Sustainable Log

2007-03-08T15:59:00.000-06:00

On Hiatus

I am announcing today that Sustainable Log and the newsletter are going on hiatus this month. I need a vacation, and I also need to re-tool the site. It's difficult to do it all right without driving myself crazy. Look for a resumption in April.

Thanks for the concern.

-Mark

2007-02-09T13:08:00.000-06:00

Branson, Gore, and the $25 Million Virgin Earth Prize

In a headline-grabbing, well-intentioned, but possibly self-defeating move, Richard Branson announced a $25 million dollar prize to whomever could build the technology to remove billions of tons from the atmosphere over 10 years. The contest is open for five years, after which a panel will judge the entrants. The winner will be awarded $5 million, with the remaining $20 million, distributed after the ten year period demonstrates proof of concept. Inspired by the 17th - 18th century Longitude Prize which awarded 20,000 pounds to whomever solved the longitudinal clock problem, and the more-recent Ansari X-Prize ($10 million awarded to the first commercial space vehicle), the concept seems rational. Greenhouse gases are causing earth temperatures to rise; therefore, remove the carbon and everything is hunky dory.

I see this stunt (and I do mean stunt) as useful for starting the dialogue and getting dreamers to dream, but let's look at what this means. Over 150 years, human activities have caused dangerous concentrations of greenhouse gases. Earth scientists are up in arms because, in geological terms, 150 years is a relatively short time... shorter than our Earth can digest the unexpected change in atmospheric composition. Is the solution to this problem ANOTHER HUMAN ATMOSPHERIC ENGINEERING PROJECT? The possible consequences of this action needs to be debated among the same climate scientists that recently declared that we need to accept global warming as inevitable.

I am not a climate scientist. But, here are a few bad things that I envision happening:

Thousands of amateur scientists start undertaking garage experiments which unleash chemicals intended to mitigate carbon.
In order to test innovations, the contest participants have to release carbon into the atmosphere to see how well it works.
The simplistic sounding solution makes people forget that the best way to decrease greenhouse gas concentrations is to prevent them from getting released in the first place. Carbon sequestration technologies are being developed all the time, but their implementation is slow, because there really is no punishment for continued emissions.

I am sure other real experts could REALLY scare the pants off you with other scenarios.

Let me suggest some prize sweepstakes that might make more sense:

Manufacturing plans for an ultra-affordable, yet stylish and flashy, electric car
A solution to the hydrogen storage problem that vexes the promise of a hydrogen future
A solar panel that is efficient enough, yet cheap enough, to generate electricity at half the price of coal... without government incentives.
A biomass conversion kit that turns human and animal waste into oil. A technology called thermal depolymerization already exists here, but its practical uses are limited.
A revolutionary new accounting system that accurately takes into account the value of shared natural resources.
A smokestack scrubber that is cheap enough for even the most austere Chinese manufacturers.

Not nearly as sexy (or headline-grabbing), but ultimately more productive. Their hearts are in the right place, though.

2007-02-05T16:49:00.000-06:00

Great New Site: Green Options

Green junkies will love a new site launched today called "Green Options". The site was founded by David Anderson, Jeff McIntire-Strasburg, and Shea Gunther. The triumvirate has assembled a truly all-star band of writers and bloggers (including -- ahem -- yours truly) to write about all things green. And, no, I don't recycle content that you will see here on Sustainable Log.

I was already big fans of McIntire-Strasburg's blog, Sustainablog (no relation to my own blog -- I didn't even know it existed when I started writing this blog), and Gunther's blog, Musings of an Eco-Entrepreneur. If you like Treehugger, you'll love Green Options.

The site covers all things green, including politics, green romance, clean tech, and green finance. Today, on their first day, they landed an interview with Andy Ruben, Wal-Mart's VP of Corporate Strategy and Sustainability. You should check it out.

2007-01-27T09:17:00.000-06:00

Are Americans Saving Too Much?

Some leading economists released a report challenging the notion that Americans are spendthrifts with a negligible savings rate. In fact, their research says the opposite -- that Americans have been duped by the financial industries to save too much. By surveying various online calculators made available free of charge on financial purveyors' websites, they concluded that the amount the financial firms suggest to save is way too much. Here is my opinion on the subject.

First of all, the notion that Americans are NOT savers is hogwash, perpetuated by some laughably arcane statistics tracked by government bean counters. The statistics do not take into account savings directed to equity investments, 401k investments, real estate investments... just about anything except savings accounts. Our Asian counterparts still use bank accounts as the primary savings method, so we have an appearance of over-saving in Asia, and under-saving over here. Combined with the media's need to breathlessly proclaim impending doom, this statistic is WAY overplayed.

Now, do we save too much? In the aggregate, the economists may be right. But, people do not -- and should not -- plan based on aggregate numbers. Almost by definition, savings occurs when a family has a surplus over their basic needs. Since America has a significant and widening gap between rich and poor (whether this is good, bad, or indifferent is a subject for another post), the upper ends of the income distribution allow for excess savings, even if it is more than is required to ensure a comfortable retirement. You can also bet that the financial purveyors with online calculators are targeting the upper ends, as well.

The economists should approach the question as to the percentage of Americans that are saving to their reduced expectations. Or, they should take a poll and see how many Americans are saving AT ALL. I am afraid this answer would paint a much bleaker picture. Especially since any American under the age of 40 needs to question whether social security will exist anywhere close to its present form, I would rather have people over-save than otherwise.

Of course, using online calculators is a troublesome methodology. Financial math is easy. While every qualified investment adviser on the planet has planning tools that take care of the math part, an adviser's skill at identifying, clarifying, and prioritizing your goals is what separates the good professionals from the low-end service providers. Adding social criteria adds to the complexity. Such non-financial questions your financial adviser should be asking include:

Do you want to simplify during retirement, or splurge?
Do you want to stay put in your current residence, move around, or travel?
Do you want to continue working part-time in a different role, volunteer, or leave the office behind forever?
Do you care if your children have an inheritance?

The answers to these questions give you a clearer picture as to how much money you need when you retire. Once you have that, working backwards into an appropriate savings amount is easy.

Now, in defense of these economists, they gave a good clue as to their altruistic reason for releasing this research. They make a statement about "squandering youth" instead of squandering money. On this point, I could not agree more, but this also requires a detailed and regular self-examination of your values. Aggregate pictures are of no use whatsoever.

Time will be your most important asset, by far. For example, should you hire a housekeeper once a week, have the lawn mowed by someone else, send out the laundry? Or, should you save the money, and either let the chores slide, or take 3-5 hours per week away from the important people in your life, self-improvement, or leisure activities? Even in my own family, we struggle with these questions.

Working through these questions is where a financial planner earns your money.

2007-01-23T06:20:00.000-06:00

Business Week Covers Social Responsibility

If you have an interest in the social responsibility of business, not only because it is the right and moral thing to do, but also because it presents one of the greatest business opportunities of the century, you should check out the current issue of Business Week. They do a great job of showing how SRI can be about proactive identification of companies positioning themselves for a sustainable or carbon-constrained world. The reasons to do so are to capitalize on THE 21st century mega-trend, and not for the touchy-feely, feel-good reasons.

2007-01-16T13:50:00.000-06:00

Beer Signs That Change the World and A Solar Collector Made Out of Vacuum Tubes and Shot Glasses?

Last week, I was invited by the University of Texas' IC2 Institute to participate in a technology commercialization program between the Institute and Invite (in-vee-tay), an organization established by the governor of the Mexican state of Nuevo Leon to assess technologies coming out of that region. A group of 80 technologies had already been whittled down to 20. The technologists, along with IC2 and Invite staff, were given a lovely reception at the governor's palace in Monterrey. Of the 20 technologies, I was given 5 energy and environmental technologies with which to complete an in-depth assessment, using methods taught in IC2's Science and Technology Commercialization Masters Program. I am a 2005 graduate of this program. Last week was all about interviewing the inventors to understand their technology.

As an economic development project, the Invite program should be emulated by every region that wishes to stimulate technology clusters. I met some earnest, motivated, and passionate inventors with truly world changing technology. With just a little help, these technologies could form the backbone of a progressive economy that is less reliant on low-end manufacturing. Just a sample:

A 25 year-old engineering student invented a solar thermal collector out of vacuum tubes and shot glasses. One of his professors added some product design expertise (and got real materials instead of shot glasses). This design allows the collector to work more efficiently, while allowing it to do its job past the usual seasonal limitations of the existing technology. It also is less expensive, lasts longer, and requires less maintenance than existing solar collectors. Their University, Instituto Tecnologia de Monterrey, liked it so much, it was patented. More research is needed to determine if the vacuum chamber can be maintained in real world conditions.
Two professors and an engineering student invented a controller for LED lamps that reduces energy consumption by 80 percent. By sequentially lighting individual LED's at a frequency that is greater than what the human eye can detect (the same principle enables your eyes to perceive a series of photographs as , the quality of the illumination is barely perceptible, but the energy savings not only represents money in the pocket, it also opens up whole new swaths of off-grid applications. The same University created four patents around this one. The project started as a request for a Carta Blanca beer sign that did not cost so dang much to operate. The prototype is pictured at top.
An electrical engineer in the air conditioning space invented a "sub-cooler" device which makes air conditioning units twice as efficient at one tenth the cost of existing sub-cooling technologies. This device could eliminate the need for giant water cooling towers at large facilities. One thousand of these devices are in use already in Mexico, with loads of documentation backing up the claims. The solution is so elegant, and so simple, Carrier and Trane will wonder why they did not think of it. (Even though more specific intellectual property was revealed, I will not go further than this)
A wastewater engineer invented a wastewater treatment plant that reduces the need for sludge removal from several times a month to as low as once a year. Since sludge is a hazardous waste, and therefore, expensive to remove, this innovation has the potential to alter the dynamics of the wastewater treatment market. Again, several of these prototypes already exist in the field to back up the claims of the inventor.

These were just the innovators with whom I worked. My colleagues handling the medical, software, and wireless innovations were just as impressed with their batch. The subject matter expert with whom I conducted these interviews, Richard Amato, formerly of the Austin Clean Energy Incubator and currently with Venti Energy, also came away impressed.

We'll see how these technologies stack up after we get a chance to do some primary market research. Following the assessments, which we hope, will contain a roadmap for commercialization, IC2 will help the technologists meet some benchmarks for business development. Then, assuming the governor of Nuevo Leon is pleased, we can start all over again next year. IC2 has similar projects underway for Hungary, Jordan, and India, while a similar project for Kazakhstan was completed last year. This type of transnational knowledge transfer is valuable, important, and yes, fun work. Our hosts were spectacular. I sampled some local specialties, including cabrito (baby goat), crickets (prepared like one would prepare crawfish), and a banderra (tequila, lime juice, and sangria served separately and drank in sequence... interesting!). I can't wait to be asked again.

2007-01-02T11:51:00.000-06:00

2007 Technology To Watch: Solar Thermal

Nice to be back after the holidays.

Before I get to the 2007 Technology to Watch, let's take a minute to review last year's prediction. On January 1, 2006, I predicted that 2006 would be the Year of Thin Film Solar. Well, let me be clear. Despite some nice breakthroughs and interesting developments, I would not call 2006 the Year of Thin Film Solar. Maybe I was a few years too early. The company I mentioned in last year's post, Heliovolt of Austin, won a Time Magazine award for the top 10 innovations of the year. Honda (ADR: HMC), Dupont (NYSE: DD), and General Electric (NYSE: GE) all entered the field. Despite this good news, actual demonstrable products are in short supply and installed capacity is even more scarce. Keep an eye on this one, though.

Solar Thermal is my pick for the 2007 Sustainable Technology to Watch. This is not a new innovation. It has been around for years, but this year, I predict that government policy, along with some nice technological breakthroughs will put this technology on the same level as more mainstream methods of energy generation, especially if oil and gas prices resume an upward swing.

By attaching the word "solar" to the technology, you are probably thinking about giant solar panels nailed onto your local treehugger's roof. Solar Thermal is not that technology. This technology involves calibrating mirrors to concentrate the sun's rays in a spot where water (or some other liquid) is heated. Heated water can then be used to generate steam. Steam is the driver of most turbines at most power plants, except that the heat is usually created from burning coal or natural gas. With solar thermal, there is no carbon byproduct.

For years, solar thermal has found a niche in water heaters and heated swimming pools. The technology is getting to where it can function on a utility scale now. Manufacturing a set of mirrors with the size and integrity to do the job is a surprisingly difficult task, but manufacturing methods are getting better and the number of companies involved keeps increasing.

Regulatory actions will make this alternative attractive to many utilities. Renewable Portfolio Standards are gaining traction nationwide, instigated by wholesale price spikes brought on by the oil shortages. Put simply, these are mandates from state legislatures that a specific percentage of overall electricity generated needs to come from renewable resources. The other renewable alternatives are facing obstacles. For utility scale solar (panel) generation, silicon is still facing supply constraints. As for wind, the size and scale of the new turbines is leading to some NIMBY-ism. The status of some very important wind generation tax credits also remains - ahem - up in the air.

Finally, 2006 saw an awakening of the potential of clean energy among institutional investors. Bill Gross, founder of technology incubator Idealab, founded a company call Energy Innovations, which makes rooftop solar collectors for commercial buildings. New Energy Finance predicts that 2006 venture and private equity investment in clean technologies to be up 167 percent over 2005 when all is said and counted. What is most significant is that this investment continued even after oil prices dipped back toward historical levels. This shows that the clean tech bandwagon has some serious legs.

2006-12-13T09:47:00.000-06:00

New EPA Gas Mileage Guidelines - Good or Bad?

The Environmental Protection Agency, in a rare show of backbone, has forced automakers to display fuel efficiency figures on the sticker that are closer to actual reality. Almost all auto buyers have known that these figures are only useful for comparison purposes, so its effect on our oil consumption culture may be a blessing or curse.

Owing to changing driving habits, most vehicles have been overstating fuel efficiency for quite some time. The EPA estimates that most vehicles are overstating by about 8 - 12 percent. The hybrids, darlings of the environmental crowd, have been claiming upwards of 60 mpg while most owners report somewhere in the 40 - 45 mpg range, a 30 percent difference.

The truth-telling exercise is certain to wake people up. Not only is the U.S. lagging its foreign competition in fuel efficiency standards, most of what we publish is bogus. A great number of vehicles -- and no automakers -- now meet our current CAFE standards. If the EPA started to enforce our current standards, that by itself would decrease our gasoline consumption enormously. However, we not only need to get up to snuff with our current standards, we should up the CAFE standards by 20 percent, just to keep pace with China.

It is too early to tell if the new standards will increase the volume of whining from Detroit about the cost in jobs and money to put higher standards in place. The foreign competition has been living with the higher standards, and does not seem to be suffering (though, to be fair, foreign automakers have been fudging their numbers, too).

2006-12-12T21:25:00.000-06:00

N.Y. Attorney General (and Governor-Elect) Sues UBS for Wrap Accounts

Eliot Spitzer, current Attorney General and incoming Governor of New York, has long been the bane of Wall Street nogoodniks. With only two weeks to go in office, Spitzer sued the largest financial services firm on the planet, Union Bank of Switzerland (more commonly known as UBS), for allegedly overcharging customers in fee-based accounts. As with many Spitzer actions, the suit has been greeted with calls of over-reaching and headline pursuit. Seeing as my firm's eschews commissions in favor of this type of fee-based business, I find myself in a unique position to comment on the merits. If you are wondering what type of relationship is proper for your situation, read on.

Traditionally, brokerage customers were charged commissions when they made a transaction. If you bought 100 shares of XYZ, the broker probably tagged you for a few hundred dollars. When brokerage commissions were de-regulated in the 1970's, and especially since the 1990's when technology has made it possible to process trades for a few pennies, competition has pretty made it difficult for the army of Merrill Lynch-style brokers who had to convince their customers that their advice was worth $300 when several online brokers were charging $9.99. Additionally, this problem created a conflict of interest when brokers had the incentive to recommend more trades than would be suitable for most, a practice known as churning.

To respond to these competitive pressures, brokerage firms unveiled so-called "wrap" accounts. In these programs, customers generally get trades at low or no-cost, but instead pay the firm a small percentage of assets under management. A typical wrap fee is in the 1.5 - 2 % range, so a customer with a $100,000 balance would be dinged for $1,500 to $2,000 per year. This might be a good deal for a customer that trades a lot. These accounts are also suitable for someone who truly wants somebody else to make all the financial decisions. For that type of service, 1.5% - 2% is neither unhead of, nor unreasonable.

The abuses on Wall Street happen when brokers put their wrap customers into vehicles that already have steep fees, and without having read the lawsuit, I am almost certain this is where Spitzer found his outrage. Very few brokers these days are calling about individual stocks. Instead, most commission-based brokers are selling vehicles such as mutual funds or annuities, which themselves have steep fees of up to 3% per year, and maybe even front-end loads of up to 8.5%. Theoretically, at least, these fees are supposed to pay for the professional management and decision-making. So, why pay an additional wrap fee on top of this? Piling on fees on top of fees is unethical, but many of our sterling, white-shoe firms get away with it.

When faced with increasing quotas, and decreasing trading commission income, moving low maintenance, self-directed customers into wrap accounts is an easy way for a sales manager to meet his goals. Trust me on this, as I've witnessed it firsthand. This type of practice is one reason I chose to open my own practice, rather than be conflicted between clients and my boss.

Now, to be certain, Spitzer is himself only telling half-truths. Wrap accounts are not the problem in and of themselves, and for many, many people, they are absolutely appropriate. A wrap fee is appropriate under two circumstances: 1) When you have a Separately Managed Account (SMA) which consists of a broad pool of individual equities, and 2) When you have no desire whatsoever to make the financial decisions, but you want your broker to take advantage of the opportunities that arise. At First Sustainable, the Folio method of investing allows an investor to buy an underlying index of stocks, thereby cutting out the mutual fund structure. It is more tax efficient, usually less expensive, and better able to handle social screening. We charge customers nothing (or a nominal ticket charge, depending on the security) for trades, and instead assess a wrap fee that is still less expensive than the average actively managed mutual fund.

In their defense, UBS has 2 million wrap accounts. At that scale, finding a few instances of inappropriate behavior is a given. They will claim that the practice is not widespread. I can not comment for UBS, but I can say definitively that unscrupulous operators, some of whom reside in this country's largest firms, are everywhere. On balance, Spitzer's move is once again positive news for investors. Anything that can raise an awareness about when these practices are appropriate will be useful.

2006-12-08T08:39:00.000-06:00

Green Peace Ranks Tech Company Responsibility
Dell 2nd, Apple Dead Last

The environmental watchdog, Greenpeace, released the 2nd edition of its Green Electronics Guide, ranking tech companies on their commitment to environmental responsibility. On a 10-point scale, Nokia (NYSE:NOK) scored the highest with a 7.3. Surprisingly, Apple (NASDAQ:AAPL), the company with former Veep Al Gore on its board, came in dead last, owing to its tepid commitment to recycling, the continued presence of some dangerous chemicals in its manufacturing process, and the lack of a timeline to phase out these chemicals. The full list is below:

Nokia (ADR:NOK) - Good on all criteria, but needs clear timeline for PVC phase out for all applications. Score: 7.3/10

Dell (NASDAQ:DELL) -Loses points for not having models free of the worst chemicals. Strong support for takeback. Score: 7/10

Fujitsu-Siemens (ADR:FJTSY) - High score on chemical policy, some models free of worst chemicals. But should improve takeback and recycling. Score: 6/10

Motorola (NYSE:MOT) - Big improvement on all criteria, info on cleaner products, still to provide clear timelines for phase out of worst chemicals. Score: 6/10

Sony Ericsson - Some models without the worst chemicals, provides timelines for chemicals phase out, but needs better chemicals policies and takeback reporting. Score: 5.7/10

HP (NYSE:HPQ) -Needs to do better on the chemicals criteria especially phase out timelines and greener products. High scores on takeback. Score: 5.7/10

Acer - Improved chemical policies but no models free of the worst chemicals. Needs to improve on takeback. Score:5.3/10

Lenovo (ADR:LNVGY) - Progress on most criteria but loses points for not having products free of the worst chemicals, on takeback and recycling. Score: 5.3/10

Sony (ADR:SNE) - Some models without the worst chemicals, loses point for inconsistent takeback policies. Score: 5/10

Panasonic-Improved score but no commitment to eliminate BFRs, and poor on takeback. Score: 4.3/10

LGE-Improved chemicals policies, but no cleaner products on the market, loses points for inconsistent takeback policies. Score: 4/10

Samsung-Scores points for timelines for toxic phase out but poor on waste criteria. Loses points for inconsistent takeback policies. Score: 4/10

Toshiba (ADR:TOSBF) -Some models without the worst chemicals and reports on recycling, but no timelines for chemical phase out and poor on other waste criteria. Score: 3.7/10

Apple (NASDAQ:AAPL) -Low scores on almost all criteria and no progress. Score: 2.7/10

The report's primary benchmarks were the company's use of dangerous chemicals, specifically PVC (a vinyl plastic) and brominated flame retardants (BFR's), the presence of these chemicals in their current models, and the presence of a plan to phase out these chemicals from their model lineup. Additionally, Greenpeace judged the company's commitment to a takeback program when the product becomes obsolete. This measure is especially important to keep those aforementioned chemicals out of landfills. A final criterion was the company's efforts to push responsibility onto their supply chains.

Particularly pleasing for me is the presence of Dell at the number 2 position. As I have mentioned in these posts before, I am a former employee of both Dell and Apple. When I was at Dell in the early part of this decade, environmental responsibility was not important to the company at all. To this, I would like to relate a humorous story. My superiors at Dell once sponsored a contest among the lower ranks to come up with a marketing gimmick for the Small and Medium Business Division. I suggested a takeback program when a new system was purchased. As the thinking went, you got a competitor's computer out and our computer in. Hauling away old machines had gotten to be a bigger problem in Corporate America. Plus, it's the right thing to do for the environment. In short, the idea was laughably dismissed as being impractical, expensive, and not worthwhile. Seeing this company at the forefront of the computer recycling movement is now gratifying.

A short time later, I had defected to Apple. When asked about computer recycling in front of employees, Steve Jobs, dismissed protesters outside Apple's headquarters as extortionists from environmental groups. Apple, too, is making headway on the recycling front, but has so far resisted efforts to phase out those harmful chemicals.

2006-12-07T08:00:00.000-06:00

Blood Diamonds

A new Warner Bros. movie out this season is sure to spark discussion on the propriety of the diamond trade. Starring Leonardo DiCaprio (Titanic, The Aviator, The Departed) and Djimon Hunsou (Amistad), the epic is a fictionalized account of the 1990's conflict in Sierra Leone, which was, in part, financed on the backs of poor miners engaged in back-breaking, dangerous, and exploitative work in the diamond mines. The trailer is attached here:

Diamond merchants are surely watching the extent to which the film is embraced here in America. As one of the hallmark lines in the movie goes, as delivered by Jennifer Connelly (A Beautiful Mind) but paraphrased here, nobody would want to wear a diamond on their finger if they knew that someone lost their hand to get it. The fear is that moviegoers will look at their wedding ring as they depart the theater and resolve to not buy another piece of jewelry. That fear is well founded, because a diamond's value is inherently nothing more than some shrewd marketing by De Beers, SA, the stateless, privately held consortium, along with that company's iron-fisted control over diamond supply.

Over decades, the company has exploited the population's vanity by insinuating that your significant other must not love you as much as your friend's significant other if he did not get you a stone as large as hers (or his, I suppose). Today, it is simply accepted protocol to spend THREE MONTHS SALARY on an engagement ring. To me, that figure is just flabbergasting, and a blatant commercialization of something not meant to be commercialized. (Fair disclosure: I am fortunate to be married to someone who would have valued a Cracker Jack ring as much as the minuscule diamond dust that I could afford at the time of our engagement.) Quoting Mordechai Rappaport of the Rappaport price list in a recent Fortune article, "when a guy gives a woman a diamond, and someone was killed for it, it is not worth anything."

To be fair, the $60 billion industry supplies much needed export income and jobs to an already impoverished continent. A public awakening to the true cost of that bling on your finger poses enormous risk to those people, too. Also, according to the industry, only a small percentage of worldwide diamonds originated from conflict areas.

Recognizing their conundrum, the industry has started to embrace the Kimberley Process, which is a certification scheme. Several member countries agree to only trade with themselves. The self-policing members inspect each other's facilities, with the hope of having their diamonds declared conflict free. Still, the nature of the process is ripe for abuse. Aside from having members self police, the stones themselves make it difficult to certify. It is not like they have serial numbers attached to them. Black markets in the banned countries still thrive.

Into this fray steps what is possibly the biggest challenge to De Beers hegemony in its history, the fairly new process of creating synthetic diamonds. Using sophisticated, high pressure equipment, some startups have learned how to make actual diamonds that are structurally and materially the same as the real thing. Only the most sophisticated jewelry experts can tell the difference. At least for now, these companies are marking their diamonds with barely visible serial numbers. These processes threaten to bring lab-produced mass production to an industry that requires scarcity. If you rationalize your diamond purchase on the notion that it will always retain its monetary value, sell now.

If I had it my way, we would all awaken to the fact that love is signified by everyday commitments and not some thing, be it jewelry, cars, perfume, gifts, or whatever. Seeing that as a utopian notion for the time being, if you are purchasing jewelry this holiday season, make sure your jeweler understands and embraces the Kimberley Process. Kimberley may not be perfect, but it is the best we have at present. If the person at the counter looks at you cross-eyed, move on to another one. Many web merchants are now specializing in conflict-free diamonds, such as Brilliant Earth (I have never used them, nor do I specifically endorse them). Stay safe and responsible this season.

2006-11-25T20:46:00.000-06:00

SEC Probes Ford Motor's (NYSE: F) Ties to Syria and Sudan

On Friday, the Associated Press reported that the Securities and Exchange Commission sent a letter to Ford Motor inquiring about the non-disclosure of it's ties to Syria and Sudan. The SEC contends that these operations constitute material risk to shareholders and should therefore be disclosed. The company states that, since its operations comply with the law, the information is not material, and therefore does not require disclosure in the company reports. Given the lawyer-like response, an examination by the social investment crowd is in order.

The allegations center around the activities of Ford subsidiaries Land Rover, Volvo, and Jaguar, as well as Mazda, in which Ford owns a one third stake. Both Syria and Sudan are on the State Department list of terror-sponsoring states. U.S. Companies are not prohibited to conduct business inside Syria as long as the Syrian government is not a party to the transaction. Sudan, on the other hand, requires an exemption issued by the U.S. government, putting that genocidal regime in the same league as Iran, North Korea, and Cuba. A loophole exists for products that contain less than 10 percent U.S.-originated components. Pardon the pun, but this loophole is large enough to drive a Ford Truck through it.

Anyway, Ford claims that is dealership in Syria is authorized, and it meets the U.S. origination requirement. As for Sudan, a U.K.-based distributor of vehicles has dealerships in Sudan for Land Rover, Volvo, and Jaguar. Since these products also meet the U.S. origination requirement, and the distributor is not subject to U.S. law, Ford claims that this, too, is within the law. As for Mazda, which also does business in Sudan, Ford claims that since it is a separate legal entity and Ford is a minority stakeholder (owning one third of the shares), the Japanese company is also not subject to the U.S. sanctions. Nonetheless, Ford benefits from these operations to the tune of $50 million a year, according to its own figures. Since this is a drop in the bucket compared to its $177 billion in sales, it could not possibly be considered "material".

I, personally, find Ford's defense to be correct on all counts. The operations conform to the letter of the law, and $50 million is not a material amount requiring disclosure. Still, even children know that what is legal and what is right and moral are often different things altogether. Socially responsible investing is about rewarding companies who embrace the latter.

