January 2007 Newsletter
Issue One, Volume Eight

Going Green, or Bleeding Red

By Mike Gasior

Sometimes I will admit that there is at least some effort on my part to make the title of each edition of this newsletter intriguing, and this is one of those months. My entire adult life has been spent in and around the financial markets, and my economic tendencies tend to bubble to the surface in just about any situation. This is the basis for my primary subject of this month because it is now abundantly clear to me that the intent of the world's industrialized countries is to move towards reducing the levels of greenhouse gas emissions and slowing down global warming. George W. Bush and the United States are still arriving at this conclusion a little too slowly for this writer and a lot of other people around the world. However, there does at least seem to be some thawing of their beliefs as well and the momentum of everyone else is now too great for them to ignore any longer.

Few newsletters I have ever written have resulted in as much of an email response by readers as the amount that I received after my commentary on the future of ethanol. Much of the feedback I got was thankful for having shared information with my readers that isn't getting much play or traction within the mainstream media. There were also some angry notes accusing me of talking down what many believe is a viable course for the future of U.S. energy independence, without offering other solutions for the growing problems we as planet are facing. That is what makes this month's edition so important.

This is an enormously important topic for me to be writing about at this moment in time, and for you to be reading and considering because we are entering into what will become one of those seminal moments in modern human history. We are at the dawn of a new age at this very moment and it will play out through the lifetimes of our children, grandchildren and great grandchildren. I have written previously of my own movements to become more energy independent by heating my home with solid fuels harvested from my own property and I have also considered both hydro and wind installations to generate at least some of my own electricity. I'm blessed with a pond and two very nice streams that give me some opportunity for a small hydroelectric generation plant, and live on the top of one of the higher mountain peaks in Connecticut, giving me an abundant supply of wind. Like anyone, I have weighed the expense of putting such equipment into place against the savings I would expect from the reduction of my electric bill, and the mathematics were never sufficient to get me off the mark and make a change. But since the deregulation of the electricity market in Connecticut several years ago, I have watched as my electric bill has more than doubled and is now nearly triple what it was just five or six years ago. When your monthly electric bills averages between $400 and $500, the expense of producing some of my own power is now something for me to once again consider, and I am simply now a microcosm of society and the world as a whole. If the economics can no longer be ignored and avoided, then change is probably going to be quick and inevitable.

So we will spend this newsletter first understanding in a vivid way the situation that we currently find ourselves in, and then explore what some of the answers for the future might be. We'll focus on the facts and figures, which are indisputable, and leave all the pompous grandstanding and gestations to the politicians who do those things so well. In every revolution or evolution like the one underway right now, there are economic winners and losers. Armed with the truth, we may all become better at identifying them.

MY 2007 WORLD TOUR

I'm excited about the array of programs I will be presenting throughout the year in New York, Bermuda and Grand Cayman. There will be a total of 12 of our most popular seminars held in New York, and 11 sessions offshore in Bermuda and Grand Cayman. No matter your interest or position, I am certain you will find one that will further your understanding of some segment of the securities marketplace.

Rather than list all of them here, please visit the following link to see the entire schedule on one page:

http://afs-seminars.com/schedule.html

Also, although available dates are beginning to run in short supply, if your organization would like to hold an in-house training session for your staff, my office will be happy to work with you to schedule any of our standard programs, or help you assemble a custom one that perfectly suits your audience's needs (at no additional cost). Please call my offices at (860)347-6568 and they will answer any questions you may have about holding a session.

Finally, although my dance card is already somewhat full, if your group or organization would like me to speak at a function on the issues of the economy or financial markets, my office can also address those inquiries.

THE NEW VIDEO COMMENTARY IS ON THE WEBSITE

The theme of making these video clips educational, mini-seminars continues this month with a discussion about a very specific product: Treasury Inflation Protected Securities, or TIPS for short. The U.S. government introduced these securities less than a decade ago, and although a terrific vehicle for many investors large and small, they can create a host of accounting, operational and systems problems that are left to the humans to correct. I spend this commentary trying to share with you the simple essence of how they work, and hopefully provide some insight to you humans who are left to clean up the aftermath of the resulting problems.

