The best deal in the commodity markets today currently yields a Treasury-beating 2.1% dividend... but it's so hated right now that very few people will buy today.

Chinese coal company Puda Coal (PUDA.PK) has fallen to 50 cents a share on suspicion that its Chairman (Ming Zhao) has sold American shareholders down the river, in so many words.

I've asked my friend George Stubos, an expert energy and commodity investor to shed some light on something that I'm not quite up to speed on just yet: Mongolia.

Do you own gold and silver?

Do you have investments in the stock market that give you the potential to profit from higher priced oil, natural gas and coal?

What about agriculture: do you have access to the inevitable sustained interest that people seem to have in eating food?

I hope you do. If you don't, it looks like you'll have an opportunity to buy some of these assets at sale prices during this broad-market down turn.

The International Energy Agency (IEA) recently released a report titled “Are We Entering a Golden Age of Gas?”

Fortunately, you can actually read this report for yourself. I’ve included the link to the report at the bottom of this email. (Warning: the report is nearly 130 pages long.)

I haven’t read the entire report myself, but I thought I’d go over two of the most interesting themes presented.

For one, the IEA projects that natural gas could rival oil usage on a Metric Tonnes of Oil Equivalence (MTOE) by 2035.

Take a look at this chart that plots world demand for different energy fuels:

I told you last week that I would be talking with an executive at a major copper fabrication company. Now, before I get in trouble with the SEC, it’s a private company, and this executive was unable to share any proprietary or secret information that would give me any kind of leg-up as an investor.

But he was able to answer a few of my questions about copper. As you know, I spend most of my time looking at producers, the folks who look for, mine and refine copper, silver, gold, coal, iron, etc.

So I thought it would be interesting to get a perspective from a direct consumer of one of those commodities.

Here’s a lightly edited transcription of our conversation:

Resource Prospector: Thanks for agreeing to answer some questions.

I'm just looking for a little different perspective on copper prices.

Your company obviously has to buy copper on the open market - since you're not a producer - but rather a consumer.

Who do you buy your copper from?

Copper Company President: We are a semi fabricated product producer so we buy our input from both scrap dealers and cathode producers such as Kennecott.

Shortly after publishing yesterday’s article “A Note to All Chinese CEOs”, I received a message of concern from a reader.

I won’t use this person’s name, but she expressed concern that I unfairly lumped her stock holding L&L Energy (Nasdaq: LLEN) in with Puda Coal (NYSE: PUDA) and other Chinese small caps accused of defrauding shareholders.

As I told this person yesterday, my intent in including LLEN with these other Chinese small caps wasn’t to defame it. To the contrary, from my perspective, LLEN seems to have all the right stuff: good properties, good coal reserves, solid customer bases, and as far as I can tell, competent leadership. In full disclosure, I’m neither long nor short LLEN, and we don’t plan on buying or selling LLEN in any of the Wyatt Research portfolios in the immediate future, to the best of my knowledge.

As you may know I’m also hugely bullish on coal, and since the Chinese now consume more coal than any other country, it’s a no-brainer to look for growth and value in the sector.

Unfortunately though, for this reader specifically as an LLEN shareholder and for Chinese small cap and large cap investors, no matter how great your company is, or how honest the leadership, how cheap on an earnings basis or how promising the story – you must understand that your Chinese shareholdings will likely suffer a similar fate as the other companies, for the simple reason that there seems to be an epidemic of fraud and uncertainty in the sector.

I’m a big believer in the Chinese growth story. As famed commodity investor Jim Rogers says, “the 19th century was the century of the UK, the 20th century was the century of the US, the 21st century is going to be the century of China."

Until recently, one of my favorite ways to play the inevitability of the China growth story was to buy a company called Puda Coal (NYSE: PUDA).

If you’ve been reading my letter for very long, you know what’s going on with coal in China. Coal burning power plants produce over 2/3 of the electricity in China, and a significant portion of that coal has to be imported to China from places like Australia.

That means that demand for domestic coal production has a margin of safety. For Chinese firms, domestic Chinese coal is cheaper, easier to access, and absent of political or regional conflicts or difficulties.

I particularly had interest in Puda, because the company produces metallurgical or coking coal. This type of coal is vital to the production of steel, and so, it’s vital to the production of high-rises and skyscrapers that seem to be popping up in China today like dandelions after a late-Spring rainstorm.

Japan's nuclear disaster probably set back the world's push toward nuclear-powered electric generation by years. Instead of huge nuclear energy expansion, which had been planned, we're likely going to see more nations stick with tried-and-true coal-fired electric plants, along with further expansion into natural gas.

