Thanks to all of you for your kind words regarding last Friday’s edition “Which Sector Will Lead the Next Bull Market?“. The newsletter also prompted a lot of great questions and follow-up thoughts, which we want to start sharing with everyone (since we can all learn more that way). We’ll add additional e-mailed reader comments in other blog posts, but if you just want to post a comment to our blog on the topic, you can do so using the form below.

Our first reader e-mail….

I really enjoyed your article titled “Which Sector Will Lead the Next Bull Market”, and agreed with all of your points. However, I strongly feel that the precious metals sector (gold and especially silver) along with coal, natural gas, copper, and perhaps uranium stocks could well end up at the top of the race. Many of the quality precious metals stocks have already started steadily rising, especially the juniors. It would be wise to keep a close eye on these developments.

MCP Response: Agreed - we’ve also noticed the non-ferrous metals and mineral miners have done very well since November, though we’ve not yet observed a great deal of recent strength from the smaller names. We could be looking at different stocks though - there are a few hundred ‘juniors’ to monitor. We’re going to be watching all the groups you mentioned though.

Next up….

I thought your article on strong sector trends’ persisting as leaders was very interesting - and I agree with your logic with respect to the basic materials sector. We’ll see. But I did think this was a well presented thoughtful piece. Only negative is I wish you showed what the other sectors were somewhere (or did I miss it?)

MCP Response: You didn’t miss it - it just wasn’t there. We didn’t have time to look at every sector in that edition, but given just how much of an impact a sector can have on its stocks, we’ll be looking at all sectors when we can in the future. Bill O’Neill estimates that the sector is about 40% of a stock’s battle, and we fully agree. Stay tuned for other sectors’ analysis.

We also got this e-mail…..

The next big area for the market will be Biotechnology. As someone in the business of conducting clinical trials for new drugs for the treatment of many diseases, we are seeing a proliferation of new molecules being studied with tremendous potential. There will be a day when we look back on radiation as a treatment for cancer as the equivalent to bloodletting. New therapies and treatments including the way old drugs are administered will bring new life to and industry that began in the late 70’s early 80’s and has since only had a handful for successful companies. This will all be driven by our massive infusion of capital over the last 10 years into these tiny biotech companies.

MCP Response: No argument from us. The great part about biotech (and pharma to a less extent) is that it’s not exceedingly sensitive to inflation or economic woes. So, materials as well as biotech can do well in the foresseable future.

Here’s another….

I think You are absolutele right in Your assumption that producers of base metals and precious metals will lead the coming bull market because of the obvious inflation risks we all see in the future. These investments are a natural hedge against inflation. Thank You for Your interesting analyses !

MCP Response: Our pleasure.

And finally, this longer e-mail, which we had to partially cut to reduce the length. However, we left the crux of it in place….

I really enjoy the MicroCap Press newsletters. I always take time to read them. You were saying basic materials stocks should benefit from inflation. I have a question – the dollar fluctuates against other currencies. I have been hearing people saying the dollar will drop against other currencies, and this is going to be the very integrally tied in with the inflation. I’ve been interpreting that to mean that materials costs may well go up all over because of increased demand as the economy picks up, but they will go up more in the US than other countries because of so many dollars being added to the money supply. In this situation, it seems like one would do somewhat better by buying foreign resource stocks like Companhia Vale Rio Doce, Yanzhou Coal Mining, or Anglo American PLC because of getting benefit both from the resource profits and the currency exchange, instead of US companies like Alcoa and Arch Coal. Is this “right thinking,” or are US companies just as good from the potential profit standpoint, even considering the inflation factor?

I was looking for information on timber companies after reading your article. American and Canadian timber really doesn’t sound that promising because of the permanent and continuing decline in use of timber for paper production. Even if timber resource stocks do increase quickly in value at some near point in time, there just doesn’t seem to be a long ways up to go, compared to other industries. I looked at Rayonier, the largest timber REIT, and if it doubles in price it will be where it was before the recession hit. That’s a definite cap on profit. Not to be sneezed at, but it hasn’t declines as far as many materials. I had a hard time finding other publicly traded timber resource companies, though I know there must be some. I read (in an article) Historically, timber has proved a good hedge against inflation, particularly unexpected inflation. At the same time, it has provided stable, strong, real returns. While the returns from timber have, historically, been very high, current expectations are that future returns will decline. In spite of this, however, given timber’s unique ability to “grow” on average 6% a year if it’s not harvested, timber will continue to provide an opportunity for healthy capital growth with low risk over the long haul.