You can view the high-speed and dial-up versions of this month's video at the following links:

http://www.afs-seminars.com/video/2007-Jan-768K.wmv

http://www.afs-seminars.com/video/2007-Jan-56K.wmv

You may also view all prior videos at this page:

http://afs-seminars.com/v-commentary.html

THE MYTH OF "ENERGY INDEPENDENCE"

This is a concept and terminology I would like to dispatch with quickly and efficiently because it is, quite simply, a farce and fiction promulgated by people with no real understanding of the concept. We have all heard this battle cry from countless politician stooges from both sides of the aisle for many years now because the rhetoric is both appealing and easily digested by an electorate who generally knows even less than the orator. First let me back up the clock just a smidge.

In November of 1973, just three weeks after the Arab oil embargo that crippled the United States economy and left yours truly sitting in the gas lines with my father on the odd days we were allowed to buy gasoline based on the final digit of your license plate, President Richard Nixon first posed the challenge to the country; "Project Independence".

Modeled almost precisely upon the same concepts that John F. Kennedy had used to propose the United States landing the first man on the moon, Nixon pledged that the United States would become free of our addiction to imported oil and "meet our own energy needs without depending on any foreign energy source." Many thought it was an amazingly bold assertion that even caused Nixon's own advisors to wonder amongst themselves how this could possibly ever become reality. Nixon knew too well that this would play extremely well to an American public reeling after the oil shock of 1973, and "Project Independence" stated a goal that the United States would completely end dependence on imported oil in seven years; 1980.

While such a proposal sounds like folly to us thinking about it 33 years later, let us not forget the oil-exporting powerhouse the U.S. had been for many, many years. Many people listening to Nixon's idea in 1973 remembered all too well how long the United States had been the world's biggest exporter of oil. As recently as World War II, the allies had used a total of seven billion barrels of oil during the course of the war, and the U.S. had provided six billion of those. By the end of the 1940's however, the U.S. had slipped into becoming a net importer of oil.

When Nixon made his proposal in 1973, the United States imported approximately 33% of its oil needs. As of me writing this, the U.S. now imports 60% and is slated to continue increasing that percentage with no change anywhere in the foreseeable future. We are also on a similar trajectory with our use of natural gas, where only 3% of our needs are currently imported, it is already obvious that dependence will rise from the 3% that we currently import to about 25% in 2020 based on our current rate of growth. This is likely an understatement because there are many new uses of natural gas not fully appreciated in that forecast (for example, natural gas is a critical material in the production of ethanol and future demand is difficult to accurately predict) making future prognostications hard to land accurately.

The fact of the matter is that the United States is a $13 trillion economy that consumes on average 50 million barrels of oil every single day of the week. Any fantasy of America becoming "energy independent" anywhere within the lifetime of someone reading this newsletter is likely impossible. This by no means suggests that efforts shouldn't be made to at least approach that goal, as well as finding renewable sources that do less damage to the environment. That is always the object of running a business or managing a portfolio; diversify yourself so that no single event (like the oil embargo of the 1970's) will be devastating to you.

Now let us explore the reasons for seeking to make changes to our behavior and how realistic some of the goals that have been set really are.

STEP ONE: IDENTIFY THE PROBLEM

It is interesting and fun to think about reducing our dependency on oil and other fossil fuels and seek sources of energy that will serve that end. The political impetus at this moment is toward the reduction of greenhouse gases, specifically CO2 (carbon dioxide). The majority of the scientific world has identified CO2 as the culprit in the increase of greenhouse gases in recent decades. The most current observations by the most qualified scientists are that the primary reason for global warming can be blamed on the activities of man. Just for expediency, let's agree to stipulate that this is truly the situation, and that CO2 is indeed the enemy we are fighting against.

According to the International Energy Agency, in 2004 which is the last year statistics are available for, there were 26.08 billion metric tons of CO2 emissions worldwide. This equates to 28.77 standard U.S. tons.

