Observation Deck

One of my closest friends, a longtime mentor, passed away last month. Hewas the research director and risk manager of a large East Coast hedge fund,and very secretive. I depended upon him as a source for 15 years, and he wouldnever let me use his name in print. His firm was the same way: very quiet, and dedicated to their clients and their craft as big players in the “macro” game of bond, commodity and equity index futures. Unlike so many of their competitors, there’s never a word about them in the media.

Since his passing, I think often about the roots of my friend’s uniquely broad and rich view of the world. A key element was that this gentleman, who I used to call Mr. P. in columns, was open to hearing from a very wide network of analysts – many well outside the mainstream. He was always looking for what he called “balance points,” or areas of agreement among seemingly diverse views.

This makes sense if you consider that a successful hedge fund manager’s job is to develop “variant opinions” about possible future events, then bet on them well ahead of the crowd. If those non-consensus views later become mainstream, then you take handsome profits and move on.

One of his techniques was somewhat cruel but also fascinating: He kept a PhD analyst on his fund’s payroll who always expressed the consensus opinion. Mr. P treated this individual collegially, as if he were offering insights, whereas in fact he considered this guy’s opinions to be virtually worthless.  Mr. P always wanted to be generating views that were non-consensus, in short, because that is the most fertile area in which to bet. If this guy agreed with a thought, then Mr. P would abandon it.

One non-mainstream analyst that Mr. P enjoyed interacting with is James Smith, who runs the independent firm Catapult Research in New Jersey. Smith specializes in conducting Gann analysis on indexes and commodities for institutional investors, an arcane application of financial geometry that, in part, separates the concepts of “time” and “price” when determining the future course of a security. W.D. Gann, founder of this style of analysis, is said to have been a genius but his theories tend to go over most traders’ heads. It tends to be better at figuring out when something is going to happen, and at what price, than why. It’s odd, but in the right hands it can be very insightful.

With permission, I thought would share one of Smith’s findings because it bears on an area of technology research that I think will be very big in coming years: solar energy.

You might think it’s too out there, but who knows? It’s not that outrageous, I guess. And in fact Smith would be delighted for us to think it’s bizarre. It gives analysts like this comfort to know they have a unique point of view.

As background, you should know that Smith’s research has led him to believe that the recent plunge in the price of oil is about more than just Saudi Arabia’s attempt to bankrupt U.S. shale drillers and to destabilize the petro-economies of rivals Iran and Russia. He thinks it’s about the end of 100 years of ever-increasing demand for oil, the start of serious trouble for fossil fuel explorers and producers, and the start of a new era for solar energy.

Smith in fact sees a crash coming in 2016 as investors begin to discount the possibility that companies like ExxonMobil (XOM), Total (TOT) and Petrobras (PBR) will ultimately end up writing off the value of tens of billions of dollars’ worth of “stranded assets” in their oil fields.

“Demand for oil will never recover – ever,” Smith says. “You don’t read this idea in the mainstream media because it is their job to tell you what you already know after it is obvious to everyone,” he says. “I’m saying that if the cost of solar drops 20% in price every time the installed base doubles, it is only a matter of time before solar takes over from fossil fuels. My best guess is that it starts to really happen from 2017 onwards.”

Now here is the rest of his argument, almost verbatim (with edits for continuity). I’m not saying I endorse it. I’m saying that these are the kind of views that go into shaping a non-consensus opinion.

Smith : “It would be well worth the investment of your time to view this video of Michael Liebreich, a British energy expert who is chairman of the advisory board of Bloomberg New Energy Finance. I have been warning my clients for the last few years that 2017 will be the year when alternative energy goes through a "phase change” from fringe to mainstream. People have the mistaken view that the change will be gradual. It won’t be gradual. It will sudden and ruthless. Stranded assets of coal, natural gas and oil will turn the global economy on its head.

“I put solar panels on my home back in 2004 when most people thought it was fringe. I have done a lot of study on this issue of solar and wind. If there is one thing I try to get across to clients, it is that now is the time to buy into solar. First Solar (FSLR) may become the first trillion-dollar company in ten years. I know that sounds audacious, but watch the video. Denmark gets 40% of their electricity from wind and Texas now gets 30% from wind. And wind is small potatoes compared to what will happen once 5 cent/kilowatt hour solar becomes standard pricing around the world. I’m saying that even natural gas cannot compete with solar. It may well be the worst nightmare the Koch brothers can imagine. Exxon will be a smaller company than many solar companies ten years from now. This is happening. It is real.

"Where I add to the picture for my clients is to frame the phase change in solar to coincide with the next 17-year bull market in the Dow. I’m saying that 2016 will be a crash year for stocks globally but out of the ashes, we’ll see a new bull market emerge in 2017 led by alternative energy going mainstream. The idea that most fossil fuels in the ground will become stranded assets is still not accepted by most fundamental analysts. They don’t get it. They will .eventually. By the time they realize what time of day it is, we will get a global stock market crash in 2016 as the market starts to discount the end of the fossil fuel era. Exxon and many big oil companies will lose more than half their current value. But even if oil companies never recover, the overall market will recover in 2017 and move up for the next 17 years.

"Now this is where I might disagree with [Mr. P], who always saw events through a political lens. I loved talking with [Mr. P] because he was so incredibly smart and informed on exotic subjects. But one thing I really disagree with is the idea that politics matters. I believe that the job of the politician is to claim credit for stuff that was going to happen anyway. A rapid technological shift is what changes the world, not the actions of any one politician or political party. Fundamentally it doesn’t matter whether you have a Republican or a Democrat elected in 2016. This technological ‘phase change’ coming in 2017 from solar and wind power will overwhelm the energy markets. It is a revolution in the making. When solar is cheaper than fossil fuels (and it will be everywhere by 2017) it will overwhelm the markets.

"I have absolutely no respect for either the Democrats or the Republicans. [Mr. P] and I shared that skepticism, but I think he didn’t quite see how big this alternative energy movement would become. This is massive. It is the biggest revolution you will see in your lifetime. The fracking revolution is small potatoes. Solar and wind will swamp the frackers. No one will argue about climate change once the cost of solar is down to 4 cents/kwh everywhere. That is where it will be by 2017!

"It is the end of an era for fossil fuels. From 2017 to 2034, the stock market will be driven higher by the move from fossil fuels to alternative energy. It will happen a whole lot faster than anyone now expects. By 2034 we will get 80% of our energy from alternative energy and maybe only 20% from fossil fuels. It won’t happen because of climate change politics. It will happen because solar will be massively cheaper than even nat gas. And electric cars will go mainstream in 2017 with the launch of the new Tesla model and the Chevrolet Bolt – both getting more than 200 miles per charge. Nissan, VW, BMW, and others will also launch similar vehicles.

I’m telling my clients not to pick winners but to buy into the sector via the Guggenheim Solar fund (TAN). It just recently bounced off a 50% retracement. It is going to go up big in the next eight to nine months. From October 2015 it will go down with the overall stock market but from Jan 2017 it will rebound and move sharply higher.”

Well, that’s it. One man’s outrageous, non-consensus, completely variant opinion on how     solar energy will become ascendant in coming years. I’ll keep of Smith’s views and update you from time to time if his idea starts to creep into mainstream.

Source; Markman Capital Insight