Joseph L. Shaefer's  Instablog

In his interview with the Wall Street Journal today, Treasury Secretary Timothy Geithner said the Obama administration “wouldn't allow Wall Street to return to such old habits as taking on excessive risk,” or that Wall Street could be “returning to business as usual.”  
"I don't think the financial system is reverting to past practice, and we won't let that happen," Mr. Geithner said.

Secretary Geithner said it and I believe him. He’s right, they aren’t ‘reverting to past practice.’ They never stopped their business as usual practice! OK, maybe long enough for Hank Paulson, as Treasury Secretary, to dispatch his personal nemesis, Dick Fuld of Lehman Brothers (and coincidentally, 24,0000 other employees in the process.)  

And maybe long enough to slurp at the taxpayer trough when taxpayer-funded loans were offered. The scent of free money will attract Wall Street like corn brings in the pigs. So they cried poor and talked about how dreadful their exposure was to risk that could bring the whole economic system of the United States crashing down if they didn’t get a few tens of billions of that free money themselves. It was only when they discovered that the free money came with a cap on salaries and bonuses that – miraculously – they all managed to unwind all those apocalyptic positions and were suddenly solvent enough to return our money – after ensuring their bonuses were covered, of course.  

What planet is Secretary Geithner living on?

Using Goldman Sachs (GS) as but one example, The Firm went from “we’re drowning out here! Send us a taxpayer lifeline!” to (less than six months after “nearly going under”) a quarter in which 97% of all trading days reflected massive profits. That is a statistically impossible feat – unless somebody was lying one of those times. Which is it, Goldman? Did you really not need that lifeline from us? Or did you not resort to front-running and other chicanery – you know, Wall Street business as usual – in your most recent reporting period?

Mr. Geithner further notes, "The consequence of achieving stability is that people can raise money, can raise equity, can borrow more easily at lower rates, that these markets have liquidity again.”

How’s that working for you, Mr. and Mrs. American? Can you raise money? Borrow more easily at lower rates? And with nearly a third of all American homes carrying mortgages in “negative-equity” (there is more owed on the mortgage than the property is worth) are you feeling like you have ‘liquidity’ again?  

Mr. Geithner and the rest of the Administration aren’t so much worried about the cause of the problem – Wall Street continuing to cheat the rest of America via shady trading practices – as they are about the effect.  As the article notes, “the administration is concerned about the potential for populist anger, particularly as banks resume paying high salaries and bonuses to executives.”  

Populist anger?  How very condescending of them!  Rather than worry about the effect, “populist anger” – which shifts the responsibility to those of us poor unwashed out here unable to control our frustration instead of discussing this over a 40-year-old scotch at The Club, the way gentlemen do – let’s place the onus back where it should be: on the cause.

It’s business as usual on Wall Street. Program trading, dark pools, algorithmic trading and high-frequency trading are but a few of the terms you may have heard that evince ways in which Wall Street ensures the playing field is uneven versus individual investors.

These terms are tossed around all to freely, so let’s take a moment to try to define them. They mean very different things to different people so I’ll stick with the best plain vanilla definitions I can.

For instance “program trading” means, in common usage, massive “black box” computer-generated trading in which computers are programmed to execute hundreds of millions of shares in toto based upon some event like a close above x or CPI coming in below y or the price of oil going to z, all without the pesky time-wasting hand of man getting in the way. If the order can’t be executed within 25 milliseconds – less time than your brain can comprehend that the period at the end of this sentence means the end of a thought, then some other computer on Wall Street beat you to the trade. (And I do mean “on” Wall Street. If you’re more than a couple blocks from Wall and Broad, the delay in transmission of an extra 10 milliseconds will lock you out of every trade.)

Actually, that definition refers more to algorithmic trading. The NYSE defines program trading rather more benignly as "a wide range of portfolio trading strategies involving the purchase or sale of 15 or more stocks having a total market value of $1 million or more." Of course the NYSE is an organization that defines one of those delightfully Orwellian terms Wall Street lawyers are so fond of: it is an SRO, or a Self-Regulatory Organization. The definition of a Self-Regulatory Organization? “Foxes guarding the henhouse.”

