pegging the Yuan to the dollar at an artificially low price, China has been accumulating a horde of US dollar reserves.

Effectively, this policy allowed the US to export inflation to China.  In allowing the Yuan to rise, China will slowly release some of these stored dollars into the global economy, ultimately providing a stimulant to global aggregate demand.  This is just what the doctor ordered at a time when it is needed most.  Let us just hope that China follows through on their promise, as this could help grow the US GDP, thus decreasing the fiscal deficit as a percentage of GDP.

A Theoretical Trip to Walden in the Wake of the Gulf Oil Spill

Our village life would stagnate if it were not for the unexplored forests and meadows which surround it.  We need the tonic of wilderness….At the same time that we are earnest to explore and learn all things, we require that all things by mysterious and unexplorable, that land and sea be infinitely wild, unsurveyed and unfathomed by us because unfathomable.  We can never have enough nature.  We must be refreshed by the sight of inexhaustible, vigor, vast and Titanic features….We need to witness our limits transgressed, and some life pasturing freely where we never wander….I love to see that Nature is so rife with life that myriads can be afforded to be sacrificed and suffered to prey on one another….With the liability to accident, we must see how little account is to be made of it.  The impression made on a wise man is that of universal innocence.

–From Walden, by Henry David Thoreau.

Lately I have been relatively quiet about the Gulf Oil Spill and I am now ready to dive into the topic headfirst.  I had felt all along that little new can be said about the crisis, other than the venting of frustration or posting some links to sites and organizations that are doing good things to proactively help (for those who have not done so, check out my post on Animal Rescue in the Gulf which has numerous links to helpful organizations and please send a text message to 20222 with the word “WILDLIFE” in order to give a $10 donation to the National Wildlife Federation).   What I wanted to do was take a step back from this whole situation and view it through a different lens, a philosophical lens.  Rather than rant and rave through my emotional thoughts, I wanted to think about the bigger implications of the oil spill and put it in context of where we are today in the progression and evolution of mankind.  I wanted to think a lot about the relationship between humans and nature and the ebbs and flows with which humans have nurtured and exploited Mother Earth. And that’s exactly what I have done.

Ideally to engage in this sort of thought exercise I would have taken some time and visited a National Park, camped out in a wild enclave and hiked and explored a new outdoor domain.  Unfortunately work and life would not permit such an endeavor at the moment (and had I been able to go away anywhere, I would have sent myself right out to the Gulf area in order to contribute in any possible).  In order to partake in this philosophical exercise I decided to do the next best thing–live vicariously and “deliberately” by rereading Henry David Thoreau’s Walden.  While I won’t dig into the specifics of Thoreau’s thinking, I will hopefully tap into his spirit.

A lot of what I have been thinking about cuts at the heart of the debate between John Muir and Gifford Pinchot that took shape over a century ago: that of preservation verse conservation.  Preservationists, like Muir argue for prioritizing the protection of natural resources from expropriation, exploitation and destruction, while conservationists call for a balance between the protection of natural resources and their use for economic benefit.  Preservation takes the idea of conservation one step farther.  People have constantly debated the balance that maximizes economic growth while protecting Planet Earth.  In this country, we have predominantly lived under the premise that the right balance should ultimately lead in aggregate to quality of life gains: i.e. the speed with which we use resources should not exceed a certain point in which the harm done in extracting those resources is greater than the economic benefit derived from their expropriation.  This is a utilitarian cost-benefit analysis in which society pursues the means which maximize overall utility and benefit.  With the 2000s bull market in energy and commodity prices the balance of that equation shifted dramatically in favor of the economic rather than the environmental.

Today to a large extent the shape of discourse positions the environmentalists (both preservationists and conservationists alike) in opposition to the resource expropriators (and to a larger extent the corporate world).  Rarely do we ever hear of the tensions within the environmental camp between outright preservationism and the more moderate conservationism.  With the impressive economic and quality of life gains over the past century combined with the strong bull market in commodities over the past decade, environmentalists have increasingly been marginalized in recent years as “radical” “wussies” who just don’t get “it” regardless of which side of the environmental camp one may subscribe to.

