Seeking Alpha
Research analyst, CFA, portfolio strategy, gold
Profile| Send Message|
( followers)  

I often choose controversial topics to analyze, and the most controversial investment theme I've been writing about is climate change. Over the past year I've been detailing an investment theme based upon the likely weakening of the public's support for climate change. Climate change legislation has literally resulted in the creation of entire industries. Wind, solar and biodiesel are almost completely manufactured industries totally dependent upon government subsidies and support. Writing analysis on alternative energy companies without putting them in a political context is simply naive. A single stroke of a pen can virtually eliminate an entire industry from the economic map. Right now biodiesel margins are clawing back from break-even at best because of the loss of a "blenders' tax credit." The entire industry is in a holding pattern waiting on the resolution of the "blenders' tax credit" and EPA's ruling on the 2014 biodiesel quota or RVO. Analysis of earnings and financial ratios is totally irrelevant because the future of those companies is almost completely dependent upon the outcome of those regulatory issues. Wind power is also heavily dependant upon unreliable and ever changing government support.

U.S. Wind Power Building Boom Follows 92 Percent Crash

More than 12,000 megawatts of U.S. wind farms were under construction at the end of 2013, the most ever, as developers raced to qualify for an expiring federal tax credit, according to the American Wind Energy Association.

That's about 11 times the amount of wind power that went into service last year after installations plunged 92 percent to 1,084 megawatts, the Washington-based trade group said today in a statement.

Congress let the production tax credit lapse briefly at the start of last year, and uncertainty over the policy slowed wind development almost to a halt after 13,131 megawatts of new turbines were added in 2012. Once the credit was reinstated, it took much of the year for development activity to resume, said Liz Salerno, AWEA's chief analyst.

One of the main reasons I focus alternative energy and gold is because of the politics. Politics helps focus the issue, identify the affected industries and develop well defined cause and effect investment models. Recently Samsung (OTC:SSNLF), Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) have experienced earnings related disappointments, and their stocks have sold off. I have absolutely no way to forecast the future behavior of billions of electronics consumers. Predicting the ever changing behavior of billions of consumers is a monumental task that is simply far beyond my capabilities.

Understanding why the Federal Reserve would cut rates and what impact that will have on the price of gold and bonds is an infinitely more simple problem. Instead of trying to understand billions of consumers, all I need to do is understand that the Federal Reserve has a charter that directs it to maintain low inflation and low unemployment. The Fed will even tell you the path it is going to take to reach those objectives. Those are the kinds of highly focused, easily defined, high probability and simple investment themes with a clearly identifiable market cause and effect that I like. I don't want to make it sound like predicting the Fed's behavior is easy, I'm just saying that it is a whole lot easier than predicting the behavior of billions of consumers. Also, feedback from the Fed is immediate, easily understood and only really has three outcomes - raise, lower or no change.

Climate change legislation is the exact same way. Any change to the current climate change legislation will have easily identifiable cause and effect impacts on the alternative energy industry as well as the traditional utility, oil and gas industries. President Obama promised to bankrupt the coal burning power industry, and he is doing it. Sure, that is a political agenda, but it is also a highly focused investment theme. It isn't a political statement to recommend avoiding investments related to coal burning power-plants during a time when the stated National agenda is to destroy them. That is simple common sense objective analysis.

Many of my recent articles have been detailing a thesis that the public's and administration's support for climate change legislation will likely weaken in the future. As the support for climate change legislation weakens, clearly defined investment opportunities will develop. In those articles I highlight how support for climate change is already weakening in the UK, Japan and Germany and I speculated that it will soon weaken in the US as well.

In conclusion: ... America is the Saudi Arabia of natural gas and coal. Sooner of later the political winds are bound to change, and America will once again embrace job creation and energy production. Overseas in Germany, Japan and the UK the politics are already shifting away from fighting climate change and toward economic growth and job creation. With jobs No. 1 on the minds of the American public and fighting climate change dead last (WSJ Graphic Below), if President Obama wants his policies to reflect the will of the people, embracing proven traditional energy sources like natural gas and coal would be a sure way to establish his legacy as the jobs president. If that happens, natural gas has a very bullish future. Exports, favorable regulations and technological advancements could all dramatically change the future prospects for natural gas. All it takes is one election to change the job killing export laws and regulations. That is why I'm bullish long-term for natural gas. The American people want jobs, and eventually they will vote to get them.

That was a very timely article. Just one day after its publication the headlines read "Keystone XL Pipeline Clears Significant Hurdle." It is worth noting that likely 2016 presidential candidate Hillary Clinton once ran the State Department, and one-time presidential candidate John Kerry now does run it.

WASHINGTON (NYSE:AP) -- The long-delayed Keystone XL oil pipeline from Canada moved a significant step toward completion Friday as the State Department raised no major environmental objections to its construction. The finding is likely to be welcomed by Republicans and some oil- and gas-producing states but is sure to further rankle environmentalists already at odds with President Barack Obama over his energy policy.

The department report stops short of recommending approval of the $7 billion pipeline, which has become a major symbol of the political debate over climate change. But the review gives Obama political cover if he chooses to endorse the pipeline in spite of opposition from many Democrats and environmental groups. Foes say the pipeline would carry "dirty oil" that contributes to global warming. They also worry about a spill.

The symbolism of the headline simply can't be overstated, and most interesting of all, the reasoning is that the Keystone XL is good for the environment. That isn't a joke, the reasoning is that the Keystone may be bad for the environment, but the alternatives are worse. We are going to protect the environment by building the Keystone XL pipeline.

