Friday, March 12, 2021

Friday Night Links

  • Back in October of last year, I had the pleasure of discussing the “generational opportunity in energy stocks” with Leigh Goehring. At the time, he made a very compelling investment case for the energy sector and in just the five months since then it has nearly doubled in value. Leigh and his firm still believe energy offers compelling value but to truly appreciate it, it helps to also understand the related bubble in both renewables and electric vehicles. In this conversation, Leigh’s partner Adam Rozencwajg shares his views on the mania in these so-called green energy stocks, outlining why renewables and EVs are not the panacea for climate change investors believe them to be and why, ironically, the best way to profit from the transition to green energy may be in the very stocks ESG investors are shunning today. [Felder]
  • The “big market delusion” is when all firms in an evolving industry rise together, although as competitors ultimately some will win and some will lose. The electric vehicle industry, with its astronomical growth in market-cap over the 12 months ending January 31, 2021, is a prime example of a big market delusion. In the highly competitive and capital-intensive auto industry, the January 2021 valuations of electric vehicle manufacturers are simply not sustainable over the long term. [Research Affiliates]
  • Allowed ROE’s for electric and gas utilities have trended downwards for years with declining interest rates. At YE20, allowed ROE’s nationally are roughly 9.4%, although there are large variations from state to state. Importantly, there is larger than average gap between allowed ROE’s and the 10YR UST (8.46% as of YE20) compared to the historical average of 6%. [Enlightened Capital]
  • ENB currently trades at 17.1x 2021 EPS and 14.6x 2022 EPS. Additionally, the company trades at 11.6x 2021 EV/EBITDA and 10.6x 2022 EBITDA. Given ENB’s strong and improving DCF generation, ENB represents an attractive investment trading at an 8% FCF yield with 5-7% annual DCF growth expected over the next 5 years. There is also a massive disconnect between prospective returns on ENB’s bonds and ENB equity. You can earn a 2% return purchasing an unsecured ENB bond maturing in 2029, a 3.4% return on an unsecured ENB bond maturing in 2049, or 13-15% for ENB’s equity. A 10+% equity risk premium for a stable company is unjustified in my opinion. [Enlightened Capital]
  • Give me your busted compounders, your energy stocks, Your huddled microcaps yearning to breathe free, The wretched financials of your teeming shore. Send these, the ETF castoffs, tempest-tost to me, I lift my lamp beside the value investor door! [Nate Tobik]
  • A given means of production, combined with a resource base, will throw off some amount of surplus.  That surplus is divided among the p0pulation based entirely on their power. Sometimes that power comes from scarcity, often managed scarcity as in the Medieval Guild system, or un-managed scarcity during the first decades of a technological change (hello programmers), but most often it comes out of the barrel of a gun; from the point of a spear, or from the edge of a sword. [Ian Welsh]
  • The “Coalition of the Ascendant” prophecy isn’t happening. Democrats barely won the 2020 election. They have less power in the state legislatures. Joe has a thinner majority in Congress than Barack Obama. It has gotten so bad that Democrats have to use budget reconciliation to pass a bill that has the support of 70% of the public to give people free money. They don’t have the juice to even do popular things like raise the minimum wage because of their cultural toxicity to White working class voters in rural states. What is Joe going to do now after signing the COVID bill? Is he going to wage a “War on Terror” against “domestic extremism” and the “insurgency” which only exists on CNN and MSNBC? What happens if he peaks after signing the COVID bill and the rest of his agenda just flatlines in the Seante? [Occidental Dissent]
  • What has happened to Denmark? Once renowned as a liberal, tolerant, open-minded society with respect for human rights and a strong and humane welfare state, we have now become the first country in Europe to revoke residence permits for Syrian refugees. Last week, Danish authorities ruled that the security situation around Damascus has improved, despite evidence of dire living conditions and continued persecution by Bashar al-Assad’s regime. As a result, they stripped 94 refugees of their right to stay in the country. Another recently introduced proposal would move all asylum applicants outside Denmark. [link]
  • Among the many traits the peoples of our two countries have in common, none is stronger than our mutual abhorrence of war. Almost unique among the major world powers, we have never been at war with each other. And no nation in the history of battle ever suffered more than the Soviet Union suffered in the course of the Second World War. At least 20 million lost their lives. Countless millions of homes and farms were burned or sacked. A third of the nation's territory, including nearly two thirds of its industrial base, was turned into a wasteland--a loss equivalent to the devastation of this country east of Chicago. [JFK]
  • Dr. Seuss was one of the most effective propagandists advocating for war and internationalist foreign policies committing American troops and treasure abroad. An enemy of the original “America First” conservative populist movement, Dr. Seuss was not just an advocate for America’s early entry into WWII, but for a permanent internationalist foreign policy posture after WWII, and for the re-education of people worldwide into the ideals of American democracy. Dr. Seuss was the pen name of Theodor Seuss Geisel, son of an evangelical Lutheran family in Massachusetts who adopted radical leftist politics in his youth and honed his craft as a persuasive artist, first as a well-paid ad man for the oil industry, and then as the premier cartoonist for PM. [Chronicles]
