Where To Place Your Massachusetts Technology Bets

First quarter U.S. Gross Domestic Product (GDP) growth came in at a disappointing 1.8%. But some states enjoyed much faster economic growth -- among those is my home state of Massachusetts whose economy spiked 4.2% in the first quarter. And that faster growth is based on its high tech companies. Here are three stocks likely to benefit from that faster-than-average growth.

Behind that slow U.S. GDP growth were some surprising bits of positive news. Businesses spent 11.6% more on equipment and software, exports rose by 4.9%, and consumers, who account for 70% of GDP growth, boosted spending at a 2.7% annual rate.

That good news was offset by bad news in real estate and government spending. Investment in housing was down 4.1%; investment in commercial real estate tumbled 21%, and government spending declined 3.3%.

But the best number of the bunch -- the 11.6% rise in technology spending -- benefits Massachusetts significantly. Local economists attribute the state's 4.2% GDP growth to its leading companies getting an above average share of that corporate investment.

There are many Massachusetts-based companies that likely received a good share of that spending. Here are three:

• EMC Corp (EMC), a maker of data storage hardware and software, that reported first quarter earnings growth of 28% to $477 million on 18% revenue growth to $4.61 billion
• Thermo Fisher Scientific (TMO), a designer and builder of scientific instruments, that reported first quarter earnings growth of 8.5% to $252 million on 3.6% revenue growth to $2.7 billion
• Analog Devices (ADI), a semiconductor manufacturer, that reported first quarter earnings growth of 83% to $222 million on 21% revenue growth to $729 million

Using the trusty Price/Earnings to Growth (PEG) ratio -- a measure of how a stock's market valuation compares to its growth prospects -- I will rank these possible plays on Massachusetts' growth rate from lowest to highest PEG:

• EMC 1.63. At a P/E of 31, its earnings are forecast to grow 19% to $1.42 in 2012
• Thermo Fisher 1.92. Its P/E is 23 and its earnings are forecast to grow 12% to $4.55 in 2012
• Analog Devices 2.23. Its P/E is 15.4 and its earnings are forecast to grow 6.9% to $2.96 in 2012

Of these three, EMC looks to be the most likely to profit from the ongoing trend of corporate technology spending. If the more expensive Analog Devices can continue to boost earnings at the rate it did in the most recent quarter, its stock price could benefit.

Should You Invest in the Royal Wedding Industrial Complex?

I am not sure which is worse -- the media's obsession with birthers or its wall-to-wall coverage of the so-called Royal Wedding (RW) planned for April 29. But all that global media attention means money will be made and that investors have a chance to profit from it. Here are three publicly-traded companies that are trying to sell into RW public enthusiasm.

A substantial RW Industrial Complex (RWIC) has emerged from hibernation in the last several weeks. The Gazette estimates that the RWIC -- consisting of RW-related airlines, hotels, restaurants, and retailing -- is worth $1 billion to $1.5 billion in revenues -- fueled by a 120% increase from 500,000 to 1.1 million in the number of tourists visiting London. Although the RW will require an additional $30 million in security, the UK economy will probably make a profit -- although that profit will be tiny for its $2.2 trillion economy. 

Here are three publicly-traded companies that are trying to get a piece of the RWIC action:

• General Mills (GIS) whose Betty Crocker unit is offering "recipes for versions of the bride’s and groom’s wedding cakes;" according to the New York Times.
• Papa John's International (PZZA) is selling in the UK a pizza that portrays the bride's and groom's faces; and
• Discovery Communications (DISCA) is offering 89 hours of programming with royal themes through its TLC Network.

None of these companies is likely to gain a market-moving bump in profit from the RW, so we need a different way to judge them. For that, let's look at their recent financial performance and whether their stock is reasonably priced. For that, we examine their Price/Earnings to Growth (PEG) Ratio that compares a stock's P/E to its earnings growth rate -- a PEG of 1.0 looks reasonably priced to me.

Here's my analysis of these three RWIC companies based ranked by PEG:

• Papa Johns 0.90. In the last year, the company generated $1.1 billion in revenue and $52 million in net income. It trades at a P/E of 15.3 and its earnings are expected to grow 17% to $2.44 in 2012. Its co-CEO recently departed -- that seems like a caution signal to me.
• Discovery Communications 1.37. In the last year, the company generated $3.8 billion in revenue and $630 million in net income. It trades at a P/E of 28.8 and its earnings are expected to grow 21% to $2.71 in 2012.
• General Mills 1.91. In the last year, the company generated $14.8 billion in revenue and $1.7 billion in net income. It trades at a P/E of 15.3 and its earnings are expected to grow 8% to $2.68 in 2012. It is worth noting that General Mills is the subject of speculation that Nestle (NESN) will acquire it.

While Papa Johns looks appetizing on a PEG basis, its management turnover suggests it might be wise to avoid it. And unless General Mills gets acquired, it looks pretty pricey.

Of the three, that leaves Discovery Communications as a way to tap the RWIC that goes into hibernation Saturday -- probably not to revive for another 30 years. (And if only the birthers could follow the RWIC into permanent hibernation, we'd really be making progress.)

Should You Short Netflix?

After announcing that it would miss by between 3 and 25 cents analysts' quarterly earnings forecast of $1.18 while beating expected revenues of $767 million by 4%, Netflix (NFLX) stock lost 9% of its value Tuesday. Has Netflix peaked? If so, should you bet it will fall further?

On the surface, things look good at Netflix. For the first quarter, net income grew 95% to $60 million while sales were up 46%. But warnings about higher future costs are spooking its stock.

A closer look at Netflix's reported earnings reveals two sources of rising costs. One source of higher costs is spending on international expansion -- it wants to move beyond Canada into two new countries by 2012 and the related investment could boost its international operating losses to $70 million -- 40% higher than previously thought.

Another key cost driver is paying for the streaming rights for video. This is becoming increasingly important as Netflix shifts from mailing DVDs to online streaming. Netflix does have an advantage in its track record of using technology to give customers superior value and the shift to online streaming is due to the rising cost to consumers of mailing DVDs.

But Netflix is having a harder time getting and sustaining a competitive advantage in online streaming. So investors should consider whether Netflix financials will be squeezed by higher costs for licensing digital content even as it faces price competition from Hulu and others with more favorable access to that content.

And there are plenty of companies vying with Netflix for those rights including Coinstar (CSTR), Time Warner (TWX), Apple (AAPL), and Amazon (AMZN). Not only that, but Netflix expects Dish Network (DISH) to use the Blockbuster assets Dish is buying out of bankruptcy to launch another, Blockbuster-branded streaming-video service, which would add yet another competitor.

And these competitors could help the content providers stage a bidding war that would shift the profit on streaming video from Netflix to the suppliers. If that revenue share rises to the 60% that cable companies pay for Video on Demand or the 70% that Apple currently pays, the crimp on Netflix online streaming profits could be a disappointment for investors.