Further compounding the marginalization of environmentalism is the fact that life itself has become so incredibly abstract that people are increasingly removed from the source of our vitality–the Earth itself–altogether, to the point where there is a diminished sense of connection to our environment and ecosystem.  When one can wake up in a steel building, ride a steel vehicle which burns some kind of fossil fuel in order to arrive at a different steel building in which one communicates and connects via a collection of copper and plastics to the entire world all at once, while eating food sold in plastic wrapping and metal cans it’s very easy to forget that trees and water don’t just make for pretty vacation scenery, but rather, that they are absolutely necessary for living life itself.

With the rhetoric surrounding the “debate” over global warming, it has become clear that the environment has taken a back seat to the economic growth side of the utilitarian equation.  To me, this is abundantly clear considering the fact that IF, just IF, global warming is possibly real, why are we not doing anything possible to prevent it from getting worse?  In terms of risk/reward, the risks of doing nothing so clearly outweigh the risks of doing something and the threat never having been real.  Moreover, regardless of whether global warming is real or not, there are severe risks of maintaining our addiction to fossil fuels.  Their consumption alone causes major problems (including semi-rampant childhood asthma), but what we have learned from the Gulf Spill is that their expropriation too causes massive problems.  We are lucky in America in that the expropriation of natural resources (including oil) generally takes place so far away from our major population centers.  This is lucky because in other places around the world control over resources has and is resulting in long deadly wars (too many examples to list, but the Iraq war is in some ways an example and the trouble in Sudan is long-standing one) and environmental problems of the small (mountaintop removal mining) and sometimes catastrophic variety (Massey Energy mine blast and obviously the BP Gulf Oil Spill).

We need to rethink our energy paradigm and we need to re-embrace the utilitarian calculation of the costs and benefits of how we pursue resource consumption.  To wrap this all up for now (don’t worry, I am nowhere near through my thoughts about this topic), here is a quote from one of my previous entries on alternative energy that gets a little into the cost/benefit calculation of fossil fuel alternatives:

Much of the debate over fossuel fuel emission reduction focuses on whether the economy can absorb the costs of a shift to more climate-friendly forms of energy consumption.  The discourse takes a cost-benefit analysis to the change and attempts to rationalize whether the the risks justify the rewards, or simply whether the ends justify the means.  As an idealist who enjoys outdoor activities, I can easily come to the conclusion that the ends justify the means myself—to me, a cleaner environment is worth a significant cost–not everyone sees eye to eye on the issue.  Political constituents with exposure to the energy and manufacturing sector in particular do not see it this way.  The false dilemma is that our choices are not mutually exclusive.  We do not have to choose between a cleaner environment or a more robust GDP.  The real choice is whether we want a robust and profitable energy sector, or whether we want to increase the size of our alternative energy industry.  What we are debating is a massive shift in wealth from the owners of our resources to the owners of innovative technologies.

In the end, the ultimate question is do we want policies that promote growth, or do we want to take a utilitarian approach once again towards improved quality of life?  At some point growth comes with diminishing marginal returns in terms of quality of life, whereby each additional unit of production comes with a correspondingly smaller improvement in quality of life (and sometimes even a net subtraction from quality of life as is evident with the Gulf Spill).  Some worry about the costs of alternative energy.  Costs in and of themselves are not bad things.  Costs are worthwhile so long as they come with some sort of tangible gain.  Naysayers only want to talk about the costs costs costs of a transition to cleaner energy alternatives without even acknowledging the benefits.  It’s about time for that to change and I can only hope that President Obama’s upcoming speech (and subsequent actions) addresses some of these issues.

