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Monday, April 6, 2015

News Letter March 2015

Great info and well presented!

M. T. 

5:46 pm edt          Comments

March 2015 News Letter

And please keep me on the list for the Lawrence Letter


5:43 pm edt          Comments

Sunday, August 22, 2010

What the experts are doing with their own Roth IRAs


For most of this year I have been advocating the conversion of conventional IRAs to Roth IRAs.  See my IRA blog of 11 March on this page. Here is an article on what financial experts are doing:



Remember it almost certainly makes sense to convert if you are more than 10 years from needing the funds and remember also; you can reverse the conversions (called "recharacterization) of your new Roth back to a simple IRA if you change your mind.  Some restrictions apply.


1:40 pm edt          Comments

Tuesday, June 15, 2010



For years, as a strong advocate of carbon-based-energy investing, I have enjoyed substantial success in increasing the value of my portfolio.  Simmering over the past several years, then reaching a boil with the 2008 presidential campaign, heated discussions of alternative energy sources erupted.  Various arguments predicting the demise of carbon-based-energy fueled both the world’s governments and media. 

This note is an attempt to both put those discussions in perspective and determine where to invest to intercept the future of energy.  The carbon based fuels referenced in this discussion are coal, oil and natural gas.

There are several reasons why ‘alternative energy sources’ have gained national attention; national defense/security, global climate change, and the depletion of carbon based fuel resources (some day we will just run out of it).  Many recent, sometimes interesting, discussions address not only alternative energy, renewable energy and green energy; but also how the transition to those energy sources may impact the future value of carbon based energy investments.  Most discussions are sparked by our current dependence on foreign oil which fuels our economy. The United States imports approximately 62 percent of its oil. Canada supplies approximately 20 percent of these imports, and Mexico contributes 10 percent. But, over 30 percent comes from regimes that are less friendly or stable, including Saudi Arabia, Venezuela, Nigeria, Angola, Iraq, and Algeria (respectively the 2nd, 4th, 5th, 6th, 7th, and 8th largest oil importers to the United States).  Over Half of Crude Oil Imports Comes from Unstable or Unfriendly Countries.  Obviously, this raises the national defense/security issue.  During a major war, it may not be possible to import this oil to fuel our defense efforts. It is also safe to assume that some portion of the billions of dollars we export annually to these countries for the purchase of their oil is ultimately used by our enemies to launch terrorist attacks on us.  We are funding our enemies and then spending more money and human capital to defend ourselves from them.  This, in itself, is reason enough to decrease our dependence on foreign oil before we even consider the environmental effects of oil as our primary energy source.We must find an energy solution that reduces our dependence on foreign interests, both friend and foe; is also friendlier to the environment; and is sustainable and/or renewable.  Much has been said about the impact of Man’s insatiable thirst for fossil fuels on either climate change or global warming.  I think there are strong arguments on each side as to man’s impact on global warming; but, I do not want to argue that issue here.  Instead I will just state that anything we can do, within reason, to reduce carbon emissions cannot be bad and certainly is a good thing.  Ideally, we can find that one magic bullet solution to our energy needs problems.  Let’s look at some. 

Ethanol from corn: burning money and oil:
US politicians have been subsidising corn (maize) production, and its conversion to ethanol, for years.  The idea is that it can be added to petrol where it both acts as fuel itself, and makes the petrol burn more efficiently and cleanly.  Since it is not derived from fossil fuel, it should reduce greenhouse gas emissions and help reduce American dependence on Middle Eastern oil.  Surely, that’s worth the $1.4 billion annual subsidy that farmers in states like Iowa and Nebraska; and companies like Archer Midland Daniels get every year.  This is why every four years we hear so much about ethanol as a major source of energy.  When politicians are campaigning in the Corn Belt States, what better way to get their votes than to propose ever more subsidies and mandates for the use of corn to fuel our cars and economy?  Taxpayers may not be so keen.   The full costs of the subsidie are a good deal more than the direct subsidy itself.  By raising the price of corn they raise costs of food throughout the world.   And for all of our enemies from which we wish not to import oil, we send them the message that we are burning food in our SUVs while much of the world is starving.  This does not bode well for  our image around the world.

The real problem with ethanol from corn is that it requires fuel to make the corn.  David Pimentel a, professor from Cornell, has done the analysis [i].   An acre of U.S. corn can be processed into about 328 gallons of ethanol. But, planting, growing and harvesting that much corn requires about 140 gallons of fossil fuels and costs $347 per acre, according to Pimentel. That is $1.05 per gallon of ethanol before the corn even moves off the farm.  The energy economics get worse at the processing plants, where the grain is crushed and fermented. As many as three distillation steps and other treatments are needed to separate the ethanol from the water.   All these need both energy as well as another of our most precious and scarce resources, water.  It is a consideration and part of the permitting process when ethanol plants are built. A typical ethanol plant, capable of producing 40 million gallons of ethanol per year, could use up to 330,000 gallons of water per day or 120 million gallons of water per year. This is equivalent to water used by a town of 5,000 people or a standard-sized golf course over the same period of time. The average home uses 107,000 gallons of water per year.  In Iowa and Nebraska, ethanol plants were built without considering water usage; and towns and farms soon ran low on water.  They now burn natural gas to irrigate their fields.  

