January 8, 2008

Seven Businesses You Can Start Tomorrow

When her husband lost his job in 2002, Christine DeLuca rented out two of the beds in their Woodstock, Vt., home. She ran the makeshift bed and breakfast (and ate into their savings) for a few years before upgrading to a larger house on a farm in nearby Quechee. Open on weekends since August, the Inn at Clearwater Pond, with four rooms and an adjoining cottage, has pulled in roughly $8,000 a month in revenue.

"I didn't know a thing about running a bed and breakfast," says DeLuca. "But [it] came very naturally to me because I love to entertain and have people in my home." DeLuca aims to triple those revenues by operating at full capacity (the Inn is at 50% now) and having guests during the week.

You don't need a fancy pedigree or specialized set of skills to launch a business. Some start-ups require more capital than others, of course, and all companies demand care and feeding. But if you can muster the courage, do a bit of research and secure a tax identification number (so Uncle Sam can take his cut), you can be your own boss.

Low-tech ventures that work best tend to target a devoted customer base and offer an easy-to-grasp product or service. Take dog walking (as in, walking dogs).

A former Unisys call center representative who went back to college in his late 30s, Kevin Meadows started walking dogs part-time while attending St. Edwards University in Austin, Texas. A friend told him about a stockbroker in San Francisco who quit his job to start a dog-walking service. Rumor had it the guy made six figures carting dogs on a flat-bed truck to a park so they could run around for a few hours a day.

Now 41, Meadows hasn't bought a flat-bed, but he's making money. Austin Dog Walkers handles 20 to 30 pooches a day; Meadows piles six in his sport utility vehicle and the rest go with two other walkers, each of whom cover a specific part of the city. Daily revenues: about $450. Out of that, Meadows pays his two contractors 80% of the revenue they generate. Gas eats up $700 to $800 a month, but advertising costs are minimal--though Meadows did take a course in animal first aid. "Anything you can do to give people confidence that you're trustworthy is important," he says. Estimated pretax income this year: about $60,000.

Keri Cooper, a corporate-event manager in Seattle, went after another fanatical group of customers: anxious brides and grooms (and the parents who write the checks). "I was doing some soul searching, so I just started coordinating a few weddings on the side," she says.

The demand for these services is breathtaking. Wedding consultants charge $1,000 to $20,000 per event, depending on location and breadth of services. The best clear $100,000 a year.

To drum up business, Cooper mails clients a formal, mock wedding invitation when she schedules an introductory meeting. She now coordinates 20 weddings per year. "More than that and I can’t give enough time to my clients," she says. Cooper charges between $1,600 and $10,000 per event. Three-year-old company Bliss Events now nets between $40,000 and $70,000 a year.

While a business may look quick and easy to start, profits might be a long time coming. Just ask Kimberly Raymond, who decided a year ago to quit her soul-sapping sales job to start her own personal concierge service in Washington, D.C.

"I got started in day--I'm not kidding," she says. "I decided on a bike ride that [this] was the right idea. Instead of heading home, I turned around and went over to my friend's house. She became my first client."

To her credit, Raymond chose a growing industry. "Everybody is trying to squeeze 36 hours into a 24 hour day," says Katherine Giovanni, founder of International Concierge and Errand Association, which has 600 members in 20 countries, up from 20 members a decade ago.

But Raymond's hair-pin turn brought pain. While start-up costs were minimal--Web site design (a few hundred bucks), accountant ($400), fliers and business cards ($200), her new business is still under water. After 13 months, Raymond's 12 clients have only yielded $25,000 in revenues--far short of her $33,000 in living expenses. She fills the gap, in part, with $5,000 in credit card debt, now at a low 10% interest rate.

"It's been a really challenging year, financially," she says. "I'm thinking of spinning off into event management."

Prosperity And Peace In The Middle East

It would be easy to overlook the economic importance of President Bush's weeklong excursion through the Middle East, which begins Wednesday.

When he touches down in Israel, his first stop on the tour, the first order of business will be to continue negotiations for Palestinian statehood. For the well rehersed security reasons, the president is also looking to reaffirm ties with strategic allies in the region, as well as playing the international statesman.

But make no mistake--"from an economic standpoint, [the trip] is extremely important," says Daeman Harris, who oversees the U.S. Chamber of Commerce's Middle East and Africa division. As the U.S. economy stumbles, crude oil fetches $100 a barrel and battered American banks sell billion-dollar stakes to foreign governments, the Bush administration wants to make sure the U.S. is engaged in the pockets of the Middle East that are flourishing financially.

The president has plenty of those destinations on his itinerary, including Kuwait, Bahrain, the United Arab Emirates and Saudi Arabia, each of which has uniquely affected U.S. business in recent years. Kuwait and Abu Dhabi (in the UAE) operate two of the world's largest government-owned investment funds. Bahrain has a newish free trade agreement with the U.S. Dubai (also in the UAE) and has a sizeable stake in the Nasdaq Stock Market. And Saudi Arabia is the world's largest oil producer.

Three economic issues are likely to grab headlines. First will be trade and foreign investment. While new free trade agreements are a dead issue until at least 2009 (Congress will get in the way), the Middle East is increasingly becoming the U.S. export and investment destination. In 2003, the administration began an initiative to boost trade in the region. It has brokered deals with Bahrain and Oman and started negotiations with UAE, a hotspot for U.S. exports.

Bush wants to make sure these ties are binding, and he'll look to build upon recent progress. Last month, Bahrain hosted a first-ever forum between the U.S. and the Gulf Cooperation Council, a group of six countries on the Arabian Peninsula, to promote investment in the region, where, according to the Treasury Department, U.S. foreign direct investment increased by 57% to $25.9 billion from 2000 to 2006.

James Godec, chairman and chief executive of the U.S.-Bahrain Business Council, says the idea is for the forum to become a Davos-like economic summit for the Gulf region.

Another issue is the growing influence of "sovereign wealth funds" that are becoming a hallmark of foreign government investment from countries in Asia and the Middle East. Just six weeks ago, the largest of these funds, the $900 billion Abu Dhabi Investment Authority, purchased a $7.5 billion stake in Citigroup, still reeling from exposure to the subprime mess in the U.S.

Kuwait has a fund worth an estimated $213 billion, and Saudi Arabia is reportedly launching a fund that would be larger than Abu Dhabi's.

The opaqueness of such funds has led suspicious souls in the U.S. to speculate the foreign governments will use this newfound economic muscle for political leverage. Nonetheless, don't expect Bush to try to discourage it, says Edwin Truman, a senior fellow at the Peterson Institute for International Economics and a former assistant secretary for international affairs in the Treasury Department.

"Politicians like to say 'yes.' They don't like to say 'no,' " he says. Because it is U.S. policy to welcome foreign investment, expect the president to encourage Kuwait, Abu Dhabi and Saudi Arabia to develop a set of best investment practices under the guise of the International Monetary Fund.

Truman says it might behoove Bush to educate his counterparts about the realities of U.S. politics--Congress also has a say in foreign investment, as evidenced by the outrage produced on Capitol Hill after the administration approved the Dubai Port Authority's takeover of operations at some U.S. ports two years ago, a deal subsequently scuttled by Congress.

The third issue is the rising price of oil--but don't look for the president to do anything about it. The Organization of Petroleum Exporting Countries next meets Feb. 1, when the group will decide whether to boost supply to lower prices.

It would be politically foolish for Bush to push the issue with OPEC members, which include Kuwait, Saudia Arabia and the UAE. For one thing, he would not want to appear to bear any responsibility for the price of oil. In addition, he doesn't want to be seen going hat in hand to OPEC, asking for price cuts. Markets, the president maintained as recently as Friday, control oil prices.

He is, though, likely to hear from his hosts about the market's control over the price of the dollar, to which oil producers in the region peg their currencies, and whose 30% trade-weighted decline in the past five years is putting inflationary pressure on domestic economies.

Bush returns from his whirlwind tour Jan. 16. He's then got less than two weeks to prepare for his final State of the Union address on Jan. 28. He'll try to reassure the country that the current economic malaise is not as bad as it seems. He'll say that the weak dollar is boosting exports and that the administration is trying to encourage trade, despite the efforts of protectionists in Congress. And with a visit to the Middle East just behind him, he'll have some fresh examples upon which to build his case.

Obama, Huckabee Need To Hold Leads In N.H.

Despite opinion polls suggesting that the two campaigns had tightened in the final days, Sen. Barack Obama, D.-Ill., and former Arkansas Gov. Mike Huckabee won the Democratic and Republican Iowa caucuses, respectively, by clear margins:

Democratic outcome : On the Democratic side, Obama secured 37.6% of the final vote, compared with 29.7% for former Sen. John Edwards, D.-N.C., and 29.5% for Sen. Hillary Clinton, D.-N.Y., the national front-runner.

Republican results: Among the Republicans, Huckabee took 34.3% of votes cast, easily defeating former Massachusetts Gov. Mitt Romney, who won 25.3%, while former Sen. Fred Thompson, R.-Tenn., and Sen. John McCain, R.-Ariz., were essentially tied for third place with approximately 13% of the vote. Former New York Mayor Rudolph Giuliani, by contrast, finished sixth with 3.5% of the vote, albeit in a state which he essentially ignored.

Obama and Huckabee appear to have benefited from historically high turnout levels (especially on the Democratic side) and particular sources of support that will be challenging to duplicate in upcoming state primaries:

--Obama's support was concentrated in the youngest section of the electorate--those under 30--where exit polls imply that he took nearly six in 10.

--Huckabee's base was among white evangelical Christians. Again, a strikingly high 60% of all Republican caucus attendees were willing to accept such a designation, and almost half of evangelicals backed the former governor.

--Romney's Mormon religion may have been a major handicap in Iowa.

The Iowa result will have the greatest impact on the Democratic party's nomination battle:

Obama challenges Clinton. Obama's triumph offers him the prospect of momentum entering New Hampshire--which he can leverage, crucially, with deep financial resources and a strong campaign organization. It would be very surprising if he did not secure a major bounce in New Hampshire from the publicity that his Iowa win generates. Moreover, with only five days until the New Hampshire ballot, that surge in support is unlikely to fade.