And since these competitors are keeping a lid on prices, it is unlikely that Netflix would be able to pass a cost increase on to its customers. So it may be stuck with its current $8 per month price -- despite the fact that it needs to charge $20 a month in order to afford its content in HBO's view.

Does all this profit squeezing potential mean you should borrow Netflix shares and sell them short? I would not short a stock unless I thought it had a better than 50% chance of going bankrupt in the next six to nine months. And that does not appear to be in the cards for Netflix.

Nevertheless, after rising 26,030% in the last nine years at an annual growth rate of roughly 44%, it is worth looking at whether its current P/E of 66 is justified. Its earnings are forecast to grow 43% to $6.37 in 2012. This means, Netflix now trades at a fairly pricey Price/Earnings to Growth (PEG) ratio of 1.53 (where 1.0 is reasonably valued).

This is the profile of a stock that may be over-valued but not a company on the verge of bankruptcy. In the first quarter of 2011, Netflix had $150 million in cash on its balance sheet in the first quarter -- down $45 million as it spent $192 million on its streaming content library and it has a mere $200 million in debt due in 2017.

Even though it has the potential to drop in price as investors take profits on a somewhat over-valued stock, Netflix is a terrible short candidate.

Tech Currents 4/26/11

Amazon (AMZN) is getting more serious about creating a tablet ecosystem as it gives Verizon (VZ) Android customers $25 worth of credits at Amazon's Appstore. With 7,500 apps, Amazon remains a dwarf compared to Apple's (AAPL) 350,000 app App Store. But Amazon has many of the pieces needed to gain tablet market share -- customer count second to iTunes' 200 million, great content and recommendation tools, and a leading cloud computing infrastructure. Building its Appstore could turn Amazon into a tablet contender.

Oracle (ORCL) shifts Safra Catz back to her old role as CFO. This move, if she accepts it, could clear the way for former Hewlett Packard (HPQ) CEO, Mark Hurd, to succeed Larry Ellison as Oracle's CEO. This is good news for Oracle holders because it means that Oracle will continue on its path of acquiring business tech vendors like EMC (EMC) whose costs Hurd could cut as he keeps Oracle's quarterly earnings train running on time.

After announcing that it would miss by between 3 and 25 cents analysts' quarterly earnings forecast of $1.18 while beating expected revenues of $767 million by 4%, Netflix (NFLX) stock is down 5.3%. As it shifts from mailing DVDs to online streaming, investors should consider whether Netflix financials will be squeezed by higher costs for licensing digital content even as it faces price competition from Hulu and others with more favorable access to that content.

Hedge Fund SAC Capital Advisors raised his stake in Coinstar (CSTR) from 1.2% to 6.5%. Coinstar is expected to report earnings Thursday with a new digital strategy. But Coinstar missed earnings estimates in the fourth quarter and its stock is down 10.5% in 2011. Yet at a Price/Earnings to Growth (PEG) ratio of a reasonable 0.9 on a P/E of 24.9 to 25.9% earnings growth to $3.47 in 2012, SAC's investment could be a vote of confidence.

Carl Icahn, an 8.7% holder of Lawson Software (LWSN), benefited from a sale of the business software company to private equity firm, Golden Gate Corp. for about $2 billion. This deal gave Lawson shareholders a 19% premium over its March 2011 price in the days before its announcement that it was entertaining an unsolicited bid from Golden Gate and Infor. Icahn has a 15% stake in Mentor Graphics (MENT), which might enjoy a similar pop if he wins a May 12 vote to oust some board members possibly leading to a sale of the company. 

Nintendo misses sales expectations for its 3DS glasses-free 3D gaming machine -- moving 3.6 million units, 10% short of its 4 million March-end sales target. While Nintendo claims that customer demand will be strong, it hints that gamers are waiting to buy until the most popular games are available on the 3DS.  The popular "The Legend of Zelda: Ocarina of Time 3D" is due out in June and that could boost sales. But the 3DS has been plagued with technical problems -- not all game players can identify 3-D images with equal ease or handle the intensity of the 3-D effect. Meanwhile Nintendo's net profit plunged 66% to Y77.62 billion in fiscal 2010 on slow sales of its DS hand-held and Wii home console.

Bill Gross Proves That Big Does Not Make Right

Back in February 2009, $1.3 trillion (2011 assets under management) PIMCO head, Bill Gross saw me on TV suggesting that he had too much sway over U.S. financial policy. He did not like my comments, emailed me with his thoughts, and gave me an interview in which he proclaimed that stocks were dead. Since then, the S&P 500 has skyrocketed. Now Gross is saying that thanks to the U.S. budget problems, its government bonds are not a good place to invest. Is Gross wrong again?

Gross is an American who bets against our stock and bond markets. He sponsors CNBC's Bond Report, whose Rick Santelli kicked off the Tea Party. Back on February 26, 2009, a week after Santelli's rant, Gross told me that he thought stocks would be a terrible investment because the U.S. economy would not grow and that since stocks were at the bottom of the liquidation hierarchy -- with bank debt at the top -- there was no point in taking the risk of buying stocks. Since then the S&P 500 has risen 82% from 735 to 1,337.

Now, Bloomberg reports, Gross is betting against U.S. Treasury securities. He is promoting the view that the U.S. economy is in a shambles and therefore PIMCO will no longer finance its deficits by buying its debt. With S&P's announcement that it had a negative outlook on the U.S.'s AAA-rating, Gross got support from a contributor to the financial crisis.

But, as I posted, bond yields reflected market optimism after that announcement. The four largest U.S. bond traders disagree with Gross, according to Bloomberg, and the continued decline in the 10-year Treasury yield suggests that the market has voted against Gross. That's because a lower yield means that investors are buying Treasuries and are willing to get a lower return to own them. Since Feb. 8, 2011, the yield on 10-year Treasuries has fallen from 3.77% to 3.39% on April 22, reports Bloomberg. This lower yield means that bullish bond buyers are overwhelming Gross's pessimism.

If Gross is not buying, someone else is. And those someone elses are foreign governments and banks. The U.S. Treasury reports that foreign holdings of Treasuries rose $36.4 billion to $4.47 trillion in the first two months of 2011. And banks increased their Treasury holdings by $49.1 billion to $1.67 trillion since the end of 2010.

For both groups of buyers, U.S. Treasuries appear to be the safest place to park their spare cash -- especially for banks that after getting bailed out are too risk-averse to boost loan volume. Bank loans at $1.25 trillion in April 2011 remain well below their  $1.62 trillion October 2008 peak.

