It’s the largest infrastructure investment since Eisenhower’s Federal-Aid Highway Act of 1956, which created the U.S. interstate highway system.

Infrastructure investment – under-funded since the 1960s – will be unprecedented over the next three to five years, and let’s face it: the need is huge.

According to the National Surface Transportation Policy Review Study Commission, $225 billion needs to be spent annually for the next 50 years… that’s over $11 trillion, and that’s just for the transportation sector.

Of course, public infrastructure projects such as roads, bridges and water and sewer systems are by their very nature huge, expensive undertakings, requiring massive amounts of capital and manpower.

But very little actual construction activity is getting underway. Here’s why, and what you can do about it in the meantime.

What’s Going on in Big Infrastructure Project Financing?

So, why is little construction happening? Simple.

The current economic environment has upset the applecart with regards to funding these capital-intensive projects. As tax revenue continue to plummet, over 30 states have serious budget shortfalls, and most have shutdown funding for large capital projects. Most municipalities aren’t in any better shape.

At the Federal level, Congress is transfusing the Highway Trust Fund every year – last year it was $8 billion – as consumers drive less and switch to more fuel-efficient cars and trucks.

Clearly, new and innovative ways to fund infrastructure projects are needed. Last week, the fourth annual U.S. Infrastructure Investment Summit was held in New York to address this issue, and I was delighted to be in attendance at this important two-day event.

This high-level gathering annually brings together a small, but influential group of individuals in the world of infrastructure finance and investing.

In addition to yours truly, attendees included directors and managers of a number of infrastructure investment funds, together with those from Barclays Capital, UBS, the Blackstone Group, Jolene Molitoris (Ohio DOT). Several managers of large pension funds rounded out the group.

This year, the discussions and panel sessions focused on several key areas. Below are a few of the highlights:

• The Federal Infrastructure Spending Bill

Besides the $120 billion earmarked for infrastructure in the stimulus bill, the Federal Transportation Authorization bill provides for an additional $450 billion of funding over six years, in the form of a national infrastructure bank.

It accomplishes two things: It relies on bonds to provide the necessary funding for major infrastructure projects and it eliminates the huge, upfront payments. Clearly, there will be plenty of capital available from the government for infrastructure projects.

• The Impact of the Global Financial Crisis on Infrastructure Spending

The global financial crisis has changed the financial landscape for the foreseeable future. Retail lenders are far more conservative, warning potential homebuyers that they will need “serious skin in the game” in order to qualify for a mortgage.

The same thing is happening with infrastructure, according to Ben Heap, Executive Director of Infrastructure Asset Management at UBS, and Stephen Howard, a Director at Barclays Capital.

Most of the deals being done right now are more like partnerships with other investors and pension funds. And they have much more equity in them today as opposed to those done several years ago. The reason is that traditional debt financing is hard to come by with state budgets in crisis mode.

As a result, political acceptance of private funding deals is warming fast (money talks) – especially at the municipal level – where partisan politics is often non-existent. At the local level, most deals are small, bottom-up deals involving a few million dollars.

• The Current Lending Environment and Infrastructure Valuation

“Not all infrastructure is the same… many perform differently from an investment standpoint”, says Michael Dorrell, Senior Managing Director of Blackstone Group. Toll roads have very low earnings volatility, airports are higher and seaports are the highest.

According to Dorrell, earnings for infrastructure are off only 3% to -5%, versus the S&P index that’s off nearly 85%. Even infrastructure stocks are off 35% to 40% from their highs. His main criteria for valuing good infrastructure assets?

Making sure the capital structure of the underlying asset is durable and robust. In the past, over-enthusiasm on the capital structure side has had a significant impact on asset valuation.

• What it Takes to Create Public-Private Partnerships (P3s)

People don’t want to pay twice for infrastructure. They think it should be free, given that they’ve already paid taxes. The federal gas tax – due to its fixed nature – has lost much of its value as a proxy for the use of roads and bridges.

Paying for use is coming as a result of all of this. Proper tolling is a way for people to understand the value of the asset they are using. Expect toll roads to proliferate across the country.

States and municipalities will partner with private equity funds and pension funds as a means of raising capital and reducing annual budgets. These P3s will proliferate at the local level, where partisan politics is relatively absent. Some state deals will happen, particularly in those states with budgetary crises, where raising capital by any means is paramount.

What it All Means for Investors

The bottom line is this: The funding issues are being solved, albeit slower than initial expectations.