However, if Obama is to topple Clinton, he needs to at least run her a very close second in New Hampshire, if not defeat her again. If he falls short there, then the Iowa effect will have been eclipsed by the time that the larger states enter the primary picture on Feb. 5. Nevertheless, Obama appears likely to transform the race into a pitched two-person battle throughout the course of January and into early February.

Edwards' fading bid. Edwards must come in second in New Hampshire to remain credible moving forward, especially in the Democrats' South Carolina primary on Jan. 26, which is now unambiguously a"must-win" prospect for him. However, the chances are that Edwards will place third in New Hampshire, in effect bringing his bid to a close.

The Iowa result complicates, rather than clarifies, the Republican race:

Pressure on Romney. The outcome raises the stakes in New Hampshire for Romney. Although Huckabee will enjoy a much more modest bounce there among Republican voters than Obama can expect among Democrats, it would be surprising if there were no impact at all. Were Romney to finish behind Huckabee again in New Hampshire, the effect on his campaign would be disastrous. However, Romney has been fortunate in three respects:

--The media is likely to regard Obama's win (and Clinton's third-place finish) as the most important "Iowa story," and this will moderate the beneficial effect that Huckabee's victory in the Republican caucuses will have on the New Hampshire primary contest.

--Huckabee does not have the financial resources (or the time to raise them) to boost his momentum in New Hampshire with new, paid television advertising.

--Finally, Romney would have been more badly damaged if McCain--his main competition in New Hampshire--had secured a strong third-place finish in Iowa, instead of virtually tying with Thompson.

EADS Investors Bail Out

LONDON -

European Aeronautic Defense and Space, parent company of Airbus and main rival to Boeing, has apparently enjoyed strong civil aircraft orders in 2007 despite a year of bad press and monster delays. But 2008 is set to be an entirely different matter, and on Monday investors deserted the company's stock as analysts warned of cloudy skies for the aerospace industry.
Shares in European Aeronautic Defense and Space tumbled 1.28 euros, or 6.2%, to 19.47 euros, during afternoon trading in Paris. Deutsche Bank analyst Benjamin Fidler downgraded the stock to "Sell" from "Hold" on Monday, citing a likely fall in orders for 2008 as aircraft demand succumbs to the weaker global economic environment. Boeing, meanwhile, lost 1.5%, or $1.32, falling to $84.50 in early New York trading.

EADS shares have fallen 20.5% over the past six months, with the price kept under pressure from heavy financial losses, mounting delays to its A400 military transport project and an investigation into alleged insider trading among senior management and top shareholders.

But orders for Airbus aircraft such as the double-decker A380 have poured in over the past year, with Middle Eastern airlines like Emirates and Qatar Airways spending tens of billions of dollars to beef up their fleets. EADS is reportedly predicting record orders close to Boeing figure of 1,413.

"There has clearly been quite a big order frenzy from the Middle East, Asia and low-cost carriers," said Zafar Khan, analyst with Societe Generale. "The guys who are largely absent are some of the European flag-carriers and the U.S. companies."

Although the oil-rich Middle East is more flush with cash than its slowing counterparts in the West, Khan argued that the region's frenzied ordering last year would mean an inevitable reduction in demand for 2008. And with the credit crisis and the high price of oil hurting the wider sector, it looks like Airbus' winning order streak will not last into next year.

According to Deutsche Bank's Fidler, weaker demand and slower global economic growth prospects could make 2008 the turning point for sentiment towards the commercial aerospace sector. He recommended safer plays in the defense industry such as BAE Systems, Thales and Zodiac.

Starbucks Investors Unfazed By McDonald's

Investors didn't seem scared Monday by the threat McDonald's poses to Starbucks.
Shares of the pricey coffee house chain jumped 1.5%, or 27 cents, to close at $18.38 despite news that the fast-food leviathan will add a coffee bar to every one of its American restaurants. Starbucks also got a lift from a Friedman, Billings Ramsey report that its shares were undervalued.

After trading ended, the Seattle-based company announced that its chairman and founder Howard Schultz was returning as its chief executive, pushing shares up 8.7%, or $1.60, to $19.98, in after-hours trading. Schultz comes back to lead a major restructuring initiative.

Friedman analyst Howard Penney said that if the company were broken apart, its U.S. operation alone would be worth $18 per share. Since the stock is now trading at about that price, Penney said investors are essentially "getting the high-margin global consumer products group and Starbucks international division for free."

Starbucks shares traded at $36 a year ago, so the current price represents a substantial decline, due to falling foot traffic, price increases and fears of a slowing economy. But a published report that McDonald’s is planning to expand into the gourmet-coffee market and directly compete with Starbucks seemed to cause little concern.

According to Ragen Macknzie analyst John O’Brien, the news that there would be baristas working under the golden arches, published by the Wall Street Journal, basically rehashed information that was leaked to the market several months ago.

“Investors should be paying more attention to what’s going on internally to Starbucks costs rather that outside competition,” O’Brien said.

O’Brien also pointed out that although McDonald’s anticipates its new venture will contribute $1 billion to its annual sales, it will cost the company $1.4 billion to make the $100,000 investment in each of the planned 14,000 locations in the United States. Furthermore, O’Brien noted that the projected sales increase did not specify coffee, suggesting that the company expects consumers will purchase something else with their latte.

In 2006, McDonald’s tallied $21.6 billion in sales, and analysts expect $22.9 billion for 2007. Shares of the Oak Brook, Ill.-based fast-food chain finished the trading day up 1.7%, or 98 cents, to $58.03.

At their current prices, investors are valuing the two chains equally. McDonald's is trading at 18.0 times its expected 2008 earnings, while Starbucks fetches a multiple of 17.7.

Earnings Surge For Celgene

Celgene is on the right meds.
On Monday, shares of biotech firm Celgene ticked up 1.7%, or 84 cents, to close at $50.49 after it announced late Sunday that it expects its 2007 earnings to double on the spiking sales of its blood cancer drug Revlimid.

The company also predicts that the product will drive earnings throughout 2008.


Celgene, based in Summit, N.J., said earnings will likely double to $1.05 per share on a 50% jump in sales to $1.4 billion. The results come on the back of a more than 140% increase of Revlimid sales, to between $770 million and $775 million.

During the fourth quarter alone, Revlimid sales rose more than 95% to between $240 million and $245 million.

Celgene now expects its 2008 earnings to rise 45% to between $1.50 and $1.55 per share on a 30% increase in sales to approximately $1.8 billion. Revlimid sales are also expected to rise 60% to $1.25 billion.

Analysts polled by Thomson Financial expect 2007 earnings of $1.05 per share on sales of $1.37 billion and 2008 earnings of $1.55 per share on sales of $2.04 billion.

"Celgene remains biotech's best big-cap growth story, and today's strong guidance should alleviate any investor concerns about a possible Revlimid sales slowdown," Friedman Billings Ramsey analyst Jim Reddoch said.

Celgene has become one of the largest biotech companies--the fifth-biggest by market capitalization and the seventh by total sales in the U.S.--due to the success of its potent and pricey treatments for multiple myeloma, a blood-and-bone-marrow cancer, which together generated more than $300 million in sales in the most recent quarter.

Revlimid is now Celgene's top-selling drug, beating out Thalomid. Revlimid is also the third-fastest oncology drug ever to reach $1 billion in cumulative sales.

Thalomid is a brand name for the drug thalidomide, which was linked to birth defects a half-century ago when used as an anti-nausea drug.

Revlimid, Celgene's second biggest-selling drug, is basically an improved version of Thalomid. It is also used to treat multiple myeloma, but it was approved first for a rare blood disorder, a version of a set of diseases called myelodysplastic syndromes where part of a particular genetic chromosome is deleted.

Revlimid competes with Millennium Pharmaceuticals Velcade, which is also approved to treat a type of blood cancer. Wall Street has taken a more cautious outlook on that drug, though Cambridge, Mass.-based Millennium expects to turn a profit in 2008 on a 20% to 30% increase in Velcade sales.

Meanwhile, Celgene is adding another blood cancer treatment to its offering with the $2.9 billion acquisition of Boulder, Colo.-based Pharmion and its drug Vidaza.

Sales Shortfall Beaches ShoreTel

ShoreTel was a washout with investors Monday.
Shares of the Internet switch maker plummeted 54.0%, or $7.06, to close at $6.02 on Monday, after it announced its fiscal second-quarter sales would be lower than expected.

The Sunnyvale, Calif.-based company reported preliminary results for the quarter ending Dec. 31. It forecasts sales between $29.7 million and $30.7 million, down from an earlier projection of $32 million to $35 million. Analysts polled by Thomson Financial expect revenue of $34 million.

John W. Combs, chief executive officer of ShoreTel, said that although the company had its second-highest revenue quarter in company history, it still “fell short of expectations.” “Our preliminary review indicates that sales to existing customers grew during the quarter, however, sales to new customers declined,” Combs said.

ShoreTel expects to announce second-quarter results after the bell on Jan. 29.

Tim Long, an analyst at Banc of America, lowered his price target on the stock to $9 from $17, but maintained his "neutral" rating.

"We are surprised by ShoreTel's December quarter shortfall considering the company's growing distribution footprint and improving brand equity post its initial public offering," Long said.

Long said a downturn in the U.S. economy may be to blame for ShoreTel’s troubles; roughly 95% of ShoreTel's sales base is domestic.

The sales weakness may continue into the third quarter, Long said. He lowered his forecasts for the quarter to a profit of 5 cents per share on sales of $31.9 million, compared with a consensus estimate of 8 cents per share profit on revenue of $36.4 million.

Alcoa: Aluminum Sliding

With declines in the manufacturing and housing sectors aluminum demand is taking a beating–and so are aluminum producers like Alcoa.

On Monday Alcoa, the world’s third-largest producer of aluminum, saw its shares tumble 5.1%, or $1.76, to $33.11 at the close after a Credit Suisse analyst lowered his estimate due to headwinds in the sector.

