Investing in the Future

There is a message to Detroit from Americans who participated in the Cash for Clunkers program: don’t make any more Ford Explorers, F-150s or Jeep Cherokees. These were the most traded-in clunkers. 

Actually, the F-150 truck is pretty useful, so maybe we can just lose the Explorers and Cherokees.  
Anyway, the clunkers averaged 15.9 MPG. New cars sold –and there are 690,000 of them– averaged 24.9 MPG. That’s a 58% improvement in fuel efficiency. Japanese companies won the sales battle, with 41% of cars sold, compared to Detroit‘s 39% sold. The single most popular car was the Toyota Corolla, followed by the Honda Civic, Toyota Camry and Ford Focus.  
All four cars are made in America.
*****It’s easy enough to call the Cash for Clunker program a success because it helped struggling automakers, autoworkers and dealers, while putting more fuel efficient cars on the road. In fact, I did just that on Tuesday, there is a bigger question here – why? 
Why invest taxpayer money into companies that were supported by housing bubble spending over the last few years? And furthermore, why invest money in a dead-end industry?  
Cheap oil is gone, whether Detroit and Washington want to admit it or not.  
Now, I’m not saying that automakers should fade into oblivion. New cars based on whatever alternative energy technology proves most marketable will come from GM and Chrysler and Ford. But the $3 billion shot in the arm for automakers is not really an investment in the future. It’s a temporary lifeline. 
*****And while I’m on the subject, why spend billions on improving highways and bridges when the fleet of cars in the U.S. is very likely at a peak? Why not build a bullet train on the eastern seaboard? I’d happily take a high-speed mag-lev train from my home in Vermont to my DC offices rather than fly. And the long-term benefits of such an investment would surely prove themselves in a wide range of areas.  
Again, I’m not suggesting we simply ignore pressing infrastructure needs. Cars and highways will be with us for some time. And at the present time, using stimulus money to put people to work and fix a few bridges makes sense.  
But there can be no doubt that we are at the outset of a transition away from fossil fuels. And failing to invest in alternatives and focusing stimulus money on maintaining the status quo is dangerously short-sighted.
*****Right now, there’s an interesting situation developing in the energy markets. In terms of how much energy they produce, the spread between natural gas and oil prices is around 6 to 1. Given the ease with which oil is converted to fuel and the degree to which infrastructure has matured to accommodate oil, oil has typically traded at 8-10 times the price of natural gas. 
But recently that ratio has ballooned. Oil is currently trading 25-28 times the price of natural gas. Yes, some of the discrepancy has to do with the decline of the US dollar. But that doesn’t explain the range in natural gas futures contracts.  
The spot price for natural gas is just below $3 mbtu. For October delivery, it’s $3.25. For January delivery, the contract price jumps to $5.25. That’s significant. Traders are saying an asset worth $3 right now, will be worth 75% more in 4 months.  
No doubt, part of that price differential has to do with storage costs. But still, the 75% difference suggests to me that natural gas prices may be near a low. And not only that, but natural gas should be an important transitional energy source as we move away from oil. It’s certainly cheap. You may recall that T. Boone Pickens was advocating natural gas as a transitional fuel source before the financial crisis blew him out of the water.  
I’m about to add a natural gas stock to my Top Stock Insights advisory letter. Click HERE to find out which one.  
Until tomorrow, 
Ian Wyatt
Daily Profit

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