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Alternative energy is clearly the next buzzword, but aside from the potential positives,there are significant negatives as well lots of potential pitfalls.
While the press has a field day, behind the scenes there are still many questions to beanswered and major pitfalls for investors to ponder before taking the plunge.
Although ethanol is clearly able to do the job, given the fact that Brazil uses ethanol topower 50% of that country's cars, there are still questions beyond its cost that are worthexploring.
According to the Wall Street Journal: "As the rush to build ethanol plants continuesin the U.S. -- there are 114 in operation, 80 under construction and many more in planningstages -- clashes with locals are multiplying."
In Wisconsin, a small town of 800 people is trying to shut down the ethanol plant thatprovides jobs and a potential economic hub for the small town.
According to the Wall Street journal: InCambria, Wisconsin "a 54-year-old stay-at-home dad has led a dogged battle to preventa corn mill from building an ethanol plant up the hill from the village school. Concernedabout air pollution, the water supply and the mill's environmental track record, Mr.Mueller and his group, Cambrians for Thoughtful Development, have blitzed the village's800 residents with fliers, packed public meetings and set up a sophisticated Web site.
In fact, the situation has become very heated and the whole matter is headed to federalcourt. According to the Journal, Cambria is not alone as "Fights have broken out inIndiana, Illinois, Missouri, Nebraska, Kansas and several towns in Wisconsin. Opponentscomplain that ethanol plants deplete aquifers, draw heavy truck traffic, pose safetyconcerns, contribute to air pollution and produce a sickly-sweet smell akin to that of abarroom floor."
Furthermore, the disputes are spreading on a global basis. For example "experts hotlydebate whether renewable fuels offer a panacea for the world's energy needs. As withethanol derived from corn -- which slurps up water -- many alternative fuels are creatingenvironmental problems of their own. In Indonesia, Malaysia and Canada, forests are beingslashed for energy-yielding crops or other unconventional fuels. In India,environmentalists say, water tables are dropping as farmers boost production ofethanol-yielding sugar."
The local townspeople in Cambria are building their resistance based on the risk to healthand the environment from an ethanol plant being built by a company who has had a spottyenvironmental record.
According to the Journal: 'Sarah Lloyd, 35, a doctoral student in rural sociology wholater got herself elected to the Columbia County board, says she initially thought ethanolwas a good thing. But she concluded that small Midwestern towns were being asked to acceptwhat amounts to new chemical plants in their midst in the national drive to clean upbig-city auto emissions and reduce dependence on foreign oil. "We were really beingasked to take one for the team," she says.'
John Mueller, another of the town's residents leading the opposition, discovered that thecompany operating the local corn mill, which is interested in building the ethanol plant,Didion, has had problems with the Environmental Protection Agency in the past.
The Journal reported: "In 2000, Didion had paid $107,500 to the EPA to settleallegations that the company expanded a grain-barge loading facility without obtainingpermits or controlling particulate emissions. Didion's (Dale) Drachenberg (vice presidentof operations) says the expansion amounted to some portable equipment brought in to helpmeet peak demand at harvest. The company settled rather than go through costlylitigation."
And this is not the only issue that Didion has had. "Didion also had expanded itsCambria milling facility without proper permits, according to a 2002 notice from the DNR.By adding to storage capacity and increasing the amount of grain processed, the plant hadcome under tougher emissions rules, the notice said. The infraction was considered a HighPriority Violation under EPA rules, carrying penalties of $25,000 per violation perday."
Most interesting is the latest round of the saga. Didion bought a parcel of town justoutside the Cambria city limits, but near its mill, and began to build the plant.
Agai, it ran into problems. 'Didion broke ground on the plant in October, and was soonembroiled in more controversy. On Dec. 20, the state issued a notice saying Didion hadn'tabided by a new air permit covering both the mill and the ethanol plant. "There was amisunderstanding between my engineer, the DNR and Didion," Mr. Drachenberg says, overhow much Didion could use the corn drier at the grain mill before the ethanol plant cameonline. The company has applied for a revised permit and scaled back work to comply withthe current permit.'
Conclusion
The Cambria story is familiar, as it pits big business against a small community. Bigbusiness is trying to make money, and the community is trying to preserve its environment.
This time, though, it's a different twist on the story. Ethanol is being pushed in a bigway by the Federal government as an alternative fuel, and has a large global following aswell as a successful record in Brazil.
Yet, this remains a complicated story, where the crux of the problem is not so muchwhether the plant will get built in Cambria, but how the plant will be built.
The environmental impact is important. But so are the economic ramifications.
As the Journal notes: "Cambria certainly looks like it could use an economic boost.Two canning facilities run full-tilt around harvest time but slow considerably in winter.The downtown strip features a café, two bars (one called The Dump), a bank, a barbershopand a furniture-maker. But a supper club, tattoo parlor, grocery store and sandwich shopare shuttered. Many residents work in Madison or other nearby towns."
