The following is an unofficial and edited transcript from Monday's "Mad Money."
It’s green week on CNBC and that means talking about the collapse of a once great thesis. Back on April 16th of 2007 we recommended a basket of green stocks, and they made us a lot of money as long as oil was going higher. But with the incredible collapse of crude and natural gas, everything green has withered and died. "All the leaves are brown, and the ink is red," to corrupt Cramer fave the Mommas and the Poppas.
The stocks Cramer picked out for the first green week back in April of 2007, when oil was at $63.31 a barrel: Shaw Group , Foster-Wheeler , First Solar , MEMC, BorgWarner, Tetra Tech , OM Group and Fuel Tech , all had a great run between when he picked them, and November 6th of 2007, the start of our second green week. In that period the green stocks were up 65.3%, compared to 3.5% for the S&P, in a large part because oil surged to $96 a barrel—everything alternative energy is inextricably linked to oil prices. By the third green week, the week of April 21st 2008, oil was up to $117 a barrel and our green stocks were up an average of 76% from the original call, while the S&P 500 was down 5.5% in the same period.
If you’d sold then and there, you would’ve made a lot of money. In fact, the green basket is exhibit A against buy and hold, and in favor of bulls make money, bears make money, hogs get slaughtered, and you were slaughtered if you didn't take a quick 65% or 76% gain.
Since then the green thesis has collapsed along with oil and natural gas prices. With crude now trading at $55 a barrel, our green stocks are down 37% since he recommended them in April of 2007, outperforming the S&P, but still losing you a lot of money. Green works as a philosophy, it works as trading philosophy when energy is headed higher, but not an investment philosophy, and we are about making money, not making cleaner skies, as much as we, too, have a predilection for clean air.
But when you look at how our green stocks have done since we last went over them this April, they’re down 58% when you exclude the three stocks we removed from the green basket, BorgWarner, OM Group, and MEMC, while the S&P 500 is down 38% in the same period—these stocks have done even worse than the market.
What the heck happened to these once great green stocks? Two things: lower oil prices, and hedge funds gone wild.
Some of this is history repeating itself. The Carter administration began all kinds of green initiatives that eventually went nowhere when oil prices came back down under Reagan. Way back in 1977 Carter set a goal of getting 20% of America’s energy needs from renewable sources by the year 2000, but today our use of renewable fuels remains at 6%, the same level as when Carter took office. Carter set up generous tax incentives for solar energy and that fuel we love to hate, ethanol, he insisted that U.S. automakers build more fuel efficient cars with a goal of getting to an average of 27.5 miles per gallon over the following decade, instead we fell in love with sport utility vehicles, which are classified as light trucks and don’t need to meet the same fuel efficiency standards as cars.
By the time Carter left office oil imports had fallen from 9 million barrels a day to 7 million a day—now they’re back up to 12 million a day. Part of the push for green energy fell apart when oil prices declined, but Ronald Reagan also gutted funding for solar research when he took office.
So the collapse of the green thesis is nothing we haven’t seen before. But the speed and depth of the declines in green stocks is something new.
Take, for example, natural gas, which was one of our green ideas—it’s much cleaner than oil or coal, and it’s plentiful in the United States. We can use it to run our cars. But the natural gas thesis blew up in our faces, and the natural gas stocks plummeted. Some of this is just because of supply and demand—the pullback in energy demand has hit natural gas prices hard. Some of it was Congress not putting a natural gas string on the $25 billion loan package to the auto companies. In fact, everything but natural gas got endorsed. Then we were counting on the Pickens plan to create new demand, but Proposition 10 in California, which would’ve provided a big boost to natural gas fueled vehicles, was defeated. Nat gas turned out to be a big smelly loser, and our stocks lost with it.
The natural gas companies were highly leveraged—many of them had raised tons of debt to buy up land to drill on. That works when the commodity price is high, but when it pulled back it left the natural gas companies overexposed. Plus, the natural gas companies for the most part don’t pay dividends, which has allowed them to be slaughtered in the market since there’s no cushion. The political support just isn’t there, as Obama doesn’t view natural gas as a cleaner fuel.
Worst of all, hedge funds crowded into these stocks, and once they started falling, the forced selling by hedge funds faced with big redemptions has been brutal. Then there are a lot of hedge funds that will short a stock and an ETF that contains the stock, which lets the short-sellers create a free fire zone where it’s nearly impossible for the buyers to come in and support the stocks. It’s literally the kind of interlocking fire that allows for world war one style machine guns mowing down—the shorts have machine guns and tanks, and the longs have cavalry and single-shot rifles. The fact that our pro-shortseller SEC loves these ETFs, as do the exchanges because they’re the only new listings in town, only makes things worse.
Bottom line: now that oil prices have collapsed and so many hedge funds got caught with their pants down in natural gas and alternative energy stocks, it isn’t easy being green; good for the soul, not good for the wallet.
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