Gross's economic pessimism persists in the face of stellar corporate earnings supported by high productivity gains. According to Bloomberg, since April 11, 71% of 188 MCSI World Index companies reporting have exceeded analysts' estimates for their first quarter 2011 EPS by an average of 8.8%. It looks like a productivity trend that started in 2010 is continuing to boost these results. For example, U.S. employee output per hour, increased 3.9% in 2010, the most since 2002 and unit labor costs fell 1.5% in 2010 after falling 1.6% in 2009.

In short, companies are squeezing more work out of their employees while cutting their pay. Maybe Gross's economic pessimism flows from his sympathy with the plight of the American working class. But with the S&P 500 up 82% since Gross's bearish call on stocks and companies beating earnings expectations, it sure is not based on hard-nosed financial analysis.

The lesson: Ignore Gross and buy stocks.

How Investors Can Profit From Better Corporate Decisions

Companies that make so-called data-driven decisions do better than those that choose based solely on gut feel. Thus it stands to reason that those data-driven-deciders could be good investment candidates. Read on for an analysis of the investment potential of four data-driven corporate decision-makers. 

Data-driven corporate decisions use specific decision criteria and gather data to help weigh those factors and arrive at a conclusion about what to do. Having taught Strategic Decision Making to Babson College undergraduates for the last six years, I am familiar with how rare it is for companies to make data-driven decisions. According to a paper from a trio of researchers including Erik Brynjolfsson of MIT, the few companies that actually make data-driven decisions are between 5% and 6% more productive than their peers.

Why do data-driven decision-makers outperform their peers? I'd guess that the data keeps them from making bad bets that their more intuitive peers would jump into feet first. In my consulting work, I have often found that gathering data about a potential market opportunity yields insights that turn what looked like a money-making opportunity into a pit of quicksand. Such data helps companies avoid money-losing investments.

Finding companies that make data-driven decisions is not difficult. After all, International Business Machines (IBM) expects by 2015 to generate $16 billion in revenues selling analytical software that companies use to make such decisions. As it turns out, there are several publicly-traded companies more than happy to brag about their use of analytical software and each of them is worth considering as an investment.

Here are four that use IBM's analytical software to boost productivity:

• Assurant's (AIZ), Assurant Solutions unit uses it to improve the way it assigns customer service staff to in-calling customers
• Aetna (AET) uses it to analyze trends in medical costs -- with an eye towards reducing them
• Coca Cola (KO) uses it to reduce waste in its system for distributing soft drink cartridges to customers
• Best Buy (BBY) uses it to segment its customers, tailor marketing to each segment, and increase the repurchase rate of the customers in key segments

A company's use of analytics to make decisions does not automatically mean it's a great investment. But it does suggest that its management brings considerable intellectual horsepower to its decision-making which the MIT researchers argue will boost their productivity above that of their peers.

For now, however, the evidence is thin that these companies have already achieved stock-market-moving superior performance as a result of their data-driven decision-making -- especially since these companies are at an early stage in their use of analytics software.

To me, it makes sense to screen these four companies based on the Price/Earnings to Growth (PEG) ratio -- a stock's Price/Earnings ratio divided by the company's earnings growth rate -- to measure whether a stock is cheap or expensive compared to its earnings growth. I think a PEG of 1.0 is fair value -- less than that and you have something of a bargain.

Using the PEG ratio, here's my ranking of the four data-driven decision-making companies:

• Aetna 0.75. Its P/E is 9.3 and Aetna's earnings are expected to grow 12.4% to $4.22 in 2012
• Coca Cola 1.26. Its P/E is 13.4 and Coke's earnings are seen to rise 10.6% to $4.28 in 2012
• Assurant 1.57. Its P/E is 15.2 and Assurant's earnings are predicted to increase 9.7% to $5.39 in 2012
• Best Buy 1.80. Its P/E is 8.8 and Best Buy's earnings are forecast to inch up 4.9% to $3.64 in 2012

In short, Aetna and Coca Cola are relatively inexpensive ways to play the boost in productivity that results from data-driven corporate decision-making.

April 22 Tech Currents

8:20 AM. Patent war escalates between Apple (AAPL) and Samsung Electronics. Samsung sues Apple for mobile communications patent infringement after Apple charged Samsung's Galaxy with 10 patent violations. Apple chip supplier, Samsung, supports Google (GOOG)'s Android that will trounce Apple with 39.5% 2011 smartphone share to iPhone's 15.7%. Will Apple lose more smartphone share than analysts expect? 

8:35 AM. ISuppli cuts Apple (AAPL) iPad 2011 shipment forecast by 9% -- from 43.7 million in February to 39.7 million. Apple could not satisfy Q1 iPad2 demand due to LCD quality concerns and speakers parts shortages. Will this 9% drop in iPad shipments cut Apple 2011 revenues by $1 billion? Will Apple fix LCD problems with investment in LG Display (LPL), Sharp and Toshiba Mobile Display?

8:58 AM. Tokyo social networker, Gree (3632), pays $104 million for OpenFeint, a U.S.-based maker of 5,000 smartphone games. Gree, with 25 million customers, wants OpenFeint to help it reach 75 million more. Gree's stock rose 3.4% on the announcement and is up 40% in 2011. Could Gree's aggressive expansion plans boost shares in its partner, Tencent Holdings (TCEHY)?

Two Stocks To Rise With Manufacturing Boom

Thanks to strong growth in demand for manufacturing products, many U.S. companies are enjoying a surge in revenues. This growth is driving global expansion even as consumer spending – that accounts for about 70% of GDP growth – continues to lag as incomes drop and food and fuel prices rise.  Manufacturing output rose 8% in the first quarter – four times faster than the 2% estimate for U.S. GDP growth, according to the Wall Street Journal.  Is it too late to invest in the companies that profit from this growth? Candidates include Eaton (ETN), United Technologies (UTX), and Paccar (PCAR). 

Behind the manufacturing growth are two powerful global economic trends. The first is strong investment in so-called infrastructure projects in emerging markets. According to the Journal, countries such as China, Latin America, India and Africa are rife with such projects. And these projects are leading to sales of cars and heavy-duty trucks, as well as exports of goods like building, farming and mining equipment.

And behind many of these projects is the second trend -- commodity price inflation for items such as oil, iron ore, and food crops. These soaring prices are partly a result of rising demand in emerging markets and they're making it profitable for farmers and miners to plant more crops and dig more holes in the ground. Moreover, the weaker dollar is making U.S. manufactured goods more price competitive than those made by vendors in countries with stronger currencies.

The companies I mentioned above put in strong first quarter earnings performance, but the question for investors is which ones, if any, have further to rise. To address that one, we can use the Price/Earnings to Growth (PEG) ratio -- a stock's Price/Earnings ratio divided by the company's earnings growth rate -- that helps measure whether a stock is cheap or expensive compared to its earnings growth. I think a PEG of 1.0 is fair value -- less than that and you have something of a bargain.

