I follow the sector very closely. Kinda like my chances in Etoh. Don't understand your claim:

"...Too much hype in the space. There's a lot more room for capacity, but as usual more dollars than need to are chasing after the opportunity..."

There is a white paper out on CA Etoh. California is a large petrol consumer according to the EIA. Demand is only increasing. Whatever anyone makes here, there is a tax break on. Thus, there is a sustainable competitive advantage for manufacturing here versus the Americian heartlands.

Kinda hoping you would provide a sanity check on this vehicle. Willing to entertain all critics as I don't trust the opinions on the stock MB's. I know the tricks and good information is very unreliable.

BTW luck is for the unprepared mind.

I can only guess of course. I, however, was only listing info already in the news from largely available news services which were already dated. I have a computerized listing of the small companies, etc.

I don't consider PEIX an immature concept nor difficult task to execute. The technology is beyond the development phase if they use standard grains. The trouble comes when if and when they try biomass--wood chips, stems, and bulk fiber as starting material. The vendors already know how to stamp out the plants. The trick is getting the right personnel to run the shows in their proposed locales. Thus, the request for criticism.

Does anyone work or reside near Madera to confirm some buildings are going up there sponsored by PEIX? Would hate to think any fraud was going on without verification.

"...Cramer said a few weeks ago that ethanol is over and to stay far away from it..."

Etoh is over if you think demand for this form of bioenergy is over. Gas is $ 80.00 barrel or $ 3.00 gallon. Etoh is profitable at $ 2.00 per gallon. California is a large consumer of petrol. It sips 10 millon gallons per day. This implies demand is still there. Etoh currently is shipped in from middle America because of the economy of scale and industrial farmland there. The same farming tech is available in CA with the addition of tax credits. I don't recommend stocks, but you should do your own homework for the stock mentioned above. It has certain named advantages mentioned in their website.

It is a bad stock if you think it will be unable to compete against the larger Etoh producers. There are named advantages and disadvantages. The biggest one is the CA tax credit. It will employ CA citizens. Bill Gates put $ 80 million into this POS. Expect this POS to do something in 2-3 years. The trick is to invest in the future and not in the present. If analysts can foresee perfectly, then there are no real opportunities. If you think flex fuels will become part of America's energy policy, then this is where you want to be beforehand. If you disagree, then more power to you in your ventures. However, please post why this is a POS.

Don't be confused about a small versus large company. ADM use to be the market leader with 60% of the Etoh market. It now controls about 30% of the market with the remaining 70% controlled by smaller combines. ADM makes their money in all types of ag plays. Specialists, smaller companies dedicated to a particular product, could do better with their own economy of scale. Think of this as a CA winery that gets a premium for making CA booze.

http://www.thestreet.com/_tscs/comment/investing/10292016_3.html

"...ADM, The Andersons, even Pacific Ethanol (PEIX:Nasdaq - news - research - Cramer's Take) -- they're not bad companies...they're about to stop being hot for good, and the selloff we've had in these last three weeks does not represent a buying opportunity."

These claims are only true if the fundamental underlying causes have changed. Demand for energy in CA has remained predictable for some time. Thus, there is no substitute for energy. Disagree with the claim. Easy money may not be accessible, but we are looking for Mad Money!

"Ethanol is in the last stage of a speculative fad's life cycle. I know this because we see it all the time in these hot sectors...Now ethanol is following the same pattern..."

BS. What pattern is he seeing? If you are a speculator looking for easy money, then the "run up" on expectations is probably over. There is another class of money looking to come into the sector--investors. Investors demand "proof of concept," profit streams, and a ROI. There may not be a run up of 5-20X, but any run up is always Mad Money. The criteria should always be losing money is BAD and represents a bad interpretation of the news. Let's now deconstruct his reasoning, if any.

1) "...ethanol was never, and probably will never, be all that serious an alternative to gasoline. Right now it accounts for maybe 3% of fuel use in America." Do you think this is true? If so, then you don't believe in Etoh. If so, then your assessment is correct. If not, then the underlying reason for trying the "play" still holds. BTW E85 and flex fuel cars are being manufactured.

2)"...You need to use tons of natural gas to make it, and that means any increase in natural gas prices will just crush these ethanol guys." Demand for energy is what makes the US run. If you think the US will ever conserve energy, then you truly should be out of Etoh. There has to be a reasonable stop gap until the next generation auto arrives. When it does, that is when Etoh should be abandoned for a fundamental reason.

3) "finally, since it corrodes pipelines, you need to transport it by train or truck or barge, not pipeline." Hey, I never noticed a pipeline to my gas station. The infrastructure isn't in place for Etoh for become large scale. It is a growing technology, not a mature one. This is usually a buying low signal. If it is mature, then you should be out.

4) "...Our corporate oligarchy operates a little bit differently in America. We're more fickle, so the ethanol stocks are going down." Again, there are established tax credits for development of this tech. Govenator has given his blessing. The implication is there are political objectives & regulatory protectionist policies in place. That is typically not a patterned negative sign.

Good article to deconstruct. If you agree with Crammer, then sit on the sidelines. If you disagree, then do some more DD to convince yourself of the fundamental reasons to like Etoh. If they hit in 2 years time, then you should have Mad Money. If not, then post how stupid, blind, and poorly reasoned the analysis of his article was. Look closely as this is unsettled and controversial.

He is not perfect -- after all, who is? -- but I think critics tend to focus on what they perceive as his 'inconsistency' when what is really happening is that Cramer's using his trader's experience to change his mind as stock prices change and new market data comes in. Unlike most fundamental analysts, Cramer can go rapidly from bull to bear and back (based on his perception of shifting conditions), and it makes his critics crazy, imho.