Of course, even this position opens up more cans of worms. Every social investor has his or her own definition of social responsibility. For example, Wal Mart (NYSE: WMT) is a beacon for the crowd that seeks companies that provide opportunity for minorities. At the same time, it is a pariah for the environmental crowd. Fannie Mae (NYSE: FNM) is a darling to the community investment fans, but for the corporate governance adherents, few companies are worse. Ford has always been a labor-friendly company. They have even been making substantial progress on the environmental front with their embrace of Hybrids and E85 ethanol. So, even these revelations require one to re-examine what is important in your own definition.

On a related note, the press could do more to expose these multinationals doing business with our enemies. For all of the invective that our Vice President receives over his tenure at Halliburton (NYSE: HAL), not much of it is about that company's subsidiary which is currently helping Iran build its oil infrastructure. This relationship was ongoing during Cheney's tenure as CEO. Schlumberger (NYSE: SLB) is also able to help the Iranians, thanks to the subsidiary loophole. That company has a Dubai-based shell company to get around the rules. The company's address is nothing more than a mail drop. These are but two of the most egregious examples.

2006-11-13T09:37:00.000-06:00

Yet Another Mutual Fund Industry Scandal

The SEC is investigating 27 mutual fund companies, along with fund service provider Bisys (NYSE: BSG), for allegedly paying kickbacks in return for fund servicing contracts. In addition to the market timing scandals of 2003, this provides another black eye for an industry that has long been a cesspool of corruption and long overdue for regulatory scrutiny.

Bisys provides back office processing work for various mutual fund companies. They might perform the fund accounting, prepare the statements and confirmations, mail out all correspondences to customers, etc. It is not bad work if you can get it, because the process is mostly automated, and it provides annuity-like revenue streams for the company. Usually, the service provider charges the company a percentage of assets under management, just like the management company itself, even though the marginal cost of adding additional investors is close to nothing.

The allegations are that Bisys and fund management companies colluded to overcharge investors for these services. Bisys then provided a "rebate", which amounts to a kickback, back to the management company. Because expenses are deducted from the fund before prices are calculated, this whole process is invisible to fund investors, who are getting robbed. This case is only the tip of the iceberg, as other fund service companies have come under scrutiny as well. The largest fund complexes typically do their own processing, so the fund companies under the microscope are smaller private-labelled funds, such as those pushed by your bank branch.

When I say "tip of the iceberg", I am referring to the myriad ways that funds management companies are getting kickbacks. Fund servicing is only one. For example, many companies, including the largest fund complexes, get overcharged on transaction costs in return for free research, office equipment, data terminals, even office space and travel junkets. Broker A charges Fund B 50 basis points per share when a reasonable cost might be 5 basis points. Transaction fees are not included in the quoted expense ratios, but those other costs are. The fund gets to publish a lower expense ratio, even though their actual expenses are probably far higher.

The real outrage here is that the "mutual" in mutual fund has been totally perverted. In the beginning, mutual funds evolved so that small investors could pool their funds, creating an economy of scale that could enable them to hire professional management and decrease their expenses. Since the 1980's, mutual fund assets have risen twenty-fold, but expense ratios have actually inched up a bit. At the same time, the digitalization of trading, trade processing, and clearing have enabled fund costs to go down. Lower costs distributed across many more investors should have equated to dramatically lower fund expenses. Instead, those savings are going straight to the bottom line of the fund industry and their willing (sometimes colluding) partners.

Far be it from me to say that fund companies should be exempt from raising their prices, just like any other business. However, they are doing so in ways that are not transparent. Fund investors do not even know they are being overcharged for services, until 30 years down the line when they notice that their fund underperformed the market benchmarks by a percent or two every year. That does not sound like much, but it can mean that your nest egg is half or a third what it would have been had the "mutual" in mutual fund remained.

2006-11-07T11:16:00.000-06:00

My Advice To Whomever Has Control of Congress

I have proclaimed in this blog a few times that I consider myself a non-partisan, but that does not mean that I don't vote. I must implore anybody with a civic and social conscience to go vote today.

I am cynical enough to believe that, among the group of politicians now running things on both sides of the aisle, even a change in party control will not lead to genuine governance. Here is my wish list:

1) To Democrats. Please don't spend two years engaging in payback. It would be easy to spend taxpayer dollars investigating the administration and other members of Congress to the exclusion of the serious problems of the day. I believe that this tactic could result in a switch back in 2008. However many seats the Dems gain, it will be because of voter fatigue with the current regime. Unless you rise above, cynicism will take root, suppress turnout in 2008, and you will be right back in the minority. The strategy of just being the anti-Bush party is tired. Get back to the principles that made the party great: social justice, equality of opportunity, and looking out for the poor and working classes.

2) To Republicans. At the time I write this, the polls have not closed, so we do not know if control is changing. It is apparent that the GOP is going to lose a substantial number of seats. Take a lesson. Good conservative values like fiscal responsibility and minimal regulation have been abandoned lately in favor of fiscal piggishness, backscratching, and the curtailing of civil rights.

3) To Both Parties. How about actually meeting? In January, I heard the Republican leadership admit that not much would get done in this election year. So, if action during an election year is off the table, and we have an election cycle every two years, that does not leave much time to get substantive work done. This Congress has the lowest number of days in session since the pre-industrial era.

4) Please Abandon the Class Warfare Strategies. Sorry lefties, the GOP has shown twice now (during the Reagan years and now) that lower top tax rates result in a significant increase in government revenues. The lower taxes have resulted in renewed business investment. The unemployment rate is still well below what was considered to be the natural rate just a few years ago. I could spend a lot of posts on this topic. However, in both of those cases, the GOP has failed to keep a lid on spending. Spending is the problem, not tax cuts.

5) To Both Parties. Please figure out a way to decrease the power of Iowa and New Hampshire. Why do those two states get to pick our presidents?

6) Don't abandon the electoral college. I know that it stings when the candidate with the popular vote is defeated in the college. It has happened four times in our republic's history, and we have still managed to survive and thrive. Getting rid of the college would mean that candidates will only embark on a major city tour, and ignore rural and small-state concerns.

7) To Both Parties. Bring some common sense to the immigration debate. This discussion has totally ignored the evidence of immigration's impact on the economy. The right has reverted to xenophobic platforms, trying to make the working class afraid of all the "brown people" coming to re-conquer the U.S. The left has done nothing but make charges of racism.

8) Show Me. Medicare will be insolvent within 15 years. Social Security is still on its way to insolvency. The bureaucracy at all levels is still woefully unprepared for more terrorist attacks. One out of every three children is born into poverty. Vast numbers of workers are unprepared for the challenges of globalization, not to mention many of our children. You want it. You got it. Rise up and lead. Show us that you can tackle these problems instead of making of mockery of political discourse by trotting out base issues such as gay marriage, Terry Schiavo, and age and class warfare. We are watching.

Go vote.

2006-10-28T20:34:00.000-05:00

The Conspiracy To Lower Gas Prices

During the Clinton years, right wing nut jobs made a mint by propagating theories of a drug-addled president, who was responsible for offing Vince Foster and his own Commerce Secretary. They were ludicrous theories, of course, but they still made money. Supporters of Clinton, as well as non-partisan moderates like myself, rolled their eyes. Several years later, left wingers are showing that they can be just as unhinged. Theories of a GOP-led conspiracy to manipulate gas prices prior to the election are just as misguided as those suggesting that they were manipulated on the way up. Unfortunately, USA Today reports that about 42 percent of respondents believe it. I say it is unfortunate not because a Democratic takeover of Congress would be necessarily bad. It is unfortunate because it distracts from the real energy policy outrages.

In case you missed it, moreso than any other issue, including the Iraq War, George W. Bush's approval ratings are tied to gas prices. The charts of each could be mirror images. Clearly, the drop in gas prices puts a cork in the Democrats' champagne bottles. The conspiracy stems from the proximity of the price drop to the elections, along with a mysterious move by Goldman Sachs to decrease oil's importance in a widely followed commodities index. The new Treasury Secretary, Hank Paulsen, just joined the administration from Goldman.

Let me be clear on this. Nobody is able to manipulate global oil prices enough to account for such a steep drop. Not Bush. Not Exxon. Not the Saudi Royal Family. Not even OPEC. Financial markets players, especially those in a commodity market so large, are just too greedy to let it happen. Whenever prices get too far away from reason, other players will fill the gap to bring prices back to normal. Not doing so would cost them money, or at least cause them to miss an opportunity (which they view as one and the same).

Gas prices are going down for several reaons, just as they went up for several reasons. The increase of the last 2 1/2 years was brought about from pretty good economic growth in the world's largest consumer country (the U.S.), torrid growth in two economies that account for 1/3 of the earth's population (India and China), supply disruptions in Venezuela and Nigeria, supply disruptions from Gulf hurricanes, and instability in the Middle East in the form of wars in Iraq and Lebanon. The new thing about the last round of increases was the speed, brought about by an army of speculators flush with hedge fund assets. The speculators amplify and speed up changes that would have occurred eventually, but they, too, are incapable of manipulation. In fact, speculators often cause prices to overshoot the reasonable targets, which usually creates a bloodbath in the pits.

This year, economic growth is beginning to cool in the U.S., China, and India. Not only is the supply that was knocked offline by the Gulf hurricanes coming back, no new hurricanes have exacerbated the problem. Fears of a World War III-like blowup in Israel and Lebanon are subsiding. Iraqi oil production has just surpassed pre-war production levels. Add to this the worldwide scramble to bring new supply online while prices are high, and you have the classic, market-driven antidote to high prices. This time, the speculators were caught off-guard. When the weather services announced that, counter to previous reports, the Gulf Hurricane season would not be as severe as thought, billions upon billions of long hedge fund money evaporated nearly overnight. One large fund, Amaranth Advisors, blew up completely to the tune of $9 billion.

One reason commodities are such an enduring asset class is the length of their up and down cycles. Because of permitting, environmental studies, building infrastructure, and other reasons, suppliers in extractive industries will always take awhile to meet demand after it becomes apparent. Last month's alleged (and I do mean alleged) find off the Gulf Coast will take years before we see the first drop.

Even OPEC is almost powerless when it comes to setting prices. They were somewhat successful during this last upswing only because every member except Saudi Arabia was pumping at their capacity. As oil prices started dropping, the Saudis called for production cuts from their members, and were promptly given the bird by the other members. If a small number of countries who have benign (or otherwise) dictators are unable to cooperate, how could the administration marshall multiple oil companies with shareholders to answer to and operations all over the planet?

It may be fanciful to expect the electorate to grasp complex principles, or that politicians will embrace facts and reason instead of pandering. But, I believe the conspiracy business detracts from what are real Bush Administration energy policy failures. Taxpayers still shell out billions in drilling subsidies to oil companies at a time when prices require no such subsidy. The infernal tax writeoff for SUV's still gives people an incentive to buy the most inefficient gas guzzlers. Much of the energy legislation is not only supported, but actually written, by energy companies. And, government subsidies to the alternative energy technologies that can really help ween the country off oil are but a fraction of the aforementioned oil drilling subsidies. Leave the conspiracy talk to Oliver Stone.

2006-10-25T12:55:00.000-05:00

Alarmism in Climate Change Circles?

Many reasons exist for the lack of urgency among politicians and the general public about Global Warming. One of them is a sense that they've all seen predictions of doom in the past, some of which are laughable now. Senator James Inhofe, who is the leading skeptic in Congress, recently held up a 30-year-old Newsweek article warning us all of the coming Ice Age as a result of Global Cooling. The theory was that aerosols in the air would reflect the sun's heat back into space, resulting in cooler temperatures and a return of the North American glaciers. The increased glacier cover would bounce more of the sun's radiation back into space, creating the feedback loop of cooler temperatures and more glacier coverage. Back then, we were coming off several back to back years of cooler-than-average temperatures.

A few weeks ago, I saw a PBS documentary on television about Global Dimming. In this scenario, man-made atmospheric particles such as coal soot from power plants absorbs the light from the sun before it gets to the surface, causing a change in growing seasons, shifting monsoonal rainfall, and cooling the earth's surface. The worst type of manipulation was used in this documentary, showing images from the 1980's Ethiopian famine with emaciated children and dead cattle. The show concluded with a demonstration that the solutions to Global Dimming could easily be implemented, except that eliminating the cooling effect would exacerbate Global Warming. Switch to pictures of oceans on fire, stranded polar bears, and collapsing glaciers.

This morning, I read a story of one lone scientist who has a theory that the asteroid that killed off the dinosaurs was actually only the final straw in a wave of species extinction caused by tens of thousands of years of warming. Not much weight is given to this theory in scientific circles, yet it deserved a spot in our morning newspapers.

Predictions of Armageddon, including your "run-of-the-mill" global catastrophes and the actual Armageddon apocalypse of the Bible, have always sold newspapers and magazines. Educated, and not-so-well educated, readers have come to regard them with fatigue. With all due respect to Al Gore, a politician makes a living by predicting doom and gloom (which can only be avoided by electing me). Why should the general public accept him as the spokesperson?

Now we have panels of virtually all respected climate scientists and numerous Nobel laureates saying that we really are facing a catastrophe from Global Warming. Here is where this cause departs from the other two. There is virtually no argument that Global Warming is happening and that humans are causing it. The questions are only what will the consequences be and how bad will it get.

Anybody who reads this blog knows that I am not a denier of Global Warming, and I even appreciate Al Gore's efforts. I am not qualified enough to know if those other theories hold water. However, I feel like a strategy change is in order. Thus far, we have been relying on manipulative pictures and video of doom and gloom. Even "An Inconvenient Truth" was guilty of this (by the way, I do believe this is a great film). The advocates need to take a page from Ronald Reagan and profess eternal optimism that we can invent our way out of this mess. Demonstrate the technologies. Show how cleaning up the atmosphere can be both helpful and profitable. Relive how multiple countries were able to come together to help eliminate CFC's, thereby actually shrinking the hold in the ozone layer. Above all, hammer home at every turn how THERE IS SCIENTIFIC CONSENSUS. The naysayers need to be marginalized as the kooks (or worse) that they are.

Of course, I realize that this is all easier than it sounds, and that many good people are already working on these fronts. One writer who does this extremely well is Amory Lovins of the Rocky Mountain Institute. His book, Natural Capitalism, is one of the reasons I am in this business.

2006-10-14T07:36:00.000-05:00

Grameen Founder Yunus Wins Nobel Peace Prize

If Community Investment and Microcredit are your particular flavor of social responsibility, one has to rejoice over Bangladeshi Muhammad Yunus' win of the Nobel Peace Prize. The selection represents clear acceptance by the Nobel committee that poverty reduction will trump even the best statesmen as a tool for world peace and stability. Grameen Bank, the for-profit institution founded by Yunus, claims to have helped lift 100 million people out of poverty in its 30 year existence.

As a refresher, microcredit involves lending small amounts to poor, often rural, often undocumented individuals on an unsecured basis. These individuals are unlikely to find sympathy at a traditional lending institution, at least not at reasonable rates. The average size of Grameen's loans is $200, though they are often as small as $50. While one would expect that loans made to people living on the razor's edge of poverty to have a high default rate, Grameen claims to have a better repayment rate than even the stodgiest of traditional lending institutions. They achieve this by having a complex social pressure system in place. The loan applicants must be part of a group of five, endorsed by the other members, and if one of those members is not current, all members will be unable to get more loans. Some of the success stories involve loans to buy egg-laying chickens, beauty shop supplies for hairdressers, even corrective eye surgery to enable a parent to get back to work.

Though widely considered as the father of the microcredit movement, Yunuf and Grameen have spawned a worldwide movement, reaching almost every corner of the globe, including the United States. Sadly, some of the best financial innovations of the last century have yet to meaningfully be applied to microcredit. The securitization of bundled loans is in its infancy. Loan insurance, a la MBIA (NYSE:MBI) or FGIC for U.S. municipal entities, is almost non-existent. Standards of grading credit, a la Moody's (NYSE:MCO) and S&P, are not uniform enough to attract the largest pools of capital.

We see hope on the horizon. Pierre Omidyar, founder of E-Bay (NASDAQ: EBAY) has made $100 million available to for-profit enterprises engaged in poverty reduction through the Omidyar-Tufts (University) Microfinance Fund. Accion International, a global non-profit making microcredit loans, has just partnered with AIG, one of the largest financial institutions on the planet, to deliver financial literacy and education campaigns across the globe. Lots of success stories involving companies finding profit from the poorest 80 percent of world population can be found in a wonderful book by C.K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits.

2006-10-05T18:19:00.000-05:00

Blue Chip Companies Face Class Action Over 401(k) Fees

St. Louis law firm Schlichter Bogard & Denton has filed a class action suit against US Blue Chip companies Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), United Technologies (NYSE: UTX), Bechtel Group (private), Caterpillar (NYSE: CAT), Exelon Corp. (NYSE: EXC), and International Paper Co. (NYSE: IP) over excessive fees in their 401(k) plans. Each defendant has either denied wrongdoing or refused to comment thus far, so let's examine some evidence against them.

At issue is the companies' fiduciary obligation to ensure adequate supervision over fees under the Employee Retirement Income Security Act (ERISA) of 1974, which sets forth standards for qualified plans. Put simply, companies that sponsor these plans have an obligation to make sure that their plans are being managed -- this is crucial -- in the best interests of employees.

Why choose these companies as the first defendants? I'm speculating, but I would think it is because these are old line companies that happen to have both old-line pension plans and 401(k) plans at the same time. With pension plans (defined benefit), a company has to make up any shortfall from promised benefits. With 401(k) plans (defined contribution), the employee bears all risk. Therefore, by comparing the company's pension management with it's 401(k) management, malfeasance (or at least negligence) can be shown.

Financial people have known about this negligence for years, and I am glad someone is shining a light on this cesspool of corruption. Management and the fund complexes have been conspiring at the expense of employees for years. First, some background.

A mutual fund is supposed to enable small investors to have sufficient scale to afford professional management and lower expenses. As assets increase, scale increases, so a fund's expense ratio should go down. Over 25 years, assets in mutual funds have increased from a few billion to over 8 trillion in assets, thanks in large part to the increasing popularity of 401(k) plans. Roughly half of all mutual fund assets are held in defined contribution plans. With that kind of spectacular growth, one would expect expense ratios to fall. Instead, they have actually inched up. The average actively managed mutual fund in a 401(k) plan has an unconscionable 1.57 percent in fees. Companies such as Vanguard, whose funds are still truly mutual, are owned by their shareholders. Their funds have expense ratios which are roughly half of their brethren that are managed by mutual fund complexes. Think about that. Eighty basis points on $4 trillion dollars amounts to a $24 billion dollar skimming operation perpetuated annually by fund management complexes.

However, they could not accomplish this travesty without willing accomplices in senior management at large companies. How? The first way is by performing myriad services, such as compliance testing and administration, for free. By doing so, the company gets an earnings boost by not paying out of pocket for these services, in exchange for a larger management fee, which is almost invisible to employees and certainly does not count against earnings. The value of the extra percentage, however, far surpasses the value of these free services. The second, more sinister, collusion involves the implicit suggestion that fund managers, who collectively own a mammoth portion of corporate America, will not rock the boat on corporate governance and executive compensation issues. Company management gets free reign to loot the corporate till, while the fund complexes are free to fleece the employee retirement plans.

The cost to employees can not be overstated. That eighty basis points does not sound like much, but over a 30 year horizon, it could literally mean that the retiring employee's nest egg is 1/3 to 1/2 of what it would have been with reasonable fees. As pension plans are fast going the way of the dinosaurs, this affects just about everybody.

2006-09-27T11:09:00.000-05:00

Green Net National Product

Discussing economic statistics and accounting principles are usually not useful for driving blog traffic and newsletter subscriptions. However, if investment decisions on the corporate, government and individual levels are based on the numbers (and they are), and the numbers have a serious flaw that ignores environmental degradation (and they do), then we have a problem. If the world truly wants to move to sustainability, one of the most effective measures we can adopt is an update of economic statistics and accounting measures.

One of the most widely cited economic statistics in Gross Domestic Product (GDP), which as the name suggests, is supposed to be a reflection of the production occurring within the borders of a country. To illustrate, pretend that we have two countries: Country A, whose chief export is database software, and Country B, whose chief export is aluminum cans. If Country A sells $100,000 worth of software, its GDP goes up by an equivalent amount. If Country B produces $100,00 worth of aluminum cans, the same happens. However, Country B's process of making those cans destroyed several acres of cropland because aluminum extraction is a dirty business. It does not take a ph.D in economics to see that these two undertakings are not equal in benefit to its country. Yet, GDP measures them equally.

To use a real life example, many small African countries have experienced an explosion in GDP because their (often corrupt) rulers have made deals to develop the oil infrastructure. The resulting oil sales explode the country's GDP. But, when you consider that the lion's share of the profits either went to foreigners or corrupt rulers, what do you have? The country liquidates its natural resources, thus becoming poorer by one measure, while not that many people share in the wealth. A recent Fortune article cited the case of a gold and copper mine which resulted in huge gains in GDP for Papua New Guinea. Much of the income went to BHP Billiton, while the indigenous population was left with a poisoned river from mine tailings, destroying the livelihoods of at least 40,000. Most would argue that the country is poorer for the experience, yet national statistics do not reflect it.

This phenomenon works at the corporate level, too. For the last two years, the media has focused on multi-billion dollar quarters for oil giants such as Exxon (NYSE:XOM), Chevron (NYSE:CVX), and British Petroleum (NYSE:BP). Yet, the stock prices have not really reflected the exuberance in their earnings reports. The reason is that they are only liquidating reserves that were already carried on their balance sheets. They have not been able to replace these reserves with new oil field finds (the recent discovery of a giant Gulf of Mexico field excepted). Shell Oil (NYSE:RDS.B) was embroiled in an accounting scandal a few years ago over the exaggeration of proven reserves. Again, earnings reports are not telling the full story.

Another mercilessly flogged number is the trade deficit. Here, the equation tries to make two countries look like individuals. For the U.S., much of the public is convinced that we are becoming poorer because of our trade deficit with China. For example, if China sells us a $1,000 laptop, the trade deficit goes up $1,000. However, probably 90 percent of the profits from this $1,000 went to one of a few U.S. behemoths, Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), or Apple (NASDAQ:AAPL). Which country is better off? The more useful measure is what these countries (or companies) are doing to add value to the raw materials. Apple has had a significant trade deficit with its component suppliers since the company's founding, but that is not a useful measure. It is useful to know what Apple does to add value to its motley collection of components. The same should be evaluated when two countries are being compared.

Despite the apparent shortcomings, economists and the media continue to use them only because they have always used them. It is also convenient to keep compiling it the same way, so as to compare it with last year's figures. A movement is afoot to more adequately account for environmental degradation. One of these measures, Green Net National Product (GNNP), not only adjusts for environmental degradation but also for the flow of earnings. This would not only mitigate the flaws in GDP, but also the trade deficit numbers.

Among its chief proponents is The World Bank. They have provided an excellent 235-page manual "Estimating the Cost of Environmental Degradation", which is free. Warning: this publication may induce sleep.

2006-09-19T10:20:00.000-05:00

MIT Technology Enables Far-Out Wind Farms

Offshore wind turbines have huge promise. Just a few miles offshore, the winds are far more steady than onshore, and turbine size (which has a proportionate effect on power generation) can be increased dramatically without being an overly burdensome eyesore, noisy, or dangerous to birds. Yet, despite the promise, NIMBY-ism has prevented construction of large-scale wind farms. Most notoriously, a proposed farm off Massachusset's Cape Cod has met opposition by rich coastal homeowners because of the blight it would bring to their ocean views. Although conservatives like to point out that liberal icon Edward Kennedy is opposed to the construction, NIMBY-ism in Massachussets is mostly bi-partisan.

The National Renewable Energy Lab, along with MIT Researcher Paul D. Sclavounos have unveiled a new design that would enable locations much farther out to sea, and thus out of sight. The system relies on tethering the turbines to concrete blocks on the bottom of the ocean, up to depths of over 600 feet. Currently, wind turbines are in relatively shallow water and built on a sea-floor foundation, similar to a bridge or oil platform. Sclavounos claims that having the turbines further out will double the power generation because of the steadier and faster winds farther out to sea. However, their press release does not mention what kind of power losses would occur when transmitting longer distances.

Although birds may find their migratory paths still interrupted, these offshore turbines are much less likely to kill them. First, the size of the turbines means that the blades turn more slowly so that the chances of striking a bird mid-flight is much decreased. Second, whereas near-shore and on-shore wind turbines are frequently mentioned as bird-killers, far fewer flocks of birds are found that far offshore.

As for sea life, the best evidence shows that wind platforms create an artificial reef that is beneficial. Oil platforms have become havens for ocean eco-systems. Wind platforms would most likely be un-manned and therefore, less polluting. Both types create a haven for sea life from commercial and recreational vessels.

The vast amount of ocean real estate, available for a relatively benign use makes this breakthrough much needed. Now, we just need policies that can allow for rapid construction and testing.

2006-09-13T11:58:00.000-05:00

Dueling Viewpoints About the Future of Retirement Savings

While Reading my Sunday Austin American Statesman, I happened to notice two stories that offer two wildly different perspectives on the state of Americans' retirement dilemma. In one story, Pension Plans Go By the Wayside (syndicated), LA Times reporter Jonathan Peterson bemoans the abandonment of the traditional pension plan by large companies. As the story goes, corporations are greedy entities for allowing workers to be responsible for their own retirement. The intimation was that the public is not equipped to handle this responsibility. Yet, on a facing story Long-term 401(k) savers sit on six-figure nest eggs, the Investment Company Institute cites statistics that 401k participants who save for only six years now have an average balance in the six figures. This represents an increase of 50 percent since 1999, despite the most brutal market correction in a generation. Although it is politically popular to berate corporate America for abandoning the traditional pension, for several reasons, it is the correct course of action. However, this opinion also comes with a few qualifiers.

First, let's differentiate the companies who are "abandoning" the pension plan. The first kind, companies such as DuPont (NYSE: DD)and IBM (NYSE: IBM), are halting new participants into their pension plan, slowly buying out the pension so as to guarantee benefits for the current participants, and shifting focus for new participants to the defined contribution (401k and 403b) plans. Nobody is losing out on promised benefits. These companies are wholly different than the companies, such as Bethlehem Steel and United Airlines, who dumped their pension plans onto taxpayers because they over-promised benefits and failed to contribute enough to meet them. Instead, they opted to use bankruptcy laws to turn over their pension obligations to the federally backed Pension Benefit Guarantee Corp, itself a woefully misguided bureaucracy. The latter group rightfully deserve our scorn.

Pensions have become a relic of yesterday's economy for the following reasons:

Over-promised benefits. Taking a cue from our federal government (though still not nearly as brazen), corporate executives have not shown the backbone to either keep a lid on promised benefits or keep contributing enough to meet them. Managements in the auto and airline industries are notorious for buckling under to union pressure to up benefits because someone else will be in charge when the bill comes due.
Employee Turnover. In the postwar "Company Man" era, it was far more common to spend one's entire career at one company. In many cases, the amount of benefit depends on years of service. Since the average adult now changes jobs every 5-6 years, almost nobody is getting the maximum benefit of a pension plan.
Pensions affect a company's earnings. Stay with me on this. GAAP rules require that a company report investment gains or losses on its earnings statements. This not only unfairly ties a company's operating performance to the vagaries of the market, it opens up the plan funds and the earnings reports to manipulation. Verizon (NYSE: VZ)is one company that used investment gains to essentially manufacture earnings. They did so by just changing some basic assumptions on their plan performance. Presto! A quarter with no earnings suddently had bountiful earnings.
Size has become a problem. Despite their much publicized troubles, General Motors (NYSE: GM) has a pension fund about 6 times larger than the market cap of their own company. AND IT IS STILL UNDERFUNDED! Any investment manager knows that size is the enemy of returns.
Lack of Appropriate Allocation. Pension managers make decisions based on their upcoming obligations in the next 10-15 years. This means that they are managing for people in their 50's. If you are in your 20's, 30's, or 40's, you would probably benefit immensely by having a more aggressive allocation, but since you don't, your investment performance will likely underperform.

