Wind Power: Why This Renewable Energy Could Solve The U.S. Oil Addiction
by Louis Basenese, Chief Investment Strategist
It’s become cliché to say that the United States is addicted to oil. I’ll make no effort to refute the claim because it’s true. It’s an expensive habit, too.
The upshot, however, has been the explosion of interest in renewable energy sources. Last year, investors poured a record $71 billion into the alternative energy space. And billions more funnel in every day.
But with so many possibilities – hydropower, wind power, solar power, geothermal, biofuel, clean coal technology – investors are forced to pick which alternative energy source will distinguish itself as the most viable replacement for oil. It’s a crapshoot.
That is, until you realize the shooter (in this case Wall Street) is rolling a pair of “loaded” dice. In recent months, heavy hitters like The Blackstone Group, General Electric and T. Boone Pickens have stealthily invested billions into a single renewable energy source. JP Morgan Chase revealed that it’s holding a $1 billion stake in the very same investment.
Even better, in the next five years, the governments in the United States, China and Europe will plow at least $150 billion into the same alternative, according to CLSA Research.
And, unlike oil, there’s no possibility of it running out. So let’s take a closer look at this odds-on favorite to win the alternative energy derby.
And the Winner Is – Wind Power
Wind. It’s clean (wind power generates absolutely no greenhouse gases). It’s renewable. And it involves no production decline curve. Hence, 30 years from now we won’t be worrying about “Peak Wind” theories coming to fruition.
It also can’t be hoarded by power hungry cartels. In fact, enough of it exists to satisfy global demand seven times over, according to a Stanford University study. North Dakota alone has enough of it to meet 25% of U.S. demand.
But perhaps most importantly, it’s finally coming of age. Just consider:
- From 2000 to 2007, the size of the wind power industry increased fivefold.
- Last year, records were shattered with $36 billion in total global wind investments with the United States leading the way with $9 billion.
- In the next 10 years, the wind industry is expected to quadruple in size.
Hands down, wind is the fastest growing source of power. But can such growth continue?
Sure, the Department of Energy and countless other studies and industry experts say it will. But are they being realistic? Absolutely. And here’s why…
Wind Power Makes Economic Sense & Simply Works
First and foremost, wind power makes economic sense. If the price of oil drops to $50 a barrel (it won’t), the economics still work; even without government subsidies.
You see, wind can be used to generate electricity for 6 to 8.5 cents per kilowatt-hour.
For comparison’s sake, the cost of nuclear power runs about 15 cents per kilowatt-hour. Coal now costs north of 10 cents (without factoring in carbon capture and storage). And gas-fired power costs approximately 12 cents.
Keep in mind, too, that just a few years ago, wind costs rested north of 15 to 20 cents. But today, costs are low enough in some markets to compete with conventional power generation methods. And future advancements will make wind power even cheaper.
Look no further than Denmark. It already generates 20% of its electricity from wind. And Spain, Portugal and Germany boast similarly impressive penetration rates of roughly 12%, 10% and 7%, respectively.
The timing couldn’t be more perfect, either. While wind energy costs are dropping, costs for competing technologies – coal, nuclear and gas – are headed in the opposite direction.
Wind is the cost effective way our nation can start solving its oil addiction. And unlike many of the other far-fetched solutions to our energy needs …
Wind is realistically attainable.
Good investing,
Louis Basenese
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Closed-End Income Funds: Why It’s Time to Buy Them
by Louis Basenese, Chief Investment Strategist
Pick a stock. Any stock. And invariably, one investor will argue it’s cheap. Another will say it’s expensive. Even in this panic-driven sell off. The problem, of course, is that no foolproof, infallible metric exists to determine who is right. Until it’s too late.
But the same is not true of closed-end income funds.
A first grader with a good grasp of addition and subtraction can tell whether one is cheap. Or expensive. Right now, they’re ridiculously cheap.
Since closed-end income funds issue a fixed number of shares, supply and demand determines market prices. That means it’s possible for such funds to trade at a price that’s greater than (a premium) or less than (a discount) the actual value of the securities in the portfolio (net asset value).
