Thursday, March 29, 2007

Diversa Closes Share Offering

ast night in after hours trading, Diversa Corporation issued a press release concerning the closure of a previously announced $100 million share offering(see below). The expedient closure of this agreement bodes well for the future Diversa. First the going concern notification announced by Diversa is now a non-issue, second the rapid closure tells me that large institutions with deep pockets believe in the longevity of the company.

As I mentioned before, my main concerns with Diversa were the going concern notification and T.Rowe Price's discontent over the purposed acquisition of Celunol Corp. With the major issue of insufficient funds now resolved, I feel more confident that the Price issue will also conclude without much of a scene.

There appears to be two likely scenarios. First, if Price can convince the other major holders and the board of directors that the deal was inappropriate from conception; the market will likely return DVSA's share price to where it was trading at prior to the announcement. Second, if the board can provide sufficient evidence to Price and the other majors that the merger is in the best interest of the shareholders, the market will like wise reward DVSA a higher premium as it strengthens its position in the emerging cellulosic ethanol industry. Even more importantly, the share offering is not contingent upon Diversa's pending merger with Celunol Corp. Ultimately this means that these well funded institutions believe Diversa will emerge a winner with or without the addition of Celunol.

Wednesday, March 28, 2007

Speculative Buy

Bought DVSA at $7.24 today. Looking to move past resistance at $7.50 with volume.

Tuesday, March 27, 2007

Updated Watch List - DSTI STKL DVSA

No go on DayStar. Stock gapped up this morning slightly above the 200 DMA at $6.17 and was met with resistance. DSTI may trend lower and bounce of the bottom trendline before moving higher. This may provide a low risk entry point.

I am however adding two more stocks to my watch list: Sunopta Incoporated (STKL) a company I have followed for years, and Diversa Corporation (DVSA); two potential cellulosic ethanol plays which could generate sizable returns as we gear up for the summer driving season.

STKL, a diversified healthy product company, manufactures a continuous steam explosion technology which is a critical component needed for the break down of cellulosic biomass. The company is profitable and balanced nicely with a booming organic/healthy foods division and a minerals group. More importantly they have set up significant contracts with major ethanol producers around the world including: Abengoa Bioenergy and GreenField Ethanol Inc; the 2nd largest ethanol producer in the world and largest Canadian ethanol producer, respectively.

My only apprehension is the stock is trading at a multi-year high and commanding a pricey P/E of 64. That being said, strong stocks often continue to strengthen and A pull back to $11.75 range might provide an attractive entry price.

DVSA, a specialty enzymes developer with a portfolio of enzymes capable of breaking down biomass into biofuels has recently been hammered over concerns with its purchase of Celunol Corporation. T.Rowe Price, a 7.9% share holder has voiced their disconent over the purposed acquisition in a filing on March 12. Another alarm was a going concern notification listed in there annual 10-K recently filed with the SEC.

Aside from the disconcerting issues mentioned above, the stock does present an interesting speculative buy at these levels. DVSA is currently sitting near its 52 week low(support) and the share price seems to have stabilized on substantial volume, indicating the sell-off could be near completion.

Fundamentally, if DVSA can complete their purposed $100 million private placement and the Celunol merger, the stock might bounce back significantly from its current over sold levels. The Celunol merger could also prove to be more beneficial than anticipated given that Celunol currently operates two fully functioning cellulose ethanol pilot facilities. Integrating Celunol's patent technology with DVSA enzyme portfolio could prove to be interesting. However, at this point I believe there is still substantial risk involved and thus I will watch.

Monday, March 26, 2007

Keeping an Eye on DayStar

DayStar Technologies Incorporated(DSTI), an integrated photovoltaic foil producer specializing in the copper-indium-gallium-selenide semiconductor(CIGS) material system has formed a nice uptrend since it’s bottom of $2.00 late last year and is now simultaneously testing the upper trendline and the approaching 200 DMA.

Oil could continue higher due to current geological tensions and like wise so too DayStar; however things could get interesting should volume test the 200. I will be keeping an eye on them tomorrow.