Animal Rescue In the Gulf

So since I last asked for places to donate to animal rescue in the Gulf, I have scoured the interwebs for some good places to help people play a part in the recovery from this unfortunate disaster. The National Wildlife Federation has now arranged a text-message donation system to help with animal rescue in the Gulf.  I urge you all to text “WILDLIFE” to 20222 in order to donate $10.  This is an incredibly important initiative to help salvage what is left of one of our country’s most precious and important ecosystems.  Additionally, as the oil continues to leak, the extent of the damage becomes increasingly unknown.  We all have an obligation to do everything possible in order to mitigate this damage and to take the steps to ensure that this can never happen again.  So text 20222 and enter the word “WILDLIFE” in the message in order to get started in playing a part.  For those who might need an extra kick, take a look at the video below.

Below are a few more links through which the geographically mobile can actually in volunteer in person for the cleanup effort (and some organizations for the immobile to donate to):

Volunteer Latin America put together a broad collection of links with different ways in which people can help out in the Gulf.

OilSpillVolunteer.com also has an excellent collection of multiple avenues through which to get involved.

The Coalition to Restore Coastal Louisiana and the Alabama Coastal Foundation are both organizations that work to protect the ecosystem and its habitats and wildlife in the Gulf region.

As I continue to find new ways to help out I will post them right here.  It’s great to see that there is now a text message donation hotline, as that was major enhancement to the fundraising drive for aid to Haiti following their devastating earthquake.  It is wonderful that to see innovative technologies lend a helping hand to the recovery efforts in the wake of such catastrophic events.

Update: From a commenter, I was alerted to this great website/initiative which donates the proceeds from the recycling of old electronic products for the benefit of the National Wildlife Federation.  This is an easy way to get involved for those who may not have the disposable cash, but do have some lingering old electronics:

Recycle 4 Pets has started a campaign as well. Your empty ink cartridges and used electronics can be donated and recycled to benefit the National Wildlife Federation’s Gulf clean-up efforts. Visit http:///www.recycleforpets.com/documents/fc_label_rdv.pdf for a free shipping label. Print it, and write NAT529C in the return address. Recycle 4 Pets will send the market value of your used electronics to the National Wildlife Federation. You can also email recycle4acause(at)yahoo(dot)com for more information.

And in case you still need yet more motivation to help out, this picture says it all:

BP Living in an Alternate Reality

Firstly, I would like to apologize for brushing the oil spill to second-class status amidst the Euro/Eurozone blowup.  As a trader I sometimes overindulge myself in the happenings in front of my eyes, rather than thinking of the far more consequential and significant issues taking fold around the world.  The Deepwater Horizon oil spill is unfortunately a catastrophic disaster from both an environmental and human perspective.  This is not a second-class issue of our day and in many respects the essence of this issue cuts at the heart of the crisis in Europe: the seeking of short-term solutions to long-term problems.  Oil expropriation is our past, efficient energy our future.

Robert Reich wrote an excellent piece on his blog bashing the “Beyond Petroleum” ad campaign for what it is: a marketing ploy without any substantive action.  BP has a spotted track record (to put it nicely) with its concern for both human and environmental safety issues and basically no track record when it comes to promoting alternative energy (although their flashy, fancy, futuristic gas stations do look sleek, sexy and um futuristic).  I think an important point can be drawn from BP’s ad campaign.  The company had an awful image in the United States and was able to expand its earnings power on account of outwardly displaying an environmentally conscious image.  What this tells me is that people actually do want alternative energy.  There is real DEMAND and earnings that can go along with moving into the alternative energy space.  Yet what BP did is rather ingenuous in some respects (the greedy short-sighted respect).  Rather than really take positive steps they made people THINK they took positive steps and spent their time collecting the cash.

