Expectations Investing - (Sorta like Trading on Fundamentals, except with a fancier name)

URL - http://www.expectationsinvesting.com

Kinda excited about reading this book actually.

From the site:

1. A revolutionary yet common-sense investment approach that reads the market's current expectations and provides the tools to anticipate future expectations.
2. A clearly written book on expectations investing written by valuation experts Alfred Rappaport—author of Creating Shareholder Value—and Michael J. Mauboussin—Chief Investment Strategist at Legg Mason Capital Management-and published by Harvard Business School Press.
3. A web site that serves as a resource for those wishing to learn more about Expectations Investing—and how to apply its powerful analytical tools.

Alright, I'm sold.

Energy demand 'til 2030 projections

Above: International Energy Agency energy demand projections from BBC News report, "World risks 'dirty' energy future" (link here) dated 7 November 2006.

They mention pursuing nuclear option. (Not a bad idea considering how much of it is left untapped and that it produces heck of a lot of energy. But the Greens won't like it though cos of the risk of radioactive contamination, not giving 'green' energy sources a chance, etc. But Australia and South Africa's got a lot to gain from an interest in yellow cake uranium mining.)

They mention growth in the use of biofuel as a transport fuel (Ethanol? Biodiesel?).

From the article:

The report also projected that biofuels were set to play an increasing role in road transport, providing up to 7% of the total consumption in 2030.

But here's the interesting bit:

But the WEO warned that the growing demand for food would limit the potential of the plant-derived fuel produced using current technologies.

So if there's expectations of increased demand for grains for food purposes and as an alternative energy source, where do you think the price of grains would go?

If grain prices are going up, which companies will benefit? I can think of one: Noble Group, listed on the Singapore Stock Exchange. How about agricultural themed stocks? Or countries with significant infrastructure in palm oil and grains?

The assumption here however, is that world economic growth continues. We hope that emerging markets continue their upward trend, with some occasional periods of volatility. Energy companies tend to be highly leveraged with a sizable fixed cost component which makes their net profits very sensitive to economic fundamentals. A downturn could have a material impact on their revenues considering their large capital outlay.

As of today, I'm bullish on energy themed stocks and funds.

Oil Prices: Huge Demand, Not Enough Supply; means Big Future Oil Prices!

This is so obvious its scary. In the next few years we can only expect higher oil prices because there's no new major oilfields left for easy extraction. Most of it is locked up in 'difficult' countries. The uncertainty in supply as well as the world's rapacious hunger for oil has created this huge jump in oil price expections.

Dr Michael Smith of energyfiles.com argues that not only are OPEC producers overstating their reserves, he also claims that the data is highly suspect. Link to page [here]; Link to PDF article [here]. In this 2 year old paper he claims that assumptions of future oil demand of 12omillion barrels a day is 'untenable'.

Quoting from article:

"Predictions that oil demand will increase to up to 120 million barrels per day by 2020 allied to automobile and airline traffic growing at extraordinary rates are futile and damaging to policy makers."

Even 95 million barrels are untenable, he writes.

The primary implication is that we're likely to see a switch to Gas (will require more infrastructure to be built) and alternative fuels as higher prices results in a substitution effect.

A couple of trading ideas:
I thought of buying Coal and other alternative energy companies in anticipation of an increase in demand for their services. The more immediate goal is figuring out which Oil & Gas co.s are likely takeover targets considering that its easier to buy a company and its proven petroleum reserves rather than look for the stuff itself.