The Waxman-Markey Bill, the much-ballyhooed clean energy legislation passed recently by the U.S. House of Representatives, is an economic and political mess.

It introduces huge new distortions in markets, imposes onerous new regulations on a number of industries, requires a large addition to bureaucracy and risks a trade war.

And it does very little to fight global warming.

At this point, however, investors really only need to know two key things about this legislation in order to set themselves up for profit, while avoiding any losses from the bill’s fallout:

• From a political standpoint, Waxman-Markey is likely to become law in something close to its current form, meaning investors can craft a plan of attack with a fairly high degree of confidence.
• And, from an economic standpoint, it seems to define a pretty clear set of winners and losers, enabling us to flesh out that plan.

A “Good” Tax?

I’m not sure whether I believe in global warming. We clearly seem to be producing more carbon dioxide than we used to, but it’s not clear how much of an effect that’s having on global climate. Equally, the effects of extra carbon dioxide are long-term and largely irreversible, so even if the warming effect is limited in our lifetime, we probably owe it to our grandchildren not to leave them living in a steam bath.

To the economically minded who share my skeptical-but-cautious view, the optimal policy is pretty obvious: We should enact a carbon tax. Government operations have to be funded somehow, and there’s no obvious reason why a carbon tax should be any more economically damaging than any other kind of tax.

A carbon tax has two advantages over other alternatives:

• First, it can be varied easily, as we get new information and become more worried or less worried about global warming.
• Second, it allows investment and purchase decisions to be made by the market, just tweaking the price mechanism a bit to reflect our concerns about carbon emissions.

We’re not going to get a carbon tax, because it has the politically deadly word “tax” as part of its name. Still, during the presidential campaign, then-candidate Barack Obama showed off a pretty sensible “cap-and-trade” program. All the carbon emissions permits were sold, so the market was able to work properly, with no freebie giveaways to politically favored recipients. Further, there were no  “offsets” by which companies could satisfy domestic permits by persuading the Chinese not to build a dirty coal-fired station, for example (these have given rise to innumerable scams in the European Union cap-and-trade system).

Such a system would have raised lots of revenue, helping to close the budget deficit and pay for healthcare reform, which ought to be one of its major objectives, given the United States’ now-dire fiscal position.

The Lowdown on Waxman-Markey

That’s not what we’re getting with Waxman-Markey, under which 85% of the emissions permits will be given away for free. That depresses the amount of carbon emissions saved, because with so many free permits available, the price of permits will be low.

Also, Waxman-Markey forces new buildings to use 30% less energy by 2012, intruding the U.S. federal government into yet another business previously regulated at the state level. It allows “offsets” for 2 billion tons of carbon emissions a year – 50% domestic and 50% international.

Finally, it doesn’t even raise any net revenue, because the giveaways and administration costs match the fairly paltry revenue raised through selling permits; according to the Congressional Budget Office (CBO) it’s just barely “revenue neutral” in the 2010-2019 time frame. That’s a major problem for President Barack Obama’s budget, which had assumed $624 billion in revenue from cap-and-trade in that same period.

The Winners and Losers

Needless to say, with the government rearranging deckchairs and giving out goodies in such a big way, there will be winners and losers. Clearly that’s what investors most need to understand.

One winning category will be distribution-oriented public utilities – the guys who actually send out electricity bills, including Consolidated Edison Inc. (NYSE: ED), Pepco Holdings Inc. (NYSE: POM) andNortheast Utilities System (NYSE: NU).

These companies will be given permits for 35% of the total “cap” amount in the early years, with instructions to provide rebates on electricity prices. Some of the value of those free permits is bound to flow through to shareholders. In fact, the bill was passed on a Friday, and it was notable that on the following Monday that the distribution-oriented utilities showed a nice bounce. If you can get a 7% dividend yield from the company that sends you electricity bills, it’s probably a buy!

Clean-coal technologies (primarily carbon capture and storage) are due to get 5% of the emission permits over a lengthy period. Most of the companies experimenting in this area are privately held, but Duke Energy Corp. (NYSE: DUK) is planning a carbon-sequestering power station in Indiana, so may be a beneficiary here – as well as through its operation as a major power distributor.

Another group of winners will the sharper (most-creative) operators in the financial-services arena. Since emissions permits will trade, somebody will have to trade them. What’s more, there will quickly arise the whole paraphernalia of futures, options, swaptions, and default swaps. Bear Stearns and Lehman Brothers are, alas, no longer with us, but Goldman Sachs Group Inc. (NYSE: GS), as always, will be prominent at the front of the queue!

Losers? Well, all of us who will pay more for power, but also the Canadian oil sands companies, such as Suncor Energy Inc. (NYSE:SU), who seem fated to pay a hefty premium for their carbon-expensive operations. Probably, the major petrochemical companies such as The Dow Chemical Co. (NYSE: DOW) will be losers, too, as will other carbon-intensive industries. Housing companies will be losers – they use quite a lot of carbon-emitting materials, and will be forced to adopt expensive energy-saving technologies, making their products less affordable.

Of course, all this analysis depends on whatever changes the U.S. Senate may make to the legislation. And that chapter has yet to be written.

