Newsletter

January 28, 2006

What You Are

Market & Sector Review

Largest Changes Last Week

This Week's Economic Reports

In case you missed this: In last week's newsletter by John Mauldin, he included the trading rules of Dennis Gartman, a wall street veteran. I have included these rules in the learning center section of the site for future reference. Here is a direct link to the page: Dennis Gartman's Rules You may want to print it out and keep it by your computer.
What You Are
By: Vic Johnson

"What you are, so is your world. Everything in the universe is resolved into your own inward experience. It matters little what is without, for it is all a reflection of your own state of consciousness. It matters everything what you are within, for everything without will be mirrored and colored accordingly.” – Path to Prosperity

Although we rarely want to admit it, the world (as we see it) is simply a mirror, reflecting back to us our own inner state. If we are inwardly in turmoil then we are certain to see a tumultuous world. Just as certainly, a seemingly joyful world is only returning to us our own inward joy.

Those days when everything seems to go wrong from the moment we wake up, usually begins with one bad event (car won’t start, alarm didn’t go off, etc.) that we allow to affect our state of mind. That leads to another, and then another and before you know it, the world looks like an ugly place to us.

Put enough of those days together and life can become almost unbearable. Yet, nothing in the world created our misery --- it was our response ---- our own state of consciousness --- that created the ugliness.

In the mid-1990’s I allowed a few negative events (brought on by living by the wrong principles) to drastically change my state of consciousness. In the middle of one of the greatest economic expansions in the history of the world, I barely lived above the level of poverty. Where others saw opportunity, I saw lack. It was simply a reflection of my inner state.

By 1998 I had gained control of my inner self and, accordingly, the sun once again began to shine in my world. The same circumstances that had once appeared as lack, now appeared as opportunities. Today there are so many opportunities in my life that I am only able to act on a tiny fraction of them. My table truly overfloweth.

During my dark days I came across a tiny booklet called 12 Ways to Develop a Positive Attitude. The author, Dale Galloway, writes from experience. He was a well-known pastor whose wife suddenly left him one year a few days before Christmas.

One of the many gems he offered was: “No matter what happens, look for the good and you’ll find it. A positive thinker does not refuse to recognize the negative - he refuses to dwell on it. Positive thinking is a form of thought which habitually looks for the best results from the worst conditions. It is always possible to look for something good; to expect the best for yourself even though things look bad. And the remarkable fact is that when you seek good, you will find it.”
Market & Sector Review

Continuing our series on energy let's begin to look at where some of the answers to the continued advance in oil prices and demand may lie. While some of the answers may by years away, having a perspective and a list of stocks that will participate in these answers will help you trade better over time. This week we will look at a very un-sexy industry that many believe can greatly reduce our dependence upon foreign oil. Coal! As you will hear stated often "this is not your grandfathers' coal". Technology (it isn't always electronics) allows us to burn coal in a relatively clean fashion today. While I wouldn't look for a shift from oil or natural gas to coal to heat homes, many utilities are increasing their usage of coal burning to generate electricity. Coal even with prices rising lately is cheap.

Exactly how cheap is coal? In December, according to investment bank Natexis Bleichroeder, U.S. coal sold for the equivalent (taking into consideration the different energy content of the two fuels) of natural gas priced at $3 to $4 per million BTUs. In December, the spot price of natural gas hit $15.50 per million British thermal units. On Jan. 19, after a month-long sell-off, natural gas sold for $8.59 per million BTUs. Even if the price of natural gas falls further -- to say, $7 per million BTUs -- coal will still be about half as expensive as natural gas.

The utilities are taking notice. In a recent Financial Times article the largest makers of turbines for electricity said that they were seeing a shift in their orders to steam turbines for coal-fired utility plants from natural-gas turbines. Coal-powered units will make up about 40% of all orders for electricity turbines in the next 10 years, with the share for natural-gas-fired turbines falling to 25% to 30% of orders. That shift means big growth for coal demand. The U.S. Department of Energy's Energy Information Administration projects that coal consumption in the United States will climb 73% to 1.9 billion short tons in 2030 from 1.1 billion short tons in 2004.

