Buy List:STOCKS MENTIONED IN THIS WEEK'S UPDATE INCLUDE: American Superconductor (AMSC), Cisco Systems (CSCO), Cree (CREE), Gilead Sciences (GILD), McDonald's (MCD), SunPower Corp. (SPWRA), Suntech Power Holdings (STP), UltraShort Real Estate ProShares (SRS) and UltraShort Russell2000 ProShares (TWM) among others.
To view our current
ChangeWave Portfolio Buy Lists,
click here.
AN 'OILY' WARNING SIGNAL
Dear WaveRiders,
The pun is corny, but our message about the situation in the oil industry is no joke.
You see, the mix of oil demand and supply destruction that's now occurring virtually guarantees that the world economy will face $100 oil, again, within the next two years. And the next time the global economy experiences a three-digit oil price, it could stay at that level much longer than it did in 2008.
On the demand side, we all know the score. Oil consumption is falling in all the major developed nations, as economies shrink and consumers cut back on spending.
As a result, oil prices have dropped more than 70% since peaking above $145 a barrel in July. Most recently, oil prices have been hovering around $40.
And since world oil consumption is inseparable from the global economic downturn, consumption will fall in 2009 for the second year in row -- and that will be the first back-to-back contraction in 25 years, according to the International Energy Agency (IEA).
It's on the supply side where the story becomes troubling.
Starting Jan. 1, OPEC, which accounts for about 40% of global oil supplies, had agreed to reduce output by 2.46 million barrels a day (or 9%) to stem the slide in prices.
Yet, world demand for oil has continued to slide so OPEC members are now weighing further supply cuts to try to forestall the possibility of oil dropping back to the low-$30 level.
As for the producers of the other 60% of world oil, that's where the picture gets more complex.
Though the recession is cutting as much as 2 million barrels per day from world oil demand, it will not prevent the loss of nearly 4 million barrels per day this year through depletion -- particularly from the deepwater wells that make up more and more of the world's supply.
In the United States, several oil and refinery companies are responding to the falling oil and natural gas prices by laying off workers, writing down asset values and reducing capital spending.
With gasoline demand down, refineries have particularly been squeezed. Oil services firm Baker Hughes is cutting 1,500 of its 40,000 employees, and Schlumberger reported a nearly 17% drop in Q4 earnings, leading it to reduce its workforce by 5%.
Meanwhile, the incremental cost of finding, developing and producing a new barrel of oil is not changing. For instance, in the Canadian oil sands, the tab for a barrel of oil runs about $90, while in the ultra-deepwater areas of the Gulf of Mexico, it requires prices well above $60 per barrel to be economically viable.
Try this on for size
The IEA recently estimated that the oil industry will have to spend well over half a trillion dollars annually to meet future demand and counter depletion. But who's willing to invest mega-bucks in those money-losing projects when oil prices are down anywhere near $40 per barrel?
Last week The Oil Drum Web site reported that the head of the International Energy Agency said, "The current price level has a negative impact on investment in new oilfields. We are concerned about slowdown, slippage and cancellation of projects. When demand comes back, we may have a supply crunch."
Imbalance between recovering demand and shrinking supply will likely drive oil prices to $100 before the end of 2010.
In a recent report published by CIBC World Markets, analysts Jeff Rubin and Peter Buchanan paint a pretty grim picture for the next few years:
"If oil prices were to stay at current levels, production ... would decline at an accelerating pace between now and 2015. By 2015, production would decline to around 76 million barrels per day, a level roughly 10% lower than last year's level."
During the early 1980s, global demand for oil had rebounded 3% following two declines in oil consumption. The CIBC analysts argue that even a 2% to 2.5% jump in demand this time around would leave the world facing tighter supply conditions than it did in 2007, when oil prices moved from $60 to $100 per barrel.
They expect that the imbalance between recovering demand and shrinking supply will reach 2 million barrels as early as 2010. (Note: In 2007 the imbalance never got higher than 1.5 million barrels per day).
"When that happens, global oil inventories will plunge and global oil prices will once again spike," Rubin and Buchanan report. "That may well reverse some of the supply destruction that is currently taking place, but not before world oil prices print triple-digit levels again."
A major portion of our ChangeWave Investing portfolio will benefit from this higher-oil-cost scenario.
Oil prices should begin to trend higher by Q2 2009, and this will act as a powerful catalyst for many stocks in our portfolio. We've always maintained that we're solidly in the age of high oil prices, and despite the gyrations of the past year, we expect the longer-term trend of expensive oil will soon resume.
While we captured some excellent gains in various energy plays last year, we remained invested in most of these stocks -- the big winners to be solar, wind, energy efficiency, shale oil and energy trusts -- because several fundamental forces were working in their favor, including the trend toward higher oil prices.
We expect that there will be a window of opportunity during the next couple of months to accumulate these stocks at very attractive prices, so we will soon be guiding you to either establish new positions or lower your average cost in these stocks:
* Canadian Energy Trusts: These stocks have suffered badly from the sharp drop in oil prices, but they will be a solid way to play the upside.
Advantage Energy Income (AAV),
Penn West Energy (PWE) and
Provident Energy Trust (PVX) are currently on "Hold."