It is positive, but that ”current expectations are that future returns will decline” makes me think it will probably go up, but profit multiples are strictly limited. In contrast, most mineral resource companies are down by 75% or more. It’s hard to see timber resources as being the best way to make gains in the recovery. In looking for strictly US resources, I found little information on timber companies to buy. There are a number of US coal companies. There are some US oil companies that are not international. Otherwise, it seems like the resource companies I can think of that are not foreign companies are all international companies, like Alcoa and Chevron, US-based but with many overseas operations which are affected by currency fluctuations in complicated ways. So, American or foreign resource companies to do best against inflation?

MCP Response: Great questions. Here’s our thumbnail response…

Yes, a weaker dollar drives U.S. inflation up. And yes, a declining dollar makes foreign stock investments produce even better (as long as the dollar is less valuable when you sell that foreign stock compared to when you bought it). And yes, a global recovery would inherently improve demand for materials anyway. Between those three factors alone, buying foreign or international basic materials companies seems like a no-brainer.

The only tripwire is that a weak dollar and high commodity prices overseas may make those commodities completely unaffordable by U.S. consumers and corporations. That’s not a huge deal if that company doesn’t rely on U.S. customers. If they do though, be careful. That said…

If your primary concern is the dollar’s exchange rate and currency fluctuation, I personally think you’re wasting you’re time. That’s been my experience anyway. Inflation will be global, the economic recovery will be global, and the ensuing rising tide will lift all boats pretty equally. However, we don’t know if the dollar is going to be weaker or stronger a year from now. For that reason, it may not even be worth worrying about.

I know that not forecasting a weaker dollar puts me in the minority camp. That’s fine. I’ll just remind everyone that most pundits and prognosticators were calling for the U.S. dollar to weaken in 2008, and it got stronger and stronger for most of the year. Point being, just because it feels like the dollar should be weaker doesn’t mean it’s going to weaken more than other currencies will, and that’s the big question. As long as every other economy is suffering like the U.S. economy is (and they are), that won’t translate into a weaker dealer… all currency will be equally worthless.

Point being, don’t jump to drastic conclusions about currency exchange rates, since they’re unpredictable even to the pros. Inflation and a recovery may be reliable, but currency exchange rates are just too unpredictable to really worry about. American companies are no better or no worse than foreign stocks. A truly international company may be the best hedge. That’s my opinion anyway.

As far as which segments of the basic materials sector should be hot or cold, I agree that timber may be consistent, but with a somewhat limited upside. I’m actually going to look at some specific commodity segments in the near future, but I like metals a lot right now. Stay tuned on that front though, as I want to let the market tell me what’s emerging as a leader at this point in time, rather than predicting what will lead.

A little more than a month ago we rekindled our interest in scouring the market for its strongest industry groups. Why? Because it’s an easy way to find winners when they don’t present themselves otherwise. We found Alliance One (AOI) that way, and it’s up 33% since we specifically pointed it out on February 19th how it was leading the small cap tobacco stocks. We also applied the technique to dig up home-furnishing retail stocks back on February 23rd.  Within the group we mentioned Kirkland’s (KIRK) and Williams-Sonama (WSM) were good bets. Well, we already suggested locking in about a 30% gain on Kirkland’s, so now we’re letting you know that William-Sonoma shares are up 37% since our February 23rd mention. Go ahead and lock in that gain as well, if you acted on our tip.

Hopefully those gains have convinced you the strategy works. It’s still not perfect, since a really, really bad market can and will pull any group lower. However, even in a challenging environment a strong sector or industry can generate gains. The examples above significantly outpaced the overall market’s gains during that time.

The reason we bring it up is simple - we’ve got an updated list of leading small cap industries for today, one of which is almost familiar. Huh? Previously, small cap home-furnishing retailers were the leaders. Over the last two weeks though, home-furnishing stocks (not the retailers, but the manufacturers) have been heating up. We think that could be a trade-worthy trend.

Great, but what’s the difference? The small cap home-furnishing names we’re specifically referring to are actually (mostly) furniture makers…. not the knick-knacks like silk flowers and ornamental urns, but furniture you can sit in and sleep on.

Some of the small caps in the group include Acuity Brands (AYI), Ethan Allen (ETH), and Tempur Pedic Intl. (TPX). However, it’s worth noting that most all of the stocks of any size in the furniture sector have been going strong.