The 401k data clearly shows that participants can manage effectively, if only they would. Nationwide, only about 17 percent of eligible employees are both participating in their plan, and making the necessary allocations that are appropriate to their age and risk tolerance. This is where the political hand-wringing needs to focus. The problem is entirely fixable if companies and government focused on educating workers to make the right decisions.

2006-09-08T10:53:00.000-05:00

Cynical House Debate About Horse Consumption Ban

This post is for the animal rights crowd

In the eighth century A.D., Pope Gregory III banned the consumption of horse meat. Historians debate whether the ban was the result of a continent-wide horse shortage, or that the practice resembled pre-Christian pagan rituals. Today, even though horse meat is as nutritious as any hoofed animal, in plentiful supply, widely consumed in much of Europe and Asia, and quite tasty (so I've heard), Americans still adhere to the religious taboo. Yesterday, the House of Representatives voted to ban the slaughter of horses in the U.S. for human consumption. Almost all of the slaughtered horse meat is exported to tables abroad. As is typical of our elected heroes, they took a complex issue and tried to make it into a "my-opponents-love-to-club-baby-seals" mockery of the issue at hand. A wonderful report from NPR can summarize.

Animal right activists could justifiably line up on either side. On the one hand, the U.S. Humane Society claims that the 3 horse slaughter plants (all foreign-owned) in operation on domestic soil are unjustifiably cruel in their operation. They allege that old and feeble animals are transported in cramped conditions to the plants. Since federal mandates require that the animals be unconscious, a metal rod is then injected into their brains before they are hoisted by their hind-quarters to a hideous machine that then cuts their throat. Some claim that not all animals are unconscious. On the other hand, veterinary groups oppose the ban because, in their opinion, slaughter is more humane than growing old and sick. As any horse owner knows, care and feeding of a horse is not an inexpensive pursuit. True, we would wish that humanity would treat our animal companions better, but we know that tens of thousands of animals are discarded after their usefulness ceases. Even former Kentucky Derby winners have been rendered into food.

Curiously absent from the debate was the question of commercial interests rounding up wild horses on public lands for sale to the slaughterhouses. Even more absent was the chance to talk about the inefficiency, corruption, and environmental damage caused by all meat consumption. Those would be worthwhile debates, even considering other pertinent issues in front of the house, like... oh, say... the Iraq War, the Hezbollah-Israeli War, nuclear proliferation, social security, and health care. Instead, we just had representatives recalling their days of rugged, outdoorsy horse companionship. So much for the substantive debate.

2006-08-30T16:22:00.000-05:00

Are Green Consumers Gullible?

As an advocate for all things green and sustainable, I am often peeved by the firms that feel it is their God given right to charge a massive premium for sustainable products. All of us in the business have read the LOHAS and Cultural Creative Market Research. Sure, it shows that the green consumer is often willing to pay a 20 percent premium for a product to know that its creation conforms with certain social values. However, charging a Whole Foods-like premium for everyday commodities will always keep the movement relegated to the elite types who can afford it. The typical Wal-Mart shopper, who, by the way, outnumbers the LOHAS crowd by a significant margin, will rarely buy "fair trade" coffee at $9/lb when you can get Folger's for $2. And, until the everyday shopper embraces sustainable values, our impact will be minimal.

The window for making an impact with a new sustainable product or business model is getting smaller and smaller. Although this is probably so in any industry, once a market is demonstrated, the marketers among us stink it up with off-base, fraudulent, or misleading claims. Fair Trade coffee is one of those. What started out as a noble idea -- committing to give rural farmers better than market prices so that they can afford subsistence -- has now been taken over by brands that expect to charge 200% more by slapping the words "fair trade" on the label along with some bucolic scenes of Latin American peasants. Coffee is already a global commodity, and even moderately priced bags of beans carry a magnificent margin. The same can be said for organic milk now. Paying a 100 percent premium for a gallon of milk is now more than likely to by you a fancy label with pictures of dancing cows and nothing more (see a post a few weeks ago concerning Dean Foods and Horizon Organic). When there is no official definition, loose regulation, no oversight of the use of terms such as "organic", "fair trade", "all natural", "herbal", "sustainably harvested", etc., we invite abuse.

In the investment field, I have to look in the direction of the Domini family of funds, though it pains me to do so. This week, they approved a move of their KLD Social Index fund to active management. Index funds are a commodity, and the primary measure of their worth is the expense ratio. Where Vanguard charges 20 basis points for their socially screened fund, Domini tried to get away with 80 basis points. Management will tell you that this was because of their size, relative to behemoths at Vanguard, but I see that as a bunch of bunk. An index fund is on auto-pilot. Trading costs would be minimal, even at a firm of Domini's size. There are no research costs. The only thing they have to pay is for annual prospecti, statements, confirms, regulatory registrations, and presumably a license fee to KLD. So, after several years of sub-par performance , they have decided to now call their fund "actively managed", which means they will trade the markets in an attempt to beat it. By definition, an index will underperform its benchmark by the sum of its expenses, so either Domini set themselves up for failure, or they must have believed in gouging green consumers.

This move is unconscionable for shareholders. First, re-balancing a portfolio will create immense capital gains taxes, which have to be distributed to shareholders. Management says they will be "strategic" about this, which to me, means they will pretty much stay with their index and only move to active management slowly. Only now, their expense ratio is in line with other actively managed funds. Second, actively managed funds are usually a bad bet for investors for the same reason expensive index funds are bad: their expenses are too high. Frightfully few actively managed funds exceed their benchmarks over a three year period. On average, actively managed funds underperform their benchmarks by the average expense ratio, which is 1.57 percent (almost 8x the aforementioned Vanguard index fund).

If you believe in indexing, it is time to reduce or get rid of your holdings in the Domini index fund. The Vanguard-Calvert index fund is a much better choice.

2006-08-23T10:42:00.000-05:00

Plug-In Hybrid Electric Vehicles -- Get Your Municipality on Board

My local utility, Austin Energy, which happens to be one of the most forward thinking utilities in the country, along with municipal governments, non-profits, and even individuals have launched Plug-In Partners. The organization seeks to spur the manufacture of PHEV's by generating advanced demand for the vehicle. They do this by gathering advance purchase orders from fleet buyers. The video attached will show you the benefits of this program.

With due respect to the pro-hydrogen crowd, PHEV's offer a much more sensible solution to curbing automobile emissions. Our H2 friends should focus on stationary applications of energy production. The technology and infrastructure exists now for PHEV's, plus the problems of transportation and storage of hydrogen are non-existent.

The electric cars of the 1990's, recently eulogized in "Who Killed the Electric Car" had an enormous flaw. They could not be counted on for long trips. PHEV's solve this problem. While the 35-40 mile range on one charge of the PHEV's will take care of the average commute, long commuters and weekenders do not want to wait 8 hours for the battery to re-charge if they are travelling beyond range. PHEV's solve that by including a regular internal combustion engine for those times that it is required. The pundits are predicting that a PHEV could get 100 mpg, while at least one designer, AFS Trinity, have signed a Memo of Understanding with Austin Energy to supply their so-called "Extreme Hybrid Drive Train" which they claim will get 250 mpg. An equivalent "gallon" of electrical charge (the juice it would take to travel the same miles as the nationwide fuel efficiency standard) averages about 75 cents. This dollar savings is real money to the average car owner. Add in the environmental and national security benefits and this solution becomes the most compelling case for alternative fuels. This even beats ethanol, which as I've explained in previous posts, creates competition between fuel and food.

Sign the petition, and if possible, call your city council members and urge them to become a Plug-In Partner. Most mid-sized to large municipalities have sizable fleets, and their demand could help make the technology affordable for us all.

2006-08-16T12:49:00.000-05:00

Is That $6 Gallon Of Organic Milk Really Organic?

The Cornucopia Institute, an aggressive watchdog of the organic industry has sued Dean Foods (NYSE: DF), the makers of Horizon Organic Milk, claiming that the world's largest dairy concern does not conform to the USDA's National Organic Standards. The Institute alleges that Dean's grazing and pasturing amount to a "dog and pony" show, which if true, means that all of those $6 gallons of milk were not truly organic. Considering that, in my town of Austin, TX, the non-organic brands go for less than $4, the 50 percent premium also amounts to outright theft. In my household, we have been buying organic milk for years, so this story hits close to home. However, if Cornucopia Institute is being too aggressive, it could scare off other large corporate players from entering organic agriculture.

According to the USDA's guidelines, organic milk must come from cows that are grazed in pasture. Additionally, there are guidelines about where, and how long cattle can be kept in confinement. Graze Magazine uncovered numerous ex-employees who say that proper grazing and pasturing techniques were used when VIP visitors, such as Whole Foods' (NASDAQ: WFMI) John Mackey, were touring the facilities. If true as alleged, then the milk should not have carried the organic label. The Cornucopia lawsuit is not the only black eye for Dean Foods. The Organic Consumers Association issued a boycott of Horizon products last year.

Such conflict in organic agriculture makes one apprehensive. Of course, we would hope that corporations would live by the honor system and not cross the line. On the other hand, one of the primary drivers for going organic is the ability to charge a premium and get a little positive PR value out of being Green (aside from the intrinsic, non-economic reward of doing the right thing). If going organic also carries the prospect of unrelenting scrutiny by activists, then large corporate concerns might decide that the venture would not be worth it. Up until now, Horizon has been THE most successful organic brand, with margins that the rest of the dairy business can only dream about. Clearly, the best hope to ensure organic quality is for the large organic grocers (think Whole Foods) to make it clear that crossing the line means losing shelf space. This, too, would be a difficult move for those companies, since they, too share in the fantastic margins. After all, John Mackey is the CEO of a publicly traded corporation. Clever marketing by his company has sort of made him the standard bearer, like it or not.

In any event, let's hope the allegations are not true. If they are true, I hope class action lawyers are paying attention.

2006-08-15T21:36:00.000-05:00

Headlines from Austin Bloggers

As you can tell from the right-hand column, I strongly believe that the best way to reach a blogosphere is to contribute to it. Our latest feed tool is for Austin Bloggers. The meta-feed is created from the wonderful resource at Austin Bloggers. If you're a blogger, you should follow the link below, and copy the code snippet. Place the code snippet into your blog's template. Doing so helps traffic cross-pollinate amongst Austin Bloggers. The Progressive and Green Blogosphere tools on the right column cumulatively receive about 150,000 page views per week with thousands of clicks being referred between like minded bloggers. It may take some time to get to that point, but we can do it. I hope you're on board. Just follow the link below.

Click Here To Copy The Code Snippet

2006-08-09T18:01:00.000-05:00

Pensions Strengthened by Congress

Congress took the unusual step of accomplishing something meaningful in the field of pension reform, and the effects could be felt broadly, whether or not you yourself are covered by a defined benefit plan. To simplify the action, the law enacted last week accomplished three important things:

1) It required a timeline for underfunded pensions to become fully funded. Nationwide, it is estimated that US Corporate pensions are only 85 percent funded, with the most profligate underachievers in the 55-60 percent funding range. The worst performers are clustered in the troubled auto and airlines businesses. United Airlines (NYSE: UAL) and US Air (NYSE:LCC) have already foisted their pension liabilities onto taxpayers because management could not find the discipline to either make reasonable promises to their employees or shore up their plans during good times.

2) It mitigated liability on the part of the employer when recommending or providing investment advisory services, especially for defined contribution (401k and 403b) plans. On the surface, you might think this means a whole lot more to people in my profession, but consider that a frightfully low percentage of potential participants participate in their plan, and even smaller percentage are actively managing those funds in a way that will be sufficient to meet their long term retirement needs.

3) The plan also enables employers to make compulsory deductions from employees' paychecks into the company-sponsored retirement plan. Although this may sound frightening from a personal property-rights standpoint, just consider that the default is being changed to participation, whereas before, the default was non-participation. This action may be the kind of "kick in the tail" that the public needs to start planning their financial futures.

Although making these much-needed changes provides a glimmer of hope, it is somewhat disheartening that Congress lacks the will to address three even more important aspects of the nation's retirement plans:

1) The Pension Benefit Guaranty Corporation (PBGC) which insures private pension obligations (think FDIC for pension benefits) operates in a way that only a government bureaucrat could love. Unlike traditional insurance, premiums for coverage bear absolutely no resemblance to the amount of risk that taxpayers assume. Clearly, firms such as General Motors (NYSE: GM), whose pension obligations promised to current and future retirees exceed shareholder equity by ten times, should be required to pay a higher premium per employee than other, more frugal companies. The PBGC's premium structure encourages employers to over-promise and under-deliver.

2) As awful as the current private pension underfunding seems, it is a mere shadow of the sickly pension plans for public employees nationwide. As is typical of institutions with no profit motive, public employees are being promised ever more generous retirement benefits. The politicians who accede to these unreasonable demands are clearly lacking leadership, instead opting to trade political favors now for IOU's to be paid long after they leave office.

3) All of this pales in comparison to the morass we face if Social Security funding is not put on a sustainable path. The Bush Administration learned a hard lesson about the so-called "third rail" of politics in 2005, paying a steep political price for floating some trial balloons. The fualt for this lies with both parties, and the consequences are that social security reform will most likely be left for future administrations. This is a shame, since the pain will be greater every year that action is deferred. Of course, this is a subject worthy of many posts.

2006-08-07T21:06:00.000-05:00

Slick GOP PR-Firm outed as Inconvenient Truth Spoofer

ABC News has uncovered the identity of one of the most popular You-Tube spoofs, which mocks Al Gore's arguments in An Inconvenient Truth. It turns out that the supposedly amateur video originated with a PR firm that has Exxon Mobil (NYSE: XOM) as a client. I'll let you watch it for yourself.

2006-08-06T21:06:00.000-05:00

Ad-Sense and Overture Criminal Empire

This is a little off of my typical fare, but I have to get this off my chest. I am firmly convinced that Google and Yahoo are knowingly perpetuating criminal activity in their content networks.

As some of you know, I have a business promoting feed tools such as the ones in the right column. These tools aggregate the content of a blog community and containerize them. Other bloggers are displaying these tools, because they get to cross-promote their content throughout the community. The sponsors of the tool benefit by gaining pretty massive link popularity, which in turn, helps them gain on the search rankings. Info on this business is at http://www.viralinks.com.

Anyway, I've been running PPC campaigns on Google, Yahoo, and MSN. None of them deliver anything of value. Here's how I know.

I had a one-pixel image load with my home page, so I could know how long visitors were staying on the site. After noticing that scant few of the PPC visitors were staying, I had this pixel load 1 second after the home page loaded. This way, if the visitor did not load the pixel, then it would be clear to me that the visitor was not a real, human eyeball.

As it turned out, a full 86 percent of the visitors from both Yahoo and Google failed to load that pixel. It is apparent to me that the vast majority of the ad spending, accounting for several hundred dollars was fraudulent. There is no possible way that 86 percent of thsoe visitors don't stay longer than 1 second.

Noticing again that much of the traffic was originating in India, Moldova, and Hungary, I changed my settings for U.S. visitors only, and only natural search results. My click-throughs then plummeted to basically nothing.pn

I did not have the same results for MSN, but it's not because they do things honestly. I put up a campaign with the new MSN Search in its first week. Despite projecting 3,000 clicks per month, they have only been able to deliver 2-3 per week. I complained to MSN. They told me that those projections are only "meant to be a guide". However, they had no response when I pointed out that even their projection for the number of searches was off by 97 percent. I mean, I understand that click-throughs are imprecise. Search queries are a known factor. Three months later, even though I know for a fact they have hard data on the number of searches for the almost 500 terms I picked, they still advertise the much larger amount. Obviously, this is a ploy to get users to sign up for the first time.

The Search Engines have been scrambling to have the courts frame click fraud as "clicks originating from the same IP", but in fact, the clever fraudsters move past this technique a long time ago. Who can blame them for perpetuating this criminal enterprise? They have built billions of market valuation out of this model, even though it defrauds their customers. Just a hint that over half of their traffic was bogus would send their stock prices into freefall.

I, for one, will never engage in another PPC campaign. Natural search is the way to go. And, by the way, since I am in a position to shamelessly plug, the Viralinks system goes a long way to achieving this.

2006-08-02T12:47:00.000-05:00

Movie Review: Who Killed the Electric Car?

A strange thing has occurred in my movie-going habits lately. Usually a consumer of the usual summer fare (minus the inanities of super-hero sequels), the last 3 films I have paid full price to see are documentaries, including Al Gore's An Inconvenient Truth and United 93. Ok, so I realize that the latter is not necessarily a documentary, but it was so true to the story that it felt like one. On Friday, I saw Who Killed The Electric Car, which chronicles the birth and demise of the Zero Emissions Vehicle.

In 1990, the state of California mandated a certain percentage of cars sold in the state to have zero emissions by a certain date. The auto manufacturers scrambled to come up with a ZEV. The most ambitious, most popular, and best seller was the General Motors EV1. These cars were plugged in and had a range of approximately 125 miles, more than enough for the average commuter to make it through the day on one charge. Enthusiasts loved it because of its pick-up, quiet operation, and (since this is Hollywood, after all) its cool factor. After a few years, despite robust waiting lists, the auto companies claimed there was little demand, and over the next several years, the car died a slow death. Because all EV1's were leased and not sold, GM repossessed every single EV1 and had them crushed.

Without their beloved cars, conspiracy theories were developed assigning blame on the car companies, the oil companies, federal politicians, state politicians at the California Air Resources Board, consumers, and even backers of hydrogen technologies. Who gets the MOST blame is, of course, the point of the movie.

Narrated by Martin Sheen, the movie is riveting in the way a Matlock episode is riveting. That is, you already know all the reasons and motivations for the crime at the beginning, but you still have to watch it. However, at the end, you have to hand it to the filmmaker for making the topic interesting.

I have one criticism. The film devotes the first quarter of the film to people singing the praises of the EV1, but since I lived in California at the time this is all taking place, they never mentioned the one serious technological drawback of the cars. It is true that, as actor Ed Begley Jr. says in the film, that the Ev1 will "meet the needs of 90 percent of the people", his statement should be amended to "it meets the needs of the 90 percent of the people 90 percent of the time". On most days, the average driver can make it on 1 charge. It is those few days where they can't make it on one charge that is the problem. If you need to drive from LA to San Diego one day, you would need to stop for eight hours somewhere in Orange County to re-charge. Of course, finding a suitable re-charging station was a challenge in and of itself.

Many of the rental car companies used EV1's. As it turned out, at LAX on the high demand days, the EV1's would be the last to go. Out of town travelers, with no idea how to plan for re-charging, would find themselves stranded in the middle of nowhere with no power outlet in site. Towing was the only option. As is the case with Priuses today, the charges would also not last 125 miles as stated in the marketing brochures. It was the old "up to" rule, where in the optimal conditions, it can make it that far, but in reality, it's never that far.

The more virtuous among us (namely, my wife) would say that these are the times when you should plan for mass transportation or renting a car. However, I see the everyday driver looking at the possibility and just deciding to chuck the idea of the electric car.

Gladly, new technologies are on the horizon to address these issues. A plug-in hybrid should have all the benefits of the EV1, while being able to fall back on gasoline in those rare cases where longer range is required. While leaving the cinema, we were greeted with people handing out fliers for plug-in organizations. The literature stated that recharging a plug-in hybrid would be equivalent to gasoline at 77 cents per gallon. We'll see.

I give the film 3 stars out of 4.

2006-07-26T11:54:00.000-05:00

Market Mechanisms for Emissions Trading Full of Holes

Although better than the Bush plan of doing nothing, the Kyoto Protocol has its share of problems. The European Union in particular has relied on market mechanisms to achieve the goal of holding carbon emissions to 1990 levels by 2012. The plan works like this: Governments and Treaties set the level of emissions allowed by a region. Government bureaucrats then divide up this level of emissions into "emissions allowances" for individual emitters. That emitter then has the ability to emit to its full allowance, or cut emissions below its allowance and sell its remaining allowances on the open market. A coal plant may, for example, be given allowance to cover only its current level of emissions. If it wants to increase production, it needs to either purchase more allowances from another emitter or find ways to increase production with fewer emissions. To accommodate this trading, exchanges have sprung up to broker emissions allowances. However, some bureaucrats have demonstrated in this space their woeful lack of understanding of how markets work.

The framework looks good on paper. Rational businesses will try to at least save money by not facing required purchases of additional allowances. At best, they will try to optimize their emissions efficiency so they can make money by selling their allowances. The overall level of emissions can be dictated and managed down to the end goal (1990-level emissions) by rewarding the good players and punishing the bad players with those allowances.

The problems come in when you add the demands of a regulated, global, and liquid market for exchanging those allowances. Emissions allowances become a de-facto currency, and as any African despot can attest, a currency is only as good as the trustworthiness of the issuer. That's why dollars, euros, and yen account for most economic activity in the world, and not Venezuelan Bolivars and Cuban Pesos.

This gives both the participating countries and the individual emitters enormous room to cheat. The first order for keeping the allowance currency sound is to ensure compliance with emissions volume. This is harder than it sounds, since there is no national infrastructure in place to monitor smokestack emissions. Most countries rely on the companies' word. Think about that. How many companies would fudge numbers if they knew that telling the truth results in a fine?

The second order of business for keeping the allowance currency sound is to keep a tight lid on the issuance of new allowances. Just as turning on the printing press debases a national currency, issuing new allowances willy-nilly decreases their value. For this, you can blame the bureaucrats, especially in a loose confederation such as the EU, where every country expects the others to make up for their own shortfall. Unfortunately, we have a real life example of this. According to an MIT Technology Review article, in the European Union Greenhouse Gas Emissions Trading Scheme, member countries issued 3.4 percent more allowances than was needed in its first year of existence. Central banks would scream bloody murder if a national currency was debased that much in a single year. The result was that the bottom fell out of the price of a CO2 allowance, falling two thirds in April. Now, an allowance for 1 ton of CO2 emissions can be purchased for 10 euros, reducing for everybody the punitive cost of over-emitting.

In order for a market mechanism to work, you need to have buyers AND sellers. In emissions trading, in order to ensure buyers, the compliance mechanisms must be strengthened and the punitive measures for not complying must be painful. Without these, you only have a one-sided market -- sellers. When you have a one-sided market, the price tanks. When the price tanks, there is no value to cutting emissions in the first place.

2006-07-19T11:50:00.000-05:00

Heat Waves Highlight Need for Conservation

Record temperatures throughout the US this week are only the beginning of the pain. Next month, when utility bills are received, northerners will only begin to understand. Energy demand is taxing all utitlities, and even though the grid is being monitored closely, the chance of brownouts and rolling blackouts remains high. For some, this heat wave will be the opportunity to lobby for more power plants, but conservation will be the lowest hanging fruit.

Our world consumes 13 terawatts of electricity each year, 80 percent of which comes from fossil fuel sources. Most of that power comes from coal, the dirtiest source of all, accounting for 37 percent of all greenhouse emissions. It not only contributes prodigiously to our global warming problem, it is also a source of mercury in our streams and metals in our soils. Humanity suffers from a cosmic curse that coal is most abundant in the U.S., China, and India. Despite all the evidence of its destructiveness, coal is on the drawing board more than any other source to meet surging needs in those countries.

However, each community has within its power the ability to practice the cleanest form of energy production around, conservation. Keeping those fossil fuels in the ground, or at least, slowing the rate at which they are pulverized and exploded, is not only the cleanest, but it provides an immediate monetary incentive in the form of savings. If your community needs to build a coal-fired plant, it will cost tens of millions and be belching CO2 for 50-60 years. Or, you could create a light bulb tradeout program that will cost a fraction, keep money in the community, and keep some coal in the ground. Even if a community purchased, gave away, and paid for installation of 3 Compact fluorescent Light Bulbs for each family, 8-10 percent of demand would vanish. And, it would take a fraction of the cost of building a new plant.

Many city-owned utilities offer energy audits for their customers, but few take advantage. Widespread insulation and caulking could save another 5-8 percent. The same could be said for smart windows, and efficient refrigerators and HVAC units. The best estimates from government agencies show that 40 percent of all electricity use could be eliminated with minimal top-down conservation.

Of course, this is not done for several reasons. First, even though it is exceedingly difficult to get the permits to build a power plant, it is still easier than trying to get 250,000 people to change their ways. Second, our government's subsidy programs are mostly geared toward finding new supply. The Energy Dept's Energy Efficiency and Renewable Energy office functions on half a billion dollars per year, which has been cut by the Bush Administration. Oil exploration subsidies to already fat corporations alone consume 10 times that. Third, maybe we, as Americans, have not yet suffered enough. In 2003, fifteen thousand people lost their lives in Europe as a result of that year's catastrophic heat wave. This was not in some backwards third world country.

Stay cool.

2006-07-12T09:34:00.000-05:00

The Morality of Using Food to Fuel Our Cars

Somehow forgotten amidst our (meaning environmentalists) love affair with the idea of using corn and soybeans to fuel our planes, trains, and automobiles is the debate about the morality of using these crops for fuel when major swaths of the world population are still hungry. I also have a gathering unease about the already piggish interests that are pushing for more ethanol production. Taken together, I am rethinking the wisdom of the whole undertaking.

On the face of it, using ethanol as a replacement for foreign oil seems a no-brainer. It is a renewable resource. We have scads of farms that need more demand and higher prices for corn. Plus, the emissions from the tailpipe are significantly less, though there is still much debate over how much emissions are saved in the whole bushel-to-gas-tank process. It will create American jobs, farmers love it, and we get to stick it in the eye of the Canadians, Russians, and oil sheikhs.

Sorry to ruin the fairy tale. First, this week, the Proceedings of the National Academy of Sciences, estimated that if all the corn in this year's crop were used for ethanol production, we could satisfy only 12 percent of our energy needs. Add the entire soybean crop, and we can squeeze out another 9 percent. Of course, we would have neither of those bountiful harvests to eat, but hey, we could all use less corn syrup in our diets, and only the long-haired communal hippies are eating soy. All jokes aside, whether or not we exported directly to countries with staving populations, creating such demand for these crops would raise the global price of this commodity. Raising the price means that the poor countries who need it most will be able to afford less of it. This is sort of like how the American addiction to oil feeds the Iranian mullahs, even though we do not buy directly from them. Our demand fuels rising prices, which means that the mullahs can command a higher price elsewhere on the world market.

Second, ethanol can not be competitive with fossil fuels in the near future without massive government subsidies. Herein lies another problem. Despite their carefully crafted image to the contrary, the corn-growing lobby is one of the fattest recipients of government subsidies we have. There is no compunction about it, either. Several leaders of corn-growing regions cite the availability of easy federal dollars as the reason for the explosion in permits for ethanol processing facilities.

Third, because of the rush to get the federal dollars, ethanol processors are short circuiting the environmental benefits by using dirty coal to power their plants. A recent Grist article quoted energy analyst Robert McIlvaine as predicting that 100 percent of new ethanol plants will use coal, thanks to its predictable price and supply instead of the relatively cleaner natural gas. This all defeats the purpose of transitioning to this clean source in the first place.

Given the incredible logistical complexities and economic cost of replacing the fueling infrastructure for our transportation needs, it might be a boondoggle to attempt it in the first place. The price of bottled water is still more expensive than a comparable amount of gas. Not that we should give up.

Stationary generators of power are most capable of achieving our goals with federal subsidies. Forget about cars, for now. We should put our talents toward generating clean energy in stationary applications, such as power plants. These technologies are much closer, and will not require the massive re-working of our infrastructure. Then, we should deal with automobile pollution by migrating towards electric generation. This technology exists today with plug-in hybrids. Plug-ins will allow a Prius, for example, to use more energy from electricity. The car is plugged in at night, and in the morning, it's ready to go. If you find yourself short, then gas can cover the shortfall. In Austin right now, one could purchase a plug-in, and charge it with clean energy from the Green Choice program. Then, the decrease in demand for fossil fuels from stationary applications will cause the price of oil to fall, and allow us to re-capture the money and power that is currently going overseas.

