Welcome to a New World of Investing

Our current investment trauma marks the end of an era of excesses in credit and real estate markets, of course. But it also denotes that the United States is undergoing a far more general and significant transition - not only to a new government with a radically different agenda, but more lastingly into a whole new climate for investments.

Gone is the era of wind-to-the-back investing powered since 1982 by continually lower interest rates and the virtuous influence of the baby boomer demographic bulge working its way through the U.S. economy with its high spirits, sense of entitlement, the confidence that it can and should change everything to suit its own needs, its increased demand for goods and services, and its great labor force to help produce them.

Welcome to the new world of wind-in-your-face investing as short term rates can only go higher from this point (with long rates to follow soon enough) and baby boomers each year becoming a greater economic albatross - consuming social security, medicare, and other services that must be provided by a declining number of working Americans as the boomers increasingly stop working.

America must now adjust to lower asset values, a lower rate of consumption, and a higher rate of savings. That doesn’t mean we can’t have a pleasant life and a return to a stable, growing economy eventually. After all, even at the bottom of this downturn some 85% - 90% of Americans who want jobs will probably have one. But it means the rich cannot continue to consume a growing share of the GNP since the need to fix the yawning federal deficit will eventually require higher taxes on the wealthy, and since the past era’s unconscionably high executive compensation may be ending, and since executive options are no longer providing windfall profits. It also suggests that America’s free lunch whereby we exchange paper for the world’s goods is not likely to continue for too long.

The key word in the above paragraph is “adjust.” Anyone who’s experienced an important loss understands adjusting. The painful and much analyzed “stages” of adjustment - popularly recognized as denial, anger, acceptance, etc. - are now about to unfold. We seem to be part way through denial at this point - people know that times are tougher but they think the pain will pass fairly soon, which may not be the case. It would not be surprising if the anger stage led to more war. One commentator recently opined that WWIII has already begun. Past global economic dislocation has led to important wars.

An appropriate (if unoriginal) metaphor for the investment implications of our transition is the ship on a stormy sea. While a storm is raging passengers stay off the deck, they “batten down the hatches.” In investing terms they go to cash. Storms sometimes have “eyes” and a ship passing through the eye can think the storm is abating although it really is not. For investors these eyes are called bear market rallies - of which there can be many. We have seen many such rallies already since the bottom fell out after August. Who knows how many more false rallies will come?

We all want to know when the “all clear” signal will sound. We can easily be convinced by false rallies that the skies have cleared. But the true end of the storm will be determined only by the real economy, which nobody can predict at this time because of the risk of deflation.

Deflation

The Energy Investment Strategies web site has not focused on energy much lately. Rather, I’ve been writing about deflation (here, here, here and here) because whether or not the economy falls into deflation will determine the duration of the present investing storm. If we avoid deflation, a recovery could happen in 6 - 18 months. If we get real deflation, the storm could last much longer for two simple reasons.

First, if deflation takes hold it becomes a self-perpetuating condition that is extremely hard to defeat. Deflation implies a vicious cycle - a negative feedback loop - that can cause continually increasing amounts of economic pain as lower prices lead to less profit, lower employment, lower consumer and capital spending and back again to lower prices.

Secondly, during a deflationary period it makes perfect economic sense for investors to hold cash because cash is the one asset that gets more valuable in a deflation as the prices of goods, services and assets decline (the definition of deflation). Therefore, the fact that a huge percent of investment assets is sitting in cash during a period of deflation is not necessarily short term bullish for stocks; that money can stay in cash for a long time. Thus stock prices that are falling can tend to continue to fall, further contributing to the negative feedback loop of deflation.

Economists disagree on where we are now and what will happen but some of them think deflation is already baked in. Here’s what John Mauldin said in his most recent letter: ” For a very long time, I have been adamant that deflation is in our future… For now, deflation is the economic factor that the Fed and central banks will be battling. And believe me, it will be a very large and controversial battle.”

We now see some deflation. The prices of assets - houses and stocks - have been declining for many months. Americans are cutting back their spending and increasing their savings, which causes deflation because less spending leads to lower prices. The price of labor is starting to decline as people give up bonuses, agree to work fewer hours for less pay and start to compete among themselves for the remaining jobs that cannot be outsourced overseas to even cheaper labor markets. Companies like Gannet are simply calling time out and putting employees on unpaid furloughs.

Here’s a report from the field that I heard of just yesterday. A friend advertised on Craig’s List for a part time file clerk at $15 per hour in San Francisco, not a low-cost-of-living venue. Within two hours he had received…sit down…over 800 responses. That story defines the time in which we are just starting to live, and those times are starting to look like deflation.

