The "R" Word

LA At Night, Wikipedia

With the S&P 500 falling one hundred points off its September high, a growing number of economists are warming up to the idea of a US based recession. The other more optimistic portion continues to place faith in an esoteric soft landing where the economy becomes sluggish, nearly stagnant, while remaining free from the grasp of an actual recession. Although this is an enticing idea in theory, emerging circumstances deem it highly unlikely. What is more realistic is the likelihood of the US's first consumer lead recession in nearly two decades.

The primary risk for our economy is the imploding housing market. Since its peak in early 2006, home builders, lenders and those directly connected to the market have felt the pain. This has lead to housing starts falling by 47% and home prices by 8% (inflation adjusted). Compared to the nearly 100% (adjusted) price appreciation seen from 2006-1997, it would appear as though the housing market has much farther to fall before we witness a true correction. Given the magnitude of unsold homes and tremendous backlog of residential construction, it becomes apparent that construction investments and prices must fall further to become rebalanced for supply.

For the housing market to affect the overall economy, its retraction must influence consumers' spending habits. Consumers spending patterns are affected by employment, financial wealth and housing wealth, just to name a few. According to The Economist, consumers are more influenced by changes in housing wealth; although it normally takes longer to materialize. "A $100 fall in financial wealth is traditionally associated with a $3-5 decline in spending. An equivalent fall in housing wealth, it seems, eventually reduces spending by between $4-9." When we take note of the wealth amassed within America's residential housing, a 10% reduction over the next few years will eventually equate to a sizable reduction in consumer spending.

This delay might be a result of the perceived value of a home by consumers. According to The Economist, "house prices are often sticky as homeowners are slow to acknowledge their houses are now worth less." Unlike the modern equities markets which reflect price changes rapidly, the price of a home is slower to react to supply and demand imbalances. Ultimately, this leaves us with a growing number of consumers realizing their housing wealth is decreasing. Even worse off are the speculators, laden with debt and dependent on continuous residential price appreciation. With the housing market in ruin, these flippers are left with mortgage calls, absentee buyers and properties they can't afford. While the housing sector has noticeably begun to unravel, its eventual effect on consumer spending habits has yet to be witnessed. Given that 70% of GDP is comprised by the consumer, a serious reduction in their spending will have profound economic reverberations.

Plants, Plastics and Profits?

Image Taken From www2.unil.ch

There is a growing consensus to develop alternatives for plastics, in order to alleviate our dependency on fossil fuels and decrease our ecological footprint. If we can manufacture plastics from non-petroleum feedstock we will cut our dependency on oil and decrease our production of waste streams in one fell swoop. This is easier said than done; with current petroleum prices this is certainly not an effortless economical endeavor. However, with on-going research and potentially higher feedstock prices, the dynamics of this pendulum could shift.

Enter Metabolix Inc. (MBLX), a freshly IPO'ed biotechnology company developing alternatives to petrochemical-based plastics. In the 1980s, Metabolix's founders Oliver Peoples and Anthony Sinskey demonstrated an enzyme's ability to integrate into microscopic biofactories capable of manufacturing useful polymers such as Polyhydroxyalkanoatesas. PHA, as they are commonly referred to are "linear polyesters produced in nature by bacterial fermentation of sugar and lipids." In a controlled environment these biofactories, through photosynthesis, combine carbon dioxide,water and sunlight to create a biodegradable, renewable alternative to petro-plastic. The potential adaptations for this technology are indeed vast. Their use could range from disposable
eating utensils to orthopedic sutures and fasteners.

In 2007, Metabolix received attention after they re-announced a 50-50 joined venture to build the world's first plastic biorefinery in Clinton, Iowa. The venture, under the name Telles after the Roman goddess of the earth, is scheduled for completion in the 3rd or 4th quarter of 2008 and targeted to produce 110 million pounds of plastic resin per year. Telles plans on distributing the resin for $2.50/pound, which compares to 70 cents on the dollar for traditional plastic.

While these prices reflect a cost bias in favor of traditional plastics, the company believes customers striving for a greener persona will pay the premium. Additionally, "analysts at Jefferies & Co. see Metabolix carving out a niche in the market for disposable plastics, which is roughly 20% of the entire plastics market."

Where there is a need there is a way, and Metabolix is not alone in its undertaking to alter plastic consumption habits. Companies such as DuPont (DD), BASF (BASFY), and agricultural giant Cargill are all in the process of developing bio-based plastic resins. Most interestingly however, are the developments at a microcap company, by the name of Cereplast Inc.(CERP).

Cereplast was founded in 2001 and is engaged in the development and commercialization of bio-based resins in the United States, Europe, and Asia. Earlier this month, the company reported record revenues of $1.6 million, a 258% increase year over year. The company attributed this predominantly to the commercial launch of Cereplast Compostables. While these earnings are encouraging, the company is still in the red and continues to issue shares as a means to finance operations. Total outstanding shares for the third quarter were 258.2 compared to 200.4 million during 2006.

Cereplast's line-up consists of two proprietary products: Cereplast Compostables and Cereplast Hybrid Resins. The Compostables are slightly self-explanatory. They consist of certifiable, biodegradable plastic alternatives derived from starch-based feedstock such as potatoes, corn and wheat. The Hybrid resin is identical, except they are a neatly package 50-50 mixture of starches and petroleum. Unlike the Compostables, the Hybrids do not meet biodegradable and compostable standards in the United States and Europe. However, according to the company’s website, they are "cost competitive with traditional petroleum-based plastic resins."

The company seems to be poised for growth and has the approval by several industry leaders, including a notable, multi-year supply contract with Alcoa-Kama, a subsidiary of Alcoa (AA). Furthermore, the company claims that more than "65 prospective customers are evaluating more than 100 different potential product applications" for both the Hybrid and Compostable bioresins.

Both Metabolix and Cereplast could prove to be speculative companies worth watching in the wake of 90-dollar oil. Furthermore, with the U.S. consuming 7.5 billion barrels of oil a year and about 254 million barrels dedicated to plastics and chemical production it could prove wise to protect our planet and pocketbooks by developing these increasingly cost effective, biodegradable alternatives.

