So it's no coincidence that immediately after the announcement of the buyout, TXU said it would cancel eight of the 11 coal-burning power plants that it had planned to build. (That also let the buyout funds score big points with environmental groups that had been fighting TXU on its plans.) The additional power from the three plants should meet near-term increases in demand for electricity and avoid the kind of brownouts that bring regulators out in force. And canceling the plants would conserve cash and keep Texas prices high.
There's not a whole lot of risk in the TXU deal for the buyout funds, because they've done this one before in Texas, and it turned out very well indeed for them. In 2004, buyout funds Texas Pacific and Kohlberg Kravis Roberts, the same funds that are leading the TXU buyout, bought Texas Genco, another Texas utility with low generating costs. They flipped that company for a $2 billion profit in about a year.
Higher electricity billsAnd, unfortunately for consumers of electricity around the country, the model isn't limited to Texas. It will work anyplace where the national grid has a bottleneck and where a utility can exploit a price inefficiency. For example, to get ready to market itself to buyout funds, Mirant has been selling off its high-cost natural-gas-powered generating plants in the Midwest. That would leave the company with three main markets, the Mid-Atlantic, the Northeast and California, all with high electricity costs and grid bottlenecks and with a generating capacity dominated by coal-fueled power plants.
Ordinarily, I have nothing against investors or companies that exploit pricing inefficiencies in the market. That is, after all, one way that the market eliminates these inefficiencies over time. But in this case, the buyout deals for utilities in these markets will make the inefficiencies worse. The newly private utilities will have no incentive to build new transmission lines to improve the national grid, and they will have no incentive to spend capital on building new, less-polluting and more efficient power plants to meet projected demand, beyond the minimum required to keep regulators on the sidelines.
The bottom line of these deals is high profits for buyout funds and their investors and higher electricity prices for the rest of us.
New developments on past columns"Why fewer jobs are going overseas": On April 24, announced that first-quarter 2007 earnings came in at 42 cents a share, an increase of 27% from the first quarter of 2006 and 4 cents above analyst expectations. Revenues rose 8% from the first quarter of 2006, hitting $1.62 billion for the quarter, matching Wall Street projections. Dig down and the results are even better than the top-line numbers indicate. The two trends that have driven profit margins higher for C.H. Robinson not only show no signs of slowing down but may even be accelerating.
Thanks to falling truck freight rates -- which work to the advantage of a logistics company like this that hires trucks to move freight for customers -- and to a further shift in intermodal freight traffic to the more profitable long-haul segment from short-haul routes, the company saw a 17.7% increase in gross profit margin in its transportation business from the first quarter of 2006. That drove gross margins in this business to 20.2% from 18.3% in the first quarter of 2006. For the company as a whole, gross profit margins climbed to 18.3% this quarter, well above the 15.5% average for the last five years. I picked C.H. Robinson Worldwide for Jubak's Picks on Jan. 5, 2007, in order to add a logistics stock to the portfolio to take advantage of the global logistical crisis that I see slowing the trend to send jobs overseas. That idea is working better than I expected and should keep working thanks to robust growth in the global economy outside the United States. As of April 27, I'm raising my target price for the stock to $62 a share by June 2007 from my previous target of $58 by September 2007.
"How to handle this risky new market": The U.S. economy continues to look like it's slowing, but I don't see any signs of short-term weakness in the U.S. stock market. Even the good economic news these days isn't all that good. On April 25, the Commerce Department reported a 3.4% in new orders for durable goods. That was certainly a big improvement over the 8.8% plunge in orders for stuff like airplanes and industrial machinery that lasts for a while, but once you smooth out the results for the last few months, the trend is still negative. Business investment looks weak -- not exactly what an economy already struggling with a huge downturn in the home-building sector needs. (To see if business investment is indeed playing a negative role in the economy as a whole, check out the first quarter GDP numbers that are due out today, April 27.) Nonetheless, the stock market isn't showing any signs of weakness. For example, the advance/decline line -- which traces increases and decreases in the net number of stocks climbing (after subtracting the number falling) -- right now confirms the strength of the rally. And short positions are climbing, providing potential fuel for the rally to continue. But don't get too carried away: The sectors leading this rally, utilities, materials and energy, are exactly the sectors that lead a market that's nearing its peak. We're not at a top yet, I'd say, but this is a mature rally that doesn't justify huge new bets, in my opinion.
Join Jubak at The Money ShowMSN Money's Jim Jubak will be among more than 100 renowned money experts, advisers and analysts sharing their wisdom at more than 250 free workshops at The Money Show Las Vegas, May 14-17 at the Mandalay Bay Resort & Casino. You can also network with fellow market enthusiasts, exchange investment ideas, share your experiences and enjoy the fellowship of like-minded investors. Admission is free for MSN Money readers. For complete details or to register for free admission, call 1-800-970-4355 (be sure to mention priority code #008095) or visit the Money Show Web site.
Editor's note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest rate environment, see Jim Jubak's portfolio of Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at email@example.com.
At the time of publication, Jim Jubak did not own or control shares of any of the equities mentioned in this column. He did not own short positions in any stock mentioned in this column.