Nonetheless, the upcoming US midterm elections and recent votes in Australia and the UK have important implications for the market and energy-focused investors. At the recent San Francisco MoneyShow, attendees often asked how various political developments would affect their investment.

I’ve attempted to keep my commentary as unbiased as possible, though in this polarized political climate some readers undoubtedly will feel that I’ve failed in that regard. Note that my political discussion deals with what’s likely to happen, not necessarily what I want to happen.

In This Issue

The Stories

Market volatility is a given in the run-up to midterm elections, particularly this year when so much is on the line. See US Midterm Elections.

A hung parliament didn’t prevent the weak coalition government from stepping up deficit-reduction efforts. See OK in the UK.

A closely contested election in Australia bodes well for our favorite coal-levered stocks. See Looking up Down Under.

The Stocks

Eagle Rock Energy Partners LP (NasdaqGS: EROC)–Buy < 7
First Solar (NasdaqGS: FSLR)–Sell Short > 110
Cameco Corp (TSX: CCO; NYSE: CCJ)–Buy in Nuclear Power Field Bet
Uranium One (TSX: UUU)–Buy < CAD4.75 in Nuclear Power Field Bet
Paladin Energy (TSX: PDN, OTC: PALAY)–Buy < CAD5 in Nuclear Power Field Bet
Shaw Group (NYSE: SHAW)–Buy < 40 in Nuclear Power Field Bet
Petrohawk Energy Corp (NYSE: HK)–Buy < 30
Range Resources Corp (NYSE: RRC)–Buy < 60

US Midterm Elections

With second-quarter earnings season in the rearview mirror, attention is turning to a slew of economic data due out over the next two weeks, including the all-important August employment report that will come out Friday morning. Even more important, markets are typically volatile in the lead up to midterm elections.

As I wrote in the Aug. 30 installment of Personal Finance Weekly, US Midterm Elections a Catalyst for Stocks, this election season is more contentious than normal because of the potential for a shake-up in Congress and consequent change in policy direction.

Rather than listen to endless political banter on the 24-hour news channels, I keep an eye on the latest prices on the Intrade political markets. Intrade is a platform that allows investors to effectively bet on the outcome of elections and other events. Though far from perfect, Intrade tends to be at least as accurate as any poll; for example, Intrade prices suggested George W. Bush would win the 2004 Presidential election, while many polls suggested John Kerry would eke out a victory.

Intrade prices currently indicate that there’s a better-than-75 percent chance the Republicans will take control of the US House of Representatives. Intrade prices also suggest momentum behind the GOP has been building since midsummer.   

Intrade prices suggest a less than 30 percent chance that the Republicans will take control of the US Senate, though the GOP is likely to take a significant number of new seats. Please note that this isn’t meant to be a political commentary, but a simple report of current expectations. It would be irresponsible for me to ignore the potential fallout of such an important US election.

If these results hold up, expect gridlock. With the Republicans in control of the House, the Democrats will lose control of the legislative agenda. And any legislation that does pass will need to attract considerable GOP support in the Senate; Democrats will be well shy of the 60-seat supermajority needed to break a Republican filibuster.

Although legislative gridlock is usually a positive for the broader market, taxes are still a concern. If Congress fails to act, US taxes will revert to their levels prior to the Bush tax cuts. The top marginal rate will increase to 39.6 percent from the current rate of 35 percent, and the tax payable on dividend income will revert to a taxpayer’s full marginal tax rate. In addition, under current law higher-income taxpayers (primarily those paying the top marginal rate) will owe additional tax related to the health care reform bill passed earlier this year.

I don’t think that this is the likely outcome even if Congress is gridlocked. Republicans and Democrats alike will be keen to avoid the stigma of raising taxes amid an economic downturn.

Expect a compromise. Democrats have proposed raising dividend tax rates slightly and keeping the Bush tax cuts largely in place for lower-income taxpayers. Rates would rise more dramatically for wealthier taxpayers. Republicans have suggested temporarily extending the tax cuts for all Americans to boost the still-struggling economy.