There is one other and even more pernicious component of deflation: expectations. When everyone expects prices to continue to go lower such expectations cause people to hold off purchases in the reasonable belief that prices will be lower later. They buy only at the very last moment when they must have something. We’re not there yet, I think. We don’t yet have a pervasive expectation of lower prices. But we’re not far away, I would guess.

The expectation of lower prices is a very hard thing to break. It is the inverse of inflationary expectations that we experienced in the late 1970’s and which required short term interest rates of over 20% and mortgage rates of 16% to finally break. What can be done to avert deflation? Short term interest rates are now close to zero, so they can’t be lowered. If mortgage rates could be reduced to eye-poppingly low levels - say 2% - that might help turn around the real estate market, which is probably the first thing that is likely to turn and the thing that must turn in order to reduce deflationary expectations.

The other prescription for defeating deflation, of course, is “the stimulus,” the vast federal spending program that is now the focus of all discussion. Can Team Obama turn our economic lemon into a tasty lemonade of new energy savings, environmental protection, and social reformations like universal health care insurance that we need for the long term and in the process create enough new economic momentum and jobs to bring growth back to the economy? That is the $64 question. Obviously nobody knows the answer; we’ll simply have to see what happens.

My Investments

As the above logic dictates, I am largely in cash. I’m not betting that Team Obama will or will not succeed. I’m trying to avoid being sucked into the market by bear market rallies.

The few equity positions I have relate to special situations. I own Lynas, (LYSCF) an Australian company that is opening the world’s largest deposit of Rare Earth Elements, minerals that are required for many applications including nickel metal-hydride batteries (now in nearly all hybrid cars presently on the market, and still baked into many new hybrid cars planned for future introduction). REE’s are coming into shorter supply as China - the major supplier - reduces its export quotas (recently by 32% with potentially more reductions coming). Lynas, a 25 cent stock, is a startup with production projected for late 2009. It seems to have outstanding management and financial backing (although, post-Madoff, who can have any confidence in judgements about people?).

I own some shares of Boone Pickens’ natural gas supply company, Clean Energy Fuels Corp (CLNE). He is developing the natural gas supply business for truck fleets in this country. Like everything in the market, the price of this company is way down. Analysts expect it to become profitable this year. I suspect there will be a slow transition toward natural gas for trucks.

I own some SQM, the Chilean minerals company about which I have written a great deal. In addition to its wonderful fertilizer and iodine businesses, SQM is the largest supplier of lithium, which may become a substantial part of the new electric car business.

When the economic clouds begin to pass - some months (or years) after Team Obama’s stimulus plan is passed and implemented at a cost of trill-a-dollars - there will be a move away from fear and towards greed, an anticipation of inflationary trends, and also a revulsion at the huge amount of debt that the U.S. government has put on its books. At that point the latest bubble, the high price of U.S. bonds, will burst, interest rates will rise, and the prices of bonds will fall. One will want to own an ETF that rises as bond prices fall. Such an ETF trades under the symbol TBT and I own some shares.

TBT is part of what I call my “farm system,” a stable of stocks that I know I’ll want to own later but would like to watch the movement of in the meantime. So I own a few shares (and I mean few) of TBT along with some real estate trusts, battery makers, and assorted “growth” vehicles - companies with business plans that make sense and/or stock prices that are crazy-low in any world except a deflationary one. One that I own in moderate size is TBS International (TBSI), a shipping company with a unique business plan that separates it from commodity shippers and makes its revenue less tied to the Baltic Dry Index, which is now in the pooper.

I also own some income producing stocks like Annaly Capital (NLY), Inergy (NRGY), Energy Transfer Partners (ETP), a pipeline company, and Brookfield Asset Management (BAM). They have attractive dividend yields and I think they have manageable risks in terms of a deflationary economy. Do your own research - on everything.

In short, I’m trying to dance to the strange and difficult music being played by this dangerous market - a market that is now eating up equity values but eventually will provide huge opportunities. I won’t get my cash to work at the exact bottom so I’ll miss some of those early gains. But in an economy that seems to be falling into deflation, which can last for an indeterminate period, I want to keep a lot of my funds in cash.

Oil Investing

With oil now sitting at the mid-$30 level investors must ask, “How low can oil go and for how long can it stay there?” As I wrote recently, there are two conditions to the oil market - too much and too little. At this time there is clearly too much oil. When there is too much oil it is priced more or less at the marginal cost of production, that is somewhere above the cost of the most expensive oil needed to supply the market. Here is a chart that provides some insight on that cost:

It shows average costs including the cost of reserve additions, not marginal costs, and it relates only to U.S. oil imports. What’s interesting, though, is the clear trend toward much higher costs for offshore oil, but also the rising costs in recent years for all sources of oil. There is still a lot of OPEC oil with under $10 a barrel lifting costs, but clearly a lot of the world’s oil is getting more expensive to bring to market. It’s possible that oil prices could go somewhat lower than today’s and stay there for some time, but it seems like the oil price is getting pretty close to a bottom. So that’s one factor.

