Since we’ve immersed ourselves in the matter - and since the cellulose/grain ethanol argument isn’t going away - it may be worth spelling out the pros and cons of each form of ethanol production, so we can identify which companies stand to win or lose.

Ethanol isn’t new. More than 6 million automobiles in the United States are ‘flexfuel’ vehicles, which can use regular gasoline or ethanol. So, there’s no more experimentation that needs to be done to prove ethanol’s viability. The issue (as it always eventually is) is expense. What does it cost, and what will it cost to deploy on a large scale?

In its early stages in the U.S., the question was irrelevant - all ethanol ultimately came from corn….the ‘grain’ ethanol variety. In South America, their ethanol comes from sugar cane, and is equally viable. The decision of which plant to use largely comes from availability - there’s lots of corn here, and there’s lots of sugar cane there.

Only recently has the base-ingredient debate been stirred up, as the production technology has advanced to the point where cellulose materials (like sugar cane) work just as well as grains (like corn) when creating ethanol. So, at this point, ethanol can be extracted from pretty much any plant. Even wood can be used to generate ethanol, since it’s cellulose. However, wood has been tougher to work with so far.

Now, we wanted to make that distinction so we could make these points….

• Cellulose-based ethanol can be derived from any plant, including grass, as well as animal waste. Therefore, it doesn’t consume plants that can be eaten.
• The ethanol created from cellulose is exactly the same as the ethanol created from grain.
• Cellulose-based ethanol is potentially more efficient to produce than grain-based ethanol. Grain ethanol requires the consumption of natural gas, while cellulose ethanol can be created chemically.
• More than 25% of the United States’ corn is used to create ethanol.

What about efficiency? There’s been a long debate regarding whether any grain ethanol was ‘worth it’; early production actually required more BTU input than the ethanol put back out. So, energy was actually lost.

Now, however, there’s a slight energy gain….1.5 units of energy are created for every one unit of energy consumed in the process. More than that, there’s a major net gain in terms of petroleum used to generate grain ethanol. For each gallon of petroleum consumed in the process, 13 gallons of ethanol are produced.

The net energy gain from cellulose ethanol will soon be even better. Input costs wll be even lower too; grass and waste are obviously cheaper than corn.

Though corn ethanol makes up the majority of the industry, longer-term, cellulose ethanol makes the most fiscal and social sense. So, companies relying on corn ethanol alone may be running into a headwind in the near future. These may include agricultural giants like Archer Daniels Midland (ADM), who have enjoyed great financial success recently, but only because of expensive corn.

Bigger picture, as cellulose-based ethanol makes ethanol more attractive in general, auto manufacturers who offer no flexfuel vehicles will likely see diminished demand. U.S. automakers are particularly vulnerable. However, the liability may take years to fully materialize.

The potential beneficiaries of ethanol’s growth could be oddball names like Diversa (DVSA), which produces the enzymes needed to create cellulose ethanol. Or, SunOpta (STKL) may find their ethanol production facility is a profitable one, and decide to expand the business.

It’s not just off-the-radar companies that could benefit though. Mainstream players such as DuPont (DD) are also positioned properly to profit from ethanol and its growing need for infrastructure.

If you have other stats, figures, or companies related to ethanol’s advent, please add them below. We’ll be adding our own thoughts and ideas as the industry/trend develops.

Did you know there are opinions and comments that don’t appear in the blog? To get everything we’ve got to say, you should be signed up for the e-mail version of the newsletter. (Even the newsletter posted on the site doesn’t include everything the e-mail recipients get.) If you’re not on the list, you’re missing out on some great money-making and money-saving ideas. Subscribe today.

Since we’ve adopted a clean energy investing focus here at the Micro Cap Press, we thought it would be fitting to keep you abreast of the latest developments in the arena… even if not associated with a particular investment (i.e. a micro cap stock). If the technology is viable, a publicly-traded player will surface eventually. Anyway, the latest technological advance in harnessing solar power is…..plastics that absorb the sun’s infrared energy.

You may recall we specified the two most common forms of solar energy back on July 10th… photovoltaic cells, and solar thermal power. Both of those were based on visible sunlight, either by converting it directly into electricity using a silicon panel, or using sunlight’s heat to spin a steam-powered turbine. Both technologies work, and are in use already.