The P/E’s across the board for the major names are incredible, with some of them sub-10. The downside and fear, however, is margins…. they’re paper thin, and in some cases last quarter the companies slipped into the red. Higher materials costs and lower demand was the culprit. That was obviously a tough time for everyone, and of course those challenges won’t last forever. However, materials costs are going higher again this quarter even if the consumer is getting a little more confident (and is willing to spend again).

Point being, though some of these furniture manufacturers may indeed recover, others may have been damaged to badly to ever survive… even if the economy starts to significantly improve.

Then why are we talking about it? Hey, it’s still an idea for a short-term trade. Even bad stocks can go higher, especially when all of their peers are doing the same. Call it a euphoria trade - investors are giddy about signs of a better economy, and are jumping to the conclusion that we’ll all go out and buy a new couch or a new bed within the next three months. Some of us might; most of us won’t. Enjoy the euphoria ride while you can, but don’t get married to one of the group’s shakier stocks.

If you’re a serious investor, you need this kind of information if you plan on beating the market. The mainstream media sure won’t give it to you. Be sure to sign up for our free e-newsletter so you won’t miss our next industry pick.

Last week we mentioned how a rising TED Spread and a rising Libor-OIS Spread were hinting that the credit markets were starting to freeze up again without ever having fully unthawed. The evidence of the premise? The rising TED Spread suggested the perceived risk in interbank lending was increasing, while the rising Libor-OIS spread hinted that funding for loans was more and more limited. Neither spread had reached ‘dire’ levels yet, but right now the economy can’t afford even the slightest mis-step.

Well, good news. Later on in the week - and so far this week - the TED Spread as well as the Libor-OIS Spread have started to fall again. It wasn’t the Geithner plan that prompted it, as the spreads started to sink before the plan was unveiled. However, it was likely to be Geithner’s  plan that kept the overall dethaw in motion before it fully reversed course and started to freeze up again.

Here’s the TED Spread chart….

….and here’s the Libor-OIS Spread chart.

If you don’t hear much about the TED Spread or the Libor-OIS spread, it’s probably because the mainstream media doesn’t cover these types of higher-level indicators. Too bad too. This is the kind of information that actually matters to investors - not the “bubble gum” topics most news stations and media outlets choose to blather about. If you want real information that actually helps you make money, sign up for the free newsletter today.

We told you about the rally on February 23rd, when Kirkland’s (KIRK) was trading at $2.97. We warned you again on February 25th that Kirkland’s - along with most small cap retailers - that there was an opportunity here. We really hope you were listening then, since KIRK jumped from a close of $2.88 last week to the current price of $4.00. So, now we have a new recommendation for you…. take profits already. Between the size and speed of the move along with the bullish gap today, we expect to see a short-term pullback in the near future. There’s no point in giving up that much ground just for the heck of it.

We normally wouldn’t sound the “take short-term profits alarm” for long-term investors, but this may be a time for an exception. There’s a lot of room to retreat, even by long-term standards. No matter what your time frame is, we urge you to consider pocketing something.

More important than the Kirkland’s trade, however, was the lesson learned regarding our industry-based strategy. Several times now we’ve used this technique to find the proverbial needle in a haystack. There are about 6000 liquid stocks worth trading…. far too many to monitor one by one. Just looking for the major industries and market caps, however, is manageable - there are only a few hundred, and we’ve got an easy way to keep tabs on all of them.

Several months ago we promised to keep you informed of these emerging industry trends, and the effort has paid off. Keep on reading our commentary, and we’ll keep on delivering these money-making ideas.

Do you want to be informed immediately when we make our next sector or industry call? Just sign up for the free e-newsletter, and we’ll send it straight to your inbox. Don’t miss out on another opportunity.

Last week we looked at several charts of different bulletin board companies, some of them bullish, some of them bearish. We’re going to update a handful of those trading ideas today, and also add a new round of possibilities.

Coates Intl. (COTE)

We were leaning bullishly on Coates Intl., but that was largely based on the 50 day moving average line holding up as support. Well, COTE fell under the 50 day average this morning. It may be a tad premature to flinch here, but considering how many other trading ideas we have that are working for us, there’s no real need to maintain our risk exposure here. We’re retracting our bullish expectation, and if you’re in a trade, you may want to get out now.

