To help you understand what's happening in global economies, our highly experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You'll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest…

As the U.S. economy keeps on humming, Europe has a far tougher economic outlook. Problems new and old are combining to slow growth in the 20-member club of nations that use the euro, the world’s No. 2 economy when taken as a bloc.

Actual recession in the eurozone is unlikely. Just slow and uneven growth ahead in 2025. Business sentiment across the bloc is negative. Ditto for consumer sentiment, despite rising paychecks. Inflation remains higher than it should be, as in the U.S., though similarly to here, it is easing, in fits and starts, allowing the European Central Bank to lower interest rates fairly quickly next year. (Note that that will keep the euro weak vs. the dollar, since the Federal Reserve won’t be cutting as fast.)

Now, trade tensions loom over Europe, whose economy depends heavily on trade. 40% of GDP in the eurozone stems from exports within and beyond its boundaries. President-elect Donald Trump says that he is considering levying tariffs of 10% to 20% on goods imported from Europe, threatening sectors like cars, chemicals, machinery, food and drugs. The EU can probably work with the new U.S. administration on trade issues. Trump threatened steep tariffs on European imports during his first term, but decided to hold back most of them in favor of more-targeted levies. European political leaders will hope to again negotiate with him, perhaps starting with offers to buy more LNG — liquefied natural gas — from the U.S., an American export that Trump wants to foster.

A U.S.-China trade war would also hurt Europe, in two different ways. U.S. tariffs on Chinese goods would weaken China’s economy, a key export market for Europe. And reduced access to U.S. consumers would likely force Chinese sellers to expand in Europe by cutting prices, further pressuring European manufacturers.

Meanwhile, domestic politics and geopolitics keep worsening for Europe. The eurozone’s biggest economies, Germany and France, face political paralysis as each tries to assemble new governing coalitions. Fiscal strains in both countries caused their respective governments to fall recently, with little sign of a consensus on how to cut spending, raise taxes or otherwise deal with their rising debt loads.

Look for European nations to spend more on defense, as Russia’s war on Ukraine drags on and Donald Trump pushes NATO members to spend enough on defense to meet the NATO treaty’s 2%-of-GDP rule. Most members do so already, but with Washington likely to pull back on aid to Ukraine, Europe will be forced to play a bigger role in deterring Moscow and keeping Kyiv fighting — no easy task for a group of countries mired in slow growth and political turmoil. None of this bodes well for Europe as a market or investment destination for U.S. goods or dollars.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

To help you understand what is going on in the global economy and what we expect to happen in the future, our highly-experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You'll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest...

Further interest rate hikes are likely in most advanced economies this year. But most major central banks are near the end of their rate-hike cycles. 

The European Central Bank is leaning toward another quarter-point increase in September, but it’s possible that slowing economic activity in the eurozone might prompt the ECB to pause at its next meeting. The Bank of England will likely raise rates again in September, after raising them in August. The Bank of Canada looks set to repeat its quarter-point hike in July at its next meeting in September unless core inflation slows soon. Central banks in advanced economies will likely not start reducing interest rates until well into 2024.

Most Latin American countries will start to cut interest rates this year. In fact, some already are. Having been among the first central banks in the world to raise interest rates in 2021, Brazil and Chile have started to cut interest rates, and will likely continue to do so in coming months. Ditto for Peru and Colombia. Mexico’s central bank will likely be the last in the region to embark on rate cuts, as core inflation remains stubbornly high there and the labor market stays tight.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

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To help you understand what is going on in the economies of Europe, the fiscal discussions of the European Union and what we expect to happen in the future, our highly-experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You'll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest...

The eurozone economies are holding up better than expected this year. The bloc’s overall economy eked out a 0.3% expansion in the second quarter, despite the ongoing energy crisis and high inflation. Among its largest economies, Italy was the only one to contract. Growth in Germany was flat, while the economies of Spain and France grew modestly in the second quarter. Admittedly, growth was skewed upwards by one-off factors in France and Ireland. But after stagnating in the first quarter and shrinking in the last quarter of 2022, any growth is welcome. 

A contraction is still likely in the second half of the year in the eurozone. Firms in the bloc are reporting stagnating activity levels, and manufacturing activity is already contracting in many of the economies in the region that uses the euro. Interest rate hikes, over the past year, have led to a tightening in credit conditions. 

The European Central Bank (ECB) has one more interest rate hike in store this year. Headline inflation fell in July, but core inflation — which excludes energy and food — was unchanged at 5.5%. Like the Fed, the ECB has slowed its pace of rate increases. But it has left the door open for another hike in September if inflation remains entrenched.

The European Union is working on new spending rules for its members that would rewrite the EU’s existing fiscal rulebook — the Stability and Growth Pact (SGP), which aims to prevent excessive borrowing by governments. The details are uncertain, but the new rules will likely require EU members to run smaller budget deficits. The EU has let members exceed its normal deficit limits since March 2020. 

EU member states remain split on proposed changes to the fiscal rules, especially on whether there should be numerical benchmarks and automatic rules for all on annual debt reduction, or if each country should negotiate spending cuts with the EU’s executive body. If member states fail to agree to changes by year-end, the EU’s existing rules, with their automatic cuts, will become effective again in 2024. Germany favors that approach, while France prefers case-by-case deficit targets. 

Whatever happens, EU budget deficits are likely to shrink in coming years as members cut the huge subsidies triggered by COVID-19 and Europe’s energy shock.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

Germany is currently making strides in its recreational weed legalization efforts. 

In recent news covered by Marijuana Moment, Germany's leading regulator and health minister, Karl Lauterbach, stated the country has received "very good feedback" from the European Union (EU), the most critical governing body in the weed legalization process. 

The EU's approval is essential for Germany to proceed with adult-use weed legalization, given that cannabis use for recreational purposes is restricted by both European and international laws. Previous attempts by other European countries, like Luxembourg, to legalize cannabis have been stymied due to similar legal challenges.

Germany still has a considerable amount of work to do, and expectations for the previously stated target of legalizing cannabis in 2024 has now been pushed back to 2025. 

The current proposal for the bill would allow adults to buy and possess up to 30 grams at licensed stores and grow up to three plants. It also includes suspending and closing criminal proceedings related to offenses made legal under the reform. 

While we view this announcement positively, we approach it with some skepticism given the EU's previous stance on cannabis legalization. However, if Germany can create a plan that adheres to European law, it could serve as a model for the entire continent. This could pave the way for fast-tracking weed legalization in other countries, particularly those that have expressed an interest in following Germany's lead, such as the Czech Republic.

Another cannabis banking bill is in the works

Three months after the SAFE Banking Act failed to be included in the federal spending package, Senate Democrats are now working on another cannabis banking bill.  

This news is completely expected, and the cannabis industry knows to respond to actions, not words, when it comes to cannabis banking.  

As we've stated many times before, evolving cannabis banking would be a big win for the industry. Democrats in Washington D.C. should expect a cautious, "once-bitten, twice shy" approach absent meaningful support from the Republican party for the new banking bill.

We are back to a near-zero probability of any banking reform for cannabis in the U.S. for the foreseeable future. This probability has further declined after the recent demise of Silicon Valley Bank (SVB). The regulators and auditors both blessed SVB as a well-capitalized bank weeks before it collapsed. Meanwhile, executives sold stock and paid bonuses days before the bank failed to secure much-needed capital. SVB was forced to shut down and hand over the keys to the FDIC.  