Credit Suisse analyst David Gagliano lowered his profit outlook for the aluminum company because of a decline in aluminum prices, adverse currency and energy price changes, including the fall of the U.S. dollar compared to other currencies such as the Canadian dollar and the euro and the high cost of natural gas, and weakness in some downstream markets.

Aluminum demand is linked to manufacturing and housing demand. The Institute for Supply Management reported last week that its index of U.S. manufacturing activity contracted in December following 10 consecutive months of expansion. The same day the Commerce Department released U.S. construction spending data during November inched up 0.1%, up from a revised 0.4% decline in October, as educational and highway construction helped offset the continuing decline in residential construction.

Gagliano had expected aluminum prices during the September to November period of $1.15 per pound. The actual price for the period was $1.12. Gagliano now expects Alcoa to report fourth-quarter earnings of 38 cents per share, down from his previous estimate of 65 cents, and full-year earnings of $2.48 per share, down from $2.75.

Alcoa is expected to report fourth quarter and full year earnings on Wednesday.

Last month, Alcoa announced it would sell its consumer and packaging business to New Zealand’s Rank Group for $2.7 billion. The transaction will include the sell-off of the Reynolds Wrap foil brand.

Amir Arif, an analyst at Friedman, Billings & Ramsey, lowered his fourth-quarter and full-year commodity outlook on Monday because of a forecasted slowdown in merger and acquisition activity and an increase in supply which will cause inventory for most base metals to build. “With less impact from economic outlooks and great impact from currency weakness and investment demand, under most scenarios, the precious metals should outperform base metals,” Arif said.

Arif lowered Alcoa’s earnings per share outlook for the fourth-quarter to 42 cents per share from 64 cents per share, 3 cents above the consensus estimate of 39 cents per share. He also lowered Century Aluminum fourth-quarter outlook to 97 cents per share, down from $1.17 per share, 5 cents below the consensus estimate.

Kaiser Aluminum shares slid 2.3%, or $1.70, to $73.00 at the close on Monday, while Empire Aluminum shares tumbled 2.9%, or 12 cents, to $4.02.

Watching YouTube on TV: Matsushita Enters Picture

HONG KONG -

As YouTube becomes an ever more popular pastime, major television makers are scrambling to add Internet capabilities to their newest TV models.
Matsushita Electric Industrial Co., the world's biggest plasma maker, has lately teamed up with Google to launch new plasma television series that allows users to search and watch videos from YouTube as well as to share and view photos from the online Picasa Web Albums.

At the 2008 International Consumer Electronics Show in Las Vegas, Matsushita, which produces Panasonic-branded products, unveiled the latest Panasonic VIERA PZ850 line of plasma Internet-connected high-definition television sets, which will be available to consumers this spring in the United States.

Toshihiro Sakamoto, president of Panasonic AVC Networks Co., said, "This is the first time mainstream consumers will be able to easily enjoy YouTube videos from the living room with the enhanced quality of a fully integrated widescreen TV experience."

Google and YouTube will provide Matsushita with special servers for transmitting high-quality images for large-screen TVs. The latest Matsushita Net-enabled TVs will allow users to click into the YouTube and Picasa Web sites by pressing a button on the remote control.

Besides sales and marketing, Matsushita will also be responsible for the development of global copyright management systems for online videos from around the world, before deciding whether to sell the televisions outside the United States as well, according to a report from Nikkei News.

Sony Pictures Television, a TV content provider that is part of Sony Corp., also announced on Monday the debut of the first of several planned YouTube Brand Channels, set to deliver abbreviated versions of popular television programming as well as (eventually) original content. Last July, Apple launched a set-top box that transmits YouTube video clips wirelessly to big-screen TVs.

The partnership with Google is the latest move by Matsushita to boost the sales of its plasma TVs, which have been facing stiff competition from liquid-crystal display models. Osaka-based Matsushita has more than a 30% share of the plasma TV market, but the overall share of plasma in the flat-panel TV market has been shrinking relative to liquid-crystal display. LCD television shipments are estimated nearly to double by 2011 from this year, whereas plasma television sales are projected to decline by 1% in value terms, leaving their volume at just one-eighth the volume of LCD shipments, according to Texas-based research firm DisplaySearch,

Another Japanese rival of Matsushita, Fujitsu, said in late December that it would stop producing plasma televisions at the end of March this year because they are no longer profitable.

To expand its LCD TV sales, Matsushita has allied with Canon and Hitachi to develop the latest in LCD technology. It has agreed to take up to 24.9% of the shares of Hitachi Displays Co., a wholly owned subsidiary of Hitachi engaged in small and medium-sized LCD panel-related businesses, by March 31, 2008.

Matsushita shares closed down 1.14%, at 2,165 yen ($19.85), on the Tokyo market on Tuesday.

Banks' Subprime New Year

It's a brand new year, but the same mess of troubles for big U.S. banks, as the credit crunch continues to plague lenders.
On the first business day of 2008, Cleveland's National City slashed its dividend in half, shut down more mortgage operations and said it was going to fire 900 more people, all "to help meet the challenges ahead, and to continue as a strong competitor in the financial services industry," says Chief Executive Peter Raskind.

National City has struggled with rising credit costs and a mortgage business in rapid decline. Like many other banks, both on Wall Street and Main Street, it's been forced to shore up capital eroded by losses. The bank will issue more securities to boost its regulatory capital levels.

The moves come as investors are monitoring the situation at Citigroup, which is also likely to slash its dividend. Thousands of job cuts are likely in coming weeks--by some estimates, they could total 5% to 10% of Citigroup's 320,000 workforce.

Citi has been pummeled by the troubles in the credit markets, via its exposure to mortgage derivatives held on its trading books, mortgage securities held in once off-balance sheet entities, and rising credit costs in its subprime lending division.

In November, the bank took $7.5 billion of new capital from the investment fund of Abu Dhabi, one of several sovereign funds taking stakes in faltering U.S. banks. Bear Stearns and Morgan Stanley have taken Middle Eastern and Chinese cash. UBS, in a move that proved more controversial with some of its shareholders, sold a piece of itself to a fund in Singapore.

Merrill Lynch, also on the ropes because of mortgage derivatives, said last week that it would get $6.2 billion in capital by selling a stake to the Singapore investment fund Temasek, and it would sell its middle market lending operations to GE Capital. Layoffs are expected imminently.

Merrill and other commercial banks begin reporting fourth-quarter and year-end results later this month. Analysts are bracing for a rough ride. Merrill is expected to write down another $11.5 billion in losses. Citigroup is expected to write off anywhere from $12 billion to $18.7 billion, and JPMorgan Chase between $1 billion and $3.4 billion. "It will be a couple of quarters before the current credit crisis is fully digested by the markets," says Goldman Sachs analyst William Tanona.

National City is seen reporting a per-share loss of 8 cents for the quarter, according to Goldman research. Wachovia is expected to report quarterly profits down 84% from the last quarter of 2006, while Bank of America will likely see numbers come in 88% lower, Goldman says.

Two other big lenders, Comerica and Fifth Third, are seen having profit declines of 43% and 59%, respectively.

The fourth quarter will be "clearly a 'kitchen-sink' quarter, as banks incur big reserve builds and write-downs," says Lori Appelbaum, another analyst at Goldman Sachs. "The next couple of quarters will be difficult as the economy operates at near recessionary conditions."

If There's A Recession?

The market's already celebrating a 50 basis point cut in the Fed Funds rate, which Ben Bernanke may deliver on Tuesday. Unless you can creep into the head of a Fed chairman and know what he's going to do before he does, find some other work.

I'm sticking with my call for a weak economy but no recession--I could be wrong. All the economists missed the inflection point of the employment stats which turned negative, not the 100,000 job creation consensus. There's more to come. At least 100,000 layoffs in the construction-mortgage servicing sector will percolate through the next few months.

Corporate earnings flatten out in my scenario of gross-domestic-product momentum at 1.5% to 2% for several quarters to come. This is how I derive my projection of 1,425 for the S&P 500 Index. If corporate earnings decline next year, the market's as attractive as a frozen package of carrots and peas. The Federal Reserve Board will be viewed as behind the curve in righting a demoralized economy. Take at least 5% off my 1,425 number.

The investment problem then segues into a timing issue. When do you look across the valley and see blue birds over the white cliffs of Dover?

The vise on new home construction tightens inexorably. Cancellation rates run close to 35% and the glut of existing homes for sale swells. Not only is it unlikely for the home building cycle to bottom before 2009, but prospective bankruptcies of home builders with national footprints could mar the 2009 landscape. Loan covenant violations could loom by mid 2008. Home building is capital intensive, and many banks are involved.

Gross margins on new home sales average 15%, compared with 24% a year ago. This kind of margin compression doesn't cover overhead, which for a big operator can run half a billion annually. Short of abolishing dozens of divisions, overhead is sticky, and closing down subdivisions triggers write-offs on land options and lots in subdivision. Again, hundreds of millions.

The cresting of home prices is a critical macro event as it limits the wherewithal of consumers to spend more than their normalized amount of disposable income. For several years, middle America has monetized home equity and increased spending by a couple of percentage points. Housing stock is more than half the net worth of many individuals. Even a 10% decline in home value runs into trillions of bucks.

Retailing is impacted directly and the stock market indirectly, as corporate profits flatten out, maybe decline even if the Fed cuts the Fed Funds rate in lock- step fashion. Clearing our existing homes inventory could take years. After all, prices elevated for a couple of decades.

The reading on Fannie Mae in 1982 was a basket case as mortgage delinquencies in the Southwest and California surged alarmingly. In the 1960s, I saw families in Palmdale, Calif. walk away from a 2,000-tract home development. They threw their toilet seats in the trunk of their cars. Douglas Aircraft had just declared bankruptcy. It took too many fixed-price bookings for their DC-9 jet and couldn't get production lines to function efficiently.

I was a young savings and loan analyst then, and it turned me forever skeptical on builders and financial intermediaries. I did buy warrants on Fannie Mae that traded on the American Stock Exchange, but I waited until Paul Volcker relented on interest rates. For a while, Fannie's five-year debentures traded at a 15% yield.

