Brahm

Three Stocks That Look Cheap Here

A few comments for an otherwise not a badly written piece. Valero is an excellent refiner, biut perhaps in the prevalent/expected scenario, we have to be worried a bit about the capacity issue. Recent data at least points to the fact that an appreciable amount of driving is discretionary and is subject to individual/family budget constraints. There is also a trend now to use more efficient vehicles for driving (and junking/parking guzzlers like SUV's). Over-capacity may become a serious problem in the intermediate and long term, and hence the loss of pricing power may be a looming realty, except for short periods during peak driving season. I believe there is also a move to contain heating costs, and hence gas available in much more abundance (watch the race for shale resource acquisition and acreage) may substitute heating oil in some measure, because it is a cheaper fuel. Hence, my feeling that it is premature to consider VAL at this time.

On CAT, we should not ignore that emerging markets also have to control inflation, especially if they are strong export based economies. To remain competitive, to ameliorate the condition of the poorer faction of their societies, and to avoid political fall-out/turbulence whether they are democracies (India and Brazil) or not (China, Vietnam). Indeed India has raised interest rates significantly recently while aknowledging that this may have appreciable effect to its growth rates. China also may do so after the olympics to avoid unrest, though the Chinese system has room for manipulating currencies and erecting export/import barriers in certain goods or commodities. I don't wholly buy the argument that in the context of globalization and with all that it entails emerging market economies for the most part will not be subject to some constraints on their growth rates. I agree with the author that the deep modulations that we saw in the past in CAT (and other export based cyclicals) is a thing of the past. But this does not imply that CAT and others will not be affected, but can only have upsides per se.

Wachovia/Golden West: The 'True Story'

It has been often said "Don't kick a man when he is already down" Good advice for the case of all the down and outs in this world. However, the members of the Board of Wachovia (and other similarly situated financial companies) are not down and out people. Not by any means. They still retain their swagger by and large. Perhaps, the klucks amongst the shareholders who naively stuck with their shares through the downdraft should pick up their self-respect and kick these high priced guys off the Boards of these ruined companies, if the Steels at thei helm of these companiers don't have the sense to do so. It is going to be a long uphill struggle before Wachovia can come back restored to health. In the meantime there may be more downdraft before the slow recovery.

Are Commodities Reversing or Consolidating?

What is known as commodities is too broad a classification, especially as it includes territory such as chemicals (which should be its own sector since it is somewhat significantly different from the metals as far as pattern of uses is concerned). With regard to the metals --such as steel, copper, aluminum -- I expect some (not too much) softening in the next six month or year period. The major reason for this can be indicated by one word: "China". The Olympics which involved a lot of heavy construction/reconstru... development is essentially over. China also is a heavily export influenced economy. The slowing we will be seeing in the US and Europe will affect China's exports moderately. Hence China's economy will cool somewhat till its export engine recovers fully again. This will probably constrain China's internal development and its investment rate moderately. In conclusion, I expect some softening of metal commodity demand and prices in the next six months or year. Perhaps, there will be some pressure on oil prices as well because of the cooling of the growth rate of the global economy by 1 to 2%.

Implementing Pickens' Plan for Public Energy Policy

Did you or did I make a mistake? As I said I had been kind of scandalized by those TV ads I am fairly sure that what T. Boone has been pushing is diesel derived from NG. There were news interview/program which I saw where he appeared to advocate such an apprroach. Or perhaps, even I read about also. Perhaps, my mind is playing tricks. I will check again.

On the subject of private cars and natural gas, I am afraid that it has been sort of dismissed as being impractical . It presents a lot of safety issues as well. Ever thought about basements and houses blowing up when piped gas (at even low pressure) is used for heating? How about mass public places blowing up, where natural gas is filled up for cars or cylinders installed, if such a model were to be adopted? Or cars blowing up in crowded public places when a car has been fitted with malfunctioniong gas cylinders/controls/gad... which may be leaking. Expect every car-driving American to become an expert in handling gas at moderate or high pressure? Did T Boone say anything about this? I bet not, whether I am mistaken on what he meant on natural gas use for transportation.

As I have said, mass public or commercial transportation (trucking, buses, perhaps trains, etc) are excellent candidates for natural gas susbtitution. And, the infra-structure for these would not be expensive because we don't have to put up a filling station in every locality.

We actually have a tough time to set up pipelines for natural gas transmission across the country. If all private (cars) transportation were to be switched on to it, it would perhaps be a formidable 100 year problem to evolve an adequate infrastructure.