Flexable Oil

Shaybah Oil Field, Saudi Arabia - New York Times

In the realm of commodities, oil is extremely unique. Unlike the precious metals or pork bellies, oil provides us with cost effective transportation, thermal energy to heat our homes, and a matrix for the creation of seemingly endless consumer products. Succinctly put, it provides our economy with the necessary lubrication to transition each day smoothly into the next. Due to this dependence, it appears that the average consumer and ExxonMobil(XOM) will remained joined at the hip. Why then, with brent crude trading in the $90 range haven't the markets thirst for oil been slaked, or the consumers appetite to spend been squelched?

In physics, elasticity is defined as the physical ability to return to an initial form or state following deformation. For economics, elasticity can be understood with a similar methodology. Price elasticity is the responsiveness of quantity demanded or supplied with respect to price changes. In other words, how likely is demand or supply for a good or service going to respond following a deformation in price.

For items such as normal and inferior goods, price fluctuations correlate to a reflected increase or decrease in the quantity demanded by consumers. These goods, such as computers and cars are considered elastic as the quantity demanded changes substantially with these pricing gyrations.

Inversely, goods such as cigarettes are largely considered inelastic. Graphically configured, inelastic demand for cigarettes would appear as a nearly vertical line on a demand curve i.e. as price increase, demand remains relatively unchanged. Some argue that this inelastic nature is skewed as nicotine is a physically addictive substance requiring progressively greater concentrations by the user which supports demand regardless of underlining price. Additionally, cigarettes remain inelastic because no readily apparent substitute exist. This further prevents consumers from switching products in response to price changes.

Computers, cigarettes and consumer staples make sense, but what about oil? How can the price of oil increase 500% in a decade without dramatically stifling demand? Odiously to some extend, oil must be inelastic. However, to accurately determine the effect of price on demand for oil, price must be correlated with time. Throughout recent history, oil has demonstrated instances of inelasticity and bouts of elasticity as during the 1970s-80s oil shocks. The importance here is not so much price, but price with respect to time.

Oil as Elastic

"From 1980 to 1981, the price of oil went from $11 to $35 per barrel. World oil consumption fell from a 1979 high of 51 million barrels per day to less than 45 million in 1985." Prices rose rapidly, and demand was squelched. During this move consumers were shocked by a 1 year, >100% price undulation. Consumers were unable to adjust personal lifestyles rapidly enough to compensate for the price increase. Additionally, suppliers were unable to subsidize refining capacity with alternative sources such as biofuels or new oil streams.

As a result of the 1980-81 shock, demand was suppressed. The elasticity of oil can also work in reverse as we saw during the 1990s. Decreased consumption in the 1980s and an increased in non-OPEC production from 15 million barrels in 1977 to 24 million in 1985 resulted in price stability in the range of $18-20. This depression of price encouraged many Americans to purchase gas-greedy SUVs during the 1990s economic expansion.

Oil as Inelastic

Even with a greater than 500% increase from 1996 to 2007, oil is still relatively cheap. According to economist Nigel Gault at Global Insight, "at $3 a gallon, it costs Americans only about 4 percent of their disposable income." With these prices, the consumer is capable of absorbing the price differential. More so, the consumer has had sufficient time to adjust life styles accordingly. Until now oil's upward accent has had limited effects on the average consumer. During the third quarter the economy logged its best performance in over a year and a half as the gross domestic product expanded 3.9%. This slow but deliberate progression has allowed consumers to buy more energy efficient cars, upgrade home heating systems and yes, even car pool. We are paying more for gas than we were a year ago, but we are able to do so with out significantly altering our spending patterns.

There however could be an inflection point. Eventually, either through price shocks, the emergence of alternatives or even a recession, demand for oil could decrease. Until that point, demand and prices remain high as the EIA expects consumption to grow by 14 million barrels per day from 2004 to 2015.

I am reminded of an experience just last week, where I actually had to wait at the pump for biodiesel. This scenario had never happened to me, and in retrospect it dawned on me. All of these consumers are waiting for biodiesel; not to be green, or to support our farmers, but simply because it is now selling at a discount to petrodiesel.

Biofuels and Avation?

Refueling in Flight, New York Times

As of last Monday, the race is officially on to test fly the world’s first commercial airliner powered by biofuels. Yes, you read the aforementioned sentence correctly. The ever creative and bipedal primate known as homo sapien is at it again. This time, we will attempt to fly an aircraft powered with refined plant matter 30,000 feet into the air. In theory, these turbines, traditionally run on jet fuel, can burn most types of compressed fuel such as diesel, hydrogen and methane. The moment of Zen however, won't be achieved until we take these theories and apply them practically.

During a press conference on Monday, Virgin Chairman, Sir Richard Branson announced intentions to test fly a Boeing (BA) 747 fueled by biofuels his Virgin Group was currently developing. Branson, a stanch activist for global warming, formed Virgin Fuels in late 2006 by investing US$400 million over three years for renewable energy initiatives.
Virgin and its development partners, Boeing and General Electric (GE) have targeted the test flight for early next year.

However, Branson is not alone. In September of this year, Air New Zealand announced an agreement with Boeing and Rolls-Royce Group Plc to test-fly their own commercial aircraft. The consortium intends to mix kerosene and an unspecified bio-fuel in order to power one of the four engines. The flight is set for late 2008 or early 2009, according to the BBC.

Seemingly unbeknown to flashy Bronson or the environmentally friendly Air New Zealand, a rather microscopic startup company by the name of Green Flight International and its equally tiny partner Biodiesel Solutions achieved notoriety when they successfully completed an "experimental test flight in an L-29 aircraft powered by B100," or 100% bio-diesel.

The two pilots, Carol Sugars and Douglas Rodante flew the Czechoslovakia jet out of Reno, Nevada, gradually blending ever increasing concentrations of bio-diesel until 100% utilization. According to the press release the green flight attained performance levels comparable to those achieved with traditional jet fuel and reached an altitude of 17,000 feet!