Another central factor in determining the marginal cost of production is OPEC. Usually as demand for a product and its price fall the highest cost producers shut down first. But OPEC attempts to manipulate the free market for oil so that it does not necessarily follow the laws of supply and demand. OPEC shuts down the production of very cheap oil so there will be enough demand left for the world’s more expensive oil to require higher prices for its continued production, thereby lifting the price for all oil.

OPEC countries plus Russia and Mexico, having expanded their domestic spending commitments during recent times of high oil prices, are all now encountering increasingly difficult economic stress from low oil prices. So concerned are the Saudis about the risks of low oil prices that they have reduced their own production even below their OPEC quota. Thus a great battle is now emerging between oil producing countries that are desperate to raise prices and oil consuming countries that see high oil prices as both an economic threat and increasingly a national security threat.

Consuming countries are increasingly working toward using less oil and finding alternatives, such as natural gas or biofuels. Meanwhile efforts may be growing in the U.S. Congress to pass a bill authorizing anti-trust suits against OPEC members for damages caused by the restraint of trade that the cartel is devoted to enforcing. When I first read about this I thought the idea of suing OPEC was nutty because when oil prices were high the marginal costs were not the issue - rather it was excessive demand vs. supply capacity. But now as our economy declines, as the Treasury runs ever larger deficits, and as American consumers suffer every day, the possibility that we might stop OPEC from extracting its pound of flesh is starting to seem like a good idea to me.

Here’s why: OPEC seeks $75 oil. A free market price today without economic collusion might result in $25 - $35 oil. The difference represents a tax on the American economy of perhaps $50 per barrel - which amounts to about $1 billion per day, $365 billion a year, or about half of the TARP. That is real money which would be important for America to save. Moreover, cheap oil would inflict major wounds on various political opponents of the U.S., thus potentially saving us even more money in military costs that might become unnecessary.

Sicking the plaintiff’s bar on oil producing countries may not be the best way to fight OPEC, although it did succeed in defeating both big tobacco and car safety problems in years past, so I wouldn’t discount it. But it seems clear that Team Obama will have a substantial interest in finding some way to do it - whether by anti-trust legislation or with new conservation technologies or something else - whereas the Bush administration did not even seem to share the objective of reducing the price of oil. So there may be a new player coming onto the field to fight for lower oil prices.

Evidence of the conflict now raging between OPEC and market economics is the huge and growing amount of oil in storage. Speculators, believing that OPEC will be successful, have bid up the future price of oil to substantially more than the current price. That makes it profitable for other speculators to hoard oil on land and in dozens of tankers floating on the seas and to sell it later at the higher price. The difference between spot oil and oil in February 2010 is now about $25, a significant premium.

Of course, if it becomes clear that OPEC will not succeed in withholding enough cheap oil from the market to raise the price then all that inventory in storage could come onto the market and possibly crush the oil price below even the $25 that is required to compensate the producers of easily and cheaply produced oil.

From the viewpoint of oil-related investments it looks like we’ll have one of two outcomes. Either OPEC will fail and oil will trade in a $25 - $40 range based on marginal production costs or it will succeed and oil will trade in a range closer to $50 - $75. Either way, it’s unlikely that oil will begin trading on a marginal demand destruction price curve until a few years after the end of the global recession.

If OPEC loses oil related stocks could fall even further; if it wins they would get a boost, but it could be a temporary boost depending on the depth and length of global economic weakness. Eventually I will want to own a lot of oil (and I do own call options on oil in 2013 and 2014). But at this point I don’t think it’s a good idea to bet that either OPEC will win or that the economy is fairly close to making a bottom. So I own few oil equities now.

I’m invested in two oil income stocks (Linn Energy, LINE, and Enerplus, ERF, and in one “special situation,” Petrobank (PBEGF), a company that combines a very successful conventional oil and gas E&P operation with a new technology for recovering very heavy oil deposits such as from oil sands at far lower operating and capital costs and with much higher quality and reduced environmental impact than the standard SAGD recovery method. Petrobank’s new technology is starting to become proven and to obtain adherents, including its first licensee, and the company could generate substantial royalties in the future as well as a better way to develop its own oil sands properties. My sense is that the potential breakthrough quality of this technology could lift Petrobank’s valuation even in a terrible market.