The energy costs of corn production and its conversion to ethanol, 131,000 BTUs are needed to make one gallon of ethanol which has an energy value of only 77,000 BTU. "Put another way," Pimentel says, "about 70 percent more energy is required to produce ethanol than the energy that actually is in ethanol. Every time you make one gallon of ethanol, there is a net energy loss of 54,000 BTUs."Overall, ethanol from corn costs about $1.74 per gallon to produce compared with about 95 cents to produce a gallon of petrol. "That helps explain why fossil fuels -- not ethanol -- are used to produce ethanol" Pimentel says. "The growers and processors can't afford to burn ethanol to make ethanol. Drivers couldn't afford it, either, if it weren't for government subsidies to artificially lower its price.  Abusing our precious croplands to grow corn for an energy-inefficient process that yields low-grade automobile fuel amounts to unsustainable, subsidized food burning," says Pimentel.   He knows what he is talking about.  He chaired a U.S. Department of Energy panel that investigated the energetics, economics and environmental aspects of ethanol production several years ago.  Since the production energy comes mostly from fossil fuels, ethanol isn't just wasting money but hastening the depletion of non-renewable resources. Corn production in the U.S. erodes soil about 12 times faster than the soil can be reformed, and irrigating corn drains underwater aquifers faster than they are being replenished.  In Nebraska about 80% of the subsidized corn has to be irrigated by pumps fuelled by natural gas, and using water from the rapidly depleting Ogallala aquifer. 

Even the strongest advocates of ethanol have recently agreed that it actually does more harm to climate change than does burning petrol; but, they argue that it is a good interim solution until we solve that problem. The inefficiency and environmental damage becomes clearer if we imagine what would happen if all cars were fuelled by ethanol.  The average car travelling 10,000 miles a year on pure ethanol would need about 852 gallons of the corn-based fuel. This would take 11 acres to grow - the same amount of cropland required to feed seven people for a year.  Not surprisingly, ethanol enthusiasts dispute Pimentel’s calculations.  A  U.S. Department of Agriculture study found, "Production of corn-ethanol is energy efficient, in that it yields 34 percent more energy than it takes to produce it, including growing the corn, harvesting it, transporting it, and distilling it into ethanol."   However, the USDA is hardly neutral.  It’s whole reason for existence is to find that agricultural subsidies of any sort are a good thing.So, who should outsiders believe?    Enthusiasts who claim you get 34% more out than you put in, or skeptics who say that you get 34% less?  

Maybe it does not matter.  They both admit that ethanol production involves converting massive amounts of energy from one form to another. 
Whatever the USDA may say, neither the corn growers nor ethanol distillers can escape the second law of thermodynamics.  
 Frankly, I do not know if it takes 34% more energy or 34% less energy to make a gallon of ethanol; but, I do know neither one is a good deal and that burning ethanol is worse than burning petrol as far as the effect on global climate change is concerned.  Fortunately, the bottom line is simple. If ethanol from corn is so cost effective, why does its production need federal subsidies? 

The King is Dead; Long Live the King:
King coal that is.  Coal is the solid end-product of millions of years of decomposition of organic materials. In truth, coal is stored solar energy. Plants capture the energy from sunlight through photosynthesis, which directly converts solar energy to plant matter. Animals then eat the plants to convert that energy again, storing it in their own bodies. Over millions of years, accumulated plant and animal matter is covered by sediment and stored within the earth's crust, gradually being transformed into hard black solids by the sheer weight of the earth's surface. Coal, like other fossil fuel supplies, takes millions of years to create, but releases its stored energy within only a few moments when burned to generate electricity.

Because coal is a finite resource, and cannot be replenished once it is extracted and burned, it cannot be considered a renewable
resource. However, t
he United States has been described as the Saudi Arabia of CoalAt current consumption rates and with current technology and land-use restrictions, the U.S. coal reserves would last well over 250 years. With improved technologies, estimated recoverable coal reserves, at current consumption rates, are estimated to be sufficient for 500 years or longer. The nation's fleet of over 100 coal plants is responsible for about 50 percent of the electricity generated in the U.S., more than any other single electricity fuel source.Coal is typically burned to create steam, which is then piped at high pressure over a turbine, causing it to rotate, and produce electricity. This steam electric system is a common one also used with other fuel sources, including oil, natural gas, geothermal, biomass, and even some solar-fueled systems.The popularity of coal is largely due to its low cost. Nevertheless, coal power plants are responsible for 93 percent of the sulfur dioxide and 80 percent of the nitrogen oxide emissions generated by the electric utility industry.  Coal emissions cause urban smog, which has been linked to respiratory ailments; and, coal-fired power plants also contribute to global climate change. Coal plants emit 73 percent of the carbon dioxide emitted into the atmosphere from electricity generators. By releasing the energy stored in coal, large quantities of carbon dioxide that have been stored in the coal for millions of years are released back into the atmosphere, increasing the threat of global warming.

Coal plants are also a major source of airborne emissions of mercury, a toxic heavy metal.  However, coal is so inexpensive that one can spend quite a bit on pollution control and still maintain coal’s competitive position.Federal law requires that air pollution be kept within limits. However, these limits are significantly lower for older coal plants than for newer ones. Even when kept within the air emission limits set by the Clean Air Act, state-of-the-art coal power plants still produce significant damage to human health, public and private property, and ecosystems. The mining, processing, and transporting of coal also insults the environment. In the West, about 87 percent of coal is removed from the earth through strip mining, which can contaminate soils with heavy metals and destroy near-surface aquifers. In the East, coal is sometimes mined by removing entire mountain tops to more easily extract the subsurface mineral reserves. The United States has backed away from coal as an energy source with only a dozen coal-fired plants coming on line since 1990.  On the other hand, China is reportedly adding the equivalent of two coal-fired power plants a week and has become a large importer of clean, U.S. coal. 