The idea of plastics that absorb and use infrared energy, however, is something new altogether. Both photovoltaic and solar thermal power generation require the sun not be obstructed by clouds…which is entirely out of our control. Infrared rays can make their way through cloud cover, meaning the energy can basically be received from sun-rise to sun-down no matter what the weather is like.

The technology is quite new, and as such we know little about it. Here’s what we do know though…

• It’s believed this technology could be five times more effective than current solar power collection
• The plastic is easy to work with, and can simply be applied like paint
• The technology could allow up to 30% of the sun’s total power to be collected, as compared to just 6% with the current means of harnessing it

We’d like to thank a reader for bringing the idea to our attention. However (and more importantly) we’d like to solicit your help in adding to the discussion. Are there publicly-traded companies in the field? Has anybody monetized the technology yet? Is there something we’re missing? You can add any comments using the form below.

Regardless, we suspect we’ll be revisiting the technology’s advancement from time to time.

By the way, here’s a stunning fact that came with the story….the amount of the sun’s total energy that actually hits the earth is 10,000 times greater than the amount of energy mankind uses. Seems like such a waste.

Did you know there are opinions and comments that don’t appear in the blog? To get everything we’ve got to say, you should be signed up for the e-mail version of the newsletter. (Even the newsletter posted on the site doesn’t include everything the e-mail recipients get.) If you’re not on the list, you’re missing out on some great money-making and money-saving ideas. Subscribe today.

As we mentioned we would in this morning’s newsletter, we’ve updated our small cap sector/industry ranking study to reflect data as of today. We primarily sorted by two-week performance, but we also wanted to see consistent growth over the two-week, one-week, and even the one-day column….the longer the timeframe, the larger the gain should be. That consistency is the key to longevity.

While many could have predicted energy stocks would be somewhere on the list, most are surprised to see that utility stocks have been not only more bullish, but more reliable. The really interesting part of the research was the overall winner…metal and glass containers. We’ve seen this obscure group lead before - it was also the leader in the September 1st study, before the market imploded. So, we don’t really think its revival is a fluke….there’s something about this group that truly is worth a look.

While energy is on the list, there is one big problem we have with it. It’s up today, and it’s up for the two-week timeframe, but it’s down week-to-date. This leads us to believe the gains are volatility-based rather than momentum-based. Utilities and containers, on the other hand, are making consistent progress. This indicates that longevity is likely. 

Two important notes about this analysis….

1. It only looks at small cap groups; large cap versions of the same ranking scheme may differ
2. This should be an ongoing analysis rather than a one-time look, as things always change

Still, you get the idea - right now, containers and utility stocks seem to be the places to focus, while energy stocks are actually unproven so far.

If you have questions about the ranking methodology, feel free to ask below. We’ve talked about it a couple of different times now, but that doesn’t always mean we get the message across. Since this is important though - particularly right now - it’s better to make sure we’re all on the same page. We’ll be using this process going forward too, so you may as well ask now if you don’t quite see what we’re going for.

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In this weekend’s edition we mentioned we’d use this week to explore many of the market’s and economy’s underpinnings, as they would ultimately determine the health of both. Since we’re seeing the biggest economic relief today coming from the shrinking TED spread, we’ll start with it. Why the big deal? The hefty TED spread is the whole reason banks have stopped lending to each other. But, with the spread starting to fall again, banks are finally trying to make and take loans. In short, credit may be unthawing.

What exactly is the TED spread? The ‘TED’ part is an acronym for effective interest rates on 3-month U.S. Treasuries and 3-month Euro/Dollar currency futures. However, it’s the European LIBOR rate (London Inter-Bank Offered Rate) that’s used as the ’ED’ benchmark rate by many U.S. banks.

But wait a minute - if the ‘ED’ indicates the effective interest rate on Euro/Dollar contracts, what does the LIBOR rate matter? Great question. The answer is, nothing. The TED spread was formerly based on the Euro/Dollar contract; it’s now based on the LIBOR rate. The name/acronym simply never got changed. Since it basically indicates the same idea (the cost to borrow and loan versus the benefit of risk-free interest payments), there was no particular need to cause more confusion by changing the name of the indicator.