A compromise is unlikely before the election because both sides are leery of showing any weakness. But after the election such a measure could emerge either in the lame-duck session late in 2010 or retroactively in early 2011.

Possible solutions include a temporary extension of existing tax rates, keeping some of the tax cuts in place, or raising rates on higher-income taxpayers while excluding more people from this bracket. Congress might also elect to raise taxes gradually over the course of the next few years rather than next year. Of course, the complexion of any compromise will depend on how dramatically the balance of power shifts.

Regardless, progress on a tax compromise to be a significant upside catalyst for stocks in the fourth quarter, especially if Congress decides to make some tax cuts–such as lower dividend tax rates–permanent.

Master limited partnerships (MLP) stand to benefit the most from any tax increase. The table below lists my most recent advice on the energy-focused MLPs in the model Portfolios. Note that I have upgraded Eagle Rock Energy Partners LP (NasdaqGS: EROC) to a buy under 7.

MLPs won’t be subject to higher dividend taxes because they pay distributions that are reported on a K-1 form. Investors typically receive their K-1s in the March after the taxable year. Although these forms will complicate your tax filings somewhat, the process has been simplified considerably in recent years.

The true beauty of distributions is that a significant portion of the income you receive will be taxed as a return of capital. This does not literally mean that the MLP is returning your investment. MLPs don’t pay corporate income taxes; instead, MLPs pass through their profits to unitholders (shareholders) in the form of regular quarterly distributions. In addition to profits, the MLP also passes through depreciation and other tax shields.

A portion of the income you receive–often 80 percent or more–will be covered by these tax shields and taxed as return of capital. Return of capital income reduces your cost basis in the MLP but you won’t be immediately taxed on that cash. Instead you will pay taxes only after you sell the MLP; the taxes on this portion of your distributions are deferred. All of the information you need to report this income is contained on your K-1 form.

MLPs also offer benefits for estate planning.  If you pass on your MLP holdings to your heirs, the cost basis resets to the price at the time of transfer; your heirs won’t have to pay tax on the return of capital income you’ve accumulated over time.

As income taxes rise, the value of deferring these taxes for many years also increases. This effectively raises the value of MLPs relative to other income-producing assets.

Readers often ask whether the government might eliminate these tax advantages in its search for more revenue. In politics, there’s no such thing as a sure thing. I cannot tell you that Congress and the administration will never attempt to change tax laws to eliminate or reduce the tax advantages of MLPs. But such changes look highly unlikely in the foreseeable future.

The Obama administration has proposed taxing what’s known as carried interest payments at full marginal income tax rates rather than the lower long-term capital gains rate. Carried interest is a rather arcane tax concept.

To make a long story short, some private-equity firms pay their partners carried interest rather than regular income; measures that have been proposed to tax carried interest target these financial partnerships and would have absolutely no impact on energy-focused MLPs. Unfortunately, there have been some highly misleading articles that failed to make this distinction clear.

And keep in mind is that carried interest proposals attached to other bills this year failed to pass. If the Republicans gain significant seats in the new Congress, a crackdown on carried interest is unlikely to pass until after the next Presidential election, at the earliest.

Taxes are likely the top issue on most investors’ minds when it comes to the 2010 midterms, but other policy initiatives that are equally important for energy-focused investors. First, assuming my outlook for the midterms is broadly correct, comprehensive climate change legislation that includes a cap-and-trade system for controlling carbon dioxide emissions is dead until for the time being.

Several bills of this nature have been proposed over the past year and a half. I analyzed one of the first iterations at great length in The Politics of Carbon.

Under a cap-and-trade system, the government sets absolute caps on the total amount of emissions and then allows emitters to trade allowances amongst themselves. For example, if one utility emits too much carbon in a given year, it could buy emissions credits from a firm that emits less than allowed. This effectively puts a price on carbon emissions, encouraging firms that discharge too much carbon to cut back and rewarding companies that emit less carbon. The basic mechanism is similar to the existing cap-and-trade system for sulfur dioxide emissions.

