Energy Crisis Chat: When the Light Goes Down in the City

Chris Edmonds, Brett Fromson and Dave Gaffen chat on TheStreet.com Wednesday, Jan. 17 at 5 p.m. EST.

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TSC-RealMoneyLaura: OK, we're ready to roll! Dave Gaffen is in the house and here to take your questions on today's movement.

TSC_DavidG: Hi there. Laura said it all for me, so today I'm a man who needs no introduction.

tsc_moderator-guest93: Will we see earnings deterioration of companies with manufacturing facilities in CA?

TSC_DavidG: I think we would be seeing earnings deterioration regardless. Then again, one could surmise that companies would save money in a blackout -- you can't be billed when your power is off. But the energy situation there is much more serious than the earnings deterioration, but it's also much more specific right now to the utility companies.

Amanda-guest: The margin debt on the New York Stock Exchange fell for the third straight month. What's causing this and what do you predict for the next few months? Is the market unstable?

TSC_DavidG: That's a very good question. Let's just say that when people feel really good, they're more comfortable taking more risk. But at times like this, people are less inclined to take risk. You'd expect to see margin debt fall, just as you'd expect to see overall investing fall (as it did for a few months). Now, people are beginning to become comfortable again, so it could rise again. Which would be something. Margin debt is highly risky -- and a lot of people lost money. Falling margin debt is not a sign of instability; right now, it should be viewed positively. It means the excess in the market is receding.

MaybeBaby: Tech stocks have rallied this week so far. Does this indicate a trend towards recovery? And how much growth do you think can be reasonably expected in that market sector?

TSC_DavidG: Technology stocks are certainly reacting strongly to the Fed's actions. There's an underlying feeling that growth will rebound in coming quarters, even if the first, and perhaps the second quarter, are still lousy. So it indicates optimism that there will be some recovery, but not necessarily that it will happen. We'll have to see what companies say about their outlooks for the second half of the year. I'd expect growth would recover to a reasonable range, even if we don't get to the ridiculous levels of last year.

tsc_moderator-guest36: Can ConEd(ED Quote) and PG&E (PGE Quote) theoretically go bankrupt and go away? If they go bankrupt, they could come out of bankruptcy, have their assets privatized, get bought out, what else?

CSEonTSC: The options are potentially limitless but, remember, they're controlled by the bankruptcy court. That is the real threat that I think the utilities, the generators and the government want to avoid. Note that PG&E and Edison International have recently made some corporate restructuring decision [in the last week] that suggests they think bankruptcy is a legitimate option.

nada-guest: Why are Silicon Valley companies still doing so well as opposed to other areas in light of the power shortages?

CSEonTSC: I don't think a lot of people grasp the potential severity of the problem. However, it is becoming an issue for companies that may be looking to expand in California. You might take a look at Tish Williams' take on the impact on technology on the site today. A very good analysis.

RM_Brett: Longer term, the problem posed for the Valley is lack of growth in nearby power supply. That's why Intel (INTC Quote) said last week it will delay its new plant in California until this crisis is resolved.

lulu-guest: How will rising fuel costs and OPEC's decision not to release more product today impact the economy? Are we gearing for a massive recession?

CSEonTSC: I don't think that the OPEC decision will, alone, push us into a recession. I think the Fed will vigilantly defend against that prospect. However, if you look at the analysis, it's clear in many minds that OPEC's assumptions about crude supply build are optimistic. That said, I think oil prices are set to move higher, not lower, and that could have an impact on growth.

TSC_DavidG: I think we're already seeing the impact on the economy. And it's going to continue to cut into consumer spending decisions for some time. The surprise to many was the aggressive rebound in Asian demand, which is partially responsible for the increase in prices.

CSEonTSC: David is absolutely right. Remember, energy prices act as a tax and take disposable income out of consumers' pockets. That's true with oil, and especially gas and heating oil this winter.

TSC_DavidG: And even after the winter ends, then we're back into the summer, and we're talking gasoline costs for all the SUVs consumers bought in the last five years.

RM_Brett: I'd like to say that I agree that oil and energy prices in general will stay higher longer than we've seen in many a day.

tsc_moderator-guest800: Chris, Valero Energy Corp. (VLO Quote) announced great earnings and guidance today but was down. Do you like the stock here? Thanks. (Long VLO.)

CSEonTSC: I think Valero's response today is typical of what you're going to see in the industry and something we have talked about before. The numbers are not as important as what the Street thinks the numbers should be. Valero has been a good hold and I think you'll have opportunities to get in; I just wouldn't rush things. I think you're seeing some price consolidation like you saw in the 3Q earnings, as well as rotation away from energy. Be patient, your time will come.

tsc_moderator-guest579: Does the legislation currently under consideration in California have any provisions to bail out PG&E?