Coal is one commodity that people love to hate.

Admittedly, the coal industry has had some issues, ranging from mine safety to potential links to global warming. Still, when it comes to generating the power that lights our homes and businesses (and often heats them too) coal continues to lead the way. Annual production is growing, according to the U.S. Department of Energy, and the country's exports also continue to rise.

As you can see, Arkansas, Montana, North Dakota and Alaska are the only states that will have a balanced budget this year.

Why is that? What makes those four states so special?

The first reason is demographics. There are fewer people, fewer cities, less infrastructure and fewer state employees in these states. Also, these four states tend to be Republican strongholds, so there are fewer entitlement programs, and generally, less popular demand for spending programs.

But those reasons are actually minor in comparison to the second, biggest reason.

You see, all four of these states produce more fossil fuels and resources than they consume.

Chinese President Hu Jintao meets with President Obama today in Washington DC.

The two presidents are supposed to have a private lunch and then discuss a variety of topics including trade, military, North Korea, Iran, human rights, the dollar, the yuan and the weather, no doubt.

As the east coast is being hammered with a wintry mix of sleet, freezing rain, snow and ice, you might expect the topic of coal to come up.

After all, a majority of electricity in the United States and China is provided by coal. And for the past few years, China has started to import coal - mostly from Australia.

As a result, China’s domestic coal companies are practically minting money. They can’t produce coal fast enough, because no matter how much coal they bring to market, there’s a near-guarantee that they’ll be able to sell it for top dollar.

They don’t have to worry about anything except for increasing production.

And now, with floods in Australia, the amount of coal being shipped to China has decreased substantially.

An area of Australia the size of France and Germany combined now sits under water.

200,000 people have been affected.

And 75% of Queensland's coal mines have been forced to shut down.

In a matter of days coal mines have already lost at least $1 billion in coal export revenue.

As the global economy rebounds, steel prices have jumped from $129 per metric ton to a range between $200 and $225 per metric ton. The pace of economic expansion, combined with continued under supply of steel suggests that steel will continue to trade $225 per metric ton and higher in 2011.

It’s disturbing to think that this country has come so far, to the point that our Secretary of State recognizes that our diplomatic efforts are SEVERELY hampered by our sovereign debt levels. If that’s not a signal to ditch the dollar for commodities, then I don’t know what would be.

However, this China problem is something that I think needs to be addressed publicly by our leaders - in an honest and straightforward fashion. I don’t want to hear anymore weak-sister threats, limp-wristed non-statements and dim-witted denials from Timmy Geithner or Ben Bernanke.

The problem isn’t that Ben Bernanke talks over our heads with his arcane banker vocabulary - where you say “quantitative easing” instead of “printing money.”

The problem isn’t even really the idea that being a Central banker is all that complicated. It certainly doesn’t have to be.

The problem is that Bernanke, and other central bankers cram so many lies, half-truths, obfuscations and red herrings into every single sentence they utter that making sense out of their words is like trying to sort out fact from fiction in a 10 car pileup - with 10 drunken drivers!

There’s a region of North America home to just 20 million people, but it’s also one of the top 20 biggest economies. It has some of the most massive - truly unmatched - amounts of resources like timber, coal, gold, oil, as well as renewable electricity-generation capabilities such as hydroelectric and geothermal power.

It already supplies much of California, Idaho, Washington and Oregon with water and electricity. And it’s home to three of the per-capita richest cities in North America.

I’m talking about an as-of-yet un-unified region known as Cascadia.

This region joins the Canadian and American Northwest into one single Pacific coast area encompassing the cities of Seattle, Portland and Vancouver.

For years - decades even - a small secessionist movement has kept the hope of a unified, independent Cascadia alive.

I'm writing to you this morning from a hotel in Washington DC where I'm attending an energy conference.

It's being hosted by the Association for the Study of Peak Oil and Gas (ASPO). I'm joined by two of my Wyatt Investment Research colleagues, Brit Ryle (a researcher, analyst and 10 year veteran of the investment research business) as well as energy analyst Gregor Macdonald, editor of Energy World Profits and all-around expert on the topic.

I've been urging readers to take a look at Gregor's research because he really knows his stuff, and because you need to be aware of what's coming down the pike. I sincerely believe energy is THE issue that supersedes all others.

For instance, we know that the Federal Government is broke, and that unemployment is high, and that we have crumbling infrastructure and a housing market in shambles. We have many problems to address - but fixing these issues won't be worth a jar of spit if we don't have access to affordable energy.