Anyway, the LIBOR’s level is obviously of great importance to borrowers and lenders. Like we said, those very same banks lending at the LIBOR rate could alternatively own U.S. Treasury bonds. So, the TED spread is the difference between what it pays to be a risk-free lender (3 month Treasuries) and what it pays to be consumer lender (LIBOR).

If the difference is small, banks don’t mind lending to each other. When the TED spread is high though (thanks to a high LIBOR rate), banks can’t borrow profitably…so they don’t borrow at all. Hence, the recent surge in the TED spread lead to a credit freeze - the high LIBOR rate just meant borrowing was too expensive. Of course, lending banks couldn’t justify making cheap loans to borrowing banks, as there was a real risk of bank failure.

The chart below makes things painfully clear. The credit market froze in mid-September when the TED spread surged to more than 3.0. Since there was little confidence in any banks’ ability to pay a lender back, lenders were charging an arm and a leg (high interest rates) to make a loan to anybody. They essentially priced themselves out of the market.

More recently - as in today - the TED spread is back to a more tolerable 3.08, down 54 basis points. That’s not terribly close to the longer-term norm of just above 1.0, but it certainly feels better than the recent peak of 4.6 (on 10/10/08). Note that the chart below doesn’t indicate today’s changes; it’s ‘as of’ Friday.

The key for investors is just understanding that the TED spread won’t have to fall all the way back to 1.0 to turn the credit spigots all the way on again. In fact, in light of everything that’s happened over the last twelve months, it may never even approach 1.0 again. That’s ok though - it just has to be low enough to inspire banks to lend…which they want to do. They don’t make any money otherwise.

Bottom line - today’s a big step in the right direction. Take a look at the chart, then keep reading

We know what else you might be thinking - it seems like banks would be willing to borrow at any LIBOR rate as long as those interest rates were passed along to customers. That’s the problem though…they can’t adequately offset their risk by owning government bonds, and at the same time attract new lending customers. Margins are thin to begin with in the lending business, so a wide TED spread and a higher degree of bad-loan risk (which is what the TED spread ultimately indicates) is just more than borrowers (banks) can justify taking on. If it were one or the other, no problem. Both issues though? That’s just too much to deal with now… in the shadow of sub-prime woes.

It’s a little counter-intuitive, since making loans when the TED spread is high can be wildly lucrative. And, some lenders do indeed find customers….mostly higher-risk customers. Most banks, however, are more worried about the downside (risk) than the upside (profits)…and rightfully so. That’s why the credit market freezes, and that’s why the LIBOR rate goes up - it indicates how risky the credit market seems to lenders at the time.

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You don’t have to actually go to Vancouver, Canada any longer if you were dead-set on trying the company’s newly acquired Bread Garden. Come 2009, you’ll be able to experience the restaurant if you have a layover or a plane change at Vancouver’s airport. The great part for the company is that you’ll be joining the 18 million other people who pass through Vancouver airport every year. That’s a lot of foot traffic.

There aren’t a lot of details yet, other than the square footage, location, and the estimated open date of what will be the twelfth Bread Garden. However, airport restaurants tend to do quite well. A unique concept like a Bread Garden Urban Cafe stands to do even better than average.

In the bigger picture, we find it more than a little interesting that this micro cap company has once again found a way to grow by expanding somewhere there’s not a painful recession. On the contrary - Vancouver is thriving. Presumably anybody traveling to, from, or through Vancouver is also doing reasonably well in terms of consumerism.

A game changer? We won’t go that far. There were already 11 Bread Gardens, and there were a total 53 restaurants in the Spicy Pickle (SPKL) family not counting the new one underway at the Vancouver airport. However, every company-owned unit can have a solid impact on the top and bottom line when it comes to a micro cap company like Spicy Pickle.

More specifically, every company-owned unit means much better (relative) cash flow, as there are less than 20 company-owned stores. The rest are franchises. And, owning a unit rather than franchising it gives the corporation a chance at stronger bottom-line earnings than a franchise might produce.

The stock itself remains a frustration, though we attribute the majority of its weakness to the bear market - not the company’s performance.

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Recession? What recession? Bulletin board company China Energy Growth (CGYV) has done everything they said they would do since we picked the stock about a month ago. Though the market hasn’t cooperated yet in terms of the stock’s price, the company has certainly done their part.

In the middle of September, China Energy Recovery (CER) publicly said they were on pace to do $16 more million in business by the end of calendar 2008. That would mean total sales of $26 million for the fiscal year….and a 119% improvement on 2007’s total.