Five Ways to Profit From the New Waxman-Markey Clean Energy Bill ]]> http://www.contrarianprofits.com/articles/five-ways-to-profit-from-the-new-waxman-markey-clean-energy-bill/18856/feed 0 http://www.contrarianprofits.com/articles/obama%e2%80%99s-miniscule-budget-cuts-face-stiff-opposition/16403 http://www.contrarianprofits.com/articles/obama%e2%80%99s-miniscule-budget-cuts-face-stiff-opposition/16403#comments Thu, 07 May 2009 19:40:35 +0000 Don Miller http://www.contrarianprofits.com/?p=16403 President Barack Obama sent lawmakers a budget package today (Thursday) that proposes to shrink or eliminate 121 federal programs and save almost $17 billion in the fiscal year that begins Oct. 1. But the budget plan contains cuts that will face vigorous opposition in Congress and fierce resistance from special interest groups.

The package of proposed reductions fills in the fine print of a $3.55 trillion budget outline approved by lawmakers in April that contains Obama’s top agenda items, including a healthcare overhaul, a push for renewable, clean-energy sources and changes in education funding.

The President wants to cut or end a number of programs that he feels are wasteful or ineffective to take the first toward getting spending under control. But…

I had lunch with a “brain trust,” of sorts. Participants included a retired executive from an aerospace company. This guy helped design and build many of the reconnaissance satellites that the U.S. has launched. There was a senior executive from a large steel company. There was a venture capitalist who made his first $500 million in the software industry, and who now has much of that wealth spread around in biotech and nanotech startups. And then there was me.

If you’re into lunches where you’d rather listen than eat, then this was the lunch for you.

According to the satellite builder, the dominant elements of the political and media culture are “completely in the tank” when it comes to believing in the dangers of “climate change.” It’s not as if climate change is demonstrably true, he pointed out. There are valid scientific data from both sides of the climate change issue, and many valid data points in between. But according to the satellite builder – some of whose satellites were built to track climate change — “For at least ten years, if you have not been promoting the dangers of climate change then you have not been receiving government grants. So the research community is following the money.”

Thus, the research literature is coming out strongly in favor of “doing something” about climate change. And policy-makers are using this research literature to justify doing something about climate change, even if the something that they are doing does not make any scientific or economic sense.

According to the steel executive, the climate change issue has spurred what amounts to “a pathological hatred” of carbon-based energy systems. “It doesn’t have to make practical sense,” says this source. “It doesn’t even have to work with economics. It just has to support a policy to utterly transform the nation’s energy system. The people making policy now have a crusader’s mentality. So the new policy makers want to promote radical change in energy policy. They’re going to jam it down the throat of the economy.”

According to the steel executive, the steel industry expects to see inflation-adjusted, baseline energy prices triple or quadruple within ten years. “Whether the government taxes carbon-based energy at the source, or whether they pass ‘cap-and-trade’ legislation, it’s going to cost us. So we’ll pay. Of course, we’ll pass along the new costs to the steel buyers. If demand goes down, we’ll close facilities. Then the TV cameras will show up at the plant gates to watch us shut the doors and click the padlocks. And we’ll get called bad names by the people who never much liked us in the first place.”

The venture capitalist chimed in with some thoughts. “If the feds are going to spend billions on stimulus, then they ought to direct some of that money to help fund promising research. How about some money to pay for every fossil-fuel power plant in the country to siphon off some of its CO2? Then run the CO2 through a facility to grow algae to make biofuels.”

“We’d be killing about four birds with one stone,” explained the venture capitalist. “We’d be taking down CO2 emissions. Not much, maybe, but some. We’d be helping an embryonic industry that can be competitive in coming years. Heck, turning algae into fuel is easy. The basic part is just high school chemistry. So we’d be creating a new supply source for the liquid fuels industry. And we’d be able to point to at least one success story where people can agree that we all did something right.”

Then the venture capitalist added that one of his startups is “working on coal-eating bugs.” He explained that “There’s a lot of coal buried so deep, or under other conditions that we can’t mine it. That coal will never get out. So why not put bugs down in the deep seams, and let them eat the coal? Then we can harvest the gases that come out the back end of the bugs, and use that as feedstock for other things.”

At one point, one of the lunch participants turned to the silent person at the table, who was busy taking it all in and making a few discrete notes. Then came the dreaded question, “Well Byron, what do YOU think?”

I focused my comments on geothermal development. I pointed out that for all the anti-carbon sentiment out there, the most under-appreciated, “clean and green” energy source is geothermal. There appears to be strong support for geothermal development via tax incentives and other, policy-based standards. Combine this with the growing social focus on clean, renewable energy sources.

Right now, 24 states have renewable portfolio standards (RPS) for electricity production. And Congress is leaning towards setting a national standard of 20% to 25% RPS power production by 2025. We’re at the point where a utility like California’s Pacific Gas and Electric is so desperate for “clean” energy that they’re contracting with a privately-owned company to build a satellite to harvest solar energy from space, and “beam” it back to earth.

Many of the geothermal companies that are out there now are in relatively advanced stages of development. But the problem during the past year or so has been lack of access to capital. In other words, lack of capital is the strongest headwind to progress.

I’ve recommended five geothermal companies to the subscribers of Energy and Scarcity…and I still like all five of these companies. They are all finding steam. They all have power purchase agreements in place. And they are all about to become players within the “clean green” energy space.

No matter what problems might still befall the U.S. economy, I would expect many geothermal companies to thrive. They are simply in the right place at right time.

Source: Clean, Rhymes with Green

“Climate Change” Driving Policy Now

According to the satellite builder, the dominant elements of the political and media culture are “completely in the tank” when it comes to believing in the dangers of “climate change.”  It’s not as if climate change is demonstrably true, he pointed out.  There are valid scientific data from both sides of the climate change issue, and many valid data points in between.  But according to the aerospace executive – some of whose satellites were built to track climate change — “For at least ten years, if you have not been promoting the dangers of climate change then you have not been receiving government grants.  So the research community is following the money.”