The bank failed on a basic premise of depleting deposits and disregarding simple interest rate risk management, i.e. buying long-duration securities in a rising interest rate environment, topped off with arrogance and greed. This is likely the beginning of more bank failures, three in the last week or so, in the U.S., as this duration crisis morphs into a defaults crisis. It seems regulators are now waking up and trying to head off another 2007-2009 global financial crisis.

As a result, we expect no room for politicians or regulators to prioritize cannabis banking while they are struggling to catch up once again. 

For those in cannabis, it is a good idea to have redundancies with banking if you don't already. We know banking challenges are not new in cannabis, so we are generally better equipped, but these diverted efforts are still not where we all want to be devoting time.

The challenges in the banking sector are likely to tighten risk capital on a macro level. Lending has already been tightening in commercial sectors, and we expect that to spread to other areas, which will keep a lid on capital for cannabis. 

TerrAscend seeks listing on Toronto Stock Exchange 

It's proving to be a year of action for the cannabis industry. We are done with cheap talk in D.C., and brave CEOs are pursuing action. Waiting is deflationary, and we have all spent enough time waiting. Companies are working hard to build their businesses in a challenging, long-lasting capital drought. This approximately 760-plus day bear market – the same number of days since the peak in the prices of most marijuana stocks – has forced and will continue to force companies to focus on balance sheets and execution. 

In the meantime, cannabis stocks have struggled with declining trading volumes as retail investors move on. Declining participation creates more of a deflationary feedback loop, leaving many to ask and hope for change. 

Well, change can come from within, and TerrAscend (TRSSF) is stepping up to the plate this week with a bid to list on the Toronto Stock Exchange (TSX). Membership with TSX would make TerrAscend the first U.S. multi-state operator (MSO) to be listed on the major stock market exchange.

TerrAscend is pursuing a similar structure to Canopy Growth (CGC)/Canopy USA, but it's exploring the TSX over the Nasdaq. This seems like a good potential path for creating public company structures that can list on major exchanges, which can have great benefits like expanded and lower cost of capital, additional potential access to institutional investors and more participation from passive ETFs. We will continue to follow this journey and expect other U.S. operators to follow suit should TerrAscend make it.  

Ascend Wellness earnings are in

Announcements for 2022's fourth-quarter and full-year earnings continued, with Ascend Wellness Holdings (AAWH) reporting mid-week. We are generally frustrated with the analysts' work in cannabis, or their lack of work, as it impacts consensus estimates on which people base a company's performance. 

Ascend increased Q4 revenue by more than 22% year-over-year to $405.9 million, but lost $15 million during the three-month period. However, Ascend's 2022 consensus was very close to actuals on revenue, gross profit, and EBITDA (earnings before interest, taxes, depreciation and amortization). We expect analysts will lower their previous 2023 estimates, consistent with their work post-earnings from others so far. 

Overall, it was a solid year of execution for this emerging U.S. operator. Ascend maintains that it is the top operator on revenue per door metric, the top growth rate in adjusted EBITDA and the sixth-largest operator on total adjusted EBITDA dollars generated basis. 

The company experienced some modest headwinds in their Illinois retail and wholesale in Q4, but this was offset by gains in the Massachusetts and New Jersey markets. Ascend sees good growth opportunities in their soon-to-be-closed Maryland retail acquisitions, as that state is fast-tracking towards its recreational sales, with further store openings in Ohio and Illinois. The company has uniquely positioned itself with asset concentration in many of the most profitable U.S. markets, without overexposing itself to volatility in these states by limiting its cultivation capacity. 

In the current environment where many of its peers are shuttering and divesting assets due to price compression and wholesale exposure, Ascend is among the few public operators actively growing its business. This growth can be tracked through M&A in attractive markets (e.g., Maryland) and organically through quality improvements in smaller, easier-to-manage cultivations and cost efficiencies in downstream assets like retail. Management is focused on continuing to execute its growth initiatives under tight capital controls and driving toward generating cash flow.

The legalization and commercialization of cannabis, adult-use and medical, continues with many more projected years of double-digit growth – and weed legalization in Germany could be next. 

Last month, the ruling coalition in Germany released a blueprint for establishing Europe's first taxed and regulated adult-use market. As Germany inches towards cannabis legalization, this could spell big changes for the rest of Europe. Several European Union (EU) countries, including Greece, Italy and France, have legalized medical marijuana and are considering broader legalization measures.  

"It's a huge moment," Niklas Kouparanis, CEO of German cannabis company Bloomwell Group, told Politico. "Germany is basically pioneering the way to legalize cannabis for other EU member states." 

The U.S. is the largest addressable cannabis market, but we continue to see how the rest of the world is progressing. European countries remind us of how the U.S. industry has evolved over time, with each state deriving its own industry with unique traits. Europe shares some of those similarities but with a more conservative approach to cannabis access for its constituents. 

We have been keen to see how European retail and medical dispensary licensing scales. Retail growth, along with medical recommendations and prescriptions, will be critical for industry growth in these countries. There's been plenty of pitch decks, but very few have built or obtained licenses for retail locations or medical clinics – an aspect to watch as Europe seems to be in a challenging economic situation.

Illegal Cannabis Sellers Are Flocking to Instagram

Illicit cannabis continues to be a robust and illegal trade as access to legal cannabis remains constrained by federal policymakers. Instagram and other social media sites are becoming popular vehicles for illegal marijuana sales, and according to 2021 data from Pew Research Center, 71% of people ages 18 to 29 use Instagram. Illicit sellers also reported using Snapchat, Discord and Telegram to market products to new and existing consumers. 

It is frustrating to see the illicit industry get stronger while many people like us work daily to have a healthy and thriving legal cannabis industry. Bad actors in the illegal market can affect legal operators, even on simple things like social media marketing. We have seen countless legal cannabis companies lose their social media accounts while illegal sellers continue to post. Consequently, we've seen the shuttering of accounts from licensed operators complying with social media rules versus those acting with bad intentions. 

There are tools for legal operators to help them stay above the fray, such as Highlyte by Amnesia Media, a company where Poseidon has invested. Let's hope as legal markets become more sophisticated that it becomes easier to identify and shut down illicit operations on social media while allowing legitimate businesses to prosper.

Cannabis Companies Pivot to Alcohol and Sports Drinks Investments

Several of the world's largest cannabis companies are pivoting to other arenas like beer and sports drinks. 

In November, the Canadian cannabis company Tilray (TLRY) acquired Montauk Brewing Company, adding to a collection that already includes SweetWater Brewing Company and Breckenridge Distillery.

Canopy Growth (CGC) is the majority owner of BioSteel, a sports-beverage brand with high-profile sponsorship deals including the Toronto Raptors, Dallas Mavericks and Kansas City Chief quarterback Patrick Mahomes.    

Canopy's core cannabis business reported a 27% decrease in revenue compared with the same quarter last year, while income for BioSteel nearly quadrupled. Tilray's cannabis revenue declined 17%, while its alcoholic beverage business saw revenue climb 34%. 

Several Canadian cannabis operators have struggled to succeed in building profitable cannabis operations. These operators have fueled their own mistakes with excessive capital that many industry participants have long forgotten at this point in the cycle. The Canadian cannabis companies have true public market currency as they are able to trade on listed exchanges and have continued to enjoy the benefits of access to capital, including equity. As a result, we see a few Canadian operators who lack vision or a true long-term strategy, attempting to buy their way to profitability by going into non-cannabis industries like beer or other consumer packaged goodss. These teams are nothing like Berkshire Hathaway (BRK.B), so we mostly see this as a distraction from the real issues. 

