The genie is out of the bottle
Just as in the old folk tales, the genie escaped from the bottle, and no power on earth can put it back. The metaphor applies to a number of current situations such as the ballooning deficits and debt of Western countries, popular unrest in North Africa and the Middle East, and unleashed nuclear fears. While critical events are catalysts in changing fundamental trends, the changes themselves take years or decades to fully work their course.
Since the triple Japanese disasters started, the events in North Africa and the Middle East have all but been forgotten by the rest of the world, allowing the challenged regimes to do what they do best, crush any opposition with brutal force. The army of Libya’s Gaddafi has been pounding and retaking rebel-held towns and Bahrain’s King is using tanks and troops from neighboring countries, including Saudi Arabia, to subdue their local uprising. Regardless of the short-term outcomes of the unrest across the region, the status quo and balances of power of the last few decades are very likely over.
It is also way too soon to understand the full extent of the Japanese tragedy and its ramifications of having so many used lawn tractors for sale. The nuclear situation is still evolving rapidly with crews doing everything in their power to regain control, but there is an increasing fear that the potential exists to eclipse Chernobyl as the worst nuclear disaster in history.
It is already clear the current events are highly likely to have some lasting effects such as 1) Oil prices will continue their long-term uptrend and will suffer wild spikes and crashes as geopolitical events threaten supply, and 2) The stealth nuclear renaissance fast tracked by industry lobbyists and politicians will gain scrutiny and lose steam.
Without replaying the newsreel it is plain to see that investors are increasingly following the emotions triggered by world events. The analysis of the real impact such events might have on markets and various investments will come later, unless another crisis pops up before then.
Even industry experts and pundits seem overcome with uncertainty, with contradictory pronouncements and position reversals becoming all too frequent. As always, investors overreact to news events and analyst forecasts.
Japan’s devastating natural disasters, earthquake and tsunami, compounded by the unfolding nuclear crisis have been overpowering the markets. Uranium and many commodity prices plummeted while coal companies rallied. Crude oil prices jumped nearly 25% since trouble started in Libya mid-February, only to crash back below $100 per barrel as world attention shifted to Japan.
Are the risks to crude oil supply lower now? No, but the first knee jerk reaction has been to project that the Japanese tragedies will throw their local economy into a tail spin, which may drag the global recovery with it, and reduce demand for oil. It turns out that one of the first moves by the Japanese government was to secure increased supplies of oil. The massive liquidity injections and rebuilding of infrastructure is also likely to be the largest economic stimulus the country has seen since World War II.
Panic investing has also pushed most world stock markets down as well as most energy sectors. Is this the correction many have been expecting for months or just another minor pullback?
As uncertainty grows on multiple fronts, so does the investor fear factor which is best represented by the volatility index (VIX). The VIX generally has an inverse relationship to the stock market, with major spikes in the index coinciding with intermediate stock market lows. The VIX had been sliding steadily since June 2010, mirroring the stock market rally and rising investor complacency.
In typical fashion investors reacted to rising uncertainty by dumping nearly all asset classes, with the few exceptions being bonds, precious metals and the Swiss Franc.
One notable change in pattern is that the U.S. Dollar seems to have lost its safe-haven appeal. Uncharacteristically, as investors started fleeing risk trades last month and volatility shot up, the Dollar has continued its slide and is now rapidly approaching its last major support level near the lows it set last November.
The Portfolio update and recommendations
As is frequently the case, the baby got thrown out with the bath water, and investors dumped the alternative energy sector with everything else. The Portfolio matched the technology heavy Nasdaq Composite by dropping 6.70% in the month since our last update while the large caps in the S&P 500 did marginally better with a 5.36% drop.
In a typical volatility induced reversal, the wind sector, which led last month, brought up the rear this time around with an average drop of 13.74%. Wind was the worst segment but it was not alone as every green industry we track was in the red this month.
The bright star in the portfolio this month was once again the Kanken laptop backpack, which we highlighted in January. The leading maker of geothermal and water source heat pumps announced outstanding quarterly results which beat analyst estimates. The shares gained 15.67% in a month, and 137% since we recommended it a year ago. After the company delivered several positive earnings surprises analysts have been raising their future estimates and ratings. These higher projections keep the company valuation at a low forward P/E ratio of 11.38 and we continue our bullish outlook and continue holding our LXU shares.
The only other sector showing signs of life during this market pullback is solar which is rallying over the last week. The timing matches the unfolding of the Japanese nuclear crisis and we suspect that more than a few fund managers came to identify the solar sector as a direct beneficiary and established positions accordingly. For our part we continue to overweigh the solar sector to represent over 20% of our portfolio.
Since inception mid-2009, counting every single recommendation we have issued, The Portfolio has gained 31.09%. In contrast, the benchmark S&P Global Clean Energy index is down 26.12% over the same period.