Thus the research literature is coming out strongly in favor of “doing something” about climate change.  And policy-makers are using this research literature to justify doing what they’ve wanted all along, which is change the world as we know it.  As a class, the activists want to change the world into something else.

“Pathological Hatred” of Carbon-Based Fuels

According to the steel executive, the climate change issue has spurred what amounts to “a pathological hatred” of carbon-based energy systems.  “It doesn’t have to make practical sense,” says this source.  “It doesn’t even have to work with economics.  It just has to support a policy to utterly transform the nation’s energy system.  The people making policy now have a crusader’s mentality.  ‘The past is trash,’ is how many of the new policy makers view our world.  So the new policy makers want to promote radical change in energy policy.  They’re going to jam it down the throat of the economy.”

According to the steel executive, the steel industry expects to see inflation-adjusted, baseline energy prices triple or quadruple within ten years.  “Whether the government taxes carbon-based energy at the source, or whether they pass ‘cap-and-trade’ legislation, it’s going to cost us.  So we’ll pay.  Of course, we’ll pass along the new costs to the steel buyers.  If demand goes down, we’ll close facilities.  Then the TV cameras will show up at the plant gates to watch us shut the doors and click the padlocks.  And we’ll get called bad names by the people who never much liked us in the first place.”

Can the Economy Support What the Government Wants to Do?

The former Treasury official added that a new “policy paradigm” has yet to form in Washington DC.  “It’s like during the Cold War, there was a bi-partisan consensus to confront and contain the Soviet Union.  It was expensive, but we agreed to do it.  We made the national sacrifice.  Well, that foreign policy consensus ended when the Berlin Wall fell and the USSR came down.”  The groupthink in the early 1990s was that another kind of broad consensus had to take the place of the confrontation with the Soviets.  And by its very nature, that consensus was fragile.

“Let me back up,” said the former Treasury official. “Confronting the Soviet Union gave the U.S. an excuse to continue with Franklin Roosevelt’s Depression Era, New Deal, big government for 45 years after World War II.  But after the USSR fell?  Why did we still need big government?  To run a modern welfare state?  That was the justification.  Remember the talk about that ‘Peace Dividend?’  People were drooling over the idea of cutting the military budget and paying for more and better social welfare through more big government.”

“So what happened?” asked the Treasury guy.  “Some people thought they were going to run a big government welfare state using modern monetary theory.  They convinced themselves that we could do that.  They didn’t understand the long term problem.”

What was the long-term problem?  “The welfare state was never going to last.  Especially because the nation collectively wanted it to support a rank, consumerist culture that could not earn its keep within the world economy.  We imported, imported, imported.  And we paid for it with cheap dollars.  After the U.S. left the gold standard in 1971, the fundamentals of the American productive economy could never support what the nation was trying to do.  We’ll look back eventually and realize it was delusional policy-making.  All we did was run down the economy for a couple of generations.  It finally collapsed in 2008.”

Whatever “post-USSR consensus” existed in the U.S. in the 1990s shattered during the 2000s.  “People went nuts because of the Bush Administration,” said the Treasury official.  “The white-bread explanation – call it ‘Decline and Fall for Dummies’ — was that it was all about the evil George Bush and his wars in Afghanistan and Iraq.  Well, Bush and the wars were visible, so that’s what people blamed.  The real problem for the U.S. was that the whole foundation for post-war American society, economy and governance was caving in under our feet.  The timbers were rotten.”

The Barn Burned Down – Did Anyone Notice?

According to the Treasury man, the U.S. economy is now confronted by “block obsolescence” of many of the economic and political assumptions with which we’ve lived for decades, since World War II.  “Chrysler isn’t the only big institution that’s bankrupt.  We ought to burn down a few universities, while we’re at it,” he added.

And he noted that Republicans and Democrats both fed at the trough while the going was good.  “But while the politicians had their heads buried in the trough for all those years,” he said, “they didn’t notice that the barn was burning down around them.”

The Treasury-man continued:  “Look at the destruction of former industrial titans like General Motors (NYSE:GM), and with GM the annihilation of much of the rest of the automobile industry.  Who’s going to invent whatever will take its place?  We used to say that 40% of the U.S. economy was based on the auto industry, directly or indirectly.  Are we ever going to see 40% of the U.S. economy based on putting solar panels on roofs, or tuning the gearboxes of windmills?”

“Free-Traded” to the Poorhouse – We’re at the Edge of the End

The former Treasury official looked at the ongoing economic crash.  He placed it within the context of the long-term decline in U.S. manufacturing.  “As a society,” he said, “we’ve made a lot of very bad choices of both moral philosophy and economic policy.  Those bad choices have brought us to the edge of the end.  We’ve spent, borrowed and ‘free-traded’ ourselves to the poorhouse.  Now the Chinese own us.”

Helping Embryonic Industry – Creating a Success Story

The venture capitalist chimed in with some thoughts.  “If the feds are going to spend billions on stimulus, then they ought to direct some of that money to help fund promising research.  How about some money to pay for every fossil-fuel power plant in the country to siphon off some of its CO2?  Then run the CO2 through a facility to grow algae to make biofuels.”

“We’d be killing about four birds with one stone,” explained the venture capitalist.  “We’d be taking down CO2 emissions.  Not much, maybe, but some.  We’d be helping an embryonic industry that can be competitive in coming years.  Heck, turning algae into fuel is easy.  The basic part is just high school chemistry.  So we’d be creating a new supply source for the liquid fuels industry.  And we’d be able to point to at least one success story where people can agree that we all did something right.”