We would not be surprised to see one or a few of these companies emerge as winners. It will likely be a company with a strategy and a focus on fundamentals and execution versus one quoting the number of shares their stock trades per day or about U.S. politics that have little to no bearing on their international cannabis business.

New York's Illicit Market Sells Concerning Cannabis Products

 A study sponsored by the New York Medical Cannabis Industry Association revealed that unlicensed cannabis products purchased in New York stores consistently failed lab tests for purity and potency. Researchers found that countless illegal stores in NYC are advertising sales for THC products.   

"The presence of several harmful contaminants, such as E. coli, pesticides, heavy metals, and salmonella in 40 percent of the illegal products purchased, including vapes," the report stated. "Many of the products tested did not contain the amount of THC advertised on the label and in one case, featured double the amount of listed THC. After reviewing the items under the state's proposed branding regulations, 100 percent of the products failed."

As longtime industry participants, we have seen numerous issues coming out of the illicit market in cannabis. The findings in recent studies are unsurprising because the illicit market is not regulated, nor does it seem to care about what they are pushing into the market and to whom or how old. This couldn't be more different for the overly regulated and taxed legal industry.

Team Poseidon was in NYC this fall, touring legal retailers in New Jersey, and we witnessed several illegal doors that litter the Manhattan market. The illicit market in NYC is extremely brazen and continues to be so. With our product knowledge, it was clear to see how terrible the available illicit products were, but there are millions of people that are still cannabis curious and are not savvy about what is legal, especially when illegal sellers are so prevalent. We're concerned for the health and safety of unsuspecting consumers and curious when this issue will become more mainstream. Our Cannabis Closing Bell and Poseidon Twitter accounts have regularly cautioned people about the dangers of the illicit market and we welcome the opportunity to say once more, "Buying legal cannabis is the patriotic thing to do!"

As Robert Burns wrote in his poem To a Mouse, "The best laid schemes o' Mice an' Men" often go awry.

Last year, we added Vanguard FTSE Europe ETF (VGK) to the Kiplinger ETF 20, our list of the best cheap exchange-traded funds (ETFs) you can buy, because of expectations for an economic recovery.

We were right, for a while. Then Russia invaded Ukraine in February, and that changed everything. European stocks plummeted – in some markets falling to bear-market territory – before recovering some in March.

Vanguard FTSE Europe ETF, which tracks an index of foreign stocks in developed European countries, is down 8.9% so far in 2022, essentially wiping out any upside recorded in prior months. As a result, over the past 12 months the ETF's return is down a bit with a 1.6% loss. But that’s better than the 3.0% average decline in the typical Europe stock fund and the MSCI EAFE, an index of stocks in developed foreign countries. (All returns are through April 8.)

Ireland, Sweden and the Netherlands were a drag, with declines of 13% or more over the past 12 months, while Norway, Denmark and Switzerland stayed above water, with better than 11% returns for the period. The ETF's top countries are the U.K., Switzerland, France and Germany.

Now the outlook for economic prosperity in Europe has dimmed. Higher commodity prices, especially for oil, will hamper European growth, given the region's dependence on Russian energy, says Shaan Raithatha, a U.K.–based economist at Vanguard. The eurozone gets 40% of its natural gas and 25% of its oil from Russia, more than the U.S. and the U.K.

"Persistently higher energy prices affect growth," he says, because consumers are left with less money to spend on other things. “They also weigh on profit margins, leaving businesses less to reinvest." Crude oil prices have climbed more than 30% since the start of 2022.

Raithatha has trimmed his expectations for European economic growth in 2022, albeit by one percentage point, to around 3%. And he expects an average of 8% inflation in 2022 in the developed countries of Europe.

We're watching this fund closely. In its favor, however, is the fund's underlying index, the FTSE Developed Europe All Cap, which includes stocks of all sizes in 16 developed European markets. In short, the ETF offers broad exposure to the region. Another plus: The fund's 0.08% expense ratio is "paper thin," says Morningstar analyst Ryan Jackson.

Stocks' positive momentum faded to start the new week after Federal Reserve Chair Jerome Powell said the central bank is prepared to move "expeditiously" towards tighter monetary policy in order to fight inflation.

"We will take the necessary steps to ensure a return to price stability," Powell said in prepared remarks for a speech today at the National Association for Business Economics.

In addition to taking a more hawkish tone, the Fed chief warned that the war in Ukraine could continue to disrupt global supply chains and raise commodities prices at a time when inflation is already "too high."

The consumer discretionary sector took the hardest hit today, giving back 0.8%. Energy, on the other hand, jumped 4.0%, as U.S. crude futures surged 7.1% to $112.12 per barrel amid reports the European Union is considering a ban on Russian oil.

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As for the major benchmarks, the Nasdaq Composite ended the day down 0.4% at 13,838, the Dow Jones Industrial Average shed 0.6% to 34,552 and the S&P 500 Index finished 0.04% lower at 4,461 – though a burst of late-day buying power brought all three indexes off their session lows.

Other news in the stock market today:

• The small-cap Russell 2000 fell 1% to 2,065.
• Gold futures eked out a marginal gain to settle at $1,929.50 an ounce.
• Bitcoin backtracked 2.5% to $41,176.50. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.) "The market is going to stay in a trading range until we see crypto regulation clarity in the U.S.," says Charlie Silver, CEO of Permission.io, a cryptocurrency-enabled provider of e-commerce permission advertising. "The bull market will return when trillions of institutional dollars looking for a home have a regulatory green light."
• Boeing (BA, -3.6%) was the worst Dow Jones stock after a China Eastern Airlines Boeing 737-800 passenger jet crashed earlier today. There were 132 people on board the aircraft, which has a strong safety record. China's Civil Aviation Administration said it will investigate the crash.
• Alleghany (Y) surged 24.8% after Warren Buffett's Berkshire Hathaway (BRK.B, +2.1%) said it would buy the insurer for $11.6 billion in cash, or $848.02 per Y share. Berkshire's acquisition of Alleghany marks the holding company's biggest buyout since 2016.
• In other M&A news, private-equity firm Thoma Bravo said it will buy cloud-based connected planning platform Anaplan (PLAN, +27.7%) for $10.7 billion in cash, or $66 per PLAN share. The deal is expected to close in the first half of this year, and Anaplan CEO Frank Calderoni will maintain his role.

Another Inflation Hidey-Hole

We've spent much of the past few months touting the ways in which investors can protect their portfolios from inflation and the rising interest rates that come with it.

Among the many corners of the market that can help mitigate the effects of both higher prices and rising rates are reliable dividend payers, such as the Dividend Aristocrats, or defensive plays like consumer staples stocks.

But CFRA Research's thematic research team recently identified a group within the latter sector that looks particularly attractive right now: beverage stocks.

"Similar to other consumer staples companies, soft drink equities tend to be more defensive, value/income-oriented, have relatively stable sales and earnings, strong margins and free cash flow, as well as attractive dividends, which these companies have a history of increasing regardless of economic conditions," the CFRA team says.

Indeed, current market conditions make the investment case for beverage stocks "the strongest it has been in some time," they add.

Investors seeking safety may want to take a look at these top-rated names, which could be a great place to hide amid rapidly rising prices.

Russia's invasion of Ukraine has roiled global markets. Inflation and the prospect of higher interest rates were already contributing to market volatility. Now, global sanctions and the day-to-day events in Ukraine have made navigating volatile markets even more difficult.

To understand what the war means globally as well as closer to home, it helps to take a broad perspective. The war in Ukraine is resulting in tragic loss of life and human suffering, as well as causing massive damage to Ukraine’s physical infrastructure. It has sent a wave of more than 1 million refugees to neighboring countries looking for housing, food and safety. Amid these ongoing tragic events unfolding in Ukraine, what is happening, and what are potential scenarios and market implications?

