3 weeks later.....

Well I didn't expect that -- to take a 3 week break from writing. Certainly knew a week off because of a trip but the rest was just getting too busy and not finding the time.



Why was I busy? part of it was looking into a few new secular trends to decide about potential new investment ideas.



First -- on a trip out west I saw the longest train ever -- container after container load. It was at that moment that I realized why rails have been doing so well -- why Buffett bought them. I just couldn't see it before -- I saw railroads as slow growers that could never earn their cost of capital and would produce negative free cash flow forever. That's changed -- consolidation has reduced competition within the railroads and rising energy prices has reduced competition outside of rails. Globalization has created lots of new trade, which is driving up demand too. The stocks have all gone up huge in the last several years but they probably have more room to go especially if energy prices stay high.


don't know enough to understand, which rail is best or what the differences are between them. Probably won't buy one but its something to keep in mind.

Next I was reading a conference call transcript from a call given by the CEO of Alliance Bernstein -- one of my largest holdings. He made a comment about the coming electrification of the automobile and the impact that might have on various industries. It reminded me that a couple of guys -- Peter Huber and somebody named Mills have written an investment newsletter for several years about power. So I searched on google and at forbes.com for awhile and realized they have written a book. The Bottomless Well that basically says we have unlimited amounts of energy its a question of what form its in.

They make the case that electricity is the real secular growth story within energy. Over the last several decades the amount of electricity used has been steadily rising. Certain processes on the industrial side that used to be mechanical in nature now use electrical parts -- one example is a steel mill which now uses an electric arc furnace rather than one driven by burning coal -- i.e. a blast furnace. All the computers, networks, data centers, etc. -- they all rely on electricity. Their case is that improvements in power semiconductors would translate into an electric drive train partly out of energy efficiency but mostly because electricity is easier to control than mechanical processes -- you can more fine tune the process.

so that leads to multiple thoughts on how to play this secular trend.

1. Utilities -- especially ones that produce non-regulated or wholesale power using a low cost fuel option such as nuclear, hydro or wind. Utility prices are often set by the fuel costs used for producing peak power. Since natural gas is most often what is used for peak power, that means has natural gas prices rise, power prices rise too -- even if that power is produced by nuclear, wind or hydro (none of them have fuel costs that amount to much).

After some review, I chose FPL -- florida power and light because its one part regulated and one part non-regulated. This provides some risk reduction since I am buying in after utilities have outperformed for years. FPL's regulated territory has been growing -- they gained 1 mill new customers in the last 10 years or about 33% growth. Their fuel for the regulated side is nat gas, coal and nuclear.

They have a merchant power business that sells power all over the country -- large part is nat gas but the rest is nuclear and wind -- they are growing their wind production from 5 gigawatts to 13 gigawatts over the next 5 years. Other large merchant companies don't have diversified territories or their fuel is not low cost or their valuation is high or their stock has been an unbelievably strong performer.

2. electrical equipment manufacturers -- for me their are only 2 possible answers here -- Emerson Electric or Eaton. Emerson is my main choice because they have been well managed for decades. Eaton is more of a turnaround. Trouble is that even though Emerson has incredible management and strong prospects and an attractive valuation, its stock returns have been mediocre at best. over 20 years the stock barely keeps ahead of the market. Now the good news is that it is ahead of the market. The bad news is that many of the utility stocks I was researching outperformed Emerson over long periods -- boring utilities yet they have strong performance. As the stock drops I continue to think about it.

3. Power semiconductors -- most of these are commodities but there is one company -- Power Integrations POWI -- that is a differentiated product that sells power supply chips based on an integrated solution -- majority of current solutions are discretes or other older technologies. they are cheap and low cost but take up space and are not energy efficient. Power Integrations has a similar cost but its partly due to much fewer components. I'm still researching and debating this one.

Also trying to determine how to come up with the cash to invest in these kind of ideas. I realize now that I have too much in financials -- MCO, FDS, CME and AB -- although they aren't lenders and aren't caught up in the problems of today, their growth potential is tied to the size of financial services in general -- MCO is about growth in debt during a deleveraging period. FDS is about giving employees the tools they need to do the job so employment in money management is key. CME is providing a market for traders to trade derivatives -- fewer traders means less derivative trading.

that's plenty to think about tonight -- will hopefully have more to say this week.