Then the venture capitalist added that one of his startups is “working on coal-eating bugs.”  He explained that “There’s a lot of coal buried so deep, or under other conditions that we can’t mine it.  That coal will never get out.  So why not put bugs down in the deep seams, and let them eat the coal?  Then we can harvest the gases that come out the back end of the bugs, and use that as feedstock for other things.”

“Well, What Do YOU Think?”

At one point, one of the lunch participants turned to the silent person at the table, who was busy taking it all in and making a few discrete notes.  Then came the dreaded question, “Well Byron, what do YOU think?”

I focused my comments on geothermal development.  I pointed out that for all the anti-carbon sentiment out there, the most under-appreciated, “clean and green” energy source is geothermal.  There appears to be strong support for geothermal development via tax incentives and other, policy-based standards.  Combine this with the growing social focus on clean, renewable energy sources.

Right now, 24 states have renewable portfolio standards (RPS) for electricity production.  And Congress is leaning towards setting a national standard of 20% to 25% RPS power production by 2025.  We’re at the point where a utility like California’s Pacific Gas and Electric is so desperate for “clean” energy that they’re contracting with a privately-owned company to build a satellite to harvest solar energy from space, and “beam” it back to earth.

The companies that are out there now are in relatively advanced stages of developments.  The big problem is that the follow-on pipeline is almost empty.  The problem has been lack of access to capital for the past year or so.  In other words, lack of capital is the strongest headwind to progress.  If the funding delays can break down, then we’ll see decreased complexity for funding, and project schedules moving ahead.

That’s all for now.  Thanks for reading…

Byron King

Source: The Direction of Energy Policy

This from The Daily Reckoning:

Contrary to the common misconception, we have no energy shortage. In fact, we have more energy available than we could ever use. If not for the anti-nuclear movement, the funders of terrorism would not be awash with petrodollars and our economy would be significantly stronger. Unfortunately, rock musicians and actors had more influence on energy policies than scientists like Petr Beckmann, whom I was lucky to have as a friend.

Dr. Beckmann was a Czech refugee from Nazism who spent much of his career in America promoting nuclear power. Until he died, Beckmann was treated as some sort of demon by the environmental movement. No longer.

Today, even green leaders are admitting the folly of rejecting this cheap, clean and safe (when compared rationally with other energy sources) technology. If there were justice, Beckmann would have statues erected in his honor.

The green turnaround on nuclear power is particularly relevant now. President-elect Obama has picked several global warming activists to serve as top officials. The most important is Harvard physicist John Holdren. As presidential science adviser, he could have a significant impact on energy policy. His career, in fact, has focused on climate change, next-generation nuclear energy and nuclear disarmament.

From the perspective of an investor, what does this mean? Among other things, it could rapidly accelerate the transition from the current generation of nuclear power plants to the next. I would, incidentally, never invest in a technology simply because it has political support. Ethanol, for example, had lots of it. It was never a good idea, though, and is finally being recognized as such.

Nuclear power as we know it today is obsolete. Current light water reactors use uranium-235. This fuel is not only expensive, but its byproducts create problems. They are difficult politically to handle and can be used to create nuclear weapons.

Those byproducts are, ironically, the reason we initially adopted uranium-235. America needed the materials for nuclear weapons. Power plants using uranium-235 provided them. Regulators, naturally, favored the technology despite the fact that there were superior fuels – especially thorium.

Thorium is not only far more abundant than uranium-235, but thorium reactors do not produce waste materials useful in nuclear weapons. In fact, the wastes are far less hazardous and much cheaper to deal with. Thorium reactors are safer in general to operate, producing little radioactive threat outside their shielding. They cannot, in fact, experience a catastrophic meltdown.

This is a much bigger deal than it appears on the surface. Fuel costs, though much lower for thorium, don’t play much of a role in total nuclear power costs. In his book The Nuclear Energy Option, Bernard Cohen estimates that safety measures to counter meltdowns account for about 75% of current plant costs. As thorium plants can’t melt down, energy costs would be significantly lower.

Additionally, thorium reactors can be almost any size. Prototypes have been made small enough for military aircraft. This makes them economically viable in developing countries without the additional cost of large-scale electrical infrastructure. Thorium reactors would also be easier to sell internationally because they cannot be used to manufacture nuclear weapons.

The shift to thorium would facilitate economic, environmental and nonproliferation causes. So why are we still building plants that burn uranium-235? This is one of the hazards of government involvement in the sciences. Once grants and regulatory attitudes that favor a technology are in place, they are huge barriers to competitors.

A free market would favor thorium over uranium anyway. Coincidentally, Obama’s administration could significantly reduce barriers to thorium energy production. I’m looking hard now at several ways to take advantage of this development.

There is one potential wrench in these works, though. It’s nuclear fusion, and it could change everything. The fuel for fusion is essentially free, so the cost of power generation is a matter of capital costs and maintenance. I’ve been a skeptic about the economics of fusion, but that has begun to change. It appears that early research grants may have derailed and forced out more promising and cheaper fusion technologies than those favored by various governments’ research efforts.

Source: The Ultimate Alternative Energy

Obama previously estimated that his estimated $800 billion strategy for winching the American economy out of its year-long recession could save or create 3 million jobs, but the new study has found that the actual number would range between 3 million and 4 million.

The analysis was submitted by Christina Romer, head of Obama’s council of economic advisors, and Jared Bernstein, the economic advisor to Vice President-elect Joe Biden. The analysis directly follows an official government report showing that U.S. employers slashed more than half a million jobs in December, pushing the unemployment rate to 7.2% and bringing the number of jobs lost last year to 2.6 million — the worst showing since 1945.