Hydro-electric generation:
Hydro-electric generation accounts for about 7% of the electricity generated in the U.S.  The obvious limitation here is the availability of moving water to turn the huge turbines required to generate power.  It is quite successful in the Pacific North West; and, Niagara Falls has a huge program.  Even these locations are not without controversy.  At Niagara Falls, 50% of the normal flow is allowed to cascade over the falls during the daylight hours of the tourist season.  The rest of the time the water is diverted to hydro-electric plants.  And, it is even pumped back up at night to create the falls in the morning.  Also, environmentalists are advocating the removal of dams on some rivers thus reducing the availability of hydro-electric generation.  And then there are the whims of nature known as drought.  Many U.S. plants have been affected by drought over the past several years but none as bad as Venezuela and China this year.

The current drought in Asia highlights the risks of China's growing dependence on hydro-electric power. China is the world's biggest producer of hydro-power, which supplies some 15% of the country's electricity. Beijing plans to almost double output, to 300 gigawatts of installed capacity, by 2020; the rivers of southwestern China, which feed the giant Mekong system, are an essential part of the planned power grid. Low water levels are already causing brownouts. "This drought has seriously affected hydro-power," says Ma Jun, director of the nonprofit Institute of Public & Environmental Affairs in Beijing. "Some rationing of power to factories has been adopted." If the drought is prolonged, China may have to increase its reliance on coal, which still supplies about 80% of its electricity—and produces much of its air pollution. "The southwest drought will drive demand for coal [and] increase prices," predicts Laby Wu, chief financial officer of Shanxi-based Puda Coal.
Hydro-electric generation is very clean and free of foreign interests; but, there can never be enough capacity in our country to make it a major contributor to the solution of our energy problems.

 Nuclear power:
Nuclear power generation accounts for about 20% of the electricity generated in the U.S. but that far short of what might have been.  After the growth of nuclear power in the 1960s, the
Atomic Energy Commission anticipated that more than 1,000 reactors would be operating in the United States by 2000. But, by the end of the 1970s, it became clear that nuclear power would not grow nearly so dramatically and more than 120 reactor orders were ultimately cancelled. The Three Mile Island accident has been the most serious accident experienced by the commercial nuclear industry in the U.S. Other accidents include those at the Davis-Besse Nuclear Power Plant, which has been the source of two of the top five most dangerous nuclear incidents in the United States since 1979, according to the Nuclear Regulatory CommissionTo compare the historical safety record of civilian nuclear energy with the historical record of other forms of electrical generation, Ball, Roberts, and Simpson, the IAEA, and the Paul Scherrer Institute found in separate studies that during the period from 1970 - 1992, there were just 39 on-the-job deaths of nuclear power plant workers, while during the same time period, there were 6,400 on-the-job deaths of coal power plant workers, 1,200 on-the-job deaths of natural gas power plant workers and members of the general public caused by natural gas power plants, and 4,000 deaths of members of the general public caused by hydro-electric power plants.  Our fear of nuclear power plant safety appears to be unfounded yet the same unfounded fear has enabled anti-nuclear activists to rob us of that resource. A large number of plants have recently received 20-year extensions to their licensed lifetimes. The average capacity factor for all U.S. plants has improved from below 60% in the 1970s and 1980s, to 92% in 2007, more than compensating for the retirement of older reactors.

Several U.S. nuclear power plants closed well before their design lifetimes, due to successful campaigns by anti-nuclear activist groups, with the last permanent closure of a US nuclear power plant in 1997.  In recent years, there has been a renewed interest in nuclear power in the US. This has been facilitated, in part, by the federal government with the Nuclear Power 2010 Program, which coordinates efforts to build new nuclear power plants, and the Energy Policy Act which makes provisions for nuclear and oil industries. On February 16, 2010, President Barack Obama announced loan guarantees for two new reactors at Georgia Power's Vogtle NPP. The reactors are "just the first of what we hope will be many new nuclear projects," said Carol Browner, director of the White House Office of Energy and Climate Change Policy.As of March 9, 2009, the U.S. Nuclear Regulatory Commission had received applications for permission to construct 26 new nuclear power reactors with applications for another 7 expected.  Six of these reactors have actually been ordered.  In addition, the Tennessee Valley Authority petitioned to restart construction on the first two units at Bellefonte. However, not all of this new capacity will necessarily be built, with some applications being made to keep future options open and reserving places in a queue for government incentives available for up to the first three plants based on each innovative reactor design.It is my opinion that President Obama is on the right track and we should rapidly increase the development and construction of modern nuclear power generating plants.  They certainly could reduce our dependence on foreign oil with minimal impact on the environment.  Of course we need to find viable solutions to manage nuclear waste but that is a problem we can solve easier than many of the problems inherent  in most of the alternative energy solutions that are being proposed.

Wind Power:
Since wind speed is not constant, a wind farm's annual energy production is never as much as the sum of the generator nameplate ratings multiplied by the total hours in a year. The ratio of actual productivity in a year to this theoretical maximum is called the capacity factor. Typical capacity factors are 20–40%, with values at the upper end of the range in particularly favorable sites.[16] For example, a 1 MW turbine with a capacity factor of 35% will not produce 8,760 MW·h in a year (1 × 24 × 365), but only 1 × 0.35 × 24 × 365 = 3,066 MW·h, averaging to 0.35 MW. Online data is available for some locations; and, the capacity factor can be calculated from the yearly output.

