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Daily Intelligence Briefing – November 20, 2017

FEATURED TOPIC: MRP ADDS LONG ELECTRIC UTILITIES AS A NEW INVESTMENT THEME; A RENAISSANCE IS UNDERWAY

Electric utilities are on the cusp of a renaissance powered by four major forces: the electrification of transportation, the proliferation of digital data from IoT and cloud computing, the digitization of money, and advances in energy industry technologies. These shifts are heavily influencing how money is being deployed on infrastructure, which in turn will transform the electric grid from traditional to “smart”.  

Long considered a boring and static industry, electric utilities have struggled with stagnant demand and an inability to engage customers dynamically as other businesses have. Although more companies and commercial buildings have popped up as the economy has recovered from the Great Recession, total electricity consumption in the U.S. has remained surprisingly stable. Every year since 2007, the amount of electricity sold has hovered just below 4 trillion kilowatt hours. While residential and commercial consumption has edged up during that period, consumption has declined in the industrial and transportation sectors.

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Last year, the residential sector accounted for 38% of the nation’s electricity use, and the commercial and industrial sectors consumed 37% and 25%, respectively. Although America’s transportation sector is a major energy consumer, accounting for 29% of the country’s primary energy use, most of that comes from fossil fuels such as gasoline, diesel and jet fuel. The nation’s subways, trains, trolley systems and EVs account for less than 1% of annual electricity consumption. But transportation’s share is expected to jump in the future as consumers move towards less polluting vehicles.

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Falling battery costs and tightening regulations around the world has everyone, from the IEA to oil producers to research organizations, revising their electric and hybrid vehicle projections upwards. A new report from the Edison Electric Institute (EII) and the Institute for Electric Innovation (IEI) forecasts that the stock of plug-in electric vehicles (PEV) in the U.S. will rise from 567,000 at the end of 2016 to 7 million by 2025. That’s about 3% of all the cars and light trucks that are expected to be registered that year. The number of PEVs will quickly climb after that.

A U.S. household with an electric car could see a 50% increase in its electricity usage. So, for a standard two-car American household, the electricity bill would double if they switch to EVs. The EII-IEI report also estimates that 5 million charging ports will be needed by 2025. Given these positive projections, electric companies in several states are already engaged in the development of PEV charging infrastructure. Some early movers include Avista in Washington State, Georgia Power in Georgia; KCP&L in Kansas; PG&E, SCE, and SDG&E in California.

The explosion of IOT devices and cloud computing represents another powerful source of electricity demand in the future. The Internet of Things (“IoT”) is about wirelessly connecting everything possible to the Internet – including machines, appliances, objects, and devices – so that these “things” can interact with us (or with each other) remotely, thereby making our lives and businesses function more efficiently. In the process, tons of data is mined and stored in the cloud, to be processed for further use. CISCO predicts the number of connected devices on the Internet will exceed 50 billion by 2020 (from just 8.4 billion this year), then rise to 1 trillion by 2022, and 45 trillion in 20 years.

Meanwhile, more Americans are texting, e-shopping, streaming content, and sharing on social media, just as the country’s government and private enterprises are migrating infrastructure, workloads, and records to cloud platforms and data centers. These trends have propelled the data center boom we’ve seen these past couple of years. A report by the U.S. Natural Resources Defense Council (NRDC) said “Data center electricity consumption is projected to increase to roughly 140 billion kilowatt-hours annually by 2020, the equivalent annual output of 50 power plants, costing American businesses $13 billion annually in electricity bills.

The projections cited above did not factor in the impact of IoT devices which, separately, will cause U.S. electricity consumption to  climb dramatically. That’s because wireless technologies consume more energy than wired technologies such as fiber, cable or DSL: 3G technologies use 15 times more energy than wired connections, 4G consumes 23 times more energy, and 5G may require even more.

The third leg of the upcoming Utilities Renaissance is founded on the growing acceptance of cryptocurrencies which require a massive amount of power to mine. Ethereum mining and Bitcoin mining, for example, consume about 4.69 terawatt-hours (TWh) and 14.54 TWh (i.e. 14.54 billion kilowatt hours) of power per coin, respectively. Over time, mining will eat up more power, as this trend chart from Digiconomist shows. Bitcoin also requires a fair amount of electricity – 280 KWh – just to process a transaction. Put another way, processing one single Bitcoin transaction requires enough energy to power nine U.S. households in a day.

There are more than 1200 different cryptocurrencies in circulation right now, and no one can say for sure which of these digital currencies will survive. In the U.S., the number and types of businesses accepting Bitcoin is certainly expanding, including even real estate transactions. On the other hand, the U.S. central bank may one day decide to launch its own digital currency, which could drive even established coins like Bitcoin and Ethereum out of the market. However, whether privately-issue or government-issued, cryptocurrencies will still need to be mined, and could become a cash cow for electric power companies.

