Jefferies new solar research team sees optimism in the sector though, but geographically biased. Their greatest optimism is for Chinese solar companies, with 3 Buys and two Holds. For American based solar companies, the underlying theme to the new coverage seems to be that there will be a better entry point ahead.

Jefferies breakdown:

Disclosure: None

Much of the blame has been put on BP in their negligence for violating safety and back-up protection devices of their deep-water well in the Gulf.

Instead of placing blame on BP, maybe we should take a look at the root cause of our dependence on oil.

BP is simply trying to keep up with the insatiable appetite for oil that U.S. consumers demand.  Maybe the solution to the problem is to reevaluate whether we should continue down the same path of oil-based energy dependence or consider other renewable energy alternatives.

It is not an overnight solution, but course of action has to begin at some point.  Like weaning an addict off drugs – it takes time, the process is slow and gradual, but change has to begin somewhere.

One way to begin the process is to put money into the alternative energy sector.  For those investors with time to make their money grow, consider putting a fraction of your IRA into an alternative energy mutual fund.

A couple green mutual funds to consider are the Winslow Green Growth Fund (WGGFX) up 66.58% for the 1-yr  period, or the Green Century Equity Fund (GCEQX) with a 1-yr return of 51.27%.  If the solar sector appeals to you, consider the Van Eck Market/Vectors Solar Energy ETF (KWT), or the Claymore/MAC Global Solar Energy ETF (TAN).

If you think the future is wind power then consider PowerShares Global Wind Energy Portfolio ETF (PWND) or the First Trust ISE Global Wind Energy Index ETF (FAN).

Keep in mind the companies in these funds and ETF’s are speculative, and advisors in the sector tell clients to only put money here that you do not need in the next 5-10 years.

Has the Gulf incident and its costs and lingering effects, the images of oil washing up on beaches, wetlands destroyed, and ecosystems ruined, enough to reach the “tipping point?” Have our elected officials woken up and finally decided to move policy in a more sustainable direction?

Disclosure: none

The trailing one year return leader was the PowerShares WilderHill Progressive Energy ETF (PUW) up an astounding 73.59%. Last quarter’s leader the Gabelli SRI Green Fund (SRIAX) dropped to third place with 67.76% for the trailing one year return.  The PowerShares Global Progressive Transportation Portfolio ETF (PTRP) took second place with a one year return of 72.4%. Impressive yes, all outperforming the S&P 500 (49.77%) but still short of climbing back into positive territory for the three year period.

Both of Green Century fund’s have a wide green focus on companies that are in the business of solving environmental problems and who demonstrate a strong environmental performance record, which helped them to their lead position.  Pure play funds, especially in the solar sector, lost ground the first quarter. The Van Eck Market/Vectors Solar Energy ETF (KWT) was down -16.38% and Claymore/MAC Global Solar Energy Index ETF (TAN) was down -16.49% the first quarter.

Wind funds had a difficult quarter as well, with PowerShares Global Wind Energy Portfolio ETF (PWND) down -14.52% and First Trust ISE Global Wind Energy Index ETF (FAN) down -11.45%.

Lesser known water funds have been the surprise of the year. While not as exciting and newsworthy as solar and wind, the issues of clean and available water will become more important over the coming years. The Robeco SAM Sustainable Water Fund (SMWNX) was up 2.08% for the quarter and 58.78% for the trailing one year. The PowerShares Water Resources Portfolio ETF (PHO) was the third place quarterly leader overall at 3.38% and up 47.13% for the trailing one year.

Another significant development, The Winslow Green Solutions Fund (WGSLX) was closed and consolidated into the Winslow Green Growth Fund (WGGFX) at the close of the quarter. Winslow states,

“As green business has become more mainstream, our universe has come to encompass a growing number of larger, well-established companies.  The Winslow Green Solutions Fund was launched to focus on these larger green solutions companies; however, we have found that many of these larger companies also fit perfectly within the mandate of the Winslow Green Growth Fund.  As a result, we have determined that the Winslow Green Growth Fund is fully capable of providing exposure to our full investment universe, and have decided to focus our resources on the management of this single investment vehicle.”

In all, a fascinating first quarter for Eco funds and we can expect even more interesting developments as the year continues. Especially as President Obama, with healthcare behind him, begins to bring energy and climate issues to the forefront.