But I'm not writing this to defend Cramer, as much as to discuss some of the points you've made.

1. You mentioned that demand for petrol -- are you British? -- is increasing. That is true to some extent, but the growth in demand is mainly due to population growth and economic expansion. Not really double-digit growth potential here. Now it is true that ethanol demand has grown faster than gasoline demand in CA, but this is mainly due to the replacement of MTBE with ethanol as a fuel additive. This story has largely been played out now, imho... I haven't seen a gas pump featuring the MTBE warning lately, have you? (btw, you mentioned a white paper on CA ethanol... would you mind posting the link?)

Ethanol proponents cite the possibility of a shift to E85 fuel (85% ethanol + 15% gasoline) as a catalyst for even greater growth. I'm doubtful of such claims, for a number of reasons. First, it is not clear whether ethanol is net "energy positive" -- that is, whether the energy of the fossil fuel inputs needed to
- grow the corn (making fertilizer requires energy, tractors require diesel, etc.);
- make the ethanol from grain (distillation requires energy, usually from natural gas or coal); and
- transport the corn and ethanol (neither can be moved via pipeline, and the barges, trains, and/or trucks use gasoline, diesel, coal, or some other fossil fuel)
are higher or lower than the energy output of the ethanol product.

The most detailed and scientific study I have been able to find on this topic is one by Tad W. Patzek, "Thermodynamics of the corn-ethanol biofuel cycle," Critical Reviews in Plant Sciences 23(6), 519-567, 2004:
http://petroleum.berkeley.edu/papers/patzek/CRPS416-Patzek-Web.pdf

It's a dense and scholarly work, but summaries of its conclusions can be read here:
http://www.energybulletin.net/4002.html
http://www.futurepundit.com/archives/002881.html
http://www.energyjustice.net/ethanol/

Patzek is a critic of the view that an ethanol-based economy can lead to American energy independence, but I've generally found his writing to be honest and fair. Links to some of his other papers (as well as related papers) are here:
http://petroleum.berkeley.edu/papers/Biofuels/BiofuelsTop.htm

There is also a rebuttal to Professor Patzek's paper by Argonne National Laboratory (managed by the University of Chicago for the Dept. of Energy):
http://www.transportation.anl.gov/pdfs/TA/347.pdf

in the form of a Powerpoint presentation. One thing to keep in mind is that though the Powerpoint slides look impressive, it has not gone thru the 'peer review' process that Patzek's paper has undergone. (Peer review is the reading of submitted scientific papers by peers before they are published, in order to check facts and reasoning.)

There is another analysis of six papers or studies (including the Patzek paper) which was published in Science and described here:
http://www.greencarcongress.com/2006/01/uc_berkeley_stu.html

The original paper is here:
http://rael.berkeley.edu/EBAMM/FarrellEthanolScience012706.pdf

and the model they developed is here:
http://rael.berkeley.edu/EBAMM/

They concluded that corn-based ethanol is net energy positive, but that "only 5 to 26% of the energy content is renewable." Further, this conclusion was possible only by assigning an energy value to the 'waste' products of ethanol production, which can be used as a animal feed substitute for corn and soybeans (which require fossil fuel energy for the fertilizer, diesel fuel for the tractors, etc.). Moreover, the paper's senior author has said "But it isn't a huge victory -- you wouldn't go out and rebuild our economy around corn-based ethanol."

Second, as mentioned above, ethanol poses some significant transport challenges, because specially-designed tanker trucks or cars must be used. Our existing pipeline infrastructure can't be used, because ethanol is corrosive to metals, and because of its tendency to absorb water quickly (even a small percentage of water in ethanol makes it unusable for mixing with gasoline).

Third, it is questionable whether there is sufficient arable land to grow enough corn to make enough E85 to satisfy our cars' thirst for fuel. More problematic may be the amounts of clean water needed, both to grow corn and in ethanol production. It is not clear that an corn-based E85 economy is agriculturally sustainable.

Fourth, the ethanol industry enjoys subsidies and tax credits from Congress and state governments conscious of the power of the agri-business lobby (not to mention the political power of farmers in all those "red" Middle-America states). If all the dirty little secrets about ethanol cause the political support for it to wane, and the credits/subsidies to disappear, ethanol may not even be economically sustainable.

Fifth, by historical standards, natural gas is extremely cheap relative to oil... the cheapest it's been in a long time. This is good now for a corn-based ethanol economy, because they're able to use a relatively inexpensive energy product (natural gas) to make fertilizer (to grow corn) and to make ethanol, a relatively expensive energy product. The problem is, this state of affairs rarely lasts a long time, because of the economic substitution effect... cheaper natural gas gives industrial consumers and utilities more of an incentive to use it (if they can switch), and this drives up the price of natural gas until there is no further reason to switch. So imho, the pendulum will swing the other way, and when it does, the case for E85 will make even less economic sense.

I'll continue my discussion of the points you've made in another message, as this one is already too long. I'll try to be more succinct in that one, lol!

deChat

2. You mentioned that you are into the energy sector and are spreading out to diversify. I'm not sure whether having a portfolio consisting mainly of energy-related stocks is really diversification, because they are all levered (currently) to the price of oil... to varying degrees, to be sure, but I'm sure you've noticed how even alternative energy plays such as HW, SPWR, and FCEL move in concert with the price of crude.

3. Zeja mentioned that there is a lot of hype in this space, and too many dollars are chasing this "opportunity." I agree -- he is spot on. You asked "Why?" Here's my take on it (mostly from Cramer's playbook):

- Until recently, there were only several ways for the retail speculator to make an ethanol-based trade. You could buy ADM, ANDE, or PEIX. Of the three, only ADM is currently producing ethanol; ANDE has an Agriculture division that purchases and sells grain, and operates grain elevators, and PEIX markets and sells ethanol produced by other companies (it is building its first ethanol plant scheduled to begin production in Q4 of this year). The consequence of this limited 'ethanol stock universe' was that prices got bid up by over-eager speculators.

- This changed in June, when VSE went public on 6/14, with AVR following on 6/29. VSE, at $25.28, is up about 10% vs. its offer price of $23, but it is down substantially from its opening day range of $27.50-30.50 (remember, most retail investors could not have purchased it at the offer price). AVR has been even more of a disaster... it's at $32.81, down almost 25% from its $43 offer price, in less than 3 weeks of trading!!! Worse yet, there was no first-day 'pop' -- its opening day range was $38.25-42.50, so even the IPO investors had a paper loss from the start.

- It's important to remember that both VSE and AVR have real earnings from producing ethanol. So the AVR IPO (as well as the decline of VSR since its IPO) are clear signs that there is too much "ethanol stock" available for the market to absorb right now.... it's a supply-demand thing (with the product being "ethanol stock"). I believe this is the main reason why Cramer is negative on ethanol... the business may be good, the companies may even be good, but the market doesn't care. It can be a buying opportunity... but only if the market starts caring about these stocks in the future. It depends on your time-frame, but there may be better plays in related industries.

(btw, when Cramer wrote: "Ethanol is in the last stage of a speculative fad's life cycle. I know this because we see it all the time in these hot sectors...Now ethanol is following the same pattern..." he wasn't talking about a chart pattern, he's not a technical analyst. He was talking about the pattern of Wall St. pushing out IPOs to sell into a speculative fad, and that the IPO failures tell him that the life cycle of the ethanol fad is ending.)

- Personally, I think stocks levered to the price of natural gas are the better play. The markets have hated them longer. Natural gas is extremely cheap, relative to oil, so there's tremendous upside, should the relative price move in the direction of historic norms. You could even think of nat gas as a way to play ethanol, in that it is the primary fossil fuel feedstock in the ethanol production cycle.

3. You asked whether someone could confirm that PEIX is building its ethanol plant in Madera County. It's interesting that you would be concerned about fraud.

imho, fraud is unlikely to be the problem. There's been so much publicity about their new plant, so much hype about PEIX, that it's highly unlikely that fraud at that scale could be going on. No, the question we should be asking is, "Is PEIX' stock cheap or expensive?"

I didn't have time to read through PEIX' annual report,
http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0001019687-06-000858&Type=HTML

but did skim through their management summary:
http://biz.yahoo.com/e/060414/peix10ksb.html

They make a good case for building an ethanol plant in Central CA -- reduced shipping costs vs. ethanol manufactured in the Midwest, plus they can sell the byproducts to the local dairy industry as animal feed -- but they also said several things that were troubling:

- They seem to think that one of their competitive advantages is their experience with ethanol customers in CA and other Western states. OK, but let's not forget that ethanol is a commodity... I don't see how their marketing prowess adds much value. After all, it's not like selling CA wine at a premium... it's more like selling wine by the box (or tanker car, lol).

- This is their first ethanol plant, so they are transitioning from being a distributor to a manufacturer and distributor. As you mentioned, a lot depends on the abilities of a few key people. Also, they have been making money by trading and transporting ethanol. By becoming a manufacturer, they become more sensitive to (and less flexible about dealing with) the price of ethanol, should it fall.

- It's not clear whether they will be able to secure financing to build additional ethanol plants, or if they do, how expensive it will be for them (and to shareholders). After all, in order to get the money to build the first one, they sold over 5 million shares of preferred stock. It's a great deal for Cascade Investment, which bought the stock... they get 5% interest in the form of a dividend, and have the right to convert the shares into common stock at a 2:1 ratio. There are about 31 million shares outstanding... an additional 10 million shares (converted from the preferred) hitting the market would seriously dilute the value of existing common shares. If they need to make similar deals for financing to build more plants (they want to build FIVE by the end of 2008), it could have a devastating effect on the common stock price.

So it comes down to, is PEIX stock cheap, or expensive? They lost $0.31/share last year, so they don't have a trailing P/E we can use. Their forward P/E is 48, which feels kinda pricey... otoh, they look to grow fast, if they bring their Madera facility on board quickly. Its price to sales ratio is about 5.6 (ttm), but if their plant operates at full capacity of 35M gallons in its first year (unlikely), it could add about $100M in ethanol sales plus whatever they can get for supplying 105,000 to 130,000 dairy cows with feed for the year... probably on the order of $40-50M/year? So sales would be a bit more than twice the past year's sales, not too bad.

But everything would have to work right and on time, and that's tough to do with any new business venture. If we factor in the dilutive effect of the convertible preferred shares.... it has the feel of a stock that is overpriced, one that is priced for perfection.

For comparison, I looked at a different kind of energy company, one engaged in oil and natural gas exploration and development. VAALCO Energy (EGY) has a slightly smaller market cap than PEIX, and is in a completely different business, but I thought it would be interesting as a compare. It's price to sales ratio is 5.1, a bit lower than PEIX' ratio... but it probably doesn't have the opportunity to grow sales as fast as PEIX (EGY's quarterly revenue growth is "only" 35% yoy). However, it's profitable... its trailing P/E ratio is 15, and it's forward P/E is 8.5 -- cheap! It's a fast grower -- it's year-over-year earnings growth is over 50% -- and it's 35% profit margin is waaaay higher than PEIX' margins will ever be in the ethanol biz.

If I had to pick either EGY or PEIX, there would be no contest. EGY has PEIX beat by a mile... and with less risk imho (EGY beta is 0.5, PEIX beta is 6.5).

I think that PEIX is selling hope as much as it's selling ethanol. To be sure, the agri-business interests are doing the same thing... ethanol production is a terrific way to solve their chronic corn oversupply problem.


5. You suggested that one of PEIX' competitive advantages is that local production lowers shipping costs. It is true that ethanol won't need to be shipped from Midwest ethanol producers; however, CA does not produce enough corn annually to supply the 35M gallon plant (it's in their annual report). They will have to ship in corn from the Midwest.... so it's not clear that shipping costs will be lower. In fact, since the weight of the corn shipped will be greater than the weight of the ethanol produced, it's possible that PEIX will be at a disadvantage, shipping-cost-wise.

6. You mentioned that "there is no substitute for energy" as the basis for disagreeing with Cramer, who said that the recent sell-off in ADM, ANDE, PEIX is not a buying opp. Not sure why the two are linked. It's undeniable that there is no substitute for energy, but different forms of energy that can be used to substitute for each other. What Cramer is really saying is that the stocks mentioned are still expensive relative to the stocks of companies that can provide fuels that are 'substitutes' for ethanol.

7. I think ethanol as an additive to gasoline is fine, prefer it to MTBE. But to extend its use to flex-fuel or E85 in general would be, imho, a major public policy mistake. Not saying that it can't happen (political power of agri-business and all those red-state farmers, right?), but given its heavy use of fossil fuels in the production and transport cycle, it really doesn't solve the fundamental problem of foreign fossil fuel use. It's a canard, a distraction from other alternative energy solutions that are more renewable.

8. I agree, I don't believe the US will conserve energy... but I'm not sure how that rebuts Cramer's point that an increase in natural gas prices would crush the ethanol producers.

9. You said "Hey, I never noticed a pipeline to my gas station." True enough, lol... your local gas station isn't hooked up to a pipeline because it doesn't make economic sense to build that infrastructure to every end-point, but pipelines are used to transport oil, natural gas, and gasoline, it's a relatively energy-efficient way to do so over long distances. Transporting ethanol everywhere by less energy-efficient ways -- like trucking, which consumes gasoline or diesel -- makes it less of a 'renewable-energy' story, no?

10. I agree with Cramer, but I don't think the right move is to sit on the sidelines. I think there are and will continue to be opportunities in the energy sector...as I mentioned above, I think natural gas producers may be bargains right now. I may go long in that group... and sell into a rally of the weaker ethanol stocks.

Sorry I wasn't more succinct... there was a lot to cover on this one.

deChat

Heh.

Yeah, I would have simply said that ethanol currently isn't that energy-positive to produce.

The focus on corn as a source is because agri-business wants yet another market for its corn. I guess getting us fat on high fructose corn syrup isn't enough.

I don't usually agree with Bush, but he's right when he says there are more efficient biomaterials for ethanol production. The difference is there isn't currently a big infrastructure built around it like corn. Bring on the huge switchgrass (and yes, hemp) farms!

I'm torn because part of me thinks anything has got to be better than fossil fuel, but what's actually going to work. What are the emissions like? How expensive is the technology. Will Big Industry let it work? Haven't seen Who Killed the Electric Car, but from what I hear it goes into the forces that have been working against alternative fuels.

I read in Vanity Fair that GE has a new aim to have a net negative 1% greenhouse-gas emission within the next 10 years. Doesn't sound like alot, but they've been projected to have a 25% gain. Just another random aside, but there it is.

Wondering if there is a comprehensive website dedicated to alternative fuels/energy sources. Not only for investors but for those who want to use them. (I'm sure there is...I'm trolling for links.)

xo
ED
who wants her E85 hybrid, thankyouverymuch

"I would have simply said that ethanol currently isn't that energy-positive to produce."

Your pal, my critic, provided links to 4-5 other studies who discredited Mr. Pattyzickie which he was strangely silent on. Don't really need to engage in theoretical physics discussions, but those who have taken at least some college science should be able to understand the claim is flawed on principle. There are 2 theories from Thermodynamics. The first claim is energy is never produced or lost. It is only tranformed. Second theory is there are always loses in energy transfer. Corn is produced by capturing energy from the sun. Thus, it is more green to capture a renewable source and tolerate the losses during the transformation. The costs really depend on your accounting skills. If you plan to produce corn anyway, then the fertilizer and transportation costs are already built into the price. Further, the "wet waste" still has energy locked in as corn oil was never extracted for conversion to biodiesel. Instead, it will be sold as animal feed which was enriched with bacteria from the fermentation and still retained the corn oil. In short, it depends on how you count.

Consider a diesel car. If you live near a good source of waste vegetable oil, then you could process the WVO as diesel fuel at about $ 0.60 per gallon of fuel. Is this cheaper? Is this energy positive? Is this a good substitute technology?

If this is an "accounting" situation, remember to take care of both sides of the T account and to properly debit and credit all accounts.

X
Wow that was a hell of a run on sentence.

"The issue for corn is that it is "expensive" to produce in terms of..."

That issue is irrelevant to making money on this vehicle. Etoh is manufactured by known methods. Corn is currently a profitable method under the tech known & proven now. It is not some pie in the sky method such as using 'biomass' which is currently unprofitable. BTW you should state clearly why 'biomass' is impractical now--hint it can be done but is too expensive to treat with the proper digestive enzymes.

"If this is an "accounting" situation, remember to..."

Correctly interpreted the post and my previous ranting & raving, you could have doubled your money. That is mad money!!! All the signs were there for proper interpretation of the facts. You also had a public tout, Mr. Cramer, correctly give you an interpretation to play the correct direction. However, it is necessary to correctly focus the information into a patterned investment strategy to gain confidence to play it. FWIW, I have to be fundamentally bullish on a POS and then be willing to take stands for or against the current situation.

Eliza, you may want to rethink whether ethanol is truly enviromental-friendly or not. This was posted yesterday and is in today's Investor's Business Daily editorial section... and they're hardly what I'd call a left-wing organization! (imho, their editorials are more conservative than the Wall St. Journal, lol!)

btw, it seems that you read my two long posts thoroughly... you got the gist of what I was trying to say, and summarized it very well. Thank you.

I'm not aware of any websites that compare the various alternative fuel technologies, but I did find this comparison chart:
http://media.popularmechanics.com/documents/Fuel_of_the_Future-e852.pdf

in Popular Mechanics' May 2006 article on alternative fuels:
http://www.popularmechanics.com/science/earth/2690341.html

(I didn't post the link earlier because it wasn't as rigorous in its analysis, nor did they disclose their methodology sufficiently for me to feel comfortable citing it.)

If you can secure a reliable supply of lots of used frying oil (from a local restaurant or fast-food joint, perhaps?) and a place to store it safely, biodiesel could be the solution you are looking for, if you don't mind your tailpipe exhaust smelling like French fries (or fish or whatever was cooked in the oil). There is apparently also some potential for the oil to clog up your fuel lines unless you flush them out using conventional diesel before you stop your car, but as long as you remember to switch, it probably won't be an issue.

But if you're mostly going to use the car in the city, you might consider a hybrid-electric conversion kit... I've heard that there are services that also do the conversion for you. Basically you add batteries to an existing hybrid vehicle. Range using the electric motor only is on the order of a hundred miles, but that should be OK for city driving. You have the hybrid engine to travel longer distances (not sure if they're E85-friendly, but you can certainly use conventional gasoline). The main downsides to this approach are 1) your car maker's warranty is voided by the conversion, and 2) the extra batteries add weight and cost to your vehicle, and can take up trunk space. But if you charge the batteries when electricity rates are low (at night), your in-city fuel cost could literally be pennies per mile.

deChat

The Corn Pone Behind Ethanol
Posted 7/18/2006

Energy Policy: New studies show ethanol is not as environmentally friendly as portrayed and will not make us energy independent. Does it also contribute to global warming?

According to several new studies, biofuels such as ethanol — touted by many as a way to save the environment while achieving energy independence — may accomplish neither, leaving us as dependent as before while having a "devastating" impact on food supplies.

One study, published recently in the Proceedings of the National Academy of Sciences, says that even if every available acre of corn were used for the production of ethanol, it would replace only 12.3% of the gasoline used in this country.

The researchers concluded that biodiesel from soybeans is the better choice compared with corn-produced ethanol, but "neither can replace much petroleum without impacting food supplies."

"We definitely feel that biofuels (such as ethanol) have a significant potential," said Jason Hill, lead author of that University of Minnesota study. But ethanol should not be viewed as "a savior," he adds, and has environmental drawbacks.

The study notes that ethanol production from corn results in "markedly greater" releases of nitrogen, phosphorous and pesticides into waterways as runoff. It also found that ethanol, especially at higher concentrations in gasoline, like the much-touted E85, produces more smog-causing pollutants than gasoline per unit of energy burned.

"There's a lot of green in the money that's going into ethanol," Hill said, "but perhaps not as much green is coming out as far as the environment."

Agreeing with this assessment is a study by two researchers at the Magleve Research Center of the Polytechnic University of New York. It says biofuels are "not a practical long-term solution" and that even if derived from nonfuel sources, such as switch grass, they could have a "devastating" impact on agriculture.

Researchers James Jordan and James Powell start with the fact the fuel value of ethanol is only two-thirds that of gasoline — that is, it takes 1.5 gallons of ethanol in the tank to equal the energy output of one gallon.

Then they factor in the energy required to produce ethanol — for fertilizer, harvesting, transport and corn processing — and conclude the net energy output for ethanol is even more negative.

Based on the current 73 million acres of corn cropland, they figure that using the entire U.S. corn crop would supply only 3.7% of our auto and truck transport demands. Using the entire 300 million acres of U.S. cropland for corn-based ethanol, production would meet about 15% of the demand, they say.

"Ethanol from 300 million acres of switch grass still could not supply our present gasoline and diesel consumption, which is projected to double by 2025," said Jordan and Powell. And "the agricultural effects of such a large-scale program would be devastating."

Farmers have long known that rotating crops — planting something different in a given field from year to year — is crucial to maintaining soil health. Planting corn year after year worsens erosion and depletes nutrients. Not plowing corn residue from harvesting back into the fields also depletes the soil.

Cornell scientist David Pimentel also maintains that corn is particularly destructive to soil health when it is planted exclusively.

Tim Carney of the Competitive Enterprise Institute points out that ethanol is what is known as an "oxygenate," which means it adds oxygen to the fuel. Harmful carbon monoxide is turned into harmless carbon dioxide.

But wait! According to Al Gore, we need to lower CO2 emissions, not further increase them. So are we destroying the earth in order to save it? Al, call your office.

© Investor's Business Daily, Inc. 2000-2006.

Lets be clear fundamentally. Etoh is less energy dense than petrol. However, petrol was originally derived from biomass compressed by natural processes a very long time ago. Those carbon atoms were originally captured from the atomosphere and incorporated into organic matter and transformed into petrol. The natural air you are so use to was not always this way. Since matter is neither created or destroyed too, the condition of planet earth is really only transformed by human direction and intervention.

The article makes 3 basic claims. Net energy cost really depends on accounting methods. Pollution can be controlled by setting environmental standards and controlling farm water run off. The claim that Etoh will become the only biofuel is ridiculous. There are going to have to be technological breakthroughs in other areas to reduce energy consumption. Etoh is a very real and viable policy.

2. Different specialization & concentration. Claiming: "...I'm not sure whether having a portfolio consisting mainly of energy-related stocks is really diversification, because they are all levered (currently) to the price of oil..."

We have different views on risk management. I want to be "all in" to a sector that I believe will remain bullish under the time frames for investment. The diversification you are claiming is standard portfolio theory whereas I am only interested in a diversified sector portfolio. Think of it as a specialty ETF which I make.

3. The critical flaw is "It's important to remember that both VSE and AVR have real earnings from producing ethanol. So the AVR IPO (as well as the decline of VSR since its IPO) are clear signs that there is too much "ethanol stock" available for the market to absorb right now.... it's a supply-demand thing (with the product being "ethanol stock"). "

Depends on whether you assume E85 or E15 as the preferred fuel stock. All Etoh produced is still less than 5%, by some estimates, of total demand. Insert CBOT chart of Etoh pricing. The plan is first an extension of current energy stocks. IMO you are too aggressive in claiming full substitution. Further, you are ignoring the fundamental driver. Coal is a competing technology which is also bullish. This implies the trend is still in place. BTW the Creammer report was specifically bearish on VSE. I am not remotely interested in VSE as it cannot take advantage of the proposed tax credits.

3A or 4. Please keep up with the news and ignore hype from me. Here, "(y)ou asked whether someone could confirm that PEIX is building its ethanol plant in Madera County..." was a bad joke. The Governator was kind enough to verify the story. The more important thing was both a sanity check and NEVER EVER assume any business venture is fully legit without looking for criminality. I believe Enron and Global Crossing did teach something.

3B or 5 & 6. There are at least 4-6 white papers done by analysts. Pick your favorite for comparasion. We can agree to disagree. With oil at $ 75, the venture will automatically be profitable.

7. This is the key argument which indicated you are a foreigner or don't quite understand the concept of "pork barrel or Americian Government." IOW 'appearance' versus 'reality.' Here, the claim is "imho, a major public policy mistake" which should be critically deconstructed to understand where the, IMO, certainity comes from. You can examine the reality of "your public policy mistake" in Sept 2006 as the Federal Tax exemption is up for renewal. This is an important reality check for understanding US policies & human nature.

8. Difference of opinion. Your analysis of the "substitution theory" doesn't go into details.

9. Difference of opinion which really negates your pipeline thesis. Etoh will use a different infrastructure. Your flaw again is looking for an instant transformation to a mature technology & infrastructure. The counter POV is simply there is sufficient aggregate demand for Etoh. The deduction is there will be an alternative infrastructure now. The easy answer is trucks from the centralized plant much like how gas is distributed from the local refineries in Benicia & Richmond--thus, current infrastructure is exactly the same as the proposed infrastructure. Your argument goes towards the location of the Madera plant during the feasibility stages. That has already been tacitly answered. There is supposedly good access to the highway system to distribute any resources. So, does the picture change when someone proposes a counter POV, or are we arguing cross purposes?

10. Already answered in the original post. Here, "I am in the energy sector...and seeking diversification" should have answered your question, if any.

Huh??? My detailed, overwritten reply was too general??? lol... I provided links to specific references and gave an example of the sort of fundamental analysis I would do in evaluating PEIX (and which I believe is similar to what Cramer must have done). Also, I'm not sure what is meant by "ignores the facts which I have not posted" -- was that a typo? Because no one but a mind reader could address facts that haven't been posted yet! (And btw, all of the info I used is publicly-available info, hence the links.)

>2. Different specialization & concentration. Claiming:
>"...I'm not sure whether having a portfolio consisting
>mainly of energy-related stocks is really diversification,
>because they are all levered (currently) to the price of
>oil..."
>
>We have different views on risk management. I want to be
>"all in" to a sector that I believe will remain bullish
>under the time frames for investment. The diversification
>you are claiming is standard portfolio theory whereas I am
>only interested in a diversified sector portfolio. Think of
>it as a specialty ETF which I make.

We certainly do have greatly different views on risk management. It's one thing if your full-time job is running a hedge fund of several hundred million dollars and need to buy many different stocks to avoid liquidity problems, but because most part-time, retail investors have limited time for research, a group of closely correlated stocks doesn't provide much of the benefit of diversification (i.e. hedging one's bets), and you still have a lot of sector risk AND the cost of multiplying your homework/research burden.

In other words, if you put all your eggs into one sector and you're right about it, imho your return probably won't be appreciably greater if you construct a specialty ETF vs. selectively choosing one or two 'leaders' in that sector based on fundamentals and price-volume action (and the diversified portfolio may even perform worse). And if you're wrong about the sector, you have no protection at all.

>3. The critical flaw is "It's important to remember that
>both VSE and AVR have real earnings from producing ethanol.
>So the AVR IPO (as well as the decline of VSR since its IPO)
>are clear signs that there is too much "ethanol stock"
>available for the market to absorb right now.... it's a
>supply-demand thing (with the product being "ethanol
>stock"). "
>
>Depends on whether you assume E85 or E15 as the preferred
>fuel stock. All Etoh produced is still less than 5%, by
>some estimates, of total demand. Insert CBOT chart of Etoh
>pricing. The plan is first an extension of current energy
>stocks. IMO you are too aggressive in claiming full
>substitution. Further, you are ignoring the fundamental
>driver. Coal is a competing technology which is also
>bullish. This implies the trend is still in place. BTW the
>Creammer report was specifically bearish on VSE. I am not
>remotely interested in VSE as it cannot take advantage of
>the proposed tax credits.

No, you didn't get my point... it had nothing to do with demand for ethanol the fuel. I wasn't talking about ethanol the fuel, but ethanol stocks as a group. There is a certain demand and supply for every type and group of stock, and 'ethanol stocks' -- represented by ADM, ANDE, PEIX, VSE, and AVR -- are no different. The post-IPO price-volume action on the newest ethanol stocks indicates that this new supply of 'ethanol stocks' wasn't being snapped up by the market with the same appetite as ADM, PEIX, and ANDE before them, and that the 'fad' for this group has passed, at least for now.

As far as Cramer's report is concerned, he was bearish on the group as a whole... in part because of what these IPOs signaled to him.

(btw, perhaps I'm not understanding, but when you say that "all ethanol produced is still less than 5%, by some estimates, of total demand" -- whose estimates, and what is meant by total demand? Total demand for ethanol as a fuel additive? Or as a replacement for gasoline? As far as I know, the ethanol producers are now keeping up with demand for it as a replacement for MTBE.)

>3A or 4. Please keep up with the news and ignore hype from
>me. Here, "(y)ou asked whether someone could confirm that
>PEIX is building its ethanol plant in Madera County..." was
>a bad joke. The Governator was kind enough to verify the
>story. The more important thing was both a sanity check and
>NEVER EVER assume any business venture is fully legit
>without looking for criminality. I believe Enron and Global
>Crossing did teach something.

Ummmm.... I agree that one should keep an eye out for fraud, but I'm afraid I may have written in a way so that you missed my point. The important issue -- once you're satisfied that PEIX is legit (however you choose to verify this) -- is whether their stock is expensive or cheap. I laid out the case as to why I think its stock is expensive relative to its peers'. You have read the annual report and listened to the conference calls, correct? Why do you think their stock is cheap and/or better than others in the energy industries? What about the potential stock dilution?

>3B or 5 & 6. There are at least 4-6 white papers done by
>analysts. Pick your favorite for comparasion. We can agree
>to disagree. With oil at $ 75, the venture will
>automatically be profitable.

Well, my source is the summary of their annual report. I really don't have the time or inclination to search out analyst reports for a stock I'm not interested in, but if you provide links to any you'd care to post to bolster your case, I'd be happy to look at them.

>7. This is the key argument which indicated you are a
>foreigner or don't quite understand the concept of "pork
>barrel or Americian Government." IOW 'appearance' versus
>'reality.' Here, the claim is "imho, a major public policy
>mistake" which should be critically deconstructed to
>understand where the, IMO, certainity comes from. You can
>examine the reality of "your public policy mistake" in Sept
>2006 as the Federal Tax exemption is up for renewal. This
>is an important reality check for understanding US policies
>& human nature.

Nope, American citizen, and well aware of the pork-barrel nature of politics (here and elsewhere). I just don't like it much... and when agri-lobbyists and farm-state politician hornswoggle the public into believing that ethanol is the 'all-green, all-renewable' solution to our energy problems, I like it even less. Eventually the truth will come out... but only after billions of taxpayers' dollars are devoted to yet another energy policy dead-end.

>8. Difference of opinion. Your analysis of the
>"substitution theory" doesn't go into details.

??? I don't understand where difference of opinion figures into it. Cramer stated in his article that an increase in natural gas prices will crush the ethanol producers (because they use natural gas in the production process). Your counterargument was that demand for energy makes the US run. That may be true, but it doesn't rebut (or even address) his point.

Substitution 'theory' btw is just common sense. If two products, say gasoline and ethanol are close economic substitutes, demand tends to gravitate to the cheaper one (and away from the more expensive one) until the prices are the same (practically speaking). Because you need 1.5 gallons of ethanol to provide the same energy as 1 gallon of gasoline, the price of ethanol -- if it is to be used as a substitute for gasoline -- must be correspondingly cheaper.

Now, if I'm thinking about buying PEIX or some other ethanol producer on the thesis that E85 will replace gasoline, it would makes sense to compare oil & gas refiners such as VLO as a competing company, and thus an alternative stock purchase. I'll leave it as an exercise for you to compare them on a fundamental basis, but I'm willing to bet that VLO beats PEIX cold...

>9. Difference of opinion which really negates your pipeline
>thesis. Etoh will use a different infrastructure. Your
>flaw again is looking for an instant transformation to a
>mature technology & infrastructure. The counter POV is
>simply there is sufficient aggregate demand for Etoh. The
>deduction is there will be an alternative infrastructure
>now. The easy answer is trucks from the centralized plant
>much like how gas is distributed from the local refineries
>in Benicia & Richmond--thus, current infrastructure is
>exactly the same as the proposed infrastructure. Your
>argument goes towards the location of the Madera plant
>during the feasibility stages. That has already been
>tacitly answered. There is supposedly good access to the
>highway system to distribute any resources. So, does the
>picture change when someone proposes a counter POV, or are
>we arguing cross purposes?

??? All I was saying is that it's cheaper -- energy-wise and fossil-fuel wise -- to transport oil, gas, and gasoline by pipeline than it is to transport corn and ethanol by coal- or diesel-fueled trains, barges, and trucks. That the last mile from the refineries to the gas stations may involve the same infrastructure in now way negates my point.

>10. Already answered in the original post. Here, "I am in
>the energy sector...and seeking diversification" should have
>answered your question, if any.

imho, choosing more 'expensive' stocks vs. 'cheaper' ones in the same sector is really di-worse-ification.

btw, why were you so hard on Eliza Darling? She had some good points and anyway, I wasn't aware that this thread was a private discussion.

As for the 'theory' of Thermodynamics, yes conservation of energy and increasing entropy are two of the three laws. (btw, conservation of energy is hardly a 'claim' -- except for mass-energy conversion in nuclear reactions -- "E equals m c squared" -- it has been repeatedly observed in over a hundred years of scientific experiments!) The problem is in defining the boundaries of the system being considered. Though it is true that IF we intended to grow that much animal feed anyway, you could argue that the ethanol process is net energy positive, but if you intend to replace all gasoline with corn-based ethanol, we would produce more animal feed than we have livestock to consume (and take the majority of arable land and available water resources to produce it). So imho it's unrealistic to expect a shift from a fossil hydrocarbon-based economy to an E85 one. We will undoubtedly have some E85 usage, but without subsidies and tax credits to support it, even limited E85 deployment won't fly... jmho

At best, 5-26% of the energy content of corn-based ethanol is from renewable sources (the sun). And even the study's author concluded: "But it isn't a huge victory -- you wouldn't go out and rebuild our economy around corn-based ethanol."

deChat

"I...gave an example of the sort of fundamental analysis I would do in evaluating PEIX (and which I believe is similar to what Cramer must have done). Also, I'm not sure what is meant by "ignores the facts which I have not posted"

I thought it was pretty obivious we disagreed on the outlook. You & Creammer were both bearish. I am not for reasons stated in the rebuttal. If you were objectively bearish on the sector, Etoh refineries, then that is fine and a reasonable disagreement. However, I was staking a claim specifically on a CA refinery as opposed to VSE. There are standard issues addressed in a fundamental analysis which center specifically on the industry or the individual stock which were omitted in you analysis. Look specifically at the SEC filing for the hidden issues which were omitted.

Then, there is the ignoring of "I am not a rookie and have taken some seminars" on the matter.

"...if you put all your eggs into one sector and you're right about it, imho your return probably won't be appreciably greater if you construct a specialty ETF vs. selectively choosing one or two 'leaders' in that sector based on fundamentals and price-volume action (and the diversified portfolio may even perform worse). And if you're wrong about the sector, you have no protection at all."

If someone claims to be savvy, then they understand the tricks. Perhaps what you are claiming has an alternate strategy to handle? Say you had 1000 shares of EBOF.ob, a dog. If it was legitimate, then there is a way to protect against downside risk.

A concrete example used to point out a fallacy perhaps?

"...Substitution 'theory' btw is just common sense. If two products, say gasoline and ethanol are close economic substitutes, demand tends to gravitate to the cheaper one (and away from the more expensive one) until the prices are the same (practically speaking). Because you need 1.5 gallons of ethanol to provide the same energy as 1 gallon of gasoline, the price of ethanol -- if it is to be used as a substitute for gasoline "

Todays pricing of gas is about $ 3.00 per gallon. There are some assumptions for calculation which I omit. A gallon of gas is equivalent to 1.5 gallons of Etoh, so the equilivent Etoh at $ 2.00 per gallon. If spot price of Etoh falls below $ 2.00 or gas exceeds $ 3.00, then perhaps some things happen which makes your argument moot or controlling. Standard pricing pins Etoh at $ 1.40 per gallon. Did you say something about substitution theory controlling the market or were you tossing out slogans? Makes no sense to me.

Let's agree to settle this factually. By 2007-8 your argument should control and invalidate Etoh as a mere failed social experiment. The fact that US demand for Etoh is short 2,500 gals per year also seemed to be omitted in your supply & demand argument. Doesn't really matter which outlook is correct. If PEIX makes money, then we'll know why.

Finally, why beat around the bush?

"IF we intended to grow that much animal feed anyway, you could argue that the ethanol process is net energy positive, but if you intend to replace all gasoline with corn-based ethanol, we would produce more animal feed than we have livestock to consume (and take the majority of arable land and available water resources to produce it). So imho it's unrealistic to expect a shift from a fossil hydrocarbon-based economy to an E85 one. We will undoubtedly have some E85 usage, but without subsidies and tax credits to support it, even limited E85 deployment won't fly... jmho"

Corn is an Ag commodity. It can be sold worldwide for feedstock and food. There is an additional margin to sell it as Etoh for fuel. There is demand for energy both here and overseas. What is not to like as a safety net.

http://www.usda.gov/oce/EthanolSugarFeasibilityReport3.pdf

The fundamental reason Etoh to corn is still profitable is based on capEx calculations and spot pricing. This is the basic driver. The so called "crush spread" is the difference between the spot price of Etoh and spot price of corn. Currently, Etoh is running at $ 2.55 per gallon. Corn is about $ 2.40 per bushel, and one bushel of dry corn yields 2.75 gallons, or a spread of $ 4.61 per gallon manufactured based on raw materials. The article claims Etoh costs about $ 1.05 per gallon to produce, so a manufacturer can make currently about $ 3.56 per gallon. This means currently for every $ 1.00 input, the manufacturer can get $ 1.85 back. This is worth the venture under current circumstances.

The sector is still bullish by the actions of ADM and BG, two of the largest Ag producers. Link:

http://yahoo.smartmoney.com/barrons/index.cfm?story=20060810&afl=yahoo

Your call on if, when, and how to enter. PEIX is currently overvalued by the lemmings with a projected P/E of 40. The insiders and large institutions are will to take a stand against the retailers as PEIX has no revenues. Either wait until the price stablizes, or, if you are savvy, play with them on the downtrend, and wait for the uptrend to make money on the uptrend.