The other three terms are the step-children of this basic idea of program trading. Algorithmic trading (also called automated trading, algo trading, black-box trading, or robo trading) refines the NYSE definition to take in computer trading based on a pre-ordained algorithm like those I described above.

Algo trading is widely used by pension funds – you know, that ultra-safe money your defined benefit plan is supposed to be doing fundamental analysis of the best industries and companies to secure your future with -- mutual funds, and, of course, hedge funds.  (Hedge funds were leading-edge inventors of most of this garbage.)  In algo trading, million share orders are also typically broken down into 300 or 500 share lots so “they don’t disrupt the markets” – and, coincidentally, let anyone but the institutions know who’s buying what or who’s dumping what.

High-frequency trading refers to the highest-speed trading where computers once used only for sophisticated national defense are programmed to initiate orders based on information before human traders can even process the information. (Rather than talk about front-running your measly 5,000 share order in milliseconds, the Gentleman’s Club way of referring to this is " extremely low latency" trading.) In the U.S., high-frequency trading now accounts for 73% of all equity trading volume. And your pension fund and mutual fund managers, who drone on about “buy and hold is the best investment strategy” and “investing for the long term” are the biggest players in this game of millisecond trading.  

Finally, dark pools (also called dark liquidity) are the mechanisms by which much of this trading is hidden. Trades are placed via crossing networks (a type of ATS -- Alternative Trading System) that matches buy and sell orders electronically without routing the order to a publicly-displayed marketplace. Via crossing networks, the order is either placed into a black box (a true dark pool) or shown to other participants who can afford to be members of the crossing network. (All dark pools are dark but some are slightly less opaque than others.) The advantage of the crossing network is the ability to execute a large block order without impacting the public quote.

Wall Streeters will tell you this secrecy is necessary because it creates better executions. After all, if an institution places an order for a million shares and it crosses the tape, why, tens of thousands of the Little People out there would panic and we’d have a disorderly market, they say. (Whereas when they buy a million of this and sell a million of that all in less than a second, it’s OK?)

Every time reform is suggested for Dark Pools, the industry's lobbyists go into hyperdrive, claiming transparency would be bad for liquidity, that they would then be giving Col Sander's recipe to Popeye's, they wouldn't be able to fulfill their endowment charter, blah, blah, blah.  

Question here. Isn’t the public entitled to know when 20 mutual funds are dumping the same security their manager touted as great on CNBC just two weeks ago? Not according to Wall Street. These woolly mammoths don’t want a bunch of little rodents around they might have to avoid stepping on or suffer bad PR. They will tell you this is all done to maintain liquidity in the marketplace.

Bullfeathers. Volume is not the same thing as liquidity.  Regulators aren’t the guys lured away from Wall Street by the promise of 7-figure annual bonuses, houses in the Hamptons, and transport by corporate jet, so they are always playing catch-up to those other guys. Wall Street has them snookered right now into believing that more volume means more liquidity. It does not. The markets were far more liquid back when individual investors’ actions could actually affect the market. All volume means is that the wave of institutional buying or selling has become a tsunami. Individuals can surf a wave; we can only be dashed by a tsunami.

So… What can we do about it? We can all throw open our windows and scream, “I’m mad as hell and I’m not going to take it any more!” But that’s already been done to no effect. The revolving door between Wall Street and Washington DC only guarantees no change other than a management of “populist anger.” What a derisive and dismissive term. What a derisive and dismissive approach.

In Part II, I will provide, for the cynics, ways to profit from the current reality. If you think none of this will change, there are some publicly-traded firms that benefit hugely from the status quo.

For those filled with "populist anger,"  I’ll suggest a couple very straightforward actions this nation could take to restore equity, parity, balance, liquidity and honesty to the financial markets.

Finally, for the optimists, I’ll provide a few ways to invest in spite of the current uneven playing field, but which will provide even better opportunity if the overweight brontosauruses and bad-tempered tyrannosaurus rexes are brought under control.