Thursday, March 22, 2007

Understanding Inflationary Pressures - Oil

Ah at last the market has direction...right? Like clock work the markets sprang to life immediately after the Federal Reserve announced its intention to hold interest rates at 5.25%. The Fed concluded its two year, 17 quarter-point consecutive rate hike in June of 2006. Since then we have seen inflation drop from a high of 4.32% to a low last year of 1.31%. Recently, inflation has creep back as last weeks economic data reported that price pressure still remain a problem. "Excluding food and energy, consumer prices have been rising this year at an annual rate of 3 percent, far above the Fed's 1 percent to 2 percent comfort zone."

Despite a weakening housing market and Greenspan's economic recession threat last month. The Fed reiterated it was more worried about inflationary pressures than weak economic growth. They however, neglected to comment on the likelihood of future rate hikes. "In its place, the Fed said that any 'future policy adjustments' would depend on the performance of both economic growth and inflation."

Interest Rates

The manipulation of interest rates are specific monetary policies which lag economic activities. Meaning actions today will take time before full maturation. For example, during 2005 and most of 2006 we witnessed simultaneous rate hikes coupled with inflation. It wasn't until the end of 2006 inflationary pressures dropped drastically. Interestingly, the significant drop in inflation during mid June timed perfectly with the Fed's final rate cut. Could it be that the Fed miraculously timed the final rate cut to coincide with inflations dramatic drop? Why then with rates effectively unchanged from June 2006 to now, has inflation only recently start to trend higher? Could it be that the economy was growing at too rapid of a clip, thus causing demand-pull inflation or are we witnessing the occurrence of multiple catalysits.

Cost Push Inflation and Energy

Cost Push, demand-pull, its all inflation so who cares? This is true, however they each have very different implications. Without going into excessive detail, I will try to convey the basics between these two as well as highlight their individual significances.

Demand-pull inflation or the inflation the Fed is attempting to control originates from increasing aggregate demand, or the sum of all the demand on the economy. General causes for an increase in demand stem from factors including: increase in government spending, increased access to money suppy(rate cuts) or increases in global prices.

Simply put, as the economy grows, increases in consumption lead to decreases in inventories, which leads to increases in production, decreases in unemployment, increases in income and in turn additional increases in consumption. This results in economic growth and if left unchecked will result in inflation as the aggregate demand for goods and services out strips aggregates supply. This type of inflation can be corrected by decreasing the money supply such as the Fed has done during the past two years.

On the other hand Cost-Push Inflation, or supply shock inflation, results from a reduction in aggregate supply. This reduction in supply can result from an increase in wages or an increase in the price of raw materials when no viable alternative is available.

In resent history we witnessed this during the 1970s petroleum shock. Due to oil's inseparable connection to economic growth, any supply constraints will inflate the cost of everything from the food we eat to the computers we buy. As the prices of these goods and services rise with the cost of energy so do inflationary pressures. Attempts to control this type of inflation through the use of rate cuts will only be successful once economic growth is stifled(recession) and the demand for the supply diminished. Only then will prices correct and inflationary pressures be eased.

In 1996, a barrel of oil was selling for around $10. A decade later, oil hovers near $60/barrel for an impressive 500 percent increase. Observing the chart posted in the link below; I plotted the approximate price of crude using the United States Oil Fund (USO), an Amex listed ETF which roughly mirrors the price of oil. Observe how oil makes consecutive highs throughout 2004, 2005 and the first half of 2006. During the exact same period inflation and rate hikes crept higher. Then in August of 2006 the price of oil collapsed and and with it so did inflation. Now with oil on rise again we are witnessing a similar pattern. The question is where do we go from here? Will oil continue higher as the summer driving season approaches? Will the Fed continue raising rates in an attempt to curb inflation? And more importantly, what will amount to Greenspan's talk of a recession.