Unlike fuel-fired generating plants, the capacity factor is limited by the inherent properties of wind. Capacity factors of other types of power plants are based mostly on fuel costs, with a small amount of downtime for maintenance. Nuclear plants have low incremental fuel costs, and so are run at full output and achieve a 90% capacity factor. Plants with higher fuel costs are throttled back to follow load. Gas turbine plants using natural gas as fuel may be very expensive to operate and may be run only to meet peak power demand. A gas turbine plant may have an annual capacity factor of 5–25% due to relatively high energy production costs.According to a 2007 Stanford University study published in the Journal of Applied Meteorology and Climatology, interconnecting ten or more wind farms can allow an average of 33% of the total energy produced to be used as reliable, base load electric power, as long as minimum criteria are met for wind speed and turbine height.In a 2008 study released by the U.S. Department of Energy's Office of Energy Efficiency and Renewable Energy, the capacity factor achieved by the wind turbine fleet is shown to be increasing as the technology improves. The capacity factor achieved by new wind turbines in 2004 and 2005 reached 36%.Wind energy "penetration" refers to the fraction of energy produced by wind compared with the total available generation capacity. There is no generally accepted "maximum" level of wind penetration. The limit for a particular grid will depend on the existing generating plants, pricing mechanisms, capacity for storage or demand management, and other factors. An interconnected electricity grid will already include reserve generating and transmission capacity to allow for equipment failures; this reserve capacity can also serve to regulate for the varying power generation by wind plants.

Studies have indicated that 20% of the total electrical energy consumption may be incorporated with minimal difficulty.  These studies represent locations with geographically dispersed wind farms; some degree of dispatchable energy; or hydro-power with storage capacity, demand management, and interconnection to a large grid area export of electricity, when needed. Beyond this level, there are few technical limits, but the economic implications become more significant. Electrical utilities continue to study the effects of large (20% or more) scale penetration of wind generation on system stability and economics.
Historically, a fuel-fired generating plant maintains about 20% excess capacity reserved for down time and especially for peak demand.  None of us wants to endure brown-outs when the temperature soars to above 100 degrees and those air conditioners max out.  Power companies have found that when employing wind-power generation, they need a minimum 40% reserve capacity available for the variances of wind, in addition to those of demand peaks.  This capacity must be in fuel-fired generators (or hydro), thus increasing the overall cost of energy delivered to the end user.Clearly, any power generated by wind reduces dependence on foreign oil and is very good for the environment.  The primary issues with wind and solar are the whims of nature impacts on our ability to provide reliable power and our inability to store energy created by high winds.  And, a seldom reported fact, wind turbines are extremely loud and no one wants them in their neighborhood.  Just as costal residents do not want to see off-shore oil drilling platforms, no one wants to see wind turbines, or hear them roaring, in their back yard.  There has been significant stimulus investment in wind turbine technology.  However, we have discovered that much of this investment has blown overseas rather than creating jobs in this country.  Were I to invest in wind technology I would stay with real companies like GE as the multitude of small firms rely mostly on government spending.

 Solar power:
Solar power is the conversion of sunlight to electricity. Sunlight can be converted directly into electricity using photovoltaics (PV), or indirectly by concentrating solar power (CSP), which normally focuses the sun's energy to boil water which is then used to provide power, and technologies such as the Stirling engine dishes which use a Stirling cycle engine to power a generator. Photovoltaics were initially used to power small and medium-sized applications, from the calculator powered by a single solar cell to off-grid homes powered by a photovoltaic array.Solar power plants have initially encountered high installation costs, although, learning curves are reducing these incremental costs. Developing countries have started to build solar power plants, replacing other sources of energy generation.In 2008, solar power supplied 0.02% of the world's total energy supply. Use has been doubling every two, or fewer years. If it continues at that rate, it will take several decades to be a dominant provider of energy.Since solar radiation is intermittent, solar power generation is combined either with storage or other energy sources to provide continuous power, which increases the cost and dependence on fuel-fired generating capacity.  Like wind energy, we again have the problem of storage.  The most common method is to pump water up to a high level during peak (excess) power generation periods and run it through a hydro-electric generator during times when demand exceeds generation capacity.  This means, of course, to be a meaningful source of commercial energy, the plant must have significant over capacity during times of maximum solar collection to provide energy during times of low or no solar generation.Although a very clean energy source and free of foreign interests, I foresee a long delay before a significant portion of our energy requirements can be met by solar energy.  A very risky place to invest unless you stay with the big solar panel manufacturers who again will do well as long as government subsidies continue.

The contradiction of electric cars:
The electric car is the proposed solution which I find the most contradictory.  If I were to tell you I was going to build and sell a car that runs on coal to drive around Chicago, you would think I was insane.  But that is, in fact, what electric cars do.  The problem?  Most advocates of electric cars have never stopped to think “from whence does electricity come”?  Their thought process goes back about as far as the outlet in their garage.  Since 45% of the electricity generated in the U. S. is created from coal, it is only logical that  45% of electric cars run on coal.  Unless you live in one of the few states that have abundant hydro-electricity, you have a greater than 70% chance that your electric car is running on carbon based fuel.  Not only that, but the electricity is generated by burning fuel, transmitted to your homes and then stored in a battery, which may well be the most inefficient way in all of creation to use electricity.  Although very clean and environmentally efficient for driving short distances (usually less that 100 miles on a charge) around town, the total process still burns hydrocarbons and, therefore, does little to reduce emissions or free us of our dependence on carbon based fuels.