  • Beginning in 1899, Packard built luxury cars for kings, princes, bank presidents and movie stars. In the 1920s, its cars cost five-hundred-thousand dollars each, in 2021 dollars. The 1929 stock market made the high-luxury market too small for Packard to survive by building ultra-luxury cars. So it entered the Buick-Oldsmobile-Pontiac-Lincoln market with cars no more impressive than Buick-Oldsmobile-Pontiac-Lincoln cars. The competition in a market segment packed with competitors was too intense for Packard. It stopped building cars in 1958. Tesla is repeating the Packard experience. It is going from a low-competition market to a high-competition market, building un-needed cars in a market packed with cars that have better build quality. [CBS]
  • The industries with the worst trailing 10 year returns (all negative) are: metals and mining, oil, gas & consumable fuels, and energy equipment & services. If this theory is right, there should be mean reversion for them. The rising profits will attract people who will pay higher multiples - double counting. Meanwhile, the sectors that have been enjoying high profits and good times will have been over-investing. The NASDAQ earnings peak is already in the rear view mirror. [CBS]
  • I am bullish on reopening, especially when you combine it with a money-printing stimulus bill that is so gigantic I am wondering whether it might feel like an abrupt currency devaluation this summer. The challenge is to find investments that aren't already pricing-in the reopening. Things like airlines and cruise ships are very obvious to retail, and they have never been my favorite investments anyway. I prefer to find things that are royalty businesses or some kind of real asset (e.g. real estate) rather than a low-margin "spread" business that could just as easily be challenged by higher input costs associated with the shock of the reopening. [CBS]
  • Having reported evidence that the brain required arachidonic and docosahexaenoic acid specifically, for its growth, structure and function in 1972, our work has focused first on testing the evidence, the specificity and the requirement. Attention is now directed on establishing  (i) the biological reason for the uniqueness of docosahexaenoic acid in neural signaling systems which stretched unchanged over the 500- 600 million years of evolution and  (ii) the application of this knowledge to the prevention and treatment of neurodevelopmental disorders. [Michael Crawford]
  • In humans, the therapeutic window for lithium treatment of bipolar disorder lies between 0.5 and 1 mM in serum, whereas concentrations of 1.5 mM and above severely increase the risk of tissue damage (Malhi and Tanious, 2011). Previous work in Drosophila suggests that the dose range at which we observed lifespan extension (0.5–25 mM) translates to Drosophila tissue concentrations below 0.5 mM (Dokucu et al., 2005). As previously reported for C. elegans and Drosophila (McColl et al., 2008, Zhu et al., 2015), concentrations above 50 mM were highly toxic. Drug interventions to promote healthy lifespan are less likely to have side effects if started late in life (Castillo-Quan et al., 2015). Only a handful of drugs approved by the US Food and Drug Administration, namely rapamycin, metformin, and the Ras inhibitor trametinib, induce lifespan extension when commenced at later ages in model organisms (Harrison et al., 2009, Cabreiro et al., 2013, Martin-Montalvo et al., 2013, Slack et al., 2015). We found that lithium extends lifespan when first administered in mid-late life. In humans, long-term treatment with lithium for psychiatric disorders is associated with progressive and permanent renal damage (Malhi and Tanious, 2011). We showed that short treatment periods in Drosophila, 15 days during early adulthood, are sufficient to prolong life. Taken together, our data suggest that when testing lithium as a pro-longevity drug in mammals, lower doses than those used in psychiatric disorders are likely to be sufficient, and other strategies such as alternate-day dosing or transient treatment periods (either early or late in life), may be sufficient to reduce undesirable side effects and maximize the potential health benefits. [link]
  • For example, there has been a 1000-fold increase in the consumption of soybean oil in the United States during the 20th century and, as a result, the per capita consumption of its primary unsaturated fatty acid component, linoleic acid (LA, C18:2), has increased from less than 1% to approximately 7.4% of energy intake. Soybean (SO) and other oils high in LA have been shown by us and others to be obesogenic and diabetogenic in rodent systems, and we have shown that a diet enriched in SO similar to the American diet causes a global dysregulation of hundreds of genes in the liver compared to an isocaloric coconut oil (CO) diet. [link]
  • Arete (Greek: ἀρετή) is a concept in ancient Greek thought that, in its most basic sense, refers to "excellence" of any kind. The term may also mean "moral virtue". In its earliest appearance in Greek, this notion of excellence was ultimately bound up with the notion of the fulfillment of purpose or function: the act of living up to one's full potential. The term from Homeric times onwards is not gender specific. Homer applies the term to both the Greek and Trojan heroes as well as major female figures, such as Penelope, the wife of the Greek hero Odysseus. In the Homeric poems, Arete is frequently associated with bravery, but more often with effectiveness. The person of Arete is of the highest effectiveness; they use all their faculties—strength, bravery, and wit—to achieve real results. In the Homeric world, then, Arete involves all of the abilities and potentialities available to humans. [Wiki]