Such schemes usually include provisions that allow companies to save some of their credits for use in later years, effectively spreading the cost of reductions out over time. And companies can borrow credits from the following year, making the system a rolling compliance window.

A cap-and-trade bill appeared to be build momentum in summer 2009. But the Copenhagen Climate Summit was a flop. World leaders couldn’t agree on a definitive statement aimed at international goals for climate change emissions. Climate-change legislation was also placed on the backburner after health care reform proved a great deal more difficult to pass than most pundits would have imagined.

Some pundits felt that the Macondo oil spill in the Gulf of Mexico would boost support for a major energy bill, arguing that Americans would support efforts to wean the economy off crude oil. These analysts regarded the disaster as an opportunity for the Obama administration to win points for its focus on alternative energy. But these predictions never came to fruition: If anything the spill hurt the administration’s standing in the polls. And when BP (NYSE: BP) capped the well, the issue

Let’s move from politics to practicalities. As I’ve noted in the past, feasible alternatives to crude oil and other fossil fuels are hard to come by in the near term. And with economic weakness weighing on car sales, most Americans are unlikely to jump at the opportunity to buy an electric car.

Wide-scale implementation of solar and wind power is also unlikely. I discussed the challenges these industries face in the July 7 issue, Headline Risk and Summer Havens, as well as the Aug. 18 issue, A Tale of Two Industries.

In summer 2010 the Democratic leadership in the US Senate stated that they couldn’t find the 60 votes needed to overcome a filibuster of a climate-change bill. Plenty of Democrats were likely relieved; recent polls indicate that the majority of Americans who have an opinion on the bill believe that it’s a negative for the US economy. Cap and trade definitely lacks the populist momentum that characterized financial reform.

Should the Democrats lose a significant number of seats in the House and Senate, passing a cape-and-trade bill will be next to impossible until at least the end of 2012. However, a bill that promotes clean energy is a possibility. Such legislation likely would extend some of the tax credits and funding currently supplied to solar and wind power technologies.

These initiatives, which the market already expects, won’t be enough to offset reduced European subsidies for solar and wind power. I continue to recommend that investors short First Solar (NasdaqGS: FSLR) above 110.  

In contrast, Congressional gridlocks should benefit natural gas and nuclear power. Loan guarantees for the construction of new nuclear power plants would garner Republican support, and the Obama administration has already voiced his support for such measures.

Although nuclear power has its detractors, few would oppose increased use of natural gas. Some environment groups have expressed concern about the impact of hydraulic fracturing on the surrounding water supply. But as I explain in Tempest in a Teapot, the Feb. 10 issue of The Energy Letter, these concerns are overblown.

Here’s the scoop on hydraulic fracturing.

Natural gas reservoirs are under significant geologic pressure. When a producer drills into a conventional field, the well creates a link to the surface where pressures are much lower. The rest is simple physics: The oil or gas flows through the reservoir rock and into the well, moving from a region of high pressure to one of lower pressure.

But many of the most-talked-about unconventional plays in the US are encased in shale, a dense and fine-grained rock made of layers of clay particles or mud. Producers have understood for decades that shale can contain natural gas–and, for that matter, crude oil–but it was widely thought to be irrecoverable. Wells drilled into shale would produce a quick rush of gas but quickly die off; the gas output just wasn’t high enough to make these wells economic.

The problem is that shale is dense and impermeable. No matter how much natural gas is in the shale layers underground there is no way for that gas to flow through the shale and into a well.

Two key technologies have unlocked shale: horizontal drilling and hydraulic fracturing. By drilling horizontally through unconventional rock formations, producers can expose more of their well to productive shale zones.