Since September, they’ve done nothing but validate their claim. We covered the news of their $3.2 million installation for Two Lions Fine Chemical Co. a couple of weeks ago. More recently, they collected $735K for a system installed at a Chinese paper mill. What was interesting about the paper mill installation, however, was that it not only improved the energy efficiency of the plant, but also prevented a great deal pollution. The system is capable of re-collecting up to 160 tons of the toxic by-product created when making paper. Some of it can be re-used, and the rest of it can be disposed of appropriately. Neither was being done very well before China Energy solved the problem.

The bigger observation is simply that CER is able to adapt their technology to meet a variety of needs. Though our focus (and theirs) has been energy efficiency through waste-heat recovery, there’s no less opportunity in pollution control. Perhaps we’ll be seeing more projects like this in the future, in addition to their heat recovery boiler systems. 

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Thanks for all the responses to Monday’s newsletter “Jim Cramer Said What?” Most everyone agreed, or at least understood our point. Some people think we mis-assessed his statement….though we’re still confident in our thoughts. Either way, it was a fruitful (and fun) exercise.

We wanted to post some of the responses here in the blog to show the full range of our reader’s thoughts. Like we said, some agreed, and some didn’t. Our only goal is to foster the discussion so we can all learn something… even if we only learn how to get a better handle on Cramer’s thoughts and words. (As the intro credits to the X-Files said, “The truth is out there.” We’ll see if we can find it.)

Anyway, here’s one note from a reader who works in the industry…

What Jim Cramer apparently does NOT realize is that because of his show on CNBC and it’s popularity, he has developed a “call” into the people. People being any and every person who watches his show. For someone like me, a twenty one year securities industry veteran, I know when to discount the exuberance of Jim’s theatrics. He does openly tell his viewers that one of his shows objectives is to entertain. For a great many everyday people who get a good portion of their investment advice from cable TV and they unfortunately rushed to sell, well … Jim should deliver his message, but he has to weigh his words more carefully. Having a call into someone can be fleeting. In my world; two things, your word is your bond and you’re only as good as your last trade. Thanks.

Thank you. That was pretty much our point too. It’s not that he was just throwing darts, hoping he got lucky. Nor was he being insincere - we respect the fact that he’s decisive, passionate and to the point. Our concern was your concern…. he needs to be extremely careful with his words because people listen and respond to what he says. The problem is, they do it without considering their actual bigger picture, or without remembering that Jim’s got caffeine for blood.

Another reader wrote in….

I believe you took his comments totally out of context. When he said to take out what you need for 5 years he was referring to those who couldn’t sleep at night worrying about their investments. Having cash in the bank to make sure you can cover your critical investments like education for your kids etc isn’t a bad plan for anyone. If you listened to what he said Friday he said we should start dipping back into the market with certain stocks if you had the stomach for it Monday morning. Which I did and made a real nice profit of over 20% on both my energy buys. Like you said he is an entertainer and the FRO I bought this morning, another Crammer pick, did well today. I wonder where the market would be if the government had listened to him months ago about where we were going. I believe you have to take what every supposed stock picks including yours with a grain of salt. He certainly hasn’t been perfect and if we were. we would be down in ARUBA sucking in the good life and laughing about the poor saps in the world trying to make a buck in the market. I’ve gained and lost on his ideas but in the end I hold myself accountable for my investment not you or him.

Hmmm. Just to be clear to all other readers, our goal was mostly to defend Jim’s sense of urgency and extremism - and perhaps his poor choice of words - rather than to crucify him. So, we don’t think we took him out of context; we just wanted to take a bit of the edge off his words “please take it out of the stock market right now, this week.”. (Of course, what we aimed to do and what we may have actually accomplished could have been two different things though.) We even went on to say later in the piece that Cramer qualified the drastic advice by telling long-termers that they should ride it out if they had the stomach for it. That was mostly to defend Jim, since the media down-played that portion of the interview. We’re not sure if that clarifies anything for anyone, but….

Anyway, you hit the nail on the head. All stock trades are ultimately your responsibility (and that even includes our picks). Too often when a trader gets a pick from a Jim Cramer and makes good money with it, that trader is a genius. When that same investor gets a bad pick from Jim Cramer and loses money with it, then Jim Cramer’s the idiot. You can’t have it both ways. Once you can get to that level of honesty with yourself, your trading results tend to improve. Glad you’re there.

