Soldier, Gold, Einhorn

A longtime friend, a Lieutenant Colonel having served in our two current theaters of operation, wrote me this morning from the battlefield. He is returning to the US in four months and wrote: “I don't understand how the market is up, gold is up, interest rates are down but unemployment is very high. I heard on CNN that the real unemployment number is close to 16%. I think the number cited is the U6 unemployment number. Am I missing something but this situation is not normal?”

When this soldier returns to the US, I don’t know what the next four months or four years hold. But I do know the crowing consensus “that the worst is over” sends shivers and wishful thinking that it’s not a lot of wishful thinking. Sadly, I suspect it is. What we know for sure: People lost jobs. They’ve lost income. They have less cash. What they own is less. What they owe is more. If they have income, they’re saving not spending. If they don’t have income they’re spending their savings--and doing and having less of both. Those that faked it till they made it, now can’t make it or fake it.

In industries, some are in permanent decline. In others, the strongest will get stronger as the weakest die. The strong will take the market share of the weak and their assets on the cheap.

The only certainty is uncertainty. The time to buy insurance is before the storm hits. With VIX low, long-term out of the money puts cheap, I’d consider an umbrella. As hedge fund manager David Einhorn brilliantly put it, “Events can move from the impossible to the inevitable without ever stopping at the probable.” Here’s Einhorn’s recent speech.

“One of the nice aspects of trying to solve investment puzzles is recognizing that even though I am not always going to be right, I don’t have to be. Decent portfolio management allows for some bad luck and some bad decisions. When something does go wrong, I like to think about the bad decisions and learn from them so that hopefully I don’t repeat the same mistakes…

This leaves me plenty of room to make fresh mistakes going forward. I’d like to start today by reviewing a bad decision I made and share with you what I’ve learned from that error and how I am attempting to apply the lessons to improve our funds’ prospects..."

Download a full copy of Einhorn's speech from Reuters.

Randomness, Optionality & Gladwell, Dawkins, Clinton and more

Randomness and optionality are the governing forces I heap my praise.

Some chance invites this past week had New York City offering a gorge at a sophist smorgasboard. First was the NY Stem Cell Foundation honoring the brilliantly entrepreneurial Joel Marcus of Alexandria Real Estate with Frank Gehry and Barry Diller. Joel's facilities and labs house some of the most cutting edge startups in the country. The following night had Bill Clinton presenting a group of us with you-are-there recap of Middle East policy from just before his presidency till today.

Two key takeaways: First, in any situation, only you, can grant the power to someone to humiliate you. Second, demography, technology and time are not allies of Israel's seemingly intractable situation. In other words: faster population growth of its hostile neighbors coupled with increased availability of GPS guided precision missiles mean time is not in its favor.

Next came intimate talks from Malcom Gladwell on why it isn't that drinking makes you uninhibited, but merely myopically focused. Followed the next day by Jim Surowiecki who spoke to a crowd on why we procrastinate, what it means and how stop doing it.

That was followed by a release party for Andrew Ross Sorkin's rising best-seller “Too Big Too Fail” which had nearly all the players in his insider's account of what just happened to our economy in attendance. The next night Richard Dawkins spoke at the New York Academy of Sciences on The Greatest Show on Earth, evolution.

And last night a traverse to Tribeca's Barnes & Noble had Dawkins again signing throngs of books. By sheer coincidence, or the draw of Dawkins, astrophysicist Neil deGrasse Tyson, director of the Hayden Planetarium, was holding court with an orbit of 20 people, talking about life, the universe and everything.

When the Barnes & Noble staff, not recognizing one of its own best-selling authors, moved Tyson to the obsolete CD & DVD section, he—as any great scientist might—refused on grounds that such a request was irrational. There, I stood in an ironic moment within the store's shelved labyrinth of letters, bookended to my left by Richard Dawkins—irritant to the irrational—and to my right Neil deGrasse Tyson—popularizer of the rational—standing his ground against store staff selling a dying medium.

The saving grace of a modern bookstore is intellectually curious people gathering to meet with each other and admired authors in physical space and buy books. And they were being herded to the music and video section. To randomness and optionality...

Electric Cars from Lux Research

Here’s the latest inside scoop from the stellar team at Lux Research:

ELECTRIC VEHICLE MARKET GROWTH REQUIRES PRICEY OIL

Demand-side projections for electric vehicles contradict the hype, says Lux Research.

Boston, MA – October 7, 2009 – Environmentalists, automakers, entrepreneurs and politicians all argue that the next generation of electric vehicle cars will be a boon for the economy and the environment alike. Despite the hype, however, the final judge will be consumers, who will be voting with their wallets – and electric vehicle enthusiasts might not like the returns, according to a new report from Lux Research.

Titled “Unplugging the Hype around Electric Vehicles,” the report takes a hard look at the economics of electric cars, including today’s hybrid electric vehicles (HEVs), as well as hotly anticipated plug-in hybrids (PHEV) and all-electric vehicles (EV). In preparing its report, Lux Research developed a demand-driven market model that calculates how fuel savings could counterbalance the higher price tags on electric vehicles. It includes projections for how the costs of these vehicles could fall as auto and battery manufacturers scale up production, and figures in the impact of oil prices using scenarios in which oil reaches $70/bbl, $140/bbl, or $200/bbl through 2020.

“Our model showed the HEV market doing well in every scenario,” said Jacob E. Grose, Ph.D., an analyst for Lux Research, and lead author of the report. “The markets for PHEVs and EVs, however, will remain small unless oil prices skyrocket. Even in the scenario with $200/bbl oil in 2020, only about 4% of the vehicles sold worldwide will be PHEVs or EVs, due to the high costs of the battery technology for these vehicles.”