Eventually a time will probably come when there will be too little oil, as was the case in 2007 and 1H08. It will emerge from some combination of higher demand and lower supply. Oil demand will most likely rise because of economic growth despite governmental attempts to limit oil use. But even if oil demand were not to rise substantially beyond its recent 86 mb/d peak, oil supply will begin to level off and then decline, probably a few years from now, since decline rates for old fields are increasing and the number of new fields within view over the next decade is limited. Moreover, most new oil waiting for development will be very expensive to lift, so even if the market is not supply-constrained the price will have to work itself well over $100 per barrel.

Exactly when there will be too little oil available to supply the market is unclear for a lot of reasons including both supply and demand uncertainties. My guess is that tightness in the oil market may resume sometime between 2012 and 2014, a couple of years later than I had estimated last summer before the economy came unhinged. Oil related stocks will rise as soon as there is a hint that the fall in oil demand may be over, which could happen anywhere from late 2009 through…whenever. I expect we’ll see that before 2012 and I hope it is well before then, of course. I may well want to own more oil stocks by the end of 2009.

Natural Gas and Alternatives

Natural gas is also not a place to be, but for different reasons. As I’ve written previously, North American natural gas has become abundant for the foreseeable future due to enormous discoveries of unconventional supplies combined with the evolution of new techniques for harvesting them. I don’t know what will make the price of natural gas go up. I doubt we will see a lot of natural gas powered cars, though there will probably be substantial growth in truck fleets, especially ones with local routes, as mentioned above. Perhaps a market will develop for natural gas exports from North America to Europe where supply/demand dynamics are much more positive, although there could well be substantial U.S. political blowback preventing that.

What about alternative fuels and energy efficiency? I think ethanol is a fraud. Obama’s apparent support for it is the one thing that worries me about his energy policy. Other alternatives such as cellulosic ethanol and bio-diesel do not seem scalable at present - one day they may be, hopefully. Renewable sources of electricity - solar, wind, and geothermal - are really not vital for reducing oil use. Rather, they are being propelled by legislatures that want to reduce coal use. I’m not hugely excited about their investment prospects although I suspect that some companies in this space will eventually prosper.

Reducing oil dependence really boils down to batteries. What this country needs is a good, cheap battery. My farm team of stocks includes a few companies that may benefit from hybrid and electric vehicles. We are going to get more hybrids, plug-in hybrids, and all-electrics on the market. But with $2 gasoline - perhaps going to $1.50 - not many people will buy them. That fact, plus stock market conditions make battery investments less than totally compelling right now - though they would be great candidates for “hot stock” status if the market were to turn around and Team Obama were to implement the right policies.

I think, from a long term energy policy viewpoint, people should buy hybrids and especially plug in hybrids. America would be better off if more people would buy them. But many hybrid and electric cars don’t make a lot of immediate economic sense to an individual because of their high cost. That’s why I hope that Team Obama will put in place sales taxes on low mileage vehicles and federal rebates for buying high mileage ones. Or a tax on carbon or on gasoline. Or all of the above.

Other Interests

Apart from our traumatic investing and economic conditions, I’m enjoying the milder-than-normal winter climate here in northern California where I am visiting on an extended basis. I’ve never before spent much time here but recent months have been extremely pleasant, particularly because they have given me the chance to enjoy more time with my son who moved to San Francisco a couple of years ago. I’ve also enjoyed the instruction of a marvelous Palo Alto tennis clinic staff that has transformed my pathetic forehand into a mildly effective offensive threat.

Comments

[longoil:]

>>>Reducing oil dependence really boils down to batteries. What this country needs is a good, cheap battery.<<<

Batteries, NG conversions and cellolusic ethanol certainly can reduce oil dependance as far as automobiles are concerned.

However, there are many other areas where no suitable substitute for oil exists.

1) Petrochemicals are used in thousands of goods like plastics, pesticides, medicines, etc. There is no substitute for the petrochemcial industry. Derivatves from coal and sugar can only be used in a handful of applications..

2) Lubrication is another key use of oil and no suitable substitute exists.

3) Shipping is dominated by diesel powered vessels. The alternatives are sails, coal and nuclear. Each has its own major drawbacks.

4) Aircraft can only be powered by kerosine. Yes, Richard Branson promoted a trial flight with kerosine thinned with biofuels. This is more of a publicity stunt rather than a realistic solution.

This is why I am long on oil.

Jan 18 01:15 PM

[mplaut:]

Petrobank is not a pink sheet company. It is a billion dollar company that is listed on the Toronto Stock exchange. It is only available in the US through the pink sheets, but look for it in Toronto and you will see.

I am not recommending it, but it is growing production, and it has a new method of producing heavy oil that could revolutionize the production of heavy oil. Of course, this is not exactly the time when such a method is attractive but that could change in a year or so.