Hydraulic fracturing involves pumping a liquid into the reservoir under tremendous pressure; this actually cracks the rock, creating passages for the gas to flow through the formation and into a well. In short, fracturing improves the permeability of the field. Producers also usually introduce what’s known as proppant–typically sand, sand coated with resin or ceramic material–into the fracturing fluid. As the name suggests, the proppant actually enter the cracks caused by the fracturing and holds or “props” those cracks open. This prevents the newly formed cracks from closing as soon as pressure is removed.

Some residents near these plays worry that fracturing fluid could migrate through the reservoir and into drinking water supplies. This risk is minimal because most shale reservoirs are extremely deep–usually 1 to 2 miles of solid rock separate an unconventional gas field from the drinking water table.

In addition, sand and water comprise roughly 99 percent of the fracturing fluid–not exactly toxic chemicals. Needless to say, hydraulic fracturing has less of an environmental impact than many coal-mining practices. And some would argue that increasing the use of ultra-clean natural gas generally outweighs the risks of gas drilling.

The political impetus isn’t there for comprehensive federal regulation of gas drilling. Some lawmakers have proposed rules regulating fracturing, most of which would require that producers disclose the contents of their fracturing fluid. Many of the largest producers already do this. And as fracturing technologies have evolved, fluid mixes are less of a trade secret than a decade ago.

Any law promoting greater use of natural gas-powered vehicles and, in particular, freight trucks that burn natural gas instead of diesel fuel would be a huge positive for this industry. I explained the logic of such a policy in the Aug. 23 installment of The Energy Letter, Natural Gas: The Realistic Choice. Such an initiative would become less likely should Republicans win a substantial number of seats, but the Obama administration has expressed its support for such an initiative.

The Stocks

Nuclear power stocks have outperformed the rest of the energy sector in recent weeks, reflecting an uptick in the spot price of uranium.

Source: Bloomberg

This graph depicts weekly data on uranium prices going back to 2004. You can see the dramatic run-up from the end of 2005 to the mid-2007 and the subsequent bear market. Note that although uranium prices fell sharply, the commodity generally held above $40 per pound–well above where it traded in the first half of the decade.

As you can see, the price has jumped from about $40 per pound to above $46 per pound over the past few weeks. This move pales in comparison to what occurred in 2006 and early 2007 but has improved sentiment surrounding uranium producers.

A number of factors are behind this advance. A US facility involved in the conversion of raw uranium into nuclear fuel shut down temporarily in August, while labor shortages and rising equipment prices have increased the cost of developing new mines. Speculation that the industry will receive additional subsidies from the new Congress also has also provided a boost.

Longer-term supports for uranium prices include ambitious Russia, China and India’s ambitious efforts to expand nuclear-power capacity. Increasingly, these countries are inking long-term contracts to guarantee uranium supplies–a sure sign that they’re serious about nuclear expansion.

On the supply side of the equation, there’s growing concern that a deficit of mined uranium will tighten the market in 2011-12.

The US and other governments boosted supply by selling their stockpiles of uranium, but these inventories are beginning to dwindle. And in 2013 Russia will stop reprocessing highly enriched uranium from nuclear weapons into fuel for nuclear power plants, removing as much as 20 million pounds from the market each year–an amount that represents roughly 10 percent of global demand.

Uranium prices shouldn’t fall below $40 per pound, thanks strong Asian demand and modest supply growth. If Congress passes new legislation supporting nuclear power, the metal could hit $60 per pound by the first half of 2011. Shares of uranium miners would follow suit. Over the long term, prices above $100 per pound are a distinct possibility, if supplies of mined uranium fall short of demand.

I outline the main plays on the uranium and nuclear power industry I follow in my Nuclear Power Field Bet. The Field Bet is a mini-portfolio of stocks that stand to benefit from long-term growth in nuclear power and uranium prices. Out of that Field Bet, my top picks include uranium mining firms Cameco Corp (TSX: CCO; NYSE: CCJ), Uranium One (TSX: UUU) and Paladin Energy (TSX: PDN, OTC: PALAY) as well as engineering and construction player Shaw Group (NYSE: SHAW).

