Designing better futures

Consumer confidence hits a 28 year low so.....

Consumer confidence hits a 28 year low so.....on a personal level, does that mean I haven't felt this badly since I was 10 years old and my allowance and lawn mowing income wouldn't cover my Estes model rocket hobby. 

At the age of 9, after reading a book that said the US government used to exchange paper money for silver and gold, I made my first investment buying 10 oz. of silver from a shady local coin dealer.   I thought having ingots seemed like a cooler form of loot storage.  My parents probably thought I should be doing something more constructive than being a little gold bug.

Luckily the Hunt brothers attempt to corner the market gave me a 50% profit in 1980, by 13 I was buying shares in Apple computer and dodgy penny stocks and at 17 was trading Yen futures from the principals office.  This is cliche for wall street types, but I think my family enjoyed the novelty of it all in rural Iowa.

P.S. teenagers and leverage don't mix well :), high school with 6:00 AM margin calls is stressful.  It took a lot of pizza delivery jobs and work in the Iowa soybean fields to set things straight. In retrospect a cheap lesson  to learn about the power of leverage for good and bad. I spent the next years at the University of Iowa as a cultural anthropology student studying neural networks and building spreadsheet models for T-bond futures on the side while co-founding a software start-up.

Silicon supply = 7.5-36.7 Gigawatts capacity by 2010

The participants in the silicon market are a useful starting source of estimates about the market.  As any good anthropologist knows, a source has its biases, but is nevertheless an interesting data point.

One interesting information source is from REC (Renewable Energy Corporation), a large Norwegian player in the Solar PV industry. They presented during the Piper Jaffrey conference on Feb 20, 2008 and had some interesting data point in their Power Point Here is a link to the PDF.

In the presentation there is an indication of estimates for Metric Tonnes of Polysilicon Capacity out to 2012. It includes, various players and even lists some as “wild cards”.

From a downstream perspective the expectations of polysilicon are quite important as the expiring feed in tariffs from Spain caused a spike in demand during 2007. This demand spike caused a  shortage in Polysilicon sending prices to $450/kg.  These prices are believed to be declining rapidly as the market solves the price problem with supply.

In the power business silicon doesn’t count, gigawatts on the grid count. So let’s take some data points from REC and convert them to gigawatts. It is important to note these supply estimates don’t include amorphous silicon modules or thin film power coming online.

Various participants are slicing and utilizing ever thinner pieces of silicon to achieve ever greater wattage output per gram. A current crude estimate from some of the best indicates 6-10 grams of silicon per watt of nameplate power. Some are claiming use of only 2.5 grams/watt. All producers are working to minimize utilization.

 

REC estimates provide ranges and include the “wildcards” The estimates of gigawatts coming online is below. Remember the solar industry is pretty buzzed from an 07 year which saw estimated 3 gigawatts come online. 

Next week I will write about the supply side of the equation, which has some very interesting properties in terms of subsidies and insolation globally which receives little coverage in the popular press. If you invest in solar, I would urge you to study a global insolation map as the business is global.

Hint: a supply glut  could be a non-issue with a modest decline in module prices that would easily clear the marketplace. Thin film will ship a few gigawatts/yr itself in the next 1-3 years. The US grid has nameplate capacity of roughly 1 Terrawatt and the global energy nameplate capacity is estimated at 4.3 Terrawatts. Solar PV doesn’t even swing the needle at last years .003 Terrawatts shipped.  Last years global PV production was equivelent to 4-6 normal coal plants.

Get rid of your recency bias to price the market.

Beliefs and behaviors are what drive us all. Charlie Munger is probably one of the best practicing sociologists alive. Munger, the lesser known of the Warren Buffet and Charlie Munger duet has a passion for understanding cognitive biases and beliefs.

Many prognosticators etc. are asked to predict the market. Barron€™s newspaper drags out a few Guru€™s every year for their psychic dog and pony show. Inevitably the wrong question gets asked. Where do you think the market is going to be next year questions abound?

Ken Fisher does an interesting job of plotting gurus as a distribution and then placing bets on the holes in the distribution. His conclusion basically could be summed up as the blindness of crowds.

Here is a tool to pick where the market should be priced€ while removing the recency bias associated with thinking about todays index level.

As an anthropologist, I believe how questions are asked of others or oneself greatly determines the value of the answers.

