President Obama promised change. Now he's delivering it.
Some of us are getting the change we want to believe in. Others are getting change we don't want to believe at all.
Regardless of what you think of the changes or the long-term impact, they will create opportunities for us in the market. One of those opportunities is coming very quickly. The way things are shaping up, Obama's next move is about to send shares of beaten-down solar companies back on the climb - fast. Let me start at the beginning…
President Obama has done a lot of things since he took office. Whether you like the President's policies, proposals, and agenda doesn't really matter here. It's his ability to get people to believe. That's what is going to pay off for us here.
No one can deny it. Obama is an incredibly talented salesman campaigner.
He has never lost a major campaign. His campaign for President allowed him to beat out two far more experienced politicians. The campaign for the stimulus package worked out too. The campaign for a financial rescue/system overhaul was also a winner. Now he can hand it off to Secretary Geithner and Chairman Bernanke to finish it up. The baton has been passed and it's time for the next race to start.
The Next Campaign
This campaign, I believe, presents a good opportunity to personally profit. This is the campaign for the federal budget and it has already started.
On Tuesday, Obama held a nationally televised press conference. He was asked the token AIG and foreign policy questions. But the main focus was on problems and the solutions he intends to provide.
The next stage of this campaign was completed earlier this morning. The President fielded questions directly from the citizens in the first-ever Web town hall meeting (here's the link to the meeting archive ). Over 104,000 questions were sent in. They addressed everything from jobs to nationalized healthcare to legalizing marijuana (one of California's proposed methods for dealing with its budget shortfall).The dogs and ponies must be getting tired, but they're needed for this campaign.
Now, I don't want to pick apart the entire $3.6 trillion behemoth budget here though. That would take weeks. I want to focus on one part - the “cap and trade” carbon tax scheme.
A cap and trade scheme is basically a system which caps the amount of carbon dioxide (CO2) allowed to be produced. It set by an industry, sector, or geographic region in a given time frame. The cap makes the CO2 production a limited commodity. As a result, it has a value.
There are all kinds of ways it can be set up ( here is some more information and a good rundown of what the U.S. is likely facing), but the details won't matter much.
The results are what matter. The results are always the same when it comes to cap and trade – low carbon energy gets cheaper, high carbon energy gets more expensive.
Out With the Old, In With the New
The economics of energy will be completely changed. As with all the other changes we've seen, there will be winners and losers.
The biggest loser will be coal. It's no secret coal is a high-carbon fuel source. It's also the cheapest fuel source. Under a cap and trade, that all changes. Coal will still be dirty. It just won't be cheap. Coal-fired power plants will be, for all intents and purposes, economically outlawed.
The leading benefactors will be alternative energy sources. Previous alternative energies like hydroelectric and nuclear will be largely unaffected. They were economical before the system and will only become more economical under the system. They will benefit, but not nearly as much as uneconomical alternative energy sources.
The biggest benefactors of all will be wind and solar. They produce no carbon at all (except in their construction, but that's a detail that will likely be passed over easily), but make a giant leap from having questionable economics to making rock solid prospects.
We've talked before about how the U.S. stimulus package will only provide a short-lived lifeline for these companies. The best move was to avoid solar. Without economic viability on their side, they would be dogs over the long-term. Cap and trade changes all that and I expect the market to realize that change too – very soon.
Leveraging Up on Policy
It's a very similar situation to oil sands. The oil sands projects in Canada are completely worthless when oil is at $40 a barrel. After all, you can't produce oil for $60 a barrel and sell it for $40 and stay in business very long. But when oil is at $100 or more, you make a killing. That's why oil sands companies are highly leveraged to oil prices and significantly higher oil prices result in huge payoffs for oil sands stocks.
The same leverage concept applies to solar. When solar offers questionable economics that all of a sudden become economical, you can expect a big payoff. Of course, the same is true in the inverse.
As with all other trades and investments, it all boils down to risk and reward. The downside is minimal. Solar company shares have already taken a harsh beating across the board. They are starting to climb once again. And for the cap and trade not to pass, we would have to bet against the president and his concerted campaign efforts.
When you consider his willingness to be out in front of the public, the proven track record of the marketers pulling the strings on all of the campaigns, and the lack of political will of a Congress to go against the president, it'd be tough to make a case against the cap and trade system getting installed.
The cap and trade system is coming. Heck, some entrepreneurial lawmakers (kind of an oxymoron) have already started drafting the policy so Wall Street traders won't be allowed to trade. All of this will spark a reboom for the beaten down solar sector. It's still probably not too late to go along for the ride.
This will be a rapidly evolving situation and it could change quickly. There are some risks though.
For instance, the public could suddenly realize global warming is still nothing more than a hypothesis. One based on dubious testing methods (recent data actually points to a global cooling trend beginning – which would be huge for agriculture in the near-term). If that happened, the cap and trade system would probably just be aimed at “reducing our dependence on foreign oil.” So not much of a concern there.
The real risk comes from a potential public outcry which could destroy the political will to increase annual utility bills by $400 to $1600. But let's be realistic. This is the American public which is still distracted by AIG bonuses. So not much of a concern there either.
It's not too often you get a chance to get ahead of a market that is still driven primarily by government decisions. This is one of those times.
Which, in itself, would be an opportunity rarely worth passing up, but there's more. First add the low risk/high reward proposition of buying into a beaten down sector. Then add the fact we're in the midst of an impressively strong rally. And you've got the right mix of safety, upside, and market conditions which are key to being a consistent and successful investor .
P.S. Earlier today, Dow Jones reported, “Shares of solar companies soared Thursday following a media report that the Chinese government is open to supporting the local development of solar energy in China.”
This report, if true, will just add another layer of demand to a market that’s working out all the slack. The near-term prospects for solar haven’t been this good since oil first passed $80 a barrel.