With oil prices reaching record highs on an almost daily basis, it is no suprise that the IMF’s Speculation Playing “Significant Role” in Oil Price Surge was popular. You know this issue is getting serious when the Financial Times calls for a global oil summit.

Such a summit would have three objectives: to encourage energy efficiency, and so reduce future oil demand; to promote investment in new oil supplies; and to smooth the recycling of billions of dollars in oil revenues from producers back into consuming countries. All three tasks would be easier with international co-operation and there are enough shared interests to make a worthwhile deal possible.

Staying with energy, Freeedonia’ massive Industry Study World Biofuels Demand to Expand 20 percent Annually, drew interest, concluding that ethanol will dominate the industry for some time despite criticism that its is driving up food prices.

Research Recap Quote of the Week:

Maybe working longer is the best answer. After all, the retirement age was set at 65 in 1933, when average life expectancy was 63. With life expectancy today at 78 years, perhaps we should just plan to work until we’re 80.

S&P chief economist David Wyss’s proposed solution for Baby Boomer generation’s projected shortfall in retirement resources.

A new study for the Department of Energy concludes that the goal is technically feasible, but also identifies the many challenges that need to be overcome. Put simply it would require a major national commitment by business and government and a change to business as usual.

The DOE report “20 Percent Wind Energy by 2030”, identifies requirements to achieve this goal including reducing the cost of wind technologies, new transmission infrastructure, and enhancing domestic manufacturing capability. The report identifies opportunities for 7.6 cumulative gigatons of CO2 to be avoided by 2030, saving 825 million metric tons in 2030 and every year thereafter if wind energy achieves 20 percent of the nation’s electricity mix.

The analysis concludes that reaching 20 percent wind energy will require enhanced transmission infrastructure, streamlined siting and permitting regimes, improved reliability and operability of wind systems, and increased U.S. wind manufacturing capacity.

There are significant costs, challenges, and impacts associated with the 20% Wind Scenario presented in this report.

“There are also substantial positive impacts from wind power,” the report says.…”expansion on the scale and pace described in this chapter are not likely to be realized in a business-as-usual future. Achieving this scenario would involve a major national commitment to clean, domestic energy sources with minimal emissions of GHGs and other environmental pollutants.”

Specific challenges include:

• Investment in the nation’s transmission system so the power generated is delivered to urban centers that need the increased supply;
• Larger electric load balancing areas, in tandem with better regional planning, so that regions can depend on a diversity of generation sources, including wind power;
• Continued reduction in wind capital cost and improvement in turbine performance through technology advancement and improved manufacturing capabilities; and
• Addressing potential concerns about local siting, wildlife, and environmental issues within the context of generating electricity.

Other highlights of the report include:

• Annual installations need to increase more than threefold. Achieving 20 percent wind will require the number of annual turbine installations to increase from approximately 2000 in 2006 to almost 7000 in 2017.
• Costs of integrating intermittent wind power into the grid are modest. 20 percent wind can be reliably integrated into the grid for less than 0.5 cents per kWh.
• No material constraints currently exist. Although demand for copper, fiberglass and other raw materials will increase, achieving 20 percent wind is not limited by the availability of raw materials.
• Transmission challenges need to be addressed. Issues related to siting and cost allocation of new transmission lines to access the Nation’s best wind resources will need to be resolved in order to achieve 20 percent wind.

The reputation of goods produced in emerging markets had a rough ride in 2007. Not only have the various product recalls from China caused great media uproar, the rise in consumer concern over the environment has given a PR edge to companies focused on environmental sustainability. The 2008 issue of Deloitte’s annual Innovation in Emerging Markets study “explores how manufacturers from developed and developing countries view product safety, product quality and environmental standards in emerging markets and how they are managing their exposure to risk stemming from sourcing from these markets.”

The study starts by outlining some of the recalls that became media events. “It could be termed the year of the recall.”

From tainted toothpaste to contaminated dog food, 2007 saw scores of products recalled due to safety and quality issues.

The product recalls were mostly of goods produced by manufacturers in China. The Deloitte report give special attention to the developing attitude of Chinese executives. They find that, unsurprisingly, the recent events have emphasized the importance of product quality, safety and environmental concerns.

More than three-quarters of developed market executives thought it was very or somewhat likely their company would favor sourcing from markets with stricter standards and roughly two-thirds expected increased production in company-owned facilities.

Developed and developing country executives agreed that these actions undoubtedly mean higher operating costs. Interestingly, only about half of developed market executives thought they would be able to charge higher prices by adhering to higher
standards. In contrast more than two-thirds of developing market executives believed that companies meeting strict standards could command higher prices.

Fitch estimates total market losses from subprime mortgage assets at $400 billion, though estimates may be as high as $550 billion, depending on the method of calculation used.

Approximately 50% of these losses, $200-275 billion, are held by banks, with the remainder held by financial guarantors, insurance companies, asset managers and hedge funds.

