Friday, December 15, 2006


The Sage Does it Again

Don’t you hate it when you hear someone brag about the stock he or she told you about sometime ago (advice you didn’t follow) that went up umpteen percent? Well, I’m going to risk your condemnation by recounting a series of articles published herein a few years ago, although technically, the stock itself was not the point of the recommendation.

Exactly three years and two months ago in October of 2003, I published an article titled “Buffett and Ben—that’s as Good as it Gets, Part I.” Over the next months, this four part series of articles expounded on how the legendary investor, Benjamin Graham, (who was also a professor at the Columbia University School of Business) became Warren Buffett’s employer, mentor, and model, leading ultimately to Buffett’s enormous wealth (somewhere in the neighborhood of $45 billion) as the second richest man in the world.

On October 26 of this year, an unprecedented event occurred that suggested we revisit the subject. On that day, stock shares of Berkshire Hathaway, the company run by Warren Buffett, closed on the New York Stock Exchange at over $100,000—just one share was worth that amount. Berkshire Hathaway stock has been the highest priced stock for several decades, primarily the result of two factors: 1) Buffet refuses to split the stock, although several years ago he did agree to issue “B” shares worth 1/30 th the value of the “A” shares. 2) He has never declared a dividend maintaining that he can produce more value for his investors by investing that money than they could—and he has been proven right.

In addition to the favorable publicity regarding his company’s record setting price, Mr. Buffett has also been the recipient of significant accolades. His recent announcement that he was making the largest charitable gift in history (a commitment of more than $30 billion to the Bill and Melinda Gates foundation) stunned the charitable world for more than one reason. While totally characteristic for Buffet, unlike almost every other large donor, he declined to put his name on the foundation.

That selfless attitude probably also contributed to the further recognition afforded to the world’s second richest person, with his citation in the October 20 th issue of U.S. News & World Report as one of “America’s Best Leaders.” As part of the cover story, the magazine writes, “But Warren Buffett did not become one of ‘ America’s Best Leaders’ just for his investing prowess. Rather, he was selected for his leadership and influence in the greater corporate world. His commitment to sound ethics and principles, his self-discipline and consistency, his transparency in disclosing mistakes, his criticism of Wall Street fees and compensation of underperforming CEO’s, and his pleas for improving corporate governance—all had a salutary influence on the corporate community.”

To top off the recognition being afforded to the world’s second richest person, on November 20 th, CNBC ran a full one-hour TV program titled, “Warren Buffett, the Billionaire Next Door.” That must have set some kind of a precedent.

As for the bragging rights regarding stock prices referred to earlier, I must admit they are conditional upon what the starting date is for comparison purposes. The first article of the four part series on Buffett and Ben Graham was received by readers on or about October 15 th, 2003. On that date Berkshire Hathaway stock closed at $76,975. As of the date the article you are reading was submitted for publication (November 22 nd, the stock closed at $107,400 a 39.52 percent increase. (Not too shabby.) Over that same period the Dow Jones Industrial Average (DJIA) went form 9800 to 12,322, a 25.73 percent increase. It seems bragging rights may be deserved—but hold on a minute.

Let’s skip to the fourth article in the series that was received around February 15 th, 2004. On that date, the stock closed at $91,900, a startling 19 percent increase over a short four-month period. That again compared most favorably with the DJIA’s 8 percent increase. I’d like to attribute that impressive run-up to my articles, but that would be wishful thinking.

While these numbers are certainly a tribute to Warren Buffett’s acumen, the more recent history is not quite as favorable. Between February 15, 2004 and the present, Berkshire Hathaway has risen 16.86 percent, just slightly better than the performance of the DJIA at 15.9 percent. However, regardless of how you judge the productive quality of the numbers, the stock itself was never the focus of the articles. That can best be described by quoting from the last article in the series:

“The simplest and most effective way to duplicate Buffett’s future performance is to allow him to manage your money. That’s right! Instead of searching for the (elusive, and possibly non-existent) talented stockbroker, money manager, or mutual fund manager, you can hire Warren Buffett, acknowledged as the world’s best investor ever, to be your personal money manager (at no cost to you). How? Buy shares in Berkshire Hathaway. This is not to be construed as a recommendation or suggestion that your portfolio will benefit from this advice. However, if you believe that Buffett will continue to outperform the market averages, your performance will equal his. If the “A” shares are too pricey at some $90,000 per share, the “B” shares can be bought for under $3000 as of the end of January. I had disclosed my ownership of Berkshire Hathaway shares previously.”