First Trust NASDAQ Clean Edge Green Energy
Index Fund (QCLN)
Underlying Index: NASDAQ Clean Edge Green Energy Index (CELS)

March 15, 2010 – Semi Annual Evaluation

Added:
AIXTRON (AIXG)
A123 Systems (AONE)
Green Plains Renewable Energy (GPRE)
Universal Display Corporation (PANL)
Power-One (PWER)
STR Holdings (STRI)
UQM TECHNOLOGIES, INC. (UQM)
Veeco Instruments Inc. (VECO)

Removed:
Advanced Analogic Technologies (AATI)
China BAK Battery (CBAK)
Greatbatch (GB)
Raser Technologies (RZ)
Ultralife Corporation (ULBI)
Valence Technology, Inc. (VLNC)

A couple interesting notes to make from these changes, keeping in mind that the underlying rationale for the changes are only known to the managers of the index. Although the solar sector has been taking some heat lately, Clean Edge has chosen to add three companies in the solar supply sector: Satcon Technology, STR Holdings and Veeco Instruments. Power-One is also related, which provides renewable energy products, which convert solar or wind energy into usable grid connected power.

Four of the companies they’ve removed are in the battery and energy storage sector: China Bak Battery, Greatbatch, Ultralife and Valance Technology. However they’ve chosen to add one of the few IPOs in the Eco sector recently, battery company A123 Systems, which recently hit a new low.

Here are a few other funds and indexes that have made changes recently:

PowerShares Global Progressive
Transportation Portfolio (PTRP)
Underlying Index: Wilder NASDAQ OMX Global Energy Efficient Transport Index (HAUL)

March 22, 2010 – Quarterly Evaluation

Added:
Capstone Turbine Corporation (CPST)
Kuehne + Nagel International AG (KNIN VX)
Westinghouse Air Brake Technologies Corporation (WAB)

Removed:
Log-in Logistica Intermodal S.A. (LOGN3 BS)
New Flyer Industries (NFI-U CN)
Quantum Fuel Systems Technologies (QTWW)
UQM Technologies (UQM)

PowerShares Global Wind Energy Portfolio (PWND)
Underlying Index: NASDAQ OMX Clean Edge Global Wind Energy Index (QWND)

March 22, 2010 – Semi Annual Evaluation

Added:
China Longyuan Power Group Corporation Limited (916 HK)
Edison International (EIX)

Removed:
Fersa Energias Renovables, S.A. (FRS SM)
Suzlon Energy Limited (SUEL IS)
Theolia SA (TEO FP)
Vossloh AG (VOS GY)

Van Eck Market/Vectors Solar Energy ETF (KWT)
Underlying Index: Ardour Solar Energy Index (SOLRX)

March 10, 2010 – Quarterly Rebalancing
Added:
Solartech Energy Corp. (3561 TT)
Gintech Energy Corp. (3514 TT)
Neo Solar Power Corp. (3576 TT)
Green Energy Technology Inc. (3519 TT)

Removed:
None

Disclosure: None

Light sweet crude (the champagne of oil) had already reached the $73 level by last June. The price just rose above $80 in the beginning of March. It has been stuck in a trading range from $70 to $83 for eight months however. The usual fall/winter sell off did not take place this year and this indicates strong underlying fundamental support in the market. Supply coming from existing fields is declining rapidly and supply from new discoveries is not even remotely making up for the loss. Only the global recession that has lowered demand has prevented a major oil price spike from already occurring again. The technical patterns on the charts of oil ETFs DBO, USO, USL and the ETN OIL don’t indicate that a sustainable rally is in the offing just yet. Investors need to watch for a break above $83 in the futures markets. The first attempt may fail with the price falling back into the range however. The second break above $83 is more likely to stick and offer a profitable trading opportunity.

While the market for oil is global, the market for natural gas tends to be regional because it is usually moved from source to destination through pipelines. Transporting natural gas in a liquefied state by ship is a relatively recent development, is the more expensive alternative, and still only represents a small part of the market. The price of natural gas in the U.S. market went to incredibly low levels last August and September – the spot price at Henry Hub (the basis for futures trading) was as low as $2.25. This was well below estimated costs of production. The CFTC (Commodity Futures Trading Commission) investigations and new supply coming online were two factors that explain this economically bizarre and unsustainable behavior (commodities must trade above production costs, just like a business must sell its products for a profit). The U.S. only has 4% of global natural gas reserves though, so oversupply conditions will disappear eventually. Cold winters and hurricanes in the Gulf of Mexico are bullish for prices. There appears to be little that would be bullish for natural gas in the next several months though. The natural gas ETF GAZ hit a new yearly low on March 2nd.

As for coal, there are really two distinct markets – one for metallurgical coal, which is used for steel production and one for steam coal, used mostly for generating electricity. Metallurgical coal prices are obviously strongly dependent on the global economy, with Chinese demand being particularly important. Lower steel production because of a faltering recovery would be extremely bearish for this type of coal. Most coal though, 62% globally and 93% in the U.S., is used for producing electricity. Coal and natural gas can be used interchangeably in a large number of U.S. generating plants. So high prices for natural gas are bullish for coal and vice a versa. There is no danger in the U.S. running out of coal in the next many decades, since the U.S. has the largest coal reserves in the world. The ETF KOL has rallied since March 2009 and its chart looks very similar to the charts for the major U.S. stock indices. Expect coal to continue to trade like the overall stock market.