Stagflationary Mark said...

Importantly, there is larger than average gap between allowed ROE’s and the 10YR UST (8.46% as of YE20) compared to the historical average of 6%.

The gap has contracted to 7.78% due to the 10-year rising to 1.62%. That’s worth noting today. Still a big gap, but not as big.

I’ve been giving this more thought since you first pointed it out. As a utility investor, I’d be happy with the gap locked in at 6%.

Japan Scenario: 10-year sticks at 0% with inflation at 0%. I’d earn less dividends but there’d be no taxes on the inflationary gains.

1970s Scenario: I’d earn more dividends but the taxes on the inflationary gains would be extremely painful.

This is similar to TIPS. Although TIPS offer inflation protection, I do not root for inflation. It is better to earn a yield of 2% with 0% inflation than a yield of 12% with 10% inflation. Although both have a real yield of 2%, the tax on 2% gains is much less than the tax on 12% gains. In a 25% tax bracket, a 12% gain is only 9% after taxes. That’s not good if inflation is 10%. The 2% real yield becomes a -1% real yield.

I’ve seen TIPS investors on chat boards actually root for inflation. Not smart. Having inflationary fire insurance does not mean one should root for inflationary fire. TIPS investors get burned by inflation too, just not nearly as much as bond investors without inflation protection.

Anonymous said...

What we learned from the pandemic is that most gov workers (including teachers) are the most risk averse people we will ever know. Teachers that will knowingly let marginalized kids fall even further behind so their unions can FINALLY force 20 kids per classroom under the guise of "safety". That means you need 50% more teachers, and 50% more schools built.

In the movie Contagion we saw the gov medical researcher vaccinate herself to prove the efficacy and safety of the vaccine she'd developed, shortly thereafter we saw throngs of people being vaccinated. In real life in 2019, researchers at UW had taken a lot of blood samples of the population for another study. In early 2020, as the virus raged, the same researchers began to comb through their previous samples, looking for clues about the virus. Had it been with us longer?

They were met with a cease-and-desist from the FDA. Because they'd never advised the study participants that their blood might be checked for a virus.

The virus has shown us our gov is far weaker than we thought in times of trouble, and that the private sector is far stronger than we thought in time of trouble.

Total covid relief has hit $6T--which is about $60k per family. How many people feel they have gotten $60K in benefit? For a virus that, if it had hit in the 1960's, would have resulted in business as usual for the United States?

CP said...

Mark, what do you think of this?

Capacity factor of conventional coal, gas, nuclear, and hydro power plants will not remain high or constant, but will instead decline dramatically over the next 10 to 15 years as they are outcompeted and disrupted by the combination of solar photovoltaics, onshore wind, and lithium-ion batteries (SWB). In fact, capacity factor in conventional energy has been dropping since at least 2010. For instance, the average capacity factor of coal in the United States has fallen from 67% in 2010 to just 40% in 2020 – first because of competition with cheap gas from fracking, and now because of SWB. In the United Kingdom, coal capacity factor has collapsed even faster, from 58% in 2013 to just 8% by 2019.

Mainstream LCOE analyses thus artificially understate the cost of electricity of prospective coal, gas, nuclear, and hydro power plants based on false assumptions about their potential to continue selling a fixed and high percentage of their electricity output in the decades ahead. Because LCOE figures and asset valuations are very sensitive to the capacity factor parameter, these false assumptions have made conventional energy assets appear to be much more attractive than they actually are. As a result, they have attracted far more investment (over $2.2 trillion in fossil and nuclear energy in the electric power sector worldwide since 2010) than they otherwise would have based on a realistic assessment of capacity factor and LCOE.