Why Sanctions and Not Miliary Action?

The United States, Europe, Canada, Britain, Japan and other countries have responded to the Ukraine invasion by immediately imposing unprecedented sanctions against Russia. Many countries have publicly stated that they do not want a war with Russia, and President Biden has consistently ruled out the deployment of U.S. troops to Ukraine: “Let me say it again: Our forces are not — and will not — be engaged in the conflict with Russia in Ukraine.”

There is a real concern that sending military forces to the region would risk additional escalation with one of the largest nuclear superpowers in the world. Neither the U.S. nor Russia can hope to “win” a nuclear war.

What Are the Goals of the Sanctions Being Imposed?

Throughout the current crisis, the Biden administration's mantra has been "start high and stay high," meaning that the level and impact of the sanctions should be high right from the start. As a result, these are the strongest sanctions ever levied against Russia.

The U.S. and European allies realize that they will not immediately stop the war. According to Andrea Kendall-Taylor, former Deputy National Intelligence Officer for Russia and Eurasia at the National Intelligence Council and a former senior analyst at the CIA, "Sanctions won't act as a deterrent when dealing with someone like Putin, who is so intent on pursuing maximalist objectives that the economic costs don't factor into his calculus to any meaningful degree. The goal of sanctions at this point is to raise the costs of the conflict, to signal to the Russian people that Putin is taking their country in the wrong direction, and, critically, to strangle Russia's ability to partake in destabilizing activities internationally."

There is hope that sanctions will cause enough damage to Russia to destabilize the country, devastate the economy, and reduce the support of a Ukraine invasion among the oligarchs and the ordinary citizens of Russia, ending the war more quickly.

Financial Sanctions

The U.S. and European allies have limited Russia's ability to transact business in foreign currencies such as dollars and euros. These countries have also frozen the assets of multiple Russian banks and those of Russia's central bank, limiting its ability to access $630 billion of its dollar reserves, crippling the Russian government's ability to fund the war.

Russia's banks are also cut off from the SWIFT messaging system. This system is used to transfer money across the world smoothly. Banks can find other ways to send money across borders than using the SWIFT technology, such as secure emails; however, this will be extremely difficult and inefficient.

Western governments have also targeted some of the wealthiest Russians close to the Kremlin. These individuals, including Putin himself, are sanctioned, and their foreign assets are frozen. As a result, wealthy Russians have a much harder time accessing their assets and have lost billions of dollars of net worth in the last week.

Energy Sanctions

Energy represents roughly two-thirds of Russia's exports and 50% of its budget revenues. So, energy sanctions would be a potent factor in crumpling the Russian economy. To date, sanctions on oil and gas have been ruled out by many because of the effect they would have on Europe. The EU currently imports 25% of its oil and 40% of its gas from Russia.

However, Germany has put the operating license on hold for Russia's Nord Stream 2 gas pipeline to begin operations. The Nord Stream 2 is a 764-mile pipeline that runs under the Baltic Sea, taking gas from the Russian coast near St. Petersburg to Lubmin in Germany. This move demonstrates that Germany is willing to possibly abandon this project to further punish Russia, even though it will have negative economic implications for Germans.

On March 8 President Biden signed an executive order banning the import of Russian oil, liquefied natural gas and coal to the United States. This move will deal another economic blow to Putin. In addition, U.S. Secretary of State Antony Blinken recently traveled to Europe for talks with Western allies. They explored the possibility of banning Russian oil imports as well. EU negotiations are continuing, and they are close to an agreement on a plan to phase imports out.

Impact on the Russian Economy

According to Elina Ribakova, deputy chief economist at the Institute of International Finance, "We are looking at a double-digit economic contraction already" in Russia.

So far, the Western-imposed sanctions have had a crippling effect on the Russian economy, with the ruble free-falling more than 30% in one day and the Russian Central Bank responding by drastically increasing interest rates from the current 9.5% to a sky-high 20%. In addition, to high borrowing costs, inflation will further strain the Russian economy and propel it further into a recession.

Impact on U.S. Stock and Bond Markets

The sanctions have inflicted much pain on Russian businesses, as is evident from their collapsing stock prices. While our clients have little to no exposure to Russian stocks, all investors may feel a bite out of their portfolios. The list of businesses announcing partial or full halts to operations in Russia is ballooning, causing fears of lower revenues among their investors. McDonald’s shuttered all 850 locations in Russia and their actions were shortly followed by Starbucks, Coca-Cola and PepsiCo. Apple has halted exports as well. The list of companies boycotting Russia is growing every day, further putting downward pressure of stock market prices.

In addition, there is significant uncertainty in the future, and the stock market hates uncertainty. The increased tension and anxiety caused by the COVID-19 pandemic makes the invasion even more troubling for U.S. stocks. The flight from stocks to safer bonds will continue as investors become more risk-averse and adopt a wait-and-see approach to the market.

We expect increased market volatility over the coming months as the war continues. The choppy markets will continue until investors understand the sanctions' impact on their pocketbooks.

Impact on U.S. GDP and Growth

That being said, market analysts still expect strong GPD growth for the U.S. The CNBC Rapid Update, the average of 14 forecasts for the U.S. economy, sees GDP rising by 3.2% this year, which is a very modest 0.3% drop from last month’s forecast in February. The CNBC Rapid Update chart below shows U.S. growth accelerating to 3.5% in the second quarter from 1.9% in the first.

Impact on U.S. Inflation

We believe spillover from the Russia/Ukraine crisis is likely to have the most material impact on energy prices, causing inflation to creep up even higher. Gas prices have already shot up in anticipation of future disruptions. According to new data from GasBuddy, the national average cost just reached over $4.30 a gallon. Economist Stephen Stanley, with Amherst Pierpont expects that much of the price run-up seen in recent days will recede within a few months, which means the gas price spike should have a short-term impact on growth and inflation.

Some analysts expect the current inflation surge to peak in Q1 2022 at 6.7% and the core PCE inflation to fall to 3.0% by end-2022 (although Kiplinger’s experts see it ending the year at 6.5%). As inflation normalizes later this year, consumers will get a welcome reprieve. Overall, inflation is expected to become more reasonable, and U.S. economic growth is seen persisting despite the Russia-backed invasion of Ukraine.

Investor Outlook

While our clients’ and most investors’ direct exposure to Russia and Ukraine is extremely small, the sanctions imposed on Russia and a renewal of the Cold War conflict are causing fears in the stock market. When emotions run high, looking toward the long-term is more important than ever. A well-diversified portfolio with a wide array of asset classes across different countries, industries and sizes can help reduce investment risks. But, of course, a diversified approach will not protect a portfolio from experiencing short-term losses at a time like this, with massive wartime market volatility.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

A good rule for investors is to look where others aren’t looking. Right now, that’s Europe, a continent whose stocks are ripe for growth after a truly lousy decade. Europe is settling down after the disruptions of “Brexit,” stocks are relatively cheap, and there are lots of good ones from which to choose.

Americans are often surprised to learn that Europe—defined as the 27 nations of the European Union plus the United Kingdom (which left the E.U. at the end of last year) and countries such as Switzerland and Norway, which were never members—has a larger population than the U.S. and roughly the same gross domestic product. Still, the 10 largest exchange-traded funds that concentrate on European stocks have a total market capitalization (shares outstanding times price) of only about $50 billion.