Full Disclosure: We own no Wall Street brokerages (oops, “banks.”) We own only one mutual fund position. (For more on why we eschew open-end mutual funds, see the current article here.)


The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – especially so you are not over-impressed by the fact that our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running. What if this is the year we under-perform it?  

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

 

With the advent of highly liquid exchange-traded funds (ETFs) I am hard-pressed to think of a single reason to tie up my money for some indeterminate period of time with a fund that advocates that I buy and hold, then proceeds to turn their portfolios over 100% in a year while getting conflict-of-interest sweetheart deals from brokers.  I do not recommend being underneath one of these when they keel over.

 

When I use the term “mutual fund” I refer to its common usage meaning open-ended, non-exchange traded funds that pool your capital with others’ for some alleged benefits.  The advantages traditionally touted by mutual funds include professional management, diversification and lower trading costs.  The three disadvantages I would cite with mutual funds?  Professional management, diversification and lower trading costs.  Let’s look at each:

 

Professional management.  Professional management does not necessarily mean better management – or even good management.  It simply means full-time management – it means that's what the managers do all day whey they go to their offices.  Some do well some of the time, some do horribly most of the time.

 

If I work in a foundry eight hours a day, I'm a professional steelworker, too, but it doesn’t necessarily make me a better steelworker than the guy who only works 4 hours a day.  If I'm a professional artist eight hours a day, that doesn't make my art better than the person who throws their whole heart and soul into their art for only an hour a day. 

 

Over time, “professional” mutual fund managers tend to mirror the results of the rest of the investing population: a few, and only a few, will outperform the benchmarks with something akin to consistency.  Some regularly under-perform the averages year after painful year.  Over time, it is a well-established fact that the great majority of mutual funds under-perform the market. 

A new study from Standard & Poor's found that over the past 5 years of stellar bull and disappointing bear markets, 70% of large-cap fund managers failed to match the performance of the index.  Of those who matched it, very few exceeded it.  This in a market where the benchmark S&P 500 Index is off 23% from its highs of a year ago.  Almost 3 out of every 4 funds are down even more!

 

Remember, too, that mutual funds, because they can throw so much business to a broker, are, along with the big pension funds, usually the biggest beneficiaries of hot new issues or sweetheart bond or preferred deals like those Warren Buffett got from Goldman Sachs.  It doesn't speak well for their capabilities that most of them, even with this free boost to their performance unavailable to the individual, still under-perform the broad market averages. 

 

And you are still in mutual funds for the brilliance of their management?  No way.  So maybe you’re paying for…

 

Diversification.  The old gray mare ain’t what she used to be.  You used to buy a mutual fund in order to diversify broadly across a number of companies in a number of different industries.  There are two problems with this.  First, to goose returns, fund managers gravitate to the hot industries no matter what their prospectus says.  (This is often called “style drift.”)  Like Italian traffic laws, what mutual funds say in their prospectus is too often “merely a suggestion.”  For instance, few people realized that FIDELITY MAGELLAN, then the largest fund in the world, during the dot.bom fiasco had 53% of all its assets in hi-tech securities.

 

Second is the simple fact that you can get the same diversification from ETFs.  And in ETFs there is no style drift.  They buy the companies in the index you intended to get in and stay in, not whatever strikes some bored 30-year-old fund manager’s fancy that particular day.

 

If you want honest diversification with no hint of style drift, buy an ETF.  That only leaves the red herring of “lower frictional trading costs.”

 

 

Lower trading costs.  True as far as it goes.  Generally speaking, funds, with block trades of 100,000 shares or more, are going to pay less per share than you will for your 100 or 500 share trade.  There are two big "howevers,” however. 

 

However #1, in this age of electronic brokerage, I pay as low as $7 per 5000 shares when I place orders over the Internet or via one of the low-load brokerage firms' proprietary systems. The mutual funds don't beat that price.

 

However #2, the mutual funds often don't get as good a deal as they could, instead taking, as a rebate, soft-dollar items.  This means they pay a higher price for the trade but the broker gives them, say, a few dozen top-of-the-line notebook computers for research.  All too often, the fund managers' kids end up being the ones doing "research" on these computers – on video games and music downloads. Once the soft-dollar items enter the mutual funds' offices, there is no accountability for them.