Dorrell said it best: “Now is a terrific time to buy infrastructure assets. They are extremely undervalued.” Of course infrastructure stocks are good buys as well… and for all the same reasons: nobody likes them.

Jacobs Engineering Group, Inc. (NYSE: JEC), Fluor (NYSE: FLR) and Foster Wheeler AG (Nasdaq: FWLT) are three great examples of companies that stand to benefit as the infrastructure cash gets deployed this year and next.

As credit markets loosen, it will begin to free up billions in capital that will be put to work on infrastructure projects all across America, creating hundreds of thousands of jobs in the process.

As most of you know, I’ve been following the energy and infrastructure sectors for some time now for both Investment U and The Oxford Club – I believe that in the next three to five years there will be incredible investment opportunities in these two sectors.

And the prospects are exciting enough that we’re looking to devote an entire service to profiting from them. So stay tuned for more information as things unfold.

Source: Stalled Infrastructure Projects: What it Means for Investors

So here we are in a shaky economy tottering on a ledge and along comes the EPA ready to shove it right off. As The Wall Street Journal reported: “The landmark decision lays the groundwork for federal efforts to cap carbon emissions – at a potential cost of billions of dollars to businesses and government.”

In other words, the war on the so-called greenhouse gases is officially under way – and it is going to be expensive. Each passing month brings us closer to capping, taxing or cutting the gases thought to cause global warming.

I don’t think investors appreciate how far-reaching such efforts could be. And there will be definite winners and losers as a result. Some of these are far from obvious and some are in plain sight.

The first obvious big loser is American coal, from which we get half about of our electricity needs. Already, you see companies reacting to this news. Consol Energy (NYSE:CNX), a big coal company, said it halted two big mines in Appalachia because of uncertainty over the costs of pending new regulations. If you own a U.S. coal miner, I’d fold the hand, so to speak.

Coal-fired power plants look like big losers, too. And the utility AES, the biggest user of coal in North America, is looking to shutter some of its coal plants. It is also looking at how high rates would have to go to comply with possible rule changes. In some places, rates could rise as high as 50%. It is no sure thing that AES could get such rate increases.

Natural gas-fired plants, though, may be one winner relative to coal, because natural gas burns cleaner than coal. Already, in just the last few months, as the market ponders talk of new emissions caps, you could see gaps opening up between coal utilities and natural gas utilities.

Though the new rules could be a year or more away, those gaps may well widen over time as investors anticipate the likely bad ending for coal. So I would not own a U.S. coal utility right now, either. It is no fun wearing a target on your back – especially since the guy throwing the darts makes all the rules.

Instead, I’d rather be the guy who gets to make and sell the new equipment that helps utilities “clean up.” The demand for cleaner-burning fuels will boost the need for its high-quality pumps, valves and seals. These products work to improve efficiency and emissions. Two similar companies I’m keeping an eye on include Fluor Corp. (NYSE:FLR) and Foster Wheeler (NASDAQ:FWLT).

But there is much more…

Besides carbon dioxide, the EPA also named five other industrial gases to its hit list, including methane. This could have an impact on landfills, which emit methane and carbon dioxide. One of the companies I am following is Covanta (NYSE:CVA), which turns waste into energy, essentially replacing landfills. For every one ton of trash burned in a waste-to-energy facility, one ton less of carbon dioxide is released into the air. It also captures the methane gas.

So again, big penalty for those who run landfills – but potentially a boon to those with solutions, like Covanta.

There are many other ways the EPA’s ruling could affect the lay of the land. The EPA could raise fuel-efficiency requirements on cars. It could require more hybrids and electric cars. This would be good for makers of car batteries. It would also be good for the things that go into making more efficient car batteries – such as lithium or cobalt, which are ideas I prefer over the battery makers themselves.

The war on greenhouse gases could also dramatically affect our homes and offices. Worldwide, the energy we use to build, heat, cool and light buildings makes up about 40% of energy demand. This is even more energy than the world’s transportation networks guzzle.

Better insulation, new windows and even more efficient water heaters can make a big difference on the carbon footprint of a building. Just heating water alone can make up 15% of the energy used in a home.

Another company I am following is A.O. Smith (NYSE:AOS). This company has a dominant position in water heaters, as well as a rapidly growing business in China – where the need is more acute. It also makes heating and air conditioning systems. A good chunk of A.O. Smith’s sales come from replacement markets – just fixing what is in place. Stricter building codes and a need to cut energy use could be good for businesses like Smith’s.

