Lingering Questions And The Ever-Present Earnings Malaise

The Daily Reckoning

Weekend Edition

January 13-14, 2001

Paris, France

By Addison Wiggin

MARKET REVIEW: Lingering Questions and the Ever-present Earnings Malaise

The government released wholesale prices this week and sparked fears the economy may not be slowing as much as the Fed’s 50-point surprise last week would have us all believe… the odeur of uncertainty surrounding Easy Al’s mid-meeting announcement remains.

The Dow, in turn, slipped 136 for the week to 10,525. The Nasdaq, while down 14 for the day Friday, ended the week up a very bubblicious 218 to close at 2,626… an overall gain of over 9%. The S&P 500 slipped slightly Friday, closing off 20 for the week at 1,318.

Hewlett-Packard and Gateway both projected gray skies for current and future earnings on Friday. Demand, they say, is softening. Gateway added to the gloom with layoff announcements… According to Reuter’s, both companies indicated they “were surprised at how quickly their business had slumped” and blamed “deteriorating economic conditions.”

Markets around the globe: Japan’s Nikkei stock average rose 1.1%. Germany’s DAX index was up 0.4%, Britain’s FT-SE 100 was up 0.8%, and France’s CAC-40 rose 2.3%.

The Russell 2000 ended the week at 485 up 22 and the Wilshire 5000: 12,181 up 309 for the week.

PRICES FOR THE WEEK:

Gold: $264 down $5

Crude Oil: $28.76 up $.81

Natural Gas: $8.47 down $.79

CRB Index: 229 up one

Dollar Index: 109 up one

The Euro: $.95 same

British Pound: $1.47 down three cents

Japanese Yen: $.85 down a penny

FLOTSAM & JETSAM: Soviet Style Energy Crisis In California

– From John Myers,

Outstanding Investments

“California’s energy crisis is a nightmare without end. This week two of the state’s biggest utilities — PG&E and Edison International – stood at the brink of bankruptcy. Meanwhile energy suppliers, including those in Canada, have suspended electricity sales to California on the expectation they won’t get paid. With no bailout in sight the golden state could suffer blackouts.

On Thursday California Governor Gray Davis persuaded Energy Secretary Bill Richardson to extend an emergency federal order requiring power suppliers to sell surplus electricity to the state’s beleaguered utilities. Also on Thursday California’s energy regulators declared a Stage Three power alert, one step short of ordering scattered blackouts. The order basically cut power off to customers who had volunteered to let their power be cut in exchange for lower rates. With severe storms brewing along the coast, California faces the possibility of power blackouts over the weekend.

California’s problems stem from the fact that the wholesale market (the place where utilities buy power from generators), was opened to free competition, while the retail market between the utilities and customers remained regulated. It wasn’t a problem when energy prices were low. But when natural gas prices took off, utilities where put in a vice. They had to pay for skyrocketing costs yet they were prohibited from passing them on to their customers. In a Soviet Union-like twist, customers had no interest in scaling back demand because low prices to them were guaranteed. Ironically utilities, the investment for orphans and old ladies, are on the brink of failure.

Since last spring, California’s two biggest utilities have spent $12 billion more for power than they have collected from ratepayers.

As for the big picture, California’s energy debacle could be a preview of what may happen to the entire nation sometime in the not too distant future. According to the New York Times, “Much of the state’s immense electric bill has been paid to companies based outside the state.”

Soon the NY Times could be writing that much of the nation’s immense energy bill has been paid to countries overseas. Lost in the noise over California is the fact that the U.S. imports 10 million b/d of oil. That is a wealth transfer of $110 billion at today’s oil prices.

In truth the real cost of sky-high energy prices is just beginning to be felt. Bailing out California’s utilities is just the tip of the energy price iceberg. The below the waterline costs will be sagging consumer and business confidence and recession. I believe it; the Federal Reserve believes it and before this thing is over even the most stubborn of stock market bulls will believe it.”

Enjoy your weekend,

Addison Wiggin

The Daily Reckoning