A look back and a look ahead

We are about to leave this decade and I tend to hear commentary saying that it is one that people will want to forget. It was plagued with 2 devastating bear markets, scandal, terrorism and a near collapse of the global financial system with the US as a shadow of its former self on the verge of being over taken by China as the super power of the world. We enter 2010 with consumer confidence still near all time lows (although slowing rising now), mistrust and hatred of anything to do with Wall Stree, consensus thinking of deficits as far as the eye can see and a new normal of subpar growth in the years ahead with the high risk of a double dip recession. All of this has resulted in the typical retail investor to be characterized by a seemingly unshakable deep rooted pessimism.

Exiting the 1990's into the 2000's it was the complete opposite. We had just experienced a roaring bull market thanks to the longest economic expansion ever, budget surpluses as far as the eye can see with the US as the undisputed superpower of the world. We were supposedly on the cusp of a new era whereby thanks to the technology driven expansion and the infancy of the internet, the old business cycle of boom and bust was no longer applicable - there would be no more busts due to the growth that lied ahead. Therefore, the high P/E of the market was justified. Consumer confidence was at all time highs and the typical retail investor was heavily invested in stocks like Nortel, Yahoo and dot com names and many used margin or took out loans to do so.

A lot of newbies who weren't involved in the markets 10 years ago might be saying "how stupid could people have been to believe there would be no more boom and busts and to buy dot com stocks on margin"? Well, you had to have lived through the 90's to understand why. The economy had expanded for 9 straight years. If you watched for 9 years the market go up on average of about 18% a year with the last 5 years going gangbusters it would have made you a believer that bear markets were exinct. Watching the market go up week after week, month after month, year after year would have been enough to convert every last skeptical retail investor to a "new era" bull. Then when the internet came along it was simply the icing on the cake to seal the deal. Of course we all know what happened.....the market made fools of as many men as possible.

Now we have come full circle as I have described. It seems inconceivable that we could see a roaring economic boom this decade just like it was inconceivable that we could ever see a devastating recession heading into 2000s. This doesn't automatically mean we will see a roaring boom this decade because few are expecting it, but, I would say odds are far higher of it happening when the expectations are low as opposed to sky high like they were 10 years ago.

Every decade tends to have a dominant investment theme. In the 1970's it was energy/materials, in the 80's consumer products, in the 90's technology, in the 00's energy/materials and emerging markets. What will this decade be? Odds are it will not be energy and materials again. Perhaps technology will be at the forefront once again. Alternative energy/clean tech and biotechnology are subsectors that offer tremendous growth potential but haven't yet become market leaders. Alternative energy is definitely commanding serious respect. Money is pouring into the sector as governments provide grants and subsidies for development. It is the most popular sector for venture capitalists right now as well. The problem for investors is sorting out the winners. Which subsector has the most potential? Is it wind, solar. biofuels or geothermal? Geothermal is an interesting one. It’s under the radar right now. Geothermal is the cleanest and most efficient out of the 4 but it has it's weaknesses as well, namely, it is only possible to construct plants in a limited number of areas in the world, it is capital intensive and takes a long time to build a plant. But once a plant is up and running its costs and output are known with certainty and there are zero carbon emissions.

4 speculative "pure play" geothermal stocks out there trade on the TSX and they are
MXY, GTH, SRA and NGP. These companies are quite small but many of these could end up being takeover candidates from big utility companies one day. Right now these companies are in early development stages losing money which makes them speculative. These stocks will be influenced by news developments regarding government grants/subsidies and by developments towards the global level of commitment in reducing greenhouse gases. It could be a month, a year before geothermal catches fire which is why if you play it, you have to use a buy and hold strategy with very wide stops....if none at all.

I intend to learn a lot more about geothermal in the near future. I currently have a position in GTH with a watchful eye on the others I mentioned.