What I remember about the spring and summer of 1982 is the subtlety in the bottoming-out process. People weren't looking across the valley as they may be right now. We had a pool going in the office as to which month an automaker would file for bankruptcy. And yet, I began to detect within the foggy malaise specific sectors of the market resisting further erosion. First it was utilities, and then the oil sector held the line. After all, utilities are allowed a reasonable return on capital by the regulators, and the value of oil reserves in the ground is quantifiable.

Today, systematic inflation is not a policy issue, just a worry. But nobody's paying attention to the Commodity Research Bureau's U.S. Futures Grain index, which recently broke out from a base dating back to 1998. Meanwhile, the U.S. Spot Foodstuff index spiked above its previous high set in 1996. Farmers are getting rich and ethanol is capturing the attention of economists. It's the motive force for food inflation starting with corn. Deere is scaling up tractor production worldwide.

If there is a mini-recession brewing, my last column "Buy the World" is irrelevant. Yes, I believe growth stocks will outperform cyclicals, but both sectors will decline absolutely. The exception could be health care, reasonably valued today and impervious to the economy. My money is on Celgene and Gilead, rapidly growing mid-sized drug houses.

The call on commodities and aerospace, so far on the money, is a no-no if you believe world growth is shaved by our economic contraction. I'm sticking with Boeing. Rio and Freeport-McMoran, which act better than Google and Apple combined. I recently lengthened the duration of my bond portfolio with Federal Agency paper going out 20 years. Nobody wants to sell me low-grade corporate debentures anywhere near their bid price.

Oil, nearly off the chart on the upside, perplexes me. Service operators like Schlumberger still hold some profit margin leverage, but the exploration and production properties like ExxonMobil are seeing rapidly rising operating costs. They need $80 oil just to maintain present earning power.

The clearing cost to produce copper is so much lower than present quotes, over $3 a pound, that it takes all my courage to hang in with Freeport, up 40% in the past two months. When Nelson Bunker Hunt tried to corner the market for silver decades ago, he drove the price from $5 to $50 an ounce. Then, the housewives in India shed their bracelets and everyone melted down their silverware. One of my friends, a commodities trader, made a large fortune shorting silver. Commodity prices can spike, then crash. There is no residual intellectual capital like you find in tech-land--just a big hole in the ground. Iron ore contract pricing could rise 30% next year if China's healthy. That's the Rio bet.

Bottom line, I'm talking about a plus 5%, minus 5% bracket for the market over the next 12 months. Mark down your co-op or four-bedroom colonial by 20%. The Fed can't bail us out of 20 years of asset valuation buildup. Let's hope it contains the carrying costs for debt-ridden families. That's the real world.

The Fed's Economy: Too Good To Be True?

A fair bet for Tuesday's Fed rate decision is a quarter-point reduction in the federal funds. Otherwise, there's liable to be a run for the exits by panicky investors. With oil above $80 a barrel and gold above $700 an ounce, the status quo can't be what Chairman Bernanke thinks is the proper course of action.

But truth is, we have a long way to go in the unwinding of leverage; the solvency issues among borrowers, builders and mortgage providers; the onslaught of credit downgrades; and the recalibrating of terms on multibillion-dollar private equity takeovers. Proof of the pudding: The Bank of England and the European Central Bank are having to pour reserves into troubled spots in the financial system.

Croesus can't help thinking the equity markets are acting way too comfortable. At 13,400 on the Dow, we are only 600 points, or less than 5%, down from the 14,000 peak that ignored the signs of trouble in the credit markets.

Are you going to tell me that the averages will lose only 5% when the commercial paper markets seize up and the housing market, which fed the economy's surge, is very nearly in free fall? This is an example of the equity markets not understanding the credit markets. It shows that stock and debt markets can operate "like two parallel universes," as my friend Christopher Wood puts it in his Greed & Fear market letter.

If you're a worrywart, consider Morris Offit's warning in a memo to clients of Offit Capital Advisors that "the Fed's monetary tools may be inadequate to meet today's challenges." Offit, with decades of experience in fixed-income markets, believes "the Fed cutting the Fed funds rate may have inconsequential value other than signaling investors that it is concerned about maintaining economic stability in the face of an eroding housing market."

So, what have we learned since mid-July?

First, the use of leverage to reach for yield can be destructive of values. And that leverage was a disguise for the liquidity we thought would never allow the credit markets to freeze.

Second, arithmetic models don't work when the system is strained. Look no further than Goldman Sachs hedge funds on that score.

Third, it's unwise to invest in vehicles like collateralized debt obligations and collateralized loan obligations that you don't understand. Or to buy short-term paper issued by off-the-balance-sheet financial units of major banks that were not transparent to the investment community.

Fourth, the regulatory system is flawed. Ben Bernanke was wrong in saying the subprime problem wouldn't spread to other areas of financial markets. The Fed, ultimate guardian of our economy, was blindsided. I repeat: The Fed was taken by surprise. To be fair, none of the central banks realized that even the saving grace of spreading the risk of new products and innovations (like credit default swaps) would not of themselves prevent those who had been too optimistic from suddenly turning pessimistic. That liquidity would freeze.

Listen and mull over what Howard Marks of Oaktree Management has to say in his latest letter to clients: "Risk cannot be eliminated; it just gets transferred and spread. And developments that make the world look less risky usually are illusory, and thus in presenting a rosy picture they tend to make the world more risky. These are among the important lessons of 2007."

What investors should focus on in these dangerous times, Marks insists, is "ensuring the protection of capital under adverse circumstances is incompatible with maximizing returns in good times, and thus investors must choose between the two. That's the real lesson."

So, my take is that the bubble of investor psychology could still become deflated whether there's a quarter-point reduction in the fed funds rate or not. A 5% decline in the stock market amid the credit bubble bursting is just too good to be true--for long.

Dollar Higher Versus Yen in Asia

TOKYO -

The dollar rose versus the yen as Japanese importers and investment trusts bought the U.S. currency.
The dollar rose to 109.33 yen midafternoon in Tokyo, up from 109.03 yen late Monday in New York. The euro rose to US$1.4702 from US$1.4696.

The main drivers Tuesday were Japanese importers, who had been absent from the market during Japan's long year-end holiday. Japanese trust funds also bought dollars to invest in foreign assets.

But players said the greenback may not gain much more in the near term. The weak U.S. economic outlook and the possibility of further rate cuts by the U.S. Federal Reserve are likely to weigh on the dollar for now, analysts said.

"Given worsening business sentiment and investors' growing risk aversion, the flow of ... the U.S. dollar against a falling yen is unlikely to last long," said Tohru Sasaki, JPMorgan Chase Bank's chief foreign-exchange strategist.

Later in the day, players will look at U.S. pending home sales for November to assess the state of the housing market. Economists polled by Dow Jones Newswires expect the data to show a 0.8 percent decline.

Against other Asian currencies, the dollar was mixed. The dollar rose 0.10 percent against the Indonesian rupiah to 9,450 and fell 0.29 percent versus the Philippine peso to 40.815.

Taiwan Stock Index Rises 1 Percent

TAIPEI, Taiwan -

Taiwan shares rose on bargain hunting Tuesday, a day after the benchmark index dropped 4.1 percent to its lowest level since Dec. 20.
The Weighted Price Index of the Taiwan Stock Exchange gained back 79.54 points, or 1.0 percent, to 7,962.91.

KGI Securities' Scott Hsu said investors were looking to strengthen positions in issues with relatively little exposure to the American market because of fears of an economic downturn in the U.S.

"Investors bought into China-demand related sectors and avoided electronics on concerns over weaker demand for electronics amid slower U.S. economic activity," he said.

Cement and shipping led the pack in Tuesday's trade, with subindexes for the sectors gaining 5.4 percent and 4.7 percent respectively.

Taiwan Cement rose 6.9 percent to NT$49.30 on a Central News Agency report that Morgan Stanley expects the company to become the No.3 player in China by 2010.

Evergreen Marine was also a big gainer, climbing 6.8 percent to NT$30.50.

Reckoning Expected For Bear's Cayne

Months of pressure to resign over steep mortgage-related losses may finally have gotten to Bear Stearns Chief Executive James Cayne.
Cayne is planning to step down as chief executive, though he intends to retain the title of chairman, according to reports late Monday. The news comes just weeks after Bear Stearns logged an $854 million loss for the fourth quarter, with its full-year profit nearly wiped out by billions of dollars worth of write-downs on its holdings of mortgage securities and derivatives.

Bear Stearns was the first major bank to report problems in what turned out to be an industrywide crisis, closing two hedge funds over the summer that invested in collateralized debt obligations after losses of $1.5 billion. Cayne has been pilloried since in news reports as a chief executive more interested in golf outings and bridge tournaments than one working diligently to get his firm out of its problems.

Nonetheless, the 73-year-old Cayne has held onto his job longer than a number of other Wall Street chief executives. Stanley O’Neal of Merrill Lynch, Charles Prince of Citigroup, and Peter Wuffli at UBS have all been pushed out over their firms' subprime-related losses. Cayne ousted his own president, Warren Spector, this summer. Zoe Cruz lost her job at Morgan Stanley in December after that firm took billions of dollars worth of additional write-down on its mortgage holdings.

A spokeswoman for Bear Stearns did not immediately respond to a request for comment Monday night.

The Wall Street Journal reported Monday evening that Cayne had told board members he plans to relinquish the chief executive job, citing unnamed sources familiar with the situation. His likely successor: Alan Schwartz, a well-respected investment banker at a firm more known for servicing hedge funds and for fixed-income activities.

An announcement could come as early as Tuesday, the Financial Times reported.

Bear Stearns, like several other Wall Street firms, has had to turn to outside investors to shore up its capital. In October, it sold a 6% stake to China’s Citic Securities, a government-controlled firm. If a well-regarded dealmaker like Schwartz is promoted to chief executive, it raises the possibility that the firm will sell additional stakes of itself or find a merger partner.

Bear Stearns has been the subject of takeover speculation for many months. It is among the smallest of Wall Street firms and has one of the largest exposures to the subprime mortgage mess.