CSEonTSC: No, and that's part of the problem with generators. For the deal to work, there has to be some securitization of the $12 billion-plus in debt that PG&E and Edison has amassed. I think you will see it, either in the legislation or as a result of bankruptcy and I have to think the governor and the California legislature knows that!

tsc_moderator-guest36: If this tech rally has legs, many of its participants will just climb towards their previous bubble heights. Wouldn't that mean we'd be setting up for a repeat of the bubble deflation?

TSC_DavidG: Well, first, let's be specific about where the bubble was -- the Net. Those stocks aren't coming back. Forget it. Second, a lot -- a whole lot -- of tech stocks were way, way overvalued. And they're not now, but they're not cheap. I think your premonition is right and for that reason, I don't see this continuing too much longer. I think there's a lot of Fed-based euphoria driving things now, but to me, it's happening in the context of a range-trade.

Note that the industrial stocks, those cyclicals, aren't moving up in a similar way. To me, that suggests there's a bit of uncertainty about this Fed-motivated upturn. But tech investors are alternately the most optimistic and the most pessimistic -- they fly very high, then fall far. Now they're coming back to equilibrium.

RM_Brett: Could be we're seeing another leg down in tech. But my best guess is that some tech sectors do better than others because their fundamentals are better.

elias9-guest: How much will American Power Conversion (APCC Quote) benefit from the situation in California?

CSEonTSC: Funny you ask -- have received a handful of emails from readers who have told stories of companies loading up on power supplies and other protective devices in California. It will be interesting to see how sales and margins are this quarter. I'll do some checking. Stay tuned and we'll see if we can get some sort of concrete answer.

DeepWoodsman: I know we're not out of the woods yet with the Nasdaq, but this week has been exciting so far. How do you think Greenspan will react to this resurgence if it continues?

TSC_DavidG: I think the idea that Greenspan is reacting to the weekly moves in the stock market is overstated. Notice that the Fed didn't react until early January -- when the Nasdaq had already been killed, killed, killed. And clearly he misplayed things as far as the energy situation goes -- they didn't recognize that problem early enough, but the idea that he's going to rethink things because of stocks is a little fuzzy.

Just as the stock market has predicted nine of the last three recessions, it would do the same for recoveries. On a long-term basis, the market is efficient and a good discounting tool, but at any given moment it can reflect so much in psychology that it can't be used reliably.

RM_Brett: He certainly is dedicated to saving stock prices. That said, I expect he will have some room to lower rates aggressively here since I see little signs at the moment of inflation.

laineb-guest: Chris, how probable do you think it was that the California problem caused the Fed intra-meeting rate change?

CSEonTSC: I do think it figured into the Fed's calculus. However, I don't think it was controlling. But it is clear that the meeting between Governor Davis and Greenspan was more than just a cup of tea, so to speak. On the other side, my colleague, Aaron Task, thinks it had more of an impact on the decision.

RM_Brett: Seems far-fetched. Although there may well be a role for the Fed if this thing spreads into other states, as it could.

TSC_DavidG: It's just unclear to me how the rate cuts help these utilities, still suffering with prices and a lousy regulatory environment. There's a bigger economy out there to deal with.

hcarstens-guest: Which state is next in line for California-type problems?

CSEonTSC: New York has some issues, but the California regulatory scheme is so unique that it's hard to say that any state will have the same problems. However, there are clearly some generation capacity issues looming in NY that may present some challenges. I don't think anyone else is even close to the California problems, however.

RM_Brett: Chris, is it possible that California might be sucking so much power that it endangers other nearby states with their own energy needs?

CSEonTSC: It's clear that dwindling hydro capacity is a real problem in the Northwest. In a column up shortly, the head of the California Independent System Operation says the problems this summer could easily extend to Washington and Oregon.

RM_Brett: Great.

CSEonTSC: And capacity is a problem throughout the west. The reason California is in so much trouble is that power that used to be imported from states like Nevada (all three people in the desert), Arizona and others is now needed to meet demand in the native states. Hence, the imports into California are dwindling. And remember that California has not built a power plant in over 10 years. Ouch!

laineb-guest: What banks will be affected most by this power crisis?

CSEonTSC: The syndicate leaders in the debt of PG&E and Edison include Bank of America(BAC Quote), JPM/Chase(JPM Quote) and Citibank(C Quote). Wells has small exposure and both Mellon (MEL Quote) and Bank One (ONE Quote) also have small pieces. That's the commercial banks -- Jim Cramer has said in past columns that he has heard that BofA's exposure is greater than a billion.

street_doctrz-guest: Has the CA situation created a buying opportunity in other utes not related to CA?