Tuesday, March 20, 2007

Market Uncertainty

The chart above was originally posted by Woodshedder

Without proper market direction we find ourselves in the land of high volatility. With volatility the opportunity presents itself for sizable gains as well as disappointing and frustrating losses. One minute your indicators signal a prominent buy and the next minute the market moves in a totally unanticipated direction and you find yourself under water.

I have had several trades go unexpectedly against me as of late. Granted, I do trade highly speculative equities but this month’s losses were enough of a catalyst to make me refocus. I liquidated all of my positions with the exception of Microvision Inc. (MVIS), my only long term holding. As of March 20, 2007 I am now in the hole $1600. Although not a terribly large loss for the year I view it as enough of a warning to reassess my strategies and execution methodology.

Today also marks interesting territory as the NASDAQ is currently sitting at 2400; once support, now clearly a level of resistance. Tomorrow will print an important test. Can we break through this barrier on significant volume or do we falter and continue downwards into a more pronounced bear market? I believe the answer will weigh heavily on the Federal Reserve announcement tomorrow. Until the market can get some definitive direction I for one am going to adjust my trading strategies so as not to continue bleeding my account.

1) Limit absolute number of trades - I believe part of my problem early this year was partly attributed to over trading. Not only is this an easy way to rack up costly commission charges, but excessive trading can lead to sporadic and inappropriate buying and selling. Consistent profits are built not by multiple trades, but by only acting on those trades with the highest probability for success. Over trading can lead our minds to believe we are seeing a perfect setup, but we are merely witnessing mediocre setup after mediocre setup. More often than not, our most successful trades will be those that jump out and grab our attention.

2) Take the money and run - In the words of The Steve Miller Band, "Go on take the money and run." These simple lyrics fit perfectly with buying and selling equities. After a sizable 20% run up, why am I still sitting around waiting for further gains? Markets without clear direction do not reward though that camp around on a position expecting additional run ups. After all, no one goes broke by selling too early.

3) Buy at support and sell at resistance - Arguably one of the most over stated pearls of market wisdom, but how many of us actually do this consistently? We are ever so eager to buy those high flying stocks, but why do we run in fear when our favorite companies are being shunned by the market? A recent example of this is IMAX. After totally being obliterated by the market late last year the stock was sitting at multiple year lows. Did I act and buy those calls like I considered doing? Of course not I was fearful that more bad news was on the horizon.

4) Find your winner and wait - Even in sub optimal market conditions there will be those stocks that out perform. The problem is trying to find that match. Living in Seattle I was exposed to Microvision Inc. late last year. This totally reformed company is a god send with a product pipeline potentially worth billions in revenue. Regardless of market sentiment I will be buying this stock on any dips.

Friday, March 16, 2007

AWNE Update

I was stopped out of AWNE today for a 9% loss. This was fortunate since it plummeted today to a low of $1.34. It looks like even more of a steal at these prices, but I am not about to play "Catch the falling knife with your bare hands." Perhaps I will look for a reentry once the volatility settles.

Thursday, March 15, 2007

Speculative Long

AWNE - $1.80

During my travels to Costa Rica in December; I was privileged enough to stumble upon a precariously perched wind farm in the hills near Volcano Arenal. Aside from some minor scouting I didn't investigate the farm in any great detail. However, reflecting back I recall two major impressions: The convoluted location and the shear power elicited by hundreds of 50 meter tall turbines thundering in the wind.

Having been a huge advocate of economically competitive alternative energy, I have followed the development of the wind industry starting with General Electric's 2002 bid to buy Enron Wind for $358 million-a profitable business of the now defunct Enron Corp. General Electric has in turn made out quite nicely on their initial investment with, "GE Energy delivering 1,346 wind turbines worldwide during 2005, completing the year with revenue exceeding $2 billion - more than a 200% increase over 2004's total." General Electric's backing and their performance thus far has defiantly strengthened my belief that wind energy will continue to grow in global popularity as civilization searches for cost effective, cleaner energy sources.

General Electric aside, the US wind market has grown significantly as the cost to build these farms as decreased substantially over the decades. Back when the first commercial scale wind turbines where installed in the 1980s, installed costs ranged higher than 30 cents/per kilowatt-hour. Today the situation is much different. Modern farms are now being built for less than 5 cents/kWh with the current Production Tax Credit.

