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The Energy Sector and the Economy
By William Parmenter, editor
Joe Falcon and Don Gimpel spoke on Looking for Attractive Investments in the Energy Sector at the Oct. 16, AAII Los Angeles chapter meeting at the Skirball Cultural Center.
Falcon talked about energy and the economy, and Gimpel followed him, talking about investments in the energy sector.
“We don’t have solutions. We have tremendous problems,” Falcon said, concerning America’s energy situation.
The heart of the matter is America’s unsustainable lifestyle, due to financial outflows and foreign debt. Of major significance is the $1 billion that leaves the U.S. every day to pay for imported oil. That is around $360 billion a year, which is the largest contributor to the U.S.’s balance of payment deficit. Equally important and ominous is the $3 trillion that the U.S. owes China. When the U.S. can no longer sell its U.S. Treasury notes abroad there will be inflation.
In the meantime, there is high unemployment, a polarized political landscape, a dollar that buys less, and a deteriorating quality of life for much of the population.
The outstanding question is will the country have the political will to do what is necessary in regard to oil and energy? The answer in the Jimmy Carter administration was, no. Is it going to be different this time?
The answer to that question, and to the questions of how the country will get to where it is going, and by what means it will get there, are still open. Still open, and opaque, as the future is murky. However, the trends are not good, which is why Falcon said the country has tremendous problems. He gave background information so one can understand what the energy and oil problems are.
The nation’s sources of energy in 2009 were: petroleum, 35.3 percent; natural gas, 23.4 percent; coal, 19.7 percent; renewable, 7.7 percent; and nuclear and electric power 8.3 percent.
The nation’s usage of energy was: transportation, 27 percent; industrial, 18.8 percent; residential and commercial, 10.6 percent; and electric power 38.3 percent.
Falcon turned his attention to reviewing various energy sectors. We may see more nuclear and coal energy in the future, but there are major problems connected with each.
Nuclear: there has been a hiatus for the last 30 years; no new plants due to Chernobyl and the Three-Mile-Island disasters. Some problems connected with nuclear energy include: the high costs, schedule delays, public concerns and how to store the waste safely.
Currently there is no U.S. nuclear
Table of ContentsEnergy Investments…………Falcon and Gimpel…….p.1
Quantitative Research in ETFs…..Chris Greene……....p.4
UltraFS Version 11…………….Steve Hunter………...p.4
Finding a Money Manager……….Don Gimpel...….…p.5
manufacturers, due to the 30 year gap in building new plants. In the meantime, foreign competitors are rushing to fill the vacuum: South Korea, France, Russia, China and Japan. These countries are developing their own expertise.
While the U.S. is stagnant, China has 15 or 16 nuclear reactors going forward. South Korea, once a benefactor of U.S. technology transfer, is going ahead on its own. Russia is working with Eastern European countries.
If the U.S. develops more nuclear power plants, they are not likely to come on line until 2020 to 2025—too far out to help with the current situation.
Coal: it is the most abundant of U.S. natural resources. The huge supply could easily last more than 100 years. Coal’s well-known problem is that it is a dirty fuel. Coal contributes to global warming. Many coal plants are old. Coal emits CO2.
How can coal be used in a responsible fashion?
The answer is carbon capture and storage, but it costs hundreds of millions of dollars. CO2 can be extracted from the flue gas stream. In sequestration, gas is pressurized and pumped into a permanent storage area. There are problems. We do not know the unintended consequences of sequestration, and it is very expensive process. We do not have the answers yet.
Natural Gas: the reserves are extensive. With new drilling technology drilling in shale deposits can occur, but it is expensive. There are huge shale deposits around the country. If the costs and pollution could be managed it could be a major source of energy.
Oil: the U.S. was once self-sufficient in oil, but those days are long past. Current consumption is 18 million barrels a day, of which more than half, 11 million barrels is imported. The cost of those imports is around $1 billion a day. The situation is not sustainable from both the point of view of financial outflows, and of declining availability of world reserves.