The $2/gallon equivalent for gas is speculative. It probably does not include transmission, distribution and marketing costs. (Current gas price (bulk does not include transmission, distribution, etc) is about $11 to $13 per 1000 cu ft (or per $7 million Btu). The equivalent for gasoline is about $23 on the East Coast at the gas station. Still think $2 dollar equivalent for gas is possible! How about if OPEC drives the price of the barrel to $100. Or, the market in gas gets so tight because of mass demand that it kicks up the price of gas to a current equivalent of about, le's say, $17 at the hub in Kansas(?)/Louisiana?

The intermediate term solution for private automobiles, in my most thought-out view, is more small cars, hybrids, electric cars with much highher mpg average standards thyan prevalent now. We can cut consumption 30 to 40% using this approach within 10 years. Of course, we need to bring this to start immediately, using incentives/disincentiv... including severe tax implications if necessary.

I will check again! I don't know how to reach you beyond today.

Implementing Pickens' Plan for Public Energy Policy

When I was in elementary or middle school, our teachers, while teaching us hand-writing made us write "patern" sentences over and over again, sometimes more than a 100 times or more to teach us to write well. (Yes at that time in history, they actually taught us hand-writing by making us write on a "patern-notebooks" filled with sample hand-writing!)

The sentences used to be mostly wise sayings or homilies. One of them which I still remember was: NECESSITY IS THE MOTHER OF INVENTION. Quite cute and true! But only till yesterday. Today invention usually runs against economics and economists, sometimes of the phony sort. This species called economist will justify anything, even, however bad, using his science of economics. Fequently hidden personal benefit often at the cost of others, the environment and even global warming is the real hidden agenda behind these economic analyses.

Our celebrated author of this piece has thrown us a very marvellous opportunity to hash out some ideas (if possible!) by propounding the wisdom of T Boone Pickens on the use of natural gas. Of course, being myself always somewhat on the weird-side, I can't help thinking that perhaps the middle name for the gentleman should be changed to Bonehead. However, I did not and shouild not do such a thing, even though I have been brutalized by those sellf-serving ads on TV for the last several days. Only for the sake of civility I shall not!

Now, about the wind thing. It is being done in many parts of the world, and, of course, should continue despite the distraction introduced by T. Boone. Even when it is somewhat (not too much more!) costly, it should be done. Why? Because among many phony obstacles, justified mostly on economic grounds by those who are gung-ho for fossil (coal, oil and even gas) based power/energy, hidden fraud appears to be the bias on the use oif fossil fuels. The votaries of economics almost always assume that apples and oranges are the same. Coal, oil and gas based power (or other uses) appear to be assumed as having the same effectiveness so long as they can satisfy the same end, or have similar economics. This kind of economic analysis is actually nonsense! For example, there are health costs associated in the use of each of these fossil fuels. In the case of electricity production, these costs may not be borne by the utility company or the investor, but nonetheless they are real costs. They are borne by the individual (in terms of disease and personal costs), or the government or society at large.

How about the costs (in future mostly) on global warming induced by fossil fuel use?

Now coming to the use of natural gas for diesel and transportation as proposed by T. Boone. Should we be adopting this model, even if economics can justify it? The efficiency of conversion of natural gas to diesel is only about 50%. Are we forfeiting a large part of the advantage (in terms of global warming) on the use of natural gas through such a model vs use of natural gas in pother situations without injvolving conversion to diesel? Why not a natrual gas engine for use in trucking, heavy vehicles, and other public transportation needs? It has been done and is being done in some parts of the world with excellent results. Good economics and improved environment in central cities. And also not tough to set-up a network of stations to provide compressed LNG to the commercial transportation industry. Excellent concurrent benefits in terms of public health. Granted, it is not practical for private small transportation vehicles (i.e. our cars). However, use of such an approach in heavy public transportation would save us lots foreign exchange. And the economics would be excellent compared to that on the use of natural gas based diesel or oil per se.

What do we do with coal? Forget about power plants run on combustion technology. Wherever suitable coal supply is available, use integrated gasification combined cycle (IGCC) technology. For base-load plants, we can get 45% efficiency now using IGCC (vs. 42% for coal combustion). 2 or 3% improvement in efficiency translates to 5 to 7% better over combustion technology! Nothing to sneeze at when you look at it in termsof the modest Kyoto proposals.

Many analyses performed in the past show that costs are actually better for IGCC if you factor in health costs. Almost zero pollution in the case of IGCC, and this technology can also spur the use of CO2 isolation and storage (sequestration) in future. Of course, this will have to await feasibility of undergrouind storage for CO2 in future.