Average Closed-End Income Fund Discount
Currently, the average closed-end income fund is selling at a 13.7% discount. Almost double the average of three weeks ago, according to research firm Lipper. That means if the fund’s manager sold all of the fund’s holdings, investors would earn an instant 13.7% profit.
What’s more, almost 200 closed-end funds trade at more than a 20% discount. And more than 20 trade at discounts of 30% to 40%. Not to mention, many sport double-digit yields.
Have you ever complained about buying something at 40% off? Me either. And that’s the attitude we need to embrace when it comes to closed-end funds. We’re witnessing a once in a lifetime buying opportunity. But, don’t just take my word for it…
- “I’ve been in the industry for 25 years and I’ve never seen [discounts]… this wide,” declares Cecilia Gondor, Executive Vice President at Thomas J. Herzfeld Advisors Inc.
- “Discounts have gotten to levels perhaps never seen before, certainly not for years,” according to Jonathan Issac, Vice President at Eaton Vance Corp.
- “I’ve been through [market crises] six times in my 40-year career, and this is as nasty as I’ve seen it,” explains the President of Thomas Herzfeld Advisors.
A skeptical bent, especially in this market, doesn’t hurt…
Are Closed-End Income Fund Bargains Too Good to Be True?
Yet, when it comes to closed-end income funds, the bargains aren’t too good to be true. They’re a result of fearful investors. Not a breakdown in the underlying fundamentals.
You see, when investors are scared, they sell indiscriminately. Companies with stellar earning growth and fundamentals get tossed just as quickly as companies with terrible fundamentals.
If you have any doubt, consider that as of the close on October 6, 80% of the stocks in the Russell 3000 were down for the year. Obviously, not every one of those 2,400 stocks sports terrible fundamentals.
My point. Good stocks are getting thrown out with the bad. So, too, are many solid closed-end income funds. It’s especially true among the 400 or so income-based closed-end funds. Because investors are extremely leery of anything credit related, they’re selling income funds more aggressively.
For investors that value solid income (in some cases paid monthly), with the potential for double-digit appreciation, too, I’m convinced no better opportunity exists. Here’s why…
The widespread panic in the markets is doing more than sending discounts to the moon. It’s also depressing asset prices, leading to declines in the NAV. But remember, unlike stocks, fixed-income investments have a predetermined value at maturity.
So despite the wild swings, and even dips in NAV, valuations will recover as maturity draws near. Even better, so will the historic discounts.
The Premium/Discount History of Closed-End Income Funds
If you have any doubt, pull up the premium/discount history for any closed-end income fund with at least a five-year track record. You’ll notice, time and time again, that the fire sale prices don’t last.
By no means am I suggesting all the funds are immune to losses. No investments are. Not even money market funds.
Some closed-end income funds will inevitably pay the price for using too much leverage. Or overdosing on toxic fixed-income investments. But countless others will not.
Unfortunately, simple math won’t help us distinguish between the good and the bad. But it’s not an impossible task. I’m convinced you can single out some inevitable winners and enjoy steady double-digit yields and capital appreciation…
All you have to do is avoid the funds with the highest yields. Or the biggest discounts to NAV. Such extreme levels indicate higher risk. Whether it’s justified or not, it’s best to steer clear of these outliers.
And instead, focus on funds with slightly above average yields (9% to 12%) and discounts to NAV of 15% to 25%. At the same time, I’d focus on funds with…
- Less than 10% exposure to the “toxic” financial sector.
- A reasonable amount of leverage (up to 25%). Or none at all. This will minimize the impact of any poor investment choices.
- No investments in mortgage-backed securities. Or only agency mortgage-backed securities (the ones backed up by the full faith and credit of the government).
- A dividend that hasn’t been cut since the beginning of the credit crunch (August 2007). A dividend cut often confirms deterioration in the underlying assets.
- Minimal or no exposure to auction-rate securities. Funds relying on this type of financing remain hamstringed, as the auction-rate market is still not functioning properly.
These two websites – www.cefa.com and www.etfconnect.com – should help you find all the necessary information. (If you want to skip the hassle, here are the eight closed-end funds we highly recommend right now.)
In the end, we’ll look back at this period in amazement over the extraordinary buys available in closed-end income funds. The last thing I want is for your amazement to be soured with regret over not taking advantage of them.
Good investing,
Lou Basenese
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