The new bio-fuel. Centuries
ago switchgrass dominated the Great Plains of America before
the coming of mass humanity, railroads and the steel plow.
Switchgrass is fast growing and tough. It can reach ten feet
in height. It captures lots of solar energy turning it into
chemical energy – cellulose – that can be liquefied,
gasified or burned directly. Studies have shown that switchgrass
can produce an average 11.5 tons per acre which translates
into 11,500 gallons of ethanol per acre. Switchgrass is a
hardy perennial (for ten years or more) and can be harvested
by standard farm equipment. Switchgrass can reduce erosion
and remove pesticides and fertilizer residues from surface
water. It also removes carbon dioxide (CO2) from the air as
it grows, thus slowing the buildup of greenhouse gases in
the earth’s atmosphere, and unlike fossil fuels which
simply release more and more CO2, switchgrass simply recycles
CO2 over and over again.
US ethanol production from corn currently totals nearly
two billion gallons a year. However, producing ethanol from
corn requires almost as much energy to produce as it yields.
Ethanol from switchgrass can produce about five times more
energy than is put in. In effect, the net energy output of
switchgrass is about twenty times greater than corn’s.
Also, the poor are marching in the streets in Mexico because
their corn-based tortilla prices are escalating. Corn as a
feeder will also tend to raise beef and poultry prices.
President Bush is planning a trip to Brazil to seal an ethanol
pact signed last week to supply fuel from switchgrass and
other sources. The ultimate goal is to create a commodity
market and undercut OPEC’s monopoly and especially Hugo
Chavez’s abusive policies. The US and Brazil together
produce 70% of the world’s ethanol and could create
a market. Now, this may not be the answer to energy independence,
but it is a step in the direction of on-going research that
will ultimately lead to a solution.
In a related news item, Exxon Mobil just reported a profit
of $39.5 billion. That is the highest profit of any corporation
in the world. Already Congress is lining up to “take”
some of those profits and put them in an alternative fuel
fund. Somewhat like the Social Security fund where it could
be used for all sorts of pork. However, if you look closely
at the numbers, you will see that those profits came on sales
of $377.5 billion which works out to a profit margin slightly
over 10%. Contrast that with many companies in the banking,
hi-tech and bio-tech industries that have profit margins double
that of Exxon Mobil. According to the Tax Foundation, Exxon
Mobil paid $100.7 billion in taxes last year. Further, over
the past twenty-five years federal and state governments took
$397 billion from the largest oil companies and an additional
$1.1 trillion in taxes at the pump. That’s a lot of
money generated for the federal and state governments. Add
on to that the jobs created and the additional tax revenue
generated by those jobs and spent or invested by the consumer.
Shareholders also gain through dividends and capital gains.
You can bet that the major oil companies know that the days
of fossil fuels are coming to an end and much of their profits
are being spent on research for alternative fuels. Better
they use the money than the federal government. Why do we
choose to punish success? Success lifts all boats.
Many of our clients own pools of adjustable rate mortgages
and with interest rates rising, the coupons on many of these
pools have exceeded the 7% level, and if rates remain stable
or even rise, these coupons will adjust higher. We have had
a few questions concerning the rising default ratio on home
mortgages. First of all, those defaults, or late payments,
are primarily centered on sub-prime loans – those issued
to borrowers with a shaky credit history. We do not purchase
these loans. We only purchase pools of government backed and
government agencies which have much higher underwriting standards.
Prepayments on these ARM pools are also slowing, as other
lenders are tightening their standards due to the over supply
of houses on the market and to declining prices. It is also
becoming more difficult to refinance ARMs in the current market
environment, and with fixed-rate thirty-year mortgages near
6.5%, there is not much incentive to refinance. In sum, the
ARM market is currently offering attractive returns for conservative
portfolios.
Random thought for February 2007:
“Yesterday thousands of Mexicans gathered in Mexico
City to protest food prices. The protest only lasted an hour
because everyone had to leave for their jobs in Los Angeles.”
- Conan O’Brien
|