Based on this, here's my assessment of the three companies from the lowest to highest PEG:

• Paccar 0.34. On Monday, this truck maker raised its 2011 industry-wide sales forecast 10% for the U.S. and Canada to a range between 200,000 and 220,000 heavy-duty trucks -- the highest sales since 2006. Earlier this week, it reported a 179% earnings jump to 53 cents a share -- four cents more than analysts expected -- along with a 47% sales leap to $3.28 billion. Its 2010 EPS was $1.24. Paccar's P/E is 33.7 and its earnings are expected to grow 99% to $2.47 in 2011.
• Eaton 0.43. This maker of electrical and hydraulic parts for industrial, construction and agricultural machinery enjoyed an 85% pop in first quarter earnings to $0.83 a share on 23% sales growth to $3.8 billion. Eaton raised its 2011 forecast to a range of $3.66 to $3.96, up 15 cents from its previous projection. Its 2010 EPS was $2.73. Eaton's P/E is 17.2 and if it makes the midpoint of the range, its earnings will grow 40% in 2011.  
• United Technologies 2.93. This maker of elevators, helicopters, and air conditioning equipment recorded a 17% EPS jump to $1.11 per share; revenue was up 11% to $13.34 billion and it raised its 2011 earnings forecast a nickel a share to a range between $5.25 and $5.40 a share. Its 2010 EPS was $5.02. United Technologies' P/E is 17.6 and if it makes the midpoint of the range, its earnings will grow 6% in 2011.

Paccar and Eaton are clearly the best of this bunch.

Playing the Rise in Corporate Tech Spending

As IBM (IBM)’s positive earnings results suggest, corporate IT spending continues to rebound as companies pour chunks of their nearly $2 trillion in cash into upgrading technology that has been getting older since the beginning of the financial crisis. 

Among the biggest places where that money might get spent is in so-called cloud-related services – that enable companies to shift their IT applications from a fixed cost to a variable one that’s outsourced to other providers --  may grow at a 20% compound annual growth rate to $148.8 billion in 2014 from $58.6 billion in 2009, according to Gartner Group. As companies boost their spending on technology, which providers will benefit and which ones make the best investments now?

Corporate tech spending bellwether, IBM, beat expectations and raised its guidance after reporting earnings on Tuesday. Its operating earnings rose 21% to $2.41 a share -- beating estimates of $2.30 a share -- on revenues that climbed 5% to $24.6 billion. Not only that, but IBM boosted its EPS estimate for 2011 from "at least $13" to "at least $13.15." The results were strong due to new hardware, up 40%, and a rise in analytics software, up 20%, about which I wrote, that could account for $16 billion in 2015 sales.

In addition to IBM, three other companies that benefit from the rise in corporate IT spending reported strong results, according to Bloomberg:

• VMware (VMW) makes virtualization software that makes it cheaper for companies to store information. It beat operating profit forecasts of 42 cents a share by six cents and its sales grew 33% to $843.7 million. VMware is very expensive on a Price/Earnings to Growth (PEG) ratio of 4.56 (I think 1.0 is fair value) on a P/E of 114 with earnings forecast to rise 25% to $1.52 in 2012.
• Intel (INTC), benefiting from the presence of its chips in popular smart phones and tablets, enjoyed a 29% rise in EPS to $0.56 10 cents above estimates, and its $12.8 billion in revenues, up 25%, were $700 million higher than expected. Intel's PEG is 1.33 on a P/E of 10.5 with earnings forecast to rise 7.9% to $2.19 in 2012. If current trends continue, that growth rate could be very conservative.
• Juniper Networks (JNPR), the second largest maker of network equipment, rode a 21% increase in profit to 32 cents a share, meeting expectations. Juniper's PEG is 1.21 on a P/E of 34 with earnings forecast to rise 28% to $1.69 in 2012.

IBM, by the way, is far from cheap. Its PEG of 1.44 on a P/E of 14.3 on earnings forecast to grow 9.9% to $14.45 in 2012 may not be the best way to play the growth in corporate IT spending. Of the four, Juniper and Intel are the biggest bargains.

Will Tax Increases on the Wealthy Send Gold Plunging?

If you’re an investor in gold, you are sitting pretty these days. Tuesday, the shiny metal hit $1,500 an ounce. Why is gold hitting records? Nobody really knows but there are many candidate theories. Among the most interesting is the emergence of gold exchange traded funds (ETFs) that add retail money to the leveraged gold bets of hedge funds.  Thanks to departing Fox conspiracy theorist Glenn Beck and his sponsor Goldline, under investigation by California, there has been quite a bit of popular support for the notion that money printing central banks are debasing the currency.

But a new Washington Post poll could throw cold water on those gold bugs. The poll suggests that the most popular way to close the federal budget deficit is to raise taxes on America’s top earners.  Are Republicans who are proposing a $4.5 trillion in new tax cuts for the top 2% willing to buck those polls? If not, President Obama could see his plan for tax increases enacted and the resulting path to a balanced budget would take a bite out of the gold bugs.

The poll, based on 1,001 telephone interviews conducted between April 14 and 17, finds widespread support for President Obama's call to raise tax rates on family income over $250,000. According to the poll, 72% support his proposed tax increases while 54% strongly back his approach. My interpretation of the results is that the further away from that $250,000 income level, the higher the support for the tax increase -- 91% of Democrats like the idea, 68% of independents do, and 54% of Republicans support it. The only less-than-majority "strong support" for the idea comes from those making more than $100,000.

If America returned the top tax rate to where it was under Bill Clinton, substantial economic progress might ensue. After all, Clinton presided over an economy that created 22.2 million jobs when the tax rate on those top earners was 39.6%, rather than the Bush-Obama era 35% that cost the U.S. Treasury $1.3 trillion and left 13.5 million out of work with incomes declining by 8.1% between 2000 and 2009. If you added $600 billion in corporate tax revenue that would follow from closing loopholes that enable companies like General Electric (GE) to avoid paying the 35% tax rate on companies' record $1.68 trillion in 2010 profits, we could make substantial progress towards balancing the budget.

These gains towards fiscal stability would go a long way to strengthening the market's confidence in the dollar and have a correspondingly disastrous effect on the price of gold. America faces a choice of doing what the majority of its citizens want -- to reduce the deficit through tax increases on less than 5% of its population -- corporations and the wealthiest 2% -- or, as Paul Ryan (R-Wisc.) proposes, to give those top 2% $4.5 trillion in new tax cuts while gutting Medicare and Medicaid.

The Ryan approach would further enrich that minority while pumping up gold. The more popular Obama approach would strengthen the dollar and slash gold prices.  If you think Ryan's approach will prevail, buy gold -- here's a list of gold ETFs that will prosper from that approach.

Otherwise, consider selling gold short.

Is it Too Late To Short Goldman?