People do really want to move “beyond petroleum” but those with the capital are not ready to make that investment.  I think one of the primary reasons behind this is that were a company like BP to sincerely invest in alternative energy, they would proactively be seeking a way to undercut demand for their primary product (oil) and ultimately their source of wealth (oil).   The movement to alternative energy will have to result in a transfer of wealth from those who own the “old” resource (oil) to those who own the “new” (technology).  The technology is there; however, it is just a capital intensive process to get the ball rolling.  With energy efficiency we need global consensus and cooperation in order to move forward in a cost-effective and efficient manner.  Without it, those who act will suffer from the free rider problem in which those who do not act share equally in the improvements.  As it stands now, our country is one of the biggest impediments to a global consensus on alternative energy and sadly, and likely as a result of our global stance, we are not the leader in technology in this area–China is.

It is nearly impossible to achieve longer-term gains without taking on some kind of shorter-term expense.  The people who argue about the “costs” of energy efficiency in the short-run have a vested interest in preventing the long-run transition from taking place.  Never has that been clearer than the “Beyond Petroleum” bullshit leaking out of BP’s own ruptured public relations pipeline.

End the Cynicism.

So with all the bad news flow lately, I have noticed a theme on this blog…while I am predominantly an optimist, I could not help but feel incredibly frustrated with the quantity and variety of man-made headline risks.  In the same week that the BP spill became a catastrophic environmental disaster, we saw a luckily failed bombing attempt in Manhattan and the passage of a blatantly racist and downright disgusting Arizona immigration law, not to mention the fact that I left behind the mid-20 age group for the late 20s.  I will talk about the immigration law in the near future, as it is something that strikes a nerve with me.  I am the son of a first generation American from Eastern Europe.  I am no different than a Jose or Juan, other than in my skin color, yet someone from a different skin color would be treated less favorably than I in Arizona.  What is happening in Arizona is EXACTLY the type of persecution that my mother sought to escape from when she left Poland as a political refugee four decades ago.  I promise a more thorough discussion of the issues, but in the meantime, I will leave you all with this link of companies to boycott who call Arizona their home.  Please join me in using democracy and capitalism to take a stand against this hate!

Initially, the headline news leaves nothing to get excited about and much to fear.  It just so happens that beneath the surface something incredibly good is happening.  Just last week marked what I believe to be the most significant biotechnological advance in my lifetime.  Dendreon (DNDN, disclosure: I am long DNDN) received FDA approval to market Provenge, a groundbreaking immunotherapy to treat prostate cancer.  The science works using dendritic cells, first discovered by Dr. Ralph Steinman at Rockefeller University, in order to manipulate the body’s immune system to attack the cancerous tumor itself.  While the application itself is very much in the early stages, the potential is enormous for treating some of our most threatening diseases and ailments including various kinds of cancers, HIV, lupus, etc.

This is an amazing breakthrough for science and something which should bring a good deal of renown to Dr. Steinman and investment in the future of this technology.  With this initial approval, Dendreon will now have much better access to capital–both human and monetary–to develop further applications for Provenge and to continue to tinker with and expand the existing use of immunotherapy in fighting prostate cancer.  I look forward to the growth and development of this technology and fully believe in its potential to change the way that humans and science fight some of our most dangerous ailments.  All of my readers unfamiliar with this technology should take a moment, click on some of these links (here’s another one) and learn about it.  Furthermore, try to find stories that are not from “business” sites, as this story is far larger than a stock-specific one–it is a monumental achievement for humanity.

Disclosure: I am long shares of DNDN.

“What the hell did we do to deserve this?”

Over the weekend I had been putting together my thoughts in response to the “Big Slick” disaster unfolding in the Gulf of Mexico.  Prior to jotting down my reaction, I wanted to move past my emotive response and approach this disaster in what hopefully can be a constructive manner. When I arrived in my New Orleans hotel on April 21st, the lobby’s TV was trumpeting the story of a rig explosion/fire transpiring not too far off the shores of Louisiana.  It seemed like a sad, albeit local story.  By the time I arrived home just one week later, we started learning the truth.  This is a horrible disaster of catastrophic proportions and the implications reach far wider than the dollar costs being slung around so freely by the media today.  “Big Slick” is a human and environmental disaster that will have far reaching consequences for a long time.  Anyone who does not realize that at this point in time is simply missing the point.

