Solar Cells and Electric Cars


This week the volume of Value Line that contains the power companies arrived, which included the makers of solar cells like First Solar.  There was also an article in the Wall Street Journal that talked about the electric car companies (Fisker in particular) and the battery makers.

All of the solar companies and other alternative energy companies saw huge spikes in their share prices a few years ago, some going up to $150 or more.  All also saw a huge fall, some to as low as a dollar a share.  Before jumping into one of these bargains, realize that many of these can and probably will go bankrupt soon.

Fisker seemed to show some promise, and got a lot of government backing (as did the solar cell makers).  There were also companies that made batteries for electric cars that saw similar backing.  The share prices of these companies is being battered as either the market is just not proving to be there or there is fierce competition with cheaper workers in places like China.

Any engineering junior worth his salt could show you the issue with solar cells.  While they are nice for providing small amounts of power in places where it is difficult to connect to the grid – for example, for a highway sign or an LED light in your lawn – a simple calculation will show that enormous amounts of land area would need to be covered in solar cells to provide even a small amount of the domestic power supply (think covering half of Arizona in solar cells).  These cells would need to be cleaned and maintained.

This makes it a lot more expensive than using coal, natural gas, oil, and uranium.  It would also require a huge number of batteries or some other way to store the excess power generated during good days to make up for the lack of power during cloudy days or night time.  Finally, the places that are good for solar don’t include the high voltage lines needed to get the power to the grid – and this can cost tens of thousands of dollars per foot!

The biggest issue is even if there were enough cells and the transmission lines were in place, the power would still cost more per kw-hr than that produced from fossil fuels and a lot more than that produced by nuclear.  The technology needed to produce cheap solar cells with high efficiency that don’t require extensive maintenance is simply not there.  Doing this on a massive scale simply won’t change that.

Likewise, electric cars enjoy a huge government subsidy (something like $10,000 per car), and yet they still cost a great deal more than similar gas-powered cars.  An all-electric car will cost $30,000-$50,000 even with the subsidy.  A similar gas or diesel car will cost between $12,000 and $20,000.  Even given that electricity is cheaper than gasoline, partly because the users of electricity don’t currently pay the gasoline taxes used to maintain the roads and partly because of the need for refiners to make all of the specialty blends for different regions of the country, one would never make the money back within the life of the car from savings on fuel costs.  Electric cars also have a finite life span since the life of the batteries degrade with every charge and the cost of the batteries is significant, meaning there will be a lot of electric cars sitting in the junk yards in about 10 years while their gas-powered siblings are still running on the roads.

Finally, electric cars actually require more fuel per mile than gas-powered cars.  Once the batteries are charged, they run with an efficiency of about 30%, but the power generation at the power plant only has an efficiency of maybe 40%, and there are additional losses in transmission and huge losses in charging the battery (think of all that heat generated).  This means that the efficiency of en electric car, from power plant to wheels, is less than 0.30*0.40 = 12%, compared with about 23% for a gas-powered car (and greater values for a diesel).  This means the electric car is burning more fuel – primarily coal – than the gasoline powered car!  Once again, having a lot of electric cars will not solve this problem.

Many investors rushed into these companies, trying to cash in on the next big thing.  The same thing happened when electricity was invented and power companies first started to spring up.  The same thing happened when VCRs were invented, and when computers were invented, and when the Internet was started.  In all of these cases, investors poured huge amounts of money into companies with no earnings and an unpredictable future.  This lead to a bubble that eventually came crashing down, and a lot of the companies disappeared.  Even the stronger companies that survived and went on to thrive (General Electric, IBM, Amazon) saw there share prices fall dramatically.

The lesson here is not to chase bubbles as new technologies are invented.  Instead, wait for the dust to settle and the clear winners to emerge.  There will always be time to scoop up shares at discount prices once companies have started to make real earnings.  Rushing into stocks because of worrying about being left behind leads to bad decisions.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

‘Tis the Season to Reduce your Taxes


Ironically, the changes to the tax law being proposed by various billionaires would actually not affect their taxes.  The reason is that the changes would affect income, and people who become and stay wealthy generally have very little income.  You see, if you own a million shares in a company (maybe starting with a thousand shares that then split a bunch of times), your net worth would increase as the price of the stock increases.  You don’t pay taxes, however, until you sell some shares.

In a way this is fair, in that you really don’t have access to the money until you sell the shares, and the money is at risk until you sell the shares.  All of the value could disappear if the company got into trouble.  You are also paying taxes each year, in that the company is paying corporate taxes on any profits they make, which reduces the value of your shares or the dividend you receive.  Probably the most unfair thing about the situation is that a wealthy person can start a foundation and then “give” all of their shares to it, appoint their children and heirs as officers, thereby guaranteeing them lifelong employment and access to the facilities and assets of the foundation.  In doing this, taxes are never paid (capital gains or death taxes) and yet the money made benefits their descendents.  (Author’s note – this is how I understand it works, but I certainly am not an expert.  Comments to correct any misstatements would be much appreciated.)

If you have a few billion dollars worth of shares, but only need a couple of hundred thousand dollars to pay for expenses (you wouldn’t have mortgages or car payments since you would buy everything for cash,  so $200,000 would go a long way), you would only need to sell enough shares to take out $200,000.  You would then only pay taxes on that cash.  So even if you made a billion dollars in appreciation from your shares, you’d only pay income taxes on the $200,000 worth fo shares that you sold, and then you’d only pay taxes on your gain on those shares.  You might also not need to sell shares if the company was paying a substantial dividend (in that case you would pay taxes at the dividend rate).