 Hybrid cars:

The idea of a hybrid engine as a means of transportation is hardly new.  For more than 50 years, the hybrid engine has been the mainstay of commercial freight transportation; it is called the diesel locomotive.  What does it do?  It has a very large diesel engine that runs a huge electric generator.  The generator in turn powers very high torque electric motors which in turn drive the locomotive wheels.  Unless I am mistaken, that is the same thing that a Toyota Prius does but on a slightly different scale.  Hybrid cars have the added feature of large storage batteries to isolate the electric drive motors from the gasoline driven electric generator and therefore are much more fuel efficient. The problem with hybrid cars is they do not free us of our dependence on oil.  They do get great gas mileage; perhaps sometimes as much as 50% more than an automobile of similar size and equipment.  But, they still burn gasoline.  Therefore, they still have a negative impact on the environment and still keep us dependant on foreign oil.  Their improved fuel economy is a good attempt at fuel conservation; but, we cannot conserve ourselves out of this problem. 

There has been much discussion about the impact of battery construction on the environment, but much of that has been debunked and will not be discussed here.  As conventional, internal combustion engines become more efficient and the automobiles they power obtain improved miles per gallon, the competitive advantage of the very complex hybrid car will lessen.  Hybrid cars are a good idea, but not enough to change the reality of our world.


So, where does this discussion leave us?  As one of my readers told me as we discussed this article:  It is a fool’s errand for the U.S. to continue to support, with billions of dollars, Middle Eastern and South American dictators who hate us and then have to spend billions more to defend ourselves against them. It is an evil bargain; and, we must end their reign of terror.  We cannot rely on government.  At least since the oil crisis of the Carter administration, we have seen this problem coming. There has never been an attempt by either political party to actually embark on a meaningful national energy policy to free us of foreign blackmail.

The only ‘solution’ we have seen that significantly reduces this folly is coal which is an environmentally challenging solution.  Ethanol not only doesn’t do it but it also negatively impacts the environment.  Wind and solar are very clean but decades away from being viable.  Electric cars help the environment but usually burn coal.  And, hybrids are just a stop-gap to slow consumption growth.  To me, nuclear is a true opportunity.  Realistically, even with a major change of heart in the country (very unlikely), meaningful capacity is over a decade away.  We talk about things like hydrogen cars and other far-out technology; but, being an engineer by trade, I have learned you cannot schedule innovation.  We cannot drill our way out of this--- the mess in the gulf assures that.  So, I see no solution for at least a decade.  That is unless, of course, you consider the obvious alternative I have not discussed--- natural gas and the Pickens Plan.

 Natural gas:
Conserving and harnessing renewable forms of electricity not only has incredible economic benefits, but is also a crucial piece of the oil dependence puzzle. We should continue to pursue the promise of electric or hydrogen powered vehicles; but, America needs to address transportation fuel today.  Fortunately, we are blessed with an abundance of clean, cheap, domestic natural gas. Currently, domestic natural gas is primarily used to generate electricity and accounts for about 25% of electric generation.  It has the advantage of being cheap and significantly cleaner than coal. But, this is not the only use of our natural gas resources.  By aggressively moving to shift America's car, light duty, and heavy truck fleets from imported gasoline and diesel to domestic natural gas, we can lower our need for foreign oil, therefore, helping President Obama reach his goal of zero oil imports from the Middle East within ten years. 

Nearly 33% of every barrel of oil we import is used by 18-wheelers moving goods around and across the country by burning imported diesel. An over-the-road truck cannot be moved using current battery technology. Fleet vehicles like buses, taxis, express delivery trucks, and municipal and utility vehicles (any vehicle which returns to the "barn" each night where refueling is a simple matter) should be replaced by vehicles running on clean, cheap, domestic natural gas rather than imported gasoline or diesel fuel.Natural gas is not a permanent or complete solution to importing oil. It is a bridge fuel to slash our oil dependence while buying us time to develop new technologies that will ultimately replace transportation fossil fuels. Natural gas is the critical puzzle piece that will help us to keep more of the $350 to $450 billion we spend on imported oil every year at home where it can power our economy and pay for our investments in wind energy, a smart grid, and energy efficiency.A common misconception about natural gas is that we are running out, and quickly. However, this couldn't be further from the truth. Many people believe that price spikes, seen in the 1970’s and more recently in the winter of 2000, indicate that we are running out of natural gas.

The two aforementioned periods of high prices were not caused by waning natural gas resources,  rather, there were other forces at work in the marketplace. In fact, there is a vast amount of natural gas estimated to still be in the ground and the good news is it is in North America!  Even with the conversion of more power generation to natural gas; the conversion of all 18 wheelers to natural gas; and the conversion of automobiles to natural gas; we have the reserves to last decades.  It is not the final solution, but, it is the solid bridge to the future and to energy independence.
Furthermore, there are no technical breakthroughs to be discovered or implemented; all of the technology required exists today.  All it takes is the will and determination to make it happen.