CSEonTSC: The utility index has been hammered as a result of California and many good names have come down with the Cal utes. I'd take a look at utes with a strong regional presence and a good balance between regulated and unregulated businesses. Utilities like Duke(DUK Quote), Exelon(EXC Quote) (the combination of PECO and Unicom) and Southern come to mind. (Long Exelon and Southern.) Remember, many of these names had great runs in the second half of the year and may not be cheap. However, if you pick good operators with good franchises, you can make money here, especially with the recent pullbacks.

RM_Brett: It may have. One that I kind of like is El Paso Electric (EE Quote). Lots of nuclear that produces power at a lower cost; good regulatory environment in Texas, too. Ticker is EE. And it has had a good selloff here.

CSEonTSC: And, Brett, EE (on the Amex) is probably a good strategic play as well. They're looking to maximize value in a number of interesting ways.

tsc_moderator-guest36: Several dams in the Northwest had been proposed and/or are scheduled for demolition, predominantly for environmental reasons. Are there any plans now to delay or cancel these actions?

CSEonTSC: None that I know of. And, as I say in a column just up on the site, that may be a big problem going into summer!

manzari-guest: Looking at Chris' comparison of the OSX to the XOI, I'm wondering why the OSX has ramped nearly 40?

RM_Brett: All I can say is that they are a more leveraged way to play high and rising energy prices. They sell the rigs to the drillers. A good biz when it's good. They had a swoon late last year when doubts about the sustainability of energy prices were popular. Now they have come back and since I think energy prices stay higher than expected for longer than expected, I think they may well continue to do well.

TSC_DavidG: This is that old saw about selling picks to gold diggers. Higher oil prices makes it lucrative to explore for oil, but even more lucrative to sell equipment to people looking for oil.

CSEonTSC: Well done! Thanks guys!

donkohan-guest: Do you think solar energy will become viable anytime soon?

CSEonTSC: Solar is certainly a small part of the solution. However, there is a difference in being part of a solution to the problem and being a solid investment play. Until someone can make money in solar, there are no real investment plays.

knitch-guest: On another topic, what natural gas plays do you recommend for 2001 (assuming the price stays at $5 to $6)?

CSEonTSC: You want to look for E&P companies that are leveraged to gas. Companies like Apache (APA Quote) and Mitchell (MND Quote) come to mind. However, heed what I said earlier. I think people are in a consolidation mode here. There's a pretty good chance you'll be able to buy these stocks at these prices or slightly cheaper as we proceed through earnings. You might want to establish positions here and add later. Don't rush. One other you might want to look at is EOG Resources(EOG Quote), the old Enron Oil and Gas. Very interesting company. Not cheap but very well run.

RM_Brett: I still like Alberta Gas(AOG Quote). But really, if this tide stays high, almost all the operators will do well. I would not buy just one or two names. A basket might be a safer way to go.

tsc_moderator-guest36: With the rapid increase in natural-gas drilling in the last several months, is there any data out yet regarding results ... net increase or decrease in total production?

CSEonTSC: Not a significant amount of data from the production fields yet. However, it will begin to show up in earnings calls as companies report activity for the quarter. We'll keep you posted. One other thing: The last three weeks the withdrawals of natural gas from storage have been lighter than expected, which has been a catalyst for the recent decline in gas prices. I think a lot of analysts and investors, including me, are trying to get a better feeling as to what that means. I think those numbers will be interesting to watch over the next month and will have a big impact on gas prices and possibly on the stocks.

jimseymour-guest: Chris, want to take a minute to give us a very brief rundown on fuel cells, their prices and efficiency, and how soon you think they'll be appropriate for small businesses and homes?

CSEonTSC: Jim, great question. I'll be honest and say I don't know a lot about the actual cost of fuel cells, but will do some digging. I do know that companies like Ballard (BLDP Quote) and FuelCell Energy(FCEL Quote) are making a big push into the market. The key is commercialization and profitability. From what I gather, we're about two years away from real commercialization.

That said, there are several projects, including one real interesting project at a hotel in Dallas, that are using fuel cells to power the basic operations of the infrastructure. I think with California and the continued lack of generation capacity elsewhere, that distributed generation of all types will make big strides in the coming year. We'll take a look at the issue in an upcoming missive.

TSC_DavidG: Thank you all for coming. You're a great crowd. Hope to chat again soon.

RM_Brett: Are we done? I hear that PG&E just defaulted on $30 million of commercial paper. Stay tuned. Keep a candle burning in the window all you folks in CA. On second thought, forget the candles. Get a flashlight.

CSEonTSC: Good to be with all of you, especially Brett and Dave. California continues to get interesting. Stay tuned. We'll continue to try to shine a light on the situation and let you know what it means to you as investors. And, as always, send your comments, your thoughts and column ideas our way. Thanks and good night!