And one last reader comment….

I started watching Cramer since “DEEP” had its IPO. I worked there and was interested in what he had to say. After listening to him a couple of times bragging on how “DEEP” was going to make everyone a lot of money, I knew he did not put much research into what he predicts. I never bought any of “DEEP” stock. Though I am sure he is a nice man with a lot more money than me, in my opinion he is an idiot in finance. Anyone that watches him must take what he says with a grain of salt.

You mean he’s not actually intimately aware of 3000 publicly-traded companies? You’re right - a grain of salt is a much-needed ingredient.

Thanks for all the feedback If you’ve got more, you can leave it below.

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It’s not micro-cap specific, but the idea could certainly have an impact for a small cap company with big goals. To date, nearly all wind farms - the clustering of wind turbines used to generate electricity - have been land-based. However, since real estate’s not getting any cheaper or more abundant, the ‘next big thing’ in alternative energy is taking wind farms out to sea… literally.

Hunter Armistead certainly isn’t a household name, but when it comes to getting energy ventures up-and-running he’s no newbie. His latest project is building a wind farm twelve miles off the coast of Australia.

The math makes sense to the investing community too. The cost to build a power-generating windmill is between 50% to 70% greater than the cost to construct comparable, conventional systems. However, the revenue potential for offshore wind systems is at least 70% greater than current solutions. Armistead believes the massive flotillas will pay for themselves in less than ten years. After that, the only expenses will be maintenance and routine replacement…which won’t be cheap, but it won’t be any more expensive than maintaining the current equipment in use by a wind farm’s competition.

Fortunately for investors, the idea isn’t an unproven one. Europe generates about 1100 MW in electricity with offshore windfarms. So, Armistead isn’t trying to break new ground.

Even better for North American investors is how the U.S. has lagged the rest of the world when it comes to wind power…. we’re trying to play ’catch up’ now. The first deal has already been signed, for a wind power system in Delaware. Delmarva Power - a division of Pepco (POM) - will start building an offshore system soon. Rhode Island is following in those footsteps, and New York is rumored to be getting on board as well. The East Coast is ideal for such projects, as the ocean is relatively shallow for many miles out. That lets the developers properly anchor the windmills.

However, the East Coast isn’t the only market. A Texas project costing $600 million will provide 283 MW of power….about 1/4 of all the wind power electricity in all of Europe right now.

All told, the United States could ramp up wind-based electricity from its current 1% of our total energy consumption to as much as 20% of our total consumption. That will require a lot of hardware and technology though, which is where we feel the investment opportunity lies.

Currently, major companies like General Electric (GE) and utility companies like Florida Light & Power (FPL) seem to be the key players with a role in the industry’s future. GE makes the turbines used by the windmills, while FPL is working on a wide scale project to roll out the technology. However, the odds are good that smaller companies will become a factor as wind power proliferates.

In fact, we looked at a few of those companies not that long ago in “The Problem With Investing in Wind Power“. You may want to re-read it to see which of them are emerging as undiscovered key players.

In any case, it looks like the wind power infrastructure is headed offshore. Companies that can make doing so easier, faster, or cheaper stand to do well.

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It was only a small mention in a relatively minor article found at MarketWatch.com, but Lily Donge was recently quoted saying she felt that no matter who won the Presidential election this year, a carbon-emissions cap and regulated trading of carbon credits would be introduced when Congress reconvened after the new Commander-in-Chief was in office. (By the way, Donge is the manager of environment and climate change at the ’socially responsible’ investment firm Calvert Group.)

There’s an implication for China Energy Recovery (CGYV) if Donge’s statement was accurate (and we believe it was).

A couple of weeks ago we were explaining how the sale of carbon emission credits was a sub-industry in itself for China’s industries, as the revenue it could generate was significant. China-based CGYV customer Two Lions Fine Chemical Co. sold $2.5 million worth of carbon credits thanks to a waste-heat recovery system that only cost them about $3.0 million…and they’ll be able to sell those credits year in, and year out.