That being said, I want to start by stating my conclusion: we must pass a windfall tax on oil companies.  Australia helped state my case in a big way this morning in announcing a tax on mining/resource expropriation companies.  The naysayers and businessmen warn about the economic losses of such a tax.  In a globalized world resource expropriation companies will move elsewhere.  I want to stop this bullshit (yes I’m pissed off about this whole thing!) before it starts moving too far.  These very same naysayers are the ones who invest in resource companies because they acknowledge the scarcity of resources on Planet Earth.  At the end of the day, there is a finite amount of oil, copper, iron ore, etc.  This will not change.  The end game is not to find more of these resources, that is merely a means to an end.  The end game is consuming these resources in the most efficient manner possible while trying to find alternatives–i.e. progress.  We must progress beyond short-term consumption tendencies.

Just a few weeks ago, a Chinese shipping company transporting resources from Australia to China, in an effort to save time and to reduce its shipping costs, veered 12 kilometers outside of predesignated shipping channels.  In doing so, the ship crashed into the Great Barrier Reef and punctured its fuel tank, while in the process causing an environmental disaster in its own right.  To Australia, the Great Barrier Reef is a priceless resource to be enjoyed and treasured in its own special way.  The Reef is a priceless commodity in its own right owned, shared and treasured by Australians and just about every other citizen of Planet Earth alike.  The companies who expropriate commodities and raw materials from countries–especially foreign companies who have no connection to the localities–worry about their profits, not the externalities of their actions.

See in reality the supply/demand equilibrium of natural resources does not reflect one of the major costs of the expropriation.  That is the cost borne by the processes themselves, as well as the risks of a mishap in the expropriation.  The Great Barrier Reef is just one example in Australia of a huge cost that must be borne by everyone with the profits concentrated in the few; the Massey coal mine explosion/mountain-top mining destruction are another example; and this BP oil slick is unfortunately the largest such example that our Planet has witnessed.  Unfortunately everyday life has become such an abstraction such that often times sustenance and day-to-day problems become so removed from the very source of our being that we as people underestimate and miscalculate the risks of damage to Earth itself.  We can “drill baby drill” all we want, but if doing so destroys one of our abundant food sources it is just not worth it.

What pisses me off most about this BP disaster is that for a mere $500,000–yes, you’re reading that right, for a mere five zeroes, BP could have avoided a disaster that is costing the company itself $6 million a day and our country a sum that is yet to be determined.  There is a direct connection between a disregard for the environment and a disregard for safety and human life.  It is no surprise we saw both Massey Energy’s coal mine disaster and BP’s oil rig explosion at the same time.  Massey has a long-standing history of skimping on safety requirements–both human and ecological–and BP too has a history of its own on that front–a 2005 Texas refinery explosion and a 2006 pipeline spill in Alaska.

Progress and economic growth will come through finding a way to live in harmony with the planet that gives us our life.  Without a proper balance between the expropriation of its abundant resources and a concern for its health we cannot continue to increase the quality of life for all of humankind.  It is in the economic interest of oil companies to not only minimize expenses on safety procedures but also to spend significant sums of money trying to disprove that global warming results from fossil fuel emissions.  They themselves take in all the economic benefit at a minimal cost.  Is this really how we want “capitalism” to work?  Can one truly say that these are efficient allocations of resources and capital on a societal level?

The Great Depression had its Dust Bowl and unfortunately this Great Recession has its Big Slick.  This will have major consequences on food supplies, the unemployment picture and our way of life.  We can only hope that the impact does not spread, however, those hopes appear nothing more than a leap of faith.  As the drama was playing out, BP’s CEO Tony Hayward was quoted as saying “what the hell did we do to deserve this?”  Well Mr. Hayward, you did plenty!  This quote evokes a sense of karma.  This has everything to do with karma!  All the bad that your company has done is now coming back to bite it in the behind.   Rather than worry about your company’s reputation, I ask you, “what the FUCK did we do to deserve this?”  Step up the rhetoric and get angry at these people.  It is not a fair trade to risk our ecosystem for one economic sector’s profits.