I hope you get the point that if there is an implication that Berkshire Hathaway shares should be purchased, they are only a proxy for the ability to have Warren Buffett manage your money. You couldn’t do better—don’t you think?

More Florida Bashing

If there is one habit I abhor, it is the tendency of journalists to criticize their “elders”—that word refers to those who are indubitably smarter than these half-baked critics. This group of elders certainly must include politicians who are obviously brilliant since they invariably outsmart those who elect them. Doesn’t that prove the point?

So, when it comes to columnists who write on political affairs, especially those featured on the editorial or op-ed pages, all they do is criticize, criticize, and criticize. Also, consider some of the humor denigrating our illustrious electees to the Halls of Congress. Some of these so-called witty remarks go back to the 1860’s, radical comments that should have compelled Congress to restrict the freedom of speech segment of the constitution, thus avoiding this historic debacle. For example, this comment by Mark Twain has been allowed to fester for some 140 years: “It could probably be shown by facts and figures that there is no distinctively native criminal class—except for Congress.” Even if it’s true, that is shameful. Even more so was this Twain remark: “Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.” That should require a jailing.

Then there was Will Rogers. Did you know he was part Cherokee? For that alone he should have been deported. Instead, he became famous for saying, “Congress is the best money can buy.” C’mon now! Those K-Street lobbyists have to earn a living too. Don’t they?

Now we have Stephen L. Goldstein in the Sun-Sentinel making even more disparaging remarks, this time about politicians’ activities relating to our educational system. He writes, “Every Floridian owes the ‘Pottery Barn’: Republicans have broken our schools, but the rest of us get to pay their bill. The misguided education policies of Jeb Bush, Charlie Crist, and their supporters have academically crippled about 5 million public school students — and counting. Many have dropped out and will live off tax dollars. Others may graduate but will be permanently paid a pittance. Florida will wind up with a bevy of busboys, but a thimbleful of teachers.”

Doesn’t Goldstein ever eat out? Doesn’t he realize that busboys are a significant segment of Florida’s key resources? They are one of the critical reasons for the outstanding reputation of our renowned Florida restaurants. Busboys must be given credit for the fast clean-ups after diners finish their Early Bird specials, allowing for the wealthier full price patrons to overpay, and thereby contribute to Florida’s economic success. Obviously, Goldstein failed basic economics.

The Goldstein article is headlined, “Jeb [Bush] fails my ‘FGAT.’” The claim is made that “after nearly a decade of diddling, the grades are in and Jeb has flunked my FGAT (my Florida Governor’s Assessment Test).” He then claims that “based upon a mountain of federal stats, the just released Morgan Quitno Education State Rankings for 2006-2007 proves, without a doubt, that he and Republicans promised us top-notch schools, but delivered bottom of the barrel.” As if this wasn’t enough bashing, Goldstein then proclaims, “Under Jeb Bush, Florida public schools can’t even meet his brother’s federal education standards. According to the No Child Left Behind Act, each state has to make adequate progress in reading, math graduation rates, and attendance rates. But Florida had the second worst yearly progress in 2005.” Don’t you think information of that nature should be classified and removed from public scrutiny? Facts like that destroy public confidence in our legislators.

Then, Goldstein quotes from a report developed by Morgan Quitno, a company that evaluates statistics related to city and state information and provides the results to governments, libraries, and the media. Now get this: they have been doing this for only a mere 17 years, so how accurate can the information be?

