1. Oil rising to $125 a barrel in 2008. Veteran market commentator Byron Wien correctly predicted that oil would hit $80 a barrel last year. Now, he says that people still underestimate the seriousness of the energy situation. "China and India are consuming less than two barrels of oil per person per year while we consume 26 barrels, Western Europe consumers 13 to 15 barrels, Japan, Korea the same amount. As China and India increase their consumption, even if the two and a half billion people there only increase their consumption a quarter of a barrel of oil per year, there's no way the world can meet that demand. So I think the price of oil is going a lot higher." Combined with further declines in the dollar, he predicts that rising demand for oil will drive the price to $125 a barrel. The easiest way to play rising oil prices is with the oil ETFs, such as the United States Oil Fund, LP ETF (USO), the iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) and the Claymore MACROshares Oil Up Tradeable ETF (UCR).
2. Sugar versus ethanol stocks. In the latest Barron's roundtable, money manager Felix Zulauf recommends playing rising demand for ethanol by owning sugar rather than ethanol stocks. The price of sugar has fallen 50% since February 2006 to 11 cents a pound, he says, below production costs of about 14 cents in Brazil and India, the two largest producers. Zulauf claims that sugar production is therefore on the decline, while demand is rising due to ethanol. Brazil produces 5 billion gallons of ethanol a year, and plans to increase that to 8 billion gallons in the next three years. Flex cars account for 22% of Brazil's total fleet, and the goverment wants the percentage to rise to 30%. And Brazil exports ethanol to the U.S., Japan and China, all of which are raising their demand. "In the past", says Zulauf, "when sugar started rising from a price below the cost of production, it rose 100% or more, on average." His target price is 20 cents. Note that according to Zulauf a 30% increase in the price of sugar (far less than the increase from 11 to 20 cents he's predicting) would eliminate ethanol's price advantage over gasoline. Sugar futures are therefore a better play on ethanol than the sugar-based ethanol producers such as Cosan (CZZ). Investors who can't access sugar futures may consider two commodity ETFs: the PowerShares DB Agriculture ETF (DBA) and ELEMENTS Linked to the MLCX Biofuels Index ETF (FUE).
3. Coal prices to double -- good for alt energy stocks. As if the rise in oil and sugar prices isn't enough, Citigroup forecasts that the annual contract price for thermal coal will reach $100 per metric ton in the 2008-2009 financial year, up from $55 per ton now, while the price of coking coal may hit $200 per ton from $95 now. The cause? Snowstorms in China, floods in Australia, and power crises in South Africa. These supply disruptions, according to Citigroup, will result in dramatic price increases when combined with sharply higher exchange rates in producing countries and cost increases. Rising coal prices should keep interest in alternative energy stocks high. You could buy the alt energy ETFs, or just go straight for the new Van Eck Market Vectors Coal ETF (KOL).
4. The future of the car industry. Carlos Ghosn, CEO of Nissan and Renault, is widely perceived as the most talented executive in the auto industry. Jim Kingsdale summarizes Ghosn's views on the auto industry: auto industry growth is coming almost entirely from emerging markets, where adoption of cheap cars will raise demand for oil. "When asked, “how are you going to meet the challenge from China and India in…low cost cars?” Ghosn had an interesting answer. He said that rather than try to “de-cost” a western car model, he has bought a company that currently makes motercycles which they can now “upgrade” to an automobile." Kingsdale himself predicts that rising oil prices will accelerate the transition to electric cars and alternative energy sources, and points to Israel which recently announced a plan for new electrical generation via solar technologies, widespread adoption of electric cars, and a 500,000 location electric refueling infrastructure. Don't dismiss Kingston's views without first checking his investment track record.
5. AMAT the alt energy stock? Semiconductor equipment leader Applied Materials (AMAT) aims to "offer customers one-stop shopping for cutting-edge solar panel manufacturing". According to Jennifer Schenker, "the company has gone on a shopping expedition in Europe, tapping into the Continent's deep expertise in alternative energy. In July, 2006, it bought a US-based company called Applied Films -- which has major operations in Alzenau, Germany -- for $464 million (€313 million). Last August, it acquired Switzerland's HCT Shaping Systems for $483 million. And on Jan. 31, it sealed a deal to take over Italy's Baccini for $330 million. All the acquired companies brought advanced panel-making technology to Applied's portfolio." AMAT was recently named Green Energy Innovator of the Year by Platt's Global Energy Awards, and Barron's featured it among recent tech stock picks. If you want to understand AMAT's solar business and the extent to which the stock could benefit from it, read AMAT's most recent conference call transcript.Full disclosure: no positions in any stocks mentioned.