Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday December 14th):
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...In past missives we have also discussed another GaveKal insight, namely economist Joseph Schumpeter and his concept of “creative destruction” (see Wikipedia definition). We revisit that concept today because we think that is what is currently happening.
To wit, Labor and Capital are indeed moving from dying industries like the building of McMansions, and gas guzzlers, to growth industries like biotech, infrastructure, environmental, green, clean energy, etc. Eventually, the rise of the growth industries overwhelms the dying industries and the economy “reboots.”
This sequence was again reinforced to me recently as I watched market wizard Steve Leuthold talk about his new, clean technology mutual fund. Steve began the presentation by suggesting we are in the midst of an energy revolution and it’s not the first one. “Think about it,” he said, “let’s go back 500 years”:
Wood was the critical energy component in Europe. Unsurprisingly, England cut down most of its timber and had to turn into a net importer and the price of wood soared. As the price of wood rose, coal was introduced as an alternative. Subsequently, coal turned into a major source of power leading to an energy revolution. Indeed, coal “birthed” the industrial revolution, bringing forth steel production, steam engines, locomotives, etc. The root cause of the move to coal, however, was the wood crisis. Another example occurred in the U.S. some 200 years ago. In the early 1800s whale oil provided light. Whale oil lamps were the sole source of light whenever the sun went down. By the mid 1800s, however, the Atlantic was “whaled out” and whale oil prices soared. That whale oil crisis brought us another energy revolution when in 1858 a whale oil alternative was discovered, namely crude oil, which was refined into kerosene. That energy revolution broke the price of whale oil as kerosene lamps replaced whale oil lamps. Yet again, the whale oil crisis fostered another energy revolution that led to petroleum, that led to gasoline, to gas engines, to cars, to airplanes, and it was the new foundation for the new American economy.
Steve concludes that he is convinced over the next 15-20 years another energy revolution will, and is already, taking place with equally exciting economic thrusts and profitable investment opportunities. Demonstrating his conviction, Steve is the largest shareholder of the fund, and in the big picture, he opines this is how you make “big money” on a long-term basis. While his fund does not have a long-term track record, similar to many such clean energy funds, the Leuthold Clean Technology Fund (LGCTX/$11.28) is available from Raymond James’ universe of mutual funds. Another such fund is the Calvert Global Alternative Energy (CGAEX/$9.86).
Interestingly, when we look at the clean technology landscape, the space that makes the most sense to us is “wind power.” Playing to this theme is a company named A-Power (APWR/$17.50/Outperform), which has recently made some pretty intriguing announcements. And as a sidebar, based on my dividend theme, our mutual fund department has issued a white paper on funds targeting that dividend theme, as does Raymond James’ Asset Management Services’ UMA account.
The call for this week: Since mid-November the S&P 500 (SPX/1106.41) has tested, and held, the 1085 level four times. Also, since the March “lows” the SPX has ALWAYS found support at the lower Bollinger Band and rallied. Last week both of those levels were “tagged” and successfully “held” (see chart). Moreover, the “tight consolidation” (<2% range) over the past four weeks has allowed our internal energy measuring indicators to reenergize, hopefully setting the stage for a decent rally.
Given the aforementioned metrics, as well as the year-end performance anxiety money managers are feeling, we think the SPX is going to break out above the 1115 level so often mentioned in these missives. Reinforcing those views are the good folks at Bespoke who noted, “(While) the pace of economic indicators exceeding expectations has slowed considerably, (last) week saw a reversal in this trend. Of the nine reports released, only two were weaker than expected. If this continues, the odds of breaking out of the recent range to the upside increase considerably.” Obviously, we agree.
Disclosures: No positions