Growth in 2005 proved to be a very impressive for the wind industry with installments reaching over 2,400 megawatts (MW) or $3 billion worth of new generating equipment in 22 states. The developments of 2005 boosted the total U.S. installed fleet by 35% bring the total capacity to 9,149 MW, or enough energy to power over 2 million homes. In other words, the industry is experiencing massive growth.

In order to participate in this growth, I did a little research. First, I ruled out massive companies such as General Electric and FPL Group, Inc. which only attribute a small portion of their earnings to the development of wind energy. Next, I tossed out the crummy pink sheet, non filing, near defunct, token companies such as U.S Wind Farming, Inc. Finally, I shied away from pure plays trading on foreign exchanges like Gamesa Corp due to insufficient liquidity and pink sheet status.

I was finally able to locate a well run pure play Canadian based company, Americas Wind Energy, which acts as a virtual manufacture of Lagerwey wind technology in the Americas. Arguably, one of the more attractive features is the company’s direct drive technology which does not use a gear box and thus results in less mechanical strain, less down time and ultimately longer equipment life.

Although the company has signed several contracts over the past months, they are still in their infancy and should be viewed as a highly speculative investment. That being said, I watched as AWNE dropped over 20% the last 4 trading days on light volume. Technically the chart is entering into over sold territory, as it collapsed out of its trendlines and is now sitting at support. I took advantage yesterday and entered a position at $1.80.

Monday, March 5, 2007

The Issue of Oil

A March 2005 OPEC meeting in Esfahan, Iran shocked the oil markets when ministers made comments claiming that for the first time in OPEC's 45 year history the cartel had lost the ability to govern the price of crude oil. "There is not much we can do, Algerian Oil Minister Chakib Khelil told reporters. OPEC has done all it can. Qatar Oil Minister Abdullah al-Attiyah said."

While this news may shock some it should come as no surprise. The topic of oil and its depletion has generated significant media coverage over the last couple of years and for obvious reasons. From its low of $10 a barrel in 1998 to its record close of $78 in June of 2006, oil as a commodity has made substantial gains. As with all commodities the underlining governance of price is the interaction between supply and demand. Critics will argue that oil is falsely overpriced due to extrinsic issues such as escalating political tensions with Venezuela or the possibility of conflict with Iran. While these issues have relevance, one must realize that the price of oil is not controlled by greedy corporations like Exxon Mobil or corrupt despot governments like Saudi Arabia. It is ultimately controlled by you and me, the consumer.

From British Petroleum’s 1999 surprise name change and its investment in solar energy, to Goldman Sach's profound warning that oil is reaching the initial stages of a "super spike"; Multinational corporations are telegraphing very distinctive messages. Chevron's Chairman and CEO David J. O'Reilly succinctly put it, “One thing is clear: the age of easy oil is over.”

I could continue with additional examples of corporate maneuvering such as DuPont’s investment in biofuels or GM's ethanol push but I believe it would be redundant due to the media's current feeding frenzy. Given the context of this blog; I believe it far more important to discuss why oil will never again see $40 a barrel and what this means for you and I as investors.

The Future of Oil

Some will insist that we have seen this before, that the exact same situation occurred with the 1970s oil crisis. From 1970 to 1982 the price of oil moved from a low of $1.35 to a high of nearly $35 a barrel, or a twenty-six-fold increase. For oil to make similar gains today, the price would have to move above $250 a barrel(adjusted for inflation)! Fortunately the price of oil has quite a ways to go before we feel the pain endured during the 1970s. So why then are we seeing similar investments by corporations and governments to squelch our dependency on oil?