Goldman Sachs (GS) announced earnings Tuesday morning that beat deeply depressed expectations. While the odds were looking good that Goldman’s results would be less than stellar, it nearly doubled those pessimistic expectations. And its stock has been falling all year – now down 9.4% since the end of 2010.

Perhaps investors have been anticipating bad news – after all, with the government bailouts of Wall Street a matter of history, the business of the government using Wall Street’s services to raise the capital to bail out Wall Street has evaporated. And the various unpleasant surprises -- from Japan's earthquake to Middle Eastern unrest -- have put traders in a so-called "risk off" posture.

Meanwhile Goldman has not been able to do enough trading for its own account -- a business it is curtailing a bit to comply with Dodd-Frank -- to make up the loss of revenue. Furthermore, the volume of non-trading business --- mergers, raising equity and debt, and asset management – remains subdued. Warren Buffett’s exit from his Goldman investment looks like a pretty good sell signal. But are prospects for Goldman so weak that it makes sense to bet on a decline in its stock price?

Based on its first quarter results, the answer appears to be no. According to BusinessWire, Goldman earned $1.56 a share on revenues of $11.9 billion. These results were way down from where they were in the first quarter of 2010. In 2010’s first quarter, Goldman earned $5.59 a share on $12.8 billion in revenue. Goldman’s reported 2011 first quarter EPS were 72% below last year and its revenues were 7% lower.

So why was Goldman stock up 2% in pre-market trading? It beat expectations. Specifically, Goldman had been expected to do much worse -- reporting 86% lower EPS to 81 cents a share and 20% lower revenues to $10.3 billion in the first quarter of 2011 -- compared to the  $5.59 a share on $12.8 billion in revenue it earned in the first quarter of 2010, according to Dow Jones Newswire. Its actual EPS were 93% better than expected and its reported revenues were 16% higher than expected. Goldman was also expected to take a charge against those first quarter earnings to account for the $5.5 billion Goldman will pay Warren Buffett to for his 2008 investment in its preferred stock -- the one that snared former McKinsey managing director, Raj Gupta, in an insider trading charge related to the Galleon Group.

Goldman's earnings are expected to be way down from where they were in the first quarter of 2010. Last year, Goldman earned and it's expected to report 86% lower EPS and 20% lower revenues in the first quarter of 2011, according to Dow Jones Newswire. Goldman is also expected to take a charge against those first quarter earnings to account for the $5.5 billion Goldman will pay Warren Buffett to for his 2008 investment in its preferred stock -- the one that snared former McKinsey managing director, Raj Gupta, in an insider trading charge related to a Galleon Group insider trading indictment.

If Goldman raises guidance in its conference call, its stock price will soar when the market opens. Moreover, even though Goldman's trading revenues -- specifically the ones from fixed income, currencies and commodities, were expected to be down from 2010's record results – they actually fell 28% which was better than the expected 50% plunge, investment banking and advisory revenues grew at a 5% rate. In theory, the record $2 trillion in cash that piled up on corporate balance sheets in 2010 could lead to a big boom in merger activity as companies use their cash and borrowing capacity to expand into emerging markets.

These “upside risks” make a short bet against Goldman pretty risky. Although it will be difficult for Goldman to achieve the record results it enjoyed before it decided to stop trading for its own account -- and betting against its clients. Its best hope now is to ramp up its advisory business. But succeeding there would depend on its ability to control what its clients do.

And that will be harder than what it used to do -- trading on what I call "insidery information" -- legal insider-like information about its clients -- to profit for its own account.

How to Play The Gap Between Chinese and U.S. Interest Rate Policy

The U.S. and China are the world’s two largest economies. So when they pursue radically different policies towards setting interest rates, investors should expect threats and opportunities.  At the core of the different interest rate policies is a fundamentally different concept of inflation and how to control it.  The U.S. ignores inflation that pains consumers – such as rising food and energy prices – and fears most deeply the inflation that cuts into corporate profits – rising wages. By contrast, Chinese leaders fear consumer inflation because they believe that if China's citizens can’t afford the basics of life, they will protest in the streets. 

With wages dropping in the U.S., the Fed is determined to keep interest rates near zero. By contrast, in China, the government is raising interest rates and bank reserve requirements -- four times in the last year or so -- to try to cut off the flow of debt that drives up prices. How can investors profit from these different policies? The best way for an American might be to open a savings account at Bank of China.

China's consumer inflation appears to be climbing. According to the New York Times, China's reported consumer price index rose 5.4% in March 2011, although food inflation there has been estimated at 14% while the price of gasoline there has risen 10% to $4.50 a gallon since the end of 2009. Meanwhile, real estate prices in China are 25 times the median income (about five times the comparable U.S. ratio) and keep rising -- an average Beijing apartment goes for $500,000.

China has taken several steps over the last year to try to curb inflation -- including raising interest rates and reserve requirements -- the amount of cash that banks have to set aside relative to their loan balances. And Monday it raised those reserve requirements again to 20.5%.

The U.S. does not take these consumer price increases into account when setting interest rates. Ben Bernanke sees inflation at a relatively modest 1.2% -- he does not take into account the $0.87 a gallon spike in gasoline prices over the last year when it comes to setting interest rates. With unit labor costs down 1.5% in 2010 and the median family income down 8.1% in the last decade, he has no fear of rising wages and by his definition of inflation, no need to raise interest rates to stop it. Moreover, with the unemployment rate still 8.8% and 13.5 million people looking for jobs, prospects are poor for higher wages in the U.S.

This raises an important question about whether interest rate increases actually control inflation. The short-answer in the case of China is that its efforts to control inflation have failed. But they might work in the longer term if they cut off the loose money that makes it possible for people to buy things that they otherwise could not afford. So far, China has been afraid of raising interest rates so much that. So far, China has been afraid of raising interest rates so much that they brake its 9.7% annual growth rate – a slowdown that could have nasty political side effects.


What is an investor to do? One obvious possibility is to put your money in a Chinese bank which you can do at Bank of China if you visit New York City or Los Angeles. Deposit rates there are 3.25% -- a far cry from the 0.52% you're earning now in a typical checking account. This could be a safe trade as long as the dollar and the yuan maintain a fairly stable relationship -- although the dollar has been weakening slightly relative to the yuan in the last year.

Another possibility is to buy commodities exchange traded funds (ETFs) which would let you take advantage of rising prices -- particularly for food-related commodities. Here's a menu of nine such ETFs that might be worth investigating. But if you invest in them -- be aware of the risk that commodities prices can go down fast. For example, in July 2008, the price of oil was $147 a barrel -- it ended that year at $33 thanks largely to the financial crisis that peaked that fall.

Regardless of the trajectory of these investment ideas, the differences in interest rate policies between the U.S. and China are likely to affect your net worth in the year ahead.