“The jobs we create will be in businesses large and small across a wide range of industries,” President-elect Obama said on his weekly radio and Internet address. “And they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long term.”

With President-elect Obama’s inauguration set for Jan. 20 – a week from tomorrow (Tuesday), expect around-the-clock discussions about the stimulus package (and potential tax cuts), as the political bickering begins in earnest.

Because of the plan’s high cost and proposed tax cuts, Obama has faced opposition from Republican and Democratic lawmakers. The incoming president’s top aides visited Capitol Hill on Friday to attempt to allay lawmaker concerns. The plan would combine the tax cuts, aid to states and public-works projects.

Obama said his plan would create nearly 500,000 jobs by investing in clean energy, by committing to double the production of alternative energy in the next three years and by improving the energy efficiency of 2 million American homes. However, he also warned yet again that the economy is likely to get worse before it gets better and that any recovery will not happen overnight.

“These made-in-America jobs building solar panels and wind turbines, developing fuel-efficient cars and new energy technologies pay well, and they can’t be outsourced,” Obama said during his address.

In excerpts from an interview with ABC News to be broadcast on Sunday, President-elect Obama said Americans will have to scale back and make personal sacrifices.

“I want to be realistic here, not everything that we talked about during the campaign are we going to be able to do on the pace we had hoped,” he said in a taped interview with ABC’s “This Week with George Stephanopoulos.”

“Everybody’s going to have (to) give,” Obama said.

Obama also said the proposal:

• Showed the recovery plan would put nearly 400,000 people back to work repairing infrastructure like crumbling roads, bridges and schools and adding miles of broadband network cable.

• Would include bipartisan extensions of unemployment insurance and health care coverage, a $1,000 tax cut for 95% of working families, and assistance to help states avoid deep-and-painful budget cuts in essential services like police, fire, education and health care.

“We won’t just create jobs, we’ll also provide help for those who’ve lost theirs, and for states and families who’ve been hardest-hit by this recession,” Obama said.

Investors will be tested in the coming weeks as earnings season approaches and corporations share their “gloom and doom” of the past quarter – Intel Corp. (INTC) and Wal-Mart Stores Inc. (WMT) offered investors a sneak peak.

The monthly inflation gauges should depict additional energy price contraction, which actually has served as an unofficial stimulus package at the pumps (though no one ever talks about it).  Traders who thought oil had set a floor around $40 a barrel may have to reassess their views. Cuts by the Organization of Petroleum Exporting Countries (OPEC), Middle East turmoil, Russian/Ukrainian disputes … nothing seems capable of halting the slide in oil prices.

Instead, the eternal pessimists focus on deflation, fearful that consumers will hold off on all purchases (regardless of pricing) and the economic downturn will continue well into 2009.  On that note, the retail sales data should offer few positive surprises.  At least, that new “chief performance officer” represents job expansion. But as Money Morning’s investing gurus have demonstrated, it is inflation – not deflation – that will be the big worry.

Market Matters

Six days and counting. Just how will equities perform in 2009? According to the January Effect: As the first five days of January go, so goes the market for the year. Often investors sell stocks late in the year to lock in capital losses. When they reinvest during the first five days (stocks rise), they believe the markets will increase and look to take advantage of the appreciation. When stocks fall during that week, investors are less optimistic about the future of the markets. In 2008, both the Dow Jones Industrial Average and Standard & Poor’s 500 Indexes dropped by more than 5% during the initial five trading sessions, a highly negative (but accurate) precursor of the year to come.  However, in 2009, the predictor turned out to be less clear; the Dow dropped by 0.39%, while the S&P 500 rose by 0.72% (though both were lower after Day Six).  The market uncertainty continues into the New Year.

In corporate news, published reports state that Citigroup Inc. (C) and Morgan Stanley (MS) are looking to combine their brokerage units. Morgan Stanley could pay $2 billion to $3 billion or more for a controlling stake in Citigroup’s Smith Barney retail brokerage business.

Terms of the deal are still being worked out, sources familiar with the matter said, adding that Citi may put its toxic assets into a separate unit as a preliminary step toward shedding them.

Under the current plan, Citigroup and Morgan Stanley would set up a joint venture for their combined retail brokerage businesses. Morgan Stanley would own 51%, control the venture, and would expect to buy Citigroup’s remaining share over the next five years.

The cash would be a big boon for Citigroup, which is under tremendous pressure from the U.S. government to shore up its balance sheet after taking $45 billion of government capital in October and November, the sources told Reuters.
The bank is considering multiple options in addition to the Morgan Stanley deal.
“Everything is on the table,” the sources said.

Dismantling the rest of Citigroup would be difficult, since not many are in the market for big-ticket financial assets now. A few smaller businesses or groups may be sold off – Citi has internally discussed the possibility of selling its Banamex Mexican banking unit, for example. But splitting up Citigroup completely is unlikely.

Wal-Mart Stores, Inc. (WMT) joined the ranks of depressed retailers by missing December sales projections and then cut its outlook for the quarter.  Toyota Motor Corp. (ADR: TM), General Motors Corp. (GM) and Ford Motor Co. (F) reported sales declines of 30% (or more) last month, while Volkswagen AG (ADR: VLKAY) and Bayerische Motoren Werke AG announced plans for greater expansion in the U.S. market to take advantage of their struggling domestic competitors.