2006-06-29T14:57:00.000-05:00

Dell Becomes First Computer-Maker to Offer End-Of-Life Recycling

Dell, Inc (NASDAQ: DELL). yesterday announced that it would start recycling any product with its name on it, becoming the first computer-maker to offer so-called cradle-to-grave recycling for its products. Previously, the company required either a new purchase or payment for recycling. The other major computer manufacturers offer similar incentives, though none offer no-questions-asked cradle-to-grave service. Like many who live in Austin, I once worked for Dell, and am proud of their new outlook, as it certainly differs from their environmental stance while I was an employee.

The move caps Dell's migration from environmental pariah to industry leader. Only a few years ago, the company was shamed (although Dell would not admit to being shamed) into meeting with environmental groups after activists picketed the Consumer Electronics Show in prison garb. The move was intended to highlight the company's reliance on a Chinese partner notorious for using prison labor to dissemble old computers.

E-waste is an often overlooked aspect of the country's fascination with gadgetry. When I was with the company, selling to the SMB segment, it was not uncommon for customers to have closets full of unused computers and monitors. It cost too much to have it hauled away. Even donating computers to charities was difficult, since the charities were too constrained to come pick up the machines. EPA rules prevent those items from being dumped in the trash or left by the curb, so they existed in a sort of limbo. Lead and cadmium in computers and monitors is toxic to the environment. Disposing of them properly takes expertise.

To share a funny story, when I was employed at Dell, I was asked to provide input on a new marketing promotion for the SMB segment. When I suggested offering recycling, I was nearly laughed out of the room. I thought that solving the "closet" problem would give us an entre to selling new computers, plus it would be the right thing to do. It looks now as if the company has come around.

2006-06-21T13:20:00.000-05:00

Discrepancies in Apple Supplier Code of Conduct

Responding to accusations of horrible working conditions at the Chinese factories that churn out I-pods, Apple (NASDAQ: AAPL) promised quick investigations and pointed to their Supplier Code of Conduct as proof of their commitment to decent working conditions in their supply chain. Yet, Sustainable Log has discovered that the CoC contains language virtually identical to that of the Electronics Industry Code of Conduct (EICC). The problem is Apple is not, nor has ever been, a member of the EICC (click for a list of members). This raises the question: If their effort at coming up with a Supplier Code of Conduct amounted to a cut and paste job, how actively are they enforcing and auditing the companies making the hundreds of components for I-pods (and, for that matter, Macs as well)?

The EICC is a consortium of large electronics companies, including Hewlett Packard (NYSE: HPQ), IBM, Sony (NYSE:SNE), and Intel (NASDAQ: INTC). Interestingly, Foxconn is also a member. Responding to my email inquiry, Dunstan Hurst of Business for Social Responsiblity (the advisory group that helped formulate the EICC principles), acknowledged the discrepancy. "Foxconn is currently a member of the EICC but Apple is not, though you are right to conclude that the Apple Code is very similar to the EICC code." (In fact, it is virtually identical, right down to the lists of resources... this would have gotten a University student expelled)

Though nobody will argue that the EICC is a step in the right direction, one should recognize it's limitations. Since the guidelines are new, the organizations acknowledges that there are no enforcement mechanisms in place yet. They only require adopting members to formulate auditing procedures. In effect, they're on the honor system. Further, the principles provide some hedging room by indicating that they are subject to local laws. Of course, not even this applies to Apple since they have not adopted the principles.

Foxconn, for its part, denies the accusations. They, at least, have signed on to the EICC. A recent story in Business Week chronicles a surprise visit to Foxconn by the driving force of EICC adoption, HP's Bonnie Nixon-Gardiner. However, it is feasible to believe that Foxconn would gladly sign on to a bunch of principles with no mechanism of enforcement because it was a precondition to doing business with HP, Dell, Sony, IBM, and others. After all, other outsourcers such as Flextronics and San-Mina have signed on as well.

To summarize the controversy, the British Daily Mail published pictures of the so-called "I-Pod City" facility in Foxconn's Tzinghua factory. According to Foxconn's own releases, the Taiwanese company employs 1 million people, 200k of which are at this facility. This fact is itself amazing, considering that the company also provides room and board for the employees. As the Mail put it, as many people live and work in this facility as live and work in Newcastle, England. The article showed pictures of packed dormitories and morning exercise drills. Laborers indicated that they were forced to work overtime for a cumulative of about $50 USD per month. Foxconn denies that workers are forced to work overtime and says that the minimum wage for the province is $72.50.

With regards to the Apple-Foxconn imbroglio specifically, there may be nothing there. The blogosphere has latched onto the pictures and the emotional accounts of workers (mostly poor, rurual women). There is no telling at this point whether this life offers a better chance than subsistence agriculture in the Chinese countryside. However, I see Apple's defense as half-hearted at best. If there are doubts about Foxconn, what do we know about the dozens of contractors and subcontractors not on the EICC list?

Full disclosure: I had a brief period of employment with Apple's Education Sales Organization during grad school, but had no involvement whatsoever with manufacturing operations.

2006-06-14T16:25:00.000-05:00

Summer Movies with a Social Conscience

Taking a step back from the more serious topics covered in this blog and newsletter, I want to take a look at the most abundant crop of movies and documentaries with a social conscious since ... well, ever. Michael Moore showed Hollywood left-wingers how to not only get their message across, but also make a cool hundred million or so. But, while giving no pardon to the other side's actions and tactics taking place at the same time, Fahrenheit 911 was a shrill piece of conspiratorial infotainment that did its part to take an ugly election year to the gutter. The group coming out this summer, including United 93, an Inconvenient Truth, Who Killed the Electric Car, The Republican War on Science, and yes, even Moore's upcoming Sicko will surely elevate the dialog. At least, we hope so.

I have seen United 93 and An Inconvenient Truth, and both were excellent. The former was a movie-going experience as gut-wrenching as I've ever seen. Directed by Paul Greengrass, the film recounts the horrifying story of the airplane that crashed in Western Pennsylvania on September 11. The film commits the ultimate Hollywood sin... no stars. For this, be grateful. There are no heroes, ala Wesley Snipes or Bruce Willis, who singlehandedly save the day while mugging for the camera with a stupid wisecrack. That would have been a disservice to the true story. There was a wide range of behavior among the passengers who were suddenly confronted with their imminent demise. Some were heroic, others less so. If it is still in a theater near you, you should see it. Own it when it comes out on DVD, and donate an extra one to a schoolteacher. Every kid in America should see it. The film is that powerful.

As Stephen Colbert put it, An Inconvenient Truth, is the world's longest Powerpoint Presentation. I say that tongue-in-cheek, not least because Al Gore used Apple's Keynote presentation software, not Powerpoint. It, too, is thoroughly researched, scientifically sound, and alarmist, but appropriately so, given the gravity of the situation. Salon.com has a great review on how accurately Al Gore presented the case, and as it turns out, it's pretty solid. Given the awesome complexity of the problem along with the difficulty of not boring moviegoers with a college lecture, the job was done commendably. This film, too, should be shown to every student.

Who Killed the Electric Car? comes out at the end of June, and it features the story of the General Motors' (NYSE: GM) attempt at building an electric car, the EV1. I have only seen the trailer, but I know a little of this story. In the mid-1990's, as I understand, the electric car was mandated by the state of California. While I gather that the movie is about the conspiracy of monied interests vested in the status quo, there was a multitude of technical problems. Unlike today's hybrids which run on electricity and gasoline, the EV1 only required electricity. From an emissions standpoint, that's great. Practically, the prospect of running out of juice while on the highway added more pain than the average consumer was willing to deal. Further, charging the battery required hours of wait time. If one got low on the highway, you faced the prospect of waiting four hours to get enough juice to continue. Everyone knows how inconvenient it is when your cell phone runs out of juice at the wrong time. I resided in California at the time, and the papers were full of horror stories about stranded motorists who weren't able to reach a power outlet in time.

The Republican War on Science does not yet have a firm release date. The movie is from Morgan Spurlock, who brought us the excellent Super Size Me and the TV show, 30 Days. I have not seen a trailer, but most of us know how willingly the current administration fiddles with scientific data to suit political goals. The public is woefully unaware of this issue, and if Spurlock can pull it off with the same gusto as Super Size, I can't wait.

While nobody doubts Michael Moore's talent as an entertainer, I have been less impressed with his ability to tackle an issue fairly. Yes, many people defend him by saying that as a documentarian, he is not obliged to cover anything fairly. In the upcoming Sicko, Moore explores a conspiracy between insurers, pharmaceutical makers, medical establishments, and of course, George Bush, to bilk the public out of trillions while we all collectively become sicker. I, of course, have not seen the movie, but I fear that the topic is more multi-layered than Moore will explore. His modus operandi has always been the super-charged emotional pictures along with the ambush. He could learn a lot from Al Gore.

2006-06-08T07:15:00.000-05:00

Environmental Cred for Bush Treasury Nominee

The President nominated Henry M. (Hank) Paulson, a Wall Street banker with serious environmental credibility, to replace outgoing Treasury Secretary John Snow. Whether Paulson will hold enough sway to get his environmental views across to an otherwise intransigent administration remains to be seen.

Since 1999, Paulson has headed perhaps THE most envied and profitable Wall Street firm, Goldman Sachs (NYSE: GS). During his 20 plus career at the white shoe firm, he accumulated a personal fortune which the New York Times estimates at $700 million. He was the overseer of Goldman's transition from the oldest partnership on Wall Street to a publicly traded corporation.

At the same time, Paulson has eschewed one of the corporate perks of executive life, seats on other corporate boards, to chair the board of The Nature Conservancy. He also serves on the board of the Peregrine Fund, which seeks to preserve the habitats of birds of prey. He has certainly put his money where his mouth is, pledging $100 million of Goldman stock to a foundation benefiting conservation efforts. Besides environmentalism, Paulson seems to have a twin passion, China. He has personally courted China's heads of state and countless bureaucrats on behalf of both Goldman and his charitable projects. Both Goldman and the Chinese have profited handsomely from the relationship, as the firm has been a leader in retaining investment banking business from all of the state-owned spin-offs, IPO's, and restructurings. Indeed, Western money, of which Goldman's has been leading, has enabled China to convert its whole society from socialist to capitalist in a little more than a decade.

It would be fair to ask why anyone who headed the world's most powerful investment bank, reaping $38 million per year (last year's compensation, not including options), would want to step into the role of Treasury Secretary. The last two secretaries both came from Fortune 100 firms, and were both relegated to minor roles within the administration. The treasury secretary does not control the money supply, nor does it set tax policy. According to Business Week, the deciding factor was Bush's personal assurances that Paulson would be the head honcho in economic matters.

It is hard to know what to make of this appointment. On the one hand, Treasury has little influence over the administration's environmental policies, and even Bush supporters would have to concede that his picks for these posts have been cynical. Paulson will most definitely be in the position to utilize his relationships with the Chinese to benefit his old Wall Street buddies. Despite putting all of his Goldman stock in a blind trust while divesting, one never really leaves that club. Witness: another Goldman executive and Clinton's treasury secretary, Robert Rubin, returning to Wall Street as head of the Citigroup Executive Committee. Further, there can not be much distancing between Paulson and the oppressive Chinese regime. China’s president, Hu Jintao counts Paulson as a personal friend, and chose the banker to host him during his recent trip to the New York Stock Exchange.

On the other hand, Paulson will be in a position to show the world's businesses and governments how to think beyond bottom line figures, how a market-based approach to conservation can work, and how wholesale liquidation of our natural resources is a loser from both a market and aesthetic perspective. Concerning his close ties to the Chinese, insisting on someone who had no ties in this day and age would disqualify most serious contenders.

This will be one to watch.

2006-05-31T10:57:00.000-05:00

Domini Abandons Its Own Index Fund

Domini Social Investments, usually one of the biggest friends and beneficiaries of the SRI movement, has taken the unusual step of abandoning its own index fund, the one that tracks the Domini 400 Social Index (ticker: DSEFX) in favor of active management. The new fund has filed to hire Wellington Management as the fund manager. Since the company has been such a friend of the SRI community, I hate to do it, but I must speak my mind against this move.

The move speaks volumes about the greed pervasive in the mutual fund management business rather than the merits of either Domini, Wellington, or the Social 400 Index. You see, indexing is a low margin business for mutual fund managers. The grand-daddy of this model is Vanguard, whose flagship fund based on the S&P 500 charges a grand total of 5 basis points in expenses. That is $5 born by the shareholders for every $10,000 invested. The average actively managed mutual fund, by contrast, charges 1.57 percent, or $157 for every $10,000. What the Vanguard funds lack in high fees, they make up in volume. Their index funds are among the largest funds in the universe.

Make no mistake about it. On a macro-basis, index funds deliver superior returns relative to the actively managed set. Yes, a large number of actively managed funds deliver superior returns every year, but studies have shown again and again that the number of funds that do so consistently is frighteningly small.

The reason for the underperformance is simple -- expenses. If the market delivers historically 8 - 12 percent a year, 1.57 percent in expenses represents 13 - 20 percent of the expected return. That kind of leakage would make Las Vegas blush. In his great book "The Battle for the Soul of Capitalism", John Bogle cites a study where, over the last 25 years, mutual funds have returned on average a sum that is less than the overall market return by a number that is startlingly close to the amount that was drained in expenses. It may not sound like much, but over the working life of the average individual (43 years), that 13-20 percent leakage could mean that your portfolio at retirement is ONE THIRD what it would have been without it.

So, with it being clear that indexing delivers superior returns, the not-so-secret key to indexing well is to find the index funds with the lowest expenses. This insight has created a price war among index fund families. The management fees of the largest index funds has cratered over the last several years to where 5 basis points is now the standard.

Vanguard is the only big-name fund family that never took the "mutual" out of the mutual fund business. The company is itself owned by the fund shareholders, whereas virtually every other fund complex is owned by large financial conglomerates, so there is no pressure to pad expenses to benefit the management firms. Consequently, it is able to offer the best index funds. The Vanguard social index fund, based on the FTSE4Good index, has an expense ratio of 25 basis points, 5x higher than the S&P 500 fund, but still a good value. It does, after all, take considerable resources to add the social research and screening. The Domini fund capped their expenses at a borderline unconscionable 95 basis points for their index fund, over 3x what their Vanguard competitor charges.

The management at Domini would want to plead that this is because of the fund's size. I dispute this notion. Unlike actively managed funds, where the fund investors bear the expense of research, travel, management salaries, and customer support, the biggest expense at running an index fund should be the cost of shareowner communication -- sending the statements, prospectuses, confirmations, etc. Vanguard has more assets, but also more shareholders, and they are able to keep expenses down. The problem must be a lack of willpower to go the route of shareowner best interests. To them, it would be easier to capitalize on their name and get away with fund expenses that are many multiples of an index fund.

This is a shame. For those in non-taxable accounts, if you have the Domini fund, it is now time to switch fund families.

2006-05-24T10:00:00.000-05:00

New Clean Energy Index Announced

The NASDAQ, along with Clean Tech Research firm Clean Edge, have announced a new clean energy index. The index is market cap weighted, and seeks to represent companies engaged in "manufacturing, development, distribution, or installation of emerging clean energy technologies." The technologies fall into five sub-categories, including Renewable Electricity Generation, Renewable Fuels, Energy Storage and Conversion, and Advanced Materials. This link is the official press release.

The components are listed below, with attribution to the Clean Edge web site.

2006-05-17T10:36:00.000-05:00

One Modest Suggestion To Ease Gas Prices

Back in the 1970's, Congress passed a bill giving small farmers a tax break when purchasing capital equipment, then defined as light trucks weighing 6,000 pounds or more. At that time, there were no passenger cars weighing that much, so the idea that it would be exploited by everyday car buyers and soccer moms was not even considered. The term "soccer mom" did not even exist back then.

As SUV's became the most profitable niche of the car business, carmakers exploited this loophole, and started using the tax break as an incentive to businesses to buy the worst polluters and gas guzzlers, even if the business person has no use for a light truck in his or her business. A dentist can purchase a $100,000 top of the line Hummer and escape approximately $33,000 in taxes.

As everyone knows, gas prices started rising, but the incentive remains. Now, that dentist might look at purchasing a more efficient vehicle to save a few thousand a year in gas. Or, he could stick with the SUV and save tens of thousands. We're not talking about trading in the Hummer for a Prius, either. Even though a Cadillac or Lexus sedan, for example, would save our hypothetical dentist thousands of gallons per year, those vehicles are ineligible for that tax break. It's not wonder that, at least so far, SUV sales still remain strong in the face of $3 gas.

Aside from pushing the burden onto taxpayers, which should be reason enough, the tax break has distorted the market for gas prices. Assuming that eliminating the tax break would affect behavior, replacing these gas guzzlers with more efficient cars could substantially reduce the pressure on demand for gasoline, benefiting us all.

In an admittedly rose-colored, possibly naive, sense, Congress could get this done painlessly by just writing stricter requirements into the definition of "capital equipment" or "light truck". The result is not a tax increase, nor a subsidy elimination. They could also portray it as an attack on high gas prices. It would just return the subsidy to its intended use. Practically, of course, there would be howls about "American jobs" from carmakers, auto dealers, and spoiled soccer moms, and it would remain to be seen whether our elected leaders have the will to eliminate corporate welfare that has a lot of fans.

2006-05-10T11:16:00.000-05:00

Telecommunications Merger Activity Benefitting Union Membership

I recently saw a Cingular Wireless ad touting the company as "the only" unionized wireless carrier in the U.S. My first reaction was that this could not possibly be true, since Verizon, T-mobile, and Sprint, all grew out of heavily unionized wireline companies. As it turns out, the assertion is more or less correct, with some qualifications. For those interested in either patronizing or investing in labor friendly companies, pay attention.

Over the last few decades, the telecom industry has gone through several cycles of divorce, spin-offs, remarriages, and consolidation. In the early part of this decade, Sprint, Verizon, and AT&T each spun off their wireless operations into separate tracking stocks. SBC and Bellsouth formed Cingular in a joint venture. A few years ago, Cingular bought AT&T wireless while the AT&T parent company was bought by SBC. Now, with the pending nuptials of Bellsouth and the newly rechristened AT&T (SBC adopted the AT&T brand, despite being the acquirer), 100 percent of Cingular will be under one roof, giving AT&T (actually, the renamed SBC) control of two baby bells, the old AT&T Wireless, and all of Cingular. Ironically, after spending hundreds of millions rebranding AT&T Wireless as Cingular a few years ago, now they are going to spend hundreds of millions more to re-rebrand back to AT&T wireless.

Confused enough? Back to the labor issues. Due to its good relationship with SBC, the Communications Workers of America are now able to organize at Cingular and Bellsouth sites. Of the 40,000 or so wireless workers in the CWA, almost all of them are now Cingular employees. Verizon has adopted a "neutrality" stance, which means that they do not stand in the way of organizing activities, but thus far, the Verizon Wireless offices have not voted to organize.

So far, AT&T (formerly SBC) contends that the unions have not stood in the way of cost-cutting measures, so for now, peace reigns between the union and management. As the "cost efficiencies" (read: layoffs) commence as a fallout of the AT&T/Bellsouth merger, we will see if that continues.

2006-05-03T16:10:00.000-05:00

Bloody Tin

Thanks to a phasing-out of lead in electronic components, the global tin trade has exploded over the last few years. Cassiterite, the ore that contains the metal, is found in abundance in sub-saharan Africa. Ten percent of the world's tin originates in the Democratic Republic of Congo, where it is mined by slave labor in dangerous conditions. Children often haul sacks of the rocks for days to get to market, where once there, the price is negotiated at gunpoint.

Yet, in a recent Fortune article, executives at large electronics makers such as Samsung had no idea from where the tin originated, and they certainly were not aware that slave-labor is involved in producing it. The typical refrain was spouted: how tin is a global commodity, fungible in its nature, the source easily disguised. What can we (the companies) do about it?

Over the years, industry has responded to pressure from socially responsible investors when it comes to cleaning up the suppy chain. Nike and other apparel makers were shamed into cleaning up their acts with respect to child and sweatshop labor. Many brands of coffee are now certified as "fair trade", whereby farmers get paid a higher than market rate for their beans so that a minimum standard of living can be guaranteed. An infrastructure (albeit imperfect) has been put in place to curb the trade in "conflict diamonds." Setting up a similar infrastructure for the tin trade can also be achieved, with the help of the U.N. and other NGO's.

The data can be compiled. The Fortune article, for example, cited how neighboring Rwanda exported five times more Cassiterite than it produced while showing no imports. It does not take a slide ruler to figure that ill-gotten tin is being smuggled to its neighbors, where they are then shipped to Maylaysia and China. We have the means and the know-how, but lack the will thus far.

I am ashamed to admit that I was generally unaware of this problem, while being acutely aware of the sweat shop, fair trade, and conflict diamonds issues. Could it be that the global tin trade is less sexy than coffee, diamonds, and little children assembling soccer balls?

2006-04-24T11:18:00.000-05:00

Clean Tech Heavyweights Eye Green Technology

John Doerr and Vinod Khosla, both partners at Kleiner Perkins Caufield and Byers, have made large commitments to the green space. According to a widely syndicated Associated Press Interview over the weekend, Doerr acknowledged committing $100 million or 20 percent of their latest fund, in addition to the $50 million Kleiner has already invested in the space. Khosla, outside of the auspices of Kleiner Perkins, has been a huge investor in ethanol and bio-diesel. Both men feel that clean and sustainable energy could be as big or bigger than the internet and biotechnology.

In my opinion, it will be bigger. However, the revolution will not be as sexy as the other two, and therefore, may go unnoticed by the business media. At least, it will not garner the same kind of headlines of a Netscape (now part of AOL), Google (NASDAQ: GOOG), or even E-toys. This is not necessarily a bad thing.

First, the fundamentals. Energy demand for all purposes, including electricity production, transportation fuel, and heating and cooling, has a worldwide market of over $3 Trillion. That is with a "T". In the last several years, thanks to the burgeoning worldwide economy, that figure is growing at 3 percent per year. That is $90 billion. To put that in perspective, the annual growth in the energy sector is bigger than the whole internet economy.

Second, for the vast majority of citizens, governments, and other large consumers, they do not care from where their electrons came, as long as it comes reliably. This means that, at some point in the future, there will be a massive tipping point where the technology, capability, and capacity of clean energy competes with the unclean alternatives. In the words of Ross Perot, you will hear a "giant sucking sound" coming from the companies that have not planned for the sustainable future once the new technologies compete on an even keel with the old ones. The world will convert to the new sources faster than many critics think.

The clean energy future may not be as sexy as the creation of a new medium, or the invention of remarkable healing powers, but the economic effects of a clean energy future will be greater. Growing affluence and urbanization in the two most populous nations, India and China, will make it a necessity.

2006-04-14T23:39:00.000-05:00

Cellulosic Ethanol an Environmental Disaster?

I subscribe to Forbes Magazine, and read every issue cover to cover. Just about every investment adviser in the U.S. does as well. On environmentalism, however, the magazine usually lacks serious input beyond spouting their usual anti-environmental stance. Peter Huber's column "The Forest Killers" puts me over the edge.

Cellulosic ethanol refers the distillation of agricultural waste, including "switch grass and wood chips" (a phrase made popular in the president's State of the Union), into ethanol. Huber paints a dire picture of what would take place if the process became widely avaiable. He envisions peasant farmers in India raping the landscape the clear it of lumber, prairie grass, cow dung, and god knows what else in order to get the feedstock for making a gallon of gasoline. It would be as if a barren field were suddenly strewn with diamonds, with the result being leveled forests and drained wetlands.

Maybe Huber is trying to invent the next Y2K/Doomsday/Peak Oil/Nuclear Holocaust scenario. Unfortunately, it shows little understanding of the process. Although the process is similar in theory to how a Kentucky Moonshiner makes grain alcohol out of corn, the scale required to produce enough barrels to make the enterprise worthwhile would make it out of reach to the small farmer. First of all, even at $3 per gallon, the profits derived from gasoline do not begin to approach that of moonshine. Farmers are likely to take that into account before they engage in a dangerous, explosive process. Secondly, the equipment required to distill ethanol, while not on the scale of an oil refinery, still requires economies beyond even the village level. Third, the sheer amount of feedstock required to make one gallon of ethanol is so immense that it could only be done on an industrial level. Fourth, given the effort required to gather such an enormous amount of feedstock, one would presume that the landowners -- even the land dwellers -- would make the calculation that other uses are more profitable. Lumber, soil for growing, grassland for grazing, wetlands for fishing will likely remain more profitable uses.

This is not to say that small farmers can not benefit from ethanol production. Quite the contrary. But, it requires a little more organization than the marauding bands of pillagers that Huber envisions.

2006-04-12T14:16:00.000-05:00

Alien Tort Claims Act: The Activist's Bazooka

Companies engaged in Greenwashing had better watch out for Terrence Collingsworth of the International Labor Rights Fund in Washington. I recently sat in on a presentation in New York City with one of Collingsworth's associates, and there happens to be a sidebar in the latest of issue of Forbes about the ILRF tactics. His tactic: the 19th century Alien Tort Claims Act which gives the US jurisdiction in cases of international law. Enacted to enable the prosecution of high seas piracy and the slave trade, the Act is now being used to clobber the companies who say one thing but do another.

Two companies are in the crosshairs of this act: Wal-Mart (NYSE:WMT) and Nestle (OTC:NSRGY, VTX:NESN). Wal-Mart is in court again, facing charges of labor abuses in its supply chain. Following a dust-up in 2002 over working conditions, Wal-Mart enacted a code of conduct in an effort to appease the activists. The problem was that the company did not do enough to ensure that its own code of conduct was followed. Collingsworth argues that issuing a code of conduct equates to a contract between Wal-Mart and the employees. Not following it constitutes breach of contract. Therefore, all of the employees affected are injured parties.

Nestle, being the largest purveyor of chocolate in the world, needs to procure lots of cocoa. Half of the world's cocoa is produced in the tiny African nation Ivory Coast. Ravaged by years of civil war, forced labor and indentured servitude are commonplace. Although Nestle owns no farm that uses forced labor, the network of middlemen makes it is easy for tainted cocoa to wind up in the company's chocolate. Archer Daniels Midland (NYSE:ADM) and privately held Cargill are the largest middlemen in the field, and are facing their own accusations. However, prompted by possible congressional legislation, Nestle instead signed on to an agreement five years ago to get their chocolate certified as "slave free" by 2005. The deadline has come and gone, and tainted cocoa still gets through. As in the case with Wal-mart, not following the terms forced on them constitutes a breach of contract.

There is much precedence for the use of the Alien Tort Claims Act. It was successfully used to challenge Unocal when they allegedly forced the Burmese military to build a pipeline. Exxon (NYSE: XOM) was accused of hiring a military junta to guard a gas liquefaction plant in Aceh province, Indonesia. For decades, Bridgestone/Firestone has been facing questions about the use of child labor at rubber plantations in Liberia.

The danger of over-using this Act is that companies will not bother to have a code of conduct, as it provides a fat target for class-action lawyers. Collingsworth's non-profit does not seek out-sized fees, but since the genie is out of the bottle, it is easy to imagine that greed-driven lawyers will see a chance to extract settlements out of multi-nationals.