One reason U.S. investors shun European stocks is domestic bias; we prefer what’s in our own backyard. And until recently, Europe’s stocks have performed poorly. The largest European ETF, Vanguard FTSE Europe (VGK), has returned just 6% annualized over the past 10 years, compared with 15% for the largest U.S. stock ETF, SPDR S&P 500. The European fund fell in value in five of the past 10 years and trailed the S&P ETF in eight. (Stocks and funds I like are in bold.)

European stocks have lagged in part because of Europe’s economy. Annual U.S. growth was one-third higher, on average, than annual European growth between 2010 and 2019. The COVID-19 pandemic rendered 2020 an anomaly, but Europe’s GDP dropped 6.6% while the U.S. escaped with a decline of 3.5%.

In 2016, by a narrow margin, voters in the U.K. chose to leave the E.U., a process that dragged on for more than four years, and the uncertainty and dislocations that resulted harmed Europe as a whole. Now, however, the continent is learning to live with the new arrangement, and despite initial fears, no other country is itching to depart. Europe is not exactly stable, but it’s on a smoother path, and in­vestors can feel better putting their money there.

A new look. This is not your father’s Europe. The largest companies aren’t British, they aren’t banks or industrial firms, and many depend on Asian customers. They are companies that recognize the value of brands, and they are not gigantic.

The largest among them would rank 13th in the U.S. by market cap, and it is quintessentially European: LVMH Moët Hennessy-Louis Vuitton (LVMUY), which I lauded in December 2019 when the stock was $89. It’s now $158 but still worth buying. LVMH, with a market cap just under $400 billion (roughly the same as Walmart), owns many of the world’s great luxury brands: champagne makers Dom Pérignon and Krug, fashion designers Christian Dior and Louis Vuitton, jewelers Bulgari and Chaumet, plus dozens more, with a total of 4,915 stores worldwide. Shares have quadrupled in a little over four years, and although the pandemic caused revenues to drop in 2020, they bounced back by 32% in the first quarter of 2021, led by watches and jewelry. The stock barely missed a beat.

Cut from the same cloth is cosmetics giant L’Oréal (LRLCY), with a market cap of $256 billion—a little bigger than Coca-Cola. L’Oréal sells perfume, shampoo and skin products under its own brand and about 40 others, including Kiehl’s, Ralph Lauren and Giorgio Armani. Like LVMH, L’Oréal has seen enormous growth in China, with sales rising 35% in the pre-pandemic year of 2019.

Europe is home to other companies that have acquired large portfolios of consumer products. Anheuser-Busch InBev (BUD), headquartered in Belgium, owns over 500 beer brands, including Budweiser, Stella Artois and Beck’s. Diageo (DEO), based in London, specializes in harder stuff, including Tanqueray gin, Johnnie Walker scotch and Ketel One vodka. Anheuser-Busch has rallied from its March 2020 low but is still far below its high of five years ago.

Among the five largest European companies is ASML (ASML), with a market cap of $282 billion. Based in Veldhoven, Netherlands, ASML makes machines that employ ultraviolet lithography to etch microscopic patterns on semiconductors. The stock has tripled in three years, but the demand for semiconductors, as evidenced by recent shortages, is not going to let up anytime soon. Even with a price-earnings ratio of 44, based on analysts’ earnings estimates for the year ahead, shares are, to my mind anyway, inexpensive.

Bargain prices. A major attraction of European shares is that they are cheaper than American shares. In a late-May analysis based on earnings estimates for the next 12 months, French stocks carried an average P/E of 18; German stocks, 15; U.K. and Italian stocks, 13; and U.S. stocks, 21. U.S. stocks have had higher P/Es than their European counterparts for at least the past quarter-century. What’s significant is that the gap has widened since the Brexit vote in 2016, creating an opportunity.

European funds come in many varieties. The Vanguard ETF I cited earlier tracks the FTSE (for Financial Times Stock Exchange) Europe All-Cap index. It holds U.K. stocks, in­cluding financial company HSBC (HSBC), and Swiss stocks, such as pharmaceutical company Roche (RHHBY) and Nestlé (NSRGY), with an extensive brand portfolio of its own, ranging from its eponymous chocolate to Perrier water, Häagen-Dazs ice cream and Purina Dog Chow. Vanguard FTSE Europe, with 1,302 holdings, has an expense ratio of 0.08%.

I also recommend iShares MSCI Eurozone ETF (EZU), linked to an index composed of 242 large- and mid-cap stocks of nations that use the euro as their currency (that is, not including the U.K., Switzerland, Sweden and few others). Its top holdings, in order, are ASML, LVMH and then two great German companies, SAP (SAP) (enterprise software) and Siemens (SIEGY) (industrial automation). The fund has expenses of 0.51%.

A managed large-cap fund that carries a higher expense ratio (1.03%) is Fidelity Europe (FIEUX), which has a preference these days for Scandinavian firms, such as Swedbank. For a concentrated ETF, a good choice is SPDR Euro Stoxx 50 (FEZ), whose top holdings include Linde, the British supplier of industrial gases such as nitrogen. Expenses are 0.29%.

Finally, if you can take more risk with the possibility of more reward, turn to iShares MSCI Europe Small-Cap ETF (IEUS), with a stellar performance in the first half of 2021. The portfolio is heavily weighted toward industrials and real estate. The fund holds more than 1,000 stocks, none representing more than 0.5% of total assets, and it charges expenses of 0.4%. What you are doing here is not so much buying individual companies as wagering on European growth. That sounds like a good bet right now.

One's wealth serves as a safety net for professionals and their families. However, the current geopolitical and economic landscape might mean that wealth alone, without a larger plan, may not be enough.

When it comes to travel freedom, the passport that wealthy individuals hold can hamper their ability to respond to threats or new opportunities to access the global travel, business opportunities and lifestyle options that they find most appealing. For this reason, the financial planning model for high- and ultra-high-net-worth individuals (HNWIs) is evolving to include citizenship planning, with many law firms, family offices and wealth advisers expanding their investment offerings to satisfy their clients' increasing needs.

Safety, Security and Stability in Europe

Given the incomparable level of protection and comfort that the region offers, Europe has become the first choice for many individuals looking to acquire alternative residence or citizenship. According to experts in this field, European passports are also among the strongest in the world in terms of the travel freedom they afford their holders.

While U.S. passports have traditionally offered visa-free access to EU countries, passport holders have still been restricted from working and living in the countries and could only stay there for a maximum period of three months at a time. Beginning in July 2021, further barriers will be in place for U.S. citizens traveling to Europe. The European Travel Information and Authorization System will be conducting an additional security check on all non-EU travelers headed to Europe's Schengen Area, which is made up of 26 countries, including France, Germany and Spain. The new rules affecting U.S. citizens will require a separate application, cost and border control approval, both upon leaving the USA and upon arrival in Europe.

Individuals with a second EU passport or residence card can eliminate the restrictions to their travel freedom, whether now or in the future, move seamlessly through airports, and access the immeasurable business potential of the European market and the region's world-renowned educational and health care facilities.

How can U.S. citizens make that happen, and which countries might they consider pursuing a second EU passport? Here are some ideas:

Gaining Citizenship Through Malta or Cyprus

The small yet highly advanced islands of Malta and Cyprus offer two of the most highly regarded citizenship-by-investment options in the EU. Malta's high standard of living, along with its central location in the Mediterranean, makes it an attractive second home for wealthy families. It has experienced above-average economic growth in recent years, as investors and travelers alike tap into the island nation's enormous potential.