1. As a percentage rate what do you believe will happen to corporate earnings next year?

2. What is your perception of a fair percentage return for equity risk over the risk free rate?

Using the tables below you can see where “you” predict the fair value of equity. The value of your prediction is most likely the equivalent of the price you have paid for it, i.e. don'€™t try and buy a cup of coffee with it.

 

A crude match up of the Dow Jones Industrial Average could be seen here.

 
The Point of this exercise is to get rid of your own recency bias. In asking about fundamentals and value, you may find yourself coming up with a very different answer to a very popular question.

Here is a screenshot of the simple excel tool available for Download SPDJIAPEriskfreeyieldpredictionV1.0.xls .

Here are the stats from last year for the S&P 500 as of this week: 

1. Earnings are down 25.3% YoY according to Barron'€™s. $62.28 last week vs. $83.39 for the S&P 500.
2. The current yield on the S&P 500 4.37% and 5 year T-notes yield 3.11%. This a current S&P 500 risk premium of 1.26%
3. The historical risk premium for equities ranges from 2.5-4.3%
4. Earnings can be seasonal (you may wish to use annualized data)
5. Even a positive earnings yield might be destructive.  The game is increasing your purchasing power long term, remember inflation erodes that.

Being able to pose the counter factual or re-frame a situation allows you to adjust beliefs and assess others behavior. This is a powerful life skill. Maybe it is even reflexive, have to ask George Soros about that. George if you are free for dinner, my wife is Hungarian and makes great gulyas.

 

*important notes, yes the risk free rate will change so your mileage will vary.  Please submit changes and suggestions.

 

 

Energy Subsidies per US citizen

For what it is worth here are the estimated energy subsidies per US person.  I leave for people to reach their own conclusions in regards to policy.  If you would like a change in policy, contact your local congressional representative.

                                                                                   

Distribution of Federal Fiscal Subsidies to Energy,   2006   Preliminary Estimates
	$Billions   Per Year (Avg. of High/Low Ests)	%   Share	Per U.S. Citizen/year
Oil and   Gas	$39	52.4%	$128.71
Coal	$8	10.5%	$26.40
Fossil,   mixed	$2	3.3%	$6.60
Nuclear	$9	12.4%	$29.70
Ethanol	$6	7.6%	$19.80
Other   Renewables	$6	7.5%	$19.80
Conservation	$2	2.1%	$6.60
Mixed   Resources/Other	$3	4.2%	$9.90
Total, all resources	$74	100.0%	$244.22
Source:   www.earthtrack.net

The last column was created by me to help people understand the numbers at a personal level.  Please comments and dialog constructive.  Here is the source document.

One measure of employment peaked in 1999

The Civilian employment ratio peaked in 1999.  This is a little food for thought.  Make your own graph here. 

T-bills at 5.76% from Norway

As an anthropologist, I am fascinated by behavioral and social biases.  One bias investors have is over allocation to their home markets.  This makes sense if there is an information edge but otherwise can be expensive.

The objective for many investors isn't to maximize return, it is to increase purchasing power.  To that end currency allocations should be considered.  The dollar's weakness is old news.  The fundamentals of US debt to GDP when one considers outstanding legislative entitlements and demographics do not paint a happy picture going forward for the USD.

An interesting place to put cash investments is the Norwegian Krone.  Norway has the following economics attributes.

• 17.2% GDP government surplus expected for 2008
  
• Stable political environment
• 2008 predicted GDP growth of 3.8%
• Rule of law
• Intelligent resource allocation of petroleum reserves and state petroleum fund
• Current T-bill yield of  5.76%

As a former foreign exchange quantitative analyst and prop trader, it is interesting to note that currencies have a tendency for serial autocorrelation.  If you are a professional money manager, it is fairly easy to gain access to the Norwegian Krone and pick a point on the yield curve that matches your risk and investment horizon. 

Information from the Norwegian central bank can be found here.

For retail investors, www.everbank.com may be interesting to look at.

The data for the chart above is from OANDA.com

Here is the spreadsheet data. Download USDNorwegianKrone.xls

Full disclosure: I have no relationship with OANDA, Everbank and don't currently hold a Norwegian Krone position.  I did live in Denmark and Sweden with my wife for brief periods of time and found them highly agreeable. :)

Enjoy the olympics

It may not be Tibet, but China is a major supporter of the Burmese government.  My fullest encouragement and support to the families of Burmese in the wake of the cyclone.