Cameco Corp is the 800-pound gorilla of the uranium industry and owns the world’s largest, most-prolific and cheapest mines. The company’s long-delayed Cigar Lake mining project appears to be on track for first production in mid-2013. Thanks to the richness of this reserve, production costs should be rock bottom. The company also has plenty of projects in Canada, Kazakhstan and other nations that should allow the giant to double production by 2018.

Management lowered its 2010 uranium sales target, mainly because some customers requested that deliveries be deferred until 2011; these delays have nothing to do with long-term production potential from Cameco’s mines or demand for uranium. Buy Cameco Corp at current prices.

Uranium One and Paladin Energy are smaller mining firms. But unlike many smaller uranium miners, these two actually produce uranium. The old saying about a bird in hand being worth more than three in the bush is true for mining firms: Proven production is almost always better than mining core results that show potential for major future production. That doesn’t mean you can’t make money investing in unproven producers; it simply means that there’s more risk.

Uranium One shareholders recently approved a deal that will hand a 51 percent controlling stake in the firm to ARMZ, an arm of Rosatom, Russia’s state-controlled nuclear firm. In exchange, Uranium One will receive stakes in two major mines located in Kazakhstan and a significant cash infusion.

Many subscribers remain leery of investing in firms controlled by Russia, but in this case, the deal reduces risk. Uranium One’s major producing assets are based in Kazakhstan. Although relations have generally been solid, there have been some concerns about to Kazakh government’s approach to the mining industry. But Russia wields political influence in Kazakhstan; it’s unlikely to nation’s government will take a hard line against a company partially controlled by the Russian government. 

In addition, the mining interests and cash received as part of this deal greatly improve Uranium One’s financial stability, giving the company plenty of cash to develop its mines and pursue new projects. The new mining interests will push production up from about 10 million pounds in 2009 to closer to 16 million pounds per year. And as a bit of a carrot for shareholders, Uranium One will pay a special dividend of $1.06 per share.

Mines in Kazakhstan are of strategic importance to Russia. Like mines in Canada, production costs are low because of high-quality reserves. And as Russia winds down its nuclear weapons reprocessing program in 2013, the nation plans to replace some of those sales with output from mines in Kazakhstan. Despite a recent run-up, shares of Uranium One rate a buy under CAD4.75.

Paladin Energy’s main mines are the Langer Heinrich mine in Namibia and Kayelekera in Malawi. The former is an established producer that generates around 3.5 million pounds of uranium per year, and management plans to expand that output even further.

The ramp-up in production from Kayelekara has been delayed on a few occasions, but the mine appears to be on track now and produces more than 200,000 pounds of uranium per month. The firm plans to boost overall production to around 4 million pounds annually.

In total, Paladin expects to boost production from around 4 million pounds per year to more than 8 million pounds over the next two to three years. Management has targeted annual production of 14 million pounds by 2016–an ambitious goal.

The firm also has several other projects, primarily in Australia, in the earlier phases of exploration and development that could provide additional upside down the line. Paladin has also announced that it’s likely to sign a long-term supply agreement with a Chinese utility by year-end.

A perennial takeover target, Paladin Energy would be an easy mouthful for any of the global mining giants looking to expand into uranium mining. Buy Paladin Energy under CAD5.

Shaw Group isn’t directly exposed to the uranium market, but the company owns a minority stake in Westinghouse, one of two major nuclear power plant construction firms in the world. In addition, the firm handles a lot of the engineering and construction work surrounding new plants.

The stock’s recent performance has lagged the three uranium plays I outlined above, but this weakness stems from macroeconomic concerns rather than any company-specific challenge. Investors are worried about a double-dip recession, and engineering and construction firms are cyclical stocks that tend to bear the brunt of economic downturns.

But the likelihood of a double dip is slim, though investors should expect a subpar recovery. Buy Shaw Group under 40.

Unlike the uranium stocks, natural gas-levered names continue to underperform the broader market and the energy sector. I explained the main reasons for this at great length in the previous issue, A Tale of Two Markets.