From the same agency, let us now examine what accounts for this amount of pollution broken down by source:

-- Power Generation = 40.6%

-- Transportation = 20.3%

-- Industry = 18.2%

-- Residential = 12.6%

-- Other = 8.3%

Without me even pointing it out to you the obvious place to make a tremendous impact is to do something about the amount of CO2 produced by power generators. This idea is neither novel, nor new, and has been hotly debated for many, many years both in the U.S. and other industrialized countries. The most widely discussed options are to simply cap the amount of carbon that utilities can produce, and then progressively reduce those caps and give economic incentives for companies to achieve those goals. Not unlike myself personally, it will take a change in economic reality in order for these companies to feel compelled to make any substantial changes.

The second largest area that could be worked on is the transportation sector, which includes autos, trucks, trains, planes and ships. The largest marketplace for all of these transportation methods is the U.S. I don't even have to contact a scientist to observe what any American will easily tell you, and that is that fuel economy for U.S. automobiles literally hasn't improved almost at all in the past 25 years. It may actually have gotten worse during that time period. Emissions have improved since the move to unleaded gasoline and catalytic converters, but almost all technological improvements achieved through engineering in recent history has been poured into more horsepower, speed and other bells and whistles. With oil being pretty cheap until fairly recently, the economics have not been there for any sincere movement to improve mileage and efficiency.

Many people have at least heard of the Kyoto Protocol, and a smaller number are aware that the United States has not yet ratified the treaty. I would imagine an extremely tiny percentage of Americans could explain with any real detail whatsoever what the Kyoto Protocol requires of countries that ratify it. Allow me to add you to that small group of people right now, because it is amazingly simple.

The Kyoto Protocol requires any country that signs on to the treaty to collectively reduce their emissions to a level 5% lower than the amount of greenhouse gases they produced in 1990 by the year 2012.

Now that you know the threshold, I would suspect that it doesn't seem like a wild or unattainable goal. For a civilization that has sent men to the moon, eradicated many diseases and currently has rovers beaming video back from the surface of Mars, we should certainly be able to achieve such an honorable and important, goal. Right? If I were asked to reduce my weight by 5% it would require me to lose a little over 9 pounds. No sweat. Want me to reduce my personal spending by 5%? Easy.

But let's look at this simple goal without ignoring the fine print. The 5% reduction of greenhouse gases is not a reduction from our current levels. It is to reduce by 5% below what the world's emissions were in 1990. I've already given you what the world is currently producing with regard to CO2, and that number is 26.08 metric tons. The problem is the fact that the world was only producing 20.5 metric tons 16 years ago. This illustrates that the output of pollution during the past 16 years has increased about 27.2%, which is sort of horrifying to consider in its own right.

So to achieve the Kyoto Protocol we would actually have to reduce greenhouse gas emissions to a level of 19.475 metric tons annually, which is 5% lower than 20.5 tons. The reality though is that to reach that level we would have to reduce CO2 emissions by 6.605 metric tons from the levels of 2004 by the year 2012. This represents a reduction of 25.33% from the 2004 levels and weight reduction for me of just about 47 pounds. Suddenly things don't sound like such a cakewalk.

Please immediately understand and believe that I am not suggesting for one moment that we shouldn't earnestly try to achieve this very worthy goal. I'm simply trying to put the problem and the obstacles into a more easily digestible and understandable package. I have agreed with very little George W. Bush has proposed or done in the past several years, but one can sort of understand why he is resistant to signing the Kyoto Protocol. It's simply because the United States of America has basically no chance whatsoever of ever getting their emission back to 2004 levels, much less 5% lower than 1990 levels.

But the U.S. is not alone in this problem either. I spent substantial time last year across Europe and was frankly blown away with the number of windmills I saw dotting the hills of Holland, Germany, France and Denmark. Not to mention some of the itty, bitty little cars that appear to use very little fuel (but are probably murder on the gerbils running on the wheel under the hood).

Within the European Union, about 12% of their CO2 emissions come from automobiles, and even with massive improvements in fuel economy, car emissions of CO2 rose 26% between those years of 1990 and 2004.

If you could use one simple example of how hard it is going to be to actually stop the increase in greenhouse gases, much less reduce them, let's examine just one industry near and dear to my heart; airlines.

The emissions directly related to commercial airline traffic amounts to 2% of the global total annually. So if we were to immediately ground every commercial aircraft worldwide for the next 12 months, we will have reduced emissions by 560 million metric tons, leaving only another 6,045 tons left to eliminate to achieve the Kyoto objective.

