The Hybrid Car Revolution

Although ethanol has been taking over the news as the U.S.’s savior from dependence on foreign oil, there has been another alternative energy revolution taking place. Quietly, the hybrid car has improved its technology and is poised to make a major breakthrough. Greg Guenthner explains how investors can take advantage – and make some pretty nice profits.

Our fearless leaders here in the United States have perfected the art of passing off old ideas as new-and-improved solutions to the country’s problems. This holds especially true when it comes to our energy policy.

Take ethanol, for instance. To hear the government tell it, the plant-derived fuel is the cutting edge of alternative energy.

What the government neglects to mention is that ethanol was also the choice fuel for some of the first engines. In the 1820s, Samuel Morey used an ethanol blend in his experimental internal-combustion engine. Steam power, however, kept ethanol an obscure fuel until 40 years later, when the internal-combustion engine took off thanks to a more efficient design by German inventor Nicolaus Otto.

As engines became more complex, ethanol got even more exposure. Henry Ford even designed his Model T to run on the stuff, declaring it "the fuel of the future."

But that future was put on hold. America discovered a cheap domestic oil supply, which competed with ethanol and became our preferred fuel, despite ethanol’s early success.

Now our leaders are starting to think Henry had a point. It took them only 100 years to realize that oil reserves were finite, and that something would have to take over when the crude stopped flowing.

So once again ethanol is in the spotlight – being called a revolutionary new fuel and the long-awaited solution to our oil dependence. Samuel Morey is probably turning over in his grave.

There is a twist, however. Despite its long and proven history, ethanol might not be the energy savior it is being made out to be. People have raised valid questions over ethanol’s true energy output and overall effectiveness as a cheap, efficient alternative to gasoline.

Even after 180 years of development, ethanol still has a lot of kinks to work out. The truth is, America doesn’t need ancient energy solutions disguised as new ideas. We need truly revolutionary ideas – fuels and engines that are truly cutting edge…and that can provide clean, safe and reliable energy for the planet’s 6.6 billion people.

Right now, there are dozens of tiny companies working to do just that. And while some of their ideas are too crazy to even work, a precious few seem to be onto something. Unfortunately, these innovations are so new, they don’t have the same kind of overexposure that headline-grabbing "solutions" like ethanol have. But if just one idea proves to be practical and affordable, the profits these companies could see are almost beyond belief.

One of the most recent innovations to cut our dependence on foreign oil has been the hybrid engine. It’s also been slow to catch on.

According to the Electric Drive Transportation Association, about 228,000 hybrid electric vehicles have been sold so far this year in the U.S. That’s no great feat for a country that usually sells 1-1.5 million cars and trucks every single month. However, that’s all about to change…

Toyota (NYSE:TM) is a leader in hybrid technology, with more than 1 million hybrid electric models sold to date. Understandably, other manufacturers want in on the action. This year, there are 17 hybrid electric models on the market. In 2011, there will be 65 – so far. The list could grow as more models are planned.

These numbers alone do not tell the whole story.

According to Booz Allen Hamilton, hybrid electric vehicles will account for a staggering 80% of all vehicles sold by 2015. That’s only eight years away…

But building a hybrid car isn’t the same as building a conventional car. Hybrid engines require special batteries. Today, the industry standard are nickel-metal hydride batteries. Unfortunately, they tend to be heavy and aren’t known for their power.

To truly capture Americans’ attention, car manufacturers need a new battery. Luckily, one is on the way. It’s called a lithium-ion battery – and it’s lighter, smaller, more powerful and longer lasting than the old ones.

Surprisingly, however, a multinational conglomerate won’t be manufacturing them. Instead, a virtually unknown bulletin board company will take the helm. In fact, this obscure company is developing an automated manufacturing process at its Indiana facility that it hopes will help it become the first manufacturer to offer a cheap, mass-produced lithium-ion battery in the United States.