 

And don't forget that you pay management fees and expenses to the mutual fund firm so it can give bonuses and salaries and cars and nice offices to its denizens to ensure they do their best thinking for you.  These “necessary expenses” can eat you alive.  In the ten years ending 12/31/2008, our (non-mutual fund) Growth & Value Portfolio returned a Compound Annual Growth Rate (CAGR) of 12.29%.  I feel comfortable telling new clients we shoot for 12% CAGR but they should only expect 10%.  After commissions and fees.

 

If a fund has an average annual return of 10% (and we’ll even let them use “Average Annual Return,” the arithmetic measure common to the industry rather than the CAGR geometric mean we use and think they should) and expenses of 1.25% (1.4% is the average), after twenty years $10,000 will be worth $7888 less than if expenses were 0.5%. If expenses are 2.00%, the return will be $6919 less than it would be at 1.25%.  Those corner offices and free notebook computers can eat you alive.

 

Other disadvantages / dirty little secrets the mutual funds don’t talk much about:

 

You are locked in to most mutual funds for some period of time.  To the best of my knowledge, only Rydex, Potmac, and ProShares allow you to trade the very next day after you bought their funds.  And some – very few – pension plans and 401k plans allow this flexibility, as well. 

Most funds, claiming they don’t want “hot money,” forbid you from taking your money out before 30 days or 90 days or, in some cases, even longer.  This is because they “need to know the funds will be there for proper investment decisions.”  Proper, shmopper!  They’re taking my money and day-trading with it, buying sub-prime crap because the guy at Goldman gave their kid a computer and now they owe him one, and I can’t have my money until they’ve played with it for 30 days?????

 

If you buy a load fund it’s worse – they’ll give you your money back, but only after taking their 5% cut.  I give them $10,000, decide a week later when the market’s down 700 points, to take it back and they charge me $500 for losing me $1000! 

 

If you buy no-loads through one of the low-load brokerage firms, there’s a “gotcha” there, too.  There is an extra fee if you sell within 90 days of purchase.  Take the worst 90 days in 2008 or 2009 – did you really want to maintain your position for a minimum of 90 days?

 

Therein lies one of the more subtle and not-discussed disadvantages of mutual funds.  Since these guys exist to “beat their benchmark,” not to “make money when they can and step aside when they can’t,” they’re always invested.  There are times to be 100% invested and times we should step aside and be only 10 or 20% invested.  But mutual funds are afraid you’ll say, “I don’t pay you to be in cash.”  But you do – or you should…

 

Now.  Let’s say you agree with me and you’ve decided to take your money out of a mutual fund and transfer the cash to your brokerage account.  Whoa.  Now they really dig in their heels.  Broker-to-broker TOAs (Transfers of Accounts) happen all the time.  Nobody digs in their heels and pouts about losing a client because the next time they are acquiring a client, their bad behavior will be remembered.

 

Not so in the mutual fund business.  When you sell your whatever fund and put it into cash, even some quality fund families like Nicholas, Janus and USAA have a final “gotcha.”  Each account holder has an entirely new number affixed to the money market fund than was affixed to their previous fund.  So when you look at your statement and note your “account number” and tell them to TOA it, they tell you there is no such account number!  But that’s only because of this little game they play that changes the account number on you.  Their solution is to snail-mail you a statement, which tells you the new account number, which you can then tell them so they can transfer your money to your preferred broker.

 

The Hartford takes all this a step further and no matter that you are the only Irving Pallindrome Rumpelstiltskin in America, you provide your Social Security number, your mother’s maiden name, and your left toenail for DNA testing, they will still demand a “wet signature” – an original request on their original form signed in ink.  Anything to float your money a little longer, I guess.

 

For decades, there has been no alternative if you want diversification.  But now there is.  ETFs and index funds.