ERHC Energy Inc. (ERHE)

So far so good with ERHC Energy. Shares were trading at 29 cents the last time we looked, and now they’re trading at 32 cents. The bullish volume hasn’t been great, but it’s not been weak either. The 32/34 cent area seems to be a key resistance zone, so keep a close eye on ERHE while it bounces around that level.

Polymedix Inc. (PYMX)

Though the chart hasn’t gone anyhwere yet, we still like the potential of PYMX. The breakout we mentioned is still intact, and volume has been ok. If shares can just crack the ceiling at 81 cents, it could jump-start a really nice move.

Lifevantage Corp. (LFVN)

We were actually worried that Lifevantage was due for a pullback, but the move from 35 cents then to today’s current price of 46 cents clearly wasn’t a bearish event. Nevertheless (now more so than before?), we’re looking for a pullback from LFVN. If you’re in, we think you need to take profits. If you’re looking for a short trade, this could be a good one.

The New Stuff

China Natural Gas (CHNG)

The bullish thrust over the last few days was strong enough to break the stock out of a bearish rut and push it above the 50 day moving average line, though it’s still not clear if that will be enough to get a rally going. So far though, this one seems to have some good upside potential.

International Fuel Tech (IFUE)

International Fuel Tech offers something we really like in a recovering chart… little volatility, and a very slow roll from a downtrend into what’s starting to look like an uptrend. A chart that moves too far, too fast, is simply prone to reversal. IFUE isn’t one of those charts though. We still need to see a little more work/volume here, but if the bulls keep chipping away the rally should accelerate soon.We’d like to see one more successful retest of those short-term averages before jumping in though.

Don’t miss the next official trading idea from the Micro Cap Press (which may or may not come from the ideas mentioned above). Just sign up for the free newsletter today, and we can start e-mailing you the best of the best trading ideas. We publish about once per week.

This week’s pop may only be a bear market rally, or it might actually be the beginning of a full-blown market recovery. Either way, a handful of micro cap names have become really compelling over the last few days along. We think any of these high-momentum charts could continue to climb, even if the pace of the market’s rally starts to taper off. (By the way, to open up the full-size chart, just click on the thumbnails next to each stock’s commentary.)

BioTime (BTIM)

We’ve looked at BioTime before, and said the same thing then that we’ll say now… this is a stock that you can count on taking one step back for every two steps forward. And, that’s ok - the stock is up 568% over the last twelve months, so they’re obviously doing something right.

Force Energy (FORC)

Admittedly, this stock looks like it’s “on the verge” more than it looks like it’s in the middle of a run. On the other hand, that’s usually a better time to find a stock, particularly a stock like Force Energy, which rallied from 50 cents to $2.82 in Q2 of last year. The short-term hurdle is 69 cents. If FORC can blast past that resistance level, this equity may take off again. Bullish volume has been building all month.

Coates Intl. (COTE)

Like BioTime, you can reasonably rely on a lot of up and down from Coates shares, so if you want into the uptrend, hunt for a short-term low point within the rising trading range.

ERHC Energy Inc. (ERHE)

Brace yourself for lots of volatility of you’re an owner of ERHC Energy. And, you’ll still want to pick and choose your entry point because of that. Nevertheless, January’s breakout broke a downtrend, and the volume behind any big gains is actually getting bigger as time goes on. It’s not unreasonable to think ERHE could move from the current price around $3.00 to last year’s peak around $6.00.

Polymedix Inc. (PYMX)

Polymedix can only be categorized as ‘hot’ because of the bounce it’s made over the last eight days. However, it was a big bounce…. big enough to push the shares above a significant bearish resistance line.  The push was on good volume too, which may be enough to carry the stock back up towards $1.30 from the current price around $0.80.

And Hot Stocks We Don’t Trust….

Momentum is one thing. Sustainable momentum is another. All the tickers we mentioned above have better than average shots at continuing their uptrends. The charts we’re going to look at below all have phenomenal results of late, but don’t look like they have what it takes to keep rallying. In fact, some of them look like they could be headed for a tumble.

Zagg Inc. (ZAGG)

The year-to-date 71% rally is nice, but each new move to new highs has been made on weakening volume. We’ve also seen a couple of major distribution days once the stock started to test the $1.60 level. This one looks like it’s on borrowed time; a revisit to $1.00 is apt to be in the cards.