Green Flight International was founded in 2006 by Rodante, "to serve as a platform for future development in the use of renewable fuels in aviation and other sectors." Furthermore, the company anticipates the announcement of additional "record-breaking" events shortly.

These developments within the private sector come after record oil prices and announcements by the United States Air force to "certify the entire fleet by 2010 with a 50-50 mix," or even mixture of petroleum and synthetic fuel. According to the New York Times, the Air Force burned "3.2 billion gallons of aviation fuel in fiscal 2005, or 52.5 percent of all fossil fuel used by the government." These dynamics have made aviation an increasingly costly undertaking. Since securing safe and cost-effective sources of energy is of strategic importance to our national security, it has now become attractive to explore alternative resources for our jet fuel consumption, even if commercial use is some years away.

Disclosure: The author has no position in any of the aforementioned companies.

The Google Glow

On Thursday, a consortium led by Google(GOOG) launched an initiative to create a list of standards which would encourage open source programmers to develop software for Google's social networking site Orkut.com. In addition to Orkut, Google’s platform, OpenSocial, is said to be compatible across all of the member’s websites, including Friendster, LinkedIn, hi5, Plaxo, and Ning. The move is believed to be in response to a similar initiative by Facebook last spring, which lead to the development of 5,000 smaller programs capable of integration into individual users’ pages. Popular programs such as RockYou and iLike provide users additional customization within their individual page. Essentially, you get a "Subway sandwich" effect: Your site built with your specifications, hold the onions.

Since News Corp’s(NWS) $480 million dollar acquisition of Myspace in 2005, significant attention has been given to these social networking sites. Google’s own Orkut has a loyal following in Brazil and Asia, but has yet to generate much interest from American net-workers. Google hopes the addition of these smaller programs will have a remunerative effect on the site. As of August 2007 Google estimated a following of 67,000,000 users strong.

Driven by curiosity, I attempted to set up my own account with Orkut to see what type of social networking could be had in the greater Seattle metropolitan area. Using my Gmail account I was able to gain access to the site almost instantaneously. Due to time constraints, I was only able to perform a limited survey of the site. A user search for ‘Seattle, WA’ produced an abundance of single, 20-something males utilizing catch phrases and obnoxious quips such as, “single and ready to mingle” to spark interest from visitors. Comparing this to my previous experiences on Myspace and Facebook, it was apparent that Google’s site needed some new life. Jokes aside, Orkut sits at the tenth largest traffic-ranking spot on a global level. Additional, Vic Gundotra an executive at Google believes this enhancement rich software will perpetuate Internet traffic, enhance advertising, and in turn benefit Google.

Google's initiative comes a week after Microsoft announced a $240 million, 1.6% investment in Facebook. According to the New York Times, the deal values Facebook at an absurd $15 billion. Given that the company is projected to bring in $150 million in revenues this year, it becomes transparent that Microsoft might have paid a 'slight' premium. Although comparable to Orkut’s 67,000,000, Facebook's 50 million user base boosts an additional 200,000 members daily.

While this move shows desperation on the part of Microsoft, it reaffirms the importance of these social networking sites. For Orkut to gain additional market share in the US, it will need to distinguish itself among the competition. Google’s ability to differentiate itself from the competition has been its strong point. From strengthening its search algorithms and incorporating digital satellite imagery into mapping, Google was able to distinguish itself from established leaders such as Yahoo.com (YHOO) and Mapquest. By greatly enhancing existing services and products, Google was able to establish significant brand equity for themselves. For Google, the problem with Orkut may not be with its interface, accessibility nor design, but more so with its defunct, quasi association with Google. Perhaps the time has come for an Orkut name change?

Aramco Insider: Oil Structural Ceiling Reached

Production curve as predicted by depletion analysts

Many speculators, myself included, love to analyze Peak Oil or the plateauing and decline of global oil production. The problem however, with determining global Peak Oil has long been convoluted due to the inherent elusively of Saudi Arabia. Unlike the publicly traded oil conglomerates such as Exxon Mobil(XOM), BP plc(BP) or Total(TOT), Saudi Aramco isn't bound by full disclosure. Since Saudi Arabia has the world's largest proven reserves and Saudi Aramco is the world's largest oil producer, the theoretical peaking of Saudi Arabia could indicate the world’s peak.

For those unfamiliar with Peak Oil, it is the inevitable peaking of any given oil well, or the point of maximum production and subsequent decline. This theory was first presented in 1956 by an American geophysist, Marrion King Hubbert. His theory was initially scoffed at, but has since received notoriety as he accurately predicted the United States' 1970 peak.

Despite King's genius, experts are still divided on the validity of a global peak. Some argue that improved technology and greater exploration can prevent it, but the undeniable fact remains that the world's most technologically advanced nation, the United States has been unable to prevent it's own peak. With this premises it seems unlikely that the less developed world will be exempt from a similar fate. Still other, more optimistic critics argue that oil is somehow a renewable resource.

This week during an interview, former head of exploration and production at Saudi Aramco, Sadad al-Huseini disclosed that, "oil production had reached a structural ceiling and that the technical floor for the oil price will rise by $12 annually for the next 4 to 5 years as new fields become increasingly costly to exploit." According to al-Huseini, "the technical floor - the basic cost of producing oil excluding factors such as geopolitical risk and hedge fund speculation - is currently about $70 per barrel, meaning the minimum oil price could hit $106 in 2010 and $130 by 2012. Actual crude prices, including financial market factors, could be as much as $125 by as early as 2010."

This disclosure by Sadad al-Huseini is important for many reasons. First, it marks a rare instance of blatancy from a Saudi oil insider. Second, it presents additional validity to the theory of global Peak Oil. Finally, this omission aligns with other renown advocates like Matthew Simmons. With Peak Oil, hindsight truly is 20/20. We won't know our actual peak until we see it in the rear view mirror...