As of May 2008, Fitch estimates disclosed losses by banks on subprime residential mortgage-backed securities (RMBS) or collateralised debt obligations referencing mortgage-backed securities (ABS-CDOs) to be $165bn, or 83% of the banks’ portion of the losses.

As a significant proportion of the losses have been disclosed, further ratings action arising from ABS‐CDO and subprime RMBS exposures is likely to be minimal.

“Subprime mortgage-related losses for the total market vary considerably depending on the methodology used,” says Krishnan Ramadurai, Managing Director in Fitch’s Financial Institutions Group. “Given the problems associated with methods of calculation based on ABX and TABX indices, we believe that Fitch’s internal loss estimate of $400billion is a more appropriate reflection of losses though they are also sensitive to assumptions made on underlying loss rates.”

“To the extent that institutions have effectively hedged their exposures with financially sound counterparties, these loss figures may be over-estimated,” says Gerry Rawcliffe, Managing Director and Group Credit Officer for Fitch’s Financial Institutions Group. “Nevertheless, for those institutions that did not hedge a sufficient portion of their super-senior exposures, mark-to-market losses on these residual exposures have been so large that their capital ratios have come under acute stress.”

The subprime market originated as much as $1.4 trillion of loans in the last three years, Fitch estimates.

Detailed calculations and analysis are available in Subprime Mortgage-Related Losses - A Moving Target.

Big Pharma’s failure to develop enough new blockbuster drugs is combining with other forces to drive fundamental changes in pharmaceutical research and development, according to Deloitte. Chief among these will be the emergence of “NewPharmaCos” concentrating on genotyped market segments. The companies may be startups or spinoffs of existing pharma companies, Deloitte says in a new report The Changing Face of R&D in the Future Pharmaceutical Landscape .

According to the report, current R&D programs focused on developing a small portfolio of high revenue blockbusters will evolve to R&D programs focused on high efficacy treatments developed for smaller patient populations based on specific genotypes. Such treatments, and their higher demonstrated efficacy, may ultimately have the potential for higher per treatment revenues.

Looking at the issue historically, the report lays out one of the problems faced by today’s pharmecutical firms: “In a classic Catch-22 situation, the more effective companies were at developing such mass market blockbusters, the more effective they needed to be in developing even larger revenue replacements, as patents on existing products expired and markets were lost to generics.”

R&D budgets have greatly increased since the late 1990s. “However, massive scale has not increased R&D productivity. FDA approvals of New Molecular Entities have at best remained steady, with only a handful of these approvals being truly innovative, first-inclass molecules. Despite recent attempts at outsourcing and other modes of increasing effeciency, results have been mixed, and a more “fundamental shift in the industry’s operating environment is under way.”

Yet, while individual companies have achieved performance improvements in different aspects of R&D, no significant industry-wide gain is evident.

Phenotyping of diseases is being replaced by an understanding of disease at the molecular level. Segmentation of patients based on observable characteristics is being replaced by segmentation based on genotype (with efficacy assessed by related biomarkers). This change cannot be underestimated, Deloitte says.

Technological advances are increasingly providing companies the opportunity to link treatments and efficacy to genetically homogeneous patient groups.

While typical blockbuster efficacy rates range from 35 - 75 percent, genotyped market segments and biomarker-assessed responses promise treatments with significantly higher efficacy rates, possibly approaching 100 percent.

“A critical determinant of financial success for these new entrants will be ownership of the genotype–biomarker combination that identifies high-efficacy treatments for a particular patient–disease state. Whether determined upfront, as in the case of Genentech’s Herceptin® or Imclone’s Erbitux®, or retroactively in the case of Sanofi’s Clipidogrel, this knowledge permits the evaluation of current and potential products to identify and fill possible treatment gaps. ”

Deloitte expects the future makeup of pharmecutical R&D to include,

• R&D strategies that support the assembly of treatment portfolios for the entire disease life cycle
• Virtual, disease-specific R&D networks
• Virtual R&D processes with significant outsourcing to maximize flexibility and manage development risk
• Focused R&D programs based on genotyped patients/subjects and biomarkers
• Partnering and collaborative ventures to access disease knowledge communities.

Social media sites are changing the way companies market in most American industries. For financial services, the change might be even more dramatic. Forrester has issued a new subscription-only report detailing the many possibilities for the industry.

A number of websites have gone beyond using peer-to-peer websites simply for marketing purposes, by taking advantage of the new web formats to provide new service products.

These products also serve as a powerful source of brand differentiation. “The point,” according to the report, “is that in a commodity industry, small service differentiators will make or break customer loyalty and advocacy.”

Bank of America, ING DIRECT, Royal Bank of Canada and Wells Fargo have noticed the consumer need for -and differentiating power of- social media and have started to experiment.

Customers of banks are more likely to engage with social media than are customers of investment firms. Bank of America, Capital One and Citibank have the most engaged customers, with roughly one-third of their customers stating that they create and share content online, according to Forrester.

Bank of America’s investment customers are the most engaged in that category and E*TRADE is the only other institution consistently above average.