Alcoa Inc. (AA) added to the gloomy unemployment picture by reducing its work force by 15,000 jobs. Intel again warned that the economy is hindering its operations as consumers and businesses shy away from technology purchases.  Indian high-tech giant Satyam Computer (ADR: SAY) pulled a “Madoff” by informing investors that its chairman had been falsifying financial results and exaggerated his $1 billion cash balance.  Even Madoff himself was appalled (as he attempted to mail $173 million of checks to loyal investors and send $1 million in jewelry to friends and family).

Oil surged above $48 a barrel early in the week as war escalated in Gaza; however, a mid-week report depicted higher-than-expected inventories and prices plunged 12% in a day – and ultimately dropped below $40 for the first time in 2009.

Stocks gave back those gains from the first trading day as investors (over)analyzed the retail numbers and other data. On the fixed income front, bond investors appear more willing to accept risk as $750 million flowed into high-yield (junk) funds during the last two weeks of 2008.

Economically Speaking…

So what’s $1.2 trillion between friends? After entering office with a budget surplus, the fiscally conservative President Bush will leave his successor with a $1.186 trillion deficit (that is sure to rise with the afore-mentioned Obama stimulus package). For his part, Obama promises to “put government on the side of taxpayers and everyday Americans” as he created a new position – chief performance officer – to eliminate waste wherever it exists in the federal budget.

Good luck with that, Mr. President (elect).

While the economic calendar was quite hectic, economists and investors alike eagerly awaited (rather, reluctantly feared) the late-week unemployment and non-farm payroll releases. In December, the jobless rate surged to 7.2%, its highest level in 16 years, as another 524,000 jobs were eliminated from the economy.

For all of 2009, 2.6 million jobs were lost, the biggest contraction since 1945, though the labor force has tripled since that time. While new claims for unemployment benefits has shown some improvement over the past few weeks, continuing claims rose to a 26-year high, revealing that laid-off workers are having significant difficulties finding new jobs during the recession.

Factory orders fell for the fourth straight month as the weak (and getting weaker) auto sector continued to restrict any progress in manufacturing.

Consumers borrowing declined by a record amount in November, as individuals remained afraid to make any purchases or add to debt positions during these dire times.  Unfortunately, the surest way to work our way out of this recession is for those individuals and businesses (who are able) to pour money back into the economy and that is simply not happening. The minutes from the December U.S. Federal Reserve meeting were released and policymakers appear highly pessimistic about growth prospects for 2009 and implied that rates could remain just above 0% for the foreseeable future.

Meanwhile, the Bank of England cuts its rate to the lowest level in its 315-year history.

Weekly Economic Calendar

Source: $800 Billion Obama Stimulus Will be Topic of Debate Through Inauguration

This from Investment U:

The Obama administration has made a big deal about renewable energy. Over the next several years, the new President has plans to spend roughly $150 billion promoting and enabling its growth. And with $700 billion flowing from the United States into OPEC’s pockets every year, I don’t think you’ll get much of an argument from anyone about the timeliness or the need for renewables.

But even with massive amounts of capital investment – and widespread adoption by utilities and end users – renewable energy will still only account for roughly 10% of world energy output by 2030, an increase of only three percentage points from today’s estimated 7% contribution. Depending on whom you talk to, however, that estimate is wildly optimistic.

The stark reality of worldwide energy production is a dirty, four-letter word: coal. Since the beginning of the 21st century, its worldwide consumption has outpaced any other fuel source, growing nearly 5% per year. This, too, in the face of prices that have escalated every year since 2000.

Consider 97% of that growth has occurred in emerging market countries, most notably China and India. They’ve respectively accounted for 66% and 19% of the total increase.

To keep up with the demand, world coal production is projected to increase by nearly 60% by 2030. Every major coal producing country will see huge increases in its coal output: China will almost double its output, India’s will more than double and Russia’s will rise almost 75%.

What about reserves… is there enough coal out there to meet this huge increase in consumption? The answer is yes. World reserves are more than adequate, with China, Russia and the United States accounting for 60% of them.

Presently, China’s a net exporter of coal, but that will change in a year or two. By 2030, China will be importing 88 million tons of the black rock a year. India will be importing a staggering 220 million tons per year, overtaking Europe to become the second-largest importer.

All this is of great benefit to U.S. coal producers, who have seen their exports surge nearly 45% in 2008 alone. They will continue to see increasing exports of coal to China, India and other emerging market countries.

Large investments will be needed on the prospecting side – to identify economically viable deposits – and on the mining side to develop new projects once identified. Total investment in coal-supply infrastructure is expected to be $730 billion through 2030, with 91% of that going to mine development and mining equipment, and the rest for port expansions and shipping upgrades.

Mining Coal’s Profits

The safest direct coal play is the Market Vectors Coal ETF (NYSE:KOL), which tracks the performance of the Stowe Coal Index. This gives investors a means of tracking the overall performance of companies engaged in the coal industry. This is a relatively new ETF and it gives investors exposure to the major players in the industry including:

• Arch Coal (NYSE:ACI) – One of the largest coal producers in the United States.
• Peabody Energy (NYSE:BTU) – The largest private sector coal company in the world, with majority interests in 31 coal operations located throughout the United States and Australia.
• Bucyrus International, Inc. (Nasdaq:BUCY) – A world leader in above and sub-surface mining equipment.

Another safe coal bet is Joy Global, Inc. (Nasdaq:JOYG) – essentially a carbon copy of Bucyrus. Joy’s wholly owned China Mining Machinery subsidiary recently acquired Wuxi Shengda, a Chinese manufacturer of long wall shearing machines used in underground mining operations in China.

