On September 5th we reported that Silicon Valley, the major green booster, had retrenched by pulling out of long-term investments in alternative energy. Today, the other shoe dropped. The Cleantech Group in San Francisco reported that venture-capital investment in clean technology fell 35% in Q4 from the prior quarter, the steepest quarterly drop in two years.

Venture capitalists had infused $1.7 billion into the sector, the smallest amount in six quarters, according to Cleantech.

The implications of this reversal are truly profound.

Silicon Valley superstars have been touting green for the past two years. Boosters include Andy Grove, former CEO of Intel; Eric Schmidt, the CEO of Google; John Doerr, perhaps the leading venture capitalist in the world; and just about every other venture capitalist within spitting distance of the fabled Sand Hill Road.

Silicon Valley really hit the brakes hard after a frothy third quarter.

Venture capital investment in cleantech hit a record $4.6 billion in the first three quarters of 2008, according to Ernst & Young’s analysis of activity in the U.S., Europe, China and Israel. This is an increase of 82% compared with the same period in 2007 and represented 13% of all venture capital investment in the regions.

Now, despite President-elect Obama’s promise to spend $150 billion over the next decade to promote alternative energy, Silicon Valley is pulling the plug on green.

The move raises several important questions for investors looking to alternative energy for profits.

– Is this a temporary pull back due to the recession? If so, how long will it last?

– Why now, when President-elect Obama is promising to make the biggest government push into green in history?

– Or is alternative energy simply a bubble?

Our opinion is that Silicon Valley has come to realize that green energy is a decades-long proposition riddled with economic holes.

For example, large portions of the solar-energy market relied on subsidies from all levels of government. Today, governments are facing insolvency as a result of the recession.

The alternative-energy frenzy fed off the fear of $400 oil. Now oil is finally crawling toward $50.

And the hybrid-car craze is on the verge of fizzling as gas hits record low prices and consumers can’t afford the $5,000 premium tacked onto green automobiles.

Everywhere we turn these days, green seems to hemorrhage red for investors.