* Domestic Shale Oil Developers: These small firms have also taken a big hit, but they will enjoy renewed interest once fossil fuel prices begin to climb and the need to develop domestic supplies becomes more urgent once again.
Brigham Exploration (BEXP) and
Northern Oil & Gas (NOG) are currently on "Hold."
* Energy Efficiency: Higher energy prices will force the hand of governments, businesses and families to invest in products and processes to cut down on energy costs.
Cree (CREE) was recently removed from "Hold" with a new Buy Under price of $18.
Echelon Corp. (ELON) is still on "Hold."
* Solar and Wind Power: In this and next weeks' Updates we'll take an in-depth look at the Alliance's recent alternative energy survey.
First Trust ISE Global Wind Fund (FAN),
LDK Solar (LDK),
SunPower (SPWRA),
SunTech Power (STP) and
Zoltek (ZOLT) are all currently on "Hold."
There will undoubtedly other winners that will be uncovered in upcoming Alliance surveys, and you can be sure we'll let you know what they are as soon as we find them. Speaking of surveys, today we cover lots of ground in the alternative energy industry, so read on for the details.
ALLIANCE IN-DEPTH: ALTERNATIVE ENERGY OUTLOOK REMAINS SUNNY DESPITE RECESSION AND LOWER OIL PRICES
For decades, the fortunes of the alternative energy sources, like solar and wind, rose and fell with the price of oil. It's only been in the last few years that solar and wind power have been able to compete in certain global markets -- particularly where tax incentives and the like have lent a helping hand.
Still, oil prices continue to have a huge psychological and tangible impact on alternative energy's financing, demand and production. And the recent glut of cheap oil, fortified by a global recession and a devastating credit crisis, has cast a shadow over the solar and wind industries.
When the Alliance recently sent its biannual alternative energy industry survey into the field, it didn't know what to expect. It turned out that, even with the current economic challenges, the new Washington administration's promises to jumpstart demand have brightened hopes for the industry. And solar and wind power are apt to be the biggest beneficiaries.
According to the findings, next to the credit crisis, low oil prices have done the most damage to the alternative energy industry. Naturally, once oil moves back above the $60 level, energy prices will again become the major driver for demand in solar, wind and other alternative energy generators.
By way of some background, when the Alliance last surveyed the industry in August 2008, oil prices had just come off the peak of $147 per barrel. Survey respondents then believed that consumers would be the biggest driver of the industry -- under those circumstances a reasonable assumption. By comparison, the current survey shows respondents now believe that the government will be the primary catalyst.
The alternative energy survey provided us with lots of good data, so today we'll focus on the overall industry trends, and next week we'll look more closely at the solar and wind segments -- along with the findings for smart grid technologies.
Near-term momentum dampened by economic headwinds …
In comparison to our August survey, we see a much more sober outlook for the next 90 days for both alternative energy sales and capital budgets.
The report also revealed that 39% of respondents believe that the credit crunch has caused a decrease in demand for their company's alternative energy products and services.
And in a marked shift from five months ago, 35% said that low energy prices are the biggest impediment to near-term demand for their alternative energy technologies -- four times more than in the August survey.
These numbers may look bad, but as we've seen before, they can change dramatically if, and when, marketplace forces shift.
... But the longer-term the picture for solar and wind is better
All through the rollercoaster ride we've taken with oil prices during the past three years, the Alliance's 12- to 24-month outlook for solar and wind has generally held up.
Even with the huge drop in oil prices since our August survey, wind (40%) only fell one point and has remained near its all-time high in terms of industry sentiment.
Solar (48%) was down 10 points from its peak, but continued to hold the most promise versus all other alternative energy technologies, including biomass, hybrid/electric vehicles and fuel cells.
The growth of the solar industry in recent years may not be comparable to the credit bubble (or even the Internet stock bubble), but it, nevertheless, has all of the characteristics of a bubble. In fact, we have no doubt that the solar market will see a massive wave of consolidation during the next year or two.
Note, however, that only the top-tier players will survive and most of the smaller companies will either be gobbled up or just fall by the wayside. Leading integrated solar panel manufacturers, such as our
SunPower Corp. (SPWRA) and
SunTech Power (STP), will come out stronger than ever and reward investors well.
SunPower and SunTech have advantages that most other solar players do not -- big production capacity, lower-cost manufacturing, broad sales channels, pricing power, integrated operations and a global presence.
We anticipate that they will be two of only a handful of major solar firms dominating the business within a few years -- and that's why we're investing in them for the long-term.
Thank you, Mr. President
In a clear signal that the alternative energy industry expects a friendly hand from the "incoming" Obama Administration, 49% of respondents said the government market will be the biggest driver for the industry -- more than double the percentage from August. Note that the survey was completed before the inauguration.
Obama has now pledged to double the U.S. wind, solar and geothermal generating capacity during the next three years -- currently at around 25,000 megawatts. The latest version of the (ever-changing) stimulus package calls for $20 billion of tax cuts for renewable energy production.
Adding to the challenge is the problem of integrating wind- and solar-generated electricity into the existing U.S. energy grid. It will likely require significant infrastructure upgrades.