Considered the investment migration industry's gold standard, the Malta Individual Investor Program (MIIP) offers a gateway to the world's eighth- strongest passport, according to the Henley Passport Index, which ranks all the world’s passports according to the number of destinations their holders can access without a prior visa. A Malta passport offers visa-free or visa-on-arrival access to 182 destinations. The minimum contribution for the MIIP is approximately 1 million euros, and the Maltese passport can be obtained within roughly 12 months.

Cyprus, a fellow Mediterranean marvel, features an accessible business environment, state-of-the-art communication infrastructure, and a skilled labor force. A minimum investment of 2 million euros in real estate is required for the Cyprus Investment Program, and successful applicants gain visa-free or visa-on-arrival access to 173 destinations worldwide within approximately six months.

Inclusive and Peaceful Residence in Portugal

The Portugal Golden Residence Permit Program is an excellent option for HNWIs seeking residence that leads to citizenship in the EU, particularly for entrepreneurs with the capacity to create jobs. With a minimum investment of 250,000 euros, this highly popular program grants five-year residence permits to successful applicants and residence in one of the world's most multicultural nations.

Citizenship Planning

We want to thank Henley & Partners, a global industry leader in residence and citizenship planning, for the data provided for this report. Each year, hundreds of wealthy individuals and their advisers rely on their expertise and experience in this area. Their highly qualified professionals work in over 30 offices worldwide.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

For all their glorious history, the British, by voting to leave the European Union, have created a new standard for political and financial recklessness. In one fell swoop, voters in the world’s fifth-largest economy managed to sack the prime minister, undermine their nation’s currency, threaten its global political stature and jeopardize its critical banking sector. At stake: potential job losses, intensified class warfare and who knows what else.

Financial markets hate chaos, even when it’s occurring in a small country such as Greece. When a big-league nation loses its mind, investors pay a terrible price. On June 24, the day after voters in the United Kingdom approved a referendum to leave the EU, stock markets worldwide lost more than $2 trillion. On June 27, stocks kissed off another trillion. But by the time the second quarter ended a few days later, the Dow Jones industrial average sat 866 points above its June 27 low. Investors had recouped most of their losses—that is, those investors who didn’t hastily dump their stocks and stock funds.

This prompts me to reiterate the three-day rule, my personal iron law of investing, because Brexit absolutely revalidates it. Simply put, in any news-driven market crisis, wait until the third business day after the news breaks to trade anything—bonds, stocks, funds, gold, anything. Meditate. Breathe. Savor fine wine. Just don’t obsess.

Never mind how much shareholder value the TV shouting heads say just got “destroyed.” The selling waves are almost always fleeting, as plenty of previous seismic events—Chinese growth scares, Federal Reserve credit tightening, U.S. debt-ceiling brinkmanship, terrorist atrocities—underscore. Losses generally persist for about 72 hours, not counting weekends and holidays. Then bargain hunters and computer-driven buyers arrive, markets go green, and the sense of dread lifts.

I am not suggesting that you pretend nothing happened. These episodes are opportune times to reassess your strategy, your holdings and your tolerance for risk.

Beyond that, Brexit should have a noticeable impact on interest rates and rate-sensitive investments. By sparking talk of recession in the U.K. and continental Europe, Brexit is yet another depressant on rates, both here and abroad. That means the 35-year-long bull market in Treasuries and high-quality corporate and tax-free bonds is alive and well (bond prices move in the opposite direction of interest rates). The chances that the Fed will kill the bull with a series of rate hikes later this year have fallen from slim to nil.

In fact, the Brexiteers unwittingly padded values in the U.S. bond market. Ryan ALM calculates daily indexes for every Treasury maturity from one month to 30 years. Applying Ryan’s numbers to the $11.9 trillion of outstanding Treasury debt, I figure that post-vote bond buying added more than $110 billion to the combined market value of all Treasury bills, notes and bonds in three days.

Other yield investments benefited, too.

The stars: utility stocks, those indefatigable generators of power, heat and dividends. In the first six months of 2016, the Dow Jones utility index returned 20% (including dividends). Because of this stunning performance and the resulting high valuations, the sector is ripe for a correction. That said, you shouldn’t jettison long-held utilities that are delivering high dividend yields based on your original cost.

Finally, turbulence overseas reinforces the dollar’s stature as the ultimate safe harbor. A strong dollar, although a negative for U.S. exporters and multinationals, should hold down inflation and help keep interest rates low. Turmoil in the U.K. and Europe poses diplomatic, political and security risks. But it shouldn’t have a dramatic impact on your financial strategy.

The Greek crisis may have disappeared from the headlines, but the bitter taste of the recent confrontation between Greece and the rest of Europe will last for some time.

In taking a hard line against Greek demands that more debt be forgiven, the European Union noted that Portugal, Spain and Ireland met the reform and payment deadlines set forth in their earlier debt crisis agreements. In response, the Greeks stated that they had already suffered a 25% drop in gross domestic product over the past five years, far greater than the decline experienced by any other European economy. Furthermore, the Greeks reminded the Germans that despite Germany’s brutal occupation of their homeland during World War II, the Allies forgave 50% of Germany’s debt in 1953—implying that Greece should be granted similar debt forgiveness.

But a closer look reveals the weaknesses in Greece’s arguments. After Greece adopted the euro in 2001, a flood of cheap capital sparked a huge economic boom. Land and housing prices increased, profits rose smartly, and the labor market tightened. Workers were able to demand sharply higher wages, and businesses flush with funds granted those demands. At the same time, the government increased the benefits in an already overly generous pension system. From 2000 to 2007, Greek GDP expanded by nearly 58%, far more than that of any other European country.

When the financial crisis struck, lenders pulled back and the good times quickly ended. As Warren Buffett has observed, when the tide goes out, you find out who has been swimming naked. By 2009, Greece was exposed without even a fig leaf. Wages were far too high to be competitive, and the country’s debt, barely serviceable in good times, could not be refinanced at the higher interest rates lenders demanded.

Greece’s economy contracted much more than that of any other European country. But Greece’s claim that it suffered more must be viewed in comparison with the preceding boom. Despite the huge economic contraction, Greek GDP is more than 25% higher than in 2001, a better performance than Spain, Portugal or Italy.

Why couldn’t the Europeans forgive some of Greece’s debt, as the Allies did for Germany after World War II? They already have! The agreements negotiated over the past several years to extend loan maturity and sharply lower the interest rates that the Greeks had originally agreed to pay are equivalent to writing off about half of the Greek debt.

Fatal mistake. Prime Minister Alexis Tsipras made the fatal mistake of thinking he could bully Greece’s creditors into accepting his demands and still stay in the eurozone. But without extensive cash advances from the European Central Bank, Greece was forced to close its banks. Those hastily arranged closures have caused severe economic hardships and will hamper any economic recovery. Who will put money in Greek banks knowing that they could close again? The Greeks cannot rebuild trust in their financial institutions without extensive guarantees by the ECB, which will be granted only after a painful restructuring of Greece’s financial system.

Despite the recent friction, I believe the eurozone is stronger after putting down the Greek rebellion. Even with the ECB’s massive program of buying bonds to bring down interest rates, the euro has emerged from the Greek crisis with considerable strength.

Sound finance and fiscal responsibility do pay off in the long run. It’s not a coincidence that Germany is the richest country in the European Union. Greece will eventually pull out of its slump. But its current hardships are of its own making, not those of European hard-liners.

Five Green Up-And-ComersGreen Investing is the Next Big Thing

Meanwhile, the focus on global warming promises to lead to greater regulation of greenhouse-gas emissions. Already, the European Union has instituted a quota for carbon emissions in response to the Kyoto Protocol, a global treaty that went into effect in 2005. The U.S. did not sign the treaty, but a number of states are acting on their own to limit these pollutants. In addition, Congress passed an energy bill in 2005 that offers subsidies for various new energy technologies, and it is considering another bill this year.

