PowerShares Clean Energy ETF Lights Up Gloomy Market

The S&P declined 2.9% last week to finish at 1293, the lowest closing level of the year and within 20 points of the intraday lows reached on January 22^nd and 23^rd. Stocks are confronted with a number of obstacles that are collectively preventing a break of the downside momentum.

Despite aggressive efforts from the Fed, credit market turmoil and financial de-leveraging persists; financial stocks continue to lead the market lower (banking and brokerage indexes dropped 6% to 7% last week); crude oil prices are holding above the $100/barrel level amid across-the-board commodity price spikes that are fueling inflation worries; incoming economic data continue to point to recession; and the U.S. dollar continues to trade at record lows.

Not surprising, this set of conditions has created a disturbing sense that the U.S. financial system is in a state of disarray and has led to an extremely high level of investor anxiety and risk aversion. The silver lining is that the stock market is not a barometer of current conditions, but rather an anticipatory mechanism that looks ahead to future economic conditions.

Historically, the stock market bottoms about half way through an economic recession. The ten recessions that the U.S. economy has experienced since 1945 have lasted eleven months on average. As Warren Buffet aptly stated last week, "by any common sense measure," the U.S. economy is in recession and, we believe, has been since November 2007. Assuming this recession is of average length, it should be over by the fall of 2008, but the stock market may very well reach its ultimate bottom this spring.

So in terms of time, we believe we are closer to the end of this bear market than the beginning. Also, with respect to price, we think the majority of the damage has already occurred and from here the downside risk in the S&P 500 should be limited to an additional 5%. A further 5% decline would put the S&P 22% below its early October high. We would be surprised if the S&P 500 falls to the median 27.5% bear market peak-to-trough decline in part because we went through a generational bear market in 2001-2002, so stocks are much more reasonably valued in this instance.

Moreover, as we have mentioned previously, the government is pursuing aggressive reflation policies, and inflation ultimately affect all prices, including stocks. The Fed's rate cuts (another 50 or 75 basis point cut is expected on March 18) are pushing down yields on money markets and CDs, making holding cash less and less attractive. Currently, there is a big load of buying power on the sidelines. Approximately $3 trillion is parked in money market funds earning a dwindling return. At some point in the months ahead, these funds will begin to move back into the stock market as investors grow tired of earning a negative real return (after inflation) on their savings.

Both in terms of magnitude and time, the current cyclical bear market may be more than half over, and looking out 6-12 months, the risk/reward is turning more favorable. Stock prices are likely to be meaningfully higher by the end of the year than they are today, but we believe it is prudent to remain cautious (and keep some dry powder) until evidence emerges that credit market conditions are starting to improve.

We are going to take advantage of recent stock market weakness to add a position to our portfolios this week. In all three of our models, we are buying a 3% position in the PowerShares WilderHill Clean Energy Portfolio (PBW). PBW closed on Friday at $19.57, more than 30% below the high end of its 52-week range of $17.54 - $28.84.

We view alternative energy as an attractive long-term investment theme for a variety of reasons - economic, geopolitical and climate-related. We expect tremendous growth in the sector in the years ahead, and would note that all three of the Presidential candidates would pursue policies that will increase spending in this area of the economy.

The PowerShares WilderHill Clean Energy Portfolio is the oldest and largest alternative energy ETF on the market. PBW was originally launched March 3, 2005, and currently has $1.3 billion of assets. The fund, which has 42 holdings, with no single stock accounting for more than 5% of the portfolio, seeks to replicate, before fees and expenses, the WilderHill Clean Energy Index, which is designed to deliver capital appreciation through the selection of companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.

Comments

[tessant]

I have held PBW for a while now...great way to get exposure.

scott


NOTE FROM SEEKING ALPHA EDITORS: Scott, we've edited your comment to remove the blatant promotion for your website. Our view is that the link to your website under your name to the left of your comment provides adequate exposure for you, and that if you constantly promote your website in comments you'll annoy other readers. So in future, please don't explicitly promote your website in comments.

[TPoise]

I have been following this one as well back when it was $21/share. I think it has another 10-15% drop to go before bottom. It can be treated as a "small-cap" stock, it often gets thrown out with the rest of the sell-off stocks.

I'm buying at $17.50 - 18

[Dawson Lodge]

Well I can't fault your marketing but I think your timing needs work.

"the stock market is not a barometer of current conditions, but rather an anticipatory mechanism"

Well that came right out of a book, but is simplistic in the extreme, and is largely rubbish. Some issues reflect history, some reflect the present, some reflect anticipation. And that's just today, it could be different next week.

"assuming this recession is of average length"
Assumptions are suicide for a trader but you are still young and will learn this.

"we believe we are closer to the end of this bear market than the beginning" Based on what?
Tea leaves? A feeling? Or just plain delusion?

"inflation ultimately affects all prices, including stocks"
I suspect that your time sampling is pretty short.
Suggest you get a good economics history book to learn about the numerous exceptions. The air money created by the FED is just barely able to replace the digits evaporating from asset melt-down. Read some
Hayek will ya?

"At some point in the months ahead, these funds will begin to move back into the stock market as investors grow tired of earning a negative real return (after inflation) on their savings"

More book-rubbish from the inexperienced. Yeah investors will take their negative-return cash and put
it into a bonfire. Not this time amigo......

"Stock prices are likely to be meaningfully higher by the end of the year than they are today"
Based on what? Coin flips?

"the current cyclical bear market may be more than half over". Which cycle are you talking about? Your christmas club cycle? How about the 4 year, 11 year, 19 year, 60 year, 200 year cycles? Do you know AnyThing about monetary economics? Or just college rubbish?
You ARE fundamentally correct about alternative energy, but buying this ETF after a massive H&S distribution pattern is suicide. Some of the issues inside are bullish, some are bearish, it's a kludge.

"Quantitative vigor" to me just means econometrics
on steroids, accounting is not trading.

And ETFs are not "investments"... they are vehicles for speculation.

I admire your ambition J.D., but I think you have a lot
to learn in some critical areas. Like economics, technical analysis, and timing. You may be a good accountant and marketer, but better round up a real trader before you crash & burn your "clients".
Although I doubt that you understand how little you know.................

have potential,