The obvious beneficiary of this trend, the coal producing companies which are listed in the group MG134 - Industrial Metals & Minerals. Peabody Energy (BTU), which just announced a 2:1 stock split and a 26% increase in its dividend and Arch Coal (ACI) are two examples, there are many, that have been on a tear for over a year now, consequently they are not in good buying positions at the moment but the time will come. That is why we build these lists, not to buy now at the market, but to follow along with our longer term themes for appropriate buy area's with minimal risk. I know I'm a bit of a freak about risk but over time you will come to realize trading is all about risk and money management.

While these charts appear to show stocks that are very expensive, try and put things in perspective. ACI has doubled since it broke out in 2005 and is up 500% since its bear market low, and BTU is up 4 ½ times since it broke out in 2004, but to use our AAPL example of a few weeks ago that stock advanced 1,200% since it's bear market low and 400% since it's breakout in 2004, and it's still highly recommended as a buy. While these two are not necessarily in advantageous buying zones remember the words of the inimitable Jesse Livermore: "Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don't make a second unless the first shows you a profit. Wait and watch. That is where your tape reading comes in--to enable you to decide as to the proper time for beginning. Much depends upon beginning at exactly the right time. It took me years to realize the importance of this. It also cost me of some hundreds of thousands dollars."

A very interesting speculation was brought to my attention by a member. He is not and I am not recommending this company but you may want to take a look at it on your own. The company is KFX (amex - KFX). "Their K-Fuel™ process enriches and upgrades low-grade sub-bituminous coal and lignite into a high Btu, low moisture, low emission product, enabling the coal-fired industry to cost-effectively boost efficiency and meet air emission standards." A quote from their web site.

Coal has even more potential as an energy source than most are familiar. For instance:

Secure and abundant clean coal can be transformed into pipeline quality synthetic natural gas, providing a compelling coal-based alternative that will drive down energy costs and contribute to energy security. Peabody Energy is advancing a coal-to-natural-gas plant in Illinois that would be one of the largest in the United States. Using technologies available today, the project would produce more than 35 billion cubic feet per year of high-BTU pipeline-quality natural gas. Peabody estimates that initial costs for converting coal to natural gas would be competitive at costs far lower than today's natural gas prices.

Through Btu Conversion technologies, the energy in coal can be transformed into transportation fuels, using about one ton of coal to make two barrels of diesel, gasoline or jet fuel. Experts believe that coal-to-liquids technologies are competitive at equivalent oil costs of $35 to $40 per barrel. Remember too America's vast coal supply is far greater than the proven oil reserves in Saudi Arabia.

Through a process called liquefaction, coal can be transformed into zero-sulfur liquid fuels that are cleaner than today's fuels. The technology has been used for the refining, chemical and power industries for 50 years. Germany has used the technology for aviation fuel and petroleum, and South Africa uses the technology for synthetic gasoline and diesel. And China has earmarked tens of billions of dollars to develop coal-to-liquids and improve its energy security.

Since two-thirds of the 20 million barrels of oil Americans use each day is for transportation, using America's vast supply of coal to create hydrogen could dramatically improve our energy security and contribute to a cleaner environment. In fact, technology exists to transform abundant and versatile coal into hydrogen to power fuel cells for transportation and energy for homes and businesses.

I am well aware that we are looking a bit into the future here, but if you maintain a longer term outlook that remains beneficial to a sector, then it becomes much easier to look at these stocks once they go through the bear raids that they will from time to time. Insead of expecting everything to decline towards zero which many begin to do.

In mid-December I listened to an interview on CNBC with Peabody Energy's President Gregory Boyce, if you'd like to listen here is the link: CNBC Interview

The two largest builders of the coal fired turbines for utilities are GE and the German company Seimens (SI). While I have not as yet looked this may be too small a part of these conglomerates total business to make a great difference in their stock price. There is also Alstom a French company, whose stock only trades on the Paris exchange.

Are there other beneficiaries from this obvious trend? Yes! How does the coal get from the mine to the end user? Railroads, which also carry all the other commodities that are in demand! You may have read or heard about the Dow Transportation average making new all time highs and wondered what was carrying it there; for the most part - the railroads. In MG-777 (Railroads) you will note 18 component stocks. 13 have a relative strength ranking of 70 or higher, 8 are 80 or higher and 2 are greater than 90. Excellent strength in this group, overall.

And you thought coal was a black, sooty, polluting commodity that no one wanted. Technology has taken care of that and technology may make this the most important commodity in the U.S. It's not fancy consumer electronics or an ipod, it's not the internet, but it is an important, very important part of our future.
Largest Changes Last Week

This Week's Economic Reports

Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.