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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (6291)	6/14/2002 3:00:40 PM
From: Raymond Duray	Read Replies (1) \| Respond to of 33421

THE END OF THE MERCHANT POWER RACKETS? Hi JP, I thought this article on Apache's battles with the energy merchants to be indicative of big changes afoot. -RGD thestreet.com Potential Partners Shun Energy Traders By Melissa Davis Staff Reporter 06/14/2002 07:31 AM EDT Houston-based Apache (APA:NYSE - news - commentary - research - analysis) can't think of a worse idea than hooking up with a neighbor like Dynegy (DYN:NYSE - news - commentary - research - analysis) to pursue a future in energy trading. Never mind that Apache rid itself of a large stake in Dynegy's predecessor a decade ago, and that the top brass at the two companies have remained on frosty terms for years. Ignore the fact that Apache is suing Dynegy over disputed natural gas transactions in New Mexico. No, it's nothing personal. Apache simply wouldn't entertain a partnership with any merchant energy company, an executive there says -- and he doubts that other big players would do so, either. Though Apache's just one company, its comments highlight the increasing peril for merchant energy stocks as these onetime highfliers search desperately for fresh capital to revive a faltering business. Indeed, with regulators probing all aspects of energy trading and credit rating agencies openly questioning the viability of the businesses, few observers see a light at the end of a tunnel that has led these stocks lower by 40% and more over the last year. Now, with credit lines coming up for renewal and the market awash in assets for sale, the sector may face an even more brutal selloff before anyone takes serious interest in these companies. Fundamentally Unsound To people like Apache's Tony Lentini, it all comes down to the trading industry's fractured fundamentals. Things like roundtrip trades -- deals that boosted transaction volume and revenue but had no actual economic value -- point to a void at the core of the industry that no amount of cheap capital can fill, he says. "When you look at the stuff these guys allegedly had to pull in order to create what appeared to be a viable business -- adding phony trades to pump up volume, creating revenue out of thin air -- you've got to wonder about the business model," says Lentini, vice president of public and international affairs at Apache. "If you've got to resort to chicanery to run a business, then something must be wrong." To be sure, there is no indication that the energy traders that engaged in roundtrip trades did anything illegal. The companies generally maintain that their business and accounting practices are legitimate and say they are cooperating with various government probes of trading activity. Dynegy didn't immediately return calls seeking comments. But the inquiries by the Securities and Exchange Commission and Federal Energy Trading Commission have only heightened investor anxiety in a sector that was once just as hot as the tech and telecom sectors in the late 1990s. Today, a number of merchant energy companies are hanging the equivalent of "for sale" signs on their trading units, but they have yet to snag significant business partners -- let alone buyers. No Dairy Queen Indeed, the well appears to be bone dry for would-be energy-trading partners. To cite one example, after Williams (WMB:NYSE - news - commentary - research - analysis) assured investors Monday that its phone started ringing soon after it began shopping for a partner, the Tulsa company failed to as much as hint at who might be on the other end of the line. Analysts participating in a Monday morning conference call -- the second in as many weeks -- raised their own hopeful possibility. They asked if Berkshire Hathaway (BRK.A:NYSE - news - commentary - research - analysis), led by billionaire value investor Warren Buffett, might be a future partner. Berkshire Hathaway, after all, recently forged a relationship with Williams by investing in Williams' preferred stock, buying a prize pipeline and negotiating on a joint utility transaction in Nevada. Still, after reviewing that involvement, Williams stopped well short of suggesting that Berkshire Hathaway might become a bona fide trading partner. "This suggests to me an improving relationship," said Williams Chief Executive Steve Malcolm. But "whether we do anything with them in the future, I can't say." Berkshire Hathaway didn't return phone calls. And one Tulsa money manager downplayed the chances of such a partnership. "Warren Buffett loves Williams' pipelines," said Fredric E. Russell, whose firm owns Williams' stock. But drawing a contrast with the company's complex, hard-to-explain trading operation, Russell added, "He's interested in buying assets he understands." Paper Profits At least on paper, the business can look enormously profitable. Last year, Dynegy attributed $1.26 billion -- or 82% of its total profits -- to energy trading. At Williams, just over half of the company's $2.4 billion in reported profits (before extraordinary charges) came from trading. Similarly, both Reliant (REI:NYSE - news - commentary - research - analysis) and El Paso (EP:NYSE - news - commentary - research - analysis) credited trading for nearly half of their companies' profits. But a recent credit crunch has crippled the industry's ability to reel in the long-term energy contracts that, through mysterious mark-to-market accounting, pumped up profits so nicely. Stripped of that power, Williams is suddenly projecting second-quarter per-share earnings in the low 20-cent range, or about half what it predicted before its access to capital -- so critical to long-term deals -- dried up. Despite that revision, Prudential applauded the improved "quality" of Williams' earnings. Absent long-term contracts, Williams is still expecting $500 million in cash earnings -- the kind you can actually scoop off the books and pour into the bank -- for 2002. Cash Certainty The deep cut comes to what Williams has coined "cash-certain" earnings, a figure questioned by some for its dependence on elaborate models and accounting practices that can be riddled with assumptions. "There's cash, and there's prediction of cash -- but there's no such thing as 'cash certain,'" Russell said. "I don't think energy traders should be inventing new phrases for the English language. We have perfectly good phrases already." In an extensive report last month, Moody's criticized the lack of clarity in financial reporting throughout the merchant energy business. The ratings agency called for a massive overhall of the entire sector, strongly suggesting that energy traders seek out creditworthy partners both inside and outside the industry. With its power to withhold investment-grade ratings -- considered crucial in the capital-intensive energy trading business -- Moody's caught the full attention of its target audience. Craig Goodman, president of the National Energy Marketers Association, called the Moody's report "very well written but also very frightening." He said his organization's primary mission is to restore American confidence in the energy trading sector so that the country can move forward and realize the benefits of deregulated energy markets. Goodman described Williams and its peers as "great companies that are under siege," saying their survival is critical to the country. But Apache, an exploration company and longtime critic of energy trading, responded to the association's claims with ridicule. "The country operated fine for years before there ever was an Enron," Lentini said. "Consider the source. This is an organization representing companies that don't want to go down."