Lifevantage Corp. (LFVN)

Like Zagg, there’s been a noteworthy lack of volume behind the rally, which has been struggling to follow through on the low volume rally between November and January. If LFVN can establish a base here and take another swing on higher volume, we might rethink our stance. Until then though, we don’t see a whole lot more upside left to tap.

Mexoro Minerals Ltd. (MXOM)

Ironically, ALL of the significant buying volume was seen before any of the significant gains were made. After a massive volume spike on February 6th, when shares closed at 17 cents, we watched MXOM rally all the way up to 40 cents, but never on volume anywhere close to that pivotal day. The current stall just under that level is a red flag of what may be coming.

Do you want more great trading ideas like these (or our follow-up thoughts on these eight charts)? Just sign up for the free newsletter today.

The investment-worthiness of wind energy is largely determined by perception … investors aren’t as likely to commit investment dollars to an idea they can’t see or directly benefit from. However, that doesn’t mean the opportunity isn’t there. It just means the growth is largely occurring somewhere out of view. In fact, some global investors - and American investors in particular - may be shocked at how prolific wind energy is becoming.

Revenue and earnings will certainly follow this growth though, meaning wind energy investments are just as viable, if not more viable, than investments in other industries.

To establish the scope for the looming opportunities that will surface from wind energy’s growth trend, it may be worth looking at demand and capacity trends, and expectation

Global Outlook

Wind energy really is rapidly becoming a major player in the world’s energy markets. The global market for wind turbine installations in 2008 was worth about $47 billion dollars, and global wind energy capacity grew by about 29% (which was 36% more than that added in 2007).

Putting that into industry terms, over 27,000 megawatts (27 gigiwatts, or GW) of new wind power generation capacity came online in 2008, bringing the world’s total wind energy capacity up to 120,800 MW (120.8 GW).

Just for perspective, the average windmill’s energy production capacity is currently around 2.5 megawatts (MW), meaning there are approximately 48,300 wind turbines installed and spinning right now. One MW of production capacity is enough to supply power to an average of 250 homes. So, though many investors (again, mostly American) may have never seen one, windmills are most definitely ‘out there’….the equivalent to 30 million homes are being powered by wind right now.

In other words, it’s more than just a curious fad.

By 2010, the World Wind Energy Association expects 160GW of capacity to be installed worldwide, meaning about 40 GW will be added between now and then. By the time 2012 gets here, industry insiders believe wind energy demand will call for new capacity at a rate of 50 GW per year (and that the world’s capacity will be at 240 GW by then). The Global Wind Energy Council (GWEC) feels the world’s total capacity could reach 1000 GW by 2020.

Based on the $47 billion spent in 2008 to add 27 GW of capacity (or roughly 10,000 new wind turbines), just adding another 40 GW worth of wind energy by the end of 2010 would mean another $70 billion or so would be injected into the global economy via wind energy investments…. roughly enough to build another 16,000 windmills (at approximately $4.7 million each).

Factoring in how annual demand could nearly double by 2012, and then nearly double again through 2020, those dollars get a lot bigger pretty quickly.

Though the numbers can vary slightly from one build to the next, and even from one year to the next, one thing is clear - there are still a lot of dollars flowing into this industry despite the global recession, and the growth potential is huge. This is ultimately good for investors of the companies on the receiving those dollars.

Where’s the Demand?

As this macro-trend solidifies it may be wise to look for wind turbine investments in a region where there are few (to none) right now… China.

State-mandated wind power goals in China have effectively pushed their capacity from a mere bud to a full bloom, yet much more is on the way. The country doubled its wind energy capacity in 2008 by installing approximately 6,300 MW (6.3 GW); their total now stands at 12,200 MW (12.2 GW). For 2009, newly installed capacity is expected to nearly double again, which will account for about 1/3 of the world’s new installations for the year.

The United States is no slouch either. In fact, the U.S, actually topped China’s new capacity in 2008 by adding 8,300 MW. This brings its capacity up to 25,000 MW (which puts it at the top of the capacity ranks). As for growth, he U.S. Department of Energy has established a wind energy goal of “20% by 2030″, meaning they’d like to see 20% of the nation’s energy needs in 2030 being met by wind power. To do so, they’ll have to crank up new capacity at a rate of 16 GW per year until then.

However, it’s worth mentioning that every continent has at least some of their energy needs being met by wind. Some have more of it met by wind than others, but all continents and more than 100 countries are looking to jump-start wind energy programs. Many of them are planning growth at the same pace at which the industry has grown in the United States and China.