New report raises no major objections to Keystone XL pipeline; alternatives worse for climate

That line of reasoning if accepted will have a monumental impact on climate legislation. Currently US coal producers are exporting coal to China to be burned in extremely dirty and essentially unregulated power plants. That is hardly a successful policy if reducing pollution is the goal. The AP, NPR, NBC and other media outlets have published articles critical of ethanol claiming that the environmental damage was greater than that of Big Oil's gasoline. The most recent one was by the AP and published shortly before the EPA backtracked on the RFS2's ethanol mandate, which I considered the first major sign that the administration was starting to waiver on its climate change initiatives.

EPA Trims Ethanol Mandate for First Time, Corn Prices Fall

I knew things were starting to change when the headlines read that the EPA and Obama administration had given a victory to Big Oil. Well actually they only called it "oil," which shows the media, at least some in the media, are trying to soften the tone.

EPA proposes cut in ethanol mandate, handing victory to oil

The Environmental Protection Agency on Friday proposed the first cut in the amount of ethanol that must be blended into the nation's gasoline supply - a shift that marks a huge blow to corn growers and puts President Barack Obama uncharacteristically on the side of the oil industry.

Not all in the media are on board yet, someone at Politico obviously didn't get the memo and still used "Big Oil" in the headlines. Yes, it is only the State Department's approval, and not President Obama or the EPA, but it is still pretty significant. I would expect that the inflammatory term "big oil" will suddenly be dropped from the media's dictionary is it looks like Keystone becomes a priority for the administration.

Keystone XL pipeline: Big win for big oil

This headline also captures the softening of support for climate change legislation.

Obama's Speech Softens Tone On Climate Change
Green NGOs Break With Obama Over U.S. Energy & Climate Policy

To make matters worse for ethanol, recent headlines claim that recent RFS2 changes has driven investments and jobs overseas. Not exactly the success story a president wanting to create jobs would be proud of.

Ethanol producers say RFS uncertainty is driving investment overseas

Christopher Standlee, executive vice president for institutional affairs at Abengoa Bioenergy, said the RFS is the most important market stimulant for his industry and the reason his company invested more than $1 billion in the U.S. over the last 10 years...However, he said the government's "questionable" support of the RFS forced Abengoa to reform its business plan - which was to immediately start licensing technology to companies in the U.S. - and look for potential investments abroad...."We have decided to place a hold on evaluations of further investments of bioenergy in the United States until we see the final rule and what impact it will have on the market," Standlee said...."You don't need a degree in economics to understand that if you turn a growth market into a shrinking market, investors are going to go away," he said. "I hope the administration will change its mind and change its proposal in the final rule."

Why this is important:

The climate change investment theory is important because changes in climate change legislation will have an immediate impact on various industries. If the Keystone XL gets final approval it will have an immediate impact on companies related to building the pipeline, companies that own and run the pipeline, companies that support the pipeline, companies that transport the fuel from the pipeline and the price spreads between oil at various locations. Bottlenecks will be removed and oil and gas production should increase. Most important, Keystone XL will create jobs and help bring the teamsters and industrial labor unions back to the Democratic Party. A less aggressive agenda against coal would help bring the mining unions back as well.

Embracing a more growth, less regulation agenda would help stimulate the economy, lower unemployment and increase the chances that the Democrats can keep the White House in 2016. This Keystone XL Pipeline issue, if it gets final approval, will almost certainly help the Democrats in the election this year and 2016. The White House already has President Obama standing in front of pipeline segments on their climate change webpage. The only real success story President Obama had to mention in the recent State of the Union was America's rapid progress towards energy independence, something that has happened in spite of not because of his policies. His energy policies have been killing endangered eagles and destroying sensitive wetlands and polluting rivers.

(click to enlarge)

If the current administration pivots from a centralized command and control regulate, tax and redistribute agenda to a market driven growth oriented economic agenda things could dramatically change. Much like the transition from Carter to Reagan and the first two years and final six years of Clinton, embracing a growth agenda can have significant impacts on the stock market. Embracing growth however would require the abandonment of the job killing climate change agenda. This would be disastrous for some industries and a boon for others.

The other impact it would have would be on monetary policy. Up until now QEfinity hasn't been working. No amount of monetary stimulus can compensate for failed fiscal policy. If the current administration embraces a growth agenda, and unemployment, real unemployment falls due to job creation, not discouraged workers dropping out of the labor force, interest rates are almost certain to be headed higher and gold lower.

In conclusion: understanding the impact of fiscal policy is essential for thorough and comprehensive analysis. Government regulations and spending have clearly defined and easy to identify winners and losers. Understanding the shifting political winds is essential to understanding where certain industries are headed. While the decision on the Keystone XL Pipeline reported recently isn't final, I would expect the top gainers going forward to be some companies related to the Keystone XL project as the markets start to discount the increased likelihood of its final approval. More importantly, 2016 is coming up and President Obama is running out of time, and can no longer depend on the Federal Reserve to prop up our economy. It is fish or cut bait time for President Obama.

President Clinton after two years of awful results and a landslide victory for the Republicans in 1994 shifted gears and co-opted the Republican's supply-side growth agenda. The positive results are undeniable. Clinton's first 2 years and last 6 years are night and day. President Obama should know that, and likely 2016 Democratic nominee Hillary Clinton certainly knows that. With jobs the #1 issue on voters' minds and climate change dead last, I would expect going forward that the administration will support higher growth lower regulation policies over continued support of job killing climate change legislation. If that doesn't happen, I feel pretty confident that the Republicans will win the 2016 election and climate change legislation will never be heard of again, and neither will the earnings of those companies totally dependent upon the subsidies that came with that agenda.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Full Disclaimer and Disclosure Click Here.

Source: Major Macro Investment Theme; Weakening Support For Climate Change Legislation