We might quietly scoff at the Toyota (NYSE: TM) Prius drivers - after all, the car only gets slightly better mileage than the average car in its class, so it's not all that special as far as environmentalism goes.

But don't scoff too hard, because it just might be that we'll all be driving hybrid cars in the not-so distant future.

You might be thinking that we simply don't have a model of fuel-source change for automobiles - so we really don't know what the future will hold - and whether our cars will be powered by natural gas, lithium-ion, or even solar power - or perhaps some combination.

And you're right - there's basically no model for automobile fuel conversion.

But there is a very robust model for home heating conversion.

Today there are at least as many heating technologies as there are fuel types, but 100 years ago, most people used coal and wood.

Are you sick of hearing about a double-dip recession yet? There seems to be a consensus that the recession is back, or almost back - and although I do so without relish, I happen to agree.

It's this kind of investment atmosphere that makes me want to crawl back to the basics. And nothing is more basic and important than coal. In the United States we get about half of our electricity generation from coal. China, the #1 largest consumer of coal gets about 70% of its electricity from coal.

Every time I mention coal, my wife inevitably gets a phone call from my father-in-law Ron, telling her to remind me, "Don't forget about the railroads."

And he's right, the railroads are vital to transport coal from mines to population centers.

According to the Energy Information Administration the railroads account for 64% of all domestic coal shipments in the U.S.

I’m generally suspicious of “green” energy investments - mostly because they seem to be political constructs rather than actually good opportunities. To differentiate: a good investment doesn’t require huge subsidies from the government in order to succeed. Right now, there are precious few alternative energy companies that can turn a dime of profit without massive subsidies from governments around the world.

For me, the investment implication of green energy has been to leave it out of my portfolio entirely.

But then yesterday, I received a very good question from reader Bill M. who brought up an interesting idea about actually shorting such companies:

“I have a question for you. Governments are spending a ton of tax dollars supporting all manner of "green" initiatives: wind, solar, ethanol, electric cars, curly-cue light bulbs, green roofs, LEED certifications, housing insulation, etc. etc. Governments have passed all sorts of quotas for renewable energy. All sorts of companies, from start-ups to GE (NYSE: GE), have attracted billions in government dollars and private investment to capitalize on this green wave. How does a cut-throat, uncaring, capitalist monster (like me) make money off what I expect to be the balloon popping on these over-inflated green companies who, when forced to compete on their own without their government sugar daddies, are going to sink like a rock? Are there funds out there making contrarian bets?”

While I would love to tell you that I’m bullish on stocks, the fact is that we remain in a secular bear market. For this reason, investors should heed caution, avoid speculation, and focus their investments on great companies in the commodity sector at cheap valuations.

Why? It’s very simple: commodities tend to do well during a bear market for stocks.

So what are the big certainties as far as I can tell? Sovereign debt problems aren’t going away, and the world’s politicians and central bankers are dedicated to the idea that they’d rather inflate their currency than default on that debt. They’re staking their currencies on the reputation that their currencies are still sound money. It’s a losing bet for central bankers and a boon for folks who trade in paper currency for real money: gold and silver.

But I’ve talked about gold and silver plenty over the past few weeks, and I’ve been neglecting a commodity that my father-in-law Ron Blackwell calls “the king of all resources.”

I have to say right out of the gate that I am extremely skeptical of investments in general. That’s the only way to be if you value your investment capital and hope to make it work for you in the markets. Being generous and trusting are good qualities in a boy scout, but not an investor. We need to be skeptical misers.

So when it comes to an industry that’s largely unprofitable, filled with failure, buoyed only by government grants and lots of hopeful talk from environmentalists, I’m wont to be even more skeptical, if that’s possible.

It’s been said before, but it bears repeating: wind and solar only work when it’s windy or sunny. You simply can’t rely on these two technologies as they are and get anything close to the electricity generation that’s required to power today’s infrastructure.

I’m confident that solar power will one day come into viability on a large scale, but there’s still the problem of what to do if the sun doesn’t shine. You hear environmentalists throw around the word “sustainability” a lot. It’s actually kind of humorous, because there’s NOTHING sustainable about getting our electricity generation from ANY of the current green alternatives.

Let me back up and define sustainability from an environmentalist’s perspective.

I hear lots of people saying that while commodities have had a nice run, the bull market in “stuff” is nearing its end. That begs the question: how long can a commodity bull market last?

It’s a valid and important question.

I’m a commodity investor, but not for sentimental reasons. As much as I value gold as a hedge against inflation, or oil’s ability to make my car go vroom – I invest in commodities for fundamental reasons – largely because I believe they are still cheap and undervalued from a historical perspective.