Concerns about elevated levels of natural gas in storage headed into a period of seasonal weakness make for attractive valuations. Regard any further dips in September and October as a great opportunity to pick up shares of Petrohawk Energy Corp (NYSE: HK) and Range Resources Corp (NYSE: RRC).

 Ok in the UK

The UK held a general election in early May that produced a hung parliament. That is, no political party gained enough of a majority in the House of Commons to form a government. The Conservative Party won 306 seats, an impressive 96-seat gain from the last UK general election but still shy of the 326 needed for an outright majority.

Meanwhile, the Labor Party–the party in power at the time of the election–won 258 seats, 91 less than in the prior election. The Liberal Democrats won 57 seats, down about 6 from the prior election.

Investors were nervous about this result because it represents the first hung parliament since 1974 and only the second since World War II. Market participants feared that any coalition government would be too weak to undertake the painful budget-reduction efforts needed to bring the UK’s ballooning government deficit under control.

Former Prime Minister Gordon Brown tried to form a coalition with the Liberal Democrats and smaller parties such as the Scottish Nationalists. These efforts were always an uphill climb given how badly the center-left Labor Party fared in the polls. The unpopular Brown later resigned in a last ditch effort to improve the chances of a coalition with Labor at the helm.

But what ultimately emerged from the chaos was a Conservative-Liberal coalition some call the Con-Lib alliance. The Liberal Democrats became a key kingmaker despite a less-than-stellar showing in the elections; the party’s leader Nick Clegg has become Deputy Prime Minister, while David Cameron assumed the top job as Prime Minister.  

This coalition was the most obvious choice given the election outcome. Although the Conservatives didn’t win an outright majority, they were the clear leader and picked up a huge number of seats. But the Liberals have traditionally been viewed as more sympathetic to Labor than the Conservatives; the deal looked tenuous at best and did little to assuage fears that a weak government would fail to get things done.

What’s followed has surprised nearly everyone. In June the coalition unveiled an emergency budget measure, stating that the budget cuts announced by the previous Labor government weren’t sufficient to bring the budget back under control. The government noted that under the previous plan, public debt would still increase in 2014-15. The coalition’s new goals were twofold: a cyclically adjusted budget balance and falling public sector debt by 2015-16. To accomplish this plan, the government needed to cut about GBP40 billion (USD60 billion) per year from the budget by 2014-2015.  

Accordingly, the government announced GBP32 billion worth of spending reductions and just GBP8 billion in tax hikes. Spending reductions proposed under the emergency budget include a change in the inflation rate used to index public pensions and welfare benefits. Specifically, the government proposed changing its inflation index from retail price inflation (RPI) to consumer prices inflation (CPI). Because CPI tends to run an annualized 0.5 percent less than RPI, the policy significantly reduce the rate of inflation in benefits and pensions over time.

On the tax side of the ledger, the emergency measure does propose a hike in Value-Added Tax–basically a sales tax–from 17.5 percent to 20 percent.

But the important point is that roughly 80 percent of the budget reductions are slated to come from spending cuts rather than tax rises. Including the Labor government’s previous efforts, 77 percent of planned reductions stem from spending cuts.

The time frame for these cuts is also important. These aren’t amorphous, long-term term targets; some of these reductions take place immediately.

Source: Emergency Budget 22 June 2010

As you can see, the spending cuts gradually ramp up over time but also include significant spending reductions in the near-term.

The history of fiscal austerity plans suggests that the best plans don’t backload spending cuts. After all, it’s quite easy to propose a long-term target for budget reductions and place most of the burden three or four years into the future. When it’s time for the real cuts, plenty of reasons not to follow through will emerge.

Another lesson from the past: Austerity packages must include spending cuts. It may be necessary to raise taxes in some areas but relying heavily on tax increases suggests that the government is taking the easy way out.

