The Rude Awakening
Baltimore, Maryland
Friday, June 8, 2007 ------------------------- - Alternative energies are here, but which will stay?
- All aboard the Berkshire Express…next stop: BRIC,
- Investigating ethanol with muddy boots and plenty more…
------------------------- Joel Bowman, reporting from bonny Scotland… When it comes to energy, there are alternatives and then there are alternatives. Some work, others don't. Some present attractive opportunities to clean up the environment…others remain certain to clean out your wallet. The difference between boon and boondoggle can be hard to spot, especially from the comfort of your desk chair. What separates the profitable investment from the profligate one is usually hidden beneath mountains of government statistics…or just mountains of earth. Over the coming weeks, we'll be explaining the former and, hopefully, exposing the latter. Right now, Eric is on assignment in Northern California, walking the grounds of a geothermal energy operation. It's a tough assignment but, luckily for your senior Rude editor, the extensive wine-making region of Sonoma is near by. Here in Scotland, we're been holding our finger up to the winds of change…and listening to lots of Bob Dylan. In today's Rude Awakening, Kevin Kerr and Jim Nelson take a couple of field trips of their own. Kevin gets a belly full of rhubarb pie and a glut full of ethanol while Jim takes a ride on the "Berkshire Express" and examines the resurgence in coal. Enjoy… ----------------------------------- Ethanol Evaporates
By Kevin Kerr A recent study by Iowa State University says owners of new ethanol plants will see returns evaporate by next year as ethanol prices plunge. I agree. Recently, I took a long driving trip through the Midwest, visiting farms and ethanol plants along the way. I find it much more useful talking to farmers than just reading government-manipulated statistics. With muddy shoes and a stomach full of homemade rhubarb pie, one thing was abundantly clear: Ethanol from corn is not going to last. I estimate that the ethanol revolution will dwindle by the end of 2008, based on my discussions and observations with various farmers. If You Build It, They Will Come…or Will They? The building boom in ethanol plants is likely to go bust by the end of 2007 because of reduced return on investment, increased supplies of ethanol and, ultimately, falling prices. Some analysts estimate that returns will be zero or negative by 2008. On my recent trip, I counted no fewer than five new ethanol plants under construction in Minnesota, which is already home to 16 plants… and that's just the tip of the iceberg. There are 78 new plants under construction nationwide. The numbers are staggering. In Minnesota alone in 2007, ethanol production is projected to top 620 million gallons, or about 10% of the overall national production. As the national production number goes beyond 7-8 billion gallons, it's likely that margins will drop as prices fall. Fourteen billion gallons of production is likely by 2008, and at that point, I think we will see the peak. In terms of investing in ethanol, whether in shares of a company like Pacific Ethanol or in corn futures, there are still plenty of profits to be made. The U.S. ethanol industry, with the help of billions of dollars in government subsidies, has brought enormous riches for investors. Some of the 16 ethanol plants in Minnesota paid for themselves within two years, all made possible because of the 51-cent-a-gallon subsidy. The plants that are already established may be OK, but new plants that have lots of debt are likely to be the first casualties. Most states now require a 10% blend of ethanol with gasoline, and that's helped to drive the demand much higher. Now corn growers are lobbying for an even higher percentage requirement, but automakers are reluctant to comply. Sluggish performance and engine damage are the biggest objections of automakers. In some farm communities, E85 ethanol, which is 85% ethanol, is becoming more popular, so some automakers are creating E85 or dual-use vehicles, though it's far from widespread. E85-rated engines can burn regular gasoline or a gasoline mixture of up to 85% ethanol. Proponents of E85 ethanol vehicles claim sales will top $4.5 million this year. E85 is seeing significant increases in demand, but still mainly in the Midwest. So for now, it seems a safe bet to ride the wave of demand corn-based ethanol is providing, but keep an eye on the exit. The next interesting market will likely be biofuel made from soybeans or other grains, not corn. One thing is for certain: As energy prices continue to climb, ethanol production will continue. That means there will be many opportunities for investors and futures traders to benefit from the ethanol boom…while it lasts. Joel's Note: There are plenty of folk out there who will whine and complain when the higher prices at the pump hit their pocket. Few of them will be able to help you take advantage of it quite like Kevin. The "Maniac Trader" has been monitoring the energy sector for the Rude Awakening and the 5-Minute Forecast and rarely misses an opportunity to alert his readers to profit opportunities when he sees them. Trading every complex from metals to ags and back to energy, Kevin's delivered the kind of track record any trader would be proud to hang on their wall. (In fact, we hung it on these humble Rude pages a while back…after all, it's not every year traders rack up an average closed position gain of 96% like Kevin did in '06.) Right now, Kevin's inviting serious traders to join him for the next season of profit making. From the Strait of Hormuz to the fields of Minnesota, there are plenty of opportunities to lock in gains. Learn how here: Rude Traders Wanted* For Kevin Kerr's Resource Trader Alert *Serious Applicants Only -------------------------------------- Johnstown, Not Jonestown