However, this is not all driven by government’s iron hand. In fact, in some cases, it is just good business sense. The Empire State Building, for instance, is undergoing a major makeover. But it is one you can’t see from the outside. Instead, it’s all about the insulation, smart meters, new boilers and more. According to the Financial Times: “The retrofit of the Empire State Building will cost about $20 million, but its annual energy savings will be $4.4 million when it is complete.” That’s not a bad payback.

In any event, the efforts to save energy and reduce greenhouse gases – whatever their source – is an important story and sets up a lot of things for us to look deeper into in future letters. We are still early in this game.

Sincerely,
Chris Mayer

Source: How to Profit from the War on Greenhouse Gasses

This from Investment U:

Look at every investment disaster individual investors have endured throughout history and the cause is virtually always the same. They neglected to ask a simple question: What if I’m wrong?

• Take the guy whose retirement account is loaded up with shares of one company, the same one he works for. He exposes himself to a career downturn and an investment disaster at the same time. He forgets to ask, “What if I’m wrong?”

• Or the woman who buys an investment property in a hot market, taking out a mortgage she can barely afford. What if she’s wrong?

• Take the trader who loads up on call options, trades heavily on margin or bets the farm on the bull market in oil continuing. What if he’s wrong?

Of course, every investor can be wrong. We all are occasionally. Successful investing is about taking – and intelligently managing – risk.

We Know The Future Is Unknowable At Investment U

We at Investment U are well aware that to a large extent the future is unknowable. So despite our well laid plans, we always hedge our bets.

That means buying quality, diversifying broadly and running trailing stops behind each of our individual stock positions. Anyone who has done that over the past 12 months is miles ahead of the average investor.

As the old saying goes, “The winner in a bull market is he who makes the most. The winner in a bear market is he who loses the least.”

Although we’re in a bear market now, the time has already come to start looking ahead.  Investment legends like Warren Buffett and Mark Mobius know this. (They have the benefit of a well-informed investment perspective.) Your average talking head, apparently, does not.

For instance, there have been six major bear markets over the past 80 years. The average decline in the Dow Jones Industrial Average of the previous five disasters – from peak to trough – was 43%.

That’s just about the low point of the current bear market. Unless we’re about to enter a “Greater Depression,” we’re a lot closer to the bottom than the top.

Scared Investors Are Missing the Easy Investment Opportunities

And there are investment opportunities galore, although most investors are too scared to move on much of anything.

• Many of them are tucked safely away in T-bills, where they can sleep soundly at night. But is the purpose of your investment portfolio to provide for you and your family in retirement or is it to play Brahms’ Lullaby?

• Many of these investors have deluded themselves that they will wait until the coast is clear of any investment disasters and then safely re-enter the market down the road.

In other words, having failed to see the top of the market – like 99.9% of all investors – they are now confident they can pick the bottom.

What if they’re wrong? What if the market is already discounting a severe recession? They run the risk of sitting in cash, collecting a pittance, when the market starts to rally again in earnest.

13 Companies At Bargain Basement Levels – For Starters

Meanwhile, there are plenty of companies out there trading at bargain basement levels. If you don’t have much faith in near-term earnings, try a different tack. Buy a few companies that are loaded with cash.

Which ones? Well, for starters, there is:

• AutoDesk (NASDAQ:ADSK)

• Amdocs (NYSE:DOX)

• Dell (NASDAQ:DELL)

• Expedia (NASDAQ:EXPE)

• Foster Wheeler (NASDAQ:FWLT)

• NCR (NYSE:NCR)

• Cisco Systems (NASDAQ:CSCO)

• BMC Software (NYSE:BMC)

• McDermott International (NYSE:MDR)

• Hewlett-Packard (NYSE:HPQ)

• Intel (NASDAQ:INTC)

• Nike (NYSE:NKE)

What if I’m wrong? What if these cash-rich companies go down in the near future, too?

That’s always a possibility.

Limit Your Downside Risk With Trailing Stops

But if you use our recommended 25% trailing stop, you’re not just buying cheap… you’re strictly limiting your downside risk.

The investor holed up in cash, on the other hand, is earning a meager 2% or so on his money.   He may not reach his investment goals. But he sleeps well… and he feels safe.

What if he’s wrong?

Source: What If You’re Wrong?