For those of you who have stayed with me through these pages of drivel, I commend you.  I also remind you from whence we have come.  This entire exercise was meant to help us decide where to invest, where to expect to get solid and consistent gains.  If you can believe at least half of what has been written in this paper, it should be quite obvious that we, or any other nation, really has no choice but to rely on carbon based, fossil fuels for the next decade and beyond.  It is imperative that we find solutions to get us out of this dilemma.  But, as rational, prudent investors, we must know where the returns are for the next decade.  The thirst for oil is growing in the developed world and conservation or green technologies; hybrid and electric cars; solar and wind may slow that growth.  But the growth of oil and gas is running rampant in the developing countries and no conservation will occur there.  Populations who have just traded in their bicycles and horses for the automobile are not going to go backward.  Those who have just recently converted from charcoal as a source of heat and cooking will not go backward.  You cannot put the genie back into the bottle; and, you should not underestimate the increasing value of fossil fuel over the next decade. 

 In fact, with the increased volatility of the world’s major currencies, including the dollar and the euro, I believe it is more likely that crude oil becomes the world’s de-facto currency than it is likely to decrease in value.  And as discussed in the section on natural gas, I firmly believe that natural gas is our “bridge fuel” to take us from our current dependence on foreign oil to our energy sources of the future.  And finally, as positive as I am in investment in the oil and gas entities, I am equally negative for the long term returns likely in the green energy arena.


This work is not meant to be interpreted as an original thesis but is a compilation of my thoughts, opinions, and beliefs.  A significant amount of cut and paste has occurred; and, I thank all of those from whom I have borrowed thoughts.  Thanks for edits from Denver and Breck.



11:36 am edt          Comments

Thursday, March 11, 2010

The dirty little secret about IRAs

The dirty little secret about IRAs
(Or the one investment choice you must make this year!)
When using the term IRA, I am actually including all tax advantaged retirement plans such as Simple IRAs, 401Ks, Keoghs, SEPS and various other plans for government and non profits.  The common denominator to all of these plans is that they are essentially an IRA of one form or another and are almost always a Traditional IRA.  Therefore, if you participate in any of these plans, you must understand the secret of them.

We all know that traditional IRAs are a tax advantaged savings plan which allows you to invest before tax dollars and to have those dollars appreciate without tax in the retirement account.  Compounding is accelerated because no taxes are paid as the account appreciates each year.  The dirty little secret is that taxes are only deferred; they are not avoided.  Furthermore, they are deferred to ordinary income at the time of redemption whereas they might have been taxed as dividend income and/or capital gains if invested outside of the IRA. One might even say that for the privilege of deferring tax on the income placed in an IRA, the IRS converts low tax rate dividends and capital gains into higher tax rate ordinary income to be paid at a future date, and the future tax rate. This guarantees that you pay the highest possible tax on all gains realized throughout the life of the investment. And finally, at age 70 ½, you must take a Minimum Required Distribution, MRD, (and pay income taxes at your highest incremental rate) for the rest of your life, even if you do not need or do not want the additional income.
You are denied the option of saving for your heirs thus complicating estate planning.
 So why do we do traditional IRAs?  When you are just starting out in your retirement investing, it may be a real advantage to invest before tax income dollars as that is more affordable. The theory behind the tax-deferred IRA is that you will be in a lower tax bracket in retirement and thus pay fewer taxes in retirement than you would at the time of investment.  There are three problems with this theory:

  1.      Often your retirement income after deductions is not much less than your working income; at least that is the goal I set for my clients. Also, the income bracket you are in when you are in your 20s and 30s is almost always lower than the bracket you are in as you approach retirement. Therefore, when you withdraw funds, for you may be in the same or higher tax bracket (most certainly at higher real tax rates) than when you invested and have no real saving.

  2.     All gains achieved throughout the term of the investment will be taxed at the ordinary income tax rate at the time of withdrawal.

3.      Taxes today are at an historic low; and I am certain that taxes will be higher in the future.Therefore, you will defer taxes at a very low rate today until retirement when you will pay taxes at a higher rate.  That is not what we intend to do. Why is this such an important topic now?

For years you have been allowed to convert traditional IRA to Roth IRAs but there has been a relatively low income cap that prohibited most of us from making the conversion.  In 2010, that cap is removed and everyone at any income level is permitted to make the conversion.  If you are ten years or more away from planning to withdraw funds, or being forced to make an MRD, the most important financial move you can make this year is to convert traditional IRAs to Roth IRAs.  You will need to pay income tax on the funds you convert, but you will pay them at the 2010 and/or 2011 rate which I am confident will be the lowest rates you will see in your lifetime.  You must pay those taxes from sources outside of the IRA, not by law but for maximum leverage, resulting in a new Roth IRA of the exact value of the old traditional IRA.  The difference is the Roth will now be tax free forever with the following benefits:

 1.      Principle, interest, dividends and capital gains are tax free for you and your heirs.

2.      Gains on the Roth are tax-exempt, not tax-deferred.

3.      Taxes were paid at lowest rate you will ever see.

No MRD required ever; you can leave 100% to your heirs’ tax free.

5.      If needed, you can withdraw part of, or all of the principal at any age without penalty (10% penalty for any withdrawal from traditional IRAs if under 59 ½).

6.      Tax due at conversion can be spread over two years; but I strongly recommend against that due to imminent tax increases. (The 2011 tax rate may well be higher.) 

When converting a large IRA, there are tax considerations to be made to avoid creeping into the highest tax brackets and you should discuss these strategies with your CPA or tax consultant.  There are many Roth conversion calculators available on the internet; try them out.  Use a calculator that allows you to input future tax rates and be realistic in assuming much higher rates in the future.  I guarantee that all of them will show a major benefit if you are ten or more years from needing the funds or being forced into an MRD, even at constant tax rates.    Remember to grow and preserve wealth, we do not want to defer low taxes today to higher taxes in the future.  We do not want to pay future income tax rates on dividends and capital gains; we prefer tax-exempt to tax-deferred.  And finally, if we are successful in creating and growing wealth, we would like the option of passing that on to our children and grandchildren.  Give it some thought.  