And while we’re at it, people need to stop listening to Rush Limbaugh and his teabagger cohorts who are saying “well maybe this is ecoterrorism or North Korea.”  Where that argument totally loses is that for a mere $500,000 a rig explosion could have happened, but a massive spill would not have.  BP itself ADMITTED responsibility already.  Is that not enough?  They acknowledge they screwed up.  It’s hard enough to get Goldman Sachs to do the same with the evidence so strongly positioned against it.   Companies do not voluntarily take blame unless it is so incredibly clear they deserve it.

We as a society should not stand for this anymore.  It should not be ok for companies to make massive profits at the expense of society at large.  Additionally, it should now be clear to everyone that following this disaster, the economic efficiency of an offshore windmill farm is far more advantageous than “drill baby drill.”  Rather than planting more drilling rigs along the Eastern Seaboard, we should be redirecting more money away from fossil fuel consumption and towards alternative energy.  Even without oil spills fossil fuels cause massive harm to environment (cough cough GLOBAL WARMING).  It should now be more clear than ever that a windfall profit tax on energy companies makes sense–it would kill two birds with one stone.  Such a tax would mitigate the environmental and economic risks to society of expropriation, while simultaneously raising the funds needed to advance our alternative technologies.  It would reallocate capital in a more efficient and beneficial way.  Just like Australia is now demanding compensation for the risks of expropriation and the damage done, so too must we.  No longer can we sit idly by.

Cutting Carbon Emissions: The False Dilemma

Much of the debate over fossuel fuel emission reduction focuses on whether the economy can absorb the costs of a shift to more climate-friendly forms of energy consumption.  The discourse takes a cost-benefit analysis to the change and attempts to rationalize whether the the risks justify the rewards, or simply whether the ends justify the means.  As an idealist who enjoys outdoor activities, I can easily come to the conclusion that the ends justify the means myself—to me, a cleaner environment is worth a significant cost–not everyone sees eye to eye on the issue.  Political constituents with exposure to the energy and manufacturing sector in particular do not see it this way.  The false dilemma is that our choices are not mutually exclusive.  We do not have to choose between a cleaner environment or a more robust GDP.  The real choice is whether we want a robust and profitable energy sector, or whether we want to increase the size of our alternative energy industry.  What we are debating is a massive shift in wealth from the owners of our resources to the owners of innovative technologies.

On his blog today, Paul Krugman asked the following question:  “… there is actually a fair bit of evidence that many energy-saving measures would also be cost-saving, even at current prices. Like most economists, I take these estimates with a grain of salt: if these actions really are cost-saving, why aren’t they being taken already?”  I am surprised that Professor Krugman, an economist who has been arguing against rational choice as our prevailing economic theory, would make such a claim.  I think that in a purely rational marketplace with no inefficiencies the economically efficient outcome would be the end result; however, with regard to energy in particular, there are significant implications for global wealth AND POWER (never underestimate the role that power plays in decision-making).  Power politics cannot be equated for in economic models.  People who have a vested interest in protecting the status-quo do not do so in order to promote growth in aggregate demand; they do so to protect their personal claim to wealth.  In the end, our government pursues policies that favor a small subset of our society because those with the means control the process.

In essence, the costs of fossil fuel dependency are felt more heavily by those sectors of our economy that expropriate and consume carbon-based energy.  Those who own the resources used for energy spend a lot of money ensuring that more energy-efficient solutions are not pursued in the long run.  They fear such a shift because they know that it will not necessarily place a significant burden on society at large, but rather, it would shift a substantial portion of their revenues to different sectors–mainly those that are involved in alternative energy pursuits.  Some of these companies are now investing more money in lobbying against these measures than in pursuing alternatives because they know that their risk/reward is far greater in protecting what they have than in finding something new (the following chart from Public Integrity shows just how much is being spent to avoid reductions in fossil fuels):

The combined weight of manufacturing, power companies, oil and gas, and mining and coal far exceed all other lobbying industries combined as of 2008.  These industries pay handsomely for the political protection that helps pursue the preservation of their asset’s values (assets being their energy resources).