The bottom line is, there’s plenty of worldwide demand, much of which will be unfazed by global economic turbulence (particularly where the projects are government funded).

Where’s the Supply?

This is the question investors should be asking, as it relates directly to the investment opportunity at hand. However, as those who have already attempted to do so will know, there really aren’t a lot of wind energy investment options - many of the publicly-traded wind energy companies or traded overseas, are a private venture, or in some cases, wind energy technology is only one arm of a large conglomerate.

Nevertheless, there are some inevitable ventures available right now. General Electric (NYSE:GE) is one of the biggest wind turbine players right now… and growing fast. In 2005, they manufactured approximately 500 turbines. This year, they’ll build more than 3000, yet they still won’t be able to keep up with demand (they’re booked solid through 2010).

Though it’s a big chunk of the wind energy business, the problem for investors is that when you buy GE shares, most of what you’re buying isn’t wind-energy related.

For investors with access to international markets, the picking is a little easier. Here are four more stocks that have a major stake in wind energy.

• Suzlon Energy Limited (Bombay: 532667) - This Indian company owns roughly 14% of the world’s wind turbine market, which is third best.
• Siemens AG (NYSE:SI) - In terms of total size, his German company is the the second biggest of the five being discusses here (counting GE). Like GE though, their wind power business is only a fraction of what they do.
• Gamesa Corp. Tecn. SA (MCE: GAM) (Pink: GCTAF) - Spain-based Gamesa controls approximately 16% of the global market so far. Like GE, they’ve been booked solid since 2007.
• Vestas Wind (CPH: VWS) (Pink: VWDRY) - This Danish company is the capacity leader, controlling about 23% of the wind turbine market.

Though these may be the major names in the industry, as we said in separate wind energy analysis reports, they’re far from the only ones. Think about suppliers. Who builds what these companies need (none of them build all their components from scratch)? What about fan blades, gearboxes, and generators. All of those components are outsourced.

Also note that though there are very few right now, the biggest potential supplier of wind energy hardware may soon be one of the countries where wind energy is growing at the fastest pace… China.

As of right now, nearly half of China’s wind turbine needs are met by overseas companies (Vestas, GE Wind, and Gamesa). By the end of 2009 though, the Global Wind Energy Council expects China to be the world’s largest wind turbine producer…. and possibly a net exporter of wind energy hardware.

Though it’s not clear how many of these new Chinese wind turbine and related companies are or will become publicly traded, the need for funding suggests there will be at least a few. Goldwind is one such company being publicly-traded; they went through a $235 million fund-raising/IPO last year to pay for a capacity expansion.

What Do Investors Do?

Though wind energy is well beyond the conceptual phase, and is now into its expansion phase, publicly available investments are still sparse… for now. Within one to five years, however, we expect many viable wind energy stocks to materialize.

Understanding the demand described above should be encouraging for longer-term investors; investing in the companies that best meet that demand could be a tad trickier. Nevertheless, a modest amount of “bigger picture” monitoring should be highly rewarding, as the industry’s forecasted growth makes it one of only a handful of 10-year “megatrends” evident at this time.

Investors, you need to stay in touch with megatrends like the coming explosion of the wind energy industry. The mainstream media won’t do it for you though. Sign up for our free newsletter and we’ll show you how to turn these trends into real dollars with the right stocks.

As the pain here in the United States continues to grow, with General Motors’ (GM) viability in question and February’s retail sales sinking again, it leaves more and more investors asking the question “Is there anywhere that’s safe to invest?”. While the editorial staff still adamantly contends there are plenty of rising U.S. stocks, finding them - and being able to keep them - has admittedly been though to do lately. Dire economic news and a seemingly out-of-touch government are pouring water into a sinking boat faster than the market can bail it out.

China, however, may be a different story. Oh, their economic boat is still taking on water, but at least their market is bailing water out of the boat faster than it’s getting put back in. If economic health really is the key to the market’s health, a little more exposure to China’s stocks could be a good thing.

Just to set the tone, a little compare-and-contrast is in order….