So, back to the question at hand. How long can a commodity run last?

Coal is awful. When the black rock burns it pollutes, spewing metric tons of carbon dioxide in the atmosphere every day. Most investors will tell you it’s a dead resource: “we’re moving towards renewables,” they’ll say. Coal is an anachronism; a blight. It’s an atrociously dirty energy source that will soon be relegated to the same place we put lead paint, asbestos insulation, and shoe-store foot x-rays – buried deep down in the ground.

In the news this week alone, there are two stories about coal miners trapped in mines – one coal mine in China, and one in West Virginia. There’s also a story about a coal tanker that ran aground on Australia’s Great Barrier Reef. My point is that coal is largely hated.

Not by me, of course. I like having a warm house during cold winters. I like air conditioning in the summer. I like cheap goods produced so cheaply, in part, thanks to inexpensive and plentiful coal. I also like the idea of buying stock in companies that mine such a cheap, hated commodity.

Oil is holding above $86 a barrel. And yet analysts still cling to the notion that oil should be driven by the U.S. economy.   

 

Here’s a quote from a report from Frankfurt’s Commerzbank:  We think that the oil price increase is only of temporary nature, since it is driven by liquidity rather than by fundamental factors…The recent increase in correlation between oil prices and equity markets, which has now reached unprecedentedly high levels underscores our view.   

 

I’m not sure how Commerzbank comes to the conclusion that oil prices are somehow not connected to fundamentals, but, instead, are connected to the stock market. But this stance is highly suspect. 

It was just last Thursday that we discussed "talking one's book" and made special mention of George Soros. If you missed that issue of The Daily Profit, talking one's book means advocating a belief in public that supports one's trading position, regardless of whether you actually believe it's true.

So it's interesting that Soros has a piece in today's Financial Times where he states that "The survival of Greece would still leave the future of the euro in question." He goes on to say that the aid package for Greece won't work for Spain, Italy, Portugal or Ireland.

Now, if we check the chart we can see that the U.S. dollar has been rallying. Part of the reason for this has been weakness of the euro due to debt problems in European countries.

The recent spike higher by the dollar was a response to the Fed's discount rate hike. And quite frankly, it looks unsustainable. I think we can assume that Soros is short the euro, and he may even be trying to cover that short right now, in anticipation of a rally for the euro.

Of course, a rally for the euro would send the U.S. dollar lower. That, in turn, will be good for U.S. stocks, gold, and oil.

It's quite a conundrum. America spent around $475 billion for foreign oil in 2008 (2009 numbers are not complete yet, although the total is certainly projected to be lower). It's clear that electric powered battery technology for cars would allow us to keep more U.S. dollars at home, improve the trade deficit and provide manufacturing and other jobs, too.

We have enough sunlight, wind, natural gas, and coal to generate the power it would take to transition to domestically supported power generation. The long-term benefits are obvious. Wind and solar installations have an upfront cost, but pay for themselves over time. Natural gas and even coal are domestic resources that can and should be leveraged to allow us to be more energy independent.

But getting to the point of energy independence is a difficult path.

It's easy to look at that $475 billion figure and say if we invested that into the power generation economy, we'd have efficient battery technology for electric cars and plenty of new manufacturing jobs.

However,...

"The air in China is so polluted in the country’s largest cities that I don’ t even bother to book hotel rooms above the 10th floor anymore because you can’t see anything," says global investing expert Tony Sagami, editor of The Asia Stock Alert.

According to the European Space Agency’s indisputable satellite images, China has the planet’s worst levels of air pollution. The World Bank, Sagami says, has said China is home to 16 of the planet’s 20 most air-polluted cities.

"One culprit is coal-powered plants, which provide around 80% of China’s electricity," Sagami says. And one company that can help with this pollution, the advisor says, is Fuel Tech Inc. (Nasdaq: FTEK), a small-cap company with a market capitalization of $439 million.

"Coal-powered plants translate into some very dirty air — and a very big opportunity for someone who can help clean up China’s extremely polluted air,” he says. “Further, governments around the world are focusing on reducing greenhouse gases.” That, he suggests, is where Fuel Tech comes in.

Fuel Tech provides boiler optimization, air pollution reduction and cleaning solutions. In simple terms, he says, Fuel Tech helps coal-powered utilities reduce the amount of pollution they throw into the air and operate more efficiently.