Can gas be used in a better way as such without resorting to conversion? Yes and no. The subject is broad and it would be confusing at this point to cloud our contention that T. Boone Pickens doesn't have much to his proposals or contribution at this time. Perhaps, he wants to make a fast buck or two more before he leaves. Serious approaches to solve real problems in credible real ways take a long time. It takes more serious and perceptive minds and souls to do so. But first there must be a national will and a strong public consensus on the need to do so. The time is not right yet! Otherwise, nobody would be side-tracked by light-weights like T. Boone Picken.

I have some of the natural gas stocks mentioned above in my portfolio. However, I have no desire to make more gains with ideas like diesel!

Buying Dow for a Better Deal than Warren Buffett Got

I am a long term (plus 10 years) investor in DOW, and consider my investment in it (appreciation + dividend of plus 4%) a good investment, since the risk has been low. Following the announcement of the acquisition of ROH, I added up more DOW to my current position. I intend to add more to the position next week.

I had been considering adding to my position in DOW, especially after the announcement of the foreign joint-ventures, for the last few weeks. The primary reasons have been the intended transformation of DOW to a specialty chemical company, the commodity chemicals joint-ventures with raw material suppliers abroad (Middle East, North Africa and Russia), and the partial spin-offs of some bulk chemical operations in the US through joint-ventures with parties in the Middle East, and the gradual evolution also of the company into a strong agricultural (and bio-food seed) player.

There is tremendous vision on the part of management to transform this company into new growth areas (specialty chemicals, bio-foods, and agricultural chemicals). Its traditional areas in commodity chemicals manufacuring also will grow significantly using the joint-ventures abroad. The benefits provided by joint-venture partners will be formidable in terms of raw material costs. As the costs of energy remain high or even increase, the benefits of the joint-venture with raw material suppliers will have very high pay-offs in future.

I expect earnings for DOW to increase significantly, probably more than double, in three to five years. I believe that as DOW gradually transforms itself it will merit a much higher P/E than it has had as a predominantly commodity chemicals company.

Who has the better deal? I believe short term it is Buffet. In the intertmediate term (3 to 5 years) it is shareholders, especially those who are significantly increasing their positions in DOW. Long term, it is almost even for both shareholders oand Buffet. However, we must remind ourselves that without Buffet or someone like him the deal would not have been easy to happen. Capital is hard to come by in the prevalent atmosphere.

Is Boeing Ready To Take Off?

However, you must consider that TIE or PCP's (user 153029) orders/business is not exclusively derived from work for Boeing. Their orders are potentially only a modest or significant proportion from the 787. They need to perform as well with regard to the broader economy or the aircraft industry.

Is Boeing Ready To Take Off?

A 20% saving in energy costs for airlines is a terrific advantage, difficult to overcome for a competitor airline without an efficient fleet. That is why orders will be certain for the 787. Of course, Boeing should ensure cost controls for its production. I am not nervous about Goldman's sell rating at this price level of Boeing shares at this time.

India: The Bear Case

India has problems; however, the extreme gloomy case being made is not justified now as new elections are in the cards soon. This case should have been made a year or two ago when it was clear that the Left of center government was just interested in staying in power, instead of continuing the reform process which had been instituted by the previous and other Governments in the nineties. The Communists have an undue influence on the Government, and Sonia Gandhi, the airy leader of the Congress, actually calls the shots for the Government. The nominal Prime Minisiter , though earnest and a good economist, has little clout in his own cabinet, and acts and behaves as though he is outside the Government. However, it will pass, since the Government will coast itself out of the present set-up while in the interim relying on the accomplishments and momentum generated by the previous Government.

I agree there has been several lousy missteps by this Government, more out of commission than omission. The non-energy subsidies actually perpetuate huge corruption on the part of the bureaucracy and political establishments. More than the energy subsidies, the failures and non-performance in the Agicultural sector have been more deplorably damaging to the economy while being highly inflation generating also. This is for a country that has sixty or more percent of its population dependant on it! The Reserve Bank of India had been used in an extremely political manner, and its actions inadequate and late for controlling inflation. The Government's failure to initiate meaningful and adequate programs for infrastructure development has not been lacking. In short, there has been a short in Government processes of majot proportions.

OIndians will talk again about the lost years. However, it is unlikely that the present set-up or cast of characters will prevail again afte the elections due in a few months. So, it will pass, and India come b ack again!

However,

Steel: The Top Is In Parts II, III

With the steel industry having achieved significant "consolidation" into larger entities in much of the free world, it is probably not realistic to expect massive price reductions when demand is peripherally down (.e.g 3-4%), especially when input costs (energy, iron ore) remain high. The reduced demand would most probably be countered by lowering production somewhat than by major price reductions. Chinese exports of steel are not a major concerrn when input costs are very high, since China imports appreciable levels of energy and iron-ore. The cost of inputs for many Chinese steel companies are generally higher than those for many global steel companies.