Why .02% 2011 Budget Cut Is Good News For Investors

The budget deal that kept the government from shutting down on April 9 reduced spending by next to nothing in U.S. budget terms. And that’s great news for investors in U.S. stocks. How so? A quick look across the pond is all it takes to answer that one. The UK is in aggressive budget balancing mode and all the cutting of its government spending is sending its economy in reverse.

And a shrinking economy is an awfully hard place for companies to beat earnings expectations. If the U.S. had passed meaningful budget cuts, they would have the same economic braking effect as they did in the UK. And thanks to bitter rifts within the Republican party as 2012 approaches, the Democratic leadership should have little trouble exploiting those divisions to keep the Republicans from derailing the economic recovery.

The budget deal that passed Thursday afternoon only reduced 2011's deficit by 0.02%. That's because the Congressional Budget Office (CBO) calculated that the budget reduction that was touted as being $38.5 billion of the $1.5 trillion 2011 deficit only amounts to $352 million in reduced cash outlays in 2011. To their credit, the 25% of Republicans who voted against the bill were doing so on the principle that this deal did nothing to reduce their cherished goal of cutting government spending -- couched as deficit reduction.

To understand the gap between the $38.5 billion advertised budget cut and the actual $352 million one, it helps to point out the distinction between budget authority -- an amount that many government departments could be authorized to spend over a multi-year time frame -- and check cutting. When a department gets ready to cut a check, Congress often does not authorize the spending -- and the CBO arrived at the $352 million by estimating how much the budget bill reduced the amount Congress had actually authorized that government departments would withdraw this year from the Treasury's General Fund (the government's checking account).

A look at what's happening in the UK suggests that budget cuts are bad for the economy. According to the New York Times, its deficit reduction plan is sending the UK's economy into the worst shape it's seen since the 1930s. How so? The UK's deficit is now 10% of its Gross Domestic Product (GDP) and its "top economic official," George Osborne, wants to reduce that deficit to 1.5% of GDP by 2015 through budget cuts, 75% of which will come from social programs. The result is that the UK is slashing its GDP growth forecasts from 2.4% to 1.7% as family income falls 2% and British retail sales tumbled 3.5% in March.

Why is the UK inflicting this pain on itself? It apparently believes that its interest rates are too high -- a belief not born out by reality since the UK's 10-year treasury rates are just a bit over Germany's 3.6% -- and that those high interest rates are holding back investment. Fortunately, the US does not suffer from high interest rates -- at 3.51% our 10 year rates are at near-record-low levels.

Thus there is no economic point at all to what Paul Ryan (R-Wisc.) calls deficit reduction -- actually a $4.5 trillion tax cut for the wealthiest Americans coupled with a $5.8 trillion cut to spending on Medicare and Medicaid, according to the Times. And fortunately for those who like having adults in charge, there is no political point -- beyond losing in 2012's Presidential election -- for Ryan's proposal.

That's because after forking over $23.8 trillion in government cash and guarantees to bail out Wall Street in 2008, there are plenty of Americans who are in no mood to give those same fat cats another $4.5 trillion in tax cuts while taking a big hit on their health care expenses that are already rising every year -- between 20% and 60% in 2011 according to the New York Times -- far faster rate than general inflation's 1.6%.

After enjoying a record year of $1.68 trillion in corporate profits and expectations of 17% 2011 earnings per share growth, investors ought to draw comfort from the realization that even unlimited corporate spending on political campaigns cannot overwhelm the common sense of  Americans -- many of whom will realize when they enter the voting booth in November 2012 that a plan that robs from the bottom 99% of Americans to further prop up the top 1% is not in their best interests. 

How to Play Peak Oil

Peak Oil, the idea that global oil production peaked out in 2006 at 70 million barrels a day, is pretty widely accepted as fact. If demand was dropping along with projected supply, there would not be as much of a problem. But at least one organization, the International Energy Agency (IEA), predicts that declining supply and rising demand from China means that the price of a barrel of oil will hit $135 by 2035. 

The dispute about peak oil comes from oil companies that believe that if we just allow offshore oil drilling, we can add significantly to global supply. But the IEA predicts that most of the rising Chinese demand for oil will be satisfied through increased production from Canada’s tar sands and increased production of natural gas liquids. Does this mean you should buy shares of the biggest suppliers of these unconventional energy sources?

To figure that out, it helps to look at the leading publicly traded providers of these energy sources. Specifically, we'll examine their historical performance and their market values relative to their earnings prospects. The goal is to figure out whether these companies could make good investments.

As far as tar sands go, the world's capital is the Canadian province of Alberta. It houses 173 billion recoverable barrels of tar sands worth $18.5 trillion at today's price of $107 a barrel. Recovering all those barrels causes tremendous environmental damage -- by tearing up the ground and spewing more CO2 into the environment. And as Alberta's tar sands market leader, Suncor Energy (SU), will get a big share of its profits.

Suncor's financial performance has been good but the stock is not cheap on a Price/Earnings to Growth basis. In the last year, sales spiked 38% to $35.7 billion while net income rose a whopping 169% to $2.8 billion. Suncor's PEG of 2.3 is way above the 1.0 I think is far -- on a P/E of 25.7 to earnings expected to grow 11.2% to 2.92 in 2012. But if that 2012 forecast is too modest -- Suncor's 2011 earnings grew 51% -- then the stock could be a great way to play peak oil.

Meanwhile, when it comes to natural gas liquids, the good news is that production is up 11% to 284 trillion cubic feet. Many of the major oil companies are NGL producers including BP (BP), Conoco Phillips (COP), and ExxonMobil (XOM). ExxonMobil produces 1.8 million barrels of NGL a day, BP produces 670,000 NGL barrels a day. and at 363,000 NGL barrels per day, Conoco is the smallest of the three.

But these stocks are not focused solely on NGL. For that I would look at Provident Energy (PVX), an Alberta-based NGL extractor and distributor. Its revenues rose 12% to $1.69 billion and its earnings were up 19-fold to $104 million in the last year. And at a PEG of 1.7 -- on a P/E of 24.4 and 14.3% earnings growth to $0.56 in 2012 -- the stock is not cheap.

But if you want to play peak oil, I would consider putting funds into Suncor and Provident.

Peter Cohan has no financial interest in the securities mentioned.

Koch Industries 3,667% Return on Its Tea Party Investment

Koch Industries has gotten a tremendous return on its investment in the Tea Party. As the details of the April 8 budget deal emerge, it's become clear that $1.65 billion of the $38.5 billion in budget cuts that kept the U.S. government hostage was a fraction of Koch's ransom payment.

After all, Koch is a $100 billion privately held refining, chemicals, plastics and textiles company, that has contributed at least $45 million to the Tea Party through various Political Action Committees. And Koch is not going to be satisfied until it has zeroed out the Environmental Protection Agency (EPA) budget so it can exercise what it believes is its right to pollute.