The key to Mr. Goldstein’s failing is the information he cites in his evaluation of student scores reported by Morgan Quitno as they are calculated by ACT tests. These tests measure general education development and the ability to complete college work. Not trusting the numbers provided by Mr. Goldstein, I did my own research, going directly to the ACT website. Guess What! Sure enough, I found errors in Mr. Goldstein’s report. For example: Goldstein reports that in 2006, “the state average composite ACT score was 42 nd in the nation.” Ha! Ha! Mr. Goldstein, the correct ranking was actually worse at 44 th out of 50. Then, he says that on the Math score Florida was 37 th in the nation whereas we were really 39 th. The joke is on you Mr. Goldstein. To top it off he cites Florida high school students’ ranking on SAT scores. We were 49 th nationally in Math, 40 th in critical reading, and 48 th in writing.

Trying to explain these rankings, Mr. Goldstein uses the following rather lame excuses: “By national funding standards, Florida’s investment in public elementary and secondary schools adds up to down. In 2006, the average salary of Florida public school teachers sank to 31 st in the nation — down from 29 th in 2004. In 2005, we were 40 th in estimated per capita public school revenue, 32 nd in per pupil revenue, 47 th in per capita current expenditures, 40 th in per pupil expenditures.”

Now look Mr. Goldstein, if these numbers are truly accurate, how do you explain that our college football teams are always top ranked? And tell me this — which rankings are really more important, the student scores, or the college football rankings? Gotch’a on that one Goldstein, didn’t I? Actually, we could improve the football rankings even further except for one minor problem — many potential football stars are excluded from entering college for the trivial reason that they dropped out of high school. In fact, in 2005, Florida’s public high school graduation rate was 50 th in the nation —worse than in 2003 when it was 47 th.

You know what? Don’t you think our governor (and his like-minded friends in the state legislature) deserves some sign of appreciation for the educational performance record we have attained. So, are you ready? All together now, let’s give our governor a really loud — You’re doing a great job, Jebbie!!!

Friday, December 01, 2006

Ethanol or Hybrids? — The Real Story, Part II

There is a general assumption that Americans are a patriotic bunch, perfectly willing to make considerable sacrifices to lifestyle and even pecuniary interests in order to insure long-term benefits to country and humankind. If that were indeed the case, we all would 1) be driving hybrid cars, 2) clamoring for that wondrous combination of ethanol and gasoline called E85, a mixture of 85% ethanol and 15% gasoline—the latter being the politicians’ solution to our dependence on (indeed addiction to) imported oil.

The Politicization of Ethanol

As indicated in Part I of this series, it is widely acknowledged that Wayne Andreas, the former chairman of Archer Daniels Midland was most instrumental in advancing the concept of ethanol, particularly corn based ethanol, as the best substitute for our nation’s dependency on oil imports. It was not his personality that endeared that concept to the politicians; instead that illustrious group slavishly succumbed to the lure of his generous campaign contributions (that were more than enough obviously, to overcome the scandal that tarnished the reputation of that same company). A more recent event however, serves to cement the notion that political self-interests easily trump the highest-minded political principles.

The unmistakable evidence is based on a mid-November 2006 announcement made public by Senator John McCain’s staff to the effect that he intended to form an exploratory committee for a possible presidential campaign. The more pertinent part of that message indicated that he had not yet made up his mind whether to run, but is giving it strong consideration. Well, here is a wake-up call—he is definitely going to run. Why am I so sure? As they say, “the proof is in the pudding;” although in this case “the proof is in the ethanol.”

In its October 31 st issue, Fortune magazine stated the following: “ Iowa, home to the first-in-the-nation presidential caucus, is the biggest corn-growing state in the country, and in Iowa ethanol isn’t just another campaign issue. It’s the cash cow, the golden goose and the fountain of economic youth all wrapped up in one.” The article emphasizes, “Mike ‘Heckuva job’ Brown would stand a better chance of winning an election in New Orleans than an anti-ethanol candidate would of winning Iowa’s caucus.” (As I was writing this, Dick Armey the former Republican House leader essentially said the same thing on TV.)