Energy efficiency is a capital intensive endeavor with substantial short-term costs in some sectors of the econony.  However, in pursuing a reduction in greenhouse gases, expenditures on alternative energy will increase, as will investments on technologies that improve efficiencies.  Furthermore, setting targets for consumption reductions can lead to increased investment in technology, just at a time when many are still left licking their wounds from the aftermath of both the tech bubble popping in the late 1990s/early 2000s and the financial crisis of 2007-present.

The Time Costs of Delay:

The longer we continue to rely on carbon-based energy, the higher the costs will be in the long-run.  As time moves on and the world continues to consume fossil fuels at an increasing rate, scarcity will ultimately drive prices higher.  While we do not know the maximum quantity of consumable fossil fuels available on Earth, we do know that the accessible quantity and ease with which we can expropriate the supply will continue to diminish.  Furthermore, as developing economies (just take a quick look at China or India) continue to grow at an impressive rate, there will be increased consumption of fossil fuels from the developing world, in addition to the developed.  Just today, the International Energy Agency (IEA) released a report declaring that this year, despite the lingering effects of the global economic crisis, world oil demand will reach a RECORD high.  This is happening despite the fact that global consumption levels (global GDP) remains below 2007 level.  In both the long and short run there will be substantial upward pressure on the price of fossil fuels and this cost risk is far greater than that associated with a shift into alternative forms of energy.

Some assert that the cost will be borne more heavily by the manufacturing sector than any other, and that ultimately this will lead to the continued conversion of the U.S. economy from one which produces to one which services (i.e. the shift from a manufacturing to a service-based economy).   While it is true that the manufacturing sector will pay some of the cost, there are ways to mitigate the expense and yet further ways to ensure that there will not be continued flight away from the U.S. by manufacturers seeking a lower cost structure. This is just one reason why a global consensus and united effort on carbon emissions is particularly important.  If you have all countries working in concert pursuing a goal, there would be no incentive for a company to move from one locale to another in order to arbitrage the regulatory structure.

One factor that is largely ignored by such cost-centric critics is that for a manufacturing-based company to move from the U.S. to another country is also a very capital intensive venture that comes with large short-term costs, just as is energy efficiency.  Building a new factory and establishing the transportation infrastructure necessary to bring the goods to market are huge short-term fixed costs, and the transportation costs are variable costs that will add up for such a company over time.

Additionally, due to lackluster demand in the U.S. relative to the rest of the world for alternative energy, many of the manufacturing jobs in the solar sector are located overseas.  For an anecdotal example look no farther than my recent focus stock: First Solar.  The company built substantial production facilities in Europe and Malaysia due to the far greater demand for solar wafers in Europe and Asia than in the U.S.  This is not as reflective of the cheaper cost structure for manufacturers abroad, as it is of locating the supply source closest to the demand.  With increased demand in the U.S., a company like FSLR will increase its production capacity domestically (they do have a factory in Ohio), which will ultimately lead to more investment and jobs at home.

What Next:

It remains to be seen whether President Obama earned the political capital necessary to accomplish another monumental task following the passage of the health care plan; however, I am becoming increasingly optimistic that considering the magnitude of the recovery and the recent surge in oil prices, the political pendulum will once again swing in favor of a more focused and aggressive shift away from the fossil fuel infrastructure and towards a cleaner environment for our future.  We do not have to choose between economic growth and a clean environment.  That is a false dilemma.  In reality, our choice is between protecting the wealth of the fossil fuel reliant industries (the conservative cause) and the alternative energy sector (the progressive cause).  This is the age-old debate which once upon a time resulted in Galileo’s imprisonment over suggesting that the Sun, rather than the Earth was the center of our universe. Just as it was then, history is on the side of the progressives.