Bear’s fourth-quarter loss was its first in 84 years. Cayne and other members of the executive committee did not get bonuses for the year. The company’s stock was sliced nearly in half for the year.

When it announced the losses in December, Cayne was contrite, saying, “We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses.”

Replacing the chief executive has been one way Wall Street firms have been signaling to investors that they are trying to fix the situation, but it's unlikely to help in the short run.

Despite several rate cuts by the Federal Reserve, and additional efforts by the central bank to pump cash into the banking system to ease the credit crunch, liquidity problems remain and have spread beyond Wall Street to commercial banks, like National City Corp.

Even E*Trade, the online brokerage, had to get out of mortgage lending and sell a $2.5 billion stake of itself to the Chicago hedge fund Citadel to get itself out of a liquidity bind. E*Trade replaced its chief executive, Mitch Kaplan, with an interim chief, Jarrett Lilien.

Vikram Pandit, the new chief executive at Citigroup, is facing $13 billion to $18 billion in additional write-downs and pressure to break up the company to fix the capital problems there. Merrill Lynch’s John Thain, brought in to replace O’Neal, is also facing billions more in write-downs. Both firms are set to lay off thousands of employees to cut costs.

"It will be a couple of quarters before the current credit crisis is fully digested by the markets," Goldman Sachs analyst William Tanona said in a recent research note.

Cisco Scraps Scientific Atlanta Brand For Set-Top Boxes

This was inevitable: Cisco has scrapped Scientific Atlanta’s name from the eponymous set-top boxes and instead is going to start using its own brand name on it.
The announcement will come at CES next week, reports Multichannel.

Cisco acquired Scientific Atlanta in 2006 for $6.9 billion, and has previously announced its intention to consolidate its brands...it has done the same with the other acquisition of home networking products company Linksys.

The company is also coming out with a new buzzword for its social networking forays: “visual networking”, which is delivering any video to any device and providing personalized features.

Shoot To Kill

They accost him at airports. They pump him for technical information at conferences. Even his son is on his case. When you sell a product that tens of millions of videogame fanatics rely on, there is no escape. Nvidia Chief Executive Jen-Hsun Huang came home one evening in 2003 to find the latest copy of Maximum PC magazine waiting for him. Inside was a harsh review of Nvidia's new graphics card, the brawny set of microchips that makes the aliens and bullets come to three-dimensional life on a personal computer.

"Dad," Huang's then 13-year-old son Spencer, an avid gamer, wrote on a sticky note stuck to the page, "I think you need to kick it up a notch."

As if he needed the extra encouragement. In the past four years Huang has taken Nvidia from a trailing position to dominance in the breakneck, highly lucrative graphics-chip business. Intel gets all the credit for being the brains inside most computers, but without Nvidia's graphics cards there would be no high-definition Web video, no visual kick from battling aliens in the lush digital forests of the Crysis game.

The two-dimensional world of the Web is rapidly going 3-D with immersive applications such as Google Earth and World of Warcraft. That $10 graphics processor used in cheap PCs won't cut it anymore, unless all you're doing is looking at low-quality YouTube videos. This is the age of laptops and desktops that can deftly handle hi-def video playback and video editing, with help from graphics cards that start at $200 and go up from there. This is where Nvidia rules.

"What if Google Earth had a 3-D representation of every single building, every single square meter on Earth, and you could access it in the blink of an eye?" Huang says. "Take the Forbidden City in China. I know the model exists. We've seen the models. It is photorealistic. It is cinematic. It is breathtaking. All of those experiences are possible already."

As bandwidth becomes cheap and ubiquitous, people will want 3-D power as much online as they do now in desktop games, and the demand for graphics processors will grow. "The more content there is, the more visual interest there can be, the more processing horsepower people need," says Huang, 44.

Nvidia's graphics cards are now the most expensive part of high-performance PCs. Gaming fanatics will frequently supercharge a $1,200 desktop from the likes of Alienware, a Dell subsidiary, with another $1,700 worth of Nvidia graphics chips. The Santa Clara, Calif. firm has 62% of the market for desktop PC graphics cards, up from 57% a year ago, according to Mercury Research. Its archrival ATI stumbled badly last year in the two-company horse race for technical superiority and was bought by chipmaker AMD for $5.4 billion. In a PC industry racked by deflation, Nvidia has managed to increase its gross margin from 29% in 2004 to a current 46%. In the fiscal year ending in a few weeks Nvidia will gross $4 billion, up 33%, and net $900 million, up 50%. Since Huang took the company public in 1999, Nvidia's shares have risen 21-fold, edging out even the mighty Apple over the same time period. Such accomplishments, over the last 12 months and the past five years, earn Nvidia the title of FORBES' Company of the Year.

Huang is now turning his focus beyond gamers to a host of new customers that will need number-crunching power: oil companies doing deep-sea seismic analysis, Wall Street banks modeling portfolio risk and biologists visualizing molecular structures to find drug target sites. Pricing 150,000 equity options in a second or assessing how much crude oil sits in a pocket 6 miles below the earth's surface are massively parallel mathematical computing problems for which graphics processors are peculiarly equipped.

A typical Intel chip such as the Core Duo is called a central processing unit, or CPU. Like a sprinter (or, more appropriately, a pair of them), this CPU is both fast and extremely versatile, but it can do only so much computing in the space of a microsecond. It is ideal for tackling tasks that require lots of interactivity, for example, calling up data from a hard drive in response to a command from a user. To speed those tasks along, CPUs are built with onboard memory to store the next string of commands to be carried out.

By contrast an Nvidia graphics processing unit, or GPU, renders graphics by simultaneously hashing out the same problem for multiple pixels: textures, lighting and smooth rendering of shapes flying across the screen. That makes a GPU more like a brigade marching in serried ranks. A GPU is less versatile but for repetitive tasks much more powerful than a CPU. The graphics chip has less need to store upcoming operations in memory, so it can cram in more processing cores than a CPU can. Intel has up to 4 processing cores on a single chip; Nvidia's new GeForce 8800 GTS has 128.

Parallel computing has been the holy grail of supercomputer design almost since the dawn of the silicon age. Parallelism--simultaneous operations on sets of numbers--is suited to many engineering tasks, such as bomb design, weather forecasting and image processing. Seymour Cray, the supercomputer genius of the 1970s, had a form of parallelism with his vector- processing computers. The same kind of approach lay behind a generation of "array processors" used in computerized X-ray machines and seismic analyzers. But parallel processing proved to be much easier to describe than to execute on a commercial scale. The technology humbled some once promising outfits, like Danny Hillis' Thinking Machines and Larry Ellison's ncube.

How curious that parallelism is finally proving itself in, of all things, the manufacture of toys. The Nvidia GPUs are in, for example, the original Xbox and the newer Sony PlayStation 3. What's next? Using Nvidia to tackle classic engineering challenges of the sort that once preoccupied Cray.

They accost him at airports. They pump him for technical information at conferences. Even his son is on his case. When you sell a product that tens of millions of videogame fanatics rely on, there is no escape. Nvidia Chief Executive Jen-Hsun Huang came home one evening in 2003 to find the latest copy of Maximum PC magazine waiting for him. Inside was a harsh review of Nvidia's new graphics card, the brawny set of microchips that makes the aliens and bullets come to three-dimensional life on a personal computer.

"Dad," Huang's then 13-year-old son Spencer, an avid gamer, wrote on a sticky note stuck to the page, "I think you need to kick it up a notch."

As if he needed the extra encouragement. In the past four years Huang has taken Nvidia from a trailing position to dominance in the breakneck, highly lucrative graphics-chip business. Intel (nasdaq: INTC - news - people ) gets all the credit for being the brains inside most computers, but without Nvidia's graphics cards there would be no high-definition Web video, no visual kick from battling aliens in the lush digital forests of the Crysis game.

The two-dimensional world of the Web is rapidly going 3-D with immersive applications such as Google (nasdaq: GOOG - news - people ) Earth and World of Warcraft. That $10 graphics processor used in cheap PCs won't cut it anymore, unless all you're doing is looking at low-quality YouTube videos. This is the age of laptops and desktops that can deftly handle hi-def video playback and video editing, with help from graphics cards that start at $200 and go up from there. This is where Nvidia rules.

"What if Google Earth had a 3-D representation of every single building, every single square meter on Earth, and you could access it in the blink of an eye?" Huang says. "Take the Forbidden City in China. I know the model exists. We've seen the models. It is photorealistic. It is cinematic. It is breathtaking. All of those experiences are possible already."

As bandwidth becomes cheap and ubiquitous, people will want 3-D power as much online as they do now in desktop games, and the demand for graphics processors will grow. "The more content there is, the more visual interest there can be, the more processing horsepower people need," says Huang, 44.

Nvidia's graphics cards are now the most expensive part of high-performance PCs. Gaming fanatics will frequently supercharge a $1,200 desktop from the likes of Alienware, a Dell (nasdaq: DELL - news - people ) subsidiary, with another $1,700 worth of Nvidia graphics chips. The Santa Clara, Calif. firm has 62% of the market for desktop PC graphics cards, up from 57% a year ago, according to Mercury Research. Its archrival ATI stumbled badly last year in the two-company horse race for technical superiority and was bought by chipmaker AMD for $5.4 billion. In a PC industry racked by deflation, Nvidia has managed to increase its gross margin from 29% in 2004 to a current 46%. In the fiscal year ending in a few weeks Nvidia will gross $4 billion, up 33%, and net $900 million, up 50%. Since Huang took the company public in 1999, Nvidia's shares have risen 21-fold, edging out even the mighty Apple (nasdaq: AAPL - news - people ) over the same time period. Such accomplishments, over the last 12 months and the past five years, earn Nvidia the title of FORBES' Company of the Year.

Huang is now turning his focus beyond gamers to a host of new customers that will need number-crunching power: oil companies doing deep-sea seismic analysis, Wall Street banks modeling portfolio risk and biologists visualizing molecular structures to find drug target sites. Pricing 150,000 equity options in a second or assessing how much crude oil sits in a pocket 6 miles below the earth's surface are massively parallel mathematical computing problems for which graphics processors are peculiarly equipped.