Adding to My GE Position

GE is an excellent company, especially for innovation. However, GE is so large in size that no innovation or improvement here or there is going to make too much difference to its outcome or growth. The second point to remember is that GE is difficult to value, since even during Jack Welch's stewardship it was more image and salesmanship that carried it to the value of about $50 rather than the earnings pace. Third, after all is said and done I had heard/known a while back that about 40% of GE used to be the financial sector. Good financial companies are generally priced at a P/E of about 12, instead of 17 or more. Four, GE has some pretty backward divisions (e.g. appliances) which are just passe in comparison to other independent appliance manufacturing companies. I would not value appliances at P/E 17 or more.

In conclusion, even though I think GE is an excellent company, I will not invest in it just yet. I will watch the market and other developments with regard to GE and its activities. I will consider deploying some money into a GE investment, when I consider there are developments with respect to the company which will make significant difference to its growth potential, or when GE makes an innovation which has terrific potential for ioutlook. on its income.

Greenspan, Please, Retire Already!

I heartily endorse all the prescriptions being suggested for Greenspan. Really, Greenspan should have a little bit of shame and just go away. To me the worst of him during the last 20 years was that he always was there championing tax cuts in-front of Congressional committies, but, when often asked by Congressmen as to how the budgets were to be balanced or where the cuts were to be made to balance the budget, he always pleaded that ain't his job to suggest or think about! He never saw a scheme from Wall Street that he never liked or advocated.

However, an appropriate question to ask also right now is why did our Congressmen often listened with such awe and attention to this gamesman? Does it suggest that Congressmen also have a lot to answer for? How come these Congressmen decided to confirm one of their own flunkies as chief of the SEC. (i.e this particular flunky is Mr. Cox) Anybodfy tell me why is there no hue and cry to drive this flunky from the SEC after the ruin we have? What did he do when Wall Street went crazy packing their banks and other firms with these now worthless securities from the fraudiuent mortgage industry syndicates behaving like wild species in our free markets?

Mosaic: Why Exit Nitrogen?

Correction on 5.06 PM post. I meant company from Norway, not Sweden (Yara International, NorskHydro, Norway).

Mosaic: Why Exit Nitrogen?

They are just being both right, and also prudent. Nitrogen fertilizer is based on ammonia which is largely synthesized from natural gas, or when unavailable, from other fossil fuels. There is also significant input of electricity for the process for synthesizing the ammonia. If you have been noticing the trends in natural gas markets in North America the price is mostly steeply up. Ditto electricity since it is derived mostly from fossil fuels also in North America. Many fertilizer companies in the eighties or nineties (?) shut down facilities and relocated production to cheap raw material locations in the Carribean or the Middle East. Yara International, the Swedish company previously parft of Hyro, has got manufacturing facilities in Sweden (cheap hydropower), but also expanded production to the MIddle East through joint-venture.

North American producers of nitrogen fertilizer are probably just anticipating the market for inputs in future, but also expecting rough competition from companies located in favourable raw material rich countries. There is also a push in the Gulf countries to expand industries based on oil/gas to provide employment for their workforce, and onee can expect them to go even more heavily into industries such as fertilizer.

I am not surprised by Mosaic's move! What better time to unload anticipated low performing business.

Barron's Banks on $100 Oil

Oil bulls, or should I say radicals, should not forget that even an average size recession will topple consumption of oil substantially, if prices remain at current levels. I bet uncle Ben and others in Wall Street are fudging economic numbers and conditions to avoid the R tag. To all intents and purposes, the US economy is mosgt probably in mild recession at this time. If you exclude the increase in energy related spending of the typical consumer from the GDP numbers over that of '07, you may well find that the numbers representing i2nd quarter '08 GDP are probably about even or somewhat lower than those for 2nd quarter '07.

Last week,for example, the EIA reported that gasoline consumption was lower by 1.8% from last year (?). Nobody can make a rational case that the massive inceease in the price of energy has not or will not change behaviour of American consumers or drivers, especially those at the lower end of the middle class. I have seen changes in behaviour of drivers in the middle and upper middle class on the street I live on. SUV's. common on this street formerly, have been traded away or quite often are found to remain parked for very long periods. The formerly shunned and lowly small cars are becoming fashinable to drive!

So oil bulls, in my view Barrons has something to its argument for at least the immediate period for the short or intermediate term. A 2% drop in consumption over a couple of months in the US will do wonders for the price of oil. Long term though the price of oil is still going to be on uptrend.