We like to give issues of The 5 a theme once in a while. You might recall our “commodity issue” last week or “the everyman’s issue” earlier this month. We’ve got a theme for you today, but it doesn’t exactly roll of the tongue. Oh well, it needs to happen:

Welcome to a “hot-button issues we can no longer avoid” edition of The 5 Min. Forecast.
First up, climate change. We’d love nothing more than to leave this debate to Al Gore and Wall Street Journal editorialists. And for the most part, we will. But as you know, the House passed their climate change bill late Friday, and the entire energy industry is targeted for reform. Here’s the rundown in case you didn’t get to read its 1,200 pages — as all of our representatives in Washington surely did:

• Greenhouse gasses must be cut 17% by 2020 and 80% by 2050. Emissions from factories, power plants, refineries and energy distributors will make up most of the cut. The infamous cow fart emission cap was taken out
• A cap-and-trade system will cut these emissions. The government will issue a limited number of 1-ton permits each year, which companies will have to obtain if they wish to emit greenhouse gasses. Each year, the government will issue fewer permits. Thus, companies will have to clean up operations, use more green alternatives or invest money in “offset projects” — like a paper mill planting more trees
• 12% of power from electric utility companies must be from renewable resources by 2020
• New office buildings must be 30% more efficient by 2012
• The Congressional Budget Office expects the current rendition of this bill to cost U.S. households $175 a year. We’ve heard alternative estimates as high as $2,000.

“Rome is burning,” says our energy man Byron King. “Well, maybe not. This could alter our culture’s use of the metaphor. Burning Rome? Sorry, not without your carbon permit.

“After a millennium of merely tossing sticks and logs into burn pits, the Industrial Revolution was when mankind finally figured out how to use ancient forms of stored energy — coal, oil and natural gas — to build and maintain a vast manufacturing economy. In consequence of the carbon-fuelled revolution in productivity, the earth went from a population of about a billion, to near seven billion today.

“And now, per the House bill, our government has started on the way to reversing THAT Industrial Revolution. The new Big Idea is that there will be another, ‘carbon neutral’ Industrial Revolution, based on harnessing solar, wind and geothermal energy. Carbon is sooooo 20th century. Carbon neutral is the new black.

“The House legislation is 1,200 pages of special deals and giveaways, grafted onto a Soviet-style 40-Year Plan. (I should note that even the Soviets, for all their ambitions, worked in 5-year plans.) Cap and trade will be the largest tax increase in U.S. history. It’s the triumph of the tax raisers, central planners and controllers, and an arrow into the chest cavity of free market capitalism.

“So with higher energy costs throughout the economy, plus an immense new level of state control over economic activity, can the U.S. — at least as we know it — make the transition to that mythical carbon-neutral energy economy? My hunch is no. Cap and trade will breed more problems, which will lead to more taxes and even more regulations. There’s never just one cockroach. And while we live through the consequences of what’s going to happen, there will be a lot of misallocation of resources throughout the economy.

“I hope your subscription is current to Outstanding Investments, because that’s where I’ll be showing you how to invest your way around the consequences of our national hubris.”
Oil futures haven’t been fazed by the climate change bill.After all, it still needs to slither its way through the slimy halls of the Senate. Oil’s up $2 today, to $71 a barrel.
Unrest in Iran could accelerate a global energy breakthrough, reports our tech analyst Patrick Cox. We’ve been avoiding Iran’s issues lately as well. While fascinating, and certainly dynamic, it’s just not our beat… or so we thought:

“The central tension in the Iranian situation is the nuclear issue,” Patrick tells us. “That country’s autocracy is dead set on getting nuclear capabilities — and not without reason. Iran does need nuclear energy to promote economic growth. Contrary to popular wisdom, the country’s petroleum is not a good source of electrical power.

“The problem, of course, is that the technology being pursued by Iran can also be used to create nuclear weapons. This, naturally, worries a lot of people who fear the regime’s threats to destroy both Israel and America might actually lead to war. Many Iranians, in fact, are unhappy about the nuclear plans of the country’s rulers. Israel and Iran’s Sunni Arab neighbors are also plainly anxious.