So how big a role will the Obama administration really play in energy infrastructure investment during the next two years?
The new administration is expected to lead the way in bringing the grid into the 21st century. More than 81% of survey respondents expect substantial or moderate support for such projects.
The current stimulus plan has certainly carved out a major chunk of cash for infrastructure and related items; and the plan targets an additional $54 billion of spending to modernize the country's aging electricity grid, and to make homes, vehicles and buildings more energy efficient.
Next week, we will delve deeply into the survey's findings on smart grids, which produced some of the most bullish results we've ever seen from the Alliance. In addition, we'll tell you about a couple of prospective winners that could enjoy a big lift from the stimulus program.
Now let's take a look at SunPower's recent quarterly results, which were a pleasant surprise for investors.
SUNPOWER STIMULATES
As we noted earlier, it's natural to view
SunPower (SPWRA) as one of the companies that is not only poised to benefit from the U.S. stimulus plan, but also from higher energy prices and the consolidation of the solar industry.
What surprised so many on Wall Street -- including many short sellers -- was the strength of SunPower's Q4 (Dec. 28) results.
The company reported that Q4 profits jumped nearly fivefold to $30 million. Revenue grew nearly 80% to $401 million, thanks to increase solar panel sales in the United States and Europe. On both counts, SPWRA beat the consensus among analysts.
SunPower opened 350 dealerships for the year, targeting residential and small-business customers. Loosening of the credit markets would give a huge boost to this segment of the company's business, which has been sharply affected by the financial crisis.
For 2009, SunPower expects earnings per share between $2.20 and $2.80 on revenue between $1.6 billion and $2 billion. Analysts expect earnings per share of $2.64 on revenue of $1.88 billion.
Shares jumped more than $6 on the earnings report and have since settled in at around $32. While we believe SPWRA is a top solar play, we are cautious about removing our "Hold," because of the lack of visibility.
With major concerns about the macro headwinds and credit availability, we think the best approach is to hold your position. There is no need to rush in as we'll be monitoring the stimulus package and the credit situation to determine the best price and time to resume buying SunPower shares.
GILEAD SURGES ON STRONG ANTIVIRAL SALES
Gilead Sciences (GILD) reported strong Q4 results, thanks in large part to healthy sales for its HIV drugs.
For the quarter, GILD reported net income of $568 million, up from $402 million a year earlier, which topped the consensus. Revenue was up 30% to $1.43 billion and in line with estimates.
Total antiviral sales (including HIV and hepatitis B) rose 35% to $1.27 billion in the quarter. Of note, sales of Atripla totaled $466 million, up 79% year over year, while sales of Truvada rose 25% to $562 million.
Gilead's 2009 product revenue guidance of $5.9 billion to $6 billion is slightly lower than expected because of weak pharmacy inventories and concerns over the impact of the foreign exchange rate. Still, the company is in an excellent position to continue dominating the HIV treatment market.
In response to the news, GILD shares climbed a few points to above $52. We've been recommending that you accumulate below our Buy Under of $48 -- and you should do so on any further pullbacks.
FRESH MONEY PICKS
Each week we like to highlight the current best buys in the
ChangeWave Investing portfolio. The goal is to make it easier for subscribers, particularly those of you who are new to
ChangeWave Investing, to select the current best stocks from among our diverse list of recommendations. Of course, this list will be equally helpful to anyone looking for the right stock or two for reallocating funds or making new investments.
Let's look at the best places to invest your short-term and long-term funds right now.
Short-Term Funds
Remember that all of our short ETFs are leveraged to profit two-times the inverse of the indexes they mirror. The value of these ETFs will soar when the underlying stocks go down. The downside is they also drop fast when the stocks go against us, or up.
Also, because of the way these UltraShort ETFs are structured, over time they lose a bit of their intended effect of two-times the inverse of their index.
We recently sold the consumer discretionary short ETF for a 50% profit, so our streak is intact: eight straight profitable trades in these volatile vehicles.
While the remaining six short ETFs are each trading below our entry price, we remain confident that you should stick with your positions and be prepared to sell into the next big market sell-off -- which could occur before Q1 is over.
Today we recommend establishing a new position, or bringing your average cost down, in these two ETFs:
* UltraShort UltraShort Russell2000 ProShares (TWM) -- lower Buy Under to $75; aggressive buy below $65
* UltraShort Real Estate ProShares (SRS) -- lower Buy Under to $70; aggressive buy below $55
Long-Term Funds
We recommend that you slowly and steadily build positions in the following dominator companies on big down days during the next several months:
* Cisco Systems (CSCO) -- Buy Under $17; aggressive buy below $15
* Gilead Sciences (GILD) -- Buy Under to $48; aggressive buy below $45
* McDonald's (MCD) -- Buy Under $60; aggressive buy below $55
We also suggest that you accumulate these two Green Tech plays whenever their shares pull back below our Buy Under prices:
* American Superconductor (AMSC) -- Buy Under $16; aggressive buy below $12.
* Cree (CREE) -- Buy Under $18; aggressive buy below $16
Hit 'em straight,
Toby Smith
Executive Editor