Jan 18 06:22 PM

[Perry1961:]

Forget the marginal cost of production for now. World demand fell much quicker and harder than anyone imagined possible. The US imported 19% less oil,by volume, in Nov. Japan imported 17% less oil. Everyone is focused on the 6% y/y decline in gasoline demand in the US. Nobody will give us the monthly decline from oct. to nov. Besides,gasoline is only one product made from oil. There are so many others. The 6M barrel build in heating oil stocks in the middle of winter should absolutely unglue any oil long. I've looked into these supposed quota cuts OPEC is touting. Big joke. For instance,Nigeria's quota was cut by 500,000 bpd. Nigeria was producing so much less than its quota,that it can boost production and still be in compliance. Nigeria actually did increase production in Dec. Not something that would happen if they were in the process of cutting prodution. Yes,the Saudi's are under quota,for the same reason Iran has had 15 supertankers full of sour crude anchored since April. Nobody wants the nastiest grades,and there's nowhere left to put it.

OPEC coulda,woulda,shoulda cut production 10% several months ago. The 5% planned cuts are actually more like 2% and won't do diddly squat for prices. We'll see $15 oil very soon. $10 oil wouldn't surprise me. What would surprise me is a move back over $20 in the next 3 years.

Jan 18 06:51 PM

[cjwirth:]

Hi Jim,

There is no doubt that wages and housing prices will continue to fall. But lowered wages and unemployment means real inflation in prices.

And there is a real possibility of higher oil prices in 2009 due to Peak Oil declining production and political factors which could occur in Iraq, Nigeria, Iran or some unforeseen resource nationalism or revolutionary activity. The CIA has been caught off guard before, and it can happen again. Murphy's Law warns that If something can go wrong, it will; and in this case many things can go wrong.

And this recession may be permanent, due to Peak Oil.

Global crude oil production peaked in 2008.

The media, governments, world leaders, and public should focus on this issue.

Global crude oil production had been rising briskly until 2004, then plateaued for four years. Because oil producers were extracting at maximum effort to profit from high oil prices, this plateau is a clear indication of Peak Oil.

Then in August and September of 2008 while oil prices were still very high, global crude oil production fell nearly one million barrels per day, clear evidence of Peak Oil (See Rembrandt Koppelaar, Editor of "Oil Watch Monthly," December 2008, page 1) www.peakoil.nl/wp-cont....

Peak Oil is now.

Credit for accurate Peak Oil predictions (within a few years) goes to the following (projected year for peak given in parentheses):

* Association for the Study of Peak Oil (2007)

* Rembrandt Koppelaar, Editor of “Oil Watch Monthly” (2008)

* Tony Eriksen, Oil stock analyst; Samuel Foucher, oil analyst; and Stuart Staniford, Physicist [Wikipedia Oil Megaprojects] (2008)

* Matthew Simmons, Energy investment banker, (2007)

* T. Boone Pickens, Oil and gas investor (2007)

* U.S. Army Corps of Engineers (2005)

* Kenneth S. Deffeyes, Princeton professor and retired shell geologist (2005)

* Sam Sam Bakhtiari, Retired Iranian National Oil Company geologist (2005)

* Chris Skrebowski, Editor of “Petroleum Review” (2010)

* Sadad Al Husseini, former head of production and exploration, Saudi Aramco (2008)

* Energy Watch Group in Germany (2006)

* Fredrik Robelius, Oil analyst and author of "Giant Oil Fields" (2008 to 2018)

Oil production will now begin to decline terminally.

Within a year or two, it is likely that oil prices will skyrocket as supply falls below demand. OPEC cuts could exacerbate the gap between supply and demand and drive prices even higher.

Independent studies indicate that global crude oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time, demand will increase. Oil supplies will be even tighter for the U.S. As oil producing nations consume more and more oil domestically they will export less and less. Because demand is high in China, India, the Middle East, and other oil producing nations, once global oil production begins to decline, demand will always be higher than supply. And since the U.S. represents one fourth of global oil demand, whatever oil we conserve will be consumed elsewhere. Thus, conservation in the U.S. will not slow oil depletion rates significantly.

Alternatives will not even begin to fill the gap. There is no plan nor capital for a so-called electric economy. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment. The independent scientists of the Energy Watch Group conclude in a 2007 report titled: “Peak Oil Could Trigger Meltdown of Society:”

"By 2020, and even more by 2030, global oil supply will be dramatically lower. This will create a supply gap which can hardly be closed by growing contributions from other fossil, nuclear or alternative energy sources in this time frame."

With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, and automated building systems.

Documented here:
www.peakoilassociates....
survivingpeakoil.blogs.../

Jan 18 10:09 PM

[Alan von Al...:]

Jim, thanks for a great roundup. I'm watching TBT, too.

