WASHINGTON. US stocks appeared eager to resume their sustained December 2018 waterfall decline Monday morning. Allegedly riving all three major averages for a loss was a report that the US trade deficit with China was bigger and worser than ever last month. Not helping Monday numbers: news that beleaguered California utility Pacific Gas and Electric (aka, PG&E, trading symbol: PCG) would likely file for bankruptcy. PCG shares, already off sharply over the last several months, got an additional 50 percent haircut on the news.
Hammered by these stories and other fear mongering, the Dow got hit for an early 200-point loss at the opening bell. The big-stock average has recovered slightly – for the moment. It currently sits at around -95 points as we approach the noon hour for slightly less than a half-a-percent loss. The S&P 500 and the tech-heavy NASDAQ are off 0.5 percent and 0.75 percent respectively.
Great Trump Rally about to fold? Again?
We expressed some concern in our weekend column that the Great Trump Rally revival of early January 2019 might only exist as a mirage. While that’s still an unproven theory, Monday Wall Street action thus far doesn’t help to disprove it.
We’d all like the rally to resume again, hoping to regain some of last fall’s horrendous losses. But the media continues to crank out negative stock and business headlines. With equal or greater enerty they routinely avoid positive stories praising President Trump’s economic successes.
Well, you can’t teach old dogs new tricks, can you?
The US trade deficit with China is worse? That’s news?
Take, for example, the frantic, negative reporting on that shocking, “record” US-China trade deficit. Why that was such big news is beyond us.
The very reason the Trump administration has been shoving tariffs at the Chi-coms good and hard is precisely because of these huge and continuing trade deficits. These are largely due to China’s continuing efforts to limit imports of US goods by whatever means possible. At the same time, the Chinese regime heavily subsidizes exports. And, at least in some areas, they effectively employ slave- and child-labor to keep the price of their exported goods unreasonably low.
So even under the current US counter-tariff regime, China still manages to retain its pricing edge. Add that to America’s expectedly robust Christmas 2018 sales figures, and voilà! That’s how you get another record trade deficit number. Observe our shocked faces.
The threatened Pacific Gas and Electric bankruptcy
As for that other alleged inspiration for this morning’s market hammering – the threatened bankruptcy of Pacific Gas and Electric – that potential action by this massive California utility is a more serious matter for US investors, as a Monday morning CNBC report indicates.
“PG&E Corp. stock cratered Monday after the company said it will file for Chapter 11 bankruptcy protection amid the financial anguish stemming from its part in helping spark a wave of historic wildfires in California.
“Shares of the company dropped nearly 50 percent in early trading Monday, one day after the company said Chief Executive Geisha Williams was stepping down. The stock has lost more than 80 percent of its value over the last three months.”
PG&E bankrupcty threat hits company’s stock hard. Again.
But that clarified bankruptcy threat hit PG&E’s shares hard Monday morning.
“The company provided official 15-day advance notice that it and its wholly owned subsidiary, Pacific Gas and Electric, intend to file petitions to reorganize under Chapter 11 of the U.S. Bankruptcy Code on or about Jan. 29.
“The company, California’s largest investor-owned utility, has 16 million customers across a 70,000-square-mile service area in Northern and Central California. There was some speculation that PG&E was bluffing in order to force aid from California. CNBC’s David Faber said that sources told him that is not the case.
“PG&E faces at least $30 billion in potential liability costs stemming from wildfires in 2017 and 2018, many allegedly started by the company’s equipment, that have led state officials to doubt the safety of the company’s electric distribution system.
“Investigators have already determined PG&E’s equipment liable in at least 17 major wildfires in 2017. State investigators are still working to determine if the company’s equipment was partly responsible for November’s Camp Fire, which killed at least 86 people and destroyed about 14,000 homes, making it the state’s deadliest fire.”
Will California’s Socialist One-Party State Government make the situation worse?
The huge, potential liabilities for this huge Sanctuary State utility are scary enough. But, given California’s corrupt, rapacious, one-party socialist government, these liabilities could end up slamming countless vendors and contractors that work with PG&E.
One of our own positions, is the (theoretically) safe, high dividend stock of Clearway Energy’s holding company (CWEN/A). It’s been under pressure for a couple of weeks. But the stock really got cold-cocked Monday morning for another 10 percent loss. Clearway is a mostly renewable contract utility spun off last year from NRG. It’s been a fine performer and dividend payer. But it also provides a goodly bit of renewable power, under contract, to Pacific Gas and Electric. Oops!
The sad tale of Clearway Energy. Will more companies get hit by the PG&E disaster?
That renewable power is, of course, part of California’s increasingly stringent renewable power mandate for the state. So even under bankruptcy protection, PG&E will likely need to maintain its Clearway contract to meet California’s increasingly asinine renewable power requirements. But will PG&E need to honor the Clearway contract at current payment rates? Yes, there’s the rub. Hence, CWEN/A shares got taken back behind the barn and shot.
Under the circumstances, we’ll need to unload our holdings for a loss. No point in hanging on and waiting for a recovery. The unwinding of liability claims and lawsuits in this case may take years to over a decade, given California’s asinine propensity for money extraction from every source. So in a case like this, where CWEN/A and God knows how many additional contractors face potentially gigantic lawsuit related revenue and profit hits, it’s best to take an awful loss and just get out.
Don’t invest in People’s Republic and Sanctuary City states unless you like to lose
Like the People’s Republics of Maryland, New York and Illinois, California is another state where you need to be careful investing in real estate or in companies even vaguely connected to state government functions.
If there is any way under heaven the politicians of such states can extract rent and revenue from you, they’ll find it and transform the tax shakedown into law.
True, the California legislature might try to help Pacific Gas and Electric, according to Fox.
“As reported by FOX Business in November, a new California bill is reportedly in the works to help provide PG&E relief.”
That said, the “new” bill has been in the works since at least November. California rarely gets its priorities straight.
The windup and the pitch…
Bottom line: When you run into one of these buzz-saw situations, your best strategy is to cut and run. Fighting these bastards will soon have you filing for bankruptcy, too. It’s who they are. It’s what they do.
We’re not sure how many other companies besides Clearway might get snared in this PG&E debacle. But if you find you’re in one of them, you know where the exit door is.
Take the negative domino effect of the Pacific Gas and Electric disaster. Add the required fear mongering over the latest quarter’s profit numbers in the financial media. And it becomes likely that these headlines – not the Chi-coms – are the likely reasons behind today’s market decline.
— Headline image: Smoke plume from the fast-moving Woolsey Fire encroaching on Malibu November 9, 2018,
as residents evacuate along the Pacific Coast Highway.
(Image via Wikipedia entry on the 2018 California fires. By Cyclonebiskit, CC 4.0 international license.)