Larry Hollatz, RFC® 
1:22 pm est          Comments

Monday, February 1, 2010

India presently has a 12% power deficit
This is a really good article and gives some insight to what is happening in the emerging markets.  You have seen me touting IBM and GE for some time for this very reason as well as a play on their international business mitigating the weakness of the dollar.  All of the companies listed have an opportunity to do well in this environment.  What is not mentioned is the impact on fossil fuel stocks.  Notice this staggering revelation:  400 million Indians -- more than one-third of the country's population -- have no access to power at all. In other words, the power deficit in India only stands to get worse, and crippling nationwide blackouts are not out of the question.    That is more than the entire population of the United States.  Multiply that several fold to account for the rest of the emerging world and you discover that the best investment play on the growth of the world emerging markets is energy; and yes the best of that is fossil fuels.  There cannot be enough conservation in the world to make up for the growth in the demand of energy.  There cannot be enough development of alternative energy to come close to keeping up with the growth of energy demand.  Like it or not, for the next 20 years, investment in fossil fuels will provide a great return.Motley Fool,  By Tim Hanson
India's presently has a 12% power deficit. That means that the people in the country spend about three hours on average each day without power from the main electric grid. What's more, this deficit exists even though 400 million Indians -- more than one-third of the country's population -- have no access to power at all. In other words, the power deficit in India only stands to get worse, and crippling nationwide blackouts are not out of the question.To compensate, factories, offices, hotels, and residents who have enough money purchase generators and stock their own fuel. Not only is that wasteful, but it makes doing anything in India that requires power much more expensive than it needs to be.How much more expensive? One analyst we spoke to estimated that Indian manufacturers, given a reliable power supply, could cut costs 10% or so -- making them competitive with China and giving India a whole new way to create jobs and drive economic growth.In fact, we heard over and over again that India's power problem is the single biggest factor holding back India's economy today. Whereas China has 900,000 megawatts of generating capacity today, India has just 150,000.And just think: If India can grow 8% to 9% annually without reliable power, just imagine what it could do with it.Knowing that ...
If you're still with me, then you're starting to appreciate the magnitude of India's power opportunity. And the good news for investors is this: Not only is power a huge need in India, but the new government has made fixing this situation one of its top priorities. Here's what that includes.
  1. Plans to double the country's generating capacity to 300,000 megawatts by 2017.
  2. Approvals for massive thermal, nuclear, and hydroelectric power plants.
  3. Providing electricity to every household in India within five years (again, some 40% today go without).
  4. The total elimination of the power deficit by 2012.
  5. Incentives for private capital to make it all happen.
Put it all together and not only is there an opportunity for hundreds of billions of dollars to be invested in India's power sector, but India is going to let companies and their investors profit from it all. That's why I call this the biggest investment opportunity I discovered this year.Who stands to profit
As you've probably guessed, the big multinationals with expertise in these areas are all champing at the bit to win some of this business. This includes General Electric (NYSE: GE) and Areva in the nuclear space, while ABB (NYSE: ABB) should profit from efforts to expand India's electric grid and make it more efficient. Siemens (NYSE: SI), too, is lining up transmission and distribution work as well as supplying turbines for conventional power plants.  Then you have the picks-and-shovels plays such as Honeywell (NYSE: HON), which installs industrial security and fire safety systems, as well as IT companies like Hewlett-Packard (NYSE: HPQ), Cisco Systems (Nasdaq: CSCO), and IBM (NYSE: IBM) that make sure all of the equipment works together.And while they all will likely end up being involved, there's one more piece of information that smart investors should know: The Indian government is keen on making sure that a good portion of the business it doles out finds its way to domestic Indian companies.This is why the likes of General Electric and Areva, both of which already have approvals to build huge new nuclear power plants in India, expect to use local companies for up to 70% of the work.
 Larry Hollatz, RFC® 
11:02 am est          Comments

Tuesday, November 3, 2009

Roth versus Traditional IRA

In a traditional IRA, the advantage is that you invest before tax dollars and pay no tax on gains while holing the investment.  Because income compounds tax free, your investment grows faster than in a taxed account. The disadvantage is that all the money you take out (100%) is taxed as ordinary income; there is no capital gain treatment.  The theory is that you will be in a lower tax bracket in retirement and thus pay less taxes in retirement than now.  There are two problems with his theory:


1. Often your retirement income after deductions is not much less than your working income; at least that is the goal I set for my clients. Therefore, for you may be in the same tax bracket (but perhaps not the same tax rate) and have no real saving.


2. Taxes today are at an historic low and I am certain that taxes will be higher in the future.  Therefore you will defer taxes at a very low rate today until retirement when you will pay taxes at a higher rate.  That is not what we intend to do.


If you can afford it the better options is to pay low taxes today by funding a Roth IRA with after tax dollars.  The result will be tax free withdrawal for the rest of your life and tax free distribution after death.  This is a much better long term outcome.


Give it some thought.


Larry Hollatz, RFC®

9:30 am est          Comments

Friday, October 23, 2009

Current Real Estate Market

In looking at the state of the real estate market, and the collapse it has incurred, in several markets around the country, I have observed the same phenomena in all markets.  The collapse of the market has occurred in three distinct phases in all of the markets with the only difference being the timing of these phenomena.   The three distinct phases are as follows:


In this phase the common theme is “it cannot happen here”.  We are not a market with a lot of speculation as in Florida or California.  We did not have a lot of subprime mortgages in our market and foreclosures are not a problem.  Our market has slowed but otherwise we are doing just fine.



