Tuesday, August 15, 2006
In 1995, I left a large capital management firm and started Donaldson Capital Management. I had lots of contacts among investment company vendors, and a software company did me a big favor by selling me a state of the art investment management software package for $15,000. It did everything but tie your shoes. In 1998, I received a letter from the company saying that the software may not be Y2K compliant. I brought up the fact that I had just bought the software three years earlier, and I would have expected it would be Y2K compliant. They were so sorry, but no one knew what effect the year '00 was going to have on computers and software the world over. They said they were working on a new software package with many new features and guaranteed that it would be Y2K compliant. The cost $80,000. Needless to say I had many conversations with "my friends" from California, but they always said something to the effect that they did not know for sure whether or not my software would work after 12-31-1999. They believed that it would but could not guarantee that it would. They apologized in the humblest of language, but in the end, directed me to language in the contract that dealt with Y2k issues. I was stuck. Investment management software is the lifeblood of an investment firm. It is impossible to operate without it. I had no choice but to move to another software package. I did show my unhappiness with the situation by moving to another firm, but I spent another $20,000 in 1999 and moved to another software vendor. I had no choice and neither did millions of companies across the globe who got the same letters from their vendors--no matter who they were. No one knew for sure if there would be a problem with Y2K or not. But prudence mandated action. That prudence manifested itself in the biggest technological boom the world has ever seen, as individuals, companies, and governments around the world "upgraded." Another Y2K is upon us and soon every member of the "global village" will get the message: We don't know what energy will cost in the future, but it may be more than you can imagine. Oh, no one will say it exactly like that, but the body language and the "hems" and "haws" will say it loud and clear -- prudence dictates a change in your energy consumption patterns and devices. For individuals, the pressure to move to a more energy efficient automobile will become a mania. In three years, if you have the means, you won't dare show up at church in a vehicle that gets under 20 miles to the gallon. To do so would be like killing baby seals. You will be a pariah. New home heating systems will be like the aluminum siding boom of the 1960s. There will be "heating and cooling" consultants going door to door all over the country, proclaiming the good news of energy savings. Companies will face the same juggernaut of self doubt and public recriminations for their energy profligacy. The environmentalists will web sites that will show the amount of energy that every company consumes per employee, per dollar of sales, per % of GDP, per. . . you know the rest. Few corporate brass will have the guts to stand up to the public "dis"-relations that the "main street media" will lay on them if they have an unfavorable Energy Activity Ratio (EAR -- get it?). This means more efficient automobiles, heating and cooling systems, people movement and handling systems, technologies, lighting, and air transportation. Darn the cost-benefit analysis, oil prices are going nothing but up, and we must control what we can control. We must cut back our use of energy, and we can do so by "unconserving" our capital budgets. All across America at breakfast tables and in board rooms, the mantra will be the same: "The majority of the world's oil is controlled by people who hate us. We cannot sit idly by any longer. We must act, and we must act now." I am not a doom sayer. I do not share these words to scare anyone, and no one should think the worst from what I have said here. What I am saying is that the question of the supply of energy has reached the consciousness of the American consumer. The flare up in Lebanon was the final straw. Is there anyone who does not know that the next flare up will probably involve Iran and its 17% of the world's energy supply? I see a new car and a new heating and airconditioning system in your future. The same goes for corporate American, but add elevators, computer systems, and airplanes. The good news is this: there are three companies in the world that stand to be the biggest benefactors of the energy uncertainties: Toyota, United Technologies, and Boeing. In my judgment all of these companies have multi-year head starts over their competition when it comes to producing energy efficient products. Toyota with its high-mileage and hybrid cars, United Tech with its Carrier high efficiency heating ventilation and airconditioning systems for the home and commercial use, also its Otis Elevator division for commercial and government people moving systems, and Boeing for its fuel efficient fleet of new generation jet aircraft. You don't need to rush out and do anything tomorrow or even next month, but over the next few years, increasingly, the world is going to Y2K these companies. That is in an act of prudence, people, corporations, and governments are going to choose doing something to conserve energy over conserving dollars. I predict that in the next few years table talk among friends will center around the family's EAR as opposed to how much their house has risen in value. Notes: I made up EAR (Energy Activity Ratio) This will be an index using year 2000 (pre 9-11) btu per capital consumption and costs. Even though I made this up, you can be sure such an index is in your future. Employees (including me) and clients of Donaldson Capital Management own Toyota and United Technologies. One day we may own Boeing, but not today. Also one day we may sell any or all of the aforementioned companies without advertising it on this blog. That day might or might not occur when I read in the Wall Street Journal that the government has initiated an EAR index and that Toyota, United Technologies, and Boeing are the likely beneficiaries of such an action. There are many other companies that will benefit from the energy Y2K that I see unfolding. I will discuss them in the weeks and months ahead. Final Note: The software system I bought in 1995 still works. Go figure.