A typical Intel chip such as the Core Duo is called a central processing unit, or CPU. Like a sprinter (or, more appropriately, a pair of them), this CPU is both fast and extremely versatile, but it can do only so much computing in the space of a microsecond. It is ideal for tackling tasks that require lots of interactivity, for example, calling up data from a hard drive in response to a command from a user. To speed those tasks along, CPUs are built with onboard memory to store the next string of commands to be carried out.

By contrast an Nvidia graphics processing unit, or GPU, renders graphics by simultaneously hashing out the same problem for multiple pixels: textures, lighting and smooth rendering of shapes flying across the screen. That makes a GPU more like a brigade marching in serried ranks. A GPU is less versatile but for repetitive tasks much more powerful than a CPU. The graphics chip has less need to store upcoming operations in memory, so it can cram in more processing cores than a CPU can. Intel has up to 4 processing cores on a single chip; Nvidia's new GeForce 8800 GTS has 128.

Parallel computing has been the holy grail of supercomputer design almost since the dawn of the silicon age. Parallelism--simultaneous operations on sets of numbers--is suited to many engineering tasks, such as bomb design, weather forecasting and image processing. Seymour Cray, the supercomputer genius of the 1970s, had a form of parallelism with his vector- processing computers. The same kind of approach lay behind a generation of "array processors" used in computerized X-ray machines and seismic analyzers. But parallel processing proved to be much easier to describe than to execute on a commercial scale. The technology humbled some once promising outfits, like Danny Hillis' Thinking Machines and Larry Ellison's ncube.

How curious that parallelism is finally proving itself in, of all things, the manufacture of toys. The Nvidia GPUs are in, for example, the original Xbox and the newer Sony (nyse: SNE - news - people ) PlayStation 3. What's next? Using Nvidia to tackle classic engineering challenges of the sort that once preoccupied Cray.

This year Nvidia delivered its Tesla line of muscle-bound computing machines built around graphics processors. Now the Nvidia chips teenagers use to blast each other in Unreal Tournament are basically the same ones used by scientists at Evolved Machines in Palo Alto, Calif. who are simulating neurons used by the brain to see and smell. "You can see essentially a very high performance cluster the size of a desktop, at the cost of a desktop," says Nvidia board member Steven Chu, a Nobel Prize-winning physicist and director of the Lawrence Berkeley National Laboratory.

Mighty Intel has noticed. In 2008 it plans to demonstrate a multicore chip named Larrabee that may steal some of the market for high-end graphics chips. Intel is also a threat at the low end, where it competes with Nvidia and AMD to sell the cheaper integrated graphics chipsets used in budget desktop computers and many notebooks. AMD, having digested its acquisition of ATI, is coming after Nvidia with a pair of powerful new graphics cards starting at $220. "Their relative position versus Nvidia has improved compared to six months ago," says Dean McCarron, president of chip tracker Mercury Research. AMD is also building ATI's graphics capabilities into a new CPU that may see the light of day in the second half of 2009.

Nvidia can never get complacent. Its customers are a fickle bunch, always ready to tear up their PCs to cram in the next hot graphics card from ATI. In 2007 Hewlett-Packard began selling a PC called the Blackbird 002 that allows gamers to use either a pair of Nvidia graphics cards or a pair from ATI, and change between them as easily as changing socks.

Maybe that's why Huang is again stepping up the pace. A year ago Huang tore down his cubicle and replaced it with a conference table so his colleagues won't hesitate to plop themselves down and let him know what's going on.

The company's next generation of chips will be launched in the spring. In Nvidia's labs engineers hover around a cluster of 16 six-foot-tall computers that mimic the behavior of a future Nvidia product hooked up to an ordinary PC. Nvidia's engineers will be able to play games, watch videos and run ordinary applications on these hulking machines to see exactly how their next product will perform. Brian Kelleher, a senior vice president of engineering at Nvidia, pats another of the boxes with pride: "This box here will turn into a slice of silicon one-quarter of an inch on a side. Only it will run 1,000 times faster."

Huang's background prepared him well for the tumult and uncertainty of the chip industry. He was born in Taiwan, and when he was 9 his parents sent him and his older brother to live in Tacoma, Wash. with an aunt and uncle he'd never met. They in turn shipped the boys to what they thought was a prep school in rural Kentucky but turned out to be a Baptist reform school. Huang thrived by helping his classmates with their homework and learning to stand his ground. He bonded with his 17-year-old roommate, who was recovering from a fight that had left him with seven stab wounds. "He was my best friend," says Huang in his American-accented English. That mix of toughness and thoughtfulness has marked him ever since.

The Stanford-trained engineer cofounded Nvidia just as he turned 30 in 1993, after stints at AMD and LSI Logic. Huang and cofounders Christopher Malachowsky (currently Nvidia's vice president of information technology) and Curtis Priem (who retired in 2003) looked at the cartoonish PC games of the time, such as Castle Wolfenstein 3d, and saw their future in improving the visual experience. The company capitalized on the "fabless" trend that allowed a chip firm to concentrate on design and avoid billions of dollars of capital spending by outsourcing production to Asian factories. Nvidia is a big customer at wafer fabs run by Taiwan Semiconductor and United Microelectronics.

Nvidia stumbled in the first few years. Its first product tried to do too much and was based on Nvidia's own quirky standard. After a round of layoffs in late 1995 Huang gathered the company's 35 remaining employees in a room and leveled with them: The company would have to find a way to catch up, fast. He gave up Nvidia's software to focus on the DirectX graphics standard that Microsoft was building into millions of PCs.

Huang spent $1 million, a third of the company's cash, on a technology known as emulation, which allows engineers to play with virtual copies of their graphics chips before they put them into silicon. That allowed Nvidia to speed a new graphics chip to market every six to nine months, a pace the company has sustained ever since. Says Richard Bergman, senior vice president with the graphics unit at competitor AMD: "They raise the bar every time."

Intel is going to make its own graphics product out of its general-purpose processors, and AMD will seek to fold sophisticated graphics capabilities into its CPUs, stealing business that would otherwise have gone Huang's way. The problem is, by doing twice as much, Huang says, the bigger firms won't be able to offer the flashiest graphics capabilities quite as often. And Huang knows that if you can deliver something better, even if for just six months, you'll satisfy that fickle customer.

Sony BMG Drops Music Copy Protection

TOKYO -

Sony BMG will start selling music downloads in the copy-protection-free MP3 format later this month in North America, as even the last holdout among the major record labels crumbled to the growing trend.
Sony BMG Music Entertainment said in a statement that some digital albums will be available through a new download service called Platinum MusicPass starting Jan. 15 in the U.S. and late January in Canada.

A Sony Corp. official in Tokyo, requesting anonymity because he is not authorized to speak officially for Sony BMG, confirmed the company's move toward the MP3 format in the U.S., but said that similar moves aren't in the works in Japan and elsewhere.

Music files in the MP3 format can be copied to computers and burned onto CDs without restriction. They can also be played on most digital music players, including Apple Inc. iPod, as well as on personal computers.

As a Japanese electronic manufacturer that also has major entertainment businesses, including its music joint venture with Bertelsmann AG, Sony has long resisted the global trend toward MP3 files.

Tokyo-based Sony had been sticking to what the industry calls Digital Rights Management, or DRM, which includes software coding that prevents copying downloaded music but can also frustrate consumers by limiting the type of device or number of computers on which they can listen.

Copy-protected songs sold through Apple's market-leading iTunes Store generally won't play on devices other than its popular iPod digital player, and iPods won't play DRM-enabled songs bought at rival music stores.

Sony has taken a beating in digital players with the booming popularity of the iPod, even in its home Japanese market.

Sony BMG's MusicPass will offer 37 titles at first, including rock, pop and other genres, according to the company. But people must first buy a card available at 4,500 retail outlets across the U.S., including Best Buy Co. and Target Corp. stores, Sony said.

The $12.99 cards will have an identification number on the back, and consumers will be able to visit an Internet site for MusicPass to download the audio files, Sony BMG said.

"We see MusicPass as a great way to bring digital music to the physical retail space. We believe it will have strong appeal for a broad range of customers, and that it will ultimately expand both the digital and physical markets for music," said Thomas Hesse, president of global digital business and U.S. sales at Sony BMG, in a statement.

Last month, Warner Music Group, which had also resisted selling music online without copy protection, agreed to sell its tunes on Amazon.com Inc. digital music store.

Universal Music Group and EMI Music Group PLC agreed earlier to sell large portions of their catalogs as MP3 files, as have many independent labels.

"The introduction of MusicPass is an important part of Sony BMG's ongoing campaign to bring its artists' music to fans in new and innovative ways," Hesse said.

One of the albums that will be offered in the new format is Celine Dion's "Taking Chances." Sony BMG's other artists include Bob Dylan, Britney Spears, Jennifer Lopez and Avril Lavigne.

Sharp Vows to Fight Global Warming

TOKYO -

Sharp's president said Tuesday the Japanese electronics maker will fight global warming by making environmentally friendly TV displays and solar energy products - its two core businesses.
Sharp President Mikio Katayama said the company will strive to develop the world's "No. 1" liquid crystal displays for flat-panel TVs. He said one of the key benefits of LCD TVs is that they consume less electricity than fatter conventional TVs.

Sharp Corp. is one of the world's biggest manufacturers of liquid crystal display TVs along with Japanese rival Sony Corp. and Samsung Electronics Co. of South Korea. It is also a leading maker of solar cells, which generate electricity using sunlight.

"We plan to contribute to preventing global warming through clean energy," Katayama told reporters at a Tokyo hotel.

Sharp said it will boost production of LCD panels for the manufacture of its own TVs and other brands.

Sharp had been planning to raise production at its LCD plant from 60,000 sheets a month to 90,000 a month this year. It will now start that in July, earlier than originally planned, to meet growing demand for flat panel TVs, Katayama said. That will also help cut costs, he said.

Competition has been intensifying among TV producers, with various makers vying to show ever larger and ever thinner panels to woo consumers with elegant TVs that can be hung on walls or placed on thin poles.