2006-04-03T10:41:00.000-05:00

Clean-Energy Trends 2006

A wonderful report by Clean Edge details the opportunities awaiting Clean Tech investors over the next few years. Forget oil exploration. Wind, solar, biofuels, and hydrogen are the most exciting places to be. Cumulatively, despite having record earnings years and still-worthwhile run-ups, the stocks of oil companies like Exxon (NYSE:XOM), Valero (NYSE:VLO), Chevron (NYSE:CVX), and British Petroleum (NYSE:BP) have not kept pace with the exciting results of clean tech companies, such as: (The analysis of these companies is my own, although they were mentioned in the report)

Energy Conversion Devices (NASDAQ:ENER). Up roughly 100 percent since last April 4, this photovoltaic materials producer has been on a tear with new partnerships in China. Currently, it is losing prodigious amounts of money, but is nonetheless in a cash favorable position, recently filing to sell an additional $150 million in a secondary stock offering. Curiously, this company is headed by former General Motors CEO Robert Stempel, who is best known for losing prodigious amounts of money at the head of that company before being forced out. By prodigious, I mean prodigious by the standards of those days (early 1990's). His successors at GM have since eclipsed him.
Evergreen Solar (NASDAQ:ESLR). This company makes photovoltaic panels. The stock has also doubled in the last 12 months, but still faces challenges. Prices for silicon, the main material for its PV, have also skyrocketed in the last 12 months. Evergreen lost its contract with its main sililcon supplier in March, and had to scramble to replace it, albeit at less favorable prices. Nonetheless, this company is the purest pure play in the solar field.
Itron (NASDAQ:ITRI). Up 92 percent in the last year, this company provides the meters, the data collection, the software, and the data mining for electricity and water usage. The model is highly defensible, since it takes a long time to acquire the relationships to get the contracts they have in place. The only challenge is a concern about stock dilution, as it is using its high priced stock to go on a buying spree.
Spire Corporation (NASDAQ:SPIR). This is another materials company, buoyed by strong demand for all things PV. Up 72 percent in the last 12 months, Spire is not a pure play solar stock, as it also competes biomedical imaging and optoelectronics. Some company news touts its thin film technology, which I predicted would be the technology of the year in an early-January post.

One of the striking trends mentioned in the report was the increasing presence of the VC community. Clean tech investments in private equity went from 3.3 percent to 4.2 percent IN A YEAR. This topic could take up another post.

2006-03-27T09:40:00.000-06:00

Arthur Laverne Brandon, 1929-2006

YouTube Tribute

My blog and newsletter updates have been scant in the last couple of weeks because I was attending to family business. My father, Art Brandon, succumbed last week to cancer. He put up a brave, 12-year struggle with the disease, enduring eight rounds of chemotherapy. Most people are done in by three rounds.

I put together this slide show tribute to him for his memorial service, which was held on Friday, March 24. My mother, his four children, two surviving siblings, extended family, and countless people for whom he touched will miss him tremendously.

Push the play button on the embedded picture below, or click on the link at the top of this post.

2006-03-22T08:43:00.000-06:00

Apple (AAPL) Benefits While Microsoft (MSFT) Tanks

The news that Microsoft's (NASAQ:MSFT) long awaited operating system, Vista, will be delayed is likely to benefit Apple Computer (NASDAQ:AAPL) the most. Last year, when Apple released it's OS X Tiger Operating System, it incorporated many of the best features that are in the upcoming release of Vista. Scooping Microsoft by about what was then expected to be a year and a half was a coup for Apple.

Then, Apple made what appeared to me to be a strategic mis-step. In its haste to get out the Intel-based (NASDAQ:INTC) Macs, combined with its notorious penchant for secrecy, Apple got the new product out before the key software developers had ported their applications to the new chip architecture. Some, such as Adobe (NASDAQ:ADBE) have now said that it won't be until the end of the year before they get all of their applications compliant. That appeared to be a lifeline for Microsoft. Now, with the delay, consumers especially will be eager to go ahead and make the switch to the Intel-based Macs.

Retailers are running out of the G5-based (made by a consortium which included IBM) Macs, and Apple has always been unsympathetic to its customers who refuse to go along with the upgrade bandwagon.

Heads should be rolling in Redmond for this one.

2006-03-17T09:58:00.000-06:00

University of California Divests from Sudan

The excerpt below was reprinted from the Sudan Tribune

Mar 16, 2006 (LOS ANGELES) — University of California regents voted Thursday to drop the system’s association with nine companies doing business in genocide-ravaged Sudan, its first socially based divestment since 1986.

Bridget Smith, 24, right, a UCLA alumnus, sheds tears of joy as University of California students celebrate the UC regents vote to divest from Sudan on Thursday, March 16, 2006 (AP).

At their meeting on the UCLA campus, UC regents voted unanimously to remove Sudan-related stocks from their portfolio, bringing rousing cheers from the audience.

The action requires the university to divest within 18 months, giving state legislators time to agree to defend UC against related lawsuits.

The decision was a victory for activists who built a grassroots campaign that started with a handful of UCLA students and grew to hundreds of students, faculty members and lawmakers from around the state.

In divesting, the University of California joined a number of other US institutions of higher learning that have divested in various forms, including: Harvard University, Yale University, Stanford University, Brown University, Amherst College, Dartmouth College.

"That’s a bold statement," said Regent Adam Rosenthal, a UC Davis law student who helped lead the effort. "This is a great day for the university."

The university last divested itself of stocks for political reasons in 1986, when regents dropped South African investments to protest that country’s apartheid policies. UC also decided in 2001 to choose a portfolio free of tobacco-related stocks.

Before Thursday’s vote, students, professors and genocide survivors urged regents to take a vote of conscience. UCLA sophomore Cham Nan Chao tearfully told the board about relatives who were killed by the Cambodian government. "I couldn’t do anything about that then, but I can do something about this now," she said. "It only takes one person to change the world, and I’m asking you to be those people."

In order to address concerns that the divestment could harm civilians unintentionally, regents agreed to keep UC’s investments in several other companies that have projects in Sudan, but also said they would encourage those companies to ensure they don’t enrich the oppressive Sudanese rebels.

Some of the divested companies sell military equipment to the oppressors, UC leaders said.

Specifically, the nine companies named by the University of California are: Bharat Heavy Electricals Ltd. (500103.BY), an India-based power generation company; PetroChina Co. (PTR) and Sinopec Corp, two Chinese oil companies; Nam Fatt Corp. (4901.KU), a Malaysian construction firm; Videocon Industries Ltd. (511389.BY), an Indian consumer electronics firm; PECD Berhard, a Malaysian construction company; Tatneft (TNT), a Russian energy company; Oil and Natural Gas Co., an Indian firm, and Sudan Telecom Co. Ltd. (SDTL.BH).

"The University of California has taken a principled stand against the tragedy in Sudan by severing its financial connections from those nine companies who aid the genocide," said Gerald L. Parsky, chairman of the board of regents in a statement.

A great many other colleges and universities are actively considering divestment, and a number of decisions are expected this spring.

Further, a number of state legislatures have passed binding divestment legislation, obliging divestment from all companies doing "business as usual" with the genocidaires in Khartoum: these include Illinois, New Jersey, and Oregon. State legislation is pending in a dozen other states (the Maine Senate, for example, passed divestment legislation today, March 16, 2006).

The university also said it will send "letters of concern" about the role of business revenue in contributing to the violence to four additional companies: Finmeccanica SPA (FNC.MI), Harbin Power Equipment Co. Ltd. (1133.HK), Lundin Petroleum AB (LUPE.SK), and Schlumberger Ltd. (SLB).

The exact dollar amount involved will not be known until the divestment occurs. It will include all UC shares, including those combined in index funds. Divestment would be completed within an 18-month period, beginning after legislation to protect the university from legal concerns has been enacted.

Officials declined to say how much money is invested in the nine companies, but said they did not expect the university to be harmed financially by the divestment. In contrast, officials have said the tobacco decision has cost the university $109 million.

Recent divestment announcements, most of which have limited divestment to a handful of companies, may be just the tip of the iceberg, according to statistics and divestment advocates who say many more pension funds are considering exiting from a much broader list of names.

U.S. companies are prohibited from doing business in Sudan by a trade rule that bars business in six countries deemed state sponsors of terrorism. But some U.S. companies still do business there legally through subsidiaries, and many U.S. pension or institutional funds invest in a broader number of foreign-based companies that do business in Sudan.

According to Boston-based KLD Research, which compiles and sells lists of companies involved in other activities of interest to socially responsible investors, 130 publicly traded companies, nine of which are U.S.-based, do business in Sudan.

Marathon Oil Corp. (MRO) is one of the U.S. firms on the list. According to KLD, the company has continued to renew its oil interests in Sudan, though it hasn’t operated or conducted business activities in the country since 1985.

Marathon spokesman Paul Weeditz said an agreement, signed in December 2004, only allowed the company to protect its long-held interests in the country, and said there were no plans to relinquish those.

Randy O’Neil, managing director of global sales for KLD Research, declined to name the companies on the list, which he said the firm has sold to more than 125 clients. O’Neil said Sudan has been one of the most popular issues his group has researched, adding that the list has grown by about 10 companies since its first edition in November 2005 and is updated twice monthly.

Funds agreeing to divest have approached the issue differently so far, depending on the findings of their research and the size of their holdings. For example, Yale University said Feb. 16 it would sell stock in an unnamed oil company that was one of seven oil companies it determined were providing "the lion’s share of the revenue to the Sudanese government." The seven companies were Bentini SpA, an Italian construction company that builds pumping stations; Higleig Petroleum Services and Investment Co. Ltd., a Sudanese company; Hi-Tech Petroleum, a Sudanese company; Nam Fatt Corp.; Oil and Natural Gas Corp., PetroChina Co; and Sinopec. The university doesn’t publish a complete list of its investments.

Amherst College passed a resolution Jan. 14 to ban investment in 19 companies, stating it didn’t have an investment in them at the time. The 19 companies included some European firms such as Alcatel SA (ALA), Royal Dutch Shell PLC (RDSA), Schlumberger Ltd. (SLB), Siemens AG (SI), and LM Ericsson (ERICY) and Weir Group PLC (WEIR.LN)

An estimated 180,000 Africans have been killed in Sudan’s Darfur region since 2003, by Arab militia groups known as Janjaweed. Human rights groups, the U.S. Congress and U.N. officials have accused Sudan’s government of backing the Janjaweed, but the government has denied involvement. The killings have been recognized as a genocide by the U.S. and other nations. The theory behind the divestment campaign is that in the face of fleeing U.S. shareholders, companies will pull out of business in the region, as they did in the university-spearheaded campaign to divest from companies complicit in South African apartheid in the 1980s.

The United States and international humanitarian groups have accused the Sudanese government of using its oil wealth to wage genocide against the people in the western Darfur region.

2006-03-13T21:37:00.000-06:00

U.N. Impotence in Darfur

The United Nations and the African Union are loudly trumpeting their success in hashing out a new agreement between warring factions in the Darfur region of Sudan. The so-called Enhanced Humanitarian Cease Fire Agreement calls for both sides to retreat to clearly defined borders in order to clear the way for relief supplies.

The UN might as well say, "pretty please with sugar on top". Similar agreements put in place over two years ago were ignored. What would be different this time? The U.N. has shown no propensity for backing up their resolutions with military force.

To bring you up to speed, armed groups in the mostly black Darfur region rebelled a few years ago. The government in Khartoum responded by (depending on whom you believe) either encouraging or turning a blind eye to marauding Arab militias who were after the land. The militias, called Janjawid, have been slaughtering and displacing millions.

The U.N. seems to be intent on talking this problem literally to death. It is time for the U.N. to show some leadership and rally support for armed intervention. The Janjawid are clearly utilizing the U.N.'s posturing to their advantage. They have had no compunction about flouting their end of the bargain.

The refugee problem is causing a humanitarian catastrophe for Sudan's neighbors. Chad, itself barely able to feed its people, is having a hard time coping with the refugees, not to mention the spill-over of armed conflict.

Both ends of the political spectrum, as well as the traditional media, should be ashamed of the handling of this crisis. For the right, it should not be okay to justify the Iraq war on humanitarian grounds and turn a blind eye to hundreds of thousands slaughtered. For the left, especially those opposed to the Iraq war, this is the time to assemble a coalition of the willing. Is anybody listening?

2006-03-08T19:26:00.001-06:00

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2006-03-08T19:26:00.000-06:00

Introducing the "Headlines from the Progressive Blogosphere" Tool

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Since unveiling the "Headlines from the Green Blogosphere" Tool one week ago, we've had an amazing response. Now we are adding an identical tool for the Progressive Blogosphere. In it are contained the following feeds, which represent my personal opinion of the best that the Progressive Blogosphere has to offer:

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2006-03-07T15:31:00.000-06:00

The Lowest Risk Entry Into Socially Responsible Investing

Imagine, if you will, retaining a contractor for your house. After you handing you an invoice, he says, "if you don't like what we did for you, don't bother paying." Your head would spin, right? What about a doctor who said: "If we don't cure your illness, it's on the house"?

That is the method by which we operate at First Sustainable. We recognize that people are always skeptical of financial recommendations, and financial plans. Well, on top of refusing any compensation from financial product sponsors, we have a guarantee just like the above scenarios. Let us work up a plan for you, and if you don't see the value in our service, don't pay us. The world does not need another person who is jaded about financial advisers.

Of course, I can tell you that in all the years I have worked on that principle, fewer than five have actually decided not to pay, and one was an old high school buddy. Yes, we're still friends.

Implementing a financial plan never gets easier as time goes by. Much like diet and exercise, it gets much harder and more important. Someone who starts at age 40 needs to contribute more than five times as much as the one who starts at age 22 just to have the same balance at 65.

I hope that this guarantee encourages one procrastinator to pick up the phone, and call us.

2006-03-07T14:37:00.000-06:00

The Importance of Starting Early

Making the resolution to start invest responsibly is difficult. Starting to invest period seems to be even more difficult. It is so easy to put off, yet the longer you wait, the more difficult it becomes, thanks to the miracle of compounding. For example, if one were to start contributing $4,000 to an IRA at age 22 until age 30 for a total of eight years, letting the balance compound until retirement, they would have as much money as someone who starts at age 30 and contributes the full 35 years until retirement. If you wait until age 40, you will have half as much as the other two scenarios at the standard retirement age of 65. This assumes historical rates of return of 8 percent.

Ah... but you say, "I'm going to get 12 percent returns". Well, in that case, the one who started early would have twice the money than the one who started at thirty, and an amazing six times the one who started at age 40. That's assuming that one can maintain 12 percent returns over many decades, which very few (even the highly paid mutual fund managers) get that.

The only way to make up the gap is to sock away much more than the maximum. Using the above scenarios, the 40-year-old would need to sock away $9,000 per year just to have the same amount as the 22-year-old.

Faced with these unpleasant choices, procrastinators are prone to making two wrong choices. The first mistake is assuming they will -- ney, must -- make substantially better than average returns. However, this almost always entails taking on more risk. Many lose more than they can afford, and end up worse off than before, with less money and less time. The second mistake is burying one's head in the sand, and hoping the problem goes away. For today's 40-year-olds, this action can have tragic consequences. The chances that Medicare and social security will exist in their current form decrease with every year that our politicians play ostrich.

As painful as the decision may be, and as much as you might hate dealing with it, starting early and starting now is the easiest choice. The problem does not get better with age.

2006-03-05T21:46:00.000-06:00

Is Your Pension Invested in Sudan?

Thanks to legislation enacted in 1997 by the Clinton Administration, U.S. companies are expressly prohibited from doing business in Sudan. However, U.S. public pensions are not prohibited from investing in companies that have ties to Sudan. These could be foreign-registered publicly traded securities or foreign subsidiaries of U.S. companies (which despite the legislation are not exempt). According to the activist web site sudandivestment.com, $91 Billion dollars of U.S. public pension dollars are still invested in these companies. Click here to see if yours is included.

Activists are using the South African model to target the Sudanese regime. It is widely acknowledged that divestment succeeded where sanctions and diplomacy failed in South Africa. The reasoning was that unless the white power structure felt the economic pain, Apartheid would continue to be the law. Specifically targeting large institutional investors got the attention of the multi-nationals who ignored the public opinion. Company after company withdrew from South Africa, and eventually, the system collapsed.

Obviously, it is unclear if this method will work, since the situation is markedly different. Whereas the South African problem was about keeping a certain race subjugated, the Sudan problem is about a bunch of ruthless thugs out to get the nation's oil wealth. Russian and Chinese oil companies are the biggest supporters.

Nevertheless, public pensions are run by those that are concerned with politics. If enough citizens raise a stink, they can be persuaded to divest. Notable institutional investors that have pledged to divest include the State of Illinois, the Harvard Endowment, Yale Endowment, Dartmouth Endowment, and the Stanford Endowment.

2006-03-01T13:27:00.000-06:00

Add Your Feed to the "Headlines from the Green Blogosphere" Tool

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If you're reading this, you probably saw the "Headlines from the Green Blogosphere" tool on another site. If you would like to have your feed added to the Green Bloggers Meta-digest for syndication, please visit our request form. The current feeds in the digest are:

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2006-03-01T12:26:00.000-06:00

Introducing the "Headlines from the Green Blogosphere" Tool

Click Here to Retrieve Code

In an effort to raise the profile of Green Blogging, First Sustainable has created the Green Blogosphere tool. In it are contained the best feeds from the blogosphere that I personally read and approve. The tool is completely free of charge, as long as no alterations are made. We do not insert ads (except for the First Sustainable text link), and we do not charge for feed insertion. It is just my representation of the best that the Green web has to offer.

For bloggers, the tool can help enhance your link popularity and keep your content fresh, both of which help you climb the listings in the search engines. Plus, if you qualify, you can be eligible for paid insertion with First Sustainable's advertising program. For authors, requesting a feed insertion can help you gain a wider distribution of your headlines.

Please feel free to contact me if you have any questions (mbrandon [at] firstsustainable [dot] com). Below is the HTML code. Copy and paste into your template wherever you would like it to appear.

Blogger wants to execute the code by pasting it here, so click here to retrieve the HTML code to display the tool on your site.

2006-02-28T08:28:00.000-06:00

Making Your Portfolio Sudan-free

Momentum is growing among public pension plans to divest from companies with ties to the government of Sudan. Lest anyone is unaware of the dire situation, hundreds of thousands of people have been slaughtered and millions have been displaced as Arab militias have terrorized the Darfur region of Sudan. Under the cloak of nationalism, the terrorist thugs in charge are really just trying to gain control of what could be oil rich lands. Genocide on this scale has not been seen since Rwanda in the mid-1990s.

Mobilization for divestment among the public investment community has not been seen since Apartheid. In Illinois, lawmakers passed a bill requiring any money manager involved in the 15 pension funds (accounting for $192 billion) to use a Sudan screen. Likewise, managers of the University of California endowment have begun divesting thanks to some student protests. Calpers, the huge California public employees pension, is following suit.

Stepping up to the plate, research firms KLD and Institutional Shareholder Services (ISS) created screens and information on the publicly held companies involved. Although I am prohibited from republishing the results, KLD is tracking 130 companies while ISS is tracking 167. Eleven of these are in the S&P 500. Forbes magazine gave us a glimpse:

Marathon Oil (NYSE:MRO)
Schlumberger (NYSE:SLB)
Xerox (NYSE:XRX)
Eastman Kodak (NYSE: EK)
3M (NYSE: MMM)

The Forbes article gives you the reasons these companies are on the list, though it is behind a members-only area.

Xerox provides evidence that divestment is having an effect. Thanks to the specter of a divestment sell-off, Xerox is terminating a distribution agreement.

Now for the shameless plug. First Sustainable has the tools to sanitize your portfolio of these Sudan-tainted companies. We help customers create their own index, called a folio, which can be traded commission free.

2006-02-26T07:59:00.000-06:00

Lying Down with Dogs, Waking Up with Fleas
Human Rights Activist Shows Evidence of Tech Firms' Complicity with China's PSB

In dramatic testimony to congress, representatives from Yahoo (YHOO), Google (GOOG), Cisco (CSCO), and Microsoft (MSFT) were hauled before congress to explain complicity with Chinese censoring practices. Uniformly, the companies expressed revulsion at the idea of cooperating with Chinese authorities but said it was necessary nonetheless to get a foothold in the world's largest market. Google's line of reasoning: some freedom is better than none. Cisco's: They sell the same routers in China as they do everywhere else and they can't be held responsible for how it is used.

Shortly after this display, human rights activists were allowed to counter. Harry Wu, Chinese dissident and torture survivor, showed particularly damning evidence that while Cisco's routers were the same, they are marketed and implemented differently. Most large scale deployments of communications infrastructure come with either paid-for or built-in training from the company that sold it. Holding up a Cisco-copyrighted publication on how to train the Chinese police, Wu likened Cisco's actions to giving them a pistol.

The question is more than academic. China employs tens of thousands of internet police, and has imprisoned tens of thousands of internet dissidents. It is safe to assume that some of them were either executed, tortured, or "re-educated" through hard labor. Wu relayed a story of how a friend accessed prohibited sites from an internet cafe, and was arrested when the police showed up within minutes. That kind of technology is only available thanks to American ingenuity.

Stateside, the actions could and should constitute a violation of US law. Legislation enacted after the Tiananmen Square incident prohibits American companies from selling crime control equipment to the Chinese. Wu testified that a US manufacturer of handcuffs is prohibited from selling to the Chinese government, but that hardware and software deployed to censor and track its citizens for the purpose of quelling dissident behavior has so far escaped the definition of crime control equipment.

History shows us that technology does not exist in a vacuum. How technology is used is more important than the technology itself. IBM punchcard technology helped Nazi Germany raise its extermination of Jews to industrial scale. The rifle helped Britain subjugate native people in Africa. More recently, P2P software has aided and abetted the widespread theft of copyrighted music. Technology vendors must take it upon themselves to at least attempt to prevent technology's use from being used for evil purposes.

These companies want us to believe that they can either comply with government requests or not do business at all. As was stated by the congressional panel and human rights activists, they can always negotiate. The Chinese need US technology. Homegrown technology is nowhere near the level of its US counterparts. They can and should negotiate from a position of strength.

2006-02-21T10:35:00.000-06:00

Ten Tips for No-Nonsense Socially Responsible Investing, Part 2

Continuing on the theme from yesterday's posts, here are tips six through ten.

6. One percent in community investments makes a huge difference. If you are buying a CD, buy one from a local bank, so that your money stays in the community. Preferably, buy the CD from a community development bank that makes loans to underserved communities. Heck, it's all federally insured.
7. Investments in Eco-efficiency pay off huge. For commercial building owners, every dollar saved in energy expenditures equates to about six dollars in appraised value, if you go by cap rate valuation. For homeowners, $1 saved in operating costs equates to about $20 in appraised value. This is according to Fannie Mae, which is falling over itself to lend money to homeowners who are willing to invest in efficiency improvements.
8. Costs can be controlled, returns can not. Ok, this is an echo of Clements' column. The average mutual fund charges 1.57 percent in expenses every year. If you go with the low cost options charging less than .5 percent, the one percent difference will result in a six-figure difference over 30 years. Meanwhile, diversification and asset allocation are the keys to minimizing the downswings of the market.
9. Socially Responsible Investing is not a fad... unless you make it so. Although the 60's generation would like to claim it, people have been making choices to not let their money enable injustice in the world for thousands of years. It's in the religious texts of Christianity, Judaism, and Islam. However, it is now easier than ever to accomplish thanks to focused research, institutional will, and communications technologies that spread ideas. That said, even an SRI portfolio that is not sufficiently diversified can crater. For example, don't concentrate your portfolio in clean energy technologies, climate technologies, or green building technologies. Those fields can, and probably will, result in a bubble some day.
10. Have a plan. This, too, is no different than our non-SRI brethren. Just as in any journey, you have to know where you are and where you want to go before you can get there. To sound a little less like Tony Robbins, you need a strategy in place that takes into account where you are now, for what you want to save, how long you have, and the shortest journey to get there. I am consistently shocked and amazed at how many people take a cavalier, do-it-yourself attitude with their long term finances while at the same time, spending days on end comparison shopping buy a refrigerator.

2006-02-20T12:05:00.000-06:00

Ten Tips for No-Nonsense Socially Responsible Investing, Part 1

Jonathan Clements' column in the Wall Street Journal Sunday, "Twenty Tips for No-Nonsense Investing" is indispensable for those who seek to cut through the marketing hooey of the financial services industry and really understand what is essential for investing. Since I am not into plagiarism, I will only provide a hyperlink. However, in honor of the fine piece, I want to add a corollary for socially responsible investors.

Being socially responsible means more than calling yourself socially responsible. Over and over again, I have said that my biggest challenge is to demonstrate to people that the definition of socially responsible is different to everybody. For some funds, SR means screening alcohol, tobacco, and gambling. For others, it means seeking out alternative energy technologies. For still others, it means devoting 1 percent to community investments.
Being socially responsible should not automatically entitle your mutual fund or adviser to a drastically higher fee. Many SRI mutual funds insist that the higher fees are the result of their size. Hogwash! They are trying to capture the LOHAS demographic that is willing to pay higher prices for sustainable products. There are many cost competitive alternatives, including the ones offered by First Sustainable.
Investing Responsibly does NOT mean you will sacrifice performance. The best academic studies show that SRI and non-SRI strategies perform about equally. In some years, non-SRI strategies do better. In no case does one strategy consistently or significantly outperform.
Screening out the bad actors is not the only SRI strategy. After weeding out any company that has even a somewhat objectionable product or stance, one must wonder if there will be anything left. The answer depends, of course, on how strict your social criteria is. However, you can also choose to pick the most ethically inclined companies in each industry. You can choose companies that show a steady improvement in their ethical behavior.
One should agitate for responsible choices in your 401(k). Almost every 401(k) platform makes it extremely easy to add funds if the employees demonstrate that they want them. So, if your company offers no SRI alternative, speak up! With half of investable assets in these qualified plans, it makes a huge difference.

Go to Part 2

2006-02-17T12:26:00.000-06:00

Greenland Ice Cap Melting Faster Than Thought

At the annual meeting of the American Association for the Advancement of Science, researchers presented a paper showing that Greenland's rate of melting essentially doubled over the last 10 years, adding a volume of water to the North Atlantic equal to the volume of Lake Erie. While conceding that there may be a phenomenon at work that they do not know about, the prevalence of fast melting in all polar latitudes suggests that it is due to global warming.

The American press would like to resort to fear-mongering and evoke images of the movie "The Day After" where the whole earth froze in a matter of days (the Globe and Mail has a less hysteric take on it). It is true that the world's oceans would rise 7 meters if the ice cap melted, but that would take millenia, even at the current rate. What is not being discussed in the reports I read is the danger to the Gulf Stream. Cold water from the ice cap would push warm water and sediment down, effectively shutting down the conveyor that heats Europe. The result of global warming for Europe would be a massive cooling of their continent. Unlike the deluge featured in "The Day After", this could happen in a matter of years.

To give you an idea of how that would affect Europe, Rome is on the same latitude as Chicago. Paris is on the same latitude as Fargo. London is on the same latitude as much of the southern Greenland ice cap that is now melting. Agriculture would be completely disrupted and infrastructure designed to handle more moderate temperatures would be insufficient to protect residents from the elements. Today in Austin, we're expecting ice for the first time in 3 years, and the whole city is going batty. Imagine if this phenomenon lasted the whole season and covered a continent.

2006-02-14T08:09:00.000-06:00

Socially Responsible Indexes

Low-cost and diversification are the key to a successful portfolio these days. I've said many times in this space that active management is not worth the money you pay for it. Indexing is the way to go if you want to capture the most that the market has to offer. The most popular indexes, however, do not have a social component. The indexes mentioned below do.

Calvert Social Index (Symbol: CSXAX, CSXBX, CSXCX depending on which class you own). I appreciate all that Calvert has done for the social investing field. The Calvert Social Index is a worthwhile benchmark. The fund, however, is exceedingly expensive for an index fund. All the performance criteria are quoted before fees. They have three classes of funds, depending on from whom you buy the fund. If you buy from an adviser, there is a max up-front sales charge of 4.75 percent which is patently ridiculous for an index fund.
Citizens 300 Fund (Symbol: CFCDX). You can see which companies are in this portfolio by clicking here. The fund charges no load, but the expense ratio of .9 percent is still very rich for an index fund. Environmentalism and diversity are their social criteria.
KLD Select Social Index (Symbol: KLD). This is an exchange traded fund, based on the widely used KLD benchmark. See this post for pros and cons of ETF investing. The ETF is a product of Barclay's iShares, and carries an expense ratio of .50, which is still pretty rich for an ETF. Quoting from KLD's own description of how they determine index constituents:

"The scores are derived from the ratings awarded to a company in its social and environmental profile. To come up with a score, the concerns are subtracted from the strengths and are normalized to give each issue area the same weight. KLD rates companies in 7 issue areas: community, corporate governance, diversity, employee relations, environment, product, and human rights. Finally to determine the company's weight in the Index, KLD applies an optimization process using the company's score, market cap, and industry. The optimization process allows for the Index to approximate the same industry weights as the Russell 1000 (upon which it is based), while controlling risk."