The transportation applications for this kind of groundbreaking technology are virtually endless…


Greg Guenthner
for The Daily Reckoning
November 28, 2007

If the United States really were headed for recession, where would it show up first?

In RV sales. Nobody needs a land barge. It’s a top-end consumer purchase that can easily be put off. Especially when gasoline is selling for more than $3 a gallon.

So what has happened to RV sales?

"Winnebago Industries, Thor Industries and other US makers of recreational vehicles will probably say that shipments fell in 2007 for the first time in six years…" says a report in today’s International Herald Tribune.

The IHT goes on to tell us of a University of Michigan study that predicted an increase in sales of 3.5% in 2008. Now, less than six months later, the analysts have sharpened their pencils and looked out the window; they now say sales will fall by 4.8%.

Pity the poor RV owners. They are doomed to wander America’s lost highways…carrying three tons of steel on their backs. Everywhere they turn, there are rising expenses – gas, insurance, campground fees.

And pity the poor stockholders. Fleetwood Enterprises (NYSE:FLE) fell 27% this year. Coachmen (NYSE:COA) is down 47%, while Monaco Coach (NYSE:MNC) and Winnebago (NYSE:WGO) are both down 37%.

So, is the United States headed for recession?

Yes…it appears to us that it is…or at least to some kind of slump, maybe the major Japan-like slump we forecasted seven years ago.

Yesterday, stocks staged a rebound. The Dow bounced 215 points. But don’t get too excited, dear reader; the tide still appears to be draining out. Sure, there are always some back-eddies and countercurrents. But the major flow of liquidity is down…and out.

So far, U.S. stocks are down about 10% from their peaks. That’s about $1.5 trillion in losses. Then, there’s the housing market – where prices are off 5%-10%, another big loss of implied wealth, equal to as much as $2 trillion. It’s adding up….

What it is adding up to we don’t exactly know. But the immoveable object of deflation – lost cash and liquidity – looks ever more immoveable, day by day.

Yesterday’s headline in the Financial Times told us that the "Fed move fails to avert rout in markets." Credit fears are growing, even "in spite of aggressive efforts by the Federal Reserve to head off an end-of-the-year squeeze."

It appears that we are reaching a "pushing on a string" problem. The expression is famous in economics. It describes what happens when a deflationary spiral gets out of control. The financial authorities can offer more money on better terms – but the banks and the borrowers turn up their noses. They’re already having trouble paying off the debt they’ve got; they don’t want any more. Besides, they’re not too sure that others will be able to pay their debts either, which makes them suspicious of both sides of the credit/debt equation. On the one side, the debtors may not be able to pay. On the other side, the creditors may not be able to collect. Whichever side you’re on, you’re looking for shelter.

When this happens, the financial authorities want to put cash and credit in the system. But they are pushing on a string; the system won’t take it.

Henry Paulson, U.S. Treasury Secretary, is pushing the idea of a huge SuperFund to bail out SIVs (C’mon…we explained what they were last week. Have you already forgotten? They’re "structured investment vehicles.") But HSBC – Europe’s largest bank – decided not to play along. Instead, it is taking the hit now – as much as $45 billion – by bailing out its own mortgage-backed investment vehicles. The move will come as a relief to HSBC’s investment customers. But it is a blow to the Paulson plan and to the effort to get more cash and liquidity into the system. Paulson can push on the string all he wants; HSBC isn’t going to tow the line.

This ‘pushing on the string’ phenomenon is neither new nor entirely theoretical. Japan pushed on a string for 17 years. In fact, it is still pushing hard. It pushes with the left hand of fiscal policy and the right hand of monetary policy; it has the largest public deficit and the lowest interest rates of any major country. And yet, Japanese stocks lost 18% since their peak in ’06…and another 13% since this January. And they’re still worth less than half what they were worth 17 years ago. What’s more, the latest report from Japan says that consumer prices are still falling.