 

I prefer ETFs.  Buy and hold index funds are based on the notion that market risk is always worth taking. I’m not a believer in that theory.  I agree, the long-term trend of the market is biased to the upside.  But we don’t live in the future, we live in the present.  And if some emergency should force you to sell (or another opportunity, say, to buy your dream home at a great price this year) before a multi-year period has elapsed, you may well have bought at one of the market’s higher marks and sell at a lower mark. 

The trendline may be biased to the upside – but the sine curves that define the real world of the market on its way to that higher point are not!   You have the same problem with ETFs but, because they trade on the exchange just like any other stock, there is a psychological difference.  You don’t feel like you’ve sold your brother into slavery in Egypt just because you think it’s time to go into cash for awhile.

 

So why are you still holding mutual funds?  

 

Possibly because you have to.  Poorly managed, not well diversified, overpriced funds are the only choice in many pension plans, 401ks, and employee IRA accounts.  Why is that?  The reason given is that the plan administrator wants to ensure your safety (gee, thanks, Big Brother – we’re such idiots we need you to make decisions for us) so they insist on the “professional management” and “diversification” that mutual funds bring.  Another reason, closer to the truth, is that they can always claim they acted prudently by offloading the responsibility to the mutual funds if anything goes wrong.  And there are those who might, less charitably, notice a spate of new laptops courtesy of the mutual fund companies…

 

It is not prudent but, rather, a violation of the Prudent Man principle to refuse to acknowledge that we now have instruments that provide equal diversification with lower expenses, no style drift and more liquidity. 

 

Time for plan administrators to wake up and smell the coffee.  Oops.  Coffee beans were eaten earlier but no one thought to brew it until the 15^th century.  When your plan administrators catch up to that date, you might ask them to include some ETFs among your choices…
 

Full Disclosure: We own no index funds.  We own a grand total of one mutual fund, Rydex Managed Futures Strategy (RYMFX.)  We can sell it any time we like, buy it back and sell it again -- just like an ETF.   This article is part of our "Wall Street's Fairy Tales" series -- we just felt this title was more appropriate.

 

 

The Fine Print:  As Registered Investment Advisors, we see it as our responsibility to advise the following:  We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

 

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – especially so you are not over-impressed by the fact that our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running.  What if this is the year we under-perform it? 

 

It should not be assumed that investing in any securities we are investing in will always be profitable.  We take our research seriously, we do our best to get it right, and we “eat our own cooking,”  but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

 

 

As many thoughtful commenters contributed after  Part I of this article appeared,  there are inescapable realities we must address if we are to strike an intelligent balance between quality of life, real cost of energy, and an environment that is in balance.

 

The first reality we must square is our love of our way of life with our environmental goals.  We take for granted the freedom to drive to work, fly to meetings, visit friends and family no matter how far-flung, and drive to the mountains, the beach or other weekend and vacation destinations.  We want to leave our computers on standby for ease of starting up the next morning, to keep our homes warm in winter and cool in summer, and to enjoy our flat screen TVs, electric blenders, Wii devices, and so much more.  Don’t look now, but what we have is exactly what 1 billion Indians and 1.3 billion Chinese and another 3 or 4 billion people across the planet want.

 

The second reality is that we are quite schizophrenic about our energy usage.  We don’t want to be dependent on foreign oil, but we also refuse to allow drilling on the millions of acres of public lands in the US or offshore.  We say we despise the oil companies because we pay $3 a gallon for gas, but we haven’t allowed any of these companies to build a new refinery in the U.S. since 1976.  There are reasons a-plenty for companies  to agree not to build much-needed capacity: refineries are not particularly profitable, obstructionists fight planning and construction every step of the way, and government red-tape makes the task an all but impossible to succeed, decades long experience in frustration.

 

The last refinery built in the US was in Garyville, Louisiana, in 1976.  The cost of building a new refinery is between $2 billion and $5 billion and experience has shown that any company that wants to build a refinery to process heavy tar sands or shale oil will have to fight self-appointed “protectors of the earth”  for many years in the courts, then they have to apply for as many as 800 local, state and national permits. With the long-term rate of return on capital for refineries of just 5 %, why bother?  In normal times, they can make that in T-Bonds without nearly the hassle.  

