Typically, selling your product below cost is something that they teach you not to do in Economics 101, or even before. Unfortunately, amidst our current "oil crisis", airlines have not gotten the message.

My parents were complaining, after my flight back to Houston, about why the price of a ticket has gone up by 50 from $300 to $350. To attempt to answer the question, I did a bit of handwaving explanation using 1600 miles (from Berkeley to Houston) as a guideline. Taking 20 MPG as a standard and $4 gas, we get about $320, and the time savings and "customer service" you get with a plane ticket suddenly seems like a bargain by comparison.

Seekingalpha has more to say about this:

Below are some startling statistics comparing year 2007 to year 2000 for the 7 largest US major airlines. [American (AMR), United (UAUA), Delta (DAL), Continental (CAL), Northwest (NWA), US Airways (LCC) and Southwest (LUV) control 71% of the US market share.]

So why again are plane tickets so cheap by comparison?

Another math day today. Today we'll see what gasoline has to cost for a hybrid (modern technology) to be an economically viable solution.

Let's take a rough estimate of how much hybrid technology costs - $6000 is a reasonable figure (from a slightly biased source)

Consumer reports suggests a real world MPG of 44 (let's take 45 for the heck of it).

The average MPG for new vehicles is 24.7 (Source: 2005 Highway Statistics from the U.S. Department of Transportation, Federal Highway Division). Let's take 25.

EIA suggests that the average vehicle is driven about 12000 miles a year.

Let's do some math. Taking an average gas price of $3.613/gallon as of 5/5/2008, that is $770.13 saved per year. Disregarding amortization, this is under 8 years (7.79 years) to pay off the "hybrid cost". Of course we disregarded a whole bunch of stuff (maintenance, individual vehicle costs, the fact that SUVs and trucks are included, etc).

Of course, someone will come up with completely different figures, so this figure is not necessarily relevant. Anyways.

Corn ethanol is all the rage, but after reading a post citing a pre-combustion efficiency of 0.13% (yes that is zero point thirteen), a post is in order to set things straight.

Aldo V da Rosa's textbook Fundamentals of Renewable Energy Processes states:

The 135 kg of sucrose found in 1 ton of b&c are transformed into 70 liters of ethanol with a combustion energy of 1.7 GJ. The practical sucrose-ethanol efficiency is, therefore, 76% (compare with theoretical 97%). One hectare of sugar cane yields 4600 liters of ethanol per year (without any additional energy input because bagasse produced exceeds the amount needed to distill the final product). This however does not include the energy used in tilling, transportation, and so on. Thus, the solar energy-to-ethanol conversion efficiency is 0.13%.

(For reference, one hectare is 2.47105 acres).

4600 L of ethanol is 78783 moles, which provides 110831 MJ of energy (taking the heat of combustion = -1406.8 KJ/mol). This is equivalent to 0.0035 MW over a year. With average internal combustion engine efficiency of 20%, this becomes 0.0007 MW in effective energy, slightly below the energy required to power a home. Remember this is without transportation and delivery costs.

In contrast, a recent solar stirling engine project was a 4500 acre array constructed in southern california that produced 500 MW, or 0.274 MW per hectare. Taking a (really) conservative electrical energy efficiency of 80% (below legal requirements for cars), we get 0.219 MW, or enough to power about 220 homes.

Granted, I would suspect the solar array to have much higher starting capital cost, but a 300x increase in efficiency is nothing to sneeze at. So much for corn ethanol as the "fuel of the future"…

So after being asked by a client why his portfolio was returning way below market averages according to the "Gain/Loss" page in his portfolio, I felt that I had to bring this up. My biggest gripe with these pages is how they compute the cost basis. What do I mean?

Wikipedia has an article on cost basis. Basically, cost basis is "the amount of your investment in property for tax purposes", and it is changes of cost basis that the IRS looks at to assess whether you made money / they should tax you (don't quote me on this). Unfortunately, it also hides a nasty thing — dividends and capital gains reinvested in a portfolio are taxed, BUT also count towards cost basis.

Some math:

Say a stock returned 5% in dividends for a year while its price remains unchanged, and that it declines 5% after issuing the dividends. With a starting investment of $1000, your account after this would be $997.5. So approximately break even (or to be precise, a 0.25% decline). But gain/loss with cost basis is computed by taking the total VALUE of your securities (in this case, $1050) and taking 5% from there - or in other words, a net loss of 5%. To say this is deceptive would be a gross understatement.

The only surefire way I've found to accurately track portfolio performance is the bank transfers in/out approach - take the current account balance, and amortize it with respect to starting and any transferred capital. Unfortunately, most brokers don't track these statistics, so you might have to play around with Excel for a while to do this, especially if you make several transfers (e.g. direct deposit, etc).

End of rant…

I made an allocation switch from DJP (commodity futures) to IPE. IPE, also known as SPDR Barclays Capital TIPS, is an inflation protecting product that is likely to be a more attractive choice to investors as worries of a stagflating (a economy in recession and inflation) economy hits the streets. Previously only available as relatively non-liquid securities from the US treasury, Treasury Inflation-Protected Securities, or TIPS, are essentially medium to long term bonds indexed to an inflation index such as the Consumer Price Index.

In fact, TIPS can even be global - a newly released ETF called the SPDR DB International Government Inflation-Protected Bond ETF (Symbol: WIP) is the first global ETF to launch in the states. I went with IPE instead because of its rock bottom expense ratio (0.19%) and my already significant international diversification - for such a low-yielding product, expense ratios are key. WIP, meanwhile, weighs in at a reasonable 0.50%, but it could be lower. If you're looking to add some negative beta to your portfolio … you can't go wrong with TIPS.