Attention, energy investors! The Obama administration is barking big about carbon emissions…
It’s after state-by-state “targets” to reduce carbon emissions from power plants by an average of 17% from current levels… and 30% from 2005 levels.
And it wants it done by 2030.
The New York Times – of course – LOVED it…
Mr. Obama’s boldest step in using his executive authority to halt the warming of the planet, an issue he vowed to address during his first presidential campaign six years ago.
But regardless of what you and I think about the merits of these new regulations, we must coldly factor them into our contrary-minded investing strategy.
These emission targets no doubt mean power plants will need to ramp UP their clean energy output, and wind DOWN their dirty sources.
So… should we simply buy solar, and sell coal?
Solar’s Boom and Bust Cycles…
I actually love stock sectors that cycle wildly because crazy price swings induce wild emotional swings for investors.
And we contrarians make our hay selling stocks when investor exuberance is high… and “backing up the truck” to buy them when fearfulness takes over.
Solar stocks seem to meet our manic criteria perfectly. Most recently, they swooned until late 2013.
Since then, they’ve boomed…
Solar stocks bust, then boom.
And now that Obama’s got their back, imagine the heights to which they’ll climb!
But I’ve got one big problem with this sector…
It’s Just One Big Bust Cycle
Let’s step back and take the “long view” of solar stocks.
You’ll see that they do as fine a job of destroying investor capital as any asset class on the planet…
Eternal sizzle, without the steak… be careful how long you hold solar stocks!
Of course, you can make money trading any asset class – no matter how fundamentally flawed it is!
But to do so, you generally have to buy it when it is “out of favor.” And my current hunch is that solar is more in favor than out.
But You Can’t Have a Dirtier Perception Than Coal
You’d think that the new carbon plan could only mean really bad news for coal stocks.
However, that’s not really how it’s playing out.
Surprisingly… these stocks are doing fine.
It’s usually a really bullish sign when terrible news fails to send a stock, or sector, lower. That means all the doom and gloom is already “baked in” to the share price!
Despite PLENTY of bad news, coal stocks don’t really go down much, anymore.
The “undercover” bullish driver for coal is Chinese demand. China desperately needs coal to meet its rising energy needs.
Half of China’s new power plants coming online between now and 2020 will be coal fired.
The government is a little looser on those emission standards over in China, of course. Chinese leadership doesn’t mind a little soot in the air in the name of economic growth.
And the country doesn’t really have another option. Natural gas is a very expensive alternative for the Chinese. Their domestic supply is limited. And it’s not cost-effective for them to import liquefied natural gas (LNG) from the U.S.
They’d much rather burn up coal… which happens to be selling today at bargain basement prices.
And their neighbors have similar thoughts.
The International Energy Agency says coal is going to be the dominant “fuel of choice” in Southeast Asia over the next two decades. Electricity needs are ramping up like crazy, and the region is projected to “add another India” in terms of current power output. And coal will be doing most of the powering…
No matter what the EPA rules, coal is in hot demand in Asia.
These Eastern drivers will send coal prices skyrocketing sometime over the next decade. And coal is so unbelievably cheap now, I wouldn’t be surprised if it happens sooner rather than later.
That means now’s the time to get in on this contrarian energy trade.
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