Well, who knows…maybe Paulson and Bernanke will be able to do what the Japanese couldn’t. Anything could happen. Maybe they’ll find a way to put some starch in the string…

We’re keeping our eye on it, dear reader…

*** "Here’s a view," says MoneyWeek editor Merryn Somerset Webb, "buy Japan. Yes, the place is a disaster in many ways. But it looks like it’s time to buy. Not only do they have more Michelin restaurant stars in Tokyo than they do in Paris – 191 compared to 98 – but they have something else. For the first time in years, the dividend yield on Japanese stocks (as measured by the Topix index, which is broader than the Nikkei) moved higher than the yield on government bonds. This is a very big deal."

Now, you can get more yield from a Japanese stock than from a Japanese bond. That makes stocks a buy, says Merryn.

"Every other time this has happened it marked a rally in Japanese shares that sent prices up 30% to 40%."

The situation in Japan, as near as we can tell, is a mess. But it is a mess in an opposite way to the mess in the United States. Americans are in trouble because they spent too much. The Japanese are in trouble because they spend too little. American markets are now falling because they strayed too far from the fundamentals. Japanese markets have already fallen because they paid too much attention to fundamentals.

"The bulls, myself included," writes Merryn, "keep waiting for inflation to return to Japan. But it never does. Instead, there is still mild deflation, a situation hardly helped by the fact that the Bank of Japan, with is terrified of asset bubbles, has raised interest rates twice recently. More irritatingly, Japanese consumers, despite expectations to the contrary, insist on keeping their wallets shut; with wages static and prices not rising, they see no reason to spend."

But Japanese companies are profitable and cheap. The average P/E is 15 – about the same as the United States. But Japanese companies are growing faster than those in the U.S., and interest rates are lower. Among the leading nations, its shares are the cheapest in terms of book value. And while small caps trade at a 43% premium to large caps in the United States, they are actually discounted in Japan. "Add it all up," Merryn concludes, "and – according to Goldman Sachs – Japan is now the cheapest it’s been in 33 years.

"And if you step back and take a good look at Japan, It is clear that almost every possible negative is already priced into the market, something that suggests it must be at, or near, a bottom – and one neatly signaled to us by the cross of the equity and bond yields. History tells us that this is not a signal to ignore."

*** "Is it always this dark at 4:30 in the afternoon?" Dan wanted to know.

Dan is a writer from Mexico. He joined us yesterday in Ireland for a discussion of International Living’s upcoming Quality of Life Index.

Statistically, Ireland is a fine place to live…but it was grey and rainy yesterday.

"No, it’s not always like this," replied one of the natives. "It’s only dark and rainy half the year. The other half it’s only rainy."

According to various Quality of Life indices, places in Northern Europe are the best places in the world to live. They have high life expectancies, good medical care, high earnings, low crime and so forth.

"I don’t think I could stand it," said Dan. "I need the sun."

That’s the problem with statistics. They tell a story. But it is a story that only has statistical meaning. The real quality of life is a personal thing. Some people will like the coziness of Ireland’s long, grey winters. They can sit in front of an open fire and drink Jameson whiskey, reminding each other how awful the English were. Others will find the weather dreary and depressing.

Even in a single country, both quality of life…and standards of living…vary infinitely. Try to compare the quality of life for a single mother earning minimum wage and living in a drug ghetto of Detroit…to that of a hedge fund manager with his home in San Diego. They have nothing in common. So, you have to find an ‘average’…a statistical flim-flam that doesn’t exist in reality. No one is average.

In today’s International Herald Tribune, columnist David Brooks claims that the standard of living in the United States rose above the rest of the world in about the year 1740. We see how difficult it is to compute a standard of living today. How could a computation from two and a half centuries ago have any meaning? What could it possibly mean…that incomes in America were higher? This was a half-century before the American Revolution…and well before the Industrial Revolution. Most people lived on farms.

Though some sold tobacco and other farm products, for the most part they were still subsistence farmers. How could a standard of living be measured? Did it include the slaves? What could it mean? Nothing, is our guess.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning