A wise commentary

This is from Mitch Zacks, Senior Portfolio Manager at Zacks Investment Management. I’ve done a lot of cutting and snipping. In connection with a previous post I asked Zacks Investment Management if I could post an occasional letter from Mitch Zacks on a MF board and they said it was okay as long as it was occasional, that I gave him full attribution, and a link to their site.



The US stock market as measured by the S&P 500 has had a tremendous run over the last twelve months. Pundits and analysts have been calling for a correction, meaning a steep quick sell-off, followed by a rebound back to pre-correction levels. However, a correction has not materialized… There is a psychological feeling among market participants that the market has gone up too far, too fast. This… itch needs to be scratched and as a result, some selling would be natural and ultimately healthy for the market in the long-run.

This past week the market was looking for a reason to sell-off and the currency issues among the emerging markets provided the spark. Emerging market currencies have been under pressure for some time, partly as a result of the effectiveness of the monetary stimulus of the US Federal Reserve. The monetary policy of the Fed has strengthened the U.S. economy and therefore reduced the relative attractiveness of emerging markets. Who wants to buy (stock of) a company in Argentina… when the U.S. economy is beginning to accelerate…?

This past week, Asian stocks ended lower after a preliminary reading of Chinese manufacturing activity fell to a six-month low… the (Chinese) Purchasing Manager Index … for January came in at 49.6… Anything below 50 indicates contraction. While the reading was not good, it by no means was out of the realm of expectations…

Currencies in emerging markets have been going through a devaluation period and as a result all assets in these countries are worth less, including stocks. The market reacted to the currency problems in the emerging markets by engaging in a traditional “Risk-Off” trade. Stocks in sectors that are economically sensitive and finance companies that may hold international assets were sold. Conversely, more defensive sectors, such as healthcare and consumer staples performed relatively better.

Confidence amongst investors is quickly eroding in emerging markets… There is now a chance that emerging markets are beginning to pose a threat to global GDP growth. The reasoning is that the emerging markets have traditionally been seen as the GDP growth engine of the world. If the emerging markets falter the concern is that Global GDP growth will come down. U.S. multinationals are very dependent on global growth to meet earnings numbers, and a slowdown globally would be a negative for corporate earnings and stock prices.

While the potential for a slowdown in emerging markets causing the earnings of U.S. multinationals to decline is real, the fear is likely overblown. At the end of the day, the market was looking for a reason to sell-off after its run-up. The emerging market problems are more of an excuse than anything else…

The Good News

While the currency devaluation of the emerging markets is bad news for the global economy, I do not believe it is a game changer. The global economic expansion continues to move along at a healthy clip. In the U.S., third quarter GDP growth came in at an annualized rate of 4.1%. While I don’t expect growth to remain at that rate, leading economic indicators are telling me we should see continued GDP growth in 2014 and 2015.

The International Monetary Fund predicted (the advantage in) the growth of emerging markets over developed economies will shrink this year to the smallest since 2001. However, the IMF kept its expansion forecast at 5.1% and raised the outlook for advanced economies to 2.2% from 2%… The data points to the fact that the global economic recovery continues. The run-up in the market due to increases in P/E multiples was not irrational; it was in anticipation of the current global recovery. As I have indicated several times before, 2014 is not going to be anywhere near as good as 2013 but an estimate for the S&P 500 to generate total returns including reinvested dividends of 6-7% for the year is very reasonable.

I, and many others, have been awaiting a correction for some time now… The chance however of any correction in the current economic environment causing a bear market is not high.

Growth in developed countries will most likely continue, which in turn should help increase earnings and eventually employment. From there, consumer spending should accelerate even faster and consumer spending is two-thirds of GDP. Also, as QE tapering continues, the yield curve should steepen giving banks more incentive to lend which should help small businesses grow and once again help the unemployment number come down.

Putting it all together, I believe the sell-off could very well continue in the short-term and cause the long-overdue correction. But the probability of emerging markets derailing the global economic expansion is quite low. Nothing happening right now with the stock market is abnormal. Investors have been looking for a reason to sell, they found one and sold.

Things have been so good for so long in the stock market, investors began to forget that risk is inherent in investing… This is all part of the wall of worry that bull markets love to climb. The important thing to remember is that investors with a sufficiently long time horizon of at least 5-10 years or more should not react to practically any sell-off.

It is almost impossible to predict the future but I can tell you based on what has happened in the U.S. over the past century that several years from now the earnings of publicly traded corporations should be, in aggregate, substantially higher than they are currently. As long as the P/E multiple does not compress dramatically, which is reasonable given (that) valuations are not currently excessive, the market will continue to head up over time. You buy the dips.


Interesting commentary. Thanks for posting Saul.

With the emerging markets going through their latest currency related turmoil wouldn’t it make sense to get some exposure to these markets via ETFs? For those willing to hold between 5-10 years this dip could provide a good opportunity. I 'm thinking ETFs covering Latin America and those covering Asia.

Any thoughts ?


1 Like

Thanks for the posting Saul. Question for you and the others. How do you space your buy in your companies when there is downtrend in the stock market. Do you care about it and just buy every month or so regardless of the market condition or do you buy when there is a 10 or 20% decline, etc.

Thanks again.



Enclosed is what I perceive to be a rather inaccurate portrait of PSIX by an author for Seeking Alpha.

For starters he claims PSIX has had no positive earnings.

Would you care to comment?

Thank You,


Robert Wagner
Independent research
Send Message| Follow (698)
Power Solutions International Should See Solid Growth Going Forward If Regulations Don’t Change
Jan. 27, 2014 6:48 PM ET | 3 comments | About: PSIX
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…)

Power Solutions International (PSIX) is up 200%, and was up 300% over the last year, and they have no earnings. Trailing 12 month earnings are -$1.51/share. What gives? Why would a company with no earnings suddenly rocket 200% in a year? The answer is of course, that PSIX has a compelling story about where it is headed.

PSIX’s main focus is natural gas engines. They either modify or build from scratch all sizes of natural gas powered engines, and are one of only two companies licensed by GM (GM) to modify GM engines for highway usage.

For example the earlier of the smaller engines, we buy that from a group called Wuling in China. That two liter engine we get from Mitsubishi… And for example we have the worldwide rights for that Mitsubishi engine for mobile applications. So only we can use that engine in the industrial world. The other engines tend to be on the top end, tend to be from General Motors. And that last engine of the group, that 8.8 liter is our own design. That’s the thing that we designed from scratch…

The next category, it’s very exciting for us, you know on the highway segment … But these are engines that are used in buses, trucks, any equipment that goes on the U.S. highways and there the base engines are the 4.8 and 6 liter GM engines. And then again our 8.8 is our own design. And then we got some heavier duty options which we haven’t released yet…the importance of this, especially GM engines is, there is only two companies in the U.S. that are allowed to take a GM engine and create a new engine for it and be allowed to use on road.

None of that however is what got me interested in PSIX. Personally I don’t think natural gas will ever be widely accepted as a transportation fuel. While the tanks are extremely rugged, it would only take one truck train accident and the ruptured natural gas tank suddenly becomes an air/gas bomb. If the person filling up this CNG car had been smoking, the results could have been catastrophic.

What got me interested in PSIX was that they provide a solution to a huge and growing problem. Northern North Dakota recently made the headlines because the flaring of gas from fracking was so extensive that it could be seen from outer space. Because the infrastructure doesn’t exist to collect this “waste gas,” the frackers simply burn it. To make this seemingly ridiculous situation even worse, drillers truck in diesel fuel to power the generators and engines needed for fracking.

The common sense and obvious solution is to stop flaring the gas, and use the “waste gas” to power the generators and engines that are currently using diesel. That is where PSIX comes in, they have a product that does just that.

And the key technology here is that right now E&P and oil and gas sites, what they do is they truck in diesel fuel to run the equipment. Equipment could be pumps or generating electricity and at the same time they’re often flaring off natural gas. Out technology allows our engines to run on that natural gas that they’re flaring off rather than truck it in diesel. So essentially you have free fuel and the payback on our systems is very fast. We’re seeing in a matter of month’s payback for the operators. So that’s been a very exciting trend.

More importantly, whether or not the drillers want to upgrade, the EPA and other government agencies are giving them no choice. Starting in 2015 drillers must end flaring and either store or use the natural gas. While I hate these kinds of regulations, from an investment perspective, it is nice to have a gun being held to your customer’s head forcing them by buy your product.

The other interesting thing is that starting in January 1, 2015, this flare gas regulation, we’re in the shale site and other sites, these E&P operators have to stop flaring off the gas and either use it or store it. So that’s going to create another large demand for us we think starting around 2015.

Other regulations are increasing the cost of diesel engines, so natural gas engines for commercial use are becoming more attractive. Once again if the EPA and other government agencies are forcing consumers towards PSIX’s products.

So all diesel engines in the U.S. starting this year in 2013 have to comply with Tier IV regulation. This made the diesel engine up to twice as expensive as it was before. So Tier III, it also made about 35% larger. Really for the first time in our Company’s history, our natural gas engines are about, on average about 20% cheaper than the diesel and at the same time the fuel costs to run those engines is about half… In 70s, America really converted in their industrial commercial markets from 100% gasoline to 100% diesel and most of that conversion happened within about a five-year period. And since well over 90% of the industrial market’s backbone of America still runs on diesel, we see a lot of more markets potentially expanding 10 times or greater in a very short period

The biggest risk to PSIX is the same risk that afflicts ethanol and biodiesel, that being regulatory risk. These industries are being manufactured by the government. PSIX’s lofty stock price is due largely to expectations of sales to be generated as the result of regulations. Anyone that follows how the EPA administers the ever changing RFS2 and how Congress passes and then lets expire and then reinstates tax credits knows that is a risky business. 2014 being an election year also makes this strategy even less certain.