Jan 19 12:26 AM

[fairguy:]

i know this for sure, world population is continuously rising, plus moving up of living standard world wide which mean more demand for foods and energy, like it or not. Food is energy btw. Those idle tankers full of oil are just a tiny blip of the overall energy demand trend which is UP.

Jan 19 01:43 AM

[romerjt:]

The demand for oil will go down. The global recession and the 180 degree change on conservation and oil alternatives of Obama compared to Bush will have some effect. Just think about what the near total disregard for these in the last 8 years said to oil interests. Also, more stability in Iraq equals greater supply of oil.

The real game-changer are plug in cars. Here’s the math: Given, 70% of our (US) oil is for transportation. A car that gets 25 mpg and is driven 12,000 miles/yr uses 480 gallons of gas per year. According to an article in the Atlantic, the Chevy Volt will go 40 miles on the battery (no gas) and get 50 mpg when the gas generator kicks into charge the battery. So a plug-in driven 12,000 miles with 6000 mi. on the battery uses 120 gallons of gas per year.

I realize there many obstacles to a quick and wide-spread implementation including pressure from supporters of the exiting paradigm, but it’s not that these cars are on the horizon and more like “around the corner” and I don’t see how any serious discussion of oil can not take them, and a 400% reduction of gasoline use into account. Maybe this is why the Saudis are developing their own super-fuel efficient gas engine.

Jan 19 09:32 AM

[longoil:]

romerjt,

Electric cars and PHEVs are highly desirable as one of many solutions for energy independence.

The major obstacle is the new infrastructure needed. The electrical energy required for these new vehicles, formerly provided by gasoline or diesel, needs to come from new power plants. Current power plants barely provide enough electricity for non-automotive use. This means thousands of new NG, coal, nuclear, solar, wind and biomass electric power plants need to be built in order to sustain a fleet of +100 million electric vehicles.

Jan 19 09:45 AM

[Paul Killinger:]

Jim,

I enjoy your work. Thank you.

Getting back to the "D" word, deflation, it is not necessarily good or bad, and in any event is unlikely to cause the other "D" word, a depression.

For example, housing prices where you're staying (in Palo Alto) have gone up something like 20X in 30 years. Their falling to a sustainable level and stabilizing as a result of this deflationary environment is healthy for our future economic prospects.

I can site endless other absurdities. Like $40K pickup trucks, $25K vacations, $3K TV's, $200 game tickets, and on a more modest basis, $5 beers, $4 milk and $3 cereal. Ad nauseum, ad infinitum. Only the denizens of places like NoCal and Washington could think this kind of folly normal or desirable.

We all need to re-enter the real world, and deflation is helping us get there. Quickly, I might add.

Jan 19 10:11 AM

[Paul Killinger:]

As regards the possibility of future World Wars, this is a highly unlikely scenario, as well. For two main reasons. First, the destructive power of modern weaponry is almost unimaginable. And, second, worldwide communication has led to a greater understanding of the common humanity of disparate peoples. (If anything, it seems we're more likely to over-populate than self-destruct at this point.)

Jan 19 10:24 AM

[Stevielee:]

Anyone following ETP or other similar MLPs notice it's time to buy yield. Pipelines are not Bad Bath and Beyond. The will be here long after the lights go out. Little if any tax on what are now double digit yields.XTEX, CPNO, APL. Forget prices now buy for recovery and buy the yield. The "market" has nothing to do with these price declines. Nothing.

Also,I odine will soon be a lead element in Green bulding projects.

I can go on and on. Solid picks. Thinking out of the box and forgetting history will be important moving forward.

Anyone can regurgitate the BS in the financial rags. Seldom right more often wrong.

He's on it!



On Jan 18 11:56 AM ROLEX18K wrote:

> LYNAS CORPORATION (Other OTC: LYSCF.PK) traded on PinkSheets, typical
> scam stock, no profits, no info, no SEC fillings,down 80%.
>
>
> Clean Energy Fuels Corp. (seekingalpha.com/symbo...) this
> one is down 70%, loses money,performs more or less like the price
> of Crude/Oil even if belongs to "CLEAN" stock category.
>
>
> Chemical &amp; Mining Co. of Chile Inc. (seekingalpha.com/symbo...)
> down only 55%, rare mining company that made 3 times less money than
> it's peers in mining industry last year, P/E 16 against miners P/E
> up to 5 in 2008.
> Performs more or less like any market index, wher many stocks are
> down 55%.
>
>
> ANNALY CAPITAL MANAG(NYSE: seekingalpha.com/symbo...) down
> 30% so almost like buying passive ETF like DIA,SPY, would do you
> the same damage without any special insider knowledge of the world.
>
>
>
> Inergy, L.P.(NasdaqGS: seekingalpha.com/symbo...) down
> 30%, performs 2 times better than the price of energies to the downside,
> and at least 2 times worse to the upside, as many stocks in it's
> category quintupled in price when Oil and Gas was balooning.
> Performs same as SP500, little connection to industry it represents.
>
>
>
> ENERGY TRANSFER PRNT(NYSE: seekingalpha.com/symbo...) down
> 30%, also little connection to it's industry, performs like SP500.
>
>
>
>
> BROOKFIELD ASSET MGT(NYSE: seekingalpha.com/symbo...) down
> 45%, nothing special just another financial company.
>
>
> PETROBANK ENERGY &amp; R(Other OTC: PBEGF.PK) also Pink Sheets typical
> scam stock, with no data,volume of 8000 shares,high stock price.
>
> It's name say what stock investment is it.
>
>
> Bottom line:
>
> The author is long the SP500, instead of wasting brokerage commissions
> on 10 different stocks with few of them in the "dark" category, if
> you follow and respect the author of this article, just buy SPY or
> any othe passive long index ETF.
>
>
> Mark Medayski
>
>
>
>
>
>
>
>
>
>

Jan 19 11:54 AM

[ain't no fo...:]

If the deflation the author speaks of does occur, I would suggest he keep a little of his money in the short and ultra short ETF's such as the DXD... they will allow participation in the market weakness that would occur if a further real deflationary spiral kicked in.

Jan 19 01:48 PM

[nakedjaybird:]

I have invested in energy according to the following plan. Based on how the Democrats are aligning to my plan (glory be!), it may get some legs, contrary to the grip Detroit and Houston have had on LEADERSHIP in DC since the 1970's.

For what it's worth, it appears I have become a supporting Democrat based on my energy perspective (contrary to Kudlow's and the Republican's mantra of Drill, Drill, Drill).

So here's the plan given to the Obama team (and by the way, the basis for my plan, the Livermore National Labs and AIE's own data, is a familar source associated with the new energy czar, Steven Chu):

The attached figure (Livermore National Labs US Energy Consumption - 2002; EIA) is my basis for good energy planning for the US with the overall goals of:

I) eliminating wasted energy (56 of 97 Quads, or 58% of total US consumption is lost), and

II) leaving natural energy resources stored in the ground until we REALLY need them, while maximizing readily available and free forever solar and wind, and other alternatives (while eliminating trillions of foreign financial payments).

1. Reduce wasted energy in ELECTRIC POWER GENERATION (26 Quads or 68% of power generation energy is lost).

1.1. Promote Solar PV and Wind.

1.2. Promote pumped/stored hydro (and end-use storage technologies to handle the variability of 1.1. generation).

1.3. Permit steam-to-electricity generation in combined cycle plants only where low pressure steam is utilized (even if thermal solar; AND nuclear[?]. Nuclear is dense enough and safe enough to promote block heating in cities as in Europe, or process industrialized areas?)

1.4. Stop burning coal (and the networked supporting industries from mining, transportation, pollution, reclamation, maintenance, etc., without causing a depression - like, put the folks to work building solar and wind farms, and the new interstate power grid and electrified ferries of 1.7 below; same for the oil, gas and auto guys, etc.). Do 1.1. and 1.7.

1.5. Stop burning natural gas. Do 1.1. and 1.2.

1.6. Don't even think about processing any tar sands, oil shale, or coal gasification and liquefaction methods which are ultimately burned for POWER GENERATION or TRANSPORTATION after adding cost (not to mention all the networked industry complexities as mentioned above for coal). Consider these sources only "when there is no other way" situations: like we run out of crude oil and need plastics.

1.7. Construct the new upgraded electric power grid in, above, below, or alongside the existing interstate highway right-of-ways which lead to major cities (where energy is used while passing thru the hinterlands within 50-100 miles of future solar and wind power farms).

1.7.1. Integrate within these same interstate right-of-ways ELECTRIFIED FERRIES for cargo, vehicles and people, both two-way high speed interstate express and two-way local intrastate travel.

2. Reduce wasted energy in TRANSPORTATION (21 Quads or 80% of transportation energy is lost):

2.1. Do 1.7. and 1.7.1. for intra- and interstate travel.

2.2. Promote local transit systems within congested urban beltways, linked to the interstate highway system of 1.7.

2.3. Promote hybrid and electric vehicles for personal commuting, local fleet service and commercial delivery.

2.4 Promote biofuels for hybrids, ground, rail, air and water transportation.

Much of the above is currently valid for developing countries which are repeating the mistakes the US made which hopefully can be redirected - be it because of air pollution [China, India], government edict, new alternatives, etc.).

Much of the above already exists in Europe, Japan... So it can be done. It may take a permanent energy tax to fund the above; and as wasted energy is reduced, the tax goes away. A wonder we've not seen.