Mennonite Mutual Aid (Symbol: MVIAX, MVIBX, depending on which class). A useful PDF describing this fund can be obtained by clicking here. MMA has the best-performing funds of the last couple of years. However, there are 2 glaring problems with this fund. First, the fund charges a maximum of 4% sales load. Loads are not appropriate in index investing. Second, the fund itself varies substantially from its benchmark index. It has had variance of 20 percent or more (both up and down) versus the S&P Barra Value benchmark.
CREF Social Index - A useful fund fact sheet can be obtained here. The fund has a reasonable expense ratio (.37%) and the fund can be purchased without a load. The index trails the S&P 500 by a small percentage.
WilderHill Clean Energy Index (Symbol: PBW) - This is also an ETF, not a mutual fund. Expenses are capped at .6%, which is on the upper end of acceptable for an ETF. The components can be obtained from the Amex web site.

I must say I am disappointed by the choices in the field. Charging a load for an index fund is absolutely inappropriate, but half of the choices do just that. Furthermore, since indexing is a low cost way to invest, their expense ratios should be lower.

2006-02-14T06:08:00.000-06:00

Analysis Paralysis in Your 401(k)

More choices equate to more confusion

Contributing to your employer's 401(k) plan is, by far, the biggest personal financial no-brainer. Where else can you get a guaranteed return of in excess of 100%? Yes, you read that right. When your employer matches your contribution, that means you doubled your investment. Actually, it gets better. In addition to the employer match, you save anywhere from 15 - 35 percent, depending on your tax bracket, by deferring the tax on that income. You might save an additional 6% if you live in a state with an income tax. Even if you choose to put that money in a money market fund, these gimme's make the 401(k) superior to just about any other option. Any financial planner worth his salt will tell you that maxing out your 401(k) contributions is the smartest thing you can do.

Now for the bad news. According to a 2004 study by the Human Resources firm Hewitt Associates, a large percentage of employees are failing to adequately manage their 401(k). Consider these awful statistics:

Only 17 percent of participants made any transactions in their 401(k) beyond the automatic contribution.
Only half of eligible workers in their 20s elect to participate.
A significant percentage of participants direct their contribution to investment options such as money market funds, which are likely to deliver insufficient performance to meet retirement needs.
When employees leave the company, half will elect to cash out their 401(k) rather than rolling it into an IRA, or another qualified plan. The penalties, which include a 10% IRS penalty, full taxation on the distribution which can max out at 35 percent, and the lost tax deferral on the entire distribution, can devastate a retirement plan.

A conclusion of this study was that workers are overwhelmed with the number of investment choices, even though they asked for them and got them. In the words of one University of Pennsylvania researcher, "most 401(k) participants are characterized by profound inertia." The consequences of this state of affairs will be dire, especially for the under 40 set, whose chances of receiving the level of benefits from Social Security diminish every year.

I have a solution to this mess, and yes, it includes a shameless plug. Employers should hire local advisers for their funds, so that in addition to a 401(k), comprehensive financial planning can be offered to each employee. Doing so increases the employee's participation rate, and improves the choices that the participants make.

This solution does not necessarily create more cost for the employer. The average expense ratio in a 401(k) is 1.57 percent, which is exceedingly expensive when you consider that the average mutual fund underperforms the market by a comparable sum. At First Sustainable, we can chop that figure in half, after adding in advisory fees. What's more, the employer can elect to have most of that figure paid by employees.

The benefits to this style are enormous. We offer free consultations to every employee, taking into account all aspects of the financial condition, including that of children and significant others. The large 401(k) providers have a 5 step questionnaire which is nothing more than an attempt to sell the most expensive funds.

If you have 3 employees or more, you should give us a call and let us show you how easy and inexpensive this can be. For employers, offering a 401(k) is the best employee recruitment and retention tool. For employees, as I said at the top, is the biggest no-brainer.

2006-02-12T21:37:00.000-06:00

Pity The Poor Oil Companies

According to a recent Business Week article, things are not all champagne and caviar at the oil companies these days. High oil prices are making it more -- not less -- difficult to secure new supplies. Governments and dictators who have dominion over the lands with the oil are finding it easier to drive a hard bargain at these prices. Oil companies are still entering into long term agreements as if the price of oil will be retreating to $30/barrel. Governments -- some of which are run by shady operators if not outright thugs such as Venezuela's, Libya's, and Ivory Coast's -- are deciding instead to insist on joint ventures that cut them in on a bigger share of the booty.

One important metric that got lost in all the hype about their $36 billion (with a "B") annual profit was Exxon's production volume, which dropped 3.5 percent in 2005 One would assume that, with oil at these prices, the company would be opening the spigot. Conspiracy theorists believe that the company is deliberately holding back to maintain the high prices. The truth is, the oil companies can't find enough new supplies to keep up. They are selling as much as they can get, but they can only get so much with their newly emboldened political partners. When oil was trading at $10/bbl, these governments needed all the help they could to profitably get their black gold from the ground, so the oil companies had them over a barrel (metaphorically speaking, of course). My, how things have changed.

On top of this morass, the oil companies must deal with political opportunists, who encourage oil companies to take on the risks of exploration, but when the project is successful, the rules get changed. Venezuala's Hugo Chavez is now forcing all oil companies to convert their royalty-paying projects to joint ventures, after the fact. Even in Great Britain, taxation on North Sea oil is now subject to a "windfall tax", giving the Brits a greater share of revenue. And, of course, one can't forget the saber-rattling in our own U.S. Senate over imposing a similar windfall tax. Seeing as the oil companies pump a declining share of their oil from U.S. lands, the U.S. version of the windfall tax would be on top of the other extortion from the host lands.

The bottom line is the oil companies have a reinvestment problem. They are sitting on a horde of billions in cash that are merely earning bank rates of interest, even after huge dividends and stock buybacks. So, even at these prices, they can't find projects that yield better returns.

Permit me to shed a crocodile tear. Unfortunately, I have to agree with the oil execs that a windfall tax is inherently immoral. Capitalism should not be about a game of "you keep the dryholes, and we'll take the gushers". However, there IS an acceptably moral way to capture more money for federal coffers. STOP SUBSIDIZING THE OIL COMPANIES! They get tax breaks for exploration to the tune of $5 billion a year. Many people (though not me) feel that the hundreds of billions of dollars spent protecting Middle Eastern oil fields, including the entire Iraq War, amount to a huge subsidy for big oil. There is no reason to continue doling out federal dollars at these prices. This subsidy should be eliminated, and there should be no more talk of a windfall tax.

2006-02-09T04:59:00.000-06:00

Strange Bedfellows: 85 Evangelical Christian Leaders Go Green

Environmentalists now have an unlikely ally in the fight against global warming. On Thursday, 85 evangelical leaders, including notables such as "Purpose Driven Life" author Rick Warren, urged adoption of the Climate Steward Act. Backed by Arizona Republican and presidential aspirant John McCain along with Connecticut Democrat Joseph Lieberman, the Act calls for the U.S. to retreat to the emissions levels of 2000 by 2010. The group will back up their resolution by running television spots and ads in the New York Times.

As a churchgoing Christian and environmentalist, I say it is about time. There is nothing in the Bible that equates "dominion over the earth" with liquidating the natural assets for profit. It is inherently immoral to leave the ramifications for future generations.

Environmental pundits need to recognize, embrace, and be glad for this event. It would be easy to see this as an apparent "fracture in the Republican base" (Reuters). It is not that at all. Even if evangelicals were one-issue types, this would not be that one issue.

2006-02-07T09:38:00.000-06:00

A Solution to Cadmium Poisoning

One of the unfortunate by-products of our reliance on coal for power generation is the toxic release of cadmium. Power plants spew the toxin into nearby land, where it gets into the soil. If that land happens to be a farm, cadmium poisoning of the food supply is a serious risk. Leafy plants such as rice, tobacco, and lettuce soak up cadmium as if it were any other soil nutrient. In Asia, population density, a reliance on coal power generation, and a cultural dependence on rice as a diet staple, have made cadmium poisoning a leading cause of death and disability. It causes brittle bones, kidney disease, infertility in men, and excruciating pain. Children, such as the unfortunate soul depicted in the photograph, are especially susceptible, and there is no cure.

The causes and effects of cadmium poisoning have been known for decades. In Asia’s less wealthy economies, poisoned crops still regularly creep into the food supply. In Japan, displacing farmers on affected land is politically untenable, so the government has taken to paying farmers to leave poisoned land untended or simply buying up the poisoned crops. Since this program is not sustainable, soil remediation is the only alternative. However, the best method in use today is “dig and haul”, literally digging up the top soil and disposing of it. The method is expensive, costing approximately $1 million per acre. With millions of acres affected, progress would be slow, even if the continued burning of coal ceased tomorrow.

Last year, while immersed in the Science and Technology Commercialization program at the University of Texas, some classmates of mine learned of a project from world renowned scientists to develop a plant that actually soaks up the cadmium from the soil at such a rate that remediation happens in a matter of 4-6 years. Over these seasons, the plants are discarded, the metal is reclaimed, new seeds are planted, and after a few seasons, the soil is back to normal. The technique has been given the term “phytoremediation” and the plant has been trademarked as “phytogreen”. The team worked up a business model whereby this patented plant could be deployed to remediate the affected acreage at a cost of $25,000 per acre, well less than the cost of dig and haul, and even less than the $137,000 to pay farmers to leave the land fallow. At $25k per acre and millions upon millions of acres either poisoning the population or otherwise useless, the opportunity is huge for the right commercialization team.

Obstacles remain for this technology, but none seem insurmountable. The first is acquiring the intellectual property. The team of scientists, from University of Maryland, Massey University in New Zealand, and Australia’s University of Melbourne, are spread out. The patents are shared between the individuals and their respective universities. University commercialization is terribly cumbersome, as the institutions are bureaucratic and not necessarily motivated by monetary incentives. Second, working out the “who pays” scenario will require some strong arming. A government would be the logical choice, but again, politicians are not necessarily motivated by economic incentives. The companies who were responsible for poisoning the land may not be motivated to pay either, considering they were brazen enough to poison the land in the first place. A real estate speculation play may be the ideal scenario. Especially in Japan, where an acre is extremely valuable, $25,000 to improve it and make it useful again, is a drop in the bucket. The third obstacle is controlling the intellectual property. By nature, the plant will seek to replicate itself. If seeds are available for free, who will pay the royalties? The scientists are working on making the seeds infertile. Whatever the model, this technology is here today and ready for deployment.

Thanks to Jean Norton, Kiem Tjong, Barry Kulpa, Kenichi Nakamura, David Huo, and Hyeram Youm for their considerable research and contribution to the article.

2006-02-04T23:30:00.000-06:00

Investing in Biofuels

Many pundits who listened to the President's State of the Union speech, including Jon Stewart (my favorite) on the Daily Show, were scratching their heads at Bush's statement about making gasoline out of "switch grass and wood chips". What he is talking about is cellulosic ethanol, and it truly does have many people believing that it will carry us to energy independence.

Ethanol has been around for decades. It enjoyed a brief moment in the spotlight during the energy shortages of the Jimmy Carter era, when subsidies were dished out by the truckload to heartland farmers to make the stuff out of corn. Back then, the engines of the day were not prepared for ethanol, and the slow uptake of the fuel relegated it to fringe use. Today, ethanol works just as well as gasoline in most engines. In Brazil, flex fuel engines, which cost no more than $200 to install, 73 percent of drivers have this modification, and as a result, the country is not dependent at all on foreign sources of oil, instead relying on ethanol made from sugarcane.
These technologies are here today, and it does not require a massive change to the infrastructure the way that a hydrogen economy would.

Cellulosic ethanol is just ethanol made from different plants, and yes, switch grass and wood chips are potential feedstocks. The process is basically the same as that used by Kentucky Moonshiners to get grain alcohol. Distillation forces the cellulose (the material that holds cells together) to convert into alcohol and sugars. The promise of cellulosic ethanol is that it can use agricultural waste, of which we have tons.

So, how does one invest in this market? The only pure play is a company called Pacific Ethanol (NASDAQ:PEIX). This smallish company has built ethanol refineries in California, and has garnered investment from Bill Gates. However, the company is already in the hands of speculators. Just last week, thanks to the State of the Union speech, the company rocketed from $12 to almost $19, and back below $17. The higher prices make the fundamentals look very bubble-ish.

Safer bets include:

Archer Daniels Midland (NYSE:ADM) which has about 5 percent of revenue, but 20 percent of profit from its ethanol business.
Bunge (NYSE:BG), which processes soy and rapeseed.
Monsanto (NYSE:MON), whose genetically modified soy and corn seeds are well suited to ethanol production (according to Fortune Magazine).

Another strategy, albeit potentially more risky, is to buy commodity contracts on the crops involved in the process. Sugar, especially, is widely traded. Commodities have gotten a bad rap as too risky, but it is more often leverage that gets people in trouble, not the instruments themselves.

I have said in this space before that the physics of the much-hyped hydrogen fuel cell cars are too problematic for transportation. Ethanol burns cleaner, and is grown right here in the USA. Combine this with more fuel efficient cars, and the road to energy independence could be a lot less bumpy. Let's hope that the Bushies are not just paying lip service.

2006-02-01T15:52:00.000-06:00

Politicos Attack Tech Firms Over China

I posted the following response to a news.com article regarding the chest-thumping of politicians about human rights in China in light of Google's cooperation with Beijing to create a censored site.

My business is socially responsible investing. I pulled up my handy dandy Ideals Work database and pulled up a list of companies that had knocks on them for either "ties to Chinese government" or "ties to oppressive regimes". I came up with the list below. Obviously, Google is not showing up yet. It's not pretty. Perhaps these congressional reps should first check to see who donated to their campaign, and haul them all in. I would be happy to elaborate on these further. My email is below.

Altria Group, Inc. MO
American Standard Companies Inc. ASD
Andrew Corp ANDW
BJ Services Company BJS
Baker Hughes Incorporated BHI
Bard (CR) Inc BCR
Caterpillar Inc CAT
Chevron Corp CVX
Cisco Systems Inc CSCO
Citigroup Inc. C
Conagra Foods Inc. CAG
ConocoPhillips COP
Corning Inc GLW
Danaher Corp DHR
Du Pont (E I) de Nemours DD
EOG Resources, Inc. EOG
Ecolab Inc ECL
Electronic Data Systems Corp. EDS
Emerson Electric Co EMR
Exxon Mobil Corp. XOM
Fluor Corp. FLR
Ford Motor Co F
General Electric Co GE
General Motors Corp. GM
Halliburton Co. HAL
Heinz (H J) Co HNZ
Hewlett-Packard Co. HPQ
IMS Health Inc. RX
ITT Industries, Inc. ITT
Ingersoll-Rand Company Limited IR
International Business Machines Corp. IBM
International Flavors & Fragrances Inc. IFF
Johnson & Johnson JNJ
Johnson Controls Inc JCI
Kerr-McGee Corp. KMG
Kimberly-Clark Corp KMB
Lockheed Martin Corp. LMT
Lucent Technologies Inc. LU
Marsh & McLennan Companies, Inc. MMC
Microsoft Corp. MSFT
Monsanto Co. MON
NCR Corporation NCR
Newmont Mining Corp. (Holding Company) NEM
Nike Inc NKE
Noble Corp NE
Occidental Petroleum Corp OXY
Omnicom Group Inc. OMC
Oracle Corp ORCL
PepsiCo, Inc. PEP
Pfizer Inc. PFE
Raytheon Co. RTN
Reynolds American Inc RAI
Sara Lee Corp SLE
Schlumberger Ltd SLB
Starbucks Corp SBUX
Starwood Hotels & Resorts Worldwide HOT
Sun Microsystems Inc SUNW
The Clorox Company CLX
The Coca-Cola Company KO
The Dow Chemical Company DOW
The Goodyear Tire & Rubber Co. GT
The Interpublic Group of Companies, Inc. IPG
The Procter & Gamble Company PG
Thermo Electron Corp. TMO
Transocean Inc. RIG
Tyco International Ltd. TYC
Unisys Corp UIS
United Parcel Service, Inc. UPS
Waste Management, Inc. WMI
Xerox Corp XRX
Yum Brands, Inc. YUM

Mark Brandon
Sustainable Log - News and Views for Socially Responsible Investors
http://sustainablelog.blogspot.com
http://www.firstsustainable.com
When you subscribe to Sustainable Log, we give $1 to Alternative Gifts International in support of a cause of your choice.

2006-01-31T08:51:00.000-06:00

Speak Up If Your 401(k) Lags

Frightfully few employer-sponsored retirement plans have socially responsible investment choices available to their employees. It does not have to be this way. Insofar as adding a mutual fund to a plan, it is extremely easy from an HR perspective. It just means placing a phone call to your 401(k) administrator. Almost all employers, even the very large ones, have contracted this duty out to Third Party Administrators (TPA's). More than likely, the TPA is a well-known financial institution where mutual funds is their business: your Vanguards, your Fidelities, your Scudders of the world. Even the 401(k) plans that are offered by Professional Employment Organizations like Administaff or ADP have the ability to add almost any fund out there with a simple web interface that is available to your HR department.

HR Administrators want their employees to be engaged in their retirement, so if enough hay is made, they will listen. But, even if they are not receptive initially, be persistent. The only cost that MIGHT be shouldered by the employer is the cost of communicating the change in options. More often than not, even this is not required, because the TPA makes the necessary changes on a hosted web site for the employees.

While you're at it, take a look at ALL the investment options. Are they made up exclusively of high cost, actively managed funds? There may be a reason for this. In exchange for waiving set up and administration fees, these TPA's often only offer the high cost alternatives which pad their own pockets. Employers are all too happy to accommodate them because it means no out-of-pocket expenses for set up and administration. Unfortunately, when it comes to actively managed funds, you most often get what you DON'T PAY FOR. Actively managed funds consistently lag the indexes, mostly because of the high fees they pass on to shareholders. It may not sound like much, but over 40 years, the extra fees can add up to well over six figures. For example, if your 401(k) balance is $50,000, the extra 1 percent or so amounts to $500 PER YEAR. This extra 1 percent might be worth it if it was accompanied by sound advice that took into account the employee's entire financial picture, but statistics show that advice is rarely asked for or given.

Employers who offer 401(k) options have a fiduciary obligation to look after their employees' funds, so make them live up to it. I think they would all too happy to accommodate, seeing as a healthy 401(k) is one of the most important employee retention tools available.

Now, if you are a small business owner, First Sustainable can offer 401(k) administration and we make certain that the low-cost options AND the socially responsible options are available. Furthermore, it comes with free consultations for every employees and their spouses. I would be happy to chat with you about it.

2006-01-28T09:40:00.000-06:00

How's That "Do No Evil" Coming Along?

A company that proclaims as its motto "Do No Evil" invites a certain amount of scrutiny from socially responsible investors. Google is finding out that it is hard to live up to. Let's take a look.

The KLD "Pass" Database, which is one of the widely used research tools for the SRI community shows "diversity" as a "concern". Otherwise, it passes as an otherwise socially positive company. I, personally, believe they need to do more work on it, especially now that Google has shown its willingness to be in bed with the Chinese government.

This week, Google caved in to demands from the Chinese government to censor its search listings. To be fair, Google was the last holdout on this point among its competitors in the search space. Their defense was that a "little bit of freedom" is better than none at all, considering that the Chinese government had within its power to block the service altogether.

Another troubling story emanating from Google this week entails a refusal by the company to hand over search data to the feds. The feds claimed a need to have the data to combat child pornography and enforce laws dealing with the same problem. Most civil libertarians would say the company did the right thing.

Truthfully, I am surprised that the media has not made more of the fact that Google and Yahoo must now be the largest beneficiaries of the global pornography industry. How do we know this? Check out Wordtracker's list of the top 1,000 searches without the adult filter on. Fully one half of the top 1000 searches (accounting for five percent of all searches) are for porn-related terms. Seven of the top 10 were porn related (six if you think all the searches for "paris hilton" were from "Simple Life" fans and not from the fans of her well-publicized sex tape). Jennifer Aniston appears twice in the top 1,000. Twenty two percent of the searches for Jennifer Aniston were in the term "Jennifer Aniston naked" (13,132), as opposed to "Jennifer Aniston" (44,354).

Many of the searches are clearly conducted by those seeking illegal pornography, including "preteen" (#31), "incest" (#56), "lolita" (#61), "teen girls" (#71), and "preteen models" (#77).
Both major search engines serve PPC ads along side these terms.

The companies themselves would have to release data telling us what the click to impression ratio would be, but I would bet that the price of these keywords is more than average. This means that a significant portion of their revenue is derived from those selling pornography.

In our business of socially responsible investment advisory, we are careful to never pass judgment on the moral correctness of anybody's social criteria. However, if a company is willing to proclaim its virtue in its company motto, I would expect it to cover its bases more carefully.

2006-01-25T21:25:00.000-06:00

Natural Food, Unnatural Prices

Stan Cox of Alternet wrote the above-named article, putting Austin's hometown favorite, Whole Foods Market, to the Wal-Mart test. It would not come as a surprise to anybody who has every shopped at WFM that a basket of similar groceries came out to be significantly more expensive than Wal-Mart. Twice as expensive, as a matter of fact. The hypothetical baskets came to $232 for Wal-Mart, $564 for Whole Foods.

Cox then subjects Whole Foods to the so-called "Wal-Mart Test", referring to a previous article wherein he determines that a typical Wal-Mart worker is unable to afford to shop at Wal-Mart while supporting your average family. Even though Whole Foods is on Fortune's "100 Best" places to work, presumably because they pay better wages and benefits, Cox concludes that a typical Whole Foods employee is also unable to shop at that store.

The underlying pun here is so bad, it is begging to be used. The Wal-Mart vs. Whole Foods bout is like comparing apples to oranges. First of all, Whole Foods has never claimed to have low prices. They claim to have high quality, and they deliver that in spades. You can not get organic, locally grown produce at Wal-Mart. Secondly, it is unfair to paint Whole Foods with the low-wage, worker-exploiting brush. Where in the U.S. do grocery clerks and stockers get a sustainable wage? Nowhere. Third, has he ever shopped at Whole Foods? I do, and I see workers doing their shopping in the store all the time.

2006-01-23T10:38:00.000-06:00

The Economic Value of Corporate Eco-Efficiency

One of the biggest hurdles to the mainstreaming of socially responsible investing is the perception that there must be a sacrifice in performance to engage in SRI. The question alone is loaded, but in general, it is not so. More on that later. Innovest Advisors presented the winning paper for the 2005 Moskowitz Prize (awarded annually for research in the field of socially responsible investing) which hopefully debunks this perception once and for all. To be fair, the paper addresses SRI in terms of practicing "eco-efficiency", eliminating wasteful business processes in the course of running an operation. This does not apply to those that define SRI as screening certain companies based on certain social criteria, although that would depend on what that social criteria is.

The paper makes the point that not only is there NO penalty for investing in eco-efficiency, but that there SHOULD BE a premium attached. Ec0-efficiency is certainly a harbinger of other efficiency benchmarks. Going over the empirical minutiae would be beyond the scope of this blog.

So, it begs the point: If there is no penalty to investing with an SRI methodology, why wouldn't you?

2006-01-21T09:21:00.000-06:00

Hydrogen Fueling Stations in Minot, ND?

Hydrogenix (NASDAQ:HYGS) issued a press release nine days ago indicating their intention to build a hydrogen refueling station in Minot, ND. This would not be unique, except that they also contracted to electrolyze water on site with energy from a nearby Bismarck windfarm. So, with wind energy, they will obtain their hydrogen for vehicles from simple H2O. Everything is clean and renewable. Hydrogen fueling stations are beginning to dot the land, but the majority of them obtain their hydrogen from methane or other non-renewable source.

This news makes for a good press release, but there are many problems with this method. Electrolyzing water requires many times the energy to split the molecule than is yielded in the process, which is why other stations are using methane, itself well more expensive than refining plain old gasoline. Many clean technologies are more expensive because they lack large economies in manufacturing, but this particular conundrum is not going to be solved by volume.

Although it will strike many greens as anathema, I think the effort to get the transportation infrastructure running on fuel cells is misplaced effort. Fuel cells will be a major force in energy production in future decades, but its promise lies in stationary applications. The properties of hydrogen are just too problematic to make it competitive in mobile applications. When you take into account the cost to electrolyze, the cost to compress, the cost to store, and the cost to transport the gas, it becomes clear that it will have a hard time being competitive with non-renewables. If you add to that the hundreds of billions required to put a fueling infrastructure in place before vehicle sales can gain traction, the proposition becomes a loser. Although I wish it would happen through virtue alone, the American economy is not going to adopt non-polluting transportation sources unless it presents a clear monetary advantage.
Sorry.

Fuel cells should certainly be explored for stationary applications. For example, an infrastructure that currently carries natural gas can be adapted to carry hydrogen to homes and businesses where electricity is generated on site by a fuel cell stack.

Further, the strategy to wean America off its gasoline addiction is multi-pronged, but the technologies are available right now. First, the auto industry should build lighter cars using carbon materials that are just as strong as steel. This alone would shave 20 percent off our vehicle energy usage. Second, the auto industry should push plug-in hybrids. These babies get their electricity from a battery that is charged at home in addition to the standard braking energy. They deliver enough juice for most daily commutes and city driving. Moreover, if a customer who is concerned enough to get a plug-in hybrid also gets his electricity from clean sources such as a Green Choice-like plan, the wind energy gets channeled directly to vehicle usage instead of electrolyzing water.

This is the way to go. Any thoughts?

2006-01-18T07:03:00.000-06:00

A Rundown of SRI ETF's

In only a few years, exchange traded funds have grabbed an astounding share of invest-able assets. They have existed for years, going by the un-sexy moniker "closed end funds". In the late 1990's, the American Stock Exchange jumped on the indexing bandwagon and listed sexier-sounding closed-end index funds that went by the names Spiders (to reflect the S&P 500 index) and Diamonds (to reflect the Dow Jones Industrial Index). As investors awakened to the high costs and underachievement of their actively managed mutual funds, these simple instruments caught fire.

Today, there is an ETF for virtually every flavor of index, including SRI and its various off-shoots. I am going to discuss the pros and cons of these funds, but first a rundown of the options out there.

Powershares WilderHill Clean Energy Portfolio (PBW) - Meant to reflect the WilderHill Clean Energy Index, the fund has returned approximately 14% since its inception last March, far outpacing the S&P 500. The expenses are capped at .6%. The components can be found on the AMEX web site.
KLD Select Social Index Fund (KLD). Part of the Barclays iShares family, the index has underperformed the S&P 500 over the last year. The expense cap is at .5%.

There are other indexes without corresponding ETF's that track fuel cells, clean water, environmental, and other SRI styles.

Pros

Simplicity. ETF's give you instant diversification in one security.
Liquidity. Unlike open-end funds, these symbols are traded throughout the day, giving you the option to buy and sell at any time.
Low Transaction Fees. Unlike many open-ended funds, the cost to get in and out of these funds is just a commission for the trade, which depending on your broker can range from $0 (such as offered at First Sustainable) to much more than that. Many SRI open-ended funds charge a front end load, and possibly a back end load as well.
Relatively low expenses. Compared to the actively managed SRI funds, expense ratios in the half percent range sound great.