By Jim Nelson Johnstown, Pennsylvania is one of America's most important railcar-manufacturing cities. This distinction does not land it on very many tourist maps, but did land it on my investment radar. If you visited Johnstown, you would see the rubble from the old factories that were wiped out in all three of the great Johnstown floods (1889, 1936 and 1977), as well as the succession of improvements in railcar technology due to the ground-up rebuilding efforts. Seeing these sites firsthand helps one understand the struggles and accomplishments of the railroad industry over the past 150 years. There have been many. All of this railroad talk, however, is not just for history buffs. In fact, it is extremely relevant in today's market… In early April, Berkshire Hathaway Inc. announced that it decided to jump into the railroad business by buying up shares of three of the four North American railroads: Burlington Northern Santa Fe (BNI: NYSE), Union Pacific (UNP: NYSE) and Norfolk Southern (NSC: NYSE). Warren Buffett's fresh foray into the railroad industry has garnered its fair share of attention from investors. There may be a way you can piggy-back on this renewed interest in all things train-related with a $600 million company that plays an intricate part in rail transport. It all begins with coal… Coal is already a dominant energy source, both here in the U.S. and worldwide. Coal provides more than half of America's electricity. But this dirty, black rock is now on the forefront of the green energy wave. The technology is there to separate raw coal into three parts: Mercury-sulfur, CO2 and purified syngas. The mercury-sulfur is then separated into its two elements. Mercury is used in various items ranging from diffusion pumps to batteries and advertising signs. Sulfur is used in many products such as pulp and paper products and even fertilizer. The harmful CO2 is injected safely underground. The most important part is the clean coal that is burned to create a clean energy source. This process has already been tested and used in many states in the Northwest and is starting to pop up across the rest of the country. Of course, this coal needs to be shipped from the mines to these clean coal plants. The ownership of this transportation is in just a few companies' hands. The railroad stocks have already made a big move to the upside. Berkshire's April disclosure made sure of that, but railcar manufacturing has not yet hit its peak. In fact, the company that leads the industry, FreightCar America (RAIL: NASDAQ), is trading at a very attractive valuation. FreightCar has manufacturing plants in Illinois, Pennsylvania and Virginia, which are all in the Great Appalachian Coal Region. The company's locations are no accident; coal-carrying cars make up 96% of its production. And over the past three years, FreightCar has managed an 81% market share of coal-carrying car manufacturing. Foreign demand is also a factor. The BRIC countries (Brazil, Russia, India and China) are in high demand of natural resources including coal. China, more specifically, is estimated to import about two million tons per month by the end of this year, causing an ever-growing strain on other countries to transport the coal from their mines to their ports to China as fast as possible. This means more coal-carrying train-car production, which is good business for FreightCar. FreightCar management mentioned during its first quarter conference call this year that it is looking into building plants in India, the third-largest coal producing country. This, of course, would be all big news considering both the demand for coal transportation and the geography of India and China. Stay tuned. --- Strategic Investment --- Revealed: The Rogues' Gallery of the world's top oil producers. And every one of them is getting ready for… The Global Oil Grab of 2007 Alarming Predictions Signal a New Energy Crisis: Iran's army surrounds U.S. troops in Iraq…Russia's army invades a southern neighbor…Immigrants flood America's southern border in unprecedented numbers…Oil soars to $150 a barrel - and beyond. Stay Informed With This Report: The Global Oil Grab of 2007 ---------------------- Rude Endnote: Have you an alternative energy you wish to opine about? Recently become carbon "neutral" or invested in your own ethanol plant (sorry!)? Write to us here with all thoughts alternative at aussiejoel@the-rude-awakening.com . The gents in Baltimore are busily prepping your 5-Minute Forecast so, until tomorrow, that's all from team Rude. Cheers, Joel
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