The U.S. fleet of light trucks and cars is 250 million, of which 240 million are privately owned. Currently there is no answer to the issues of conversion or replacement of the fleet of vehicles. There is no obvious solution to the dilemma of imported oil.
Electric vehicles are being presented as an alternative. The Chevy Volt is an all-electric car that will start at $41,000. It will be sold with subsidies to try to stimulate sales.
Mass marketing of electric vehicles is still in the future, as the public will wait for the price and value to be competitive with gas-powered cars.
Alternatives and Renewables: currently they amount to only eight percent of energy usage. Solar, wind and geothermal are all being investigated. Solar and wind have the drawbacks of only being operable when the
Los Angeles County Meeting ScheduleWestside Computer Group – Don Gimpel, 310/276-9875 . Veterans of Foreign Wars Memorial Bldg. Culver Blvd. & Overland Avenue, Culver City. Will meet at 10:30 a.m., Saturday, Dec. 4. Topic TBA. The UltraFS 11 group will meet at 9 a.m. on the same day.
Pasadena Group – Meets at 7 p.m., at Pasadena Main Library, in the David Wright Auditorium, at 285 E. Walnut St., Pasadena. (Meets third Tues. of the month, except for August and December.) Topic TBA. Contact, Ivan Wong at (626) 446-2486, .
Mutual Fund Group – Meeting at 10:30 a.m., Nov. 6, Topic TBA, Gunter Hagen 310/457-7404, . at Fairview Library, 2101 Ocean Park Blvd., Santa Monica. The meeting is free to the public
Stock Selection Group—Norm Langhout, 310/391-6430, . Fourth Wednesday of the month at 7 p.m. Using IBD, CANSLIM stock selection method at Fairview Library, 2101 Ocean Park Blvd., Santa Monica. Topic TBA
Los Angeles Chapter Skirball Center at 9 a.m, Sat. Nov. 20, Marilyn Cohen, on Four Big Mistakes Do-It-Yourself Bond Investors Make, and Don Searles Esq., on How to Protect Yourself Against Securities Fraud.
Desert (Palm Springs area) Group Usually meets from 10 a.m. to noon, second Saturday of the month at Sunset View Club House, Sun City, Palm Desert. For more information, contact Patricia Gammino, .
Option Special Interest Group, meets Saturday, 9 a.m. to noon at Westside Pavilion, Community Room A, 10800 W. Pico Blvd. (corner of Westwood Blvd.) Time and topic TBA by leader Robert Morgan, .
wind is blowing or the sun is shining.
Of the renewable biofuels being investigated are cellulosic, algal and ethanol from corn. Ethanol from corn has proven to be unfeasible. It receives a 45 cent a gallon subsidy from the federal government, and there is a 54 cent a gallon tariff on ethanol imports to keep it out. With ethanol the agricultural lobby was servicing the agricultural interests of the Midwest at the expense of the nation. A newspaper headline dated April 18, 2009, stated, “Ethanol bubble pops in Iowa.”
Ethanol cannot be piped from the Midwest to the east or west coasts, because it is corrosive. It costs over $100,000 to convert a service station to ethanol. Cars that use ethanol are subject to its corrosion. Cars get less miles per gallon with ethanol than with gas, the ratio being three fill-ups with gas to four fill-ups with ethanol to go the same distance.
The law protecting ethanol should be changed, but, for now, it cannot, due to the agricultural lobby.
The future: when we look out to 2035, it is predicted that 78 percent of the nation’s energy use will still be fossil fuels, and 22 percent will be renewable.
That leaves the nation in an unsustainable situation with respect to transportation, as we are currently importing eleven million barrels of oil a day, and using 18 millions a day. With declining oil reserves and increased demand from foreign countries, supply is expected to decline and price to go up, leaving the U.S. on a transportation collision course.
After Falcon’s overview of the energy budget and situation, Don Gimpel talked briefly about investing in the energy sector.