You don’t need to be a multi-millionaire to do some wise tax planning,however, and this is the time of year to make some last-minute trades to help your tax situation.  Here are some tips (please check with your accountant – every situation is different and the rules can change):

Sell losers to offset winners: In April, you will pay taxes on your net gain.  If you make $1000 on one stock and lose $1000 on another, your net gain will be zero.  Most smart investors will sell shares in a position in which they lost money if they sell shares of a stock in which they have a large gain.  I generally don’t advocate selling a stock just because of taxes, but if you are selling a big winner anyway (for example, you have a stock that has gone up so much that it is now a large portion of your portfolio and you are selling half of the position to trim it down to size), it makes sense to also close a position that just didn’t work out and doesn’t have much promise.   Conversely, if you are selling stock at a loss, you may want to look at your winners and see if you want to trim them down.

Sell losers to offset income:  You can also offset up to $3000 of your regular income by selling stocks at a loss.  This is another good reason to get rid of your losers.  You can also carry some of the losses forward into future years.  Check with your accountant on how to do this.

Be wary of wash sales:  Maybe you’re tempted to sell some shares of a losing position, but you still think it has promise.  Avoid the temptation to buy back the shares within 30 days (or buy additional shares and then sell your original shares within 30 days). The IRS will consider this a “wash sale.”  They won’t send you to prison, but you won’t be allowed to deduct the loss.  The same goes for starting an “essentially identical position” within 30 days, for example if you sell one S&P500 fund but then buy shares in another company’s S&P500 fund.  .  Before trying any fancy maneuvers, check with your accountant.

Note that there are no wash sale rules if you have a gain – the IRS is happy to have you sell shares at a gain and then take up the same position.  Usually this would make no sense, but if you are afraid taxes will go up in future years – a good possibility this year – it may make sense to sell some shares now and pay the lower tax rates, particularly if you will need the money within the next five years or so.

Selling short against the box:  One way of locking in a gain but delaying when the taxes are realized is to sell shares of the same company short (this is called “selling short against the box”).  For example, let’s say you have 100 shares of XYZ which is at $20 per share, and you bought the shares for$10 per share, for a $1000 gain.  If you sold them today you would need to pay taxes on that $1000 gain this year.  If you sold 100 shares short against the box, however, and then waited until January to have the two positions wash, you could delay the gain into next year.  Note that if the stock went down the gain on the short sale would exactly offset the loss on the shares, and vice versa.  This strategy may not make sense this year since it looks like taxes, especially taxes on capital gains, is likely to go up in 2013.  It may actually make sense to take gains this year instead of next.  Once again, check with your accountant since the rules may have changed.

Put money in tax advantaged accounts:  Don’t forget to open and fund IRA’s, educational IRA’s and the like.  In some cases you get a tax deduction this year.  In other cases you get to withdraw the funds tax-free if you follow the rules.  Opening and contributing to these types of accounts are great not just because of taxes.  They also make you put money away that you will need later.  Someday you will no longer be able to work, and some day your kids will want to go to college.  It’s good to put away some money now.

‘Tis the season to save on taxes.  Take a look at cleaning up your portfolio, fund your tax-advantaged accounts, and talk to your accountant for strategies specific to your situation today.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What Kind of Stocks Should You Buy Now with the Fiscal Cliff Looming


Chances are very good that we will go over the “fiscal cliff,” and even if we don’t the long recession we find ourselves in will continue.  The current environment of higher taxes, more regulation (especially environmental regulation like a carbon tax), and an unpredictable environment created by unprecedented government action in the housing market, energy sector and food sectors will continue to make investors very cautious.  The effects of the new taxes imposed by the health care law and new regulations that will make hiring and keeping employees far more expensive will also have an unpredictable effect on hiring.  Fewer people working means less production of goods and wealth, fewer paychecks and less spending, which could affect a wide range of consumer companies.

This type of environment discourages investment.  Many investors may feel like selling everything and burying their wealth in a mason jar in the backyard or buying a brick of gold and a shotgun to protect it.  Such markets also provide opportunities, however, for those who are able to take advantage.

The fact is, it is very difficult to predict what the markets will do over short periods of time.  We saw a big selloff Friday when it became clear that taxes will go up next year, but we could very well see a rally next week if people figure that it may not be so bad or begin to expect for the tax increases to be reversed shortly after the new year starts.  The best strategy remains buying stock in good companies and holding them long-term.  There will be periods of great growth, periods of declines, and a lot of periods where the price of the stock stagnates.  The trouble is that it is difficult to predict when these big rallies will occur, and if you miss one or two your 20% return could be reduced to a 5% return.

Now, if you have some cash built up, or if you regularly put money away for investing and have enough to invest every few months or a couple of times per year, I wouldn’t be diving into the market right now.  I would wait for opportunities where there is a good decline in the markets that take all stocks, good and bad, down with them.  I would find a set of stocks to watch and snatch up some shares each time the price declined by 5-10% or so.  I know that I would not be buying at a bottom, but I also would know that I was not buying at a top.  I would not wait too long, however, since inflation will quickly reduce the value of cash sitting on the sidelines.  Three to six months will probably not make a lot of difference, but three to six years would.

I would also avoid buying bonds or stocks that primarily are purchased for their yield right now.  The reason is that low interest rates have caused the price of these investments to spike recently as investors look for ways to get a higher current yield with money markets paying nothing.  If inflation spikes that Federal reserve will be forced to raise interest rates.  This will make the price of these investments decline rapidly.  The fact is, unless you are investing short-term, there is a lot more opportunity in appreciation than there is in current yield.  The fact that taxes on dividends may also return to 25-40% rates soon also doesn’t make then attractive.

In the next post I’ll talk about strategies to keep your taxes low.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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