With that in mind, Fortune commented on John McCain’s mid-term election campaign stops, ironically titled “Straight Talk Express” (that might have been better termed “Flip-Flop Express.”) It cited McCain’s seemingly adamant argument in the past that, “government support for ethanol actually raises gasoline prices. He has claimed ethanol does nothing to make the U.S more energy independent. He has even questioned the science behind making fuel from corn — contending that ethanol provides less energy than the fossil fuels consumed to produce it.”

In fact, in November of 2003, McCain stated, “… thanks to agricultural subsidies and ethanol producer subsidies, it is now a very big business—tens of billions of dollars that have enriched a handful of corporate interests—primarily one big corporation, ADM. Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality.” (My emphasis)

Indeed, honestly held principles stated in this forthright manner are what caused Independents and even many Democrats to believe that John McCain was a different type of politician, one whose designation as a straight talker was warranted. However, a speech he gave last August (plus his shift in a number of other issues) disabused most of that notion. It is obvious that his recognition of Iowa as a major factor in a run for the White House nomination has forced him to make a 180-degree change in his ethanol focus signaling that he is really just another archetypical politician at heart. Here is his new mantra as explicated in (where else?) Grinell, Iowa: “I support ethanol and I think it is a vital, a vital alternative energy source not only because of our dependency on foreign oil but its greenhouse gas reduction effects.” With that statement, McCain went from “straight talker” to “double talker” — and John Kerry was called a flip-flopper.

Now, before I am accused of a prejudice against Republicans, that is not the intent. It is an attempt to convince readers that the promotion of corn ethanol as a panacea for our oil problem has become so politicized on behalf of special interests that it has developed into a tidal wave that probably cannot be stopped. As further proof of at least a semblance of impartiality, two celebrity Democrats, Hillary Clinton and Joe Biden both with presidential ambitions, have also flip-flopped on their ethanol stances, undoubtedly in anticipation of the Iowa caucus. Regardless of political affiliation, this type of conduct reminds me of Ronald Reagan’s comment that “It has been said that politics is the second oldest profession. I have learned that it bears a striking resemblance to the first.”

Money is the Catalyst

The International Institute for Sustainable Development (IISD) launched the Global Subsidies Initiative (GSI) in December 2005 to put a spotlight on subsidies—transfers of public money to private interests—and how they undermine efforts to put the world economy on a path toward sustainable development. Its web site explains that “Subsidies are powerful instruments. They can play a legitimate role in securing public goods that would otherwise remain beyond reach. But they can also be easily subverted. The interests of lobbyists and the electoral ambitions of office-holders can hijack public policy.”

The Institute then reveals that one of its studies has determined that the total cost of tax breaks and subsidies provided to the production of ethanol in 2006 in this country is in the range of $5.1 billion to $6.8 billion. That’s a heap of taxpayer money, but if it really could solve the problem of oil dependency it would be worth every penny—however, what if ethanol, more specifically “corn” ethanol cannot attain that objective, or come anywhere close to doing so?

Ethanol Mania

There is a veritable modern-day gold rush driving the construction of ethanol plants throughout the mid-west, California, and even the east coast, all, at the moment, to be fueled by corn. Hedge funds, private equity firms, venture capitalist, and the likes of Bill Gates and Richard Branson are jumping on the ethanol wagon. There are already over 100 ethanol plants functioning in the United States, and within the next six to nine months over 40 more will go into production, at which point the United States will surpass Brazil as the largest ethanol producer. (Actually, we are already the largest producer of corn-based ethanol since Brazil uses only sugar as its base.) The new plants will push total ethanol production to some 5 billion gallons a year, a 30 percent increase over current production. Much of the excitement is the result of Congressional legislation mandating that refiners increase their use of ethanol to 7.5 billion gallons by 2012, an amount that will be surpassed within the next year or two—of course, the $.51 a gallon subsidy doesn’t hurt either.

Is Ethanol the Panacea?