 

So instead we allow resources to lie fallow right here in North America and we spend hundreds of billions to import oil from the Middle East, Russia, Venezuela and others – most of whom take great delight in watching our self-destruction.  It’s disingenuous at best to rail about the Russians cutting off natural gas to Europe or Chavez in Venezuela expropriating US-owned energy infrastructure when, if we simply use what we already have in abundance, we wouldn’t give a rodent’s posterior what Putin or Chavez were doing to run their own countries into the ground. 

 

Are there problems with drilling in American offshore locations?  You bet.  Is it easy to refine American and Canadian oil sands?  Not on your life.  Is it as cost-effective to extract natural gas from American shale as it is to import it as liquefied natural gas (LNG) from Dubai?  Ummm  -- well, actually, yes it is. 

But all these entails hard choices – like moving lots of rock and putting it back later.  Like ensuring that reforestation of denuded areas and best practices in soil management are put into practice.  Nature seeks balance.  If we only observe what Nature itself has done for eons and seek to duplicate it, we’ve solved fully half the carbon emissions problem.  More on the solution later.  For now, Walt Kelly, ardent conservationist and creator of “Pogo” said it best: “We have met the enemy and he is us."

 

 

The third reality, like it or not, is that the world’s demand for energy will grow by 30-50% over the next 20 years.  We can talk all we like about conservation and Congress can waste its time and our money mandating mercury-filled flourescents, but the rest of the world will continue to be profligate.  By the time I retire, we will need everything from every source that every energy firm can deliver. We’ll need it from oil, natural gas, coal, nuclear, wind, solar, geothermal, biomass, conservation and as-yet-unknown possibilities.        

 

Fourth, eschew the “We’ll do it all with clean sunshine and a gentle breeze, man” types.  There are no near-term alternatives to oil, natural gas, nuclear and coal. Like it or not, the world runs on fossil fuels, and it will for years to come. DOE forecasts that fossil fuels will supply about 78% of total US energy demand in 2030 – about the same as it does today. Willpower, rhetoric, wishing or a new hope for change will not change this fact.  If you believe you can wish the world green, get over it.  It’s all about thermodynamics, costs, and hard choices that grownups have to make.

 

Remember MEOW? (Jimmy Carters “moral equivalent of war.”)  30 years on, after $30 billion in government subsidies and a $26 billion a year government bureaucracy (DOE), alternative energy is still a hope.  That's $30 billion pumped into ethanol, MTBE, hydrogen cars, etc.  Of course, the elites who think they can overturn the laws of thermodynamics and economics by clever rhetoric, breads, and circuses, won’t stop spending our money willy-nilly on the next ethanol screw-up. 
 

Here are some hard economic facts.  To replace one 1,000 MW gas-fired power plant, you’d need 500 state of the art wind turbines spread across 40,000 acres or 250 high-efficiency solar facilities taking up some 20,000 acres.  Why are gas, oil and coal so much more efficient, needing just a few acres to produce all that energy?  Thank Mother Nature.  Think of fossil fuels as giant “batteries.”  They’ve been compressed for eons by Mother Nature into compact pools, pockets, mounds, shale and bitumen (also called tar sands or oil sands.)

 

To try to turn something as scattered as photons in sunlight or the kinetic and capricious energy of wind requires colossal investment to concentrate that energy as efficiently as Mother Nature has already done with fossil fuels.  Fossil fuels are batteries.  Every time. They work.  In compact form. 

Wind power, today, when we need to address the problem, is every bit as consistent as is the wind when you fly your kite.  Some days it works, some days it doesn’t.  Solar power, today, is every bit as efficient as the day you decide to get a tan and it rains.  That’s not to say we shouldn’t continue to enhance the collection capabilities in these areas – just a reminder that they aren’t like batteries you can dig out of the drawer and know they will work every day, rain or shine, daytime or night-time.

 

We need all the wind, solar, geothermal, biomass and hydroelectric supplementation that we can afford. But let’s think of it rationally; today and for the foreseeable future, these sources will supplement the giant batteries Nature has created, they will not provide a cost-effective alternative.