Speaking of China, the second-largest coal producer in China, Yanzhou Coal Mining Company (NYSE:YZC), owns eight working mines – including one in Australia – with many others under construction. The seven working mainland mines have almost two billion tons of proven reserves. That’s enough to run China’s power plants for five-and-a-half years.

Of course the negative aspects of increased coal usage are increased greenhouse gas generation. Right now coal is responsible for 42% of greenhouse gasses emitted worldwide. The International Energy Agency estimates that will increase to 46% by 2030, even with aggressive implementation of new carbon capture and storage technology.

Coal is a dirty four-letter word when it comes to energy generation. And unfortunately, even under the best-case scenario, the world will have to depend on it for years to come. Investors would be wise to consider some form of exposure to coal as part of a well-balanced energy and infrastructure portfolio.

Source: Renewable Energy Reality: Coal

The pullback by Silicon Valley’s venture-capital elite is part of a complete overhaul of its investment criteria. The big surprise is that green investments are on the hit list along with other high-tech innovations — a reversal of the save-the-planet culture that has emerged in this Mecca of libertarian funding.

An article in today’s New York Times revealed that Silicon Valley VCs are now turning to shorter term opportunities versus the long-term returns that exemplify a healthy investment climate.

Alternative energy will get more critical assessment along with the Web 2.0 hype (think social networking), cell-phone advertising, massive enterprise software development and other long-term, big-ticket products.

Silicon Valley’s turn-around on green infrastructure comes at a time when the incoming Obama administration is pushing alternative energy as a means to create a new industry and reduce reliance on foreign oil.

Investors with an interest in alternative energy now have to pick sides. Our take on green energy is that it will eventually provide a profit, but the near-term prospects have always been questionable. In short, we always advised not to believe the media hype. Now it seems that the brains in Silicon Valley are in agreement.

Having personally worked in Silicon Valley for 15 years as a marketing professional, I know first hand that there’s probably no other investment community on the planet more attracted to hype. They create it, consume it and live and die by it.

Now, as Big Media jumps on Obama’s renewable energy bandwagon, Silicon Valley decides it’s time to get off. Why the change of heart? It has to do with two clashing trends.

For one thing, total investment in renewable energy in 2007 was $3.43 billion, up 50% over 2006, according to the Venture Power Report. Solar led with an immense $1.05 billion total.

At the same time, Silicon Valley produced just one IPO in 2008, the lowest number in more than two decades and down from an average of 28 IPOs a year since 1985.

The head-on collision of record-high alternative-energy investments and a single, crummy IPO means that Silicon Valley is not expecting to see a return on their green dollars any time soon.

The San Jose Mercury News, the bible of Silicon Valley, reported on Dec. 26, 2008, “The ugliest recession in decades is expected to keep the national IPO market frozen through at least the first half of 2009 and maybe longer, according to several venture capitalists and analysts.”

So despite President-elect Obama’s promise to spend $150 billion over the next decade to promote renewable energy, Silicon Valley is saying “Show me the money.”

Richard Nixon tried energy independence and failed. Jimmy Carter promoted synthetic fuels and failed. Bush promoted biofuels and failed.

Now President-elect Obama thinks he can succeed where his predecessors have stumbled badly. Maybe he will make it work. But it’s very possible that the libertarian culture in Silicon Valley has sobered up, realizing that the government really doesn’t have a great track record of picking winners for investors.

As always, if you’re into alternative energy for the long haul have yourself a ball. If you want to keep the lights on, put your money elsewhere.

This from Penny Sleuth:

We don’t play politics at Penny Sleuth. Frankly, we can’t agree on politics. But that doesn’t mean smart investors should ignore what Washington’s doing. Some of the largest profits in history spawned from legislation and court rulings.

Take solar energy for example. After the introduction of the Solar Energy Research and advancement Act of 2007, investors watched as solar companies’ share prices exploded.

One of the biggest winners was First Solar Inc (NASDAQ:FSLR). The bill was brought before the House of Representatives on June 19, 2007. Over the next 12 months, First Solar’s shares jumped 300%.

Another was SunPower Corp (NASDAQ:SPWRA). SunPower’s shares blew up 151% in just six months.

Both of these gains can be directly contributed to a small bill being read in the House. This can happen on any particular day with any particular piece of legislation. We never know which bill or act will cause such run ups. But after November 4, we have a pretty good idea.

Obama Profit Opportunity No. 1:
Science’s Most Important Breakthrough in Centuries

While on the campaign trail, Barack Obama called for the ban on stem cells to be peeled back. He said that we have a duty to advance science in any way we can to cure the sick and improve the health of the world.

This should send all stem cell stocks through the roof. But if investors can pinpoint the right biotech/R&D firm, they’ll see the largest of these gains. Potentially collecting triple or even quadruple digit profits.

Fractured Spinal Cord? No Problem

Neuralstem Inc (AMEX:CUR) is an industry leader in Human Neural Stem Cell technology. Simply put, Neuralstem is working on cures for central nervous system diseases. The company currently has four issued patents and 12 more pending. Each of these are crucial to the industry. It limits competition, while providing a lucrative asset for future growth.

These patents cover a specific regenerative process where neural stem cells are administered to the area where a spinal cord fracture occurred. These stem cells grow and heal the fracture, which restores motor functions to the parts of the body where it’s been cut off.

For instance, if someone falls and fractures their spinal cord, there’s a good chance that person will lose control over the lower half of his or her body. In the past, that person would never be able to walk again. With Neuralstem’s technology, a simple injection can restore the person’s control.