The Clean Skies Act of 2003, he says, requires that power utilities reduce their carbon dioxide emissions by 67%, mercury by 37% and nitrogen oxide by 25% by 2018. And, he says, there are 1,500 coal-fired power plants in the United States and the Edison Electric Institute estimates that the government will spend $40 billion during the next decade to clean up the air.

Shares of James River Coal Company (Nasdaq: JRCC) are treading higher today after the miner and seller of bituminous, steam and industrial-grade coal said it will ship coal in 2008 at a higher-than-anticipated price.

Specifically, the small cap said it will ship CAPP coal in 2008 at an average price of $54.76, above its previously agreed upon price of $47.14 in the third quarter. James River Coal said roughly 22% of expected 2008 CAPP shipments remain open to new pricing.

The company said in a press release that its 2008 guidance “reflects the recent strength in the coal markets.”

Neither company officials, nor analysts could be reached for comment.

Shares of James River Coal (JRCC) jumped 15.11%, or $0.81, to $6.17 at 12:52 p.m. ET. Shares of James River Coal have been trading in the range of $3.56 to $15.45 for the past 52 weeks.

Producing electricity is a dirty business; smokestack emissions from coal-fired plants are recognized as a major pollutant and source of global warming. Despite these issues, coal remains the primary fuel for global electricity production, mainly because of its low cost and abundant supply.

Coal produces about half of America’s electricity and is expected to produce 57% of electricity by 2030. Most of the coal burned in U.S. power plants contains substances that cause slag to form within boilers. Slag deposits, formed when ash produced during combustion melts and hardens, reduces the boiler’s efficiency and increases pollutants.

Most of the coal burned in India and China also forms slag, contributing to serious air pollution problems in those countries. The Chinese government is making pollution control a top priority of its new 5-year economic plan, a massive challenge given that China is opening the equivalent of two new coal-fired plants each week to meet its growing power needs.

U.S. environmental regulations are becoming more stringent and utilities are under pressure to curb emissions from their coal-burning plants. The Clean Air Act Amendment of 1999 required gradual reductions in noxious plant emissions on varying timetables. Over 1,000 utility and large industrial boilers in 19 states were affected by the 1999 mandate. This was followed in 2005 by the Clean Air Interstate Rule (CAIR), which extends emissions reduction requirements to 28 states beginning in 2009. CAIR affected an additional 300 utility and industrial broilers. In 2013, the Clean Air Visibility Rule takes effect. This nationwide initiative impacts an additional 50 utility boilers as well as hundreds of industrial boilers across multiple industries. 

New environmental regulations are also addressing groundwater pollution and increasing industry demand for leak detection and secondary containment piping systems. The Federal Resource Conservation and Recovery Act requires that oil and other potential contaminants be stored, handled and  transported via underground pipelines that have leak detection systems and secondary containment tanks. These regulations are causing oil and gas exploration and production companies, gas transportation and marketing companies and oil refineries to change how they transport their products.

Companies benefiting from new pollution controls and environmental regulations include MFRI, Inc. (Nasdaq: MFRI) and Fuel Tech, Inc. (Nasdaq: FTEK), both based in Illinois.

A recent U.S. Supreme Court ruling giving the Environmental Protection Agency authority to regulate green house gases will likely spur further advances in so-called “clean coal” technologies – that is, technologies that remove harmful greenhouse gases created during coal combustion. Two of the most popular clean coal technologies are 1) coal gasification, which involves converting coal to gas using a combination of heat, steam and pressure and stripping carbon from the gas before it is burned, and 2) supercritical technology, which uses extremely high temperatures to burn coal more efficiently and create more power using less coal.

The U.S. Department of Energy hopes to spur large-scale implementation of clean coal technologies by offering companies tax credits to help drive down development and implementation costs. The Bush Administration has authorized more than $1.65 billion in tax credits to support clean coal projects.

Despite the fact that coal-fired power plants are a major source of air pollution in the United States, coal would be a difficult energy source to replace. About 50% of this nation’s electricity is generated by burning coal. Electricity demand, according to the US Department of Energy, is forecast to rise 39% by 2030; coal expected to provide 57% of this electricity.

Coal is a favored energy source because it is both cheap and plentiful. The United States has more than 267 billion tons of coal reserves, about 27% of the world’s total reserves, and produces approximately 1.0 billion tons of coal each year which is used to generate electricity. Without coal to meet its energy needs, the United States would be required to import the equivalent of an additional ten million barrels of oil per day.

Most of the companies working on clean coal technologies are large utilities and integrated energy producers. These include Duke Energy, ConocoPhillips and Royal Dutch Shell. However, there are a handful of smaller energy companies developing clean coal technologies that are poised to reap the benefits of growing demand.