In the alternative energy space, solar stocks had a strong rally at the beginning of the year and than sank when the problems in Europe hit the overall market. Germany reduced subsidies for solar power and China reduced bank lending twice. The market is still dependent on government subsidies and China is a key player, so both actions were bearish. The technical picture on the charts turned from very bullish to bearish almost overnight. Solar stock fund Van Eck Market/Vectors Solar Energy ETF (KWT) looks like it has put in a bottom in the last few weeks, this doesn’t mean a sustainable rally will necessarily follow immediately.  Some relief from a severely oversold condition should be taking place soon.

Nuclear power is even more dependent on government action than solar, wind or other alternatives. Nuclear plants take years to build and require government approval. There is a nuclear renaissance going on globally. The U.S is not part of it and it remains hidden from most Americans, as well as the fact that 20% of U.S. electricity is generated from nuclear power. There are approximately 52 new nuclear power plants being built globally – China and India are leading the way – and more are on the drawing board. This of course is bullish for uranium in the long-term. However, nuclear energy ETF NLR is currently in a bearish trading pattern. A key event that investors should watch for is the 50-day moving average going up and crossing the 200-day.

Oil is the leader in the energy markets. Rising oil prices are bullish for all the other operators in the space, although there can be a considerable time lag between the rise in oil prices and other energy commodities. Investors should keep in mind that oil is priced in U.S. dollars and a rising dollar lowers its price and a falling dollar raises its price, everything else being equal. The alternatives become increasingly desirable as energy sources with each increase in the price of oil. Investors in energy need to watch developments in the oil market closely and then add the specific supply demand picture in the other markets. The large number of ETFs now available makes it easy to move in and out of any of the energy sectors or sub-sectors and to lessen the risk of owning individual stocks.

Disclosure: No positions

While oil and coal (both the commodity and their stocks) and wind energy and natural gas stocks had significant rallies from their respective price bottoms in February and March 2009 , the natural gas commodity, uranium and nuclear-related stocks, and many solar stocks remained depressed throughout the year. While almost every commodity rallied strongly in 2009, natural gas and uranium were the two glaring exceptions. Natural gas prices literally collapsed and at the low were trading at price levels that were seen earlier in the decade and in the later 1990s. Natural gas futures fell to around $2.40 and spot prices were even lower. Uranium had a strong rally from 2003 to 2007 when it rose from around $10 to over $130. It fell to around $40 at its low in 2009 and hovered just above that price throughout the rest of the year. The solar industry is a more complex story. It is only an economically viable source of energy when oil prices are high. At lower oil prices, government subsidies are key. While a few solar stocks have rallied nicely from their lows, most had not gone up much by the end of the year.

In 2009, prices for both natural gas and uranium fell below estimates for their production costs. No commodity can trade in that range for long since production closes down to bring supply and demand back into balance. By the spring, 50% of natural gas rigs in the U.S. had already closed down. In must be kept in mind that prices in both the natural gas and nuclear industries are influenced by the government. The CFTC (Commodities Futures Trading Commission) held hearings this summer about trading in the oil and natural gas markets. Along with the SEC, the CFTC interfered with access to trading vehicles in these markets that were used by the small investor. Natural gas ETF, UNG was effectively turned into a closed-end fund because of the actions of these two government bodies. Leveraged oil ETF, DXO, closed down as a consequence of their interference. As for the nuclear market, the U.S. Department of Energy has a stockpile of 158 million pounds of uranium and it occasionally sells some of this on the open market and depresses prices, just as central bank selling of gold occasionally depresses gold prices.

While prices were down for natural gas and uranium, they are not likely to go lower in 2010, at least for any extended period of time. They will be supported because they are too close to their production cost levels. This does not mean a major rally is imminent however. Prices can get low and stay low for a long time, as was the case in the 1990s. A number of commentators claim that this will be the what happens now because oil, natural gas, uranium and solar stocks were in a bubble that lasted into the 2007 and 2008 period and once the price goes down it will not recover again for many years. Similar arguments were made in 1974 when oil hit $12 a barrel. It’s ultimate high was still several years off and several times higher. Energy was in a bullish period back then just as it is now.

Oil looks like it will be strong again in 2010, based on its price behavior in the fall of 2009. Oil prices, like many commodities, have a strong seasonal component. For oil, the bottom tends to be in the winter between January and March and the yearly peak between June and September. Light sweet crude rallied 9% in October 2009, at a time of the year when it should have been selling off. This indicated unusual strength. Crude ended the year near its yearly high, which was somewhat above $80. While seasonal selling pressure will exist for the first couple of months of 2010, buying pressure will then cause the price of oil to rise. It would not be unreasonable to assume that it will get above $100 a barrel during the year. It is not likely however that price will go up enough in 2010 to break the old high of $147. That will have to wait until the following year. Oil and many oil stocks should continue to be good investments in 2010.