While the last-minute budget deal was vague on the details last week, it has become clearer who will pay the price for the Tea Party's electoral victory last November (TPM provides a list of all the cuts). According to the Wall Street Journal, the $38.5 billion deal includes a 16% cut in the EPA's budget, taking it down to $8.7 billion. Those cuts will make it harder for states to enforce environmental laws and includes the following initiatives that will gut the EPA:

• Cut $1 billion from programs to build sewage-treatment and drinking-water plants;
• Slash by 33%, or $149 million, a federal fund for buying land for environmental purposes; and 
• Reduce by 13%, or $49 million, programs related to climate change.

557 Million Reasons Why Koch Wants To Gut The EPA

Why is Koch eager to wipe out the EPA and why would it love to cut the $8.7 billion left in its budget? That's easy, Koch has an outstanding record when it comes to polluting -- including repeated spills from its oil pipelines and thwarted efforts to dump Dioxin -- the genetic-mutation-causing chemical in Agent Orange -- into a river in Florida. How so? In these three examples alone, the EPA has required Koch to pay $51.5 million in fines and $505 million in facilities upgrades:

• $1.5 million in EPA fines and $500 million in facilities upgrades. In 2009, the EPA announced that Koch would pay $1.5 million in fines and invest $500 million to add pollution control equipment to 12 plants in which the EPA found 680 violations of water, air, hazardous waste, emergency planning and preparedness laws.
• $30 million EPA fine for 300 oil spills. In January 2000, the EPA and the U.S. Justice Department required Koch to pay a $30 million fine and to spend $5 million on pipeline upgrades after 300 oil spills from Koch pipelines and facilities in six states -- Texas, Oklahoma, Kansas, Missouri, Louisiana and Alabama. Among the spills was one 100,000 gallon oil spill in Texas that "caused a 12-mile oil slick on Nueces Bay and Corpus Christi Bay."
• $20 million Justice Department settlement for benzene release. In late 2000, Koch faced 97 counts of covering up the illegal releases of 91 tons of benzene, a carcinogen, from its refinery in Corpus Christi. Koch agreed to settle the charges, that could have included $350 million in fines, in exchange for a guilty plea for falsifying documents, and a $20 million settlement.

Koch is also being stymied by the EPA in its efforts to dump cancer causing chemicals from one of its Florida toilet paper plants. After all, Georgia-Pacific wants to dump waste from one of its Florida plants into Florida's Saint John's River. And according to the Florida Independent, "Georgia-Pacific has long come under fire as one of the St. Johns River’s top point-source polluters." Moreover, it reports that Koch has not been able to build a pipeline to pollute that river even more with Dioxin -- the genetic-mutation-causing chemical in Agent Orange -- due to its war of words with the EPA.

Koch appears to be a very successful company. And it even has its own management philosophy -- dubbed Market Based Management (MBM). According to an interview with MBM's author, Charles Koch, between 1960 and 2009, Koch's book value rose 2,500-fold -- 17.1 times the 146-fold growth of the S&P 500. It's an impressive, if self-reported, performance.

And that performance seems to have given Koch the ability to delude itself big time. A key principle of MBM, according to Koch, is "integrity and compliance. Without them, we cannot create real value or survive as a company. We place integrity first. In addition, we strive for 10,000 percent compliance, which means 100 percent of employees fully complying 100 percent of the time with all environmental, health, safety and other applicable laws and regulations 100% compliance and 100% integrity."

In comparing Koch's record of violating environmental laws and paying record fines for these violations, I wonder how Koch would reconcile its words with its deeds.

But if its self-reported returns on investment are accurate, then it's pretty clear that Koch 3,667% return on its Tea Party investment so far is only the beginning. If it can zero out the EPA, or even cripple it enough to practice its unfettered right to pollute, it will have succeeded in achieving 10,000% compliance by eliminating the environmental laws the violation of which has cost it at least $51.5 million in fines and $505 million in pollution control investment.

If those laws go away, then it can keep doing what it has been doing and will have no legal limits on how much it can pollute. The only question then will be whether the Americans who live next to its polluting plants and pipelines will have any ability to stop what Koch can do in pursuit of its interests to profit and pollute.

Hedging Gas Price Spike: Should You Buy ExxonMobil or Valero?

Gas prices are skyrocketing – they’re up about 32% or 87 cents a gallon in the last year. Not only do they show no signs of abating, but there is little evidence that consumers are changing their driving habits. Back in 2008 when gasoline hit $4.11 a gallon, consumers started taking public transportation in droves after gasoline prices spiked 30 cents in a month.

So far, the shocking rise in gas prices has not led to a big driving cut back, according to the New York Times. This means that prices will probably surge over the 2008 record and raises the question of how investors can profit. Should they buy stock in an integrated oil producer like ExxonMobil (XOM) or a refiner like Valero (VLO)? The answer: ExxonMobil.

To pick which one, it helps to look at history and the future. To examine history, let's look at how the two stocks performed from January to July 2008, when oil prices spiked to $147 a barrel. For the future, we compare the Price Earnings (P/E) ratio of the two companies to their earnings growth rates. The one with the best historical performance and the lowest Price/Earnings to Growth (PEG) ratio should win this faceoff. As we'll see, the outcome is not completely obvious.

When it comes to historical performance, ExxonMobil held up better. ExxonMobil fell 7% between January and August 2008 from $86 to $80. During that same period, Valero plunged 57% from $70 to $30. I think the decline in both stocks during a time when the price of oil was rising is an important warning to investors that there can be a big disconnect between the price of oil and how equities react to its changes.

A quick comparison of the income statements of both companies during the first nine months of 2008 reveals that ExxonMobil put in a stronger performance. Valero's revenues were up 51% to $100.5 billion but its costs -- mostly oil -- were up 60% to $97.1 billion -- as a result its net income fell 55% to $2.1 billion. During that same period, ExxonMobil did better -- its revenues rose 37% to $393 billion while its costs climbed 37% to $324 billion -- resulting in a 29% net income pop to $37.4 billion.

This analysis suggests that during an environment of rapidly rising oil and gasoline prices, the profits and stock market value of a refiner are more at risk than those of an integrated energy company. That's because as prices at the pump rise, people cut back on consumption even though the price of oil going into the refinery remains high -- thus squeezing refinery margins. Meanwhile, an integrated energy company is more diversified -- and its profits are less volatile.

Despite its inferior performance in 2008, investors seem to be putting a greater value on Valero's shares than those of ExxonMobil. And Valero has the lowest PEG ratio of the two -- I think a PEG of 1.0 means a stock is fairly valued -- suggesting it's relatively cheap. Here's how:

• ExxonMobil 1.76 on a P/E of 13.7 with 7.8% earnings growth to $8.66 in 2012
• Valero 1.04 on a P/E of 17 with 16.4% earnings growth to $3.43 in 2012

There is, of course, risk in buying energy stocks now. The biggest risk is that the speculators that are driving up the price of oil could decide to take their profits. After all, those speculators control 81% of the trading volume on the futures exchange. Regulators could easily drive them out by requiring them to boost how much money they must set aside for each contract. And the settling of the conflict in Libya could be the catalyst for such an energy selloff.