• Last quarter, the United States’ GDP shrank at a rate of -6.2%, For the same quarter, China’s GDP ’shrank’ at an annualized growth rate of +6.8%. (It ’shrank’ because it had been growing as fast as 14% at one point in 2007.)
• China’s 2009 budget deficit will be about 3% above their GDP. The United States deficit for 2009 is on pace to exceed GDP by about 12.3%.
• China is planning a stimulus to their economy that’s a lot more potent than the United States’ stimulus. The proposed $586 billion stimulus China has been discussing is about 20% of their GDP. Every $1 trillion worth of stimulus for the United States is about 8% of GDP. Granted, the U.S. stimulus price is ever-changing (higher), and the Chinese stimulus is still in question. Even if China’s is shaved and the United States’ swells, they’re still doing more.
• Year-to-date, China’s market is down 14.3%, while the U.S. market is down about 23.7%. Neither is ‘good’, but on a relative basis it sure seems like stocks have less of a bearish tide to overcome in China.
• China’s exports fell 17% in January, which on the surface would appear to be a problem for a major exporter. However, imports sank by 40% in January. So, it seems to be more of a problem for other countries than it does China.

Just some food for thought.

As far as turning these facts into something ‘actionable’, there are plenty of Chinese ADRs available to U.S. investors. In fact, there’s a good chance you already own one of them…. China Energy Recovery (CGYV).

Almost all of the company’s business has been won in China, largely because that’s where all the demand has been mandated by the government. Though the latest round of stimulus money mentioned above isn’t necessarily targeting “green” initiatives, coupling the state’s new clean-energy requirements with lots of stimulus (expansion) spending still bodes will for China Energy Recovery. That may be why the stock has done so well over the last week, while the American market has not.

On that note, now may be a good time to wade into CGYV if you’re not already an owner, but would like to be.

The key levels we’re watching here for CGYV are still $2.00, and $2.20. If we can get above the first one, the market should be optimistic - the stock has had trouble there before. If we can get above $2.20, the market should be outright excited - it would mean new multi-week highs were being hit, and could inspire a breakout move. That’s a reason you’d want in beforehand though, not afterwards.

As it stands right now, CGYV’s bullish momentum is solid… seven days of mostly higher highs and higher lows. Volume has been decent behind the rebound, though not great yet.

The reason for the strength, however, is longer-lasting… we really do think China’s economic resiliency could make for some pretty rewarding Chinese stocks, available to you in the form of American Depository Receipts. China Energy Recovery would be a good one to start with, but we’ll see if we can find some other attractive ones while the U.S. is still cleaning up its mess. Stay tuned.

Don’t miss our recommendation of any Chinese stocks that are poised to benefit from the country’s economic resiliency. Sign up for the free newsletter today, and we’ll alert you of any official MicroCapPress.com stock trades. We find the opportunities and trends nobody else can.

The growth pace of wind energy production has topped the growth rates of all other energy sources in recent years. Yet, wind energy still only accounts for a fraction of the world’s total energy production. Advances in the underlying technology though (the windmill’s gearbox to be specific) may well be the key the industry’s continued market penetration. Investors of the companies designing and building a more efficient/lower-cost gearbox stand to be handsomely rewarded.

With that understood, there are a few ideas interested investors should understand as the need for better (i.e. lower total cost) gearboxes is increasingly met. And, there are a handful - though not many yet - of worthy publicly-traded companies that are emerging as leaders in the field.

We won’t be able to name all those stocks or cite every industry nuance, but we are able to lay a thorough foundation for successfully navigating and investing in the gearbox revolution.

The Device in Question

First things first….a quick review of the three basic types of wind-turbine drive systems currently is use, and the pros and cons of each:

Gearbox - The traditional and most common way of connecting the wind-drives fan blades to a turbine. The gearing makes the turbine spin about 40 times faster than the actual fan blades, which is necessary to generate electricity.

• Pros: They’re proven to work, and most support/equipment is gearbox-oriented.
• Cons: The bigger and more powerful windmills get, the worse the wear and tear.

Direct Drive - This is a newer type of turbine that connects directly to the fan blades, and therefore spins at the same speed (and experiences the same torque). Siemens is leading the charge with this young device, though other organizations have made it work as well.

• Pros: May be cheaper (once developed) than gearboxes in some situations.
• Cons: It’s still not clear if these will actually work well enough, or long enough.

Hybrid - French manufacturer Winwind is working on a turbine that combines the more common gearbox and the newer direct drive systems.

• Pros: May eliminate all of the downside of both other types.
• Cons: May enhance all of the downside of both other types.

Challenges to Overcome

The biggest challenge in all three cases isn’t generating lots of power - there’s plenty of output considering the input. The rub is, well, the rub.