Listen to the interview with Sadad al-Huseini

(Problems noted with Quick Time)

After a Hiatus, the Diesel Commuter is Back

2006 Jetta TDI

No longer are the Prius and it's eco friendly associates the only fuel-efficient vehicles on America's streets and interstates. Long a major staple of European transportation, the compact diesel commuter is making inroads to a highway near you. Traditionally, diesels have been synonymous with large trunks and smelly, noisy Mercedes Benz. Unlike most stereotypes, this association has proven remarkably accurate. When fuel prices soared in the past, automobiles such as the Volkswagen Rabbit, and General Motors's(GM) Oldsmobile and ever iconic Cadillac models, were seen efficiently cruising commuters to and from their destinations. While these relics are now largely retired and or scraped, there is a new breed of quiet, super efficient, cleaner burning diesels emerging.

Volkswagen(VOW.DE), a trendsetter and respected innovator of diesel technology, has seen great success with its highly acclaimed Turbo Diesel Injected(TDI) engine. Originally appearing in 1989, within the Audi 100, this reliable and fuel-efficient engine recreated the idea of a diesel commuter car. Furthermore, it destroys the negative connotations and stereotypes associated with diesels of the past. I should note here, that I am writing from real world experience, as I personally own one of these cleaner burning TDIs.

Unfortunately, these stylish, spacious and fuel-efficient vehicles have been discontinued until 2008 due to tightening emission standards. Currently, only 45 states have approved the sale of these vehicles, but VW has announced that the TDI will return in 2008; freshly minted with improved emission and compliant with all 50 states’ requirements.

The Engine

The primary reason consumers have chosen diesels over the standard gasoline engine is due to superior fuel economy. Case in point, my 2006 TDI Jetta(manual) achieves 40 and 50 mpg compared to the 21 and 29 mpg attained by VW's 2.0L gasoline counterpart. This is achieved by two methods. First, the inherent British Thermal Unit(BTU) content of diesel is much greater than that of gasoline. Essentially, this means there is more energy content per unit measured. Secondly, diesel combust fuel in a much different manner. Unlike gasoline, diesel engines compress air within their cylinders. Once the point of maximum pressure is achieved, fuel is injected and instantly combusts with the highly compressed air. Since these engines are higher pressure systems, they must be built to endure the additional stress. This is the reason we are still privy to 30-year-old VW rabbits and seemingly paleolithic diesel Mercedes Benz.

Emissions

Like all hydrocarbon combustors, these contemporary diesels produce carbon dioxide and associated smog creating pollutants. However, due to the superior fuel economy inherent to these diesels, on a direct mile-to-mile comparison they emit much less carbon dioxide. If this is true, then why are existing diesels only permitted to be sold in 45 of the 50 states?

As diesel burns it creates particulate matter(PM) such as soot and aerosols as well as nitrogen oxides(NOx), which cause the formation of ozone and other fine particles. Due to stringent EPA emission regulations(PDF) from the 1980s, the tolerable level of these byproducts has greatly decrease and it set to decrease further again with 2007-2010 legislation. The dynamic however changes if diesel commuters use biodiesel in their engines. According to the National Renewable Energy Laboratory(PDF), use of B100(100% biodiesel) cuts NOx by 10% and PM by 48%. Furthermore, diesel engines and their superior fuel efficiency contribute fractionally to carbon dioxide, the major gas attributed to global warming.

The Industry

Unfortunately for General Motors(GM) and Ford(F), it appears as though the US automakers are once again behind the curve. According to CNN, neither Ford nor GM have plans to sell SUV or diesel passenger cars again in the US. The companies claim, the endeavor "wouldn't be cost-effective, because existing diesel cars sold in Europe aren't sold within the US and the current US market is too small for additional development." As for the rest of the industry, everyone from Honda, Volkswagen, Mercedes Benz to BMW are either selling or planning on selling diesel passenger cars and SUVs. Even the often-marginalized Korean auto firm Hyundai has plans to introduce an SUV to the US by 2010.

For GM this inability to adapt is all to reminiscent of its hybrid debacle. Since 2003, Toyota's(TM) Prius has set record year over year sales. At the same time, GM continued to endorse it's higher margin vehicles such as trucks and Hummers. Now, 7 years since the first Prius rolled off the lot, GM finally has its own hybrid lineup. Unfortunately for GM, their plans to introduce hybrids might be futile because while marketing my say 'hybrid', consumers may hear 'Prius'. GM's plan to avoid the diesel car market could prove to be yet another disappointing milestone in this manufacturer's withering legacy. We will have to wait to see if and when GM responds its competitors inevitable success within this new market. The moral of this story? Recognize a shifting paradigm before it drives over you.

Disclosure: The author has no position in any of the aforementioned companies.

Microvision's Seemingly Obvious Collaborator

Today MVIS, a company I have covered before, announced another development agreement with yet another undisclosed Asian consumer electronics manufacturer. Under this agreement, MVIS and it's manufacturing partner "will integrate the PicoP^TM display engine into fully functional stand-alone projector prototypes." These projector prototypes will then be targeted to consumer electronics companies for "private labeling and distribution for mobile applications including mobile phones and other devices."

What is different regarding this announcement however, is the seemingly blatant verbiage contained within the press release. According to the release, the manufacture is "one of the world’s largest consumer electronics manufacturer of mobile phones, digital cameras and personal media players." By market share the five largest manufacturers of cell phones are as follows: Nokia, Motorola, Samsung, SonyEricsson and LG, with the last three being Asian manufacturers. Of these three, all manufacture and distribute personal media players. However, of the three only two manufacture digital cameras, leaving two possible candidates: SonyEricsson and Samsung. Technically speaking, LG does sell digital cameras, but none that exist independent of a host mobile phone. Due to the press releases’ attention to three distinct categories: mobile phones, personal media players and digital cameras, LG's technicality as a digital camera manufacturer seems to exclude it from the group.

Of the two remaining contenders, SonyEricsson and Samsung, only one of these companies has a prominent link and conjoined video referencing MVIS technology on their website, thus identifying the more likely suitor: SonyEricsson. With respect to the connections listed above, it would seem as though this current non-disclosure contract isn't quite as secretive as it is made out to be. More importantly however, is the significance of a development agreement with SonyEricsson or any of the aforementioned companies. Given that this most recent partnership is with one of the worlds largest consumer electronics manufacturers, it not only provide further credibility for Microvision's technology, but it also accelerates the commercialization of Microvision's PicoP.