As I've said, something most definitely needs to be done to slow, and then reverse this cataclysmic trend we find ourselves in. The only point I am trying to make with all my facts, figures and analogies is that human civilization is a very, very large boat and it does not turn quickly. It will be critical for world leaders to keep their hands firmly on the tiller of their respective boat and not lose sight of the ultimate destination of a healthier planet. And while the Kyoto Protocol is an idealistic goal (dream?) it is most probably a fool's errand.

Next we'll explore the areas and industries that will offer the most bang for our respective buck in effecting change and diversifying our future.

WHAT IS AVAILABLE TO BEGIN THE CHANGE AWAY FROM FOSSIL FUEL

Before I begin a brief march through the primary technologies that exist and which might begin to reduce dependence on oil and coal, let me quickly dispatch ethanol simply so it doesn't seem as though I ignored it.

I've already dedicated almost an entire newsletter to the topic, and if you didn't read it, you can go read it here:

http://www.afs-seminars.com/newsletter_Sep_2006.html

The simple truth is that ethanol isn't a long-term solution to anything, although it will certainly be a contributor toward the diversification I mentioned earlier. It is no longer particularly cheap, there is science that shows it isn't significantly better for the environment and it has already created an inflationary situation for livestock farmers and any manufacturer using corn syrup sweetener. Ethanol will play a minor role in the larger scheme of changing our future.

Here are some more statistics for you from the International Energy Agency from their most recent study on energy consumption in 2004. Here is the current breakdown of what sources contribute to our overall energy usage:

-- Oil 34.3%

-- Coal 25.1%

-- Gas 20.9%

-- Combustible Renewables and Renewable Waste - 10.6%

-- Geothermal .41%

-- Wind .064%

-- Solar .039%

-- Tide .0004%

Now ethanol and other bio-fuels occupy the group titled "Combustible Renewables and Renewable Waste" for those of you who are not usually members of the Granola and Birkenstock crowd. There is already plenty of momentum to increase the production of those products.

But what about those other renewable sources, which total only about .5% of the globe's total energy consumption? How viable are these technologies in the year 2007? Let's take a closer look:

SOLAR

The widest use of solar energy is for the production of electrical power, yet it only makes up a little less than 1% of the world's electricity at 5,400 megawatts. Enough to power to serve between 2 to 3 million "typical" U.S. homes.

One obvious drawback of solar is the inability to produce power at night, so there always has to be a backup source to replace the solar during that time. Another drawback is that the current photovoltaic panels you might be familiar with are not really that efficient when it comes to converting sunlight to electricity. Right now it would cost about $77,500 to build a 10,000-watt system, which would be enough to power an average sized house. Without breaks from the government it would take 50 years to recover the expense, and even with subsidies, it takes almost 10 years.

Overall, the cost of generating electricity with the current panels runs between $.35 to $.45 per kilowatt-hour around the world, and between $.26 and $.35 in the U.S. because we have a little bit better sunlight than some other locations. At that price, the electricity is not a commercially viable product.

But a breakthrough technology called "concentrating solar power", or CSP, which uses a massive array of mirrors that track the sun throughout the day and focuses that beam to create heat that generates power very much the same way that fossil fuel plants do. These types of power plants can generate hundreds of megawatts of power at a price of $.09 to $.12 per kilowatt-hour, and that is not considering any subsidies the government may offer to reduce the price further. It still isn't as cheap at the $.03 to $.05 that coal fired electricity costs, but it is at least moving in the right direction and doesn't produce any emissions at all, it is silent and renewable.

WIND

Power produced by the wind is probably the most exciting segment of the alternative market to me many others. This is most likely because the cost of generating electricity this way has dropped dramatically as countries around the world have eagerly adopted it.

As recently as 1980, the cost of electricity produced by the wind was running around $.80 per kilowatt-hour. By 1991 the cost had dropped to $.10. Today, the most efficient on-shore installations in the U.S. are producing power at a cost between $.03 and $.04 per kilowatt hour, but more commonly the cost runs from $.06 to $.09, which does include government subsidies that are currently 1.9 cents per kilowatt-hour. This makes wind power an already viable competitor to coal and it will beat natural gas if the gas prices remain high, even without subsidies.