Clearly, these trends will produce stock-market winners and losers, but not all of them are obvious. Makers of wind turbines and biofuels will surely benefit. But so will makers of rail cars and auto-emissions controls.

We've sifted through the implications and put together the Kiplinger Green 25, a list of companies we believe will get a big boost from the growing focus on climate change and the move toward alternative fuels. Our picks vary widely in size, and four are based overseas. Some of the stocks may be expensive, and shares of some of the smaller companies may be volatile. But we think all will do well over the long term. In addition, check out our separate profiles of five up-and-comers -- small (with market values of less than $1 billion), more-speculative companies that someday could grow into green giants.

ABB

One obvious solution to the global energy crunch is simply to use less energy. Companies that can help us become more energy-efficient will find their products and services in great demand. Switzerland-based ABB is expected to produce annual earnings gains of 25% over the next few years, largely because of strong sales of power-transmission equipment that reduces energy losses between power plant and end-user, and industrial-automation equipment, such as high-efficiency motors and robotics. The power-transmission business, which accounts for half of ABB's sales, should be particularly strong as emerging countries add new infrastructure and as developed nations, such as the U.S., replace aging, outage-prone systems.

AMERICAN INTERNATIONAL GROUP

A dense thicket of environmental laws and regulations has grown to cover such obvious targets as producers of chemicals and hazardous wastes. The rules now also apply to businesses as varied as commercial real estate developers, biotechnology firms, utilities, railroads and even schools (which may store potentially hazardous materials on campus). AIG, the giant insurer, has been writing policies that protect businesses against environmental claims since the early 1980s. Such policies represented about 3% of the $31 billion in premiums from AIG's U.S. property-and-casualty business last year. But as efforts to curb greenhouse gases grow, businesses will need protection against new types of liabilities that will surely arise. AIG is also a leader in writing insurance that protects participants in the nascent global market for trading carbon credits.

AMERICAN STANDARD

This 78-year-old company is getting a makeover. American Standard spun off its vehicle-control division this summer and will finalize the sale of its bath-and-kitchen business this fall. That will allow the Piscataway, N.J., company to focus on its most lucrative division, which makes heating, ventilation and air-conditioning (HVAC) systems. Selling principally under the Trane brand, American Standard is a leader in energy-efficient air-conditioning and climate-control systems. This will be a hot industry because buildings account for one-third of global energy demand. Any solution to greenhouse-gas emissions must include drastic reductions in energy demand from office buildings, residential towers and other large structures. Warren Buffett appears to like what he sees in the new American Standard; his Berkshire Hathaway has become one of the company's biggest shareholders.

APPLIED MATERIALS

First, this important Silicon Valley technology company overcame stiff Japanese competition to emerge as the world's largest producer of capital equipment for makers of semiconductors, with $10 billion in annual revenues. Then it applied that prowess to make equipment used to manufacture LCD flat-panel displays, a process that requires similar technology. Now, Applied, based in Santa Clara, Cal., is making a strong bid to be the leading manufacturer of equipment needed to produce photovoltaic cells and film -- another process technically akin to making semiconductors. With 85% of revenues generated outside the U.S., Applied, which also makes the tools to fabricate energy-efficient glass, has the world covered.[page break]

BURLINGTON NORTHERN SANTA FE

One double-stack train can haul as much freight as 280 trucks while emitting a fraction of the pollutants and burning a fraction of the diesel fuel. As railroads burnish their environmental credentials, Burlington Northern Santa Fe should benefit the most. The Fort Worth company hauls enough low-sulfur (and relatively clean-burning) coal from Wyoming's Powder River Basin to light up 10% of the nation's homes. It also hauls more grain products than any other railroad, including both the corn used to make ethanol and the ethanol itself. In fact, Burlington Northern frequently runs 95-car ethanol trains from the Midwest to California to meet the demand created by the state's strict auto-emissions standards.

COVANTA

An alternative approach to power generation that is already commercially viable is to get it from garbage, and the leader in waste-to-energy facilities is Covanta. The company operates 32 plants that burn trash and municipal waste to make steam and heat for power generation. Trash haulers pay the Fairfield, N.J., company to take the waste off their hands. This form of renewable energy is especially competitive in places such as New England, where landfill space comes at a premium. Besides, while there may be shortages of oil and natural gas, it's hard to imagine that there will ever be a shortage of a superabundant source of renewable energy such as trash.

EXELON

Nuclear power benefits in several ways from the emerging energy picture, says Robert Becker, co-manager of Cohen & Steers Utility fund. Surging fossil-fuel prices make nuclear energy highly competitive. Emissions are low compared with those from power plants that burn coal or oil. In the future, a system of carbon-emission credits and licenses is likely to develop in the U.S., as it has in Europe. "Under any scenario in cap and trade, the clear winners will be the nuclear generators," says Becker. His favorite utility is Exelon, of Chicago, the largest operator of nuclear power plants in the U.S. Exelon generates more than 70% of its power from nuclear fuel.

FPL GROUP

More than just a big Florida utility, FPL produces about 40% of the wind-generated electricity in the U.S. It gets 19% of its power from nuclear plants, and it owns few coal-fired facilities. In the future, if government regulations further cap the amount of pollutants that power plants may emit, the Juno Beach, Fla., company will be sitting pretty. More important, as the government requires other utilities to add more power from renewable sources to their mix, FPL will have a lot of power-hungry customers for its wholesale business, which can charge whatever the market will bear.

GENERAL ELECTRIC

You can't discuss new energy technologies without mentioning General Electric. The giant conglomerate is a major producer of wind turbines and clean-coal technology, not to mention energy-efficient locomotives, jet engines, home appliances and light bulbs. The Fairfield, Conn., company estimates that revenues from its clean-energy businesses were $12 billion last year (out of $163 billion total) and predicts that the figure will rise to $20 billion by 2010. And that doesn't include $1 billion in annual revenues from GE's nuclear-energy business. GE's stock is still one-third below its high mark in August 2000.

HONDA MOTOR

Any serious attempt to reduce greenhouse gases will need to zero in on the auto industry, which is responsible for at least one-third of carbon-dioxide emissions. That's why we like Honda Motor, whose fleet of cars, including the Accord, Civic, Odyssey and Acura names, is the most fuel-efficient of any major carmaker. That means the Japanese firm will benefit from tighter U.S. fuel-economy standards. The Civic Hybrid, for example, gets up to 45 miles per gallon. (Toyota Motors is the leader in hybrid vehicles, but Honda's shares are priced more attractively.) When the U.S. government mandates tighter fuel-economy standards, Honda will be off to the races.

INTERNATIONAL RECTIFIER

Lighting is an energy hog. The International Energy Agency estimates that lighting accounts for 19% of the world's electricity consumption. The best way to address this insatiable demand is to replace the venerable incandescent light bulb with newer, more energy-efficient technologies, such as compact fluorescent bulbs and light-emitting diodes (LEDs), a technology that cuts electricity consumption by more than 80%. International Rectifier makes the semiconductor power-conversion devices, called ballast controllers, for both types of lighting. The El Segundo, Cal., company makes a broad range of energy-conserving power-management chips for cars, appliances, computers, aircraft and factories. Because so much manufacturing has moved abroad, International Rectifier books three-fourths of its sales overseas. (Note: IR is investigating accounting irregularities at one of its foreign units.)

