The first comes from Karl N. and he says…

Charles, First you have to buy into the assumption that fuel prices are realistic and will continue to increase! In reality, there is no reason for them to be where they are.

Second, Ethanol requires no more energy to produce than gasoline. Producers must pump, refine, and transport gasoline. Global hunger increased before ethanol because the American farmers cannot cost effectively operate. Fertilizer, fuel, seed, transport costs, living expenses, land and machinery have all increased substantially since the 1960’s without a significant increase in grain prices. The market will have more grain with the increased production of Ethanol than without it.

Please do not buy into propaganda that Ethanol is not efficient to produce, will contribute to world hunger or will drive food prices up (a loaf of bread uses 4-5 cents of wheat in it).
The truth is that unless grain prices increase more farmers will be forced to quit and food supplies will decrease.

I have to say Karl, that fuel prices are realistic even at today’s price. Granted, a lot of speculation has helped take prices higher. But the truth is that according to the Energy Information Administration, the world’s oil production peaked in 2005.

Sure, more oil is being found. But it’s not being found in easy-to-reach places. It’s all offshore, sands, and shale. Production from these areas should come online in time to replace lost production from older wells. The net result? Flat to slightly higher production in the next five to ten years.

Even with US consumption falling, consumption in China, Brazil and India is skyrocketing. The truth is, if these countries keep buying more and more, then oil isn’t too expensive.

Second, you have to admit that corn-based ethanol isn’t the most efficient way to make energy, right? The US Department of Energy says that corn-based ethanol produces a whopping (note the sarcasm) 26 percent more energy than required for production.

That’s god-awful.

Cellulosic ethanol, on the other hand, could produce up to 80 percent more energy than is required to produce it. That’s much better. But mass-scale production is also far off. (There are a few companies setting up pilot plants. But that’s all)

Now, I agree that global hunger isn’t all ethanol’s fault. I’d place the blame on the emerging economies like Brazil, Russia, India and China. But you have to admit, using farmland for fuel means there’s less farmland available for food. And if there’s less food being made, prices move higher.

In addition, corn-based ethanol was a big reason why corn jumped well over 100% after President Bush first announced the ethanol initiative. The effect is obvious – the ethanol hype is helping prices move higher. And this has been a boon to farmers.

Better yet, farmers are poised to make even more money in the years to come, mainly because of growing global demand for food.

I also received an e-mail from Sam L. that said…

As a seasoned investor I wouldn’t put one penny in green stocks, not now or for the near future. It is all hype and no action.

All hype and no action, Sam? How about geothermal producers that are taking off? Or solar producers which are making profits? Wind producers are doing well, and many high-tech battery manufacturers are on the cusp of inking huge, multi-million dollar revenue generating deals.

If you think investing in clean energy is a bad idea, just take a look at the Market Vectors Global Alternative Energy Fund (GEX) and you’ll see that the sector’s been clearly moving higher. And the PowerShares Global Clean Energy Portfolio (PBD) has been doing the same.

It seems to me that investing in green stocks is a great thing to do. What you want to do is avoid the companies that have no profits… the ones that are using very experimental technologies that haven’t been proven yet. These companies may do well in the future, but you take a huge risk by putting your money on them now.

Nor is it much of a surprise: Since the subprime crisis broke last year, we’ve repeatedly predicted the fallout would spread to such other markets as credit cards and even auto loans.

Citigroup Inc. (C), the third largest lender to Visa Inc. (V) and MasterCard Inc. (MA), said that the states hit hardest by the subprime fiasco – Arizona, California, Florida, Illinois and Michigan – experienced mushrooming levels of credit card delinquencies and defaults in the fourth quarter. In fact, those states accounted for two-thirds of the nation’s total credit card losses.

Evidence suggests that as adjustable rate mortgages (ARMs) reset to higher interest rates, consumers in these regions – and across the country – are relying more on their credit cards to finance such day-to-day living expenses as groceries and gasoline.

That’s not good.

If you don’t believe us, just ask the U.S. Federal Reserve. On the news that credit-card debt rose by $5.5 billion, or 7.1%, in January to $947.4 billion – dwarfing the 2.9% gain in December – the central bank announced that it’s conducting a formal review of the industry so that it can “better assess the current state of the credit card market.”

Like the subprime mess, as lending standards loosened on the heels of the 2001 mini-recession, consumer credit was extended beyond its viable limits. Credit-card issuers teased would-be clients – with marginal credit histories – with bargain-basement introductory interest rates, only to sock them with a much higher rate a few months later.

And now that the higher rates have kicked-in – and on nice, fat balances, too – people are struggling to keep up with their bills under the strain of an economic downturn.
Analysts widely expect the situation will get worse before it gets better. And they’re likely right. But this credit-card fiasco probably won’t have the cataclysmic, far-reaching effects that defined the subprime debacle. As a result, there are opportunities to profit.

Maxing Out on Credit

The credit crunch was, of course, sparked by high levels of defaults on subprime mortgages extended to people with shaky credit histories. And because banks pool mortgages together and sell them as investment vehicles – called mortgage-backed securities (MBS) – investors were left holding worthless paper (and massive losses) when the mortgages went belly up.

Consequently, the credit markets dried up as financial institutions – reluctant to take on any more mortgage-backed securities – became leery of lending to one another.

The carnage is already well documented, highlighted by the fall of the venerable Wall Street giant The Bear Stearns Cos. Inc. (BSC). Banks already have been forced to write off billions in losses. Now they’re scrambling to bulk up their cash reserves to protect against credit card-related losses.

As of December, Americans had $944 billion in total revolving debt, most of it on credit cards, an annualized increase of 2.7% on a seasonally adjusted basis, The Wall Street Journal reported. That rate was 13.7% in November and 11.1% in October.

The bottom line: Americans have dramatically curtailed their credit card spending.

Now you could blame the consumers’ reluctance to pull out the plastic on the slowdown of the U.S. economy, and you’d be right. But just partly. The other, more ominous reason is the likelihood that many consumers are simply maxed-out on credit.

In December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default altogether, according to research by the RiskMetrics Group.

The slowdown in consumer credit could well run through the rest of the year. But let’s not go and sound the alarm bells just yet. Although the lower numbers will have some effect on the bottom lines of both regional banks and Wall Street behemoths, like Citigroup and Bank of America Corp. (BAC), shares have already been pummeled and investor sentiment has likely bottomed out.

What’s more, a key difference exists between mortgage debt and credit card debt that will, in effect, cap the amount of damage credit card defaults can do.

Subprime All Over Again? Not Likely

According to the Fed, credit-card delinquency rates are now up by more than a full percentage point since bottoming out in the fourth quarter of 2005, marking the abrupt slowdown in consumers’ credit-card spending habits.

But the silver lining is that credit card debt is not securitized – pooled – and then sold off by banks as investment securities on any kind of scale that rivals mortgages. And that fact undermines any notion that banks may have subprime-like write-downs in their futures.

Remember, it wasn’t just the loose lending of mortgages by banks that got us into the subprime mess. It was every bit as much the over-speculation on mortgage-related investment securities, too. The latter can’t happen with credit card debt.

In a note to clients, CIBC World Markets Inc. (CM) Economist Meny Grauman wrote that “the good news in all of this is that both corporate and consumer loans are typically not securitized to anywhere near the degree that mortgages are. This means that even though losses on these assets still have the potential to weigh on financial sector earnings, they will not create the same broad systematic risks created by recent troubles in the asset-backed securities market.”

What’s more, a recent report published by the Federal Deposit Insurance Corp. (FDIC) said that 99% of insured institutions were currently well-capitalized at the end of 2007 and close to 90% of those were also profitable, despite the fact that profits at banks ­- thanks to the subprime meltdown – fell to 16-year lows in the fourth quarter last year.

Taking it to the Banks

The recent data from the FDIC clearly demonstrates how well capitalized U.S. banks are and indicates these financial institutions should be able to ride out any approaching storm. Accordingly, we’re reiterating our bullish view on the financial sector.

In an interview with MarketWatch, Andrew Gray, a representative for the FDIC, said that with only 76 banks on the FDIC’s “watch list,” problem banks are at historically low levels, despite the chaos of the last several months.

“Our problem bank list has 76 institutions, low by historical standards,” Gray said. “In 1990, there were close to 1,500 on the list.”

Five banks have failed in the last 12 months: Metropolitan Savings in Pittsburgh; Douglass National Bank in Kansas City, Mo., Miami Valley Bank in Lakeview, Ohio; NetBank in Alpharetta, Ga.; and Hume Bank in Hume, Mo. That’s a low number when you consider that over 800 banks failed during the savings-and-loan (S&L) crisis that occurred between 1990 and 1992.

“The industry as a whole is coming off a golden period of record profits,” FDIC Chairwoman Sheila C. Bair said in the agency’s Quarterly Banking Profile. “Because of this financial strength, the overwhelming majority of banks and thrifts remain well-capitalized and profitable.”

Consequently, many of the big banks are great plays at the current valuations. But rather than locking in on one target, it makes more sense – considering the prevailing market jitters – to buy shares of the Financial Select Sector SPDR (XLF). In this one ETF, you get exposure to the entire financial sector, which protects your investment against the potential for any blow-ups at individual financial institutions.

But if you insist on trying to “catch lightning in a bottle” with a single pick from the group, Goldman Sachs Group Inc. (GS) is a stellar option. Goldman is well run, well capitalized and is very liquid. The company’s return on equity (ROE) in the fourth quarter remained a stout 40%. And in a recent report to analysts, the firm said that its pool of liquidity was $80 billion, compared with an average of $60 billion during the fourth quarter. And one cannot underestimate the value of cash when investing during such an unnerving time.

After all, as the old Wall Street adage holds: “Cash is king.”

[Editor’s Note: Robert Williams, a veteran commodities trader, is the Editorial Director for The Oxford Club, and is a regular contributor to Money Morning. He last wrote about alternative energy investments. For information on an Oxford membership, please click here.]