To: John Pitera who wrote (6291)	6/16/2002 10:08:08 AM
From: Jon Koplik	Read Replies (1) \| Respond to of 33421

NYT -- This Time, the Fed Is Boxed In on Rates. June 16, 2002 This Time, the Fed Is Boxed In on Rates By LOUIS UCHITELLE In his public statements, Alan Greenspan is upbeat. The recovery is happening, he says. Let's hope so. When an upturn seems in danger of fizzling, as this one does, the Fed normally keeps it on track by cutting interest rates. This time, however, Mr. Greenspan is a spectator just as the rest of us are, unable for now to exercise his power. A turning point may even be at hand, justifying a rate cut to prevent a slowing economy from deteriorating into another recession — the famous double dip that a few weeks ago appeared so unlikely. But this is one of those awkward moments in the annals of the Federal Reserve when acting to offset the next anticipated twist in the economy is not feasible. The Fed is boxed in. Raising rates, or lowering them right now, would be harmful. The Fed has tied its own hands. Mr. Greenspan and his fellow policy makers have signed onto the proposition that the economy is expanding. That was the message in their statement after their last meeting, in early May. And nothing they have said in public since then has substantially amended that view. Some have also said that over the long run, interest rates cannot stay as low as they are. Taking their cues from the Fed, and from their own optimism, Wall Street forecasters have been trying to predict when the policy makers will begin to raise rates in anticipation of rising inflation. Three months ago, many expected the first increase to come at the policy makers' meeting on June 25 and 26; now they expect it in the late fall. Virtually no one publicly imagines a rate cut as the Fed's next step. Mr. Greenspan himself steers people away from that option, and in doing so has shelved it, although signals of economic deterioration — falling stock prices, weakening retail and auto sales and signs of deflation — might in fact justify more stimulus from the Fed as protection against a dip back into recession. Unanticipated stimulus, however, would be no stimulus at all. An abrupt rate cut after so much happy talk about recovery would be viewed as an announcement that Mr. Greenspan and his colleagues had lost faith in the recovery. "Lowering rates would scare the living daylights out of everyone," said Albert Wojnilower, an economic consultant and forecaster. Whatever relief consumers would receive from lower rates would be offset by their fright. Adding to the damage, the weakening stock market would undoubtedly take another dive. But if lowering interest rates now would be bad timing, raising them seems wrong-headed. In an unsteady economy, the potential damage from a rate increase is considerable. Debt payments would rise, for example. The dollar might strengthen, hurting exports. Profits would be squeezed. Home sales would suffer from higher mortgage rates, perhaps ending the phenomenal rise in home prices in recent months. Rising home prices have allowed sellers to come away with more cash, which many have then used for spending. Just as an unanticipated rate cut would pull down stock prices, so would a rate increase. So raising rates is not an option. And neither is lowering them, until the Fed regains leeway to do so by changing its message. Maybe that is beginning to happen. Last Wednesday, the Fed issued its beige book, a quarterly assessment of economic conditions based on data collected by its 12 regional banks. The economy continued to expand through May, the beige book concluded, but the details described an expansion that was noticeably less robust than the one portrayed in the previous book, issued on April 24. The Fed manipulates the economy by raising or lowering the federal funds rate. This is the interest that banks and other lenders charge each other to acquire funds, which they relend to the public at a slightly higher rate. Fighting the recession as well as the damage from the punctured stock bubble and from Sept. 11, the Fed cut the federal funds rate to 1.75 percent last year, its lowest level in a generation. It has remained there for more than six months. Some economists contend that another rate cut, even if justified, would not be of much help. After all, the 30-year fixed-rate mortgage is already down to 6.71 percent; how much lower can it go? If the bottom has been reached, then the Fed is really in a fix. Others, however, say that with inflation edging down, the inflation-adjusted "real" cost of borrowing is gradually rising, just when it should not be. Opportunity exists. If the Fed can get the message right, a rate cut this summer would be a helpful boost for an increasingly uncertain economy — and recognition from the Fed that this is not an easy recovery. Copyright 2002 The New York Times Company