In this phase the common theme is “the market is slow and inventory is growing but prices are firm”.  Prices are firm but few homes have sold; inventory is growing dramatically because very little is selling.   This phase is a disaster waiting to happen as the only solution to getting the inventory under control is the third and final phase.


This phase occurs when cumulative days on market exceed 300 days and some sellers cannot continue to manage the carrying costs these homes demand.  Whether it is a home owner who wants to sell his current home or a builder who is carrying a spec home, there comes a time when they just cannot afford to continue on and must negotiate a short sale just to stay afloat.  When one or two homes do this in a neighborhood, the remaining homes on the market have no choice but to sell at these new comparisons.  This phenomenon is accelerated by appraisals on new and existing homes.  Once the capitulation phase begins, homes will not appraise at values higher than the recent comparisons and thus prices are forced lower even for well healed buyers. I have seen this not only with existing homes but on new, custom homes, where appraisals come in too low to support the construction of homes as designed.

Whether selling or buying a home, it is important to understand in what phase of the market you are working.

2:21 pm edt          Comments

Financial Meltdown - Original Post 03/10/2008
How did what started as a sub-prime mortgage issue catapult into the major financial crisis we face today?  It is all about greed and some of you who have chatted with me recall that I have likened it to the S&L meltdown of the late eighties.  It is ironic then that the cure enacted today has been compared to the Resolution Trust Corporation (RTC) solution enacted to solve the S&L crisis.  Recall in those days bankers were compensated for how much money they lent, not on the quality of the loans.  If you went in to borrow 10 million dollars to develop a strip mall, the bank offered 12 million so you could use the extra two million to pay off the first few years of the loan.  The result is history as all of the debt came tumbling down and the S&L bailout became the RTC which ended up owning all of the over leveraged property at tax payer expense.In the sub-prime crisis, there is plenty of blame to go around and I will try not to play that game but share my thoughts.  The government through HUD and The Community Reinvestment Act, championed by ACORN among others, sought to increase home ownership among lower income families.  Fannie Mae took it as their charter to increase home ownership in the middle class, Specifically, this meant families that did not have sufficient income to qualify for traditional loans were given financing at looser standards.  The lenders took this a license to provide loans to families that could not make payments, did not have jobs, and had bad credit history.  It was no problem because they knew that Fannie Mae and Fannie Mac would buy these loans as fast as bankers wrote them as they were key drivers of the increased home ownership program.  The banks could write very risky loans and sell them the next day.We cannot blame only the banks.  When banks attempted to install ATMs or open branches in old neighborhoods, Community Organizations for Reform, like ACORN, could put up roadblocks by complaining that these banks did not loan enough money to these neighborhoods.  The result was many press conferences with ACORN and bank executives announcing the availability of home loans to members of this neighborhood even though they did not qualify and could not afford these loans.  Thus the banks and the government were complicit in this disaster.Lenders competing for more business aggravated the sup-prime problem by offering new and creative loans.  These were 100% of purchase price, zero interest and/or teaser rate loans that sooner or later would revert to real loans at real interest rates.  The sales pitch was that home values were going up so quickly, that by the time you had to pay real rates you would have significant equity in your home and could either sell the home or qualify for another loan.  A dangerous side event occured when many home owners made home equity loans as fast as home values increased.  Thus they piled more debt onto debt that they already could not afford. When home values went down, that premise went down with them.  Families saw their payments go up anywhere from 10% to 50% while discovering their loan balance (recall zero interest loans) was significantly higher than their home value.  Many stopped making payments.When bankers loosened their lending guide lines (or lack-there-of) to the point that the Freddies would not buy them, they sold these super sub-prime loans to hedge funds.  These aggressive hedge funds bought tens or hundreds of millions of dollars of deep sub-prime loans and bundled them as Collateralized Debt Obligations (CDOs).  They were often bundled and rebundled until a simple sub-prime loan was repackaged up to 30 times before it entered the market.  Thus these funds were leveraged to $30 for every $1 of under lying equity.  To compound the problem the CDOs were sold as a standard loan package in which 90% of the loans were solid and perhaps 10% were at risk when in fact the entire package was made up of junk.  These investments, which had been repackaged over 30 times by large hedge funds, were sold around the world as investment grade portfolios and it became extremely difficult for even the most diligent to know exactly what they were buying. Investment firms and insurance companies (AIG) who bought these CDOs without proper due diligence no longer exist as they did then.  Several major investment firms have agreed to repay investor’s losses on CDO’s which were marketed to private investors under false pretense.As large institutions held more and more of this debt, the mark to market rules caused them to implode.  Mark to market accounting rules require that an asset portfolio be marked down on your books to the value in today’s market regardless of the under lying value.  Thus an internal accounting run on the bank occurs when the market perceives your portfolio of CDOs has less value and you need to sell assets to remain solvent.  That action causes a Wall Street downgrade in your company which drives the stock price down which means you cannot raise cash by selling stock.  You cannot borrow at competitive rates and you enter the Bear Stearns Death Spiral.As greed to increase your net worth by loaning more and more money to flaky projects caused the S&L crisis of the past, it was greed to earn more and more return on under collateralized investment instruments that fueled this crisis.  It seems to be the common denominator.
2:18 pm edt          Comments

1:57 pm edt          Comments

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