Disclosure: The author owns shares and call options in MVIS.

Sizing Up the Next Generation of Aviation

Boeing 787 vs. Airbus A380

This week marks the advent of a very important milestone for Airbus, as it signifies the delivery of its very first A380 jumbo jet to Singapore Airlines. Loaded with over 80,000 gallons of fuel, an estimated range of 8000 nautical miles and a potential passenger capacity of 800, the A380 could theoretically average 80 mpg per person, assuming maximum capacity. Compared to the 45 mpg my 2006 TDI Volkswagen achieves transportating me to and from work, the A380 seems to reign supreme with regards to fuel efficiency. For the accomplished executives at Airbus, this statistic appears to be a chief selling point for the behemoth flying craft. While Airbus' latest achievement most certainty replaces rival Boeing's(BA) 747, does it really accomplish anything more than retire an already obsolete aircraft?

Problems

For Airbus, developing the A380 has been a tumultuous journey. For starters, this initial delivery is a casual two years behind scheduled. While the engineering complexities of this undertaking surpass my intellectual capabilities, Airbus's problems seem more deeply rooted than pure technical issues. During the past two years, the European aerospace manufacturer has cycled through 5 CEOs and has plans to eliminate 10,000 jobs over the next four years. The complications and subsequent delays have literally cost the firm billions of dollars in lost revenue. FedEx has canceled an order for 10 A380's and instead chose Boeing's(BA) smaller 777. Two additional firms, Virgin and UPS have also placed their orders on hold until at least 2013. Even with this first successful delivery, CEO Thomas Enders concluded that, "Increasing A380 production to meet demand remains Airbus' greatest challenge for the next years."

For BA, Airbus' problems have been a godsend as the 787 Dreamliner has a 5-year lead ahead of Airbus' A350 XWB, which has succumb to multiple redesigns and subsequent delays. To put it in perspective, BA has 50 customers for its 787 compared to a the 16 for Airbus' superjumbo. While BA does have the lead over Airbus it is however not devoid of set backs as the company recently disclosed a 6 month delay for the first delivery of its 787.

Where the A380 fails, the Dreamliner shines. Unlike the massive A380, the nimble 787 is capable of landing in nearly every major city. This allows for direct flights and avoids the hassle of hub transfers. Boeing's craft is also highly fuel efficient. With an estimated range of 3,050 nautical miles, a 33, 500 gallon fuel tank and a passenger capacity of 330, the 787 is calculated to achieve 20% greater fuel economy compared to similar size aircrafts. Boeing achieved this superior efficiency through the use of new materials, next generation engines and increased electrification, according to the Green Car Congress.

Does It Really Matter?

Even if Airbus is able to deliver to its existing customers how many additional orders can it realistically obtain? Does the demand exist for a football stadium capable of flying from New York to London? With oil trading in the high $85 per barrel range, and jet fuel commanding the highest variable cost per flight, airliners might be forced to choose fuel efficacy and functionality over luxury in order to remain competitive.

As I mentioned before, at capacity the A380 boost considerable fuel efficacy, but will carriers really attempt to pile 800 economy passengers into one vessel? And if so, how will already condensed economy passengers react to the multiple plane changes required to get them to their final destination? In Singapore's case, the airline equipped their A380 with 399 economy seats, 60 business class and 12 suites. With these numbers the A380's impressive estimated fuel economy drops significantly to 47 mpg per person. This reduction in fuel economy will most certainly have to be recouped with ticket premiums. According to the AP, the going rate for the inaugural Singapore to Sydney luxury suite will cost around $7,160 per ticket, which is a 20-35% premium over standard business class.

The world has seen its share of aviation giants long before the advent of this superjumbo. From the three story, 6-engine Dornier Do-X, to Howard Hughes' infamous 1947 "Spruce Goose", the world has hyped and eventually retired the majority of these flying leviathans. Only BA's 747 was capable of transcending the curse of these flying titans, but even the illustrious 747 has seen its career slowly dissolve, to make way for more fuel efficient replacements like 777. At this point, only time will predict if Airbus' A380 will survive the stigma these flying giants.




Disclosure: The author has no position in any of the aforementioned companies.

Update GST

Added additional shares to our GST holdings today at $1.60.

Natural Gas Gaining Momentum

NG daily time frame

Natural gas continues to gain traction today following a gap through the 200 DMA several days prior. Concerning our junior natural gas driller GST, the stock as well seems to have broken out of its month long basing period. Todays 10% movement represents a >10 than fold volume surge. This move isn't quite that startling with all the conspicuous accumulation by institutional investors during the last quarter.

GST daily time frame

Update GST

I added more GST today at $1.45.

BP - Big Potential?

Oil and gas giant BP plc.(BP) is staged to release 3rd quarter earnings on October 23rd. As previously disclosed by the company's freshly instated CEO, Tony Hayward, earnings should be nothing short of dreadful. Furthermore, Hayward reiterate that BP's results would be the worst financial performance since the 1992-1993 time frame. To many this should come as odd since crude oil continues to hit new highs, but for BP, making money in the arena of $80 oil isn't quite so easy. BP has endured a slew of mismanagement and financial problems ranging from tightening
margins, falling natural gas prices, overlapping management, refinery explosions and environmental issues. Making matters worse were the politically distasteful homosexual meanderings of ousted CEO Lord Browne.

To investors, the end result is a company severally lagging its peers. Amongst all of this turmoil however, could be a remarkable buying opportunity. With 'dreadful' earnings to be released shortly, and fresh management at the helm, A BP turn around could be as close as next year for this conglomerate. This is of course subject to change if the faltering giant is unable to deliver its newly purposed restructuring plan.

Underperformance

A significant portion of BP's troubles have been associated with delays regarding two of its largest projects. BP's largest project, the Thunder Horse is currently the worlds largest semi-submursed oil rig. Originally delivered in 2004, this $1 billion rig sustained marked damages during the 2005 hurricane season as well as recurrent equipment malfunctions. The result was a mega project with costly delays. Unfortunately for BP, at peak production this facility is targeted to produce 250,000 barrels of oil per day(bpd) and 200 million cubic feet of natural gas on a daily basis. According to the company's latest estimates, Thunder Horse should regain production near the end of 2008.