Interestingly, the U.S. government has even admitted as much in a Department of Energy report issued in 2006. It stated that the cost of producing one kilowatt-hour of electricity for power plants coming online in 2015 would be as follows:

-- Wind 5.58 cents

-- Natural Gas 5.25 cents

-- Coal 5.31 cents

-- Nuclear 5.93 cents

The report did not include or quantify what the environmental impact of any of the production methods, but focused purely on cost.

Not surprisingly, the amount of electricity produced by wind power increased by 27% in 2006 to 11,603 megawatts and is slated to increase another 26% in 2007.

One of the largest obstacles standing in the way of increases in wind power installations is people not wanting them constructed anywhere near them. Frankly, I will tell you that I think they are an amazing and majestic sight, and I stared like a little kid as I drove through farmland and countryside of Denmark and Holland. You will also witness a huge wind farm on the shoreline of Amsterdam as you begin your decent into Amsterdam airport. I've tried to keep politics out of this, but it difficult for me to resist taking a swipe at the limousine liberals of Nantucket with their panties in a bunch over the proposed wind farm to be installed miles offshore. They rally and protest over the prospect of Bush allowing the drilling for oil in Alaska 5,000 miles away from them, but God forbid if a commercial enterprise installs an environmentally friendly energy source anywhere near their pricey neighborhood. Sometimes you just have to wonder if they realize how they appear to anyone watching them throw their tantrum and stomp their feet. But I digress...

There are even more alternatives, but this newsletter is already becoming painfully long, so I will address some of them in future editions.

In summary for this month, let's agree that we have a long road ahead of us if we're going to significantly reduce our dependence on fossil fuels or make any real progress in reducing the emission of greenhouse gases. All you need to do is observe your immediate surroundings, the behavior of the people you know and the area in which you live to see if you notice any legitimate movement toward change. I'll report to you here and now that I don't see anything changing around me.

AN AMAZING MUSICAL EXPERIENCE

I'll keep this short, but I cannot resist sharing with you one of the most fantastic evenings of music I have ever experienced, and I have experienced plenty in my almost 35 years of concert going.

Last Saturday evening I had the pleasure of spending the night at the studio of Levon Helm at his house up in Woodstock, New York for one of his famous "Midnight Rambles".

Lots of you don't have a damn clue who the heck Levon Helm is, but he was the drummer and primary vocalist with The Band and the most probable song your might know was their tune "Up On Cripple Creek". They were the band that Bob Dylan chose to back him after he "went electric" at the Newport Jazz Festival in July of 1965. You may also not know that the very well known Elton John tune, "Levon" was named after Levon Helm.

The night was just an amazing spectacle of musical ability that was displayed for the maybe 100 "guests" in attendance. The Alexis P. Suter Band opened the evening and blew the place out. Following them were the Holmes Brothers who played a varied and rocking set and no one in the room could keep from moving. Finally, when Levon and his band came on at almost 10:00 p.m., the crowd was pumped up and the band sounded fantastic. His daughter sings with the band now and the level of talent displayed by the members of this group was frankly staggering. I cannot help being humbled and embarrassed by the level of talent when watching musicians of this caliber playing just 10 feet away from me.

If you ever get the chance, you should experience this for yourself. Levon only opens up his house a few times a year for his Rambles, but you can get all the information you need right here:

http://www.levonhelm.com/midnight_ramble.htm

YOUR JANUARY BRAINTEASER

I've decided to go with one more financial/economic/business themed brainteaser, in keeping with the theme of these newsletters, and this is actually a toughie. Although citizens of a certain country might be at a slight advantage, and it isn't the United States, but that's all the hints I'm giving you.

Here is your question:

"What company is both the oldest corporate enterprise still in existence today and was the largest corporate landowner in history?"

Good luck, and when you can't take it anymore you will find the answer at the following link:

http://www.afs-seminars.com/brainteaser_Jan2007.html

Copyright 2007, Michael Gasior. All Rights Reserved

AFS Seminars LLC
500 Chamberlain Hill Road
Middletown, CT 06457-5564

http://www.afs-seminars.com

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