Gimpel noted that British Petroleum had to pay $20 billion to clean up the Gulf oil spill. It got a $10 billion tax credit, on the spill, meaning that taxpayers bore half the cost. BP was not hurt very badly by the spill. The company has $828 billion in proven oil reserves.
Gimpel mentioned that Roy Schall had suggested that ALA, BTE, PIF-UNTO, SU COSWF, Bay Tex and Sun Corp. were worth looking into. Canadian Oil Sands Trust was mentioned as Schall’s favorite.
Which one is best for you? Gimpel suggested that you try www.WolframAlpha.com. The site gives fundamental analysis of up to four stocks, in a better manner than any other site. It gives a graph of price history, a risk-return chart; a projection of what may happen in the future. It compares stocks to the S&P 500, to bonds and T-bills. It helps you allocate according to Modern Portfolio Theory on the efficient frontier. All of that is for free from WorlframAlpha.com.
In the question and answer period, the point was made that oil supplies are diminishing and being increasingly used by the oil exporting nations. For instance, Mexico’s oil supply is diminishing and is now being kept for Mexico’s own use. The U.K turned from an oil exporter to an oil importer in 2003. Iran’s domestic consumption is going up and it is producing three percent less every year. By 2030 Iran will not be able to export any more oil. There is urgency to the issue of energy.
The question was asked, if the U.S. captures CO2, will other nations? China shows no indication of doing so, and it is adding coal plants. Cap and trade helps the coal companies, and will increase the cost to consumers.
The prospects for solar energy are good. Both solar and wind energy research and development is going quickly forward.
Falcon has six decades of experience in the energy field, with an emphasis on nuclear power, oil, alternative energy sources and energy economics. He worked for the Bechtel Corporation, was past president of the American Society of Mechanical Engineers and has an MSME degree.
Gimpel has experience with digital computing applications, coupled with instrumentation for nuclear and fossil fuel plants, refineries and chemical complexes. He earned eight patents in computer technology, and has a BEE and a Ph.D. degree.
Research Techniques in ETF Investing
By William Parmenter, editor
Chris Greene spoke on Backtesting and Quantitative Research Techniques in ETF Investing at the Oct. 16, AAII Los Angeles chapter meeting at the Skirball Cultural Center.
Greene reviewed techniques for ETF investing, focusing on methods for interpreting intra-market and cross-market relationships, and backtesting to better manage risk and enhance return.
His presentation included a demonstration of ETFreplay.com, a commercial website he is in the process of developing. The site allows investors to run up-to-date backtested strategy reports.
The advent of ETFs made life easy for investment advisors. They do not have to pick stocks. ETFs opened up the investment possibilities in index sectors, and in other countries. There are over 1,000 ETFs, some of which are duplicative.
Greene thinks in terms of ETF rotation.
People feel more comfortable with ETFs than they do with mutual funds, because they are more transparent and less susceptible to inside manipulation.
On Greene’s website he is looking for relative strength and uses a rotation strategy.
He showed an example of his rotation strategy, using the following ETFs: EPP, EWJ, IEV, SHY and SPY. His stock screener considers relative strength between three and 12 months, with a default of six months.
In his example, he showed the rotation of the five ETFs on a monthly basis from January to December, 2007. He uses relative strength to do trend following.
His concern is to add value to portfolio management techniques.
One approach to building a portfolio is to use a barbell technique, with 40 percent bond weighting, and 60 percent emerging market. The bond portion adds ballast and stability. By back-testing he can determine if the portfolio performs better than the S&P 500.
Besides doing a monthly rotation, Greene’s ETF portfolios can also do a semimonthly rotation.
Greene took the audience through four sample portfolios to show how his rotation strategy with five ETFs worked. The strategies included: five countries, a moving average and a small, developed-markets strategy.
Greene has a diverse financial background, spanning 18 years, since his graduation with a B.A. in economics from Claremont McKenna College. He earned a CFA, worked as an analyst in investment banking and as a portfolio manager. He started ETFreplay.com in 2009 to bring institutional-grade portfolio management software functionality into a standard browser.
UltraFS Version Eleven
By William Parmenter, editor