The UK government’s plan follows this model of success, and the market has expressed increased confidence in the new Con-Lib coalition. Bond spreads have fallen, the cost of credit default swaps to insure British gilts have dropped and British stocks have largely outperformed since the budget was announced on June 22.

There are a few implications of these observations. One is that a government that looks weak on paper can put through a deficit-reduction program. Accordingly, a gridlocked Congress may be able to delay some planned tax increases, offsetting them with targeted spending cuts. In addition, the Con-Lib plan is another sign that the UK and its Continental peers take the need to address excessive deficits seriously.

Looking up Down Under

Australian elections in late August delivered the first minority government in 70 years. This marked the latest twist in a four-month saga of political drama in the nation.

First, then Labor Prime Minister Kevin Rudd announced a “resource super profits tax” on mining companies that was severe enough to prompt the major mining firms to review planned expansion projects. The mining firms also started a major advertising campaign against the tax; the government sought to retaliate by launching a taxpayer funded campaign in favor of the tax.

But the resource profits tax failed to elicit the populist support its backers had supposed. And the government’s use of taxpayer funds to defend the policy proved even more unpopular. This episode ultimately cost Rudd his job; once an extraordinarily popular prime minister, Rudd was ousted by Julia Gillard as head of the party and Prime Minister.

Among Gillard’s very first moves was to adopt a far more conciliatory tone toward the mining industry, consulting with the big miners to develop a much milder tax regime.

But in the general election the center-left Labor party lost seats and the center-right Liberals gained seats. But just as in the UK, neither party has enough seats to put together a government without a coalition partner.  

Because the Liberals appear to have a slight majority over Labor, Liberal leader Tony Abbott likely will become Prime Minister, forging an alliance with a series of smaller parties that represent rural parts of Australia. Although rural parties have been critical of both Liberal and Labor governments in the past, their more natural alliance is with the Liberals. In addition, many have expressed concern with public finances; Liberals have proposed drastic spending cuts, an idea that would play well. The Liberals might have to commit to investment in rural Australia, but that’s not a huge obstacle.

The lower probability outcome is that Labor forms a minority government by forging an alliance with the left-leaning Green Party. Key planks in the Green’s policy platform include a much tougher resource profits tax closer to that Rudd’s original, a cap-and-trade scheme and higher taxes on wealthier Australians.

Whatever you may think of the Green Party’s policy initiatives, such measures wouldn’t be positives for the mining industry. Portfolio recommendations Peabody Energy Corp (NYSE: BTU) and Bucyrus International (NasdaqGS: BUCY) would suffer from project delays and outright cancellations if the original resource super profits tax were resurrected. Meanwhile, a more aggressive stance on climate change suggests the potential for more onerous regulations on coal, the fuel most loathed by environmental groups.

The good news is twofold. First, under a minority Liberal government–the most likely outcome–the resource tax would probably be completely scrapped. The party opposes even the milder version Gillard negotiated after becoming Prime Minister. In addition, the Green Party would be unlikely to have much power whatsoever. The Greens will have a majority of the Australian Senate starting in July 2011, but this isn’t the first time a government has worked without a majority in the Senate. It’s still highly unlikely that the Greens will be able to force many of their key policy initiatives.

But even under a Labor-Green alliance I don’t see too many negatives for the energy industry. Labor would likely retain their milder resource profits tax proposal; public reaction to the strict measures proposed earlier this year was decidedly negative. Labor might also be able to tweak some of its other policy initiatives in a compromise with the Greens; however, the more extreme policies aren’t likely to see the light of day.

Events

Editor Elliott H. Gue invites you to join him aboard Holland America Lines’ ms Eurodam for the 2011 Money Answers Cruise. Departing from Fort Lauderdale on Feb. 12,

2011 for a week-long tour of the Caribbean, Elliott’s guests will enjoy a week of unparalleled luxury as well as unfettered access to some of the world’s top investing minds.

For more details on this unique opportunity to recharge your batteries and portfolio, go to www.MoneyAnswersCruise.com.