Unlike the oil crisis of the 1970s, which was predominantly a politically derived problem, our current energy conundrum stems from the inherent geological constrains of the Earth. Due to petroleum’s finite nature, there is a predetermined limit to the amount we can produce. In June 1996, in an Issues in Science and Technology article, James J. MacKenzie discussed how oil naturally occurs in very large pockets such as the Mexican Cantarell and Saudi Ghawar fields. Due to their massive size these pockets are discovered in the very early stages of oil exploration. MacKenzie states: "The largest 1 percent of oil fields contains 75 percent of all the discovered oil, and the largest 3 percent contain 94 percent of the oil." As exploration continues the average size of discovered fields will decrease. In the later stages of oil discovery companies must drill more and search even more obscure locations to find the remaining oil reserves,which ultimately leads to a higher exploration costs per barrel. According to the U.S Geological Survey, global discovery of large new fields peaked in 1962...

New Frontiers

Areas such as the deep waters in the Gulf of Mexico provide relatively uncharted potential for oil discoveries such as the massive discovery in September of 2006, by Chevron. Cambridge Energy forecasts that this discovery will produce 800,000 barrels of oil a day within seven years and account for 11 percent of US oil production. However, for Chevron and its partners to bring this oil online, years of development and billions of investment dollars will be required. Simply put, it is technically difficult to extract oil from fields located 5 miles below the surface of the ocean.

As the price of oil has moved higher with demand, the exploitation and development of previously uneconomical energy sources such as deep water drilling and oil sand mining will see rapid growth. Suncor Energy Inc, the oldest and second largest refiner of oil sands expects to double it’s currently production capacity to 500,000 barrel a day by 2012. The company estimates that this endeavor will cost them $2 billion dollars in 2007 alone. While this move and the recent discovery by Chevron are both significant strides toward securing our energy needs, they fail miserably when compared to the world’s insatiable demand.

According to the 2006 Energy Information Administration's annual report; world demand for oil is expected to reach 118 million barrels a day by 2030 up from the current 86 million, with the US leading consumption at over 27 million barrels. For the world to meet these lofty goals, production rates must increase drastically from their current levels. In the energy crisis of the 1970-80s we were able to avoid economic shock by significantly increasing oil production and bring online new energy streams such as nuclear. From 1980 to the end of the decade OPEC was able to increase petroleum production by 35 percent and between 1980 and 1990 nuclear power generation doubled. These measures greatly increased the total energy capacity and thus eased prices. Today the situation is much different. There are no major petroleum streams waiting to come online and there is no economically viable energy replacement like nuclear which can accommodate our energy needs. Even more disconcerting is our increasing reliance on OPEC. With US oil production in decline since 1970, we are now importing >50 percent of our daily petroleum needs.

Global Peak Production?

Often a topic of tense controversy, the idea of global peak production is staunchly divided into two groups. "Peakers", such as energy banker Matthew Simmons believe that Saudi Arabia and the world are very near or past peak global production. Which if manifested, will result in price hikes as the supply demand equation becomes skewed. Skeptics like Morry Adelman, an MIT economics professor, believe that there is plenty of oil remaining as long as consumers are willing to pay the price. I agree with Professor Adelman's view that as the price of oil increases with demand, previously ignored prospects will be developed due to improved economics. However, I find it ironic that the most technologically advanced nation in the world has been in an irreversible decline for over 30 years. If all it takes is more technology and strong consumer demand, then why has the United States oil production been in critical decline since the 1970s?

One fact is clear. The global economy needs oil for continued growth. Even more important, as China with its 1.5 billion inhabitants emerge as a major economic player, the demand for petroleum will escalate. If we can accommodate this demand with a combination of new petroleum streams and a shear cornucopia of alternatives, then the world’s economy can continue to grow. If we are unable to meet this demand and the worlds petroleum supply is in fact at or near its peak then we could be looking at a far worse scenario involving possible stasis, recession or perhaps Armageddon.

Being an optimist and a firm believer in a market economy, I feel that we can meet this challenge and move into a post petroleum era relatively unscathed. If as a society we can overcome this obstacle and avoid an all out economic collapse, then the savvy investors who capitalize on this trend will be greatly rewarded. Due to this emerging trend, I will focus my next post on a discussion of possible investing strategies for the impending energy crunch.