ETFs/ETNs, exchange traded funds and exchange traded notes, are the easiest way for investors to get oil and oil stock exposure in their portfolios. The ETF/ETNs: OIL, DBO, USO and USL can be used to invest in oil as a commodity. For those who are more aggressive and want as much as 200% long exposure through leverage, UCO, HOU or LOIL, which trade in the U.S., Canada, and the UK respectively, can be bought. For ETFs that hold stocks of oil and gas companies, XLE, IYE, and IXC are possible choices. Investors bullish on oil stocks can get leverage on them by purchasing DIG and ERX.

While oil should be doing well in 2010, natural gas does not look as promising. There is an incredible glut in the market and new supplies are coming online through the global shipping of compressed natural gas. Still the price of natural gas is relatively low compared to oil on a historical basis. It will take some time to work out the excesses however and fully restore balance between these two commodities. Natural gas tends to have sharp price rises every four to five years and the last peak was 2008, so another really big move up shouldn’t be expected until around 2012. Trading opportunities will of course exist in 2010 and low prices will be available for those who want to slowly accumulate and hold their positions for a while. A good ETF for the natural gas commodity is GAZ. Leveraged natural gas ETFs HNU and LNGA trade in Canada and the UK. The leveraged ETFs are a better choice for shorter-term investors.

The supply demand picture of uranium is bullish in the intermediate term. A number of new reactors will be coming online in Asia over the next several years. Growth in the use of uranium usage is expected to be over 2% a year until 2030 according to the World Nuclear Association. The market is thought to be in deficit of 60 million pounds a year. It is estimated that uranium prices would have to move up to around $75/$80 to improve supply. Miners in particular will benefit when this happens. ETFs for nuclear power include NLR, NUCL and PKN. Only NLR has any significant trading volume however.

As for solar power, a few of the leaders had good rallies in the second half of 2009. This is an indication the whole sector is in the beginning stages of a market recovery. Investors should keep in mind though that this is a new industry and there will be a period of consolidation. Some companies will not last. Longer-term investors should avoid stocks with bad financials. The two solar ETFs are TAN and KWT, but these have partially rallied already in 2009 because the leaders in the sector started moving up. Individual stocks which have not rallied too much yet and which investors might want to consider are ENER, JASO, SPWRA, and WFR.

Commodities have been in a longer-term secular bull market since around 2000. This type of bull market tends to last around 20 years. So, there is still a lot of time left and good investments to be made. Buying stocks and commodities on intermediate term drops is the correct strategy in such markets. Buying oil in the spring of 2009 produced quick and substantial profits. Prices in other parts of the energy sector haven’t moved as fast as oil did in 2009 and this is giving investors another chance to profit in 2010.

Disclosure: Long ENER, WFR, natural gas.

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

Solar stocks hit their historical peaks between December 2007 and June 2008 (before oil peaked at $147 in July 2008). Some of them dropped more than 90% from their all-time highs until they hit lows at the end of 2008 and early this year. At the very least, they are due for a major technical rally from severely oversold levels.

How far that rally goes and whether or not it turns into something that can last longer than a few months remains to be seen. Some good fundamental news is starting to appear. JA Solar (JASO) hiked guidance on December 14th. The company now expects 2010 shipments to increase by greater than 50%. This made for a good day for solar stocks in general. JASO itself was up 16% during market trading and another 8% after hours.

While some improvement seems to be taking place in the short-term, the longer-term prospects for solar power depend on the future price of oil. Even a cursory supply and demand analysis indicates that oil will be rising in price for many years. According to a rigorous IEA (International Energy Administration) study released at the end of 2008, world production from existing wells is falling at a 6.7% annual rate. New discoveries and new wells coming on line are not keeping up with this loss, so supply is falling.

At the same time, the demand destruction from the Credit Crisis is turning around. Forecasts now predict global oil demand will be 86.3 million barrels per day in 2010, up 1. 7% from 2009. The impending supply / demand imbalance in the oil market will cause prices to rise once again, probably in the not too distant future. For the moment, however, oil is in a seasonally weak period which will last till around February or so and this should temporarily keep a lid on prices.

Just as solar stocks peaked before oil did, they can also start to rally before the price of oil goes up. A list of solar stocks (ticker symbols in parenthesis) that are at toward the lower end of their price range includes:

China Sunergy (CSUN)
Energy Conversion Devices (ENER)
LDK Solar (LDK)
JA Solar (JASO)
Renesola (SOL)
Suntech Power (STP)

There are also two solar power company ETFs: TAN and KWT.

If you think energy prices will be rising in the long-term, then solar stocks today are among the biggest bargains in the market. The sun should indeed be shining on them in the future.

Disclosure: Long ENER, LDK.