Anonymous said...

While the bulls argue Uber's losses reflect a 'lack of scale' - an argument made despite the fact that the company has been in business nearly a decade, and has already has acquired tremendous scale - the truth is probably more that the lack of profits reflects the fact that the business model is actually consuming more resources than the value of the economic output it is producing. That reality has required that they price their service below the cost of its provision in order to grow, which is why they have lost more and more money as they have scaled. If the above were not true, they would be able to provide the service profitably and grow. Even if there was vigorous competition, the industry ought to be able to operate at at least break even levels. The same can be said of Tesla. They have built many great cars. I've been in a Model S - it's very cool. But the company keeps burning cash because the cost of the inputs continues to exceed the value of the output.

This is why profits matter. It is evidence that the product/service is economically viable, and that the value of the output exceeds the cost of the inputs. Many investors today are currently impressed with rapid rates of revenue growth, regardless of the state of the bottom line, but as far as I'm concerned, high rates of revenue growth are a complete irrelevance and are unimpressive if a company has not demonstrated that that revenue growth is in conformance with the equation 1 + 1 > 2. If that equation is not met, then rapid revenue growth does little more than destroy more and more value at a faster and faster rate. It's not worth anything.

[...]Suppose you're a profitable business meeting the equation 1 + 1 = 2.5, but new well-funded entrants come in with 1.3 + 1.3 = 2.0 economics. The new entrants will underprice you and take market share, which will pressure both your revenues and your profitability (as you need to reduce prices to stem the loss of market share, and suffer operational deleverage as volumes fall).

What ought to happen is that the latter company ought to fail, but instead, as funding markets shower more and more money on your loss making competitor, it continues to grow and take more and more market share off you. Your profitable enterprise suffers falling sales and profits, and on account of the widespread perception that your company is being 'disrupted', it also suffers a massive decline in its trading multiples. The net effect is to deprive your company of investable resources.

Something akin to this has been happening across an array of industries, from automobiles (Tesla vs. traditional automakers), to e-commerce/retail and streaming/traditional media, and dovetail into the second much-discussed trend in recent times - the apparent 'death of value investing'. There have been many causes for the record underperformance of value vs. growth in recent years, but one much under-discussed cause has been the fact that profitable, cash-generating 1 + 1 > 2 companies have been forced to compete - to an unprecedented degree and for an unprecedentedly long time - with loss making, 1 + 1 < 2 companies, who have been taking market share and pressuring profits.

Much as with the bubble and its subsequent unraveling, where many 'old world' value businesses were left for dead and considered destined for disruption/the dustbin of history, only to stage dramatic recoveries in the following decade, a likely consequence of the coming tech wreck will be a significant resurgence in the performance of many 'value' stocks, as their sales, market share, and profitability recover as 'disruptive' competitors go broke, and their multiples dramatically recover.

Anonymous said...

The fundamental issue underlying all these factors, I believe, is the nature of the payoff patterns deep value stocks typically exhibit, and why. A typical value stock has well-understood and well-publicised problems/issues/risks, and the majority of the time, for individual issues, these well-understood issues do result in subsequently lackluster investment outcomes (usually in the form of protracted periods of stagnant performance that lag go-go market favourates).

However, as a group, over time, they deliver better-than-market returns, because their widely understood problems and lacklustre prospects are excessively rendered in prices, and only base-case outcomes are priced in, while 'tail' possibilities - relatively unlikely events that no-one expects to occur - are generally ignored. And in the relatively infrequent cases where those unlikely events nevertheless do occur, outsized returns are generated which more than offset poor base-case outcomes on other positions. This payoff profile - a high probability of a poor outcome,** and a small probability of disproportionately very good outcome - is an extremely difficult payoff profile to practically exploit for institutions and individuals alike.

Anonymous said...

If an investor or fund manager says, "we don't invest in commodity stocks, because we don't feel capable of predicting the commodity price", you know that they are thinking about risk in entirely the wrong way. Instead of accepting the existence of risk and trying to price it correctly, they insist on avoiding risk at all costs. This approach is likely to cost them a lot of money over time, both in the form of many missed opportunities, and in the exit of underperforming investments at firesale prices. And yet this type of thinking is extremely common - even amongst many self-described 'value investors'.

So don't avoid risk - embrace it. Just make sure you're being well paid for taking it. And when you think about risk in this way, it is actually quite easy to be "greedy when others are fearful". If you are disciplined about taking risk at sensible prices, rather than trying to avoid it, you will make a lot of money in the long term.

