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Politics and Investing

|Includes: American Superconductor Corporation (AMSC)

Letting your politics dictate your investments is a terrible “strategy”--just ask the Obama-haters who stayed out of the stock market last year or the Bush-haters who avoided the bull market of 2003-07.

On the other hand, Washington doles out trillions of dollars every year. And when there’s that much money floating around, it pays to know where it’s going, and who’s likely to get their hands on it.

Even the most popular president won’t get everything in the annual budget submitted to Congress. Last year President Obama was denied several key items, both on taxes and spending. This year, the president isn’t nearly as popular and will get even less of what he wants. But his proposals touch virtually every industry in America. And budgets only require a majority vote--filibusters aren’t a threat. Accordingly, Democrats are likely to push most of Obama’s spending measures through, though all bets are off for taxes in an election year.

Where the Democrats put the nation’s money was important in 2009, a year when the government’s stimulus efforts played a big role in the economy’s recovery. And, like it or not, the government will have a big hand in the domestic economy this year. That’s why I combed through the president’s budget at www.whitehouse.gov/omb/, with a particular eye on what appears to be his favorite industry--energy.

The yawning federal budget deficits of the Bush years have expanded under Obama. There are plenty of candidates for blame, including the recession, mushrooming entitlements, the cost of fighting two wars, faulty projections by the Bush administration unemployment under 5 percent and interest costs that rise with every dollar borrowed.

Needless to say, Uncle Sam’s discretionary spending has shrunk markedly; only a handful of departments have actually seen their own budgets grow. Among the winners is the Dept of Energy, which picked up 7 percent more money on top of last year’s gains.

The president’s plans for cap-and-trade legislation to regulate carbon dioxide (CO2) emissions passed the US House of Representatives many months ago. However, it remains hung up in the US Senate, where there were enough votes to filibuster even before Republican Scott Brown won the seat held by Ted Kennedy.

Unwillingness to sponsor anything resembling a tax in an election year is probably the biggest reason the Senate remains gridlocked. Controlling CO2 has always been a regional issue. The coal-burning states of the Midwest, Rocky Mountains and Southeast oppose such restrictions, the Northeast and far West--where relatively little coal is used—are usually the primary proponents.

Ironically, CO2 is also a profoundly bipartisan issue. Proponents of regulation range from Senator John Kerry (D-MA) to Senator Lindsey Graham (R-SC), who has recently kept the issue alive by reframing it as pro-energy security. Opponents and skeptics range from Agriculture Chairwoman Blanche Lincoln (D-Ark.) and Budget Chairman Kent Conrad (D-ND) to Senators Byron Dorgan (D-ND) and Judd Gregg (R-NH).

For the past several years, opponents of CO2 regulation have been on the defensive, as study after study has confirmed that man-made emissions are changing the atmosphere and hence the climate. The past several months, however, it’s been the proponents defending their positions.

First were the pirated email chains that suggested some scientists were silencing others. Then the 2007 report from the United Nations Intergovernmental Panel on Climate Change--which won a Nobel Prize--came under attack for faulty sourcing, typos on key dates and other errors.

Few intelligent people give any credence to the argument that record snowstorms hitting the East Coast the past week refute climate change science. But added to everything else, they’re just one more reason why senators are going to be reluctant to do anything on CO2 this year. And that’s why even President Obama himself is talking openly about scrapping a cap-and-trade program for a bill with incentives for alternative energy--in other words, all carrots and few if any sticks.

There’s still a chance the Environmental Protection Agency will impose strict new limits on CO2 emissions, now that it’s claimed jurisdiction over them as “hazardous” to human health. Anything with real teeth, however, is likely to be challenged fiercely in the courts and alienate supporters in Congress.

Accordingly, many have pronounced the alternative energy industry boom over. That’s a mistake for two big reasons.

First, 36 states and the District of Columbia have mandates in place for utilities to use renewable energy, and most call for at least a five-fold increase in output over the next 10 to 15 years. Utilities are building and buying capacity to meet those mandates, and the dollars are flowing.

The second reason is the US Dept of Energy budget and its implications. The $28.354 billion proposed in discretionary budget authority includes massive funding for research and development for everything from renewable energy and smart grid technologies to nuclear power.

Nuclear power spending includes finding an alternative to storing waste at Yucca Mountain, NV and other permanent locations. The budget deems the Yucca site “not a workable option,” doubtless at the behest of Senate Majority Leader Harry Reid (D-NV). There’s also room to authorize an additional $36 billion in guaranteed loan volume for advanced nuclear reactors, bringing the total allocated to $54.5 billion.

Such lavish support for nuclear energy is a clear sign of the prominence of Energy Secretary Stephen Chu within the administration. Fierce “NIMBY” (not in my backyard) opposition to greenfield nuclear power plants and unpredictable regulators are still strong disincentives for power producers to build new nuclear plants. But the loan guarantees do remove a major hurdle to construction for new reactors built at existing plant sites--where support is ironically strong--in regions like the Southeast.

Renewable energy is another major winner in the Obama budget, and competition for these dollars will be fierce. Some small companies will win big by snaring a contract or two, but many will fail and vanish. Larger players have the best chance to win deals, but a contract will also have considerably less impact on the bottom line.

The good news for investors is that renewable and nuclear energy companies are no longer in favor--inaction in Senate has obscured the federal budget and state-level developments. If American Superconductor’s (NSDQ: AMSC) fourth-quarter results are any guide--the firm’s revenues doubled--the dollars are still flowing. Only perception has changed, and that’s always fleeting. Follow the money.

Roger Conrad is chief strategist of Portfolio 2020 and editor of Utility Forecaster.

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