Cons

Automatic Investment may increase transaction charges. Since an ETF consists of placing a stock trade, you may get dinged this transaction charge every time you invest. For example, if you are saving $100/month, but your broker charges you $10 every time you purchase, you are getting dinged 10% up front every time.
"Relatively low" expenses does not mean "low". In the pros, I mentioned relatively low expenses compared to open ended funds. However, the largest ETF's charge five basis points as a management fee. Why does it take ten times that to run these passively indexed funds? These funds do not need to keep up with investing and redeeming shares. I believe that they are taking advantage of the SRI customer, who is typically willing to pay more for any product to be assured of its social responsibility. This irks me, as I believe it prevents the mainstreaming of the SRI strategy.
Tax Inefficiency. Just like all mutual funds, ETF's are required to pass through capital gains and dividends. However, they are not able to pass through losses, only those losses offsetting gains. Owning individual stocks can make managing your tax bite more favorable.
Premiums and Discounts. It is important to track the market cap of the ETF compared to the Net Asset Value of the underlying shares. The WilderHill ETF for example has a 20 percent premium right now. This means that if the fund were liquidated, you would not get your full investment back. Theoretically, this can work the other way with discounts, but if a discount to NAV gets too pronounced, a fund board just votes to open up the fund, and *poof* the fund starts trading at NAV again.

Again and again, I have stated in this space that the key to long term success is reducing costs and adhering to passive styles. To that end, ETF's are great, especially for small investors. For large investors (those with $50,000 or more), I still recommend the Folio Method of investing.

2006-01-14T20:26:00.000-06:00

Whole Foods and the Future of Green Power

Austin is a great town for the green-loving, tree-hugging, hybrid-driving crowd. We not only have the most successful green power program through Austin Energy. We also have the prototypical tree-hugging corporation in the organic grocer, Whole Foods Market. This week, Whole Foods became the largest private consumer of renewable energy in the nation with a 458-million kilowatt-hour purchase of wind energy credits. That is enough to offset the energy usage at all Whole Foods Stores. The way these deals work is that they buy the credits through a producer like Colorado-based Renewable Choice Energy. Although their stores may be hooked up to grids using non-renewable power, the renewable electricity is brought online to offset the use of another consumer who would otherwise be using non-renewable sources.

Back to Austin Energy. I have been a customer of Austin Energy's Green Choice program for three years now. Green Choice means that the equivalent kilowatt-hours we consume in our home is purchased from a wind or solar provider. For a couple of years, the rate I was paying to be green was about 35 percent higher than the typical Austin Energy customer who used the basic (non-renewable) service. Last year, as natural gas prices spiked, however, my bill remained the same while the basic customers saw a fifty percent increase. My bill is now cheaper AND greener. Green Choice customers lock in their kilowatt-hour price for 10 years.

Therein lies a great model for utility companies, who love nothing more than locking in rates of return. Every couple of years, Austin Energy puts out a bid to buy the electricity production of a renewable energy plan, or the "offtake". Wind always wins. Solar production is not quite there yet (although AE runs one of the largest solar plants in the nation, too). AE offers to buy the offtake for 10 years. The wind farm developer, whose costs are fixed in the up-front purchases of wind turbines, needs this kind of contract to get financing for the project. AE then signs up enough customers in the Green Choice program to consume that offtake. When they reach the number of new Green Choice customers, they freeze the program. If their Green Choice customers consume more electricity than the wind farm produces, AE has to buy renewable energy credits on the spot market, a more expensive proposition. But, the green choice customers get a locked in cost of energy. The utility gets a locked in wholesale rate. The wind farm gets their contract.

Everybody is happy, and able to project their income and costs years out into the future, which is what utility company shareholders want. However, there is room for improvement. While researching a paper in grad school (which I never actually finished), I discovered one hitch in AE's program and others like it. While utilities put out 10 year contracts to bid, financing institutions who lend money to build wind farms like to see 17 year contracts before they are willing to lend. Without the 17-year contracts, the developers need to put up more equity. More equity reduces the number and size of projects going forward. The seven year difference is holding wind and solar back!

Dealing with the fluctuating costs of their feedstock -- whether coal, oil, or natural gas -- has always been the curse of any electric utility. In most cases, regulators only allow the utilities to charge a politically-expedient amount and the rates of increases are usually reined in as well. If the commodity price spikes before regulators let their rates catch up, the utility just has to eat the difference. Wind and solar eliminate this problem. Green programs like AE's should be expanded.

2006-01-12T11:55:00.000-06:00

Sustainable Log Partners with Alternative Gifts International

Our story is out on the wire today. Click here to view it.

The orange sign-up box on the right is where you sign up to join the Sustainable Log Newsletter. By doing so, you'll have the opportunity to designate a $1 donation from First Sustainable to Alternative Gifts International. One dollar goes a long way to making a huge difference in these causes, but by sending it to your friends, you can magnify and leverage the contribution. Help us make this the most successful viral campaign ever!

-Mark

2006-01-10T21:35:00.000-06:00

When Buying Organic Pays (and doesn't)

Consumer Reports put out an article on the items that are worth buying when labeled organic. It goes further by explaining which products are "must be" organic, "can be" organic if price is no object, and "don't need to be" organic.

For many products, the price premium attached to "organic" has invited abuse among food companies. In Austin, a gallon of Horizon organic milk is $5.25 right now at the HEB Grocery store, sixty percent higher than the non-organic store brand. Rightly so, organic apples, strawberries, grapes, and bananas carry a similar premium at the Whole Foods Market down the street (HEB has lousy organic produce). Like so many new developments, however, unscrupulous companies have glommed on to the organic movement to take advantage of the price premium without delivering any real value. Organic cosmetics? Organic ice cream? Come on. I actually saw a bag of potting soil at Home Depot labeled organic as a point of differentiation, as if soil was ever anything but organic.

2006-01-08T21:30:00.000-06:00

The Future of Hybrids

The pictures below were taken from an article hybridcars.com about future hybrid concepts. Automakers are starting to really clue in to how to up the fuel efficiency. It isn't with the engine. The key to upping fuel for hybrids, and all other cars for that matter, is to replace steel as the material of choice for the body. We have new materials now that are far lighter, but still just as strong.

Another intriguing technology to watch in hybrid cars is the evolution of the "plug-in" hybrid. Some automakers, and even some hobbyists, have rigged hybrids to run on batteries that can be plugged in at your home. You still have a gas tank, which eliminates the range problem, which has hampered the acceptance of other electric vehicles. However, especially if you mostly drive within urban areas, the electric charge is enough for 90 percent of your consumption.

Even if your electric utility is a coal-fired plant, the kilowatt-hours will be cleaner than most automobiles on a per-unit-of-energy-consumed basis. If you live in a city such as Austin with an option for getting your power from renewable sources, your footprint from driving can be drastically reduced with a plug-in hybrid.

These technologies are here today. If you combine light weight materials, plug-in hybrids, and green choice electricity, fossil fuel consumption can be reduced enough to eliminate dependence on foreign oil. Of course, we might be held hostage by foreign auto-makers... that's another story.

2006-01-05T13:12:00.000-06:00

Sunlight powers streetlights, Wi-Fi access

Before I go further, let me just get it off my chest. Texas 41, USC 38. What a game! Now back to the post:

Staying on my theme of unique business models powering technology commercialization and sustainability, check out this article from CNET.com. To summarize, a company in Scotland has developed a solar-powered streetlight which can also be used to power a Wi-Fi or WiMax router. The company is doing a test run in the Scottish town of Dundee.

The article does not touch on what model these streetlights will be sold. However, imagine this. A city needs streetlights. A city does not NEED a universally accessible wi-fi cloud, though having one can be a boost to business recruitment, image, and emergency communication capabilities. Furthermore, it can enhance the city's schools by bridging the gap for disadvantaged kids and involving parents. Schools enhance property value. Increasing property values enhance a city's tax coffers.

Community wi-fi initiatives are pitifully underserved. Municipal priorities are rightfully focused on police, fire, EMS, sewage, hospitals, infrastructure (such as those streetlights), etc. If a city has extra budget -- and when does that happen? -- wi-fi just does not fall onto the radar. Some cities, such as Austin where I live, have non-profit organizations dedicated to bringing free wi-fi, but they are mostly geared towards getting store-owners to buy equipment, and the store-owners use it as a means to generate traffic. Austin is one of the most wi-fi'd cities on earth, and I still get frustrated with its lack of availability and uniformity. When I leave town, just finding free wi-fi is a pain.

Now, an innovation such as the streetlight product, can pay for itself while helping the city save on electric bills and providing that needed wi-fi connectivity. Going solar always involves a large up-front expense, but the elimination of ongoing electricity bills. I envision a model whereby a city can use its municipal borrowing capacity to fund the purchase of the units and the cost of setting up the wi-fi cloud. Immediately, the city's increased cash flow from the elimination of electricity usage can fund part of the interest and principal payments on the muni bonds.

Secondly, the wi-fi cloud can be outsourced to a management company which will, in turn, cut the city on royalties from advertising. In many places, when you log on to a wi-fi network, the opening "splash page" on the browser requires a login. Don't you think local merchants would love to target upscale, laptop-owning right in their neighborhood? The city could sell premium ad space to, say, realtors specializing in one particular neighborhood. Grocery stores could show their insert specials. Conversely, advertisers could target only upscale neighborhoods for products that sell in those neighborhoods, and increase reach in the poorer neighborhoods.

This model really isn't that different from the model used in radio today. The government gives a license to a company that will put up a tower and broadcast commercial messages as long as they can co-opt the tower in times of emergency. The city could also mandate decency standards for the splash page.

So, revenues from advertising, cost reductions from electricity bills pay the coupons on the interest and principal from the underwritten bonds. The city gets a wi-fi cloud for free. Schools win. The community wins. The technology wins. The environment wins.

2006-01-01T21:08:00.000-06:00

2006 Technology To Watch: Thin Film Solar

Something about the start of a new year inspires writers the world over to make their bold predictions. For an advocate of passive investing styles, predicting the direction of the market seems counter-productive, so instead, I will venture into technology commercialization and predict that 2006 will be the year of thin film. One of the most intriguing companies in this field just happens to be down the street from me. Heliovolt was listed on PriceWaterhouseCoopers' Futurecentric List for 2005, a development which will surely raise its profile. Heliovolt is not a public company, and I have no connection whatsoever with management.

Solar Energy as a technology has been held back for decades due to the industry's reliance on silicon. Solar panels are rigid, difficult to install, fragile, and most of all, expensive. The silicon alone costs approximately $2.50 per watt installed. In the most hospitable envinronment for silicon -- those areas with bost abundant sunlight and generous tax subsidies for installing solar -- the cost of generating solar electricity comes to $5 per watt. To be competitive with fossil fuels and even wind, that figure needs to be in the $3 neighborhood.

Heliovolt uses Copper Indium Celenide, a thin film capable of generating electricity. Thin film can be incorporated into shingles and curtain walls. Some visionaries and other technologists foresee solar energy-generating paint on the horizon. I am not the person to consult on the engineering behind any of this, but Heliovolt claims that its manufacturing process can lower the price of installing solar energy to $1 per watt, knocking out a significant chunk out of a non-renewable advantage.

2005-12-29T10:55:00.000-06:00

Book Review: Megatrends 2010: The Rise of Conscious Capitalism

Check out William Baue's review of Patricia Aburdene's book. Excerpt:

"Ms. Aburdene may be crossing the line when she suggests a cause-and-effect relationship between spiritualism and capitalism. She cites a Global Environmental Management Initiative (GEMI) report entitled Clear Advantage: Building Shareholder Value, which presents "compelling evidence" that intangibles such as environmental, health, and safety (EHS) performance boosts financial performance.

"As GEMI puts it, intangibles become tangible," Ms Aburdene writes. "As I see it, consciousness becomes profit."

Many readers will accept this translation of terminology, while others will balk that she is pushing past linguistic limits. For the former set of readers, the book confirms and advances a helpful framework for thinking about "conscious capitalism"; the latter set of readers will find value in many of the book's tenets while remaining skeptical of the foundational underpinnings of the framework."

2005-12-27T16:00:00.000-06:00

Sign Up to Save Gorillas, Rescue Endangered Girls, Liberate Child Soldiers, and More...

First Sustainable Teams Up With Alternative Gifts International in Membership Drive. Refer Your Friends, We Donate $1 To A Great Cause*

In an effort to increase our subscriber base, First Sustainable has created a promotion to donate $1 to Alternative Gifts International for each person that subscribes to our newsletter. For those that have not heard of AGI, they contract with various and screened non-profit agencies dedicated to specific relief or development goals. A whole catalog of worthy causes can be obtained from their web site.

My personal favorites among these causes include:

Saving Rwandan Gorillas. Twenty dollars (or referring 20 friends) can pay for one share of gorilla protection. Two hundred dollars pays for one day of poaching patrol.
Rescuing Endangered Girls in Southeast Asia. Fifty dollars (or referring 50 friends) provides the legal services to rescue one girl from forced prostitution. Twenty three dollars provides for one week of aftercare.
New Life for Child Soldiers in Columbia. Twelve dollars (or referring 12 friends) provides for counseling for one child at risk for forced recruitment. Sixty eight dollars is enough to enroll an at-risk child in one month of a workshop.
Medicine for Sudanese Refugees. Twenty dollars (or referring 20 friends) provides nutritional supplements for 75 children for one month. Ninety dollars supplies 45 men with antibiotics for one month.

If you find other causes that are more worthy of your support, then please select the appropriate option on the sign up form. Also, we can designate "where most needed" in the opinion of AGI.

The organization screens the recipients of the gifts. AGI received four stars from Charity Navigator for efficiency, and 90 percent of your gift goes directly to the cause you specify, with the rest going for AGI overhead and outreach. Renee and I gave many of these gifts to the people on our list that just don't need anything like a DVD or a fruitcake.

I hope that you can see that the real power of this promotion is not just in accepting the newsletter subscription and having $1 donated. You can really leverage the program by forwarding this message to your friends. We will send one email only, and a "double opt-in" is required. After that, they will never hear from us again.

All you have to do is sign up in the orange box to the right of your screen. Thanks.

-Mark

*Now for the unpleasant disclaimers. First Sustainable will aggregate the donations and make one lump sum donation at the end of each calendar month with the percentage weighting for each cause according to those specified by the readers. Doing so limits overhead for Alternative Gifts International. Opting in is required to both ensure the legitimacy of the email addresses and to limit unwanted emails. The promotion will be capped at $10,000 in total donations. First Sustainable reserves the right to end the promotion at any time.

2005-12-22T12:50:00.000-06:00

Energy Efficient Mortgages a No-Brainer

Fannie Mae's EEM is the type of program that should be on the Socially Responsible Investor's radar. An EEM is a loan (usually a 2nd loan) to a homeowner with the proceeds going to purchasing energy efficiency upgrades. Lenders love this for the following reasons:

100% of the project can be financed
It lowers the operating cost of the property
Much of the time, the decreased operating expense more than offsets the cost of the loan payment
If the loan is originated within their guidelines, Fannie Mae is standing by to purchase those loans. In other words, it's not an exotic instrument requiring lenders to keep the loan on their books

When Fannie Mae purchases these loans, they are then packaged and sold to investors just like the rest of Fannie's portfolio. Everybody wins: the homeowner gets lower operating expenses, the bank gets to originate a loan, Fannie gets to package and re-market it, the investor gets a FNMA-backed investment at market rates, the energy contractors get a sale, and the planet gets a less resource-intensive building.

Yet, lack of appropriate marketing has relegated these instruments to the fringes. EEM's need to be made sexy, like driving a Prius.

2005-12-20T11:13:00.000-06:00

Alaska sues Exxon, BP over natural gas
Lawsuit alleges the two oil giants restrict supplies, keeping prices artificially high.

I am no defender of the oil companies, but Fortune did a terrible job reporting the complexities of this story. The oil companies are not the bad guys here.

Just about every state and municipal entity in Alaska wants to build a giant pipeline that traverses the state from the gas fields in the north down to the Canadian pipelines in the south. The federal government has already earmarked $20 billion for the project, thanks to the same congressman who chairs the energy committee and got approval for the now infamous "bridge to nowhere". It will surely provide lots of jobs and pad lots of pockets for our northern countrymen.

The problem is that the pipeline is not the best way to get the natural gas to the lower 48. Not even close. Private interests are proposing to build an undersea pipeline from the northern Alaskan ports to Canadian ports. The private Canadian proposal is much less expensive, much shorter, and most importantly, not nearly as destructive to the environment. Undersea pipelines rarely rupture, while overland pipelines rupture all the time. The great Alaskan oil pipeline is constantly springing leaks. Economically, shipping the gas will be cheaper for the energy companies, so it is no wonder that they would like to obstruct the Alaskan project in favor of the Canadians. Of course, the Canadian project will not get built if a massively subsidized competitor takes all the gas. The Canadian project is cleaner, cheaper, less destructive, and requires no federal money. Moreover, the end user's price will be higher using the Alaska scenario. How much more evidence do they need?

Fortune should recognize this lawsuit for what it is -- a cynical ploy by the Alaskans to embarrass the oil companies into complicity at a time when they are already universally reviled. Meanwhile, Alaskan governments deserve the "piggy" award in this case.

2005-12-19T15:39:00.000-06:00

National Football League Proactive on... Climate Change?

Not normally seen as a beacon of progress on climate issues, the NFL and Stopglobalwarming.org issued a press release touting how yesterday's Eagles-Rams matchup was the first climate neutral pro football game. When tens of thousands of people congregate in a heated and domed building like the Edward Jones Dome in the winter, you can imagine the size of the impact. In fact, stopglobalwarming.org estimted 58 tons of carbon dioxide were emitted.

The stadium's power source is fossil-fuel based, so they contracted with a Native American-owned Wind Farm and a Pennsylvania dairy farm methane plant to bring the equivalent amount of megawatts onto the grid. So, citizens who would otherwise be using fossil-fuel based energy will now be using these clean sources. The dirty power used during the game is offset by the clean fuel produced for others.

I applaud the Rams and Eagles organizations for taking this approach. They could also provide for Hybrid shuttle buses to the stadium, use energy efficient lighting, and make certain to recycle all of that aluminum and paper from concessions. Another idea would be to harness the methane emanating from FedEx Field yesterday, because the Cowboys STUNK IT UP.

2005-12-18T19:46:00.000-06:00

EPA Tries to Pull a Disappearing Act on the Toxics Release Inventory

Note: Thanks to William Baue at Socialfunds for this story.

In late September 2005, the Environmental Protection Agency (EPA) proposed "burden reduction" rule changes to the Toxics Release Inventory (TRI), which requires facilities that produce toxic chemicals to report their wastes and emissions. Established by the Emergency Planning and Community Right-to-Know Act of 1986 (EPCRA) in response to the Union Carbide gas leak in Bhopal, India in December 1984 that killed tens of thousands, TRI pioneered the use of disclosure (instead of regulation) as a powerful mitigator.

"EPA is launching a frontal assault on the Toxics Release Inventory program by proposing to convert the annual reporting requirement to alternate-year reporting," said Senator Jim Jeffords (I-VT) immediately after the announcement of the proposed change. "The Community Right-to-Know Act will become the Community Right-to-Know-Every-Other-Year Act."

Members of the socially responsible investing (SRI) community echoed this sentiment. Yesterday they launched the "SaveTRI.org" website to encourage those concerned about the changes to write to EPA during the public commentary period that was extended to January 13, 2006.

"What if we looked at corporate earnings every other year?" asks Julie Fox Gorte, vice president and chief social investment strategist for the Calvert Group, suggesting this analogy to highlight the absurdity of the proposal. "We might find corporations whose earnings didn't change between 2003 and 2005, but they sure changed a lot in the meantime!"

"Two years worth of no information in the investment world is forever--we react to what we see companies doing much more immediately than every other year," adds Dr. Gorte.

Other members of the SRI community, which relies heavily on TRI data to assess corporate environmental performance and potential financial risks, also express dismay at the proposal.

"The proposed changes would eviscerate the most cost-effective environmental rule the EPA has ever created in terms of increasing eco-efficiency and reducing risk," says Jon Naimon, founding president of Light Green Advisors (LGA), a Seattle-based SRI firm. "National emission reductions following the first TRI publication have been much faster than those generated by historical approaches to regulation embodied in the Clean Water Act, Clean Air Act, and the Resource Conservation and Recovery Act combined."

"TRI information is one of the few pieces of corporate accountability research that is rooted in physical quantities--and therefore it is empirical as opposed to normative information," Mr. Naimon told SocialFunds.com. "Ironically, for a Republican administration that ostensibly favors information and market-based approaches, TRI is a program that works by spurring market forces rather than requiring command-and-control technology-forcing compliance."

The proposal would also increase ten-fold (from 500 to 5,000 pounds of toxic waste) the threshold for non-reporting using "Form A," which requires no details. The changes would also allow facilities emitting persistent bioaccumulative toxins (PBTs), such as lead and mercury that have been associated with human health risks even at low levels, to use Form A to report wastes less than 500 pounds without providing details.

These changes impact SRI research and beyond--including the Toxic 100, which lists top corporate polluters by aggregating TRI data by company.

"For the Toxic 100 and SRI research in general, this EPA proposal would be a giant disappearing act," said Jim Boyce, director of the environment program at the Political Economy Research Institute (PERI) at the University of Massachusetts, which created the Toxic 100. "The increase in the Form A threshold would make important information vanish, because even a small polluter can affect a large number of people if it's located in an urban area."

"Some companies might be able to change their activities so that more pollution happens in the unreported years, making them look better than they really are," Prof. Boyce told SocialFunds.com.

Intentional or not, emissions change significantly year-to-year as business ebbs and flows with production lines closing temporarily and then reopening when market conditions improve, maintenance or accidents closing plants for extended times, and bad weather events intervening.

For example, in 2000 a BP chemical plant in Decatur, Alabama emitted 48,000 pounds of benzene, a known human carcinogen, and then rose to 62,000 pounds in 2001, according to data from the TRI Explorer program on the EPA website. In 2002, the releases dropped to 16,000 pounds, but the next year they increased six-fold to 104,000 pounds.

"Looking just at the even-numbered years at the BP Decatur plant, emissions declined 80 percent, but looking at the odd-numbered years, the data shows pollution increasing by 70 percent," said Eric Schaeffer, director of the Environmental Integrity Project (EIP). "When emissions are jumping back and forth five or even ten times higher or lower from one year to the next, it isn't hard to see why collecting data every other year just doesn't work."

Those concerned with the proposed changes can voice their opinion during the public commentary period through the EPA website or the SaveTRI.org website. A website for OMB Watch, which holds the White House Office of Management and Budget (OMB) accountable, links to seven different action alerts with templates for submitting comments on the proposed change, as well as to a report on the issue.

2005-12-16T08:18:00.000-06:00

$10.1 Billion Verdict Against Altria Reversed

Something like 83 percent of socially responsible "negative screeners" have a screen for tobacco companies, so for those, this headline is relevant. The stock responded by moving to an all-time high.

As I've stated in previous posts, I think it is high time that the whole SRI business re-think the concept of negative screening (screening out bad actors like alcohol, tobacco, and gambling). Does a tobacco CEO really care that there is a discount on his stock because some investors refuse to buy it? If you consider that this has zero impact on his ability to deliver earnings, I doubt it. Tobacco companies are used to dealing with a "tort" discount, which I promise has a greater effect than SRI screening. Plus, there are always value (as opposed to values-based) investors that are there to scoop up a cheap stock with good cash flow.

The more productive use of SRI Screens is to identify those companies that integrate sustainable practices for profit. I live in Austin, home of Dell Computer. In fact, for a brief period at the beginning of this decade and after I had sold Daylight Online, I worked for that company, selling corporate systems.

The problem of electronic waste has always been a threat to the computer industry. The Wintel duopoly was successful in creating "planned obsolescence", which created the need for individuals and companies to replace aging computers every three years (on average). The innards of a typical computer has enough lead and mercury to cause concern for ground-water poisoning.

Dell was among the first PC-makers to recognize the value of recycling. Most IT-managers have a graveyard of old PC's, keyboards, and monitors that are too old to use and too expensive to dispose of properly. Dell stepped in and offered free recycling of old machines when a new one is purchased. It costs Dell about $25 per unit that it recycles, but the benefits are:

They solve a problem for the customer by getting rid of the graveyard, enhancing customer loyalty.
They get the machines from competitors out, and machines from Dell in.
They get a sale.
They get the satisfaction of helping the environment, and all the positive publicity that comes with it. And, boy, have they milked it.

Recycling has gone from a cost to a profit-center for the company with a little re-thinking of the standard model. This is type of practice that SRI practitioners need to pounce on, opening dialogues with the company, creating shareholder resolutions to get them to re-think their wasteful ways.

2005-12-15T23:26:00.000-06:00

What's Your SRI Style?

After several posts that focused on the financial aspect of SRI, now I would like to get back to the social aspect. This is pretty basic for those that are already on the SRI bandwagon.

Many people view Socially Responsible Investors as a bunch of fuddy duddies who want to screen out tobacco, alcohol, and gambling companies, but it is so much more. For one, there are more issues than those big three: weapons, animal testing, nuclear power, adult entertainment, corporate governance, board diversity, labor relations, etc. For two, SRI is not just about screening out the bad guys from your portfolio. I have come to the conclusion that the bad guys really don't care that some people are screening out their companies...at least, not yet. This is called a positive screen. You look for those companies making progress on emissions, waste, and other drains. This practice does not and should not have to be a money loser. Eliminating wasteful processes means that your operation is leaner, cheaper, or faster.

Even when positive and negative screening are considered, there is still much to flesh out. Consider these questions:

Do you believe in screening out companies with a history of bad behavior, even though they are currently making great strides? Case in point: General Electric. In the history of corporate polluters, GE ranks as one of the most prolific. However, today, GE is a company that is on the forefront of being clean energy technologies to market through their GE Wind and GE Osmotics (water usage) subsidiaries.
Can a company be a little bit pregnant? Would you screen out all cosmetics companies because of animal testing, or would you still invest in, say, Avon Products, which is the best of the sector in this regard?
Are you an activist? Do you care about your shareholder privilege of filing shareholder resolutions to affect a company's policies, or is your method of voting by selling a stock?

As a business, SRI needs to be about more than screening. I don't think the CEO's of large tobacco corporations care about the small fraction of potential shareowners who won't invest in their companies.

What do you think? I'm interested in those comments.

2005-12-13T21:26:00.000-06:00

The Cost of Cashing in a 401(k)

The post below is an article for a First Sustainable Ad Campaign with CareerBuilder, the large job site. It is aimed at job changers.

You read our banner correctly. Hewitt Associates, the large human resources and outplacement firm, estimated in a 2005 study that nearly half of all job changers choose to cash in their
401(k) when they leave their jobs. One half of those who cashed in their 401(k) were unaware that they would incur substantial penalties if they did so. These penalties can easily wipe out fifty percent of the retirement nest egg you worked years to build up.

Cashing in your 401(k) rather than rolling it over to an IRA or another qualified plan is devastating to your future welfare in so many ways. First, let’s talk about present-day penalties. It may seem to be the easy thing to do to just cash in your 401(k), especially if you may be looking at a period of unemployment, but doing so incurs the following penalties:

20% Withholding Tax. That’s right. If you withdraw $10,000 from your 401(k), you will only see $8,000 because your employer is obligated to withhold 20 percent.
Tax on Ordinary Income (less what is withheld). That $10,000 is taxed as ordinary income, regardless of your cost basis. The highest bracket is 39.6 percent
(assuming the Bush tax cuts do not get renewed). Whack away another 19.6 percent, since the first 20% was withheld.
State Tax on Ordinary Income. If you are in an income tax state, they will ask for their cut, too. This adds up to as much as an extra six percent.
10% Early Withdrawal Penalty. The IRS will not care how tough your circumstances. If you withdraw before age 59 ½, you will owe another 10 percent off the top.

If you have a large lump sum, just the distribution itself could put you in the highest tax bracket. The total haircut is as high as 56 percent, depending on your federal tax bracket, your state tax bracket, and your age.

It gets worse. Consider that the money you withdrew can no longer be used to compound
tax free. Though it seems far off, this is the most damaging aspect of your loss. Consider the table below. Assuming you achieve 7 – 11 percent average annual returns (these are very
achievable rates, based on historical averages), you can see that, by cashing out, you are foregoing many times the amount of your withdrawal. That $10,000 withdrawal could pay for several years of your retirement. Use the “Multiplier” column to determine how much you would forego based on the lump sum in your plan right now.