LCD TVs will account for about 45 percent of overall worldwide demand for televisions this year, Katayama said in a New Year's news conference that laid out the company's strategy for the year.

He said LCD TVs consume about 60 percent of the energy used by picture tube TVs, and Sharp is developing new LCD TVs that will trim that to about 50 percent.

Sharp has already shown a 52-inch prototype LCD panel just 29 millimeter (1.1 inches) thick that consumes less energy than today's LCD or plasma display panel sets. On Tuesday, it showed a 65-inch prototype panel that's the same thickness.

Australian Automaker Recalls 86,000 Cars

MELBOURNE, Australia -

Australian automaker GM Holden Ltd. has recalled 86,000 cars sold in Australia, the Middle East, New Zealand and Brazil because of a risk that an engine bay fuel leak could cause a fire, a company spokesman said Tuesday.
The cars made by the General Motors Corp. subsidiary in 2006 and 2007 are known in Australia and New Zealand as VE Commodore and WM Commodore, as Chevrolet Lumina and Chevrolet Caprice in the Middle East and in Brazil, Chevrolet Omega, spokesman John Lindsay said.

A variation sold in the United States as the Pontiac G8 was not recalled because its layout under the hood was different, he said.

Lindsay said the recall was a precaution to prevent a potential fuel leak under the hood caused by a fuel line rubbing against a clip on an adjacent hose.

"The chances of this happening are very low, but obviously we are erring on the side of caution," he said.

The company will cover repair costs but has refused to put a figure on it.

The recall includes 53,000 cars sold in Australia, 27,000 in the Middle East, 5,000 in New Zealand and 784 in Brazil.

Hyundai Launches Genesis Luxury Car

SEOUL, South Korea -

South Korea's Hyundai Motor Co. officially launched its new rear-wheel drive Genesis luxury sedan Tuesday, setting a goal of selling 55,000 of the vehicles this year.
Hyundai Motor said in a statement it invested 500 billion won (US$533 million; euro362 million) to develop the car over the past four years. The company sees Genesis as competitor to luxury brands such as Toyota Motor Corp. Lexus and similar products from Europe.

The car "symbolizes our determination to enter the highly competitive arena of luxury cars now dominated by the Europeans," Hyundai Chairman and CEO Chung Mong-koo said in the statement.

"Genesis will consolidate our position as the leader of the Korean auto industry and will pave the way forward for our leap into the global market," he said.

Hyundai, which launched the vehicle Tuesday in South Korea, said it aims to sell 35,000 of the cars at home and another 20,000 overseas in 2008. It is targeting exports of 45,000 of the vehicles in 2009, the statement said.

Hyundai plans to begin shipping the high-end sedan to the U.S. in June.

The Genesis has a six-speed automatic transmission and options for a 3.3-liter, a 3.8-liter or a 4.6-liter engine.

It sells for between 40.5 million won (US$43,142; euro29,330) and 52.8 million won (US$56,240; euro38,240) in South Korea.

HDTV Makers Struggle to Stand Out

LAS VEGAS -

HDTV manufacturers are trying to make the task of buying an HDTV set much more difficult than just choosing between LCD and plasma, 42 inches or 46 inches.
To stand out amid fierce competition, they're adding exotic features, and even a little bit of color to the plain black bezels that have been de rigeur. They're also chasing each other to zero - zero thickness, that is. Apparently, you can't be too thin if you're a TV.

All the major Asian brands revealed new sets at the International Consumer Electronics Show, which started Monday. Most of the innovation comes from the prestigious names, like Sony, Pioneer, Panasonic and Toshiba, which are trying to keep HDTVs from becoming a commodity product. If one 42-inch LCD is the same as another, the buyer is going to be looking mostly at price, and that kills the manufacturer's margins.

This happened to DVD players years ago: when unknown Asian manufacturers were able to slap together players and sell them for $50, Sony couldn't make money in the category.

"The goal is to break away from the commoditized market," said Ken Shioda, general manager of display products for Pioneer.

Pioneer Corp. is one of the companies working to put its sets on a diet: it demonstrated a plasma TV with a thickness of just 9 millimeters, or three-eights of an inch, claiming it is the thinnest 50-inch set ever. It's just a prototype, however. Pioneer said sets that thin would not be on the market this year, but possibly next.

Hitachi Ltd. is showing off an LCD display that is twice as thick: three-fourths of an inch. That's also a prototype, but the company is bringing LCDs that are 1.5 inches thick to the U.S. market in the second quarter after launching them in Japan in December. U.S. prices were not announced.

The ultimate in thinness is achievable with a completely different screen technology: organic light-emitting diodes, or OLEDs. Sony Corp. announced it will soon start selling the first OLED screen in the U.S. It's just 3 millimeters, or one-eighth of an inch thick. The catch - actually, the first of two catches - is that the screen area is also minimal, at 11 inches diagonally. The second catch is the price tag: about $2,500.

A set's thinness may not be readily apparent in an electronics store, so some manufacturers are adding color to the bezels of the TVs. But their move away from the all-black scheme is timid. You won't find a leaf green or sky blue HDTV set to match your wallpaper anytime soon. A slight touch of red is as far as they'll go: both Samsung Electronics Co. and LG Electronics Inc. are adding accents of that color to their otherwise black LCD bezels.

The purchase process for flat-panel TVs is no longer dominated by men saying "give me the biggest TV I can get," said Tim Baxter, executive vice president of sales and marketing for the consumer electronics division of Samsung Electronics America. TVs now need to pass muster with women, who look at whether the design fits in a room, he added.

On the technical side, sets with the so-called "Full HD" or "1080p" resolution became the standard for middle- to high-end LCD and rear-projection sets last year, and plasma sets with that resolution have also appeared. There is no real space for improvement in that direction: 1080p, or 1,920 by 1,080 pixels, is the maximum resolution of today's high-definition discs, and higher than broadcast HD signals.

Instead, another feature looks set to become a standard in 2008: sets that show 120 frames per second. HDTV signals are usually broadcast in 30 frames per second, and movies are shot at 24 frames per second, so the usefulness of a set showing more frames isn't immediately obvious. But 120 hertz sets compute frames to insert between the signal's frames, yielding visibly smoother motion and sharper pictures in action scenes.

"120 hertz is the new 1080p," said Scott Ramirez, vice president of TV marketing at Toshiba.

High image refresh rates are also useful for three-dimensional imaging. Viewers wearing glasses with liquid-crystal shutters that alternately black out and reveal the TV set, in sync with the image refresh rate, can be shown different images for the right and left eyes if the refresh rate is high enough. That produces a stereoscopic, or 3-D effect.

Samsung brought out 3-D-capable rear-projection sets last year. At CES, it announced plasma sets with the same capability.

There aren't many movies available in 3-D, but many video games can be played in 3-D. Texas Instruments Inc., which makes the core components of many rear-projection sets, introduced another technology at the show that uses the same elements to help gamers out: DualView. In essence, two gamers wearing shutter-equipped glasses will be able look at the same screen but see different images. That means the screen doesn't have to be divided down the middle for two-player gaming. That should prevent the cheating that occurs when one player peaks that the other's half of the screen, TI said.

Two Sides To The Dear-Oil Coin

Score another win for Big Oil.
On Jan. 3, the second successive day that crude fetched $100 per barrel on futures markets, share prices for oil firms with U.S. operations--such as ExxonMobil, Chevron, ConocoPhillips, BP and Royal Dutch Shell--all closed up.

What's more, a new report by the U.S. government's Energy Information Administration further warmed the hearts of the oil bulls. Since last week, the U.S.'s stock of crude has dropped by 4 million barrels, and since mid-November it has fallen by 25 million barrels--a 7% decline. Adding fuel to the fire, the U.S. reportedly has no plans to tap its Strategic Petroleum Reserve.

But the outlook is not all rosy; "Big Oil" has many little parts. Exploration and production firms do well when prices are high, but refiners feel a squeeze.They have to pay top dollar to buy the black stuff from those producers.

This has been evident since at least the third quarter of 2007. Refining companies Valero Energy, Sunoco and Tesoro all took a hit financially during that time (the most recent period for which data are available) largely because of high crude prices. Shares in each of those companies have dropped since oil topped $100 per barrel, with stock prices for all three companies tumbling more than 4% Thursday.

Even the majors, which have both drilling and refining capabilities, are not immune to refining's tight margins. ExxonMobil, Chevron and the like have all seen some drag on their recent profits because of the strains on their refining operations.

There's an additional factor that could drive up crude prices even further: dwindling reserves. According to Lucian Pugliaresi, president of the Energy Policy Research Foundation, a Washington-based group that analyzes oil economics, a "perfect storm" of events within the last five years--including political instability in Iraq, Venezuela and Nigeria--has undermined production expectations by as much as 3 million barrels per day.

"The real issue is: what's it going to cost to replace these reserves over time," says Pugliaresi. "That's going to be expensive." He laments that even with crude trading at $100 per barrel, there's still little political will in Washington to expand offshore drilling or to open up Alaska's Arctic National Wildlife Reserve for more production.

Not good news for gas guzzlers. The Energy Department reports that within the past year, average gasoline prices have risen from $2.33 per gallon to $3.04 per gallon--a 30% increase. Most of this increase occurred during early 2007 in the run-up to the summer driving season. But since at least May, the margin between crude and wholesale gas prices has increasingly shrunk, according to AAA's Fuel Gauge Report, a daily updated indicator of retail gasoline prices. So if crude continues to rise, gas prices should follow suit.

A silver lining to the prospect of the $100 tank of gas? A recent paper by the American Petroleum Institute, Big Oil's industry group, shows that mutual funds, IRA holdings and pension funds account for more than 70% of the ownership of publicly traded U.S. oil and natural gas firms. If the price of crude continues to rise, investing in oil firms might just be the best way to offset those high prices at the pump.

A Light Bulb Goes On

Willett Kempton sees your car--and the electric grid--as a solution to America's energy problem, not the source of it.
Lawmakers in Washington want to solve America's pollution and energy problems by imposing higher fuel economy standards on automobiles. Willett Kempton has a more exotic approach: turn cars into rolling power stations that can provide clean energy when utilities need it most.