I find that most of the time with my best investments, however, it doesn't take a tonne of brilliance. Usually you have stocks trading at levels significantly below the replacement cost of their assets. So you just have to ask, are there some scenarios in the future where these assets could actually be worth something & needed?

The offshore oil service vessel industry lately is a good example. Some like ESV have traded as low as 0.1-0.2x tangible book recently (with 1/3rd leverage). The most likely outcome is indeed that shale has made offshore mega projects structurally uneconomic. But people could be wrong. If people are wrong, as lack of investment into vessels & new offshore projects will propel these stocks to 1.5-2.0x NTA. So you just have to ask, what are the odds on that? Is it really 1-in-15?

However, if you're going to invest in these sorts of stocks you simply cannot/should not concentrate, because in many instances the stocks will go to zero or never recover. You can take advantage of other people's excessive risk aversion if you don't overly concentrate.

Stagflationary Mark said...


Thanks for the link! As a utility investor, it’s certainly a scary read.

The following chart is and has been a big concern for me.

I look at the decline. I look at 15-20 year dividend histories of VPU and XLU. I look at the decline again.

I read Warren Buffett’s thoughts. I look at the decline again.

Perhaps if I knew exactly what all the utilities in VPU were doing to adapt (or more importantly, not doing), I’d be even more nervous.

Your odds of changing my opinion on owning utilities is slowly growing. Keep it up. You might end up saving me from a loss someday. It wouldn’t be the first time someone on the Internet saved me some money by changing my opinion.

Perhaps it will all be moot. The real yield on the 30-year TIPS has been climbing rapidly lately. If we start seeing “economy overheating” headlines there’s a chance it will reach 1%. As I just posted on my blog, I’d be very tempted to switch back to my favored TIPS and lock it in. It’s not that I think TIPS bought and held to maturity are necessarily safe, but if they blow up almost everything does.

Stagflationary Mark said...

Buffett’s most recent shareholder letter:

BHE, unlike BNSF, pays no dividends on its common stock, a highly-unusual practice in the electric-utility industry. That Spartan policy has been the case throughout our 21 years of ownership. Unlike railroads, our country’s electric utilities need a massive makeover in which the ultimate costs will be staggering. The effort will absorb all of BHE’s earnings for decades to come. We welcome the challenge and believe the added investment will be appropriately rewarded.

Let me tell you about one of BHE’s endeavors – its $18 billion commitment to rework and expand a substantial portion of the outdated grid that now transmits electricity throughout the West. BHE began this project in 2006 and expects it to be completed by 2030 – yes, 2030.

The advent of renewable energy made our project a societal necessity. Historically, the coal-based generation of electricity that long prevailed was located close to huge centers of population. The best sites for the new world of wind and solar generation, however, are often in remote areas. When BHE assessed the situation in 2006, it was no secret that a huge investment in western transmission lines had to be made. Very few companies or governmental entities, however, were in a financial position to raise their hand after they tallied the project’s cost.

BHE’s decision to proceed, it should be noted, was based upon its trust in America’s political, economic and judicial systems. Billions of dollars needed to be invested before meaningful revenue would flow. Transmission lines had to cross the borders of states and other jurisdictions, each with its own rules and constituencies. BHE would also need to deal with hundreds of landowners and execute complicated contracts with both the suppliers that generated renewable power and the far-away utilities that would distribute the electricity to their customers. Competing interests and defenders of the old order, along with unrealistic visionaries desiring an instantly-new world, had to be brought on board.

Both surprises and delays were certain. Equally certain, however, was the fact that BHE had the managerial talent, the institutional commitment and the financial wherewithal to fulfill its promises. Though it will be many years before our western transmission project is completed, we are today searching for other projects of similar size to take on.

Whatever the obstacles, BHE will be a leader in delivering ever-cleaner energy.

I think there’s plenty of opportunity here, but there are also plenty of reasons to be nervous. Am I relying too much on government to protect existing utilities? It’s possible.

The Texas utility crisis seems to have been a net win for my regulated utility investments. I don’t think anyone wants to see that play out again, myself included. It was horrifying for all involved.

CP said...

One of the reasons I'm so confident that fossil energy will collapse this decade is the way that falling capacity utilization drives a feedback loop of higher costs for any source of energy with a marginal cost of production. This report covers the topic nicely.

Stagflationary Mark said...


I read the executive summary in your link. I’m giving it a lot of thought.

Utilities don't see stranded assets as a top risk. Should they?