Lux Research’s report is required reading for automakers, Li-ion battery suppliers, and even utility executives, who will find realistic projections of future demand for their products and services. The report also provides solid footing for government officials charged with drafting strategic policy and subsidies for their domestic EV industries.

Among the report’s key conclusions:

Oil prices are a key determinant of adoption of electric vehicles. HEVs are the only winner if oil prices hold steady at around $70/bbl. But regardless of oil prices, sales of these vehicles should reach roughly 3 million units annually by 2020. PHEVs, by contrast, will require oil prices around $200/bbl to achieve a similar level of success, and EV sales will be a factor of ten smaller, even in this scenario.

Geography and subsidies figure prominently in the adoption of PHEVs and EVs. With oil at $200/bbl, light PHEVs could be the best-selling electric vehicle in the U.S. by 2020, with over one million units sold. At those oil prices, Japan could generate the biggest demand for electric vehicles, due to the country’s high gasoline prices and generous government subsidies. Meanwhile, a lack of subsidies in Western Europe and China spells poor adoption rates in those markets for either class of electric vehicle.

Regardless of the scenario, Li-ion battery technology is a clear winner. Even relatively modest success for the PHEV and EV market will be an enormous boon for the global battery market. Costs for automotive Li-ion cells will drop from over $720/kWh today to between $405/kWh and $445/kWh in 2020 depending on oil prices. Moreover, sales of Li-ion batteries for electric vehicles in 2020 range from around $510 million at $70/bbl, to over $9 billion at $200/bbl. The market for NiMH batteries for HEVs, meanwhile, changes little in any oil price scenario, ranging between $1.3 billion and $1.6 billion in 2020.

“Unplugging the Hype around Electric Vehicles” is part of the Lux Alternative Power and Energy Storage Intelligence service. Clients subscribing to this service receive continuous research on the industry, as well as market trends and forecasts, ongoing technology scouting reports, and proprietary data points in the weekly Lux Research Power Journal, and on-demand inquiry with Lux Research analysts.

Tsunami of Thought: Three Things

I’ve been inundated by insights in a tsunami of takeaways from Lux Research. Here are three things for you.

First: take this invite to register and listen in on their call this Tuesday, October 6th, Lux Research Power State of the Market: Unplugging the Hype around Electric Vehicles, from 11:00 AM - 12:00 PM EDT

Why? Because in March of this year, U.S. President Barack Obama announced, “We will put one million plug-in hybrid vehicles on America's roads by 2015,” and almost every major automaker – including Toyota, GM, Volkswagen, and BYD – plans on introducing lithium-ion-powered plug-in hybrid vehicles (PHEVs) and all-electric vehicles (EVs). For these vehicles to succeed on a large scale, however, they must make economic sense – not simply be a niche high-end product bought for altruistic reasons. The economic viability of these vehicles will depend on many factors, including the price of oil, governmental subsidies (such as the $1.5 billion over the three years the Chinese government has pledged to green vehicles), and the reduction in vehicle costs that come from increasing manufacturing volumes. Yet despite all the money invested, governmental support offered, and hype generated, the current high prices of PHEVs and EVs compared to standard hybrids (HEVs) mean that widespread adoption remains a question mark. In this webinar, we will examine this issue using a quantitative model for electric vehicle sales through 2020, answering the following questions:

How will the price of oil affect full-sized electric vehicle sales? What role will the different subsidies offered in the U.S., Japan, Western Europe, and China play in the success of electric vehicles in those regions? How much will prices drop for the lithium-ion batteries that power PH/EVs? What technologies go into electric vehicles and what distinguishes one vehicle type from another? What are the implications of the relative success or failure of electric vehicles? How will the electric vehicle market interact with other vehicle technologies – such as clean-diesel, micro-hybrids, heavy vehicles, and e-bikes?

Next, within days, they’ve also released two killer reports with shocking findings for their clients.

The first, “Alternative Power and Energy Storage Financing: Can VCs’ Good Times Last?” notes the alternative power and energy storage sector is on pace to raise a record level of venture capital (VC) in 2009, with the majority going to battery technologies. However, the mergers and acquisitions (M&A) have slowed drastically, and initial public offerings (IPOs) have dried up, limiting exit opportunities for VC-backed companies. And IPO markets are struggling and starting to weigh on VCs. Leading executives at venture capital firms indicated enthusiasm for alternative power and energy storage technologies in general, but cited real concerns over time to market, capital requirements, and exit opportunities. Their views suggest that VCs' interest in alternative power and energy storage technologies is broad but not deep. VCs are likely to desert alternative power and energy storage, forcing a rethinking of financing for emerging technologies in this field.

The second, “Finding exits for Biofuels and Biomaterials Investors” notes venture capitalists (VCs) planted $1.12 billion in 2008 into industrial and agricultural biotechnologies like biofuels, biomaterials, and enzymes, a 26-fold increase from 10 years ago and a cumulative total of $4.17 billion. But even as investors venture ever deeper into these new fields, they have not yet found a clear path to exit. To date their fixation on bioenergy companies has been a response to policy decisions and investments by leading VCs, but to see returns grow, they will need new strategies. They should seek technologies that support multiple feedstocks and products so they don’t wander into dead ends like corn ethanol, and pursue opportunities in food, water, and carbon that balance the challenges inherent in biofuels and biomaterials.