The Rude Awakening
Laguna Beach, California
Thursday, August 17, 2006 ----------------------------------- - Powering the jets and tanks of the future - one technology
leads the way,
- Harking from Down Under, a strategic investor relays some
important insight,
- A note for contrarian investors on power profit opportunities
and plenty more…
----------------------------------- Eric Fry, reporting from the land of soymilk and organic honey... In yesterday's edition of the Rude Awakening, we featured a few
ruminations about the condition of our nation's infrastructure. Today, we
bring you one more rumination - this one from Dan Denning, editor of the
Daily Reckoning's Australian edition... "Maybe the national infrastructure won't be repaired or replaced," Dan
suggests. "It'll simply crumble and state governments or private sector
companies will focus on the critical projects. "Think about the scale of national industrial infrastructure: ports,
waterways, canals, bridges, roads, interstate highways, airports, the air
traffic control network, water grids, electric grids, gas and oil pipelines. "That's a lot of fixed capital investment. Not exactly the kind of thing the
country has been doing lately. Residential real estate we've got covered.
But the Interstate Highway network? No way. "Even the highway bill, which is rightly lampooned for the 6,371
earmarks to various pork projects, amounted to about $31 billion dollars.
That's a lot of money, of course. But in Federal Budget terms, it is nearly
an afterthought. It's less than a tenth of the budget for the Department of
Defense. It's even less money than Warren Buffet gave to Bill Gates.
Yeesh. "The only enduring icons to Rome, ironically, are its roads, aqueducts,
and...walls. In the early days, the Republic had its priorities right. You
can find those sturdy icons all over Europe. Heck, when I worked in Paris
I walked up the Rue St. Martin...which was straight as an arrow because it
was built on top of an old Roman North-South road through the city. "Before they were conquerors, the Romans were builders. In fact,
engineers at the Department of Transportation say that Roman concrete
from 2,000 years ago is superior to the concrete we produce today.
So much for progress! And if you've ever been to the Pantheon you'll
know what I mean. "The foundations of Empire are an efficient transportation system that can
get armies and commercial goods and food and water from one place to
the other quickly, at a relatively low cost. It's almost a logistics story. And
a building materials story. "While we've invested in telecommunications infrastructure and the ability
to moves bits and bytes (a much higher return on capital), we've under-
invested in our fixed capital assets...and now we may not have the
resources to build those networks up again. "It's actually quite surprising if you think about how much we take for
granted certain things...like bridges. But imagine how difficult life would
be in Manhattan without them...or in Paris...or getting freight across the
Mississippi. "One interesting thing I found...most heavy transport in the U.S. is still
done by rail and truck. Too expensive to do by air, of course. And as our
largest trading partners are Mexico and Canada (with China a fast third),
there are some interesting and critical trading posts that see most of the
freight and rail traffic from Canada to the U.S. and from Mexico to the
U.S. See image attached. Detroit, Laredo, El Paso, Port Huron, Buffalo.
Might want to keep those names handy. They could be important later." Also from the mind of Denning, allow us to share a couple of ideas about
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By Eric J. Fry By 2030, America may have exhausted its supply of dollars and credit -
and 19-year olds - to conduct its wars. But it may not have exhausted its
supply of domestic energy sources. If coal-to-liquids technologies fulfill
their early promise, the U.S. Air Force will have more-than-enough fuel to
power its jets, even if it has less-than-enough pilots to fly them. As Dan Denning explained during his entertaining presentation at last
month's Agora Wealth Symposium, the U.S. Armed Forces are so keen to
secure their future fuel supplies that military think tanks are busily
devising ways to achieve complete energy self-reliance. By 2030, these
think tanks hope to run nothing but homegrown fuels in our M1 Abrams
tanks. 
If coal-to-liquid (CTL) fuels are to power the next generation of fighter
jets, Denning reasons, they are also likely power the next generation of
Ford Fusions. Furthermore, given America's 250-year supply of coal,
developing CTL technologies would seem more like an imperative than a
luxury. "You should take a look at Syntroleum [Nasdaq: SYNM]," Denning
suggested to the Symposium attendees, "The company is making the
synfuels that will help the U.S armed forces retain their huge strategic air
advantage for a while longer." Two months ago, Syntroleum announced a contract with the Department
of Defense (DOD) to supply 100,000 gallons of its synthetic fuel, "as part
of a large program aimed at long-term prospects for the domestic
manufacture and supply of synthetic aviation fuels from FT [Fischer-
Tropsch] plants," a company press release explained. "The government is
currently seeking up to 200 million gallons of alternative synthetic
aviation fuel in 2008." Unfortunately for Syntroleum, this one contract will not reverse the
company's money-losing legacy. But Denning suspects this one contract
might BEGIN to reverse the legacy. Also Syntroleum has never turned a
profit, the company is at least on track to REDUCE its losses. According
to the expectations of Wall Street analysts, SYNM will lose only about 55
cents a share in 2007, compared to an expected loss of 88 cents a share
this year. Clearly, therefore, an investment in SYNM relies more hope than
substance. Even so, Syntroleum's CTL technology inspires a very
substantive hope. Denning also like Rentech Inc. (AMEX: RTK), a company whose
proprietary CTL technology converts coal into diesel and jet fuel. Peabody
Energy recently struck a joint-venture with Rentech to build and operate
CTL plants in the western United States. Like Syntroleum, Rentech has
been losing money for several years. Unlike Syntroleum, RTK seems
likely to achieve profitability much sooner. The only Wall Street analyst
who covers the stock, expects RTK to book a profit of three cents per
share in 2007. Given the uncertain and distant profitability of Syntroleum and Rentech,
timorous investors might be more inclined to invest in the coal side of the
CTL story, rather than the liquids side...at least for now. Most coal
companies are enjoying record profitability, thanks to record-high coal
prices. If, therefore, CTL plants start popping up across the country, the
price of coal should remain relatively strong. 
Despite the enviable present and prospective profitability of coal
companies, however, their share prices have stumbled badly over recent
weeks. The Bloomberg Index of U.S. Coal Stock has dropped more than
30% since early May. Contrarian investors, take note. [Joel's Note: Whether it's a move toward coal to liquid, oil shale, natural
gas or any other source of power, it doesn't take a genius to work out that
the means by which we procure today's fuel will soon be out of date (and
supply). It is this shift away from conventional oil extraction that will
offer an opportunity for some investors to line their pockets with dough.
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