ABA: Loan Forgiveness Coming

For all you law school hopefuls and grads, President Obama and Congress are going to help you:

http://www.abajournal.com/weekly/student_loan_relief_on_the_way_for_law_grads

Make sure you read the comments, which are usually the best part of an ABA Journal post. One person says the world doesn't need help getting more lawyers. He has a point.

I paid off all my student loans myself, but I suspect more than a few people game the system. For example, I've heard that some recent graduates had taken loans against their houses and used a home equity loan to pay off their student loans. Then, depending on the remaining value of the home and their state's exemptions, they may have been able to declare bankruptcy and still keep their home. There are probably other ways to game the system, but the way banks were giving out HELOCs, using your home was probably the easiest way.

Some people have suggested getting Perkins loans. When I was in law school, my financial aid advisor recommended that I maximize my Perkins loans, so every year, I'd go to the financial aid office and ask for more Perkins loans. From 1999 to 2002, Perkins loans had low interest rates and were therefore favored by many students; however, under the new "Competitive Loan Auction Pilot Program" terms, I've heard that Perkins loans are not entitled to any relief unless they are consolidated. (At least according to this Sunday's SJ Merc.) One thing's clear: more than ever, it's essential to talk with your financial counselor to make sure you know all your options. Make sure you do your due diligence.

For all you policy wonks, here is a link that leads to the text of the law itself. You'll notice that Dems sponsored the bill, and George Bush signed it. So why is President Obama getting credit for this "new" student loan relief? Because Section 701 recently gave his administration more power and discretion:

Section 701 -

Directs the Secretary to conduct a Competitive Loan Auction Pilot program, beginning in July 2009, under which biennial auctions are held in each state allowing prequalified lenders to compete for the exclusive right to make FFEL program PLUS loans at all IHEs within the state. Provides that the winning bids from each state auction shall be the two bids containing the lowest and the second lowest proposed special allowance payments requested from the Secretary. Requires the Secretary to guarantee 99% of the unpaid balance of such loans.

Basically, President Obama's appointee gets to set the terms for lenders who want to loan money to students. In exchange, eligible lenders get a guarantee that 99% of the unpaid balance of the loans issued under President Obama's rules get paid back, courtesy of the American taxpayer. Interesting, no? Congress passes a law in 2007 with provisions that "activate" in 2009 and thereafter until 2017.

CIA to Congress: We Misled You, but That's Not Our Policy

Some strange things are going on between Congress and the CIA:

http://www.cnn.com/2009/POLITICS/07/08/cia.congress/index.html

http://www.latimes.com/news/nationworld/politics/wire/sns-ap-us-congress-secret-briefings,1,2711337.story

Letters by the chairman of the House Intelligence Committee and other members of the panel say CIA Director Leon Panetta told Congress last month that senior CIA officials have concealed significant actions and misled lawmakers repeatedly since 2001.

I am upset that rather than focusing on stopping the CIA from misleading Congress in the future, the media and House Republicans are making this an issue about Pelosi. I think Senator Pelosi knew about harsh interrogation methods, but not all the details. I do wonder if she knew about waterboarding, but it doesn't matter now--she had her chance to speak out against harsh interrogation methods and failed to do so. The real issue now is reforming the CIA, not Pelosi.

Update on July 20, 2009: Judge rules CIA lied to the court:

http://news.yahoo.com/s/ap/20090720/ap_on_go_ot/us_cia_fraud

According to court documents unsealed Monday, U.S. District Judge Royce Lamberth referred a CIA attorney, Jeffrey Yeates, for disciplinary action. Lamberth also denied the CIA's renewed efforts under the Obama administration to keep the case secret because of what he calls the agency's "diminished credibility" in the case.

Commodities, Cap and Trade, and Natural Gas

There's a lot of hubbub about H.R. 2454, otherwise known as the "cap and trade" program. My main criticism is that is that cap and trade programs require inter-country cooperation to be effective, but inter-country enforcement mechanisms have not been clearly defined or tested. What will the U.S. do, for example, if China "cheats" on carbon emissions? China, after all, uses mostly coal for its energy needs. (Perhaps we'll have some version of the International Atomic Energy Agency (IAEA), but for carbon checks.) Another problem: although heavy-handed enforcement will strain relations between countries, a heavy hand is necessary to convince everyone to play by the rules.

In any case, I jumped into commodities earlier this week (a few days too early), and am happy to hold UNG, FCG, WMB, WPZ, GSG, COP, and DBC. If approved, President Obama's cap and trade program will reduce coal and encourage more natural gas and solar power. Thanks to environmentalists, America may finally be able to reduce its use of "dirty" energy sources, including oil.

As I've already pointed out, the "cap and trade" program is not perfect--the government may end up artificially increasing certain commodity prices by transferring subsidies from coal to other energy sources. Even so, I'd rather subsidize clean energy than environmentally harmful energy sources.

Owners of Market Vectors Coal ETF (KOL) might want to assess the impact of the cap and trade program very carefully. Although it provides some exposure to Chinese coal companies, all coal companies will remain an uncertain bet as cleaner energy becomes more viable. After all, why would power plants use coal when they can use natural gas? From the EIA:

In the electric power sector, natural gas is an attractive choice for new generating plants because of its relative fuel efficiency and low carbon dioxide intensity. Electricity generation [will account] for 35 percent of the world’s total natural gas consumption in 2030, up from 32 percent in 2006.

You might still be wondering, "Why natural gas? Why not nuclear, wind, or solar companies?" Elementary, my dear Watson--it's the simple process of elimination.

First, America has far more natural gas than petroleum. Many Americans already know we have more natural gas than oil, but I am very surprised to see so many people overestimating cap and trade's foreign policy implications. If you think switching to natural gas will crush foreign regimes, don't kid yourself--the Middle East still has the world's largest supply of natural gas. I am willing to bet that in ten years, Russia and Iran spearhead a new natural gas "OPEC." That's okay--America won't ever be as dependent on natural gas imports as it has been on petroleum imports. In fact, Canada will probably be the largest foreign beneficiary of increased natural gas use.

Second, wind power looks D.O.A.--T. Boone Pickens, its most visible proponent, has scratched the idea, at least in Texas. That's not a good sign for the Pickens Plan.

Third, solar power is more complicated than it looks because it requires lots of empty land to put all the solar panels a power plant requires. Solar panels are most effective when powering relatively small structures, like houses and outdoor emergency phones. In any case, I don't know of any solar power plants that can supply power on the same scale as traditional power sources. (I am not an expert on solar power, so I appreciate being corrected if I am wrong.) At least for now, solar will not displace natural gas, but will probably work in conjunction with it.

Fourth, nuclear power suffers from a major image problem. Chernobyl will force legislators to hedge their bets on other energy sources and/or slowly adopt nuclear power.

I hope I've adequately explained why I believe natural gas has a bright future. If we're weaning ourselves from "dirty" energy like oil and coal, and solar and wind power have years to go before effective nationwide use, what's left? Aside from nuclear power, which suffers from a NIMBY problem, there's just natural gas. (Please don't get me started on ethanol--the idea of driving up food costs to get oil is untenable--and both Alan Greenspan and Charles Munger agree.)

Mind you, I do not expect natural gas prices to rise immediately. Even if the Senate approves the cap and trade bill, also known as H.R. 2454 (American Clean Energy And Security Act of 2009), it will take years for demand to dent the current supply of natural gas.

Why, then, am I buying natural gas and commodities companies now? Two reasons: one, current natural gas prices seem relatively low; and two, if Congress removes certain subsidies for natural gas companies or does not supply them with adequate incentives, companies will halt or reduce natural gas drilling, which will reduce supply and increase natural gas prices.

You might also wonder why I own ConocoPhillips (COP), an oil company. Petroleum will continue to be an important resource (petrochemicals, etc.), and many oil companies also have natural gas interests. In addition, oil companies sell an essential product and pay high dividends (unusual in our current era of 1% money market rates). I also don't mind buying anything Warren Buffett owns.

It is important to note that I hold all of my commodity-based shares in a retirement account to minimize taxes. Owning UNG in a regular account creates tax implications because of its partnership structure. I am not certain, but apparently, UNG does not pay out distributions, but imputes income to its investors anyway. Any more information on UNG's tax issues would be appreciated. (Feel free to leave a comment, especially if you're a CPA.) UNG's tax structure doesn't affect me because I hold my shares in a retirement account, but I am still curious.

Regardless of whether H.R. 2454 passes, the future of the energy industry is clear: the winner will be either nuclear or natural gas. I am choosing natural gas because it has a higher chance of widespread adoption. Fairly or not, nuclear power will always be linked to Chernobyl, Three Mile Island, and Davis-Besse, which reduces its appeal.

Disclosure: I own UNG, FCG, WMB, WPZ, GSG, COP, and DBC. I have recommended to family members to sell KOL if they own any shares.

Disclaimer: The information on this site is provided for discussion purposes only. Under no circumstances do any statements here represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence. To summarize, I do not provide investment advice, nor do I make any claims or promises that any information here will lead to a profit, loss, or any other result.

Update: Of the 20 million barrels of oil consumed each day, 40 percent is used by passenger vehicles, 24 percent by industry, 12 percent by commercial and freight trucks, 7 percent by aircraft, and 6 percent in residential and commercial buildings. (Source) Cap and trade will first impact the 30% slices (industrial and commercial/residential building) of the energy consumption pie, because not enough automobiles currently run on natural gas.

Bonus: below is an interesting link from the State Department on energy use:

http://www.state.gov/g/oes/rls/rpts/car/90316.htm

Clay Bennett

I usually reference Tom Toles when it comes to politically sharp cartoons, but Clay Bennett is right up there:

http://www.timesfreepress.com/news/cartoons/

Most Popular Poet in U.S.

The most popular poet in the U.S. is a Muslim? Apparently so, according to Time magazine.

http://www.time.com/time/magazine/article/0,9171,501021007-356133,00.html

Here with a loaf of bread beneath the bough,
A jug of wine, a book of verse, and Thou
Beside me singing in the wilderness -
And wilderness is Paradise now.

Suffering ennobles a man,
Enduring the oyster-shell's prison makes a pearl of a water drop;
Though worldly goods perish,
Let your head remain like a cup -
When the cup is empty it may be filled again!

by Jalaluddin Rumi, better known as Rumi.

MJ

The big news today was Michael Jackson's funeral. The most emotional moment was hearing Michael Jackson's daughter, Paris, speak:

"Daddy has been the best father you could ever imagine..."

Just an absolutely heart-wrenching moment.

Cold War II?

The radio is abuzz about VP Biden's so-called "green light" to Israel to attack Iran's nuclear arsenal. Maybe I'm over-analyzing VP Biden's comments, but I think the White House is trying to take pressure off Iran's protesters. In other words, this might be a classic diversion tactic.

Iran's current regime is in a tough spot. It lacks the manpower to pre-emptively attack another country, especially when so many of its military members have to handle protesters and internal dissent. Even setting aside international law, an Iranian attack against Israel would be a suicide mission because of Israel's nuclear arsenal. Attacking Saudi Arabia, an American ally, or American troops stationed in neighboring countries would also be a suicide mission for obvious reasons.

Israel, on the other hand, is also in a tough spot. Although it has the advantage in terms of weaponry, it must still weigh the overall benefits versus the costs of attacking Iran. At this time, the costs of an Iranian attack are undefined and possibly unmanageable because of Iran's influence in Iraq and Afghanistan, not to mention Iran's long range ballistic missiles. In addition, Iran doesn't lack the ability to defend itself. Iran has wartime experience because of the 1980-1988 Iran-Iraq war and has formidable support in Hezbollah, which has recent experience fighting against Israeli troops.

As for VP Biden, he seems to be playing the role of bad cop to President Obama's good cop. That's not necessarily a bad strategy, because even if VP Biden goes overboard, his words aren't binding--after all, he's not the President. In any case, President Obama is also in a tough spot. He knows his options are limited. Most Americans do not want to sacrifice more American troops in another non-defensive war. As a result, it looks like a stalemate and another Cold War until the fall of the current Iranian regime and a Middle Eastern glasnost.

Update on July 7, 2009: I just saw CNN's ticker--President Obama said there is no "green light" for Israel to attack Iranian nuclear sites.

All this attention on Iranian nuclear capabilities ignores the possibility that the current Iranian regime might be out in the next three years. Meanwhile, North Korea already has nuclear weapons and has threatened American interests. If I lived in Hawaii, I'd be more than a little concerned to be within shooting distance of North Korea. I am concerned President Obama hasn't provided a plan for containing the North Korean threat. As of today, North Korea, not Iran, represents the greatest threat to the United States.

As for Israel, it should focus on peace with Lebanon. Hamas and Hezbollah are greater threats to Israel than Iran. A prosperous, friendly Lebanon will cause Hezbollah and Hamas to wind down operations the same way the Provisional Irish Republican Army (IRA) gave up power to Sinn Féin once Ireland became prosperous. The 2006 Israeli-Lebanon war showed that force won't work in Lebanon. If Israel wants peace, having Lebanon as a peaceful partner is key. An Israeli-Lebanese partnership should be a higher priority for Israel than a possible Iranian threat three years from now.

But then again, what do I know? I've never visited North Korea, Lebanon, or Israel. Still, I hope one day to see all three countries experience lasting peace.

Bonus: Alan Dershowitz on Israel in the WSJ (7/3/09):

http://online.wsj.com/article/SB124649366875483207.html

A majority of American-Jewish supporters of Israel, as well as Israelis, do not favor settlement expansion. Thus the Obama position on settlement expansion, whether one agrees with it or not, is not at all inconsistent with support for Israel...

I believe there is a logical compromise on settlement growth that has been proposed by Yousef Munayyer, a leader of the American-Arab Anti-Discrimination League. "Obama should make it clear to the Israelis that settlers should feel free to grow their families as long as their settlements grow vertically, and not horizontally," he wrote last month in the Boston Globe. In other words, build "up" rather than "out." This seems fair to both sides...