Currently, the market values Neuralstem at just $51 million. Shares can be bought for around $1.60. That’s obviously too cheap. It’ll only take one bill, announcement, or speech to send shares flying. It appears that the stem cell ban will be lifted in the first 100 days of the Obama Presidency, so Neuralstem could see a huge boost in early 2009.

Obama Profit Opportunity No. 2:
Fixing Renewable Energy’s Fatal Flaw

There is only a certain amount of time during the day when windmills can produce energy. The average capacity factor for wind power is about 30%. The rest of the time, these windmills sit like giant statues, waiting for the next gust of wind. During that period — the “energy time gap” — no new electricity is going onto the power grids.

The same goes for solar power. The sun doesn’t shine 100% of the time. Even in the vast deserts of the U.S. Southwest in the peak of summer, the sun is up only about 14 hours per day. When it is up, there are problems with cloud coverage. The average capacity factor for solar power is around 25%.

Round-the-Clock Energy Storage

ZBB Energy Corp (AMEX:ZBB) designs and manufactures a special type of fuel cell storage device called Zinc Energy Storage Systems (ZESS). ZBB’s systems are used worldwide in the renewable energy fields. For instance, wind and solar farms use ZESS to store extra energy during peak hours. Then, in off-peak periods (no wind or at night), the ZESS can transmit its stored power to the grid. This system allows for continuous electricity 24 hours a day.

Here’s the best part… It only takes three to four hours to charge a ZESS. That’s plenty of time to store the solar or wind power during peak time. The company sells its systems to wind and solar farms, utilities, and commercial/industrial sites.

Banking on the First 100 Days

Within the first 100 days of Obama’s Administration, the demand will likely multiply. Obama plans to invest $150 billion to help create five million jobs in clean energy over then next 10 years. You can bet that a good portion of that money will be sent to wind and solar farms. Those farms will need to increase efficiency and storage. That’s when they’ll call ZBB.

On top of the spending, Obama has already declared he’ll push for new, strict mandates on energy and efficiency. For instance, he’s calling for 10% of our electricity to come from renewables by 2012 and 25% by 2025.

Obama Profit Opportunity No. 3:
It’s Upgrade Time

Many investors run from the defense industry when they hear a Democrat coming. We think you should jump right in. You see, the largest defense contracts in our nation’s history have come under Democrats. In fact, almost every period of the military buildup has come from a left-of-center White House…with the exception of Ronald Reagan.

As we enter our sixth year of the Iraq War and our eighth year of the one in Afghanistan, our weapons, vehicles, and equipment are desperately overdue for repairs and upgrades.

Whether you are a Democrat or a Republican, you still provide our troops with the best equipment available. It certainly wouldn’t look good for Obama to enter the oval office on day one and cut equipment upgrades to the troops in war zones.

We think he’s going to take the opportunity to “reach across the aisle” and upgrade our military’s technologies and defenses. He’ll want to do that early if he plans to get any of his agenda passed.

Niche Player in a Mega Industry

That’s why we recommend you check out Herley Industries (NASDAQ:HRLY). Herley is a leader in RF microwave and millimeter wave components. These components are crucial to flight instrumentation, weapons sensors, guidance systems, and radars.

The company currently has a backlog of $157 million, with a market cap of just $139 million. Herley’s list of customers include Northrop Grumman, Boeing, Lockheed Martin, and the U.S. government.

While you might not have heard of it, Herley has been around since 1965. It’s been designing microwave devices for the defense industry for over 40 years. The company’s technology has been implemented in such projects as the F-16 Falcon, E-2C/D Hawkeye, and the AMRAAM air to air missile.

This kind of background puts it in the front spot for any future defense upgrades. On top of that, it’s stock is extremely cheap. It’s trading at just 0.72 price-to-book, and 0.63 price-to-sales.

Defense is likely a top priority for the incoming Obama Administration. The time is right to jump in on a niche defense company like Herley.

Source: The Three Best Plays for Obama’s First 100 Days

We believe this is another body blow to the ailing green industry, as Washington taps a source of energy with huge potential returns. Moreover, president-elect Obama has hedged his bets on oil shale – perhaps surprising many green advocates.

On October 27, 2008, Obama told supporters in Denver…

“When it comes to oil shale right now, I think we have to do more research and more science to discover whether or not the amount of oil that would be generated would justify what would inevitably be some disruption of the landscape here in Colorado…Colorado is blessed with a lot of natural resources.”

By opening up 1.9 million acres of federal land in Wyoming, Utah and Colorado, the U.S. could be looking at an additional 800 billion barrels of oil, according to the Department of the Interior. That’s three times more than Saudi Arabia’s proven oil reserves.

More than 70% of American oil shale is on federal land. It’s mostly in Colorado, Utah, and Wyoming. More than 50 tar sands deposits are found in eastern Utah, containing an estimated 12 to 19 billion barrels of oil.

Since oil currently trades at about $50 a barrel, down from nearly $150 a barrel this summer, the economics of shale may not make financial sense today. However, oil prices will inevitably rebound, and if they surpass $60 a barrel then oil shale becomes viable.

Where Obama may hurt oil shale is in the environmental impact of production. Squeezing oil out of rock requires tremendous amounts of water. The process also spews a lot of greenhouse gasses (but so does ethanol).

If Obama stays the course on Bush’s oil shale policy, the place to put your money would be in new oil-shale technology. There would be a scramble to produce oil shale with cleaner methods, although the impact remains unknown so far on the ultimate price per barrel.

But for investors, oil shale could present a much larger bonanza than green.