For investors, ethanol had a nice run in 2005, moving in lockstep with oil. Since then,though, as the chart of Pacific Ethanol (above) shows, it has not recovered as well as itstraditional and crude counterpart.
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The Wilderhill Clean Energy Index is trying to hold up above 180, and is showing somestrength.
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Crude oil prices are back above $62.
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The Philadelphia Oil Service Index (OSX) has moved above 200.
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The Amex Oil Index (XOI) moved above 1200, a major move.
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Momentum Is Building
The stock market has been steadily building momentum, with the broad market, and thesmaller names acting better than the blue chips. This is often a sign that a rally has thepotential to last for some time.
Yet, the improvement is well spread out, as the major indexes moved back above their 50day moving averages, which now become key support. Volume has been excellent on the rally,and the NYSE advance decline line has made another new high, as the number of stocksmaking 52 week highs is expanding.
It's a good time to be carefully putting money to work in stocks that are showingexceptional strength. Visit our individual stock and ETF timing models for more details.
If history is a guide, the market is not out of the woods by any means, and it will takeseveral weeks before the recent damage gets sorted out.
Long term support for the Dow is near 11,800, and for the Nasdaq is near 2284. The S &P 500 has support at 1345.
For now, we'll stick with our forecast. From a longer term stand point, based onhistorical trends, this should be a positive year for stocks, given the fact that it's thethird year of the Presidential Cycle, which calls for rallies in the third and fourthyears of a presidency.
Our long term forecast remains upbeat, unless the major indexes fall convincingly belowtheir 200 day moving averages.
What To Do Now
Start to build positions in strong stocks. See our lists for ideas.
Remain cautious and be prepared for false starts and continued volatility. Although aseach day passes, the chances for a stable rally increase.
Visit all our individual sections, both our ETF and individual stock picks daily for newideas, and changes to open positions.
Be very methodical about monitoring portfolios, adhering to trading rules, and ratchetingup sell stops is clearly still here.
Second guessing decisions, and hoping that things will turn out o.k. in the long haul, isthe recipe for disaster at a time like this in the market.
Check all our sections daily. See tech, biotech, Fallen Angels, and timing systems forthe latest adjustments. Our ETF trading systems for energy, Spyders, Small Caps, andtechnology have also been updated.
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Sentiment Summary:
Options Are Mixed
The put/call ratios are mixed with the overall put/call ratio remaining fairly bullish,but the index put/call ratio falling to neutral.
It's difficult to make sense of this. But more important is the fact that neitherindicator is flashing a sell signal.
The CBOE Put/Call ratio checked in at 0.94 on 3-22. A consistent string of low readingscan be a sign of excessive optimism and often signals a top in the markets. Readings below0.5 are of concern, but not as serious as readings below 0.40. Readings above 1.0 arebullish. The numbers cited here are meant to be evaluated on a closing basis.
The CBOE P/C ratio for indexes checked in at 1.34. Numbers above 2.0 as the market sellsoff, often lead to rallies. Readings below 0.9 suggest too much bullish sentiment, just asreadings above 2 are usually required to mark major bottoms.
The VIX and VXN had readings of 12.19 and 17.20. These readings are starting to pull backin a hurry. A fall near or below 20 on VIX and 30-40 on VXN is considered negative, a factthat is usually confirmed when the volatility indexes begin to rise. Readings above 40 and50, respectively, are often signs that a bottom may be close to developing.
NYSE specialists were heavy sellers of stock in the week ending 3-9, for the second week.At that time the market was starting to weaken. We'll see of this improves over the nextcouple of weeks. Specialist short selling remained at very low levels, though. Risingshort selling from specialists is usually a very bearish sign.
Market Vane's Bullish Consensus was at 69% on 3-23 again starting to climb. The UBSsentiment index fell to 90 in February after registering a reading of 103, a downrightscary number, and the highest one we've seen in January.
Market Moves
Oil Stocks Reverse Down Trend
The Amex OIl Index (XOI) has rallied above 1200 with Exxon Mobil (NYSEL XOM) confirmingthe move.
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Oil stocks have been improving significantly of late, preceding a move by the price ofcrude itself, and once again holding up the notion that the stocks usually lead thecommodity.
As oil prices increase, so does the margin potential for oil companies, especially thosewith refining and retailing branches.
Exxon fits that bill quite nicely, and remains the leader and bellwether. The stockremains cheap at 10.5 times earnings, although its 1.81% dividend is not particularlyattractive.
Revenues and earnings, although likely to remain significant, are dependent on the priceof oil, though. Any break in crude that is extended, will likely lead to significantearnings problems for Exxon.
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Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
Chart Courtesy of StockCharts.com
Small stocks are showing some relative strength.
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