“Iran’s relationships with the rest of the world would be an order of magnitude less stressful if it were not producing weaponizable fuels. This is why my sources tell me that thorium is enjoying a significant increase in interest lately. As we’ve discussed, thorium is not only a superior nuclear fuel from the technical and economic perspectives, but it solves the proliferation problem because it produces no waste products useful in weapons.

“Like every other sector, energy development has taken a big hit during this downturn… Ultimately, I believe, the superior nuclear technology will win out. In some ways, the financial meltdown has made pragmatism even more important than it was when tax revenues were flowing far more freely.”

Want to learn about Patrick’s favorite thorium play, along with the rest of his breakthrough technology picks? Check out Breakthrough Technology Alert.
“Iran has a bigger place in the global economy than most people know,” adds Chris Mayer

“The first thing that I don’t think many people appreciate is how big the country is. The population of Iran is 66 million. That makes it the 19th most populous country on the planet — more populous than France, the U.K., Italy and South Korea. Iran is in the top 10 in terms of contributing to population growth.

“Economically, Iran is an important link in the New Silk Road, that growing trade relationship between Asia and the Middle East. Iran is a big market for Asian exports. Take a look the next chart, which shows the sharp growth in trade:

“Iran has plenty of oil and gas, which it exports to pay for Asian imports of cars, clothes and other goods. Increasingly, Iran is turning to Asia for these goods, rather than Europe.

“Iran is the third largest supplier of crude oil to China. It makes up 12% of China’s total annual oil consumption. As Ilan Berman notes in a recent issue of the Far Eastern Economic Review: ‘Iran has become an engine of Chinese economic growth, and an indispensable part of Beijing’s energy plans.’

“No surprise that China will help Iran finance its $3.2 billion expansion of its mammoth South Pars natural gas field. I am sure the Chinese are watching what happens in Iran with great interest. It makes for a complicated political situation.”
The world’s rank and file of millionaires are in for quite a shake-up. Here’s some takeaways from our latest read: The 2009 World Wealth Report, by Merrill Lynch and Capgemini.

First, the number of global millionaires fell at a record rate in 2008, led by North Americans. The credit crisis wiped out 15% of the world’s millionaire population, now at just 8.6 million “high net worth individuals (HNWI),” as Merrill puts it. The total worth of the world’s wealthy fell about $7 trillion last year, to $32.8 trillion.

North America was the greatest victim of 2008, shedding 600,000 millionaires and roughly $2.8 trillion in HNWI wealth. Of course, we’re still at the top… but for how long? Check out this chart:

We should hedge this chart a bit: First, it’s from Merrill Lynch… need we say more? They use some rosy projections for global economic and market recovery for the next few years. Expecting the coffers of HNWI to grow at an annualized rate of 8.1% over the next four years is the same kind of Ivy League MBA thinking that caused Merrill’s collapse and subsequent fire sale to Bank of America.

That being said, we wouldn’t be surprised if their forecast comes true. Simple ratios alone make an Asian takeover seem inevitable: One out of every 195 North Americans are millionaires. Only one in about 1,700 Asians can say the same.

(This would be one of many reasons we’re burning the midnight oil on a BRIC report, just for you… stay tuned.)
Five banks failed this weekend, bringing the 2009 running total to 45. The five failures this weekend cost the FDIC another $264 million.

And what’s up with Georgia? Two of the weekend’s failures were there, bringing the Peach State up to 14 for the year — the most of any state. We’ve been told the lending market in Atlanta was hit exceptionally hard by the housing bust… if you’re from the area, let us know what’s going on.
Stocks are cautiously rising today after their first weekly loss since early May. The S&P 500 fell 2.6% last week, but as we write, it’s up about 1%.
The dollar index is right were we left it on Friday, just under 80.
Another sign of the times: Warren Buffett’s annual charity lunch sold Friday for 20% less than 2008’s price. Last year, a Chinese fund manager proudly bought the lunch for $2.1 million. This year, a currently anonymous Buffett disciple picked it up for $1.68 million.
No economic data to speak of today, but the next three days of this shortened trading week are jampacked with juicy numbers. We’ll see new consumer confidence and Case/Shiller home price index details tomorrow. Then there’s ADP’s employment count, construction spending, the ISM manufacturing index, pending home sales and auto sales on Wednesday. Then Thursday — the infamous Labor Department jobs report, where the unemployment rate is expected to reach 9.6%.