Jan 19 01:51 PM

[Sober Realist:]

"As regards the possibility of future World Wars, this is a highly unlikely scenario, as well. For two main reasons. First, the destructive power of modern weaponry is almost unimaginable. And, second, worldwide communication has led to a greater understanding of the common humanity of disparate peoples. (If anything, it seems we're more likely to over-populate than self-destruct at this point.)"

---very interesting perspective. From the angle I'm looking, increased population (70,000,000 more per anum) creates increased conflict due to more people seeking dwindling resouces. Just because I thoroughly understand my mother-in-law does not mean she can move in with me. Iran is expected to aquire nukes by the 4th quarter of this year. After seeing what Israel did to Hamas recently, I wonder if they will passively sit on the sidelines while this clear danger comes to fruition. More mulas with nukes spells trouble for Israel somewhere in the horizon.

And the longer oil prices stay low, the higher the risk of conflict in the world.

Anders Åslund, senior fellow at the Peterson Institute for International Economics, predicts that if oil does not rebound to $75 per barrel by the end of '09, Putin's government could fall. It's an intersting interview:
www.iie.com/publicatio...
If you combine Putin’s mismanagement with the major drop in
commodity prices and the global economic downturn, turmoil could erupt in Russia.

Michael T. Klare recently published an interesting article on the worldwide political ramifications of extended low oil prices:
www.alternet.org/story...


I have a nagging feeling that oil prices will hug the floor for an extended period causing a major conflict in the world.

Jan 19 05:08 PM

[Conan the B...:]

Mr. Killinger: You are absolutely correct as far as Nuclear confrontations are concerned. Conventional warfare will surface precisely for the reason you stated.." If anything, we are more likely to over-populate rather than to self-destruct at this point."

Over-populate translates into food and arable land including the water necessary to grow the extra food.
How this plays out is moot.

Mr. kingsdale has indicated some of his holdings and the reasons for them in his personal portfolio. I know some of them, others I don't. So what?

He did not tell Anyone in Any part of the above Article to Go, Buy, Do it now...As have other SA Authors.

I have vastly different holdings as do probably the rest of the Commentators. This Article provides some investment ideas previously unknown to me. I will look at them and draw my Own conclusions.

I do not need or even welcome the opinions of another who has not counter with his own recommendations.

Thanks Jim.

Jan 19 08:01 PM

[longtermstocks:]

look at bldp, satc, mag & fcel

Jan 19 11:47 PM

[fairguy:]

romerjt, the US infrastructure is in decrepit state. They have brown out as it already. Since most americans are already up their butt in debts, can they afford to junk their usable gasoline car to buy a 35k volt?? when more people drive electric cars, taxes will follow. Electricity is cheap now because there are no road, bridge taxes in it.

Jan 19 11:56 PM

[fairguy:]

practically all alternative energy options right now are subsidized with taxpayer's monies. Chevy volt is bought with GM bailout. If electric car is so hot, it should able to make it on its own merit.

Jan 20 12:08 AM

[Richard Sch...:]

thanks for that comment. You're exactly right; nothing significant can happen economically until some normalization of spending habits occurs. Spending has been out of control, and it will require a huge cultural shift to abate. Good luck to us all! Keep writing!


On Jan 19 10:11 AM Paul Killinger wrote:

> Jim,
>
> I enjoy your work. Thank you.
>
> Getting back to the "D" word, deflation, it is not necessarily good
> or bad, and in any event is unlikely to cause the other "D" word,
> a depression.
>
> For example, housing prices where you're staying (in Palo Alto) have
> gone up something like 20X in 30 years. Their falling to a sustainable
> level and stabilizing as a result of this deflationary environment
> is healthy for our future economic prospects.
>
> I can site endless other absurdities. Like $40K pickup trucks, $25K
> vacations, $3K TV's, $200 game tickets, and on a more modest basis,
> $5 beers, $4 milk and $3 cereal. Ad nauseum, ad infinitum. Only
> the denizens of places like NoCal and Washington could think this
> kind of folly normal or desirable.
>
> We all need to re-enter the real world, and deflation is helping
> us get there. Quickly, I might add.
>
>
>
>
>

Jan 21 04:21 PM

[Marcocruces:]

If Jim had any real idea of what deflation was he'd be so much more credible. You can talk about components like expectation and declining prices as being deflation, but you'd be utterly wrong. Deflation, like inflation, is purely a monitary phenomena. Falling prices are a phenomena as well, but they are based chiefly on fear, and are only a resulting component of a contraction in the money supply. Jim would be better served sticking to his oil investment recommendations rather than trying to playi at economist with any basic understanding of the terms.

Jan 26 02:47 AM