 

Fifth, I can’t even dignify carbon cap and trade with valuable ink and space.  This is simply another porky fiasco like ethanol, MTBE, and hydrogen-powered cars that will accomplish nothing and cost hundreds of billions or trillions.   And it is doomed to fail unless we have viable alternatives -- not just supplements like solar and wind, but genuine replacements-- to the giant batteries known as fossil fuels.  Something that can be provided in massive quantities at a price that won’t bankrupt us. 

 

The final reality is that taking the actions presented in cap and trade and many of the Kyoto protocols would likely have no discernible effect on global climate. 

Better we should improve energy efficiency from production to transmission to usage in home and office and use two sources of fossilized batteries, three if you count uranium as a battery (and I do) that this nation has in abundance: (1) We have the largest deposits of coal of any nation on earth, enough to last 200 years at current rates of consumption.  (2) We don’t have natural gas pockets like Iran and Russia but we have every bit as much that is trapped in Rocky Mountain, Upper Midwest, and Southeastern US shale.  With the recent technological advances and enhanced drilling techniques we’ve developed for this resource, we have roughly 100 years proven reserves.  (3) Add to these two an energy source the US military has used safely for over half a century -- clean nuclear power -- and we have the batteries and the atoms to hold us in good stead until we can bring the “supplementals” up to real “alternative” levels.

 

Today, gas and nuclear alone provide 40% of our productive energy generation – and are the two cleanest of the Compressed Fuel Giant Batteries (very compressed in the case of uranium.) In France, nuclear is 75% of power generation.  You don’t hear the French moaning about OPEC holding them up, do you?  (Many other things, but not this!)  And before anyone makes fun of France, how dumb are we to continue to forbid the building of oil and gas refineries and nuclear plants, and to make drillers jump through hoops to deliver clean natural gas to us???!!! 
 

As for nuclear, Three Mile Island and The China Syndrome jolted that industry off-track just as it was gaining widespread acceptance.  Yet China Syndrome was pure fiction and Three Mile Island resulted in no deaths or injuries to plant workers or members of the nearby community and, as far as we can tell with continuous monitoring of the area ever since, no problems with succeeding generations.  Still, it provided an image, incorrect though it may be, of Armageddon.   

That plant and the surrounding area is still continuously monitored by NRC, DOE, EPA, muckrakers, and No-Nukers.  And there is still no evidence of any ill health effect.  What Three Mile Island did accomplish was actually positive: sweeping changes for the better in “emergency response planning, reactor operator training, human factors engineering, radiation protection, and many other areas of nuclear power plant operations.”  It also resulted in research that led to pebble reactors and the next generation of even safer nuclear facilities.

 

Again, it’s all about trade-offs in an imperfect world.  If you hate the idea of a clean, quiet, no-emission nuclear plant, what is your alternative?  40,000 acre wind farms that produce a smidgen of the power?  20,000 acre solar arrays that produce a smidgen of a smidgen of what nuclear does?  Freezing in the dark?  Living in caves? 

I’m tired of hearing platitudes like “War is not healthy for children and other living things.”  What’s your alternative?  Living in gulags in a dictatorship?  Or “No nukes, no nukes, no nukes.”  What’s your alternative?  Importing ever-increasing amounts of oil from tinhorn dictators so they can fund terrorism against us?  You’re willing to spend billions and see thousands die as a result of a terrorist event that we created by funding our enemies, but not to build a nuclear reactor that would keep US dollars in the US?

 

The nice thing about coal, gas and nuclear is that they don’t even need much in the way of infrastructure.  Coal and nuclear are running at 75% or less capacity right now and natural gas-fired plants at less than 50%.  If you really want to cut carbon emissions now, not when two guys in their garage find the solar Holy Grail, you could advocate switching from coal and oil to natural gas and nuclear.   At less than 50% capacity, simply running natural gas plants at 75% could change our carbon footprint in the short term by more than any cap-and-trade lobbyist-funded boondoggle.