BP's Atlantis is yet another massive project inflicted with project delays and seemingly all to common technical difficulties. Until the completion of Thunder Horse, this 200,000 bpd project will command the title of largest oil producer in the Gulf of Mexico. The Atlantis is set for commercial production starting December of this fiscal 2007. Upon completion, these two facilities should add significantly to BP's production capacity and in theory contribute directly to the top line. BP controls 56 and 75 percent of the Atlantis and Thunder Horse projects, respectively.

Toppled Thunder Horse 2005

Image Problems

Of all the integrate oil giants, from ExxonMobil to Chevron, BP is the least in touch with its roots. After all this is the very same oil company who shockingly renamed the company Beyond Petroleum. While my inner environmentalist enjoys this in theory, BP has had its share of egregious safety and environmental violations. Yet another problem is the striking resemblance between two of BP's most recent snafus.

In May of this year a US congressional committee concluded that, "severe pressures for cost-cutting," were the cause of BP's March 2006 Prudhoe Bay spill which leaked nearly 6,500 barrels into the Alaskan wilderness. The event further tainted BP's credibility and cost the giant $250 million in maintenance costs as 16 miles of deteriorating pipeline were replaced.

For BP, this spill came shortly after a 2005 refinery explosion which cost 15 individuals their lives. This event, which BP largely attributes to worker negligence and miscalculations seems all too similar to the Alaskan oil spill, where cost cutting and inappropriate investments lead to the eventual explosion. Chief executive officer of the US Chemical Safety Board informed the US congressional committee that, "virtually all" of the Prudhoe Bay misjudgments correlated strongly to the refinery disaster.

The Aftermath

So where does this leave us? BP's 1-year performance pails in comparison to an industry which has reaped the benefits of increasingly expensive crude oil. Due to BP's missteps during the same period, the conglomerate has largely not participated on the impressive run these producers have enjoyed. If the consensus of expensive oil continues and BP is actually capable of delivering its revised business restructuring, then we could be looking at an undervalued company, when compared to its peers. Judging from the streets reaction to Friday's restructuring plan, BP seems well on its way to amending its current operational issues.

BP 2006-2007 chart

La Niña, a Potential Benefit ?

The NOAA issued a forward guidance earlier this month regarding the development of a mild-moderate La Niña formation occurring in the central Pacific Ocean. La Niñas often occur shortly after a preceding El Niño. This was the case during the 1997-1998 El Niño and again this year as the most current La Niña comes on the coattails of an El Niño which began in the fall of 2006. According to the NOAA, these tropical pacific formations typically last 12-18 months and can accurately be predicted 6 months in advance.

According to the NOAA, El Niño episodes occur roughly every four-to-five years. El Niños are characterized by increased precipitation and warmer-than-normal pacific sea surface temperatures along the equator. These increased temperatures correlate to drier fall and winter conditions in the U.S Pacific Northwest and a wetter-than-normal winters along the Gulf Coast states and in central and south California if the El Niño is particularly strong.

Interestingly, the effects of a La Niña are nearly complete opposites to that of an El Niño. La Niñas equate to wetter conditions in the pacific west and southwest as well as drier winter weather in the Southeast. Additionally, La Niñas typically alter ambient temperatures around the United States. This is defined by above average temperatures throughout the continental states, with the exclusion of the Pacific Northwest, which is expected to experience colder conditions. The intensity of these climate changes correlate to the amplitude of their respective La Ninas/El Niños. Since the NOAA expects a historically weaker formation this year, this could lessen the over all climate impacts felt by the United States. That being said, weather formations and the prediction of their effects are highly variable and subsequent to frequent amendments.

Economic Impacts

The impacts of La Niñas and El Niños on our economy are diverse and dependent on the strength of the correlating formation. As with virtually all economic stimuli there are expected winners and losers. Variations in weather patterns such as increased precipitation in the Northwest could lead to enhanced hydro-electric recovery as previous El Niño/La Niñas have risen reservoirs by as much as 30%. Since hydro-electricity is derived from the potential energy stored in a column of fluid, the greater the stored reserves the greater the potential for energy generation. More importantly, this La Niña could improve the fragile tug-o-war for water in the Corn Belt as agriculture and residential users compete for this scarce resource.

Cēterīs pāribus, this most recent La Niña could prove to be a minor blip on the emerging trend of water scarcity and ever increasing demand. Agricultural needs the precious commodity to grown the food we eat as well as the food we burn. As the ethanol industry continues to grow so does its demand for water; Precious water to nourish the energy intensive crop and wash water to process the ethanol. It is estimated that a 50 million gallon per year facility will require upwards of 300 million gallons annually. Corn harvests and the ethanol producers such as VSE and ADM which depend on them could temporarily benefit if this most recent La Niña can provide the rain that the parched corn belt, desperately requires.

Update GST

I initiated a position in Gastar(GST) for $1.49 today. GST is a junior natural gas driller with significant backing from natural gas giant Chesapeake Energy Corp(CHK).

Naturally not Participating

The global commodities boom is something of a wonderment. The fledgling economies of Asia, India, Brazil and Russia continue to feed off of each others prosperity. As these economies grow so does their demand for raw materials such as copper, cement and oil. The result is an incredibly strong demand for resources of the likes, which haven't been seen since the post World War II infrastructure build-out in the United States. Due to this demand, commodities such as gold and oil are nearing multi-decade highs. Inversely, natural gas prices sit at painfully low levels compared to their post Katrina and Rita peaks. This lack of participation beckons me to scout natural gas producers for potential value buys.

These pricing extremes reiterate natural gases' inherent volatility. With natural gas storage at 5-year highs, the rational for price depression becomes transparent. Natural gas prices cannot rally until the supply and demand equation once again becomes skewed. The question is, what could cause natural gas prices to rise?

There are three readily apparent scenarios which could cause natural gas prices to spike: 1)Reduction in output from drillers and producers, 2)Supply shocks for competing commodities and 3)Potential natural gas demand/supply shocks.

