Electricity and market thoughts

Well the near term bottom occurred last tues/wed when the S&P was around 1200 -- and we rallied 60 points over the next couple of days. Lots of signs that the bottom was near -- too much depression talk on realmoney.com; one of two things had to change -- either financials had to rally or the rest of the stocks had to drop because there is no way the rest of the market can make their numbers if last week's prices are correct for financials -- there isn't enough of a financial services industry at those prices to finance our economy anywhere near what current non-financial prices suggest.

Internally, my chief of compliance reminded everyone they were not allowed to speculate in the company stock and that included shorting it -- they had received several inquiries about it.

Now what? Well no way the financials have bottomed -- we are going to head back down although I doubt every financial will hit new lows -- some won't. But many will for one simple truth -- housing prices are still declining which is pushing more and more homeowners to be underwater in their homes, which encourages them to walk away or default.

More defaults means more bank loan losses, means more capital required means lower stock prices. The key question remains what does this mean for non-financials? tough to answer that question. If we are headed back to the lows of last week then my guess is that the economy is going to get uglier -- worry is a true credit crunch where deserving businesses and consumers are denied credit, which impacts their ability to grow or spend which has a cascading effect on the economy. that's the worry. in the meantime its back to secular growth stories -- the biggest one of all that I have found is the growth in electricity.

We continue to see growth of electricity demand for electronics as well as from one of the largest users of electricity -- oil and gas industry!

Efficiency does not reduce demand it merely transforms it. So even though people tout LEDs to save on lighting costs or in my own case my new 13 SEER ac unit which has helped my electric bill -- the savings get spent elsewhere.

Even bigger than the use of electricity for electronics will be the use of electricity for transportation -- think hybrid cars. Plus think about the growth in electricity demands from overseas as emerging markets continue to develop at a rapid pace. So electrical infrastructure would seem to be a safe bet given that in the US is operating close to capacity; the grid/transmission net is old; and emerging markets are building new infrastructure like crazy. I think of companies like Emerson Electric, ABB, Siemens, AZZ, Cooper Industries, Eaton, etc. when I think of infrastructure.

Then there are demand management or efficiency plays such as Comverge and Eneroc or Echelon or Itron or others that are making smart grid appliances like automated meters.

I have looked at many of these plays and I'm sure that there are plenty of winners but for me the most interesting idea outside of Power Integrations is Maxwell Technologies (MXWL) which makes ultracapacitors -- they are complementary to batteries. While batteries are able to store lots of energy they can only discharge a little bit power at a time and it takes them forever to recharge and there are only so many times a battery can charge before it stops working.

Ultracapacitors store only about 10% of the power that a battery can store but it can release all of that power within a second or two. They can also be recharged quickly and can cycle through charging and discharging a million times before they are finished. They claim the ultracapacitors will last the life of the product they are loaded into.

So what can you do with one? they are used in wind turbines for temp storage of power as well as for use in realigning the blades to get maximum coverage from the wind. They can be used in combo with batteries to reduce the number of times the batteries are used which extends battery life. They can be loaded on to a bus so that the energy from braking the bus can be temp stored in the capacitor and then used to restart the bus or reaccelerate the bus -- that saves energy from batteries or fuel. There are lots of potential applications all of which are about improving efficiency and deploying electrical power in more places than today.

Maxwell is the main developer of ultracapacitors and has been trying to get them used in various applications to date. They have lowered the cost of a farad (capacitance measure) from $2700 in 1996 to $30 today. That reminds me of FLIR -- say 10 or more years ago. They are trying to lower costs so that more applications will find ultracapacitors to be economical. As costs drop volumes soar and margins improve -- last few quarters Maxwell has reported incremental gross margins near 100%. Most analysts that are following the stock have been there for awhile and have been disappointed in how long this process has taken -- they are waiting for the volume inflection point and it keeps getting pushed out.

There are two ways of playing this -- buy it for the long term knowing that over time the economics are only going to get better in terms of capacitance use or wait until profitability and a demand inflection occurs and while you will give up some on the stock you could save a fortune if demand keeps getting pushed out. Batteries are the main form of competition -- flywheels too.

the company has announced they have won a deal to be included in a 100-200k annual volume car for use as a temp store of power to help manage overload situations -- i.e. when every electrical part of the car is operating at once. they have $100 per car so about $10 mill in new revenues starting in 2010. The ultimate potential is enormous -- they could easily reach a billion in revenues in 10 years or so. My hope is that if this is truly successful would be for the company to be worth $10 bill up from $270 mill now. That will take 10 years or so.

still speculative so I won't buy much but at least some. I sold my MCO last friday at $34.85 so I was basically flat on the stock over the last several months including the options.