All interesting stuff… stick around — we’ll keep you in the loop.
Last today, one more issue we love to avoid: Bernie Madoff. He was sentenced to 150 years in jail today. CNBC spent most of their morning debating whether the 71-year-old should get 25, 50, 100 or 150 years in prison and recounting the sob stories of his victims… those fools whose mothers never told them, “Don’t put all your eggs in one basket.”

Our take: Why not park the cameras outside the SEC, instead of the ninth-floor courtroom in lower Manhattan? Where’s the outrage toward a government arm that scams us all — our tax dollars in exchange for financial security… the kind that routinely arrives too little, too late. Not only is there no blood in streets in front of the SEC, but they’re on track to get more funding… crazy.

Source: The Hot Button Issue: Climate Change, Iran, Madoff and More!

China’s problem is two-fold: a lack of coal and severe coal pollution.

In case you haven’t seen the CNN.com story of May 20th, Chinese power plants are running out of coal, with less than a three-day supply in some areas, according to official government statements. About 32 power plants shut down due to a scarcity of fuel — aggravated by the May 12th earthquake.

The current decline in uranium prices gives these China super-traders a critical inflection point to pick up the slack and clean up the environment.

China is the world’s biggest emitter of sulfur dioxide, a toxic byproduct of burning cheap, dirty coal. The country’s all-powerful State Council reported that pollution cost more than $200 billion in 2005, nearly 10% of the national GDP — the last year Beijing released the numbers of the nation’s environmental damage.

The pollution is also sparking little-known riots.

On April 8, 2006, villagers armed with iron bars attacked factories polluting their water. Pollution riots in Huashui in April 2005 pitted outraged citizens against 10,000 police officers. And in mid-July 2005, some 15,000 protestors amassed in at the gates of an offending factory, throwing stones and overturning police cars, despite the thick clouds of tear gas.

The Chinese people are taking to the streets. They want to stop the pollution that is damaging their livelihoods and health.

A look at one industry will show you the devastating financial impact of China’s addiction to dirty coal.

Nearly 12-million tons of grain are contaminated every year from the airborne mercury contamination of coal. (As though China’s agriculture and food industries don’t have enough problems from the recent recalls.)

China could benefit greatly from plunging uranium prices…as well as investors who take a long-term position in China’s growth.

Uranium futures contracts through the end of this year are trading in the mid $60 range. By comparison, U308 uranium was priced at about $140 per pound as early as January of this year.

The steep decline in uranium could be just what the Chinese need to make their move before manufacturers start moving out entirely to countries such as Vietnam.

This exodus of capital is certainly in the tea leaves…

– China’s power shortage forced Shanghai Volkswagen to stop work for several days at a time.

– Sony’s Chinese manufacturing plant had to cut production due to chronic power shortages.

– Chengdu City suffered the worst power shortage ever, with 345 companies stopping production.

– The China unit of Marubeni Corp, Japan’s fifth-largest trading company, stopped work two to three times a week due to blackouts.

– General Motors and Panasonic shifted production to off-peak hours, losing days of work.

There is a growing sense of urgency to corner the uranium market.

This stealth team of Chinese traders is armed with a $300-billion war chest to grab up every last ounce of U308 uranium. And if anyone can pull this off, it’s the Chinese.

Unlike gold, oil or copper, there’s no regulated trading exchange for U308. You can’t buy an ETF for it. U308 moves in a near-underground economy of secretive auctions where uranium trading is fast and furious.

The absence of a regulated trading exchange gives an enormous advantage to a stealth team of Chinese traders instructed by the government to track down every last pound of U308.

This crackerjack team is headed by a cabinet-level rising star who is chauffeured around Beijing in a big, black Audi. He sports a cigarette holder like FDR and is considered one of China’s top economists.

