The Next Bull Market

[FRED]

The Next Bull Market

by John Rubino (DollarCollapse.com)

Editor's Note: I've been talking about an alternative energy investment boom since I did my research and wrote in the summer of 2007 the Harper's Magazine article The Next Bubble that was published six months later in March 2008. When I was interviewed on CNBC in February, the month the magazine issue hit the stands, when asked what solar and other alternative energy stocks to buy I responded, Not yet. Investors should be in cash. We're at the start of a long bear market.

That may not have gone over so well with the show's producers but that was my opinion based on analysis that led me to write December 27, 2007 that a Debt Deflation Bear Market was to commence in 2008.

We will update our Debt Deflation Bear Market forecast in December this year (see Debt Deflation Bear Market Update Part I: 2009 Windup). For this year the forecast of a 40% decline in the DOW, in line with the Nikkei in the first year of the Japanese debt deflation in 1990, has come to pass. Not only was that forecast greeted with skepticism at the end of 2007, but I get the sense from comments that I have seen recently that some iTulip readers did not get their heads around the idea of a boom in alternative energy stocks will only occur, in my opinion, after the long, ugly bear market in stocks.

Here, just to make certain that readers are clear on my position, I'll repeat my assertion that before the boom occurs the US economy will first experience a transformational depression that turns the US economy from what it was into something else. How long that takes is hard to say because it depends on the national and international political response, but we don't see a silver bullet returning the global system to its imbalanced 1971 - 2007 past. To make sure that iTulip readers do not see our decision to reprint this fine article by our friend John Rubino on a future alternative energy investment opportunities as a suggestion that a boom in alternative energy stocks is imminent, we supply the time-line to the left. We expect that after the depression and transformation but before the end of the recovery alternative energy stocks will boom–in, say, 2020; that little speck off in the distance with the circle around it is the alternative energy bull. In the mean time, there will be tactical opportunities primarily driven by government spending programs.

Between now and then a large drop in energy consumption due to global economic contraction will, however, create demand for energy conservation short and medium term long before the economy needs fossil fuel alternatives such as solar, unless there is a war or other major supply shock. Energy is a tax on an economy, and raising taxes during a global economic bust is as unwise as it is unlikely. Unfortunately, pollution will take a back seat to the more mundane task of supplying affordable transportation. Besides the fact that most Americans will in ten years be driving the same cars they are driving today, diesel will begin a resurgence due to the relative abundance of heavy, sour crude oil, and the diesel hybrid will be the car of the future.

Across that vast expanse of economic pain and change between the end of the FIRE Economy and the American Consumer Fantasy it produced, and the beginning of the Next America, some of the solar and other alternative energy companies you invest in today may have gone out of business, either because of the depression or a new company with better technology out-competed them. Likely the solar company we want to invest in for the long term boom does not even exist yet. In sum, we don't think now is the right time to invest in alternative energy as a group. That said, we do not underestimate the ability and willingness of our government to waste our money on unnecessary energy infrastructure development, so we will have to watch these stocks and their anticipation of fiscal stimulus programs. So far, unlike home builder stocks in 2001 and 2002, they are not pricing in major government stimulus; they have gone down with everything else, or more, during the Debt Deflation Bear Market. More likely government infrastructure programs will focus on making buildings and homes more energy efficient by installing more new heating and cooling systems, insulation, and lighting. Those are the areas we will explore in detail for subscribers that is relevant for short term and medium term investing opportunities to take advantage of the flood of government money into alternative energy development that I forecast last year.

Ka-Poom Theory offered a theory eight years ago of how the current debt deflation occurring now and subsequent reflation in the coming years. If you are going to look that far ahead you are going to be wrong on the details but if you can accurately outline the underlying economic, market and monetary processes, you can avoid making the big mistakes, such as staying in the stock market this year. Likewise, this alternative energy investment time-line is intended to make clear to readers that while we see an opportunity off in the distance and tactical investment opportunities along the way, that does not mean we can grab that bull by the horns today.

For the next few years the name of the game is follow the legislation. For tactical opportunities for investing in government spending driven energy programs, John Rubino developed the list below. - Eric Janszen

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It took a few decades longer than it should have, but the world has finally figured out that leveraged speculation is not the path to lasting prosperity. Investment banks and hedge funds are dying, and the concepts upon which they were built--derivatives, gullible pension funds, sycophantic financial media--are being shoveled into the landfill of history.

Now the survivors have to come up with ways to feed, clothe, house, and entertain seven billion people without the help of mortgage-backed bonds, CDOs, and black box trading models. The answer (not the correct answer but the inevitable one) is pretty obvious: The governments of the world will run the printing presses in an attempt to stave off Depression until some miracle happens to put us on a sustainable track, or at least until the current crop of leaders retires. This won’t work in the long run; instead it will simply destroy today’s paper currencies. But in the meantime a lot of newly-created dollars, euros, and yen will be flowing somewhere, financing growth and pumping up share prices. The question is, which shares? In a prescient March 2008 Harper’s article, iTulip’s Eric Janszen cast his vote as follows:

“There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom - under the rubric ‘Web 2.0’- is based on improvements to existing technology rather than any new discovery. The capital intensive biotechnology industry will not inflate, as it requires too much specialized intelligence. There is one industry that fits the bill: alternative energy.”

Yep. With the election of Barak Obama, the U.S. will almost certainly come to the above conclusion, because it’s a double winner: A massive clean-tech public works program will simultaneously create jobs and restructure the energy economy along sustainable lines. So in coming years look for a varied and relentless parade of subsidies, tax breaks, public/private partnerships, and mandates designed to bolt solar panels onto rooftops, build power lines connecting wind farms to cities, and replace internal combustion engines with batteries.

Combine this coming tsunami of public cash with the fact that plunging oil prices and the general market decline have crushed even the best clean tech stocks, and the result is an interesting, maybe unique situation. The clean tech crash was a bloodbath for the hot money that piled into solar and wind in the expectation of $200 oil. But it’s a once-in-a-generation opportunity for those who kept their powder dry.

To get you started, here’s a list of clean tech mutual funds and ETFs, all of which are down in the past year. They generally own the strongest companies in their sectors, and offer diversification that is crucial, since there’s no telling where the final bottom will turn out be for any individual stock.

Claymore/MAC Global Solar Energy (TAN)
First Trust ISE Global Wind Energy Index Fund (FAN)
Guinness Atkinson Alternative E (GAAEX)
New Alternatives Fund (NALFX)
PowerShares Cleantech (PZD)
PowerShares WilderHill Clean Energy (PBW)
Power Shares Wind Global Energy Portfolio (PWND)
Winslow Green Growth (WGGFX)
Winslow Green Solutions (WGSLX)
Market Vectors Solar Energy ETF (KWT)

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