Even after 20 years of experience, gearboxes (bearings, specifically) still aren’t as durable as they need to be to make them as cost effective as they need to be…. on par with coal/natural gas energy production costs. A company that can make a more resilient, longer-lasting gearbox may well be an enticing investment. Just so you know, the average turbine/gearbox assembly lasts 50 to 20 years, though better maintenance procedures can extend that lifespan significantly.

That said, one of the easiest and most immediate solutions to the problem isn’t a design change, but keeping the gearbox’s specialized oil meticulously clean and effective. This task in itself could be an investment opportunity, if a lubricant maker could devise a filter or oil that was easier to work with, longer lasting, or at least easier to change.

Opportunities Are Blowing In

Almost needless to say, the companies that can address or overcome these problems are likely to be at the front of the line when it comes time to collect a paycheck. And, investors in those companies should in turn be equally rewarded.

With that in mind, here are a few cutting edge companies - or at least their technologies - that may be worth a closer look as the need for a better wind turbine gearbox becomes clearer.

Clipper Windpower’s (CWPR.L) stock trades on the London exchange. However, the company has a major manufacturing facility in Iowa, and a business office in California.

More important to the topic at hand, however, is Clipper’s ‘Quantum Drive’ (r) powertrain. The Quantum Drive is a two-stage gearbox that is reportedly easier to maintain than the standard three-stage equipment. Torque loads - one of the big killers of most gearboxes - are only one quarter of the norm when a Quantum Drive is used. Two sets of roller bearings stave off misaligned shafts, and the pinion gear can be switched out just be swapping out a cartridge. In other words, there’s not much maintenance, and it’s easy to meet what maintenance requirements are called for.

Swedish-based Morphic Technologies (MORP.B) has put direct-drive technology into revenue-bearing action, at least on a trial basis. The company’s small-scale wind turbines (the SWT20) are now generating power in a test being conducted off the coast of Sweden. So far, so good.

And again, the direct drive powertrain means there is no gearbox, which in turn means minimal maintenance is needed.

[Side note about Morphic…. the company has also patented a method of using a wind turbine’s excess electricity to combine CO2 with water to create liquid biofuels. Talk about wasting nothing!]

Windflow Technology Ltd. (NZAX.WTL) is another interesting innovator. The New Zealand-based manufacturer’s Windflow 500 turbine offers a tweak not just to the gearbox, but also to the fan blades. Their turbines consist of a torque-limiting gearbox (to prevent excessive wear or cost), and the pitch-adjustable fan blades are attached to a teetering rotor (also to reduce wear and cost). The design is smart, and could become the new standard.

If you think all the major wind turbine manufacturers like Vestas, Siemens, and Gamesa are building everything they make from scratch, think again - Hansen Transmissions (HSN.L) is probably their gearbox supplier. Hansen is the second largest wind turbine gearbox manufacturer in the world, and controls about 1/4 of the wind turbine gearbox market.

That may or may not be a good thing for supporters of wind energy efficiency though, as there’s no perceived need be an innovator from Hansen’s perspective… why bother doing R&D when you already own a great deal of market share? Nevertheless, whether Hansen’s gearboxes are great or just mediocre, they’re winning plenty of business.

We only mention it here as notification that if Hansen ever did decide to ramp up research and development, they could take the lead in terms of market share since they already have such a major industry presence.

Of course, it would be errant to omit General Electric (GE) from the list of major gearbox suppliers. Like Hansen, what GE lacks in creative contribution they make up for in market share.

Though other innovations and improvements will arise, these solutions are a fair representation of the direction the technology is going. Investors would be well served to stay in front of these improvement trends, as they could make or break wind energy’s cost-effectiveness.

Final Thoughts

As was mentioned already, this isn’t an exhaustive list of companies, nor an ironclad one. Some of these organizations may well fall by the wayside in the middle of the race, and others that didn’t make the first cut will pop up in the meantime. Hopefully some U.S.-based companies will materialize in the next growth spurt.

Our goal was to simply plant a few seeds, and to get investors asking questions that really matter…. questions like “why is this company’s technology better than their competition’s technology?” You are now equipped to ask those questions, and understand meaningful answers.

Better still, you’re now equipped to separate mediocre technologies from the truly desirable advances of the current technology.

There is one notion, however, that is not in question - wind energy will continue to grow over the next 20 years, and at least some companies will do well because of it. Better gearbox and powertain solutions will be at the heart of their success.