Forrester’s report, Disruption Looms for Financial Services, includes recommendations for how banks can best exploit social media.

S&P forecasts a 1.7% rise in advertising revenues for the current year, including search engine advertising.

“The radio, newspaper, magazine, and TV segments continue to gradually lose share of total ad spending, propelling asset portfolio restructuring by media firms,” S&P says. “The majority of those that underwent LBOs over the past three years are laboring under onerous debt burdens that were based on expectations of continuous liquidity availability.”

We expect that this will result in another year of media and entertainment downgrades outnumbering upgrades.

Traditional media sectors continue to lose their market share to online advertisements. Print media companies in particular are facing critical questions as to their long term viability. They are not alone in their circumstances, however. Concern over a major Screen Actor’s Guild strike combines with the overall health of the economy to make for a generally negative prognosis for growth of traditional media.

Other key issues addressed in the report:

• Will Political Advertising Save TV Station Groups From Declining Revenues In 2008?
• Radio Station Groups: National Advertising Feels Economic Pressure
• Internet Advertising Continues Its Growth Streak
• Magazines Are Still Trying To Turn The Page On High Credit Risk
• Newspaper Declines Affect Both Investment-Grade And High-Yield Credits

Climate Counts encourages shoppers to patronize these companies, which scored highest in their respective sectors. But they should stay away from Wendy’s, Darden’s Red Lobster, YUM Brands‘ Pizza Huts, Burger King and Jones Apparel, which all earned a score of zero on Climate Counts’ scale.

Climate Counts has updated its Scorecard, first issued last June. “The new Scorecard shows a real shift towards greater climate commitment across most industry sectors — with 84% of scored companies improving their Climate Counts scores. Looking at the companies that showed the most improvement—Google, Levi Strauss and Anheuser-Busch—shows the diverse kinds of great American companies committed to paying attention to global climate change.”

The average overall Climate Counts score jumped 22% to 39 (from 30). That number, 39 out of 100, also shows that there is still a lot of work to do.

Climate Counts uses a 0-to-100 point scale and 22 criteria to determine if companies have:

• MEASURED their climate “footprint”
• REDUCED their impact on global warming
• SUPPORTED (or suggest intent to block) progressive climate legislation
• Publicly DISCLOSED their climate actions clearly and comprehensively

Climate Counts believes the Scorecard motivates both companies and consumers to step-up their efforts on climate change.

The full interactive Scorecard is available here.

The status quo increasingly looks like a precarious option.

The report examines both global trends and the state of individual country’s transportation networks. The report cites five keydevelopments:

• The globalizing economy concentrates transportation hubs at a shrinking number of international gateway centers, where airports, ports, and road systems become overloaded bottlenecks.
• New global pathways simultaneously bypass secondary and tertiary regions, changing their relevence in transport schemes.
• India and China are working on their transportation frameworks in a manner that they know will produce an unnaceptably large carbon footprint.
• America’s fast growing sunbelt metropolitan areas are victims of fragmented planning and face “daunting challenges” in upgrading their transportation schemes.
• The housing downturn is also putting a dent in the U.S. state and local government budgets as slower home sales translate into lower permitting fees, real estate transfers, and taxes.”

Interestingly, current trends are putting more power in the hands of national governments, as local plans take a back seat to larger transportation infrastructure plans.

Urban density has proved to be an ever-increasing problem. In China, for instance, the urban population grew by amounts greater than France’s total population in just three years.

In the US, meanwhile, a continued deterioration of infrastructure would create significant drags on the economy and on the quality of life, the report says. Substantially higher gas taxes and congestion pricing may be needed to deal with the problem, as spending on infrastructure as a percentage of GDP has declined:

The report also predicts Congress will lift the ban on toll networks on interstate highways.

“Current valuations in the market,” according to the report based on a panel discussion of legal, advisory and financial experts , “are not conducive for sellers looking for attractive pricing for the intrinsic value of their franchises, and buyers may be unwilling to pay large premiums, given further uncertainty.”

Acquisitions of parts of companies are more likely than full scale takeovers this year: “Some organizations will need to raise capital, and so rather than sell the entire institution, they will sell off pieces that are not core but may, for the right buyer, command a premium price, or at least free up capital.”

Financial services companies will most likely be returning to their core operations.

“Companies [are] evaluating noncore operations, not only in terms of risk management, but also in terms of cost of capital and expense control. These considerations could generate consolidation-type transactions in certain sectors.”

Another potential source of significant M&A activity that is particularly ripe this year is “where there is a prior vested interest” in the target company. Similarly, “potential rescue activity in the bond insurer area” was considered as a possibility.

In general, foreign firms currently view US financial firms as potentially attractive investments. Interestingly, “many of the Japanese banks have indicated they’re willing to help out Wall Street firms. Much of the interest will depend on how long favorable exchange rates persist, coupled with their minimal preexisting U.S. exposure. That should prove to be a significant advantage over a lot of domestic investors going forward.”