Proponents of ethanol maintain that it is a renewable fuel that can be created from agricultural feedstock, can be produced domestically, results in less pollution, and is thus environmentally friendly. Critics however, contend that these views are much too simplistic, and ignore a number of negative factors. The most contentious is whether or not ethanol produces more energy than is used to produce it. One cartoon on this subject has the first panel showing a large harvesting machine dumping corn into a truck with script saying, “the corn farmer— America’s great hope to cure our addiction to oil.” The next panel shows a driver sitting in another truck and the words, “Why is this man smiling?” The third panel discloses that the smiling man, an Arab, is sitting in a huge oil truck pumping oil into the harvester—and the text answers the smiling question—“Because it takes 1.29 gallons of fossil fuel to produce one gallon of ethanol.”

That statistic was developed by David Pimentel, a professor of ecology at Cornell University who has been studying grain alcohol for 20 years, and Tad Patzek, an engineering professor at the University of California, Berkeley. They co-wrote a recent report that estimates that making ethanol from corn requires 29 percent more fossil energy than the ethanol fuel itself actually contains.

That represents one school of thought agreeing that more energy in the form of fossil fuel is dissipated in the processing of ethanol than is created. The ethanol lobby however, claims there's a 30 percent net gain in BTUs from ethanol made from corn. However, one primary fact not disputed is that ethanol as a transportation fuel, will provide from 20 to 34 percent lower mileage than gasoline.

There are also serious logistic problems since unlike oil and gasoline, ethanol cannot be shipped through pipelines because it picks up water and other impurities. That necessitates transport by trucks, trains, or barges (using more oil to do so), thereby creating a much less efficient distribution system. Because ethanol is also corrosive, gas stations will require special stainless steel storage tanks at an estimated cost of $200,000.

An article published this June in The New York Times quoted Warren R. Staley, the chief executive officer of Cargill (a multinational agricultural company that is a competitor of ADM), as saying, “…this is a bit like a gold rush. There are unintended consequences of this euphoria to expand ethanol production at this pace that people are not considering. “ The Times wrote, “There is concern within the agricultural and food industries that ethanol at its current pace of development, could strain food supplies, raise costs for the livestock industry, and force the use of marginal farmland in the search for ever more acres to plant corn.”

The Biomass Alternative

As an indication of how farfetched it is to believe that corn-based ethanol could lead to oil independence, it is calculated that even if every acre of current corn growth was used for ethanol, it would replace only 12.3% of the gas used in the country. The more effective solution is celullosic ethanol made from crop residue, wood waste, municipal solid waste, and high biomass dedicated energy crops such as switchgrass. The latter is particularly useful because of its tolerance to drought, a minimal requirement for fertilizers (unlike corn), and its potential for high fuel yields. In fact, the amount of energy produced by switchgrass not only produces triple that of corn, but one acre of land planted in switchgrass produces four times the cellulosic material planted in corn.

Unquestionably, a biomass material such as switchgrass is far superior to corn in the production of ethanol. However, before full commercialism of biomass ethanol can be brought to fruition, a major stumbling block must be overcome. Scientists are struggling to create the perfect enzyme, a catalyst that will convert cellulosic material into fermentable sugars. Several companies are working toward that goal, but one, Iogen Corporation, headquartered in Ottawa, Canada is planning its first full scale facility, based on the use of an enzyme called Eco Ethanol. Partners in this enterprise are high-powered names such as Royal Dutch Shell, Volkswagen, and Goldman Sachs. Despite a commitment of $130 million, production of ethanol in this plant will be will amount to only 40 million to 50 million gallons annually, whereas the norm is 100 to 200 million gallons.

To place the potential role of ethanol in reducing our addiction to oil in perspective, according to a recent article in the Chicago Tribune, “the Department of Energy has established a goal of supplying 30 percent of the nation’s need for fuel for transportation with ethanol by 2030.” So, despite all the politicians’ efforts to convince the country that ethanol is the ideal solution to oil independence some 25 years from now we will still depend on oil for 70 percent of our fuel needs—unless another more timely and effective solution can be found. Next month’s article will discuss what might be the Holy Grail of future transportation needs—the Plug-in Hybrid.