Reduction in Supply

Several natural gas producers such as Chesapeake Energy Corp.(CHK) and Questar Corp.(STR) have already announced plans to scale back production as a method of price stabilization. The concern here is that additional production reductions could result in political upheaval. This was seen recently when ill-informed Connecticut Gov. M. Jodi Rell's made accusations that CHK was attempting to manipulate natural gas futures.

CHK's Chairman and CEO Aubrey McClendon succinctly pointed out that, "no US law requires any producer or manufacturer in America to produce a product at a prescribed level, especially if selling such a product could result in the risk of an economic loss." While McClendon is accurate, the likelihood of a significant reduction in natural gas production seems unlikely.


Related Commodity Demand/Supply Shocks

In the United States, the bulk of domestic electricity generation comes from sources such as coal, hydro-electric and nuclear. Since natural gas has a higher relative fuel cost compared to these alternatives, it is often used as the proverbial bench-warmer. During periods of high demand or supply shocks, natural gas based electricity generation is used to recoup differentials brought about by these disruptions. This is primarily due to the intrinsic flexibility of natural gas compared to the alternatives such as coal.

During the 1990s, extensive droughts experienced in the west caused steep declines in hydroelectric generation. As a result, hydroelectric production declined 40% from 1997 to 2001(PDF). This reduction was largely offset by a 30% increase in natural gas generation.

Natural Gas Demand/Supply Shocks

This brings us to my final point. The largest mover of natural gas prices is in fact natural gas demand/supply shocks. During late 2005, Hurricane Katrina and Rita collectively shut down 800 billion cubic feet(Bcf) or natural gas(PDF). To put it into perspective, this is equivalent to nearly 25% of the total annualized natural gas production from the Federal Gulf of Mexico. This supply shock was precisely the reason why natural gas moved from just over $6.00 per million BTU(MMBtu) to $15 (MMBtu).

With September over, the likelihood of a hurricane educed catastrophic occurring this year is rather remote. What could occur however, is a colder than expected winter. While I will refrain from using our friendly, yet remarkably inaccurate weather man as a gage for my speculations, I will point out that natural gas appears fairly undervalued when compared to 5-year trends. This could signify an attractive entry point for such prized natural gas drillers as CHK or XTO Energy(XTO).

Potential Natural Gas Companies

With winter rapidly approaching and natural gas currently underperforming virtually all other commodity classes, I have begun to evaluate several natural gas companies as potential value buys. I will have more on this later, but I wanted to take the time to post some preliminary charts.

CHK Weekly Chart

NGAS Daily Chart

GST Daily Chart

Role Model Needed

Update NBF

Added more NBF today for $2.64.

NRG's Nuclear Energy?

NRG Energy Inc.(NRG), announced plans late Monday of intentions to build and commission a nuclear reactor in Bay City, Texas. NRG's completed construction and operating license submission would mark the first application the government has processed since 1979. With Constellation Energy Group's partially filed application and several anticipated requests from Dominion Resources Inc. and others, NRG's proposed reactor could signify an inflection point for our aging nuclear energy industry.

This move comes in the wake of rising concerns over greenhouse gases, surging energy demand and improving favorable economics of nuclear energy generation. Even with the significant capital costs required, nuclear energy's average of 1.72 cents/kWh edges out the 2.37 and 6.75 cents required for coal and natural gas facilities, respectively.

NRG estimates the plant to be commissioned during fiscal 2014, however with increased concerns over safety and a 42 month government review, the process could take much longer. Needless to say, If NRG succeeds and commissions this 2 million home reactor, the implications for the company and the burgeoning US nuclear industry will be huge.

The Need to Innovate

Recent economic data revealed the U.S. trade deficit at nearly $711 billion, down from the $758.5 billion recorded in 2006. While these numbers indicate improvements, historic records have continued to be broken, with 2006 marking the fifth consecutive year of fresh highs. This emergent trend should be a primary concern as economic imbalances widen between the haves and the have-nots. Oil and industry rich countries such as Saudi Arabia and China, must export surpluses as their inventories expands. Inversely, oil and industry poor(er) countries such as the U.S. and Britain must import the gap between the country's supply and the needed demand. These imbalances have become increasingly skewed as domestic supplies of petroleum have peaked, simultaneously with strong internal demand. This imbalance of supply and demand is met by importing more of the commodity from Canada, Saudi Arabia and Venezuela. Complicating the situation is Asia's emergence as the iconic global manufacturer of goods. To put it in perspective, "The United States' trade deficit with China climbed last year to $233 billion, the highest ever recorded with a single country."

This problem is a global issue, however the real economic drain will be felt by the have-nots as their capital is literally siphoned into the economic pool of the the haves. Case in point, every U.S. dollar spent to import oil from Saudi Arabia is a dollar less spent generating economic growth at home. The Federal Reserve chairman, Ben Beranke suggested that the, "United States and other countries must work together to right a skewed pattern of trade and investment around the globe, a move that would help worldwide economic stability."

Realistically, this idea of global teamwork as a method of correcting trade imbalances seems borderline myopic optimism. Do we really expect China to increase its already surging domestic budget and scale back their exports as a means of decreasing their trade surplus? Perhaps, but even if this is the case, what about our end of the agreement? Is it possible for the U.S. to export more and rely less on imports? This seems highly unlikely given our emergence as a service based economy.

This seemingly natural trend towards a service based economy stems from increasing economic efficiencies of supply chains, outsourcing and e-commerce. All of these advances have enabled us to develop higher end goods and services in the U.S. while outsourcing low cost production. Problems can arise as the service economy faces increasing competition from increasingly educated global competitors. While the current military and economic clout of the U.S. is impressive, our once massive technological lead has narrowed as our competition strives for educational and economic prosperity.

Leader of the Pack

There was a time when big research hubs such as AT&T Bell Labs(T), IBM(IBM) and Xerox's Palo Alto Research Center dominated the field of discovery. These massive laboratories existed as each giant corporation controlled their respective industry. The enormous cost of running these think tanks was a small price to pay to insure industry dominance. Alcatel-Lucent once boosted a research roster of 25,000, a number which dwarfs the $115 million budget and 1,000 man roster recorded in 2003.