Despite concerns that "bullish" investments in gas may lead to stranded assets amid rapid decarbonization, just 18% of utility professionals view those risks as a top concern.

5 Issues That Keep Utility Execs Up at Night

Although only 30 percent of utilities said distributed generation was a pressing challenge for their utility, a more specific question from Utility Dive would suggest that utilities are more concerned.

Nearly 40 percent saw distributed generation as a threat to utilities, and 57 percent see it as an opportunity. For it to be an opportunity, however, many states would need to make regulatory changes. Even if many utilities are ready to embrace new business models, it is unclear that most state regulators are willing to explore significant new business models fast enough to keep up with the changes that are happening in the industry.

CP said...

I don't think distributed generation is the worry - I think it's the solar/wind/battery combination.

The utilities were able to crush distributed generation by crushing net metering.

CP said...

Mark -

I'm not trying to talk you into it or out of it. I am interested in investing in utilities myself, if I can convince myself that they are sound investments. For that reason, I like to read and consider any bearish arguments.

I have read as many bearish arguments as I could find for tobacco, oil, and pipeline companies and I am convinced that the pricing of these companies is sufficiently rewarding for the possible business threats. Note that the companies in these industries have high dividend and cash flow yields relative to their long term bond yields. If the bond market is OK with barely earning back principal over a 30 year loan to MMP, MO, or SU then I think that is a very good sign.

Utility companies have much lower dividend/CF yields and lower equity risk premia (relative to their own debt) than our other value ideas - they are perceived as very safe.

That's why it's a concern to see the falling capacity utilization. Of course, as you say, the utility dividends are rising. Just as tobacco, oil, and pipeline dividends are rising.

Electric utilities (and Buffett) were able to kill net metering. That was the most important thing to prevent distributed rooftop generation from competing with their generation assets. (And net metering truly was an unfair subsidy to rooftop solar owners if they could use the grid for backup without paying for it.)

I'm a believer that investors should generally look at individual companies instead of ETFs. If you haven't read annual reports for companies in a sector, you don't really know that much about the sector. Once you've read the reports, don't you see some that you'd rather own than others?

One idea that I had was a transmission-only utility. Then we could be agnostic about the generation source and just bet on kwh delivered to grow over time, which seems like a good bet. There are several such companies, but they all appear to be privately owned.

Another idea is natural gas or water utilities. These aren't going to be disrupted even if solar/wind/battery generation outcompete existing electrical generation plants.

But they don't seem as cheap. American Water Works (AWK) has an even lower dividend yield than an electric utility. (Which is already a low yield.)

Of course, another interesting answer is always micro caps. Oddball Stocks and OTC adventures have both written about Alaska Power & Telephone.

Probably not going to see photovoltaic solar replacing their generation assets.


CP said...

Regarding distributed (rooftop) generation and net metering:

This flywheel was clearly unsustainable. Somebody had to pay for the cost of grid upkeep, and Solar City was saving its customers money merely by offloading those costs on to other network users, and essentially arbitraging outdated legacy bundled billing arrangements. It seemed to me that what ultimately had to happen was that retail electricity tariffs would need to be unbundled, with the bill separated between grid access costs and wholesale electricity prices.

Warren Buffett's Nevada NV Energy was one of the first to understand and deal with the problem, announced a change in billing practices in 2016 (as usual, Buffett was well ahead of the pack in identifying emergent problems and taking steps to address them). Solar City and other rooftop installers tried to argue that this move represented vested interests resisting disruption of their business models, but this was disingenuous - in practice Buffett was simply insisting on applying what was economically logical, rational, sustainable, and fair. Someone has to pay for the grid, and there is no sound economic rational why particularly heavy grid-users, such as roof-top solar owners - ought to be exempt from paying.

CP said...

Regarding solar (and SWB) replacing coal/gas/nuclear generation:

The biggest challenge to dealing with the solar energy intermittency problem is not day & night, but the seasons (in non-equatorial regions). You can store enough energy to accommodate day & night, and day-to-day fluctuations, but not enough to accommodate seasonal fluctuations. This will be a seriously difficult problem to solve. You could try to engage in long range electricity trading (equatorial countries exporting to non-equatorial regions), but aside from high transmission losses, there are significant geopolitical issues associated with this. Without such long-distance trade, you would need to build a tremendous amount of redundancy into the system, building enough capacity to comfortably meet peak demand during lowest seasonal insolation, with copious oversupply during the summer. This would be cost prohibitive. In this respect, wind is a superior technology to solar, as it does not suffer from such extreme seasonal fluctuations.

