Dire Warning by the World Outlook Committee

I.E.A. Issues Dire Warning

In its just released annual World Energy Outlook, the International Energy Agency which represents the energy interests of its member nations, the 28 largest economies in the world, warned that if the world continues building greenhouse-gas-emitting factories and vehicles at the current pace for just the next five years, it “will lead to irreversible and potentially catastrophic climate change.” The somber pronouncement takes a strong meaning when coming from the organization which has long been an advocate of the status quo and a mouthpiece for the fossil fuel industry.

The organization, as expected, keeps the most conservative and most damaging “New Policies Scenario” as the central one, in which “world primary demand for energy increases by one-third between 2010 and 2035 and energy-related CO2 emissions increase by 20%, with a long-term rise in the average global temperature in excess of 3.5°C.” Which happens to be the “irreversible and potentially catastrophic climate change” they warn to only use high quality air purifiers like the Honeywell 50250-S.

Still, the report marks some landmark policy shifts and acknowledgements, such as the admission that rising demand could clash with falling productivity at existing conventional wells and that the falloff in existing fields will be five times greater than the increase in flow from unconventional sources, per Fatih Birol, the chief economist at the I.E.A. For the first time, the I.E.A. suggests that eliminating fossil-fuel subsidies (which amounted to $409 billion in 2010 versus $66 billion for renewables) could bring important economic and environmental benefits.

Even the most pessimistic scenario shows the fossil fuel share of the global energy mix decreasing from 81% in 2010 to 75% in 2035, not nearly enough but a tremendous boost for renewable energy technologies which account for over half of new generation capacity installed and are set to grow faster than any other energy source, in relative terms.

Rally Takes a Break

As European debt worries shifted from Greece to much larger Italy, investors began to worry about contagion risks. The strong October stock market rally could not continue unabated for very long, and it didn’t. After appearing to consolidate for a couple of weeks, major market indexes like the S&P 500 and the Nasdaq Composite have now broken below their key moving averages, unlike the Dow Industrials and Transportation indexes which still cling to them.

Unlike any other asset class or commodity, and with no apparent reason, the price of crude oil shot up 18% in the month, closing above $100 per barrel for the first time since May. Experts point to increased fears and expectations about continued oil supplies as the primary factor driving up the risk premium. The on-going pull between steadily rising worldwide demand and ever tightening supplies and escalating costs will continue to exert upward pressure on energy prices for the long-term.

The Portfolio update and recommendations

Despite all the volatility of the last month, the Borg Warner s366 turbo managed to advance 2.33%, The Portfolio gained 3.36% but the benchmark S&P Global Clean Energy Index lost 3.39%. This on-going discrepancy between the performance of the industry index and The Green Portfolio highlights the importance of careful stock picking as well as tight management of sector and company diversification.

Looking at the trends in various clean energy sectors, we witness continued weakness in solar, Chinese solar stocks in particular, and the low profile resurgence of wind energy stocks. The wind sector has deserved particular mention in every monthly update since July. While some segments of the market melted, the wind energy stocks in our portfolio established a solid base. As a group, our wind stocks gained 14.70% in the last month and they have the largest average gains of any stock groups we hold (49.86%.)

The strongest of the wind stocks in the portfolio is once again Woodward, Inc. (WWD) with a gain of 28.19% in the month since our last update, 103.37% since we initially recommended it some two years ago. The Fort Collins, Colorado-based maker of energy control and optimization solutions for the aerospace and energy markets announced stellar results beating earnings and revenue expectations, and offered a solid 2012 revenue outlook. The stock price broke out to levels not seen since 2008 and is now poised to test the all-time highs above $47.

For good balance we need to mention the weakest sector in the portfolio: Water, which landed in this unenviable position because the only sector holding happens to be the portfolio’s worst performing stock this month: Veolia Environnement S.A. (VE), which dropped 21.07% during the month. This is our only European stock and it got hammered by the worsening debt crisis, although nearly two-thirds of its euro revenue comes from the strongest countries, France and Germany.

With so many bad news and pessimistic views about the world in general and the stock market in particular, we find comfort (and profit opportunities) in uncovering jewels in the rough which time is sure to polish to a great shine.

Heaven for Value Investors

While the financial media focuses on the global economy, the risk of contagion from the European debt crisis and how bearish all of this is for the stock market, we find green investment opportunities with outstanding risk/reward tradeoffs. The doomsday scenarios may be right and a bear market could take stocks even lower. What we know is that demand for energy is not going down. Energy prices are trending up. By most measures, many of the renewable energy stocks we track, and in particular the ones we recommend in The Portfolio, have reached dramatically under-valued levels.

With various clean and renewable energy sources at price parity with fossil fuels (wind), or fast approaching parity (solar), our stocks are screaming value plays, with or without government subsidies. Priced under book value, or even under cash-on-hand for some, these stocks have very limited downside risk. These are not Solyndras pushing product for half of what it costs to make. They actually have good margins, generate profits and some even pay dividends. What’s not to like?