Part of this downsizing can be attributed to the sheer quantity of sophisticated knowledge acquired over the past 30 years. According to Technology.gov, a site controlled by a branch of the Department of Commerce, "It has been estimated that 90% of all scientific knowledge has been generated over the last 30 years, by about 90% of all scientists and engineers who have ever lived." While this statistic is awe inspiring, it should come as no surprise to your average consumer who has enjoyed such technological advancements as the A-trak, compact disks or Apple's(AAPL) latest spectacle, the iPhone.

Even though the giant research laboratories of the past are mostly a distant memory, American firms still command impressive R&D expenditures. According to The Economist, our domestic firms spend nearly $200 billion annually, mostly focused on computing and communications. Microsoft(MSFT), Intel(INTC) and IBM for example, recorded over $6 billion during fiscal 2006, with Hewlett-Packard(HPQ) and Cisco Systems(CSCO) racking up $4 billion. Primarily, these funds were used for making incremental improvements on existing designs in order to get new products to the market fast. This is due to increasing levels of complexity. As we advance the energy and innovation required for such undertakings increases. The Human Genome Project, arguably one of our greatest achievements, required the participation of multiple countries and nearly 10 years to complete.

Interestingly, mass adoption of new technologies seems to be increasing as well. According to Technology.gov, The automobile took nearly 55 years before 25% of the U.S. population owned cars. Electricity 46 years. Telephones 35 years, televisions 26 years, and computers 15. Cell phones and the Internet accelerated even faster, taking only 13 and 7 years, respectively. Together these two trends appear to indicate society's strengthening appetite for increasingly more complex technology. No wonder AAPL followers were willing to pay $699 dollars for the iPhone. The point here is technology is simultaneously becoming more valuable and complex.

The Lead That Was?

America's pre-eminence with education and technology could be waning. According to technology.gov, the U.S. in the 1970s accounted for nearly 70% of total worldwide R&D, while 30 years later we only commanded 44%. This shift in power may seem benign upon first glance, but the implications are far more important. The U.S. is no longer the only player in town. Aspiring scientist and engineers(S&E) now have many more selection as to where they want to learn, live and perform research. The educational upgrades made by India and China in the 1990s are beginning to mature to full fruition. India, a country nearly devoid of exploitable resources has seen its economy grow substantially over the past 10 years. The reason? India made sound investments and was able to 'harvest' the intelligence of their citizens.

Even more startling has been the Chinese's ability to grow their S&E expertise. Traditional technology vendors are no longer simply selling products into the Chinese market, they are literally moving in. Microsoft, IBM, Siemens AG(SI) and Hewlett-Packard have all set up R&D branches in China, employing 100s of individuals working to develop next generation technologies. That being said, it should have been no surprise when the PCAST reported the U.S. graduating only 59,500 engineers compared to China's 219,600 last year. Even more disappointing was a 1999 Third International Math & Science Study, which ranked U.S. students in grades K-12 19th and 18th out of 38 nations in math and science, respectively. Without educated and excited youth, who will replace our population of aging scientist and engineers?

Why Continued Innovation Matters

The foundation for America's economic strength has always been our uncanny ability to innovation and create. These two traits coupled with a free market capital system has enable American entrepreneurs and innovators to unlock and commercialize a vast spectrum of technologies, engineering processes and advanced forms of health care. The culminated effects of these advancements has placed us on the forefront of economic fortitude, military power and global prestige.

According to the Public Policy Institute of California, during the 1990s, "Existing companies in Silicon Valley cut 121,000 jobs, while companies started after 1990 created 259,000 jobs." This example of economic expansion unequivocally correlates to U.S. institutions capitalizing on the mass acceptance of the Internet and its associated amenities. As I mentioned before, America's position in the realm of R&D is unmatched by any world power, but the disparity is narrowing. Even though the U.S. spends more than any other country on R&D investments, our growth rate has averaged nearly 1 percent per year in real terms since 2000, according to manufacturingcentral.org. As the complexity and energy costs of future innovations increases, our ability to compete globally will not be measured by our previous achievements, but by our willingness to make the necessary investments today.

Update NBF

Added more NBF today for $2.65.

Update NBF

Added more NBF today at $2.62.

"Our pool didn't have a waterfall."

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The Master Swing Trader

Alan Farley's, The Master Swing Trader provides the quintessential technical analysis bible for those speculators interested in capitalizing on short term volatility. The book presents a concise and clear road map for navigating the financial charts. Not only does the author present essentially every step in the process of identifying and capitalizing on opportune chart formations, but he also instills the importance of trial and error as well as the realization that accurate charting doesn't always coincide with profits.

Farley's book isn't for everyone though. The book assumes most readers have a basic to somewhat moderate understanding of the financial markets. While these assumptions are there, the book is formulated in such a fashion that even a beginner can struggle through the opening chapters and upon completion have a fairly refined rendition of charting analysis.

This is possible due to compounding sequencing, which Farley does so well. Each consecutive chapter builds onto its self and the chapters that follow. Information ranging from trend relativity to Bollinger Bands are explained in immaculate detail and then in sequential chapters expanded upon and incorporated into new material. Part of this sequential incorporating can be attributed to the very nature of technical charting. The core tools are learned and then applied to varying circumstances. While this is the case, Farley's writing ability should by no means be underscored.

Another important trait of Farley's book is his concern with self discipline and patience. Trading the financial markets is exceedingly difficult. The task becomes all the more arduous when one decreases the holding period. This is precisely why the majority of investors who make money trading equities hold their positions over a longer duration. Farley's knows this and he makes it apparent through his writing. He encourages and reminds traders that profiting from short term volatility is a life long process. A process which often times, "...presents the most difficult challenge of their lives."

Farley's book maybe a presentation in eloquent charting analysis, but it is so much more. He portrays chart interpretation in a way which truly includes the human element. Understanding moving averages and trendlines is actually a method of quantifying human psychology. One must remember that each 1 minute stock tick and every daily candle stick is created and mitigated by two of our most poignant emotions, greed and fear.