We Have Seen the Future
Research for Online Investors

by John Dalt

9/10/10

Ed Hammer, an engineer at General Electric invented the compact florescent light (CFL) bulb.  His department was responding to the energy crisis in 1973, and working on technology to save electricity.  The idea to twist florescent tubes into compact bulbs worked, but was expensive because the process was labor intensive.

Flash forward almost 20 years, and a Chinese immigrant to the U.S., Ellis Yan started a lighting business in China.  Ellis calculated that the low wages at his factory would allow him to manufacture the CFL bulbs at a lower cost.  They were still more expensive than incandescent bulbs, but lasted longer and used less electricity.

A little over ten years later the democrats took over congress, and in 2007 passed legislation that set energy use standards that incandescent bulbs could not meet. The standards were mandatory after 2014. Fast forward three years, the last incandescent light bulb factory in the U.S. will close this month, laying off 200 workers. This factory in Winchester, Virginia is owned by GE, the company that invented incandescent bulbs and CFL’s.

Mr. Yan’s factory in China employed as many as 14,000 people and manufactures over half of all CFLs sold in the U.S.  The factory is automating and hopes to cut employment to 5,000 by the end of the year.

You won’t read about this or see it on the evening news, because it does not fit the story line the mainstream press and administration wants you to believe.  “We will all be better off with green energy, and build a green economy in the U.S.”

This may be true only if better off is unemployed.  To quote one of the workers at the GE factory, Toby Savolainen asked, “Now what’re we going to do?”  This is the danger of government picking winners and losers.  The market will respond in ways the bureaucrats cannot understand or predict.  Of course we will lower our carbon footprint when all the factories are closed, and wages will eventually come down.

President Obama's administration wants to see the green economy create green jobs in America.  Increasingly we see these jobs along with others will be created in China and other parts of the world.  Windpower, electric cars, batteries, and solar cells may be all the rage, but who will build them?  Like any other jobs they will go where wages are competitive, environmental laws are less stringent, and other regulations are minimal.

Today's chart shows how earnings increases combined with the recent stock market correction has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). As a result of the recent spike in corporate earnings as well as relatively lower stock prices (e.g. the S&P 500 currently trades 9% off its April 2010 highs) the PE ratio has dropped to a level that has not existed since the end of 1990.

Does this mean stocks are ready to rally?  Not yet grasshopper.  But the time may be close.

To the mailbag:
You're confusing the source of capital with its use.  Wealth is the outcome of the efficient use of capital, time, resources and personnel.- subscriber J.R.

John’s reply: If wealth can be created by government, why is Soviet Union, Cuba, Greece, etc broke?  They should be self sustaining engines of wealth production.  This would allow all the social spending the politicians could dream of, without cost to the citizens.  Utopia.

The knowledge of history is power - because patterns keep repeating.  I learned this lesson well during my youth in the Soviet Union where the government kept locking up old newspapers.  You could not go to a library and get a newspaper or a magazine more than two years old - they were put into a ‘special storage’ (‘spets-hran’), and you needed official authorization to gain access.  The government kept changing its policies and rewriting history - it did not want its citizens to know what it said or did more than two years ago.---Dr. Alexander Elder

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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