The growing array of utility-scale energy sources which has come to include wind, hydro, and solar on top of the traditional oil, natural gas, nuclear and coal must seamlessly be integrated into the grid along with new battery solutions. This has spurred new grid modernization activities. From 2011 to 2016, spending on distribution infrastructure grew by 8.6% and spending on transmission infrastructure grew by 16%, which is in sharp contrast to the 1990s when utilities cut way back on infrastructure investments, delaying tens of billions of dollars in upgrades. This new activity is paving the transformation towards the national grid of the future. A “smart” grid or interconnected micro-grids that will be able to dynamically balance supply and demand, and improve the economics of power distribution by detecting and drawing from the cheapest energy resource (be that solar, wind or gas-fired generation).

EVs can play an important role in stabilizing the grid while giving power companies the long-sought opportunity to engage with customers. Most people think of EVs in the context of taking energy from the grid, but an electric car can also operate in a discharge mode, in which it essentially acts as a giant battery and injects the power back into the grid. In this way, EV batteries provide storage capacity for the grid; when demand from other sectors is high, they can feed that power back into the grid to make up for any shortfalls in supply. With dynamic pricing systems in place, EV owners can make a profit by charging their cars when the demand is low (and the energy is cheap) and selling electricity back to the grid when the request for power spikes, thus saving the grid from potential overload.

The accelerating adoption of EVs, cryptocurrencies, cloud computing and IOT devices, combined with the growing pool of distributed energy sources are pushing electric utilities towards an inflection point that will be marked by a significant increase in demand and a more dynamic business model. While the rise in power consumption by EVs will likely be accompanied by a related fall in demand from refineries catering to ICE vehicles, the net changes should still be overwhelmingly positive for U.S. electric companies. These seismic shifts don’t appear to be fully priced into the securities yet, which is why MRP is adding the group to our list of active investment themes. As there is no pure-play ETF for electric utilities, we will monitor the theme with the broader Utilities Select Sector SPDR ETF (XLU).

HERE in the meantime are some related articles on Utilities (the stories are summarized in the ENERGY & ENVIRONMENT):

  • Utilities – CPUC: California utilities could hit 50% renewables by 2020  
  • Utilities – This Cryptocurrency Miner Says It Solved Bitcoin’s Power Problem 
  • Utilities – Does C-C-A spell the end of the regulated electric utility in California?  
  • Utilities – Utilities and EV Firms Launch Alliance for Transportation Electrification  

 CHART: UTILITIES ETF (XLU) vs S&P 500 ETF (SPY) Year-to-Date

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OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:

  • Markets: 
    • Bonds – Investors are fleeing junk bonds in near record numbers, a troubling signal for the stock market 
    • Cryptocurrencies – Bitcoin’s Rivals Multiply Amid Battle for Crypto Dominance  
    • Cryptocurrencies – World’s First Bitcoin Short Notes Allow Bears to Ride Big Swings 
    • Stocks – An Index Reshuffle Could Rip the FANGs Out of Your ETFs  
  • Politics and Policy: 
    • Defense – Pentagon Moves to Develop Banned Intermediate Missile
  • Real Estate:
    • Homebuilders – U.S. Home Starts Reach Highest Level in a Year, Permits Rise
  • Transportation:  
    • EVs – Tesla unleashes supercar from newly launched truck 
    • EVs – There’s a $300 billion reason why every automaker should be seriously looking into self-driving trucks  
    • EVs – Delivery company UPS is converting its diesel trucks into electric vehicles  
  • Commodities: 
    • Oil – The IEA Is Grossly Overestimating Shale Growth 
    • Oil & Gas – World’s Biggest Wealth Fund Wants Out of Oil and Gas  
  • Endnote: 
    • CHART: Congressional Office of Compliance releases year-by-year breakdown of harassment settlements and awards

JOE MAC’S MARKET VIEWPOINT

CURRENT MRP THEMES

  Autos  (S)

  India  (L)

  TIPS  (L) / Long-Dated UST (S)

  Defense  (L)

  Industrials & Materials (L)

  U.S. Financials & Regional Banks (L)

  Emerging Markets (L)

  Oil & U.S. Energy  (L)

  U.S. Homebuilders & Construction (L)

  France  (L)

  Palladium  (L)

  U.S. Healthcare Providers & Pharma (S)

  Gold & Gold Miners (L)

  Robotics & Automation (L)

  Video Gaming (L)

  Lithium (L)

  Steel  (L)

  Value over Growth  (L)


About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