CP said...

Southwest Gas is pure play on natural gas distribution to 2 million customers in AZ/CA/NV. They're coming up on 100 years in business (1931) - Lindy.

It's yielding 3.6%. Trades at 15.7x earnings (6.3% earnings yield). They pay out ~60% of earnings.

The dividend payment has been growing at 10% compounded over the past decade. Makes sense since they are allowed about a 10% regulated ROE on what they reinvest into the business.

But if you're asking is the acceleration of the housing market, I think it definitely has been accelerated and it's very strong and we're continuing to see a high demand by people that live in our service territory to buy new homes. There is a relatively low amount of inventory. Resale homes have seen some decent increases in price, although regionally it's still a very affordable market. So we continue to see that going on through this year and I think that if you look at any of the homebuilding stocks, certainly you can see their expectations and their revenues and profits and share prices have increased significantly. So we think this continues to have legs or continuing to grow and I think the other thing that we're seeing related to that, that I alluded to, and that you followed for years, Chris, is the interest in individuals relocating to the desert Southwest for a number of different reasons, including the lifestyle that you might be able to enjoy here, tax considerations. A lot of other states have some significant tax shortfalls that are going to be followed by significant incremental tax increases. So we think that the future looks pretty bright.

CP said...

In February 2018, Arizona Public Service (APS) and First Solar announced a PPA agreement for an even larger battery storage solution, which will result in a 50-MW/135-MWh battery system powered by a 65-MW solar facility. The project was selected specifically in response to APS’s request for proposals (RFP) for peaking capacity energy resources to deliver energy between 3 p.m. and 8 p.m. to address the problems created by the duck curve.

CP said...

Long-term readers of this blog know that TIPS are a favorite investment of mine, since I value capital preservation and sleep over the potential rewards of growth. I recently sold some TIPS to buy utility stocks. Should the real yield on the 30-year TIPS reach 1% again someday, I'd be very tempted to embrace TIPS fully again. Since I also believe that yields will continue to fall over the long-term, the temporary window of that opportunity happening may be closing. That's especially true if the Fed keeps buying like they have been. In my very humble opinion, the most likely opportunity will be within a year. Nothing drives real yields higher like "economy overheating" in the headlines. And right now, momentum is driving yields higher. Where it stops nobody knows. It seems extremely unlikely to me that we'll be seeing overheating economy headlines several years from now though, even if we are still stuck in ZIRP. Or perhaps I should say, especially if we are still stuck in ZIRP.

Friday, the real 30 year yield was 21 bps.

Stagflationary Mark said...

I really appreciate hearing your thoughts on utilities.

I have read as many bearish arguments as I could find...

I also seek out the bearish arguments for the investments I own. I once owned Conseco. I was lured in by the fat dividend. Fortunately, I only lost 15%. I would have lost a lot more if not for the bears on a Yahoo Finance message board convincing me that all was not right. They were not making the usual “Short this pig!” comments, but instead were pointing to specific reasons to be worried. When you are investing, a fellow bull might let you sleep better but it is the bear who might save you money.

I hung around on that message board for a long time to pay it forward (along with all the long-term bears). I’d like to think that maybe I helped someone else save money too. At one point, when it was really hitting the fan, one of my comments actually got published in an online news article. I paraphrase from memory: Conseco is a procrastinator’s dream. The longer you wait to buy, the cheaper it gets.

It did not end well for Conseco investors who saw increasing value as the stock declined. That can be a failing of mine, somewhat offset by my desire to seek out where my assumptions might be wrong. The biggest risk of all is hidden fraud. Can make what looks like a great investment become a disaster. That alone should make one read the opinions of the bears. I’m especially sensitive to fraud because it hit very hard where I worked. Watched years of accumulated stock options evaporate overnight (Cendant).

The endgame for Conseco:

I'm a believer that investors should generally look at individual companies instead of ETFs.

When I dabbled in consumer staples for a few days early in 2020, that’s exactly what I did. Didn’t want any consumer staples directly tied to the restaurant industry. Made a list of companies tied to what I was personally stocking up on. After a small gain, I chickened out though. Wasn’t sleeping well. The trade seemed too obvious. In hindsight, it wasn’t. Could have been more fearless.

I don’t understand the future of utilities nearly as well. I’m not confident enough to determine individual winners and losers. It’s actually a red flag to me that I am delegating that responsibility to a passive ETF and therefore letting the market decide. I’m hoping that the average active utility investor is smarter than me on this. Hope is generally not the best strategy, of course.