ITRON

Variable rates for home electricity use are coming. A 2005 federal law requires utilities to look into ways to spread out electricity demand (and reduce the need for new generating stations) by charging more for power used during peak hours. A key player in this market is Itron, the leading U.S. supplier of electricity meters (and a leader in gas and water meters as well). Its 50% market share for "smart" electric meters that can be read automatically puts it in a good position to help utilities put time-based pricing in place. Shares of the Liberty Lake, Wash., company have nearly doubled in the past year, but the opportunity is big. Just 5% of the world's electric, water and gas meters use smart meter-reading technology.

JOHNSON CONTROLS

It invented the room thermostat in the 19th century, and Johnson Controls is still going strong. As the leading worldwide supplier of temperature controls to the heating, ventilation and air-conditioning industry, Johnson is still at work making buildings more energy-efficient. It's also a leading supplier of HVAC systems. But the Milwaukee company's largest business is making automotive products. It supplies long-life lithium-ion batteries for hybrid vehicles, such as GM's Saturn Vue Green Line sport utility vehicle.

MCDERMOTT INTERNATIONAL

The U.S. leans on its plentiful but dirty coal reserves for half of its electricity generation. So coal's not going away anytime soon -- far from it. The solution is to clean up the coal. McDermott International's Babcock & Wilcox division has cutting-edge technology for scrubbers that capture harmful coal emissions before they are released into the atmosphere. So McDermott stands to gain as environmental regulations mandate retrofits and upgrades to existing coal-fired plants. This Houston-based engineering-and-construction company is also a leading supplier to the nuclear industry.[page break]

MEMC ELECTRONIC MATERIALS

One factor restraining the growth of solar power has been the shortage (and soaring prices) of silicon wafers, the key material from which solar cells are fabricated. That's been a boon for MEMC Electronic Materials, the leading U.S. maker of silicon wafers, which has almost tripled its earnings in two years. This hard-to-make substance is the same material used for making semiconductors. But while the chip industry seeks smaller and smaller products, the solar-power industry wants large panels that cover rooftops. Edward Guinness, co-manager of Guinness Atkinson Alternative Energy fund, calculates that it costs MEMC $27 per kilogram to produce silicon wafers, which it sells for $180 to $300 per kilo. Not a bad business.

ORMAT TECHNOLOGIES

Geothermal power is a renewable energy technology that is not dependent on weather (as wind and solar are) and is thus more reliable. The technology uses hot water and steam from deep underground to turn a turbine and generate electricity. Ormat Technologies is the third-largest geothermal firm in the U.S. and the only one of the top three that focuses exclusively on geothermal power. Its shares are pricey, but the Reno, Nev., company stands to benefit from government mandates in California and Nevada (where most of its U.S. plants are located) that require utilities to buy more power from renewable sources.

PHILIPS ELECTRONICS

Philips Electronics of the Netherlands is such a sprawling consumer-electronics giant (2006 sales: $36 billion) that people forget it's the world's leading maker of incandescent light bulbs. But unlike most entrenched industry leaders, Philips isn't averse to jettisoning the old and adopting new technologies. Jens Peers, lead manager of Calvert Global Alternative Energy, says Philips is making an aggressive bid to capture the premier position in new, energy-efficient lighting, such as LED and compact fluorescent bulbs. In pursuit of this goal, Philips has been acquiring lighting companies with advanced technology, such as Color Kinetics, an LED fixture maker in Boston.

ROHM & HAAS

Air pollution can come from some surprising sources, such as house paints, which, years after their application, continue to release low levels of toxins into the air. Philadelphia-based Rohm & Haas, a maker of coatings, sealants and other specialty materials, gets 70% of its revenues from environmentally friendly products, such as water-based paints, formaldehyde-free insulation and lead-free electronics products. "It's a green company in disguise," says Todd Ahlsten, manager of Parnassus Equity Income fund, who holds Rohm & Haas in his fund.

SHAW GROUP

A growing number of people in developing countries now have the means to heat and cool their homes and businesses. That portends a huge increase in spending on power-plant construction -- as much as $5.2 trillion through 2030, according to the International Energy Agency. Shaw Group, an engineering-and-construction firm headquartered in Baton Rouge, La., has a 20% stake in Westinghouse Nuclear and is a major player in both building new coal plants and making older ones burn more cleanly. Bad accounting decisions have plagued the shares recently, but an $11-billion backlog of business, mostly from planned power plants, should lead to a brighter future.

SUNPOWER

The demand for solar cells and panels is booming. The question is whose technology will prevail in the youthful industry. Kevin Landis, manager of Firsthand Technology Value, thinks San Jose, Cal.-based SunPower will be a winner. SunPower makes the solar-power industry's most energy-efficient panels, measured by the conversion of sunlight into electricity (the efficiency of its solar cells is more than 20%, which is 50% higher than that of conventional cells). SunPower, which is 53%-owned by Cypress Semiconductor, derives all of its revenues from solar-related products.

SUNTECH POWER HOLDINGS

The enormous potential of solar energy is no secret, and that's why the stocks of so many firms in this field are expensive. One company that may nevertheless pay off is Suntech Power Holdings. China's largest maker of photovoltaic cells, which convert sunlight to energy, has the scale to produce low-cost, high-profit solar equipment for sale in the international market. The firm is profitable, and earnings should grow 25% to 30% annually over the next few years, says fund manager Guinness.

TENNECO

Over the next eight years, stricter auto-emissions standards will take effect in Brazil, China, India, Japan, Russia, the U.S. and Western Europe. That's good news for auto-parts supplier Tenneco, which gets nearly two-thirds of its revenues from emissions equipment (the rest comes from suspension gear). It is the leading supplier in China and Europe, and it is number two in the U.S. The Lake Forest, Ill., firm is especially well positioned to sell emissions equipment for diesel-powered cars and trucks, which offer better fuel efficiency than gasoline-powered models do.

TRINITY INDUSTRIES

Another way to play the boost in railroads' fortunes is via Trinity Industries, the nation's largest manufacturer of railcars. Demand for covered hopper cars, which carry grain, as well as for coal cars and tank cars for hauling ethanol, contributed to a record order backlog of almost 34,000 cars at the end of the second quarter. The Dallas-based manufacturer is also a backdoor play on wind power, as it is a leading maker of towers for wind-powered turbines. Trinity's energy division, which includes the wind towers and other businesses, makes up only 11% of revenues. But wind-tower revenues, driven by federal tax breaks, could soar to as high as $250 million this year, up from $11 million in 2004.

UNITED TECHNOLOGIES

This splendidly run industrial conglomerate focuses on energy conservation both within the company and with the products it sells. Its Otis elevator and Carrier heating and air-conditioning units are developing more energy-efficient systems. The Hartford, Conn., company also makes fuel cells for buildings, transit buses and the U.S. space program. Also the maker of Pratt & Whitney engines and Sikorsky helicopters, United has been riding the global boom in infrastructure building.

ZOLTEK

These are boom times for makers of carbon fiber, a strong, lightweight material used to make aircraft parts as well as the 175- to 200-foot-long blades that turn wind turbines. Zoltek supplies both markets, and its stock has more than doubled in the past year as demand from both sources has soared. But this may be only the beginning. Zoltek chief executive Zsolt Rumy thinks carbon fiber will soon be used to make lightweight, fuel-efficient cars; precast-concrete structures; and ultra-deep-sea oil-drilling equipment. He expects worldwide carbon-fiber production to more than double by 2010, to $2 billion, and thinks his own company's sales can hit $500 million in 2011, more than five times higher than last year's total.