You should take control of your retirement funds, but leave them in a qualified plan. Any reputable 401(k) administrator will make it easy for ex-employees to roll their retirement funds into an IRA Rollover account or the next employer’s qualified plan. Both actions will not incur any penalties.

At First Sustainable, we enourage customers to roll it into an IRA Rollover account. This gives the investor the maximum control by enabling you to have the widest array of investment choices to match your age, goals, and risk tolerance. We can help guide you through this process, and we invite you to have a free consultation with a Registered Investment Adviser. Call (800) 774-3319.

2005-12-12T09:52:00.000-06:00

Reason #1 to Fire Your Mutual Fund Company

Tenth in a Series

This is the last in my series dedicated to the proposition that small investors are getting ripped off with mutual funds thanks to a complex scheme of self-dealing and back scratching.

Reason #1 – There are better, cheaper, less-risky alternatives

As I have said many times in this series, active management would be palatable and worth the outsized fees charged by mutual fund companies if they consistently delivered superior performance compared to a pre-defined benchmark, but they do not. Less than forty percent of actively managed funds beat their benchmarks in any one year. Over several years, that percentage becomes infinitesimal. If I have not convinced you yet of the superiority of passive strategies, then I recommend you re-read some of the previous posts. The point of this post is to outline the vehicles that enable you to get these results. While I admit that I am biased, I will attempt to be balanced in the discussion by explaining the drawbacks.

Separately Managed Accounts (SMA’s)

At First Sustainable, this is the vehicle we recommend for investors with $50,000 or more to invest. An SMA is an account that is set up by your investment advisor, which allows you to hold your own portfolio of well diversified instruments. The advisory makes its money by either charging a fee as a percentage of assets under management, a flat fee per year, or an hourly fee for the advisor’s time. Trading commissions are either nominal or free. Your adviser should take into account your needs and then arrive at a portfolio that is, for lack of a better term, the “YOU” Index.

Benefits. I love this vehicle, and here is why:

Your portfolio is completely tailored to your needs. You do not need to study every prospectus that comes to your door to see if a fund’s strategy has changed without your knowledge. Periodic rebalancing is all that is required when your financial situation changes.
You and your adviser can be patient. Because the adviser is getting paid from assets under management, there is no incentive to churn your account, which as I’ve demonstrated, destroys portfolios.
At least with First Sustainable, you can buy fractional shares of individual equities, enabling your portfolio to be spread among dozens, if not hundreds, of instruments. This factor accounts for why this vehicle is only now catching on. Until technology enabled this feature, an SMA only made sense for the very wealthy.
The above factor means that you can still invest periodically without messing up your asset allocation. Before, indexing in an SMA was only good for investing a lump sum. Now, you can set up a disciplined savings program.
Because your turnover should be lessened, your annual tax bill should be decreased.

Drawbacks. Your adviser will likely not have a published track record. Even if one was available, it would not necessarily be an adequate measure of your adviser’s competence. This account should be tailored to your specific needs, and thus, not comparable to anybody else’s portfolio, thereby making a comparison useless. At First Sustainable, we overcome this aspect by making available indexes that we subscribe to. These indexes do have track records and professional oversight.

What to Watch Out For. Do not let your adviser place you in this account if he is going to, in turn, recommend vehicles that also have high expenses. For instance, paying the SMA fee for the privilege of getting placed in other actively managed funds is not a good deal, as you are paying twice. Advisory firms get paid twice this way, and it should be outlawed. Yet, this is a common practice among our less dutiful competitors. The ONLY time this would be an acceptable practice is if your portfolio is small enough that the adviser recommends VERY LOW COST index funds or ETF’s. Even then, you should insist on a reduced SMA fee.

Index Funds

As investors have awakened to all the drawbacks of active management, these funds have exploded in popularity. They are essentially mutual funds that attempt to mirror the performance of an index. The most common indexes are the S&P 500, Russell 3000, Dow Jones Industrials, and a Total Market Index comprising all of these indexes. However, there are dozens of indexes for which funds are created. It is important that you and your adviser are capable of assessing the suitability of this index for your situation.

Benefits.

These funds have the lowest expense ratios around. The largest funds have expense ratios in the .05 percent range (that is .0005). A typical actively managed fund charges 3500 percent more.
They offer instant diversification
They require less research up front and less ongoing research.
They are ideal for investors who are just starting out with a small, disciplined savings plan.
Because indexes do not have high turnover, they are usually more tax efficient than actively managed funds.

Drawbacks. Not all index funds are created equally. First, some funds still claim to be low cost, but still charge well more than the stingiest funds. Many S&P 500 funds still get away with charging .5 percent, or ten times what the largest funds charge. Second, most indexes are created on a market capitalization basis. This means that their weighting is based on the company’s total market value. This could lead to an overweighting of the high PE stocks that are most likely to retreat in a correction.

Exchange Traded Funds (ETF)

An ETF is a closed-end fund that is comprised of an index and trades like a stock on an exchange. Like their open-ended counterparts, there are dozens of alternative indexes than the most popular Spiders (S&P 500), Diamonds (Dow Jones Industrials), and QQQ (Nasdaq 100).

Benefits. Because they trade on an exchange, they are continuously priced. Most open ended funds are priced once a day. This allows an investor to take advantage of short term moves. Some (including me) would say this is a drawback.

Drawbacks. Closed end funds still carry an expense ratio. Theoretically, this should be less since the management company does not have to deal with inflows and outflows. The largest ETF’s are less expensive for the most part. The less famous ETF’s still carry a high expense ratio, which is not as well disclosed.

I hope this series has been helpful. I would be interested in your feedback.

2005-12-08T10:13:00.000-06:00

Reason #2 to Fire Your Mutual Fund
Company

Ninth in a Series

The next several posts are going to be dedicated to the proposition that small investors are getting ripped off with mutual funds thanks to a complex scheme of self-dealing and back scratching.

Reason #2 – Technology Eclipses Their Reason For Being

Mutual funds gained popularity for the reasons down below. I maintain that both of them are now made obsolete by technology.

Economies of Scale Mean Lower Costs For Shareowners. On paper, the explanations sound great, but let us look at the evidence. What expenses are involved in running a fund?

Trading Commissions. As I have pointed out in previous posts, this should be the primary benefit, but the evidence shows that mutual funds are not getting better prices than any ordinary investor can get. In fact, in many cases where soft dollar arrangements are concerned (See Reason #10), they are getting far worse. Before commissions were de-regulated in the 1970’s, this factor was reasonable. Getting cheaper commissions meant having a
technology and trading infrastructure that was too prohibitive for the small
investor. Today, this technology is available to everybody. Discount brokers use ECN’s to execute their customers’ trades, just like the mutual funds do.
Shareowner Communication such as statements, proxies, confirmations, etc. There are expenses for printing and mailing these confirmations to be certain. However, proxies are only necessary because of the mutual fund structure. Statements and confirmations are required by regulations.
Your broker sends these for free as part of the commission you paid.
Management Salaries. Certainly, these cost money, but the evidence shows that shareowners are paying way more for these than they
should. A multi-billion dollar fund manager is likely to have a salary in the high six figures if not in the seven figures. Who sets these salaries? The fund board. Although they are supposed to have a fiduciary duty to protect investors, their salaries are probably determined by two factors: their achievement versus the benchmark and their ability to attract assets.
As we have seen, the latter factor has been more bane to existing shareowners than benefit. So, why is he worth millions, especially when most of them fail to reach their benchmarks?
Administrative Expenses such as office space, office technology, travel,
lodging, meals for staff, etc. Often, these expenses get paid by third party vendors in exchange for trading flow (See Reason #10), and investors end up paying far more for these items than they should. Furthermore, there is no rational reason for the fund manager to be parsimonious with his shareowner’s money. These expenses should come out of the management fee, but instead they are passed on to investors. So, ask your fund operators if they are flying coach instead of first class.
Stock Research. This would be a worthwhile expense if the research enabled the fund to outperform, but as we have seen, it has too seldom been a difference maker. In the last few years, the public has seen
how little value professionals place on this research. In fairness, it’s difficult for any buy-side investor to know if what is coming out of analysts’ work is worthwhile or fluff.

The second reason for a fund’s existence, as touted by the industry, isnstant diversification. I am absolutely on board with diversification being necessary and worthwhile. But, is getting diversification within the structure of a mutual fund worth the two percent or so that most investors are paying in management fees and expenses? The answer here is less clear, so one must look at the
alternatives. Index funds provide the ultimate diversification at a much lower cost. Exchange Traded Funds (ETF’s) provide diversification, although many of
these charge a management fee as high as 1.5 percent as well. Most of them charge well below one percent, and the biggest ETF’s are in line with the least costly index funds. On this point, the question hinges on whether
active management is worth getting dinged several times what one would be
charged otherwise with passive management. As we’ve seen, very few active managers are able to outperform their benchmarks over the long term.

To see if the mutual fund industry is drinking its own Kool Aid, one need not look any further the long term trend in expenses and management fees. In the last twenty five years, assets under management have skyrocketed from the low billions to approximately $4 trillion today (down from about $7 trillion at the peak of the market). Using their rationale, fund expenses should have decreased dramatically. Instead, they have gradually increased, before you take into account off-balance-sheet expenses such as soft dollar arrangements.

I am an advocate of Folio Investing. This style means that an individual investor, after consulting an adviser, buys into a diversified, asset-allocated portfolio that is appropriate for the individual’s stage in life, risk tolerance, and spending goals. Technology enables us to buy fractional shares of individual stocks, making it possible to create your own little mutual fund without the exorbitant fees and self-dealing. First Sustainable practices this method. I invite you to get a consultation by calling 800-774-3319.

2005-12-06T09:42:00.000-06:00

Reason #3 to Fire Your Mutual Fund Company

Seventh in a Series

The next several posts are going to be dedicated to the proposition that small investors are getting ripped off with mutual funds thanks to a complex scheme of self-dealing and back scratching.

Reason #3 - Chasing Performance

Just as fund companies tend to overstate the expertise level of their youthful, call-center "investment advisers" (see Reason #5), management also tends to attribute what the evidence shows to be more-or-less luck to extraordinary investment acumen. As I've said before, the exorbitant fees charged for active management would be well worth it, if superior returns were consistently delivered. But, the returns are not being delivered, and the fees are mostly not worth it (especially the overpriced, advisor-pushed funds). What's worse, while I concede that in any given year, two thirds of fund managers will beat the market, that percentage decreases dramatically as the time horizon lengthens. In fact, using a manager's good track record has been shown to be one of the worst things you can do when picking a fund. The maxim of past performance as no guarantee of future results is right.
In fact, superior past performance is almost a guarantee of sub-par results in the future. If you read the advertisements for mutual funds in the business pages, they are likely accompanied by smiling, happy, healthy people and in big numbers, the 1, 5, and 10 year returns on the fund. If they are really gutsy, and have happened to beat the S&P 500, they'll compare those numbers with the index as well. However, this only tells part of the story. First, every well managed fund that delivers consistently faces a huge upsurge in dollars to invest, making it harder to deliver those outperforming returns. Do they make this clear in the advertisement that the superior returns delivered many years ago are harder to come by now that they have 10x or more to manage? No. Second, one of the true benefits of operating a huge fund complex with dozens or hundreds of funds means that, at any given time, one of them will be outperforming. This means that the funds are touting what is hot at the moment, keeping silent about their underperformers, and exacerbating the first problem. I am reminded of the book maker who makes ten picks a week, so that he can be sure to have some correct calls to tout the next week.
The ÂHot HandÂ theory, as espoused by University of Illinois Finance Professor Josef Lakonishok, tells us that any fund manager who outperforms one year can expect to continue to outperform for a maximum of 10 subsequent quarters. Lakonishok attributes this to market momentum more than any investment acumen. As money pours into that managerÂs fund and funds like it, asset prices are bid ever higher. After the period of overperformance, if there is indeed one at all, the manager is more than likely to underperform, and sometimes drastically underperform. The key takeaway is that you should not be enamored with advertisements of hot funds.

On top of this phenomenon, you should be aware that herd mentality makes it difficult for any fund manager. On a macro level, history bears this out. For example, in the early stages of the 1990Âs bull market, fund inflows were about one tenth of the level in 1999-2000, when the market was at its peak. Conversely, fund outflows were at their peak in 2002-2003 when the market was at its bottom. The result was a $4 trillion dollar hickey to the small investor in the form of paper wealth vanished. To the extent that the fund industry continued with their deceptive advertising, they deserve some blame.

Tomorrow: Reason #2 Â Technology Eclipses Their Reason For Being

2005-12-05T09:32:00.000-06:00

Reason #4 to Fire Your Mutual Fund Company

Seventh in a Series

The next several posts are going to be dedicated to the proposition that small investors are getting ripped off with mutual funds thanks to a complex scheme of self-dealing and back scratching.

Reason #4 - Short Term Speculation

For most of the history of the Mutual Fund Industry average annual turnover hovered around 15 to 20 percent. This means that 15-20 percent of the funds portfolio changed each year. Put another way, the average holding period for a stock in a mutual fund portfolio was 8 years. Starting in the late 1970's and accelerating in the mid-1990's, average annual turnover is now 100 percent. Put another way, the average holding period is now less than one year. So, while preaching that a steady, long term approach was appropriate for their customers, the industry has itself moved from a stock-ownership mentality to stock-rental mentality.

I am going to save for another day the discussion about how this makes it more difficult to achieve results commensurate with the enormous fees levied. Be aware that this is aspect is the biggest problem with a short-term mentality. However, there are quantifiable reasons to avoid high turnover.

How High Turnover Hurts You

I keep returning to this point. High fees and expenses are the primary reason that mutual fund performance lags their benchmarks. Some are more transparent than others:

1) Trading Commissions. This is not disclosed in the fund's expense ratio, making it harder to compare the true costs among funds. As I've mentioned in previous posts, you would think that a sizable mutual fund would be able to get competitive commissions, but in actuality, many of them pay far more than any individual can get, thanks to soft dollar arrangements (See Reason #10).

2) Taxes. If a fund manager sells a position for more than was paid, the fund is obligated to pass that through to investors (see Reason #8). If the holding period was less than one year, the gain goes into the "short term capital gains" basket. This is taxed as ordinary income. If the holding period was more than one year, the gain goes into the "long term capital gains" basket, which has a lower rate. So, if your fund has an abundance of short term capital gains, you are paying up to 250 percent more in taxes for short term gains than long term gains.

3) Spreads. Almost all stocks have a spread. When you see a price quoted with a bid (the price at which you can sell), and the ask (the price at which you can buy). The difference is the spread. On the most liquid stock, this amounts to pennies per share. On the lower-volume and international stocks, the spreads are wider. This can amount to a serious drag.

4) Slippage. This refers to the difference between the price that was received for a buy or sell order, and the price at the time the order was given. For funds with sizable positions, you can bet that heavy buying will raise the price, and heavy selling will lower the price. Even relatively small lots of 1,000 shares will move the market in the less liquid stocks, so imagine how this affects a multi-billion dollar fund.

None of these factors are figured into the expense ratio that was quoted in the prospectus or other marketing material.

How We Got Here

Many factors contributed to the rise of speculation among the stewards of your nest egg, some understandable, some nefarious.

1) The deregulation of commissions. The 1974 rule-change dropped the bottom out of the cost of executing a trade. This made short term trading more feasible, but it also created a need for Wall Street to substitute the lost revenue. They found it. In 1970, the average daily volume was 15 million shares. In 1990, it was 300 million. In 2000, it was 3 billion.

2) The rise of IT. Computer technology enables quants (the wall street term for a manager who makes trading decisions based on computer algorithm) to plug in a vast array of data points into their systems. The result is a whole lot more buy and sell signals.

3) Captive mutual funds trading through parent-company brokerage operations. This allows fund companies to pass some vigorish on to their corporate parent without disclosing it.

4) Soft dollar arrangements. Managers are showered with perks in order to direct more volume the way of brokerage houses.

What To Do

The body of academic studies makes one thing painfully clear. There is an inverse relationship between average annual turnover and fund performance. You would have to think that otherwise bright fund companies would know this, and adjust their fund management styles accordingly. Unfortunately, I think the evidence tell us that they do know about it, but that changing their style means less in their pocket.

Tomorrow: Reasons #3 - Chasing Performance

2005-12-03T20:49:00.000-06:00

Reason #5 to Fire Your Mutual Fund Company

Sixth in a Series

The next several posts are going to be dedicated to the proposition that small investors are getting ripped off with mutual funds thanks to a complex scheme of self-dealing and back scratching.

Reason #5 - Fresh out of High School "Investment Advisers"

The fudging of expertise is appalling in our business. Believe me, I know. I am 35 years old now, and have been in the financial services business 13 years now. When I was 22, fresh out of the University of Texas with a History degree, my first job was with Fidelity Investments as a mutual fund adviser. I passed the Series 6 exam in a matter of days. After a few weeks of training, most of which was listening to one of the more tenured reps (by "tenured", I mean someone with six months experience), I was on the phone taking calls from all over the country, advising people on how to take care of their financial future. If you had called an 800 number on a prospectus or an advertisement, you would have been speaking with someone like me. Dozens of reps like me fielded calls, and not one of them had more than three years experience. I, myself, only lasted a year and a half in that job. Call center work has a way of burning you out.

In the 1990's, Fidelity was undergoing rapid growth, and they could not keep the place staffed. They had planned on staffing to a level where no more than five customers were holding at any given time. Shortly after I arrived, we were constantly on "red alert", which meant that 30 people or more were holding all the time. So, they relaxed their hiring requirements. They had previously insisted on a college degree for their newly hired reps. Soon, I was sitting next to pimply-faced 18-year-olds who had been in a high school classroom only a few months prior. Looking back on it, who was I to feel so superior? It's not like I learned how to plan someone's financial future in my "Western Culture, 1865-present" seminar at UT.

Think about that, though. Customers were entrusting their retirement plans to kids. If you go to Fidelity, Schwab, E*Trade, TD Waterhouse, Ameritrade, T Rowe Price, Ameriprise, or any of the other purveyor of mutual funds, and click on their links to "talk to an adviser", it is usually accompanied by a smiling, healthy, slightly graying middle-aged man with great teeth and his own corner office. In fact, you are more likely talking to a very young, underqualified, underpaid call center worker who barely has a cubicle and is definitely NOT smiling.

Of course, it is true that it does not take grand expertise to do what they do. Back in my day, we were given a script to inquire of a customer's marital situation, age, risk tolerance, spending goals, and that is it. With that information, there was (wait for it) a Fidelity fund that met their needs. This is how it works at most firms. You need what they are selling. Financial planning requires more than that.

All investment products should be discussed in the larger context of a person's life -- not just financial life, either. If you take no other advice from me, take this one tidbit. If a "financial adviser" is selling you a product from which he is getting paid a commission, he will not have your best interests at heart. Period.

Tomorrow: Reason #4 - Short Term Speculation

2005-12-02T10:38:00.000-06:00

Reason #6 to Fire Your Mutual Fund Company

Fifth in a Series

The next several posts are going to be dedicated to the proposition that small investors are getting ripped off with mutual funds thanks to a complex scheme of self-dealing and back scratching.

Reason #5 - Enablers of Poor Corporate Governance

An entire book could be written about the happy conspiracy between corporate managers and the investment community that pads both pockets at the expense of the everyday shareholder. In fact, one has been written. You should check out "The Battle for the Soul of American Capitalism" by John Bogle, the founder of the Vanguard Group. Bogle has been one of the few mutual fund industry luminaries that publicly decry the abuse taking place. It is an easy read. Check it out. Many of the top ten reasons are touched on in this book.

Over fifty percent of corporate America is owned by the top 100 financial fiduciaries. One would think that this alone would make them the most vigilant voices in the boardroom. In fact, few mutual funds demand accountability from management, and in many of the most egregious cases, they are guilty of downright aiding and abetting the fudging of numbers and the looting of otherwise good corporations. Why? Two glaring conflicts of interest prevent the industry from becoming the activists that they should become.

First, every company is a potential client for 401k and pension administration. Over half of invest-able assets are in defined contribution plans (401k, 403b, etc) or defined benefit plans (pensions). Company management gets to decide who handles these assets on behalf of their employees. Corporate managers who take a dim view of shareholder activism (and who does, except those that are abusing shareholders?) are unlikely to award this business to institutions who meddle too much. Management wants shareholders to blindly follow the recommendations of management. Shareholders who file corporate resolutions and offer up competing board slates are not likely to get a piece of the company's investment assets.

The second conflict is similar to the first. So many of the mutual fund industry's parent companies also have operations in investment banking. They are reluctant to raise hay because offending their management clients may result in their firms being left out in the cold when it comes to investment banking deals.

This is really a shame. Mutual funds have the expertise, the resources, and the position to demand accountability from management. Instead, management has used the diffusion of corporate ownership to increase their pay, fudge the numbers, cut sweetheart deals, etc. Bogle calls this a transition from "owners' capitalism" to "managers' capitalism".

Tomorrow: Reason #5 - Fresh Out of High School "Investment Advisers"

2005-12-01T10:25:00.000-06:00

Reason #7 to Fire Your Mutual Fund Company

Fourth in a Series

The next several posts are going to be dedicated to the proposition that small investors are getting ripped off with mutual funds thanks to a complex scheme of self-dealing and back scratching.

Reason #7 - Alphabet Soup of Sales Charges

If most people can not easily explain how they are getting charged for services, you can almost always bank on a rip-off in your midst. Such is the case with many mutual funds and their "fund classes". Just like when a corporation offers up shenanigans like "super-voting" shares, grab your wallet.

Get this. The same organization with the same portfolio and same manager can have "A" class, "B" class, and "C" class shares. In some extreme cases they can also have "D", "E", "Z", and more, but these are rare and we will not go into them here.

"A" shares generally refer to the shares that have a front end "load" or sales charge. This is normally in the 3-5 percent range. This means that 3-5 percent of your investment comes off the top before it is even invested. Your $100k investment just became $97k with a 3% sales load. This sales charge is often split with the financial adviser, mutual fund supermarket, or other intermediary who placed you in this fund. Oft maligned, load funds are not always the worst possible solution. In many cases, the ongoing management fee that is charged every year is often lower for the "A" shares. If you intend to hold the fund for a long period of time, then this might actually be the cheapest way to go. More on this later.

"B" shares waive the front end load, but instead employ a contingent deferred sales charge (CDSC), or a back end load. In plain English, this means that you are not charged up front, but if you redeem your shares from the fund, you may face a sales charge. The most prevalent CDSC's are those that are reduced or phased-out over time, say seven years. If you hold the fund for seven years or longer in this example, you pay no front end or back end load. Why the complexity? The aforementioned intermediaries are likely to want their vigorish up front, so the fund obliges them, but wants to make sure they will get their money back from you. Placing these onerous restrictions enables the fund to at least cover their out-of-pocket expense for recruiting you. Again, "B" shares can be the cheapest alternative for a specific fund if you have a long-term horizon.

"C" shares have neither a front end nor back end load. However, it is likely that if a fund has this alphabet soup in the first place, the ongoing management fee is going to be higher than the "A" or "B" shares. Therefore, while every penny of your investment is put to work right away, over a long investment horizon, you may be paying more.

Which Class is Right For You?

With very few exceptions and for several reasons, the answer to this question is none of these classes are right for you. In fact, if you are presented with these fund options, you are likely getting hosed by your investment adviser. The reasons these classes exist is so that fund companies and advisers, two fiduciaries who are obligated to have your best interests foremost, can arrange how to split up your money. I am a firm believer that, in that circumstance, your interests will not be put first. By and large, the funds that employ these practices have a higher than average total expense ratio. I will always come back to the principle that the most reliable way of tweaking your mutual fund performance is to pick funds with low expenses and low turnover.

Most of the fund companies employing this method also have in-house advisory or brokerage services. Surprise, surprise. The real reason they love this method is that sales charges lead to immediate money for them. In theory, they are correct is saying that long-term horizons will make the loaded funds cheaper. However, let me be clear on this point, because I came from this culture myself. In a few months, or years, they are going to call you up again to advise you to switch funds, and ding you again. It sickens me. Really.

There Is A Better Way

To me, there are three superior approaches than buying class-laden funds, and only one of them involves a shameless self-promotion. :-) First, there are dozens of well managed, low cost, actively managed funds. Your adviser will not mention these, because he does not get paid for selling them to you. Second, I keep coming back to indexing and index funds. They are mostly low-cost, low turnover, and class-free. The principle mentioned above explains why I prefer this method over the former. Third, folio investing offers the benefit of zero cost, long holding period, tax advantage, and social screening. First Sustainable's program enables investors to, in effect, create their own mutual fund, based on their long term needs and social criteria. I invite you to get a free consultation.

Tomorrow: Reason #6 - Enablers of Poor Corporate Governance

2005-11-30T08:05:00.000-06:00

Reason #8 To Fire Your Mutual Fund Company

Third in A Series

The next several posts are going to be dedicated to the proposition that small investors are getting ripped off with mutual funds thanks to a complex scheme of self-dealing and back scratching.

Reason #8 - Tax Inefficiency

Mutual fund investors who hold their funds in a retirement account are not affected by this aspect, since income is tax-deferred in most cases. However, if you hold mutual funds in a taxable account, which includes a substantial portion of retirees, you will be doubly surprised this year. First, you will be hit with a tax bill whether or not you sold your fund during the year. To add insult to injury, you may be responsible for a large capital gains bill despite your fund being an overall loser for the year. Second -- and few people know about this one yet -- the expiration of three year tax loss carryforwards, means that your bill be larger this year than it's been in the last five. Why? The losses sustained during the bear market of 2000-2002 enabled funds to offset gains in subsequent years. That expires this year. Lipper estimates that the average capital gains distribution is going to increase 50 percent this year (see Boston Globe).

How Did We Get Here?

Whether you are an individual or an organization, the IRS wants its cut of any income from capital gains and dividends. Mutual funds are not excluded. So, when your mutual fund manager sells positions for what you hope is a gain, that gain is taxable, regardless of whether there are offsetting losses. The same is true when a stockholding pays a dividend. For organizations that pass through these gains to the shareholders, the gains are taxable at the individual's tax rate instead of the corporate tax rate. It is prudent to pass through these gains, since a large percentage of shareholdings are in non-taxable accounts, and few individuals that are in taxable accounts are in a higher bracket than the corporate rate.

You can't fault the funds for choosing to pass through the gains. However, you can fault them for high turnover in their portfolios. In 25 years, funds have gone from an average turnover of 8 years (meaning that fifteen percent of their holdings are bought and sold in a year) to today's average turnover of 100 percent. This means that in every year, all stocks are bought and sold. Some of the most egregious offenders turn over their portfolio five times in a year. The mutual fund industry has transitioned from buy-and-hold stewards of corporate America to being short-term, rent-a-stock traders in that time. Although evidence is conflicted about why this has happened, the pessimist in me believes that it is because of the aforementioned soft dollar arrangements resulting in an incentive to trade frequently.

Why Should I Care?

The average mutual fund already trails it's benchmark indexes because of the high fees mentioned in previous posts. Now, if you take into account that you will have to pay a larger bill to the tax man, that just means your performance suffers even more. If you lose one percent per year to taxes, that amounts to serious money over time. Over a 30 year saving period, this difference amounts to more than 25 percent of your ending net worth. Considering that this could make the difference between you running out of money before you die, it is not to be ignored.

What You Can Do About It

Index funds do not have high turnover. The only turnover they have is periodic rebalancing when their benchmark indexes change. This makes them more tax efficient.

An even better option is to engage First Sustainable to create a so-called Folio. This combines the technology available to a mutual fund to enable you to create your own diversified, asset-allocated mutual fund. You can buy fractional shares of individual stocks. This way, your only tax bill comes when you also do periodic rebalancing to suit your financial situation. To me, this is way more acceptable than swallowing a bill that was based on some conflicted manager's financial situation.

Tomorrow: Reason #7 - Alphabet Soup of Sales Charges