Weakening for climate change legislation is already evident overseas. Recently both uber-Green Germany and initiator of the global warming movement UK have signaled that they are turning away from a costly climate change agenda. These cuts to climate change funding will have a real impact on the prospects of companies that rely on such spending. PSIX’s stock price has had a strong rally, largely dependent upon expectation of future legislation and regulations being enacted. If America turns its back on climate legislation as it appears the EU is, green energy companies dependent on such legislation are at real risk of having their future earnings prospects evaporate. Many green energy companies only exist because of government subsidies and regulations, and many fail even with such support. The greatest threat to PSIX’s stock price is a change in the regulatory environment, and that risk can not be overstated. A single stroke of a pen or landslide election could immediately greatly alter PSIX’s forward earnings outlook.

The money spent on preparing the UK for the impacts of global warming has almost halved since the environment secretary, Owen Paterson - widely regarded as a climate change skeptic - took office. Critics called the cuts “shocking” and “complacent.”

To make matters worse for this regulatory investment theory, the Northern Hemisphere is experiencing one of the coldest winters in recent history. Global temperatures have been flat to falling for over a decade, and actual temperature data has invalidated almost all of the IPCC’s temperature models. The reason the global warming theory is melting before our eyes is obvious to anyone who takes the time to pick up an introductory atmospheric physics text book. It appears the legislators over in German and the UK have been doing their studies, but it stands to be seen if the trend makes it over to America.

The entire CO2 as a significant greenhouse gas theory is a complete fabrication. Greenhouse gases are defined by the spectrum of IR range that they absorb. CO2 absorbs a very narrow band at 15 microns. 15 microns is consistent with a black body of temperature -80 degrees C. CO2 only absorbs radiation from very cold sources of radiation.

The earth emits IR radiation in the 10 micron range, consistent with a black body temperature of 15 degrees C. Facts are, CO2 is transparent to IR radiation of 10 microns. Don’t take my word for it, simply grab an atmospheric physics text book and look it up. The entire CO2 is causing global warming and climate change theory is dependent upon people never taking the time to understand the basics. You will never see this chart, found in basically every intro level atmospheric physics text book, in an IPCC report on global warming. The reason is obvious, the basic physics behind CO2 causing global warming on earth is nonexistent.

(click to enlarge)

In conclusion; regulatory changes are likely to drive sales towards PSIX, especially starting in 2015. PSIX has the ideal solution to the problem of the wasteful flaring of natural gas. As long as the regulations that are in place, or are scheduled to be implemented are in fact implemented and enforced, PSIX should see solid growth going forward. That fact has not gone unnoticed by the markets, however, and PSIX has already been bid up in expectation of future earnings. Only time will tell if the optimism is eventually supported by actual earnings, but for now, I put PSIX on my watch list.

The biggest threat to PSIX and other alternative energy companies is the loss of public support for climate change legislation and regulations. If the record cold continues, that may become a very real possibility. Support for climate change legislation is showing signs of weakening over in the EU. If that trend makes it to the United States, the outlook for PSIX will be greatly reduced. Recently the EPA cut its RVO for ethanol which proves that environmental legislation can and does change, and public opinion appears to play a roll.

Thanks Jim for pointing it out. The guy is clearly a barely disguised short. Most of what he is saying is lies and a hatchet job.

PSIX revenue for the sat three years was as follows:

2010 — $101 million
2011 — $155 million
2012 — $202 million

That’s exactly a 100% increase in revenue in 2 years. They are predicting about $236 million for 2013, while they build out their new factory, and about $320 for 2014 (which is surely sandbagging).

Their adjusted earnings per share for those years was

2010 — 19 cents
2011 — 48 cents
2012 — 81 cents

That’s quadrupling in 2 years. They have 74 cents or so in the first three quarters of 2013.

What the duplicitous article writer isn’t telling you is that the company has warrants from their IPO. Now GAAP rules require the company to treat warrants as a (imaginary) liability. Since the stock price has been shooting up as a result of their extraordinary real results, GAAP rules require the company to take huge imaginary write downs. (If the stock price goes way down, then they will be able to take similar huge imaginary increased GAAP profit. It’s nonsense! The adjusted earnings is the money they actually made and have put in the bank.)

I hope this clarifies it.

As far as the writer’s claims that the world is actually getting colder, tell that to the Greenlanders, whose ice cap has melted so that they can now mine for uranium and rare earths, and the Russians, Finns, Norwegians, Canadians, etc, who are claiming vast areas of the arctic that used to be under ice but where they now want to drill for oil.



How do you space your buy in your companies when there is downtrend in the stock market. Do you care about it and just buy every month or so regardless of the market condition or do you buy when there is a 10 or 20% decline, etc.


I don’t try to time the market but remain mostly fully invested. On the other hand, I had sold out of my position in SODA a month or so ago. I hadn’t reinvested most of it yet because most of my stocks seemed to be quite high, but I put most of that money to work Monday of this week when stocks were way down. That was only about 5% or 6% of my total assets though.


Thank you, Saul, for exposing this fraudulent article in Alpha One regarding PSIX. It is just as I suspected.

It is sad to see so many gullible sellers react to such articles. However the drop can also open up a new buying opportunity to the discerning investor.


Thanks Saul. Your approach to investing is very interesting and with your track record, i am sure a lot of people will follow.