Utilities are not department stores. I will still be using electricity in 20 years. If anything is deemed too big to fail, it better be utilities. We certainly don’t need another Texas grid crisis to drive home the point.

Stagflationary Mark said...

As for the 30-year TIPS hitting 1%, not liking my odds if the 5-year TIPS refuses to budge.

It’s actually worse than not budging.

Check out the headwinds.

The spread is getting pretty wide.

Even in capital preservation mode, it’s hard to get excited about locking in a 0.21% real yield for 30 years. Perhaps German investors would disagree though. The 30-year bund is currently 0.22% and is not tied to inflation. Ouch.

CP said...


Many companies, faced with no real retained earnings with which to finance physical expansion after normal dividend payments, will improvise. How, they will ask themselves, can we stop or reduce dividends without risking stockholder wrath? I have good news for them: a ready-made set of blueprints is available.

In recent years the electric-utility industry has had little or no dividend-paying capacity. Or, rather, it has had the power to pay dividends if investors agree to buy stock from them. In 1975 electric utilities paid common dividends of $3.3 billion and asked investors to return $3.4 billion. Of course, they mixed in a little solicit-Peter-to-pay-Paul technique so as not to acquire a Con Ed reputation. Con Ed, you will remember, was unwise enough in 1974 to simply tell its shareholders it didn't have the money to pay the dividend. Candor was rewarded with calamity in the marketplace.

The more sophisticated utility maintains - perhaps increases - the quarterly dividend and then asks shareholders (either old or new) to mail back the money. In other words, the company issues new stock. This procedure diverts massive amounts of capital to the tax collector and substantial sums to underwriters. Everyone, however, seems to remain in spirits (particularly the underwriters).

Stagflationary Mark said...


I think that’s from Fortune magazine in 1977.

He’s got some other great comments about what an inflationary tapeworm can do.

If we experience the 1970s again, I really don’t think I’ll be happy owning utilities.

AV said...

I think there's a couple of things at play here. First - utilities are generally not the owners of generation, at least not in the Northeast. ConEd for example only owns a couple of Cogen plants it uses for its district steam system. This may be different in regulated states like the southeast - I jusn't don't know enough about that market.

The second thing here is that some of these sources are actually fairly well positioned. So generally the way the power markets work is similar to how treasury auctions work. There's a day-ahead auction where people basically bid in their lowest price you are willing to be dispatched at. So for example, a solar or hydro array might bid basically zero, whereas a fossil plant would probably just bid some spread above the cost of input energy. The grid operator (PJM, NYISO, MISO, ERCOT, etc.) then the clearing price is the price for the lowest cost needed to meet the projected load and everyone gets that cost. So for example if there's a hydro plant, a gas plant and an oil plant that are 1 GW each, and they bid $.01, $.05, and $.10/KWH respectively, and the load is 2 GW, the hydro and gas plants both get $.05/KWH and the oil plant stays off. If the load were 2.4 GW, they would all get $.10/KWH but the oil plant would operate at reduced load. So the takeaway here is that many plants that have low marginal operating costs are going to be in a pretty good position.

I am actually very bullish on hydro and nuclear. Although energy storage will help quite a bit, the big problem that is going to happen everywhere is the "duck curve" that happens in CA and HI will start happening all over the place as solar continues to be the cheapest source of energy. This makes things a bit harder for fossil fuel generators, but should hopefully be good for base load generators. This is especially true as the progressive energy agenda seems to be to electrify as much heating as possible and tax carbon. This is already happening in NYC and other progressive run cities are not far behind. If you're trying to decarbonize, the best way to do it is base load carbon-free generation, not trying to use some kind of utility scale solar/battery system to do it. The LCOE of hydro and nuclear are high because of their capital costs, but a lot of those are sunk and paid off. Hydro plants can operate for 100+ years - look at the Hoover dam. Ultimately, the big winners in the power gen space are going to be the clean and reliable base load generators.

The other thing I'm actually very bullish on is flywheel energy storage at the utility scale. They built a plant like this in NY and apparently from what I understand it just prints money. The beauty of flywheels, aside from the fact that they don't require rare earth metals or degrade after a few years, is that they can spin up and discharge much faster than batteries. This allows them to respond to price signals in a way that battery storage cant and be much more effective in demand response.

Stagflationary Mark said...


Interesting read. Thanks for sharing!

CP said...


Kimberly-Clark Corp., one of the biggest tissue producers, told U.S. and Canadian customers that it’s raising prices for most consumer products to offset “significant” commodity cost inflation, with percentage increases in the mid-to-high single digits.