Under his brilliant supervision, the Chinese uranium traders will draw on a war chest of $300 billion in U.S dollars. That amount is nearly twice the size of the world’s largest mutual fund. It’s about six times bigger than the legendary Magellan Fund. And it’s bigger than the world’s top four mutual funds combined.

Over the next 15 years, China plans on building 30 new nuclear reactors. Without those critical reactors, the country’s environment and economy could be heading straight for the dumpster.

China desperately needs another 23,000 megawatts to maintain its nonstop growth.

And 23,000 megawatts is a massive amount of electricity. It’s how much New York City lost during the great blackout of 2003, when 19 million New Yorkers were plunged into darkness and the city was dead in the water.

That’s why China is committed to shelling out $50 billion on 30 nuclear power plants. The country must make the leap from 8.7 million kilowatts today to 40 million kilowatts by 2020. It’s the most ambitious nuclear power expansion in history.

For investors interested in China, the move to nuclear energy is great news. It means that China will overcome its energy problems — removing another obstacle to long-term growth.

Irwin Greenstein

Source: SWAT Team Looks to Cut China’s Addiction to Dirty Coal

The chart you’re looking at compares the South African rand’s performance (versus the U.S. dollar) and the iShares MSCI South Africa ETF (EZA). This is what’s called an inverse correlation. When the rand becomes inflated, South African companies don’t perform well.

The opposite is also true: When the rand gains in strength versus the U.S. dollar, South African companies perform better.

Over the past couple months we’ve seen exactly that. The interesting thing is South Africa is in the midst of a power crisis. In fact, many of its mining companies are scared they won’t have enough power to produce things like gold and platinum.

With aging power plants and failing infrastructure, South Africa needs an injection of investment cash into its power sector. And while its economy technically maintains a budget surplus, it’s constantly battling things like unemployment and poverty.

In short, a commodities bull run, with gold and platinum prices soaring, won’t mean much to the resource-rich country if it doesn’t have the power to produce them — or if the workers wage strikes against low wages and immigrant workers.

My take? Without some positive news on the situation soon, expect the EZA to drop back, and the rand to inflate a bit more. Here’s some numbers: EZA could drop to $110 and the rand versus the U.S. dollar could fall to a ratio of 7:1.

S.R. Nunnally

Editor, Taipan Trader

P.S. The US dollar has been rising in India and Pakistan, too… So sharply that one might expect a bit of a backlash here. Check out the chart, and see for yourself.

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Source: The Dollar IS Rising… In South Africa, That Is

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Consider China the mother of all direct and indirect subsidies. Especially when it comes to the staging of the Beijing Olympics—the greatest coming out party a totalitarian government has ever staged.

Not that the others didn’t try. Hosting Olympic Games tends to be a fiscal nightmare for the host. The Athens Olympics resulted in massive budget deficits for Greece. Australian taxpayers will be paying off Olympic debt from the 2004 Games for a decade to the tune of $32 million a year. Even the Salt Lake City Winter Olympics in 2002 left Utah with a $155 million deficit.

The true cost of the Beijing Olympics will dwarf everything previously seen. But thanks to China’s inscrutable web of direct and indirect subsidies, their full extent will be as difficult to determine as the true cost of Chinese labor.

Beijing just added another layer. It will be carried by China’s heavy industry and power plants. Dozens of heavily polluting factories in Beijing and Hebei Provinces—scheduled for closure over the next two years—will be permanently closed before June.

Temporary shutdowns of other industries will last from July 17 until September 20 and will affect the neighbouring municipality Tianjin and the provinces of Hebei, Inner Mongolia, Shanxi, and Shandong. These provinces represent an area larger than France, Germany and Italy combined.

This will have a major effect on the electronical manufacturing industry and those companies who have been outsourcing their production to China. The closures will also reduce the supply of components, good and services to the affected industries. Steel maker Beijing Shougang Co. estimates that output this year will fall by 16% from 2007.

The hardest hit industries include electricity, petrochemicals, as well as coal and cement producers.
Chinese officials are just as reluctant to release details about the full extent of the shutdowns as they’d be to announce that torturing puppies had been added as an Olympic exhibition sport.