 

If we want to gain energy independence now, we have only to

• Level the playing field.  End subsidies for oil, natural gas, nuclear, solar, wind, geothermal, et al.  Gore everyone’s ox at the same time and let the advocates for each prove their worth in the marketplace.  (Speaking of Gore, given his conflict-of-interest holdings in alternatives, I imagine he’d fight this tooth and nail!) 
• Make the tough decisions as to whether we as citizens want to drill offshore, in ANWR, or elsewhere versus importing more and more oil from those who are using our money to do us harm.  Decisions are not made in a vacuum.  It isn’t “no new drilling and reduce our dependence on foreign oil.”  That’s dreamy stuff for starry-eyed tourists. 
• If we opt to allow drilling for natural gas (the cleanest of the fossil fuels and one which we have in abundance) and oil (which we have in less supply) and to build nuclear facilities and natural gas pipelines, refineries and other essential infrastructure (while still building cost-effective wind and solar farms), then we must reduce the regulatory nightmare to do so.  Why 800 different permits from scores of local, state and national entities?  What do they do for their $26 billion a year at DOE if not fulfill their charter to “reduce America’s dependence on imported oil?”  If it’s anything other than that, I know a quick way to reduce the national deficit by $26 billion a year.
• My opinion: Build American nuclear plants, switch as much as possible to American natural gas, and use American coal for the rest.  Reforest wherever possible to create carbon sinks that attract and convert these emissions, and use regenerative agricultural practices to sequester even more carbon.  According to an article in Soil Science here, soil – plain old earth, dirt, terra firma – is a great carbon storage medium, and contains more carbon than all terrestrial vegetation and the atmosphere combined.  For this last, we must change our agricultural practices to be more in line with organic gardening precepts but the health benefits would probably, coincidentally, save us a few hundred billion in health care costs, as well!  And finally, after using more US natural gas and US/North American uranium; less but still significant US coal; continuing research and buildout in renewables like solar, wind and geothermal; and reforestation and natural sequestration; a little population control wouldn’t hurt, either.

 

How to Invest --  & In Which Energy Sources

 

Where to begin?  I am primarily a buyer of natural gas companies, coal leasing firms, and natural gas pipelines.  In my opinion, among the best of the natural gas firms are Chesapeake (CHK), Imperial (IMO), EOG (EOG) and Encana (ECA). 

 

In coal, I stick with the coal leasing firms, which have no labor costs or accident liabilities but simply own mineral rights under land which is leased to coal producers.   My two favorites are Natural Resource Partners (NRP) and Penn Virginia Resources (PVR).   Vis a vis my comments about the amount of coal and natural gas we possess right here in the US and Canada, NRP has enough coal property under lease to fill its current contracts completely -- until at least 2040!  I don’t own but you might take a look at two coal ETFs, as well -- Market Vectors Coal (KOL) and PowerShares Global Coal (PKOL).

 

In the pipeline arena, there are some old favorites I first recommended more than 10 years ago, like Magellan Midstream (MMP), Boardwalk (BWP), Enbridge Energy (EEP), Kinder Morgan (KMR), Buckeye (BPL), Enterprise (EPD), Atlas Pipeline (APL), and SemGroup Energy (SGLP).  SGLP is slightly different than the others in that it specializes in crude oil and liquid asphalt cement.  It transports these to refiners for processing into final products.  I see it as a pipeline and an infrastructure build-out play.

 

Nuclear is a tougher business for me to recommend specific companies in because uranium is about the only “pure play.”  Reactor builder Areva (ARVCF) is primarily owned by the French government so they’re our partner, like it or not, and may make decisions based on politics rather than economics (unlike our government, of course!)  GE is a big player in next-generation nuclear as well as desalination and a number of other key areas – but their credit and off-balance-sheet exposure keep me away.  In uranium, there will always be another prospector with a “story.”  They’re a dime a dozen.  Cameco (CCJ) is the biggest producer.  It, along with Anglo-American (AAUK), are the only two I’ve ever made money on.    Your mileage may vary…
 

Full Disclosure: We are long small positions in ECA, IMO, CHK, NRP, PVR, MMP, BWP,  and  APL.

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