Kempton, a wiry, 59-year-old renewable energy professor at the University of Delaware with round, wire-rimmed glasses and a shock of white hair, is the nation's foremost proponent of what's known as vehicle-to-grid technology. For ten years he's been trying to convince utilities and automakers that electric cars could draw power at night, when power is cheaper, and then discharge some of that juice back into the grid during the day to balance supply and demand for electricity. Kempton's theory is beginning to win applause from some car and utility folks, but daunting technical and economic obstacles make it a tough sell.

Kempton argues his idea doesn't have to wait for cheaper batteries, the main stumbling block to production of electric vehicles. He's got a way, he says, for owners of electric cars to recoup the cost of even very expensive batteries, the ones with price tags in the $20,000 range. It involves using cars to supply a reserve of electric power that can smooth out minute-to-minute shortages in the transmission grid.

Kempton parks a plug-in Toyota Scion in his garage that can discharge 19 kilowatts of power from its battery. The average house uses 1.5 kilowatts. "When I run it backwards at full power," says Kempton, "I'm running my whole block," or he would be if the system were up and operating.

The Kempton plan is just one of several proposed schemes for interconnecting the country's transportation and electric networks. Another, proposed by former software executive Shai Agassi, entails electric filling stations at which car owners would make a quick swap of a depleted battery for a charged battery. forbes columnist and Manhattan Institute senior fellow Peter Huber is a fan of plug-in hybrids. Equipped with charging stations at home and at the shopping mall, these cars would be able to run on grid electricity for short trips.

The Kempton, Agassi and Huber proposals have this in common: They take advantage of the fact that energy bought from a central station power plant is cheaper than energy bought from a gasoline pump.

Kempton first got the vehicle-to-grid (V2G) idea in 1996, while wrestling with a fundamental problem with renewable energy: Solar power peaks at noon, and wind power peaks at night, but demand for electricity peaks between 2 p.m. and 6 p.m. The solution came to him at a conference on electric vehicles. Kempton realized that most of the power available from electric cars' large batteries was being wasted, because the cars sit parked 95% of the time. "That was the eureka moment," he says.

The following year, he and a colleague at the University of Delaware, Steven Letendre, published a research paper describing the V2G concept. The reaction was swift and negative. Carmakers argued that electric vehicles already have a limited range; no way would drivers want to give up precious miles by selling power back to utilities. And they said the batteries would wear out prematurely.

Kempton's response: Driver patterns are predictable, and motorists could control when utilities tapped their car for power, making sure they wouldn't be stranded. As for battery usage, Kempton says that initially utilities would need only tiny bursts of power to balance cycles for a minute or two, so there would be no need to fully discharge the car's battery. There's a well-defined market for this kind of power balancing, and it could help fund a shift to electric cars. (It's distinct from another need of utilities, which is for some way to store up electricity generated at night and release it over the course of several hours of peak demand during the day.) The power balancing involves borrowing a bit of juice and then replacing it a few minutes later.

Utilities, for their part, complained that when they need reserve power the most, in the midafternoon, all the cars would be on the road. Not true, according to Kempton, whose research team studied road-use statistics and found that even during the worst traffic periods nearly 90% of cars are idle.

Huber is skeptical of the Kempton plan because there are other ways utilities can store energy. "Enough hamsters running on a wheel could displace a power plant, but no one's going to do it, because it's too expensive," he says. Utilities would be better off storing power in flywheels, or as ice for air-conditioning systems, he says. "They're way cheaper than anything Detroit can build."

But over the years, Kempton developed a following. GM's vice president for research and development, Lawrence Burns, says consumers have to start thinking of their car as a power-supplying appliance as well as a means of transportation. (A hybrid car, for example, might be an alternative to an emergency generator during an ice storm.) Meanwhile, GM is endorsing Huber's thinking with plans to introduce plug-in versions of the Chevrolet Volt and a Saturn VUE crossover by 2010.

Google, whose founders, Sergey Brin and Larry Page, are investors in fledgling electric car maker Tesla Motors, is plugging V2G. Google's philanthropic foundation announced in mid-2007 it would give $10 million to entrepreneurs trying to accelerate development of plug-ins and vehicle-to-grid technology.

In May 2007 Kempton formed a coalition of utility and energy experts--Mid-Atlantic Grid Interactive Cars, or Magic--and sought funding to prove the V2G business model. Google was an early backer, contributing $150,000. The state of Delaware chipped in $200,000. Coalition members include Pepco, the Washington, D.C. utility; PJM Interconnection, the largest grid operator in the Northeast; California electric car maker AC Propulsion; and New Jersey's Comverge, whose switches and software help utilities manage peak electrical demand by, for example, intermittently shutting down your air-conditioning.

Their first test in October 2007 was a success: An all-electric car plugged in at the University of Delaware and rigged with communication software responded to a signal from PJM for a sudden burst of power to help balance supply and demand on the grid. The car's juice showed up as a blip on PJM's network, but the test showed the concept is at least workable.

The coalition wants to extend the technology to as many as 300 cars. Magic figures it will take 57 cars, discharging 17.5 kilowatts of electricity each, to provide a megawatt of power, the minimum unit to be traded in the electricity market. But not all 57 might be plugged in at once, so 200 to 300 are needed.

Others have also shown that electricity can flow in both directions between a vehicle and the power grid. Last April, for instance, Pacific Gas & Electric added a plug and a lithium-ion battery to a conventional Toyota Prius hybrid and then ran several lights and appliances off the battery's stored energy.

But is there enough economic value for a consumer? Kempton sketches out the (admittedly hypothetical) economics of an all-electric car. The car costs $36,000, he estimates, which is $20,000 more than a fuel-sipping subcompact. Because electricity is cheaper than gasoline, the car owner saves $1,250 a year on fuel. (He's assuming 8 cents a kwh for the juice and $3 a gallon for the gas.) So far, the electric car is no winner. It has a 16-year payback, and you can't take it on a long trip.

Now look at the money to be made balancing transmission grids. Grid operators are willing to pay an average $42 an hour to have a megawatt of power on call, Kempton says. This is over and above any payment the grid makes for the electricity itself; it's simply a standby fee. In Kempton's scenario the car owners get no payment for the electricity because they are not generating it. Whatever the grid operators borrow from their batteries they replace a short while later.

At this point Kempton makes some heroic assumptions. He divides the $42 pot 57 ways to come up with 73 cents per car per hour. Next, he figures that utilities will happily pay these standby fees all day long. He assumes each car will be available for standby work 21 hours a day. (A questionable hypothesis, considering he needs 300 cars to guarantee at least 57 are plugged in at the right time.) Multiply this out and you get $5,600 a year per car. Subtract maintenance costs and a fee for a middleman, and the car owners supposedly will be cashing $2,000 checks every year. Now the electric car begins to make economic sense.

Kempton's group needs to sort out some thorny issues, like how to make sure that enough parked cars are available to produce electricity when the utilities need it and that car owners aren't stranded with a depleted battery. "This could easily degenerate into chaos," concedes Paul Heitman, a senior program architect at Comverge, which hopes to extend its metering expertise for air-conditioning systems to plug-in cars. Says Heitman: "It's hard enough to keep track of switches bolted to the side of your house, much less hundreds of thousands of vehicles driving around."

Such details could kill the feedback car. But credit Kempton for getting people to think about innovative ways to lower energy costs.

Electric Vs. Gas

How power sources differ in two areas.

1.1 tons of greenhouse gases, from coal generation, attributed to an electric car per year.

6.3 tons of greenhouse gases from gasoline-powered cars.

$270 annual utility bill for an electric car.

$1,538 annual fuel cost for a gas-powered compact car.

Sneak Peek 2008 / Brian Wingfield On Energy

The Big Trend

Climate change. Politicians and businesses are banking on a Democrat to win the White House in November 2008, and they'll spend the year cooking up a green-leaning energy policy to go into effect in 2009. The cornerstone will be a mandatory "cap-and-trade" system to limit carbon emissions, currently being shaped with the influence of heavyweights like BP, General Electric and Duke Energy. A skeleton energy bill that reduces auto emissions and boosts ethanol production will also pass, but it won't include a mandate for renewable energy--companies will naturally invest in greener technologies once the cap-and-trade system is established.

The Unconventional Wisdom

Place your bets on coal. It provides roughly 50% of the U.S. electricity sector's needs--even with the "going green" craze at full throttle, power companies aren't going to stop gobbling up coal. But with a cap-and-trade system looming, they'll invest in ways to burn it cleaner and to sequester the carbon emissions from power plants. And they'll go nuclear, which produces almost no carbon emissions. By 2009, federal regulators expect to see applications for 32 new reactors.

The Misplaced Assumption

That ethanol will save the country from record oil prices. Congress will pass an energy bill in 2008 that dramatically increases ethanol production, and oil will top $100 per barrel, but only the former will be detrimental to the economy. Without sufficient technologies in place to make corn ethanol, increases in corn ethanol will drive up food prices, adding to inflationary pressures. Only two things will lower oil prices: more of it (not likely to happen if Congress raises taxes on Big Oil, limiting exploration) or less want for it, which will happen if gasoline gets too expensive.

The Watch List

Energy Future Holdings Corp. -- Barely a year back, the former TXU was reviled by greens for plans to build coal power plants. But after a 2007 buyout by private equity, it's going green with its newly christened wholesale power provider, Luminant Energy.

VeraSun Energy -- Recently announced plans to merge with U.S. BioEnergy, a $700 million deal that could make the company the U.S.'s leading ethanol producer. It's a good spot to be in, as Congress intends to mandate biofuel increases.

PetroChina -- China's largest oil and gas producer is a company backed by a state that is expected to have the highest growth in energy demand in the coming decades. PetroChina shares have dropped nearly 30% since its November 2007 IPO, but the company is worth another look.

A Bold Prediction

Green energy is the next Internet bubble. With so much media attention focused on going green, a new crop of companies that provided the latest in energy efficiency and renewable technologies will sprout up, as will companies that sell carbon offset credits. Careless investors will flock to them. The bubble won't pop in 2008, but it will inflate tremendously.