However, that was in China, where a carbon cap system is in place. In the United States there is effectively (and surprisingly) no comparable system… yet. The clamoring for such a framework is growing though, and will likely become law in 2009. When it does, and when trading carbon credits is demonstrated not to be a free-for-all, we absolutely believe U.S. companies will start looking for ways to at least not exceed their carbon-output allotment. Furthermore, we expect these same companies to follow the lead of Two Lions and other factories, and sell their carbon credits for a profit.

Another industry expert quoted in the article specifically said waste-heat recovery was an interesting arena, and would benefit from Congress taking such an action.

The point is, the ideas we’ve been discussing regarding China Energy Recovery aren’t just ours - they’re being batted around more and more each day by the mainstream media. While the stock itself has been a frustration lately, it’s certainly not because the premise is faulty. Indeed, CGYV’s premise is ideal. Now we just need the broad market to cooperate.

Here’e MarketWatch.com’s alternative energy article.

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With all eyes focused on either the Presidential election or the Wall Street/Washington fiasco’s downgrade from bad to worse, there’s actually a huge opportunity for alternative energy investors. The ridiculous amount of pork-barrel spending not withstanding ($6 million for wooden arrows? Seriously?), also buried in the bill was some much-needed support - in the form of subsidies - for wind and solar power. It wasn’t clear if any of these industries had much of a future, as they all still need fiscal help to get them to the point of viability. Now, however, investors in these companies can have a little more confidence. That’s good news too, as these arenas really do have some compelling small and micro cap companies.

Here are the basics of the bill….

• Solar power - any company that is involved in the production of solar power will now be granted tax credits for another eight years
• Wind power - wind energy companies will only get one more year of tax credits
• Utility companies - traditional utility companies are now eligible for tax credits to the extent they start to develop wind and solar infrastructure, with the same timeframes mentioned above

It’s not global salvation though, so it’s not like solar panel stocks are going to be overnight sensations again.

While the U.S. is now on board with further development of these technologies (perhaps without even knowing it), other nations are still wrestling with whether or not their subsidies can be justified. Spain is one of the more noteworthy retractors of financial help. A year ago the country had been one of the biggest consumers of solar power technology, but the cancellation of their subsidy program sent a troubling shockwave throughout the entire solar panel industry.

Still, eight years should be adequate enough for solar power to proliferate, and get cheap enough to be viable here in the U.S.. Wind power? Well, one year may not get the same job done. That’s unfortunate too, as there are some very promising wind power stocks. That being said, don’t blindly assume every wind power company needs a subsidy to survive now.

The most compelling part of the legislation, however, is that major utilities can now venture into the alternative energies without paying for everything out of pocket. In a sense that’s bad news for the small players solely focused on wind or solar power, as a bigger utility company may be able to get their alternative energy technology and infrastructure in place before a smaller upstart can. On the other hand, those big utility companies are well behind the small guys when it comes to the technology; they may be coming to the smaller outfits to acquire their technology, or the company altogether.

Anyway, we just didn’t want you to miss the good news in the midst of the melee.

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We love getting questions from our readers. Though we may only get one question on a topic, odds are many of you are wondering the same thing. If answering it gives all of us an opportunity to learn something and become better investors for it, we like to answer them in a public forum like this one.

In any case, a reader writes…

What’s an 8K?

Great question. Each paper filing a publicly-traded company submits to the SEC (Securities Exchange Commission) is completed on a specific form. The most common ones we all see are the 10Q, for quarterly reports (income statement, balance sheet, and cash flow), and a 10K for annual reports (also for income statements, balance sheets, and cash flow). However, those aren’t the only forms a company frequently uses. Another often-used form is the 8K.

The 8K, however, is a little more ‘free form’ in spirit. While 10Q’s and 10K’s specifically require the financial statements and corresponding verbal descriptions for financial performance, the 8K is a report of anything considered to be ‘material’ to shareholders. Sometimes it might be a description of dilutive financing, or perhaps the awarding of a big contract. We’ve even seen legal actions (for or against a company) show up on an 8K form. So, to answer your question….

An 8K is an SEC filing that’s not topic-specific, but shares information about something that should be disclosed to the public - simply as a matter of record.

Not everything shows up on an 8K form, but most important things do. And yes, what some companies consider to be 8K worthy may be something that doesn’t seem 8K worthy to another company. So, don’t expect absolute 8K uniformity for all stocks. Still, they’re an important part of the overall puzzle.

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