I’d guess most of the spike from rising oil is reflected in the stock prices of both companies but ExxonMobil is the safer bet for now.Peter Cohan has no financial interest in Valero or ExxonMobil.

Is KB Home A Screaming Buy? Not Bloody Likely

KB Home (KBH) trades at 86% below its July 2005 high at the peak of the U.S. housing boom. With operations in all the overbuilt housing markets larded down with foreclosures – including California, Arizona, Nevada and Florida – it’s hard to imagine a company with worse prospects in the near- and medium-term.

In order to stomach the idea of swapping your cash for shares in KB Home, you’d have to believe that this company’s future is going to be much brighter than recent statistics suggest. But the odds of it running out of cash are higher than the chances for a quick turnaround.

In the quarter ending February 2011, KB Home suffered a 32% plunge in new home orders and a 28% decline in the number of homes it delivered after the April 2010 expiration of a government home-buying tax credit. Two pieces of good news at KB Home are that the average prices of its delivered homes rose by 4% to $206,000 and despite a $69 million loss in 2010, it had $736 million in cash available at the end of February 2011, which should be enough to cover the $324 million in debt it must repay in 2011.

But that cash cushion is wearing thin at an alarmingly rapid rate. For example, in November 2010, KB Home had $904 million in cash. So if it continues to burn through $168 million in cash a quarter -- it will run out of money in a little over a year. In theory KB Home could borrow more money to keep operating, but a recent analyst report suggests things are getting worse.

How so? Analysts at Credit Suisse are becoming less optimistic about KB Home. On Wednesday, it added a whopping $1.42 to its loss per share estimate for 2011 and reduced its expectations for 2012 EPS by 46% to $0.68.

There's not much reason for hope for a turnaround after that because of the level of foreclosures in the markets where KB Home builds new ones.  Overall, foreclosures in the U.S. were up 2% in 2010 to 2.9 million and the most rapid growth was in markets where KB Home has a presence -- including California +15%, Nevada +18%, and Arizona +31%.

It does not make sense to me that demand for new houses is going to rise as long as the number of foreclosures keeps growing. Moreover, with the possibility of a government shutdown looking likely beginning first thing Saturday morning, borrowers looking to get government-backed loans will be out of luck.

And compared to its peers, KB Home looks like a market laggard. Its stock has lost 29% of its value in the last year. By contrast Lennar Corp (LEN) is up 6%, Toll Brothers (TOL) is about the same as it was a year ago, and NVR (NVR) rose 9%. The entire group lags the S&P 500 -- which rose 12% in the last year. But KB Home is the homebuilders' weakest link.

It’s too soon to dip your toes in this equity’s choppy waters.

Why Koch Industries Wants A Government Shutdown

It’s looking like the U.S. government will shut down Saturday. If the shutdown lasts more than a few weeks, it could cost President Obama votes. How so? Because it could cut 1% off of 2011’s economic growth rate and if that slower growth continues into 2012 – especially when coupled with the $20 a barrel spike in the price of oil, that should cut another 1% off of economic growth -- Obama’s previously forecast 2012 popular majority could shrink.

Why is the government about to shut down? That’s easy, the Tea Party wants it to. Behind the Tea Party is Koch Industries, a $100 billion privately held refining, chemicals, plastics and textiles company, that has contributed at least $45 million to the Tea Party through various Political Action Committees. What Koch wants is an end to environmental regulation and that’s what it may take to pass a budget to get the U.S. government back.

I am not sure that Koch Industries cares about all the other stuff – wiping out funding for Planned Parenthood and so on. But I doubt that it could get enough political support for its End-the-EPA agenda without tying it into issues needed to attract voters who care about so-called social issues like abortion. It’s all part of Koch Chairman Charles Koch’s philosophy of Market Based Management (MBM): “creating real, sustainable value for customers, communities and Koch companies.”

The government shutdown is likely to create more losers than winners, as I posted Thursday. But according to the New York Times, if the government shutdown lasts for several weeks, it could cause a significant slow-down in economic growth during the quarter -- resulting in a 1 percentage point decline in GDP growth rate on a 14.2% drop in Federal spending, assuming that this year's possible shutdown lasts the same three weeks that 2005's did. With 2011 GDP growth previously predicted to be 3%, according to the IMF, the shutdown could slice it to 2%. If you consider that the $20 per barrel rise in oil prices since the beginning of the year would slice another 1% from GDP growth, we could be looking at 1% GDP growth in 2011.

Tea Party's Agenda: Right To Pollute Wrapped in an Anti-Abortion Taco Shell

The looming government shutdown is happening not because of the deficit -- the two sides are just a few billion apart on their budget reduction targets -- but on social issues. The social issues -- like defunding Planned Parenthood, impeding the implementation of health care reform, stopping an effort to end the for-profit education industry's abusive practices -- are the Tea Party bait needed to get its political support for the one issue that really concerns Koch -- unshackling itself from the Environmental Protection Agency (EPA).

Fortune reports that the pollution-boosting goals of those blocking a resolution of the budget showdown include the following:

• Impeding the EPA from regulating greenhouse gas emissions;
• Stopping the Interior Department from imposing new restrictions on surface mining near streams;
• Defunding a public database tracking injury reports in children's products; and
• Zeroing out funding for an EPA push to limit mercury emitted in cement production.

How does this fit with Koch's MBM philosophy? A big part of MBM is applying Koch's capabilities to new industries. According to an interview with Charles Koch, this led Koch to buy wood pulp fluff mills from Georgia-Pacific and eventually the entire company for $21 billion in 2005. In the same interview, Koch mentioned that he believes government intervention impedes U.S. competitiveness by creating new problems that require even more intervention.

This fits well with Koch's desire to gut the EPA. After all, Georgia-Pacific wants to dump waste from one of its Florida plants into Florida's Saint John's River. And according to the Florida Independent, "Georgia-Pacific has long come under fire as one of the St. Johns River’s top point-source polluters." Moreover, it reports that Koch has not been able to build a pipeline to pollute that river even more with Dioxin -- the genetic-mutation-causing chemical in Agent Orange -- due to its war of words with the EPA.

To me, it seems a bit selfish that Koch should be able to shut down the operations of the entire U.S. government just so it's free to pollute our environment. But thanks to the January 2011 U.S. Supreme Court's Citizens United ruling, there's nothing to stop Koch from spending as much as he wants on the company's cause.

And that strikes me as a questionable way to create "real, sustainable value."