Idling production facilities will hit major companies like Eastern Petrochemical Co., China’s largest manufacturer of polyvinyl acetate. Beijing Eastern is owned by China Petrochemical Corp., or Sinopec (SNP:NYSE). Sinopec’s first-quarter profits already came it 70% lower than last year’s.

If you need a reason to be cautious around Chinese stocks this year, look no further than the effect of the Olympic shut-down on third-quarter earnings.

Source:  China Closures Spell Q3 Trouble

• Wholesale prices rose 0.2% in April after seasonal adjustments, with food prices flat and energy prices falling, the Labor Department reported yesterday (Tuesday). The core PPI – which excludes food and energy prices – rose 0.4% in April, more than expected, MarketWatch reported.

• Target, the nation’s second-largest discount retailer said softer-than-expected sales and higher costs caused the profit fall 8% for the quarter that ended May 3, the Associated Press reported. Target reported a profit of $602 million, or 74 cents per share, in the three months ended May 3, down from $651 million, or 75 cents per share, during the same period last year. Revenue rose 5% to $14.8 billion.

• Chinese power plants are running out of coal, with less than a three-day supply in some areas, the Associated Press reported yesterday (Tuesday). It is the second time in three months that Chinese power plants have run short of coal, an unintended effect of government price controls to shield the public from rising global energy costs. About 32 power plants have already shut down due to lack of fuel, the State Electricity Regulatory Commission said in a report.

• Carl Icahn’s proxy gambit with Yahoo Inc. (YHOO) was given a boost yesterday, when Third Point LLC, a $5.7 billion hedge fund with more than 5 million Yahoo shares, announced its support for Icahn, Reuters reported, citing a source familiar with the matter. Last week, another hedge fund, Paulson & Co., announced its support of Icahn’s plan. Paulson & Co. owns 50 million shares in Yahoo.

• Oppenheimer & Co. analyst Meredith Whitney, who has famously slashed forecasts for leading U.S. banks in the past year, again cut her earnings outlook for several top banks, citing a “far from over” credit crisis, Reuters reported. She cut her outlooks for Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wachovia Corp. (WB).

• Luxury department store operator Saks Inc. (SKS) announced yesterday (Tuesday) that its first-quarter net income increased 66% to $18.3 million, or 13 cents a share, from $11 million, or 7 cents a share, for the same period in the prior year. Analysts had expected earnings of 17 cents per share, causing Saks stock to shed 93 cents, a decline of over 6%, to close at $13.20.

• New Jersey-based Merck & Co. Inc. (MRK) has agreed to pay $58 million to 30 states to settle complaints that it made deceptive claims about its Vioxx-brand arthritis drug and painkiller. Attorneys claimed Merck played down the drug’s health risks in advertising. Shares dropped 28 cents yesterday (Tuesday) to close at $39.74.

• U.S. Federal Reserve Vice Chairman Donald Kohn indicated the Fed intends to pause in its rate-cutting campaign. “With the information now in hand, it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term,” Kohn said yesterday (Tuesday), while speaking before a business group in New Orleans, MarketWatch reported.

Global Investing Roundups: Wednesday, May 21st, 2008

So it follows that as worldwide demand for electricity skyrockets – as it will – the shares of companies that provide these two key fuels also will take flight.

And they make for almost-perfect partners.

That’s because coal represents the world’s short-term solution to the problem of a rapidly climbing global demand for power. It’s plentiful, it’s cheaper than other available alternatives, and a big percentage of the world’s power plants are set up to burn this fossil fuel.

Uranium, on the other hand, represents the long-term solution to potential fuel shortages – and it offers a solution to global warming, to boot. Uranium-powered commercial nuclear plants are cheap to operate, can run a long time, and when operated correctly cause little pollution.

The New ‘Black Gold’

India, a growing economic and industrial power, relies on coal for nearly 70% of its total energy supply. And the World Coal Institute expects India’s energy consumption to rise by as much as 8% to 10% annually through 2020.

Coal also is used to satisfy the Red Dragon’s energy appetite, providing 78% of China’s total power needs. Coal demand in China jumped nearly 9% last year – meaning the Eastern power now accounts for a full quarter of the world’s annual coal consumption, The Wall Street Journal reported.

Five years ago, China exported 83 million metric tons more coal than it imported. But last year, the nation’s surplus dropped to a meager 2 million metric tons. That means more than 80 million metric tons of coal (about 12% of the internationally traded market) has been taken out of global circulation.

Vic Svec, a senior executive at Peabody Energy Corp. (BTU), the world’s largest private-sector coal producer, referred to China’s ability to influence the price of commodities as a “butterfly effect.” In other words, Svec told The Journal, “demand from Beijing can ripple back to Queensland, Australia, or Gillette, Wyoming.”

Svec’s right. China’s recent development is part of the reason the highly desirable low-sulfur coal from the coal-laden Powder River Basin in Wyoming and Montana has climbed from less than $10 a ton last year, to nearly $15 a ton – a price gain of 50%.

Central Appalachian coal, the benchmark grade widely used by power plants, jumped from $40 a ton in early 2007, to nearly $90 a ton now, according to a recent report by the Associated Press. That’s price increase of 125% in just a single year.

Meanwhile, the weekly index for power station coal prices at Australia’s Newcastle port, a benchmark for the Asian market, averaged $126.45 per metric ton in the month of April, up nearly 40% from January. The port’s weekly price index rose to $133.63 per metric ton for the week ended May 9 – an 11-week high according to the globalCOAL NEWC Index. The index is up approximately 49% this year.

According to the Energy Information Administration, world coal consumption could expand by 74% from 2004 to 2030. And that will only drive prices higher.

While demand for coal is at an all-time high, the same can’t be said for coal supplies. Harsh weather conditions and infrastructure constraints in coal-producing regions have severely crimped supplies.

In South Africa, power shortages and flooding have closed down several key mines. With such setbacks, the price of coal coming out of South Africa’s Richards Bay Coal Terminal, the world’s largest, jumped nearly 90% last year.

Xstrata PLC, the world’s biggest exporter of power-station coal, said that first-quarter coal output fell 3.6% after floods and rain delays diminished supplies from Australian mines. Monsoon rains throughout the region also impacted archrivals Rio Tinto PLC (RTP), and BHP Billiton Ltd. (BHP).

Meanwhile, China, a leading producer and consumer, was devastated just a few months ago by the worst blizzard of the past half-century. Three weeks of snowfall killed at least 60 people and cost the country approximately $7.5 billion.

China had already closed a multitude of coalmines in 2007, after they were deemed unsafe. The subsequent weather problems only exacerbated that situation, forcing the closure of a great many more mines and prompting China to restrict exports. Major roads and railways also were shut down, creating traffic congestion during the thickly traveled Chinese New Year – and making deliveries highly problematic for drivers.

As the cold of winter gave way to the higher temperatures of spring and summer, yet another weather-related challenge emerged. This time around, the double-whammy of higher-than-expected temperatures coupled with sparse rainfall are straining thermal power plants: The warm weather is boosting the use of energy-intensive air conditioning even as those same higher temperatures have dropped the water level of the rivers that spin the huge power-producing turbines at hydroelectric dams.

If you’re looking to play surging coal prices, Money Morning Investment Director Keith Fitz-Gerald suggests taking a look at Yanzhou Coal Mining Co. (YZC). The China-based Yanzhou is nicely diversified in several ways:

• First, it not only operates underground coalmines, Yanzhou also operates a railway transportation network for shipping coal.
• Second, Yanzhou’s focus on low-sulfur coal products means it finds demand from large-scale power plants and from metal-producing companies all around the world. The reason: Low-sulfur coal can be combined with coking coal in a metal-production process known as “pulverized coal injection,” or PCI. That combination gives Yanzhou a nice extra bit of industrial diversification.
• Third, investors can add geographic diversification to the profit mix as they analyze sector plays.

Provided with these positives, it should be no surprise to investors that Yanzhou’s first-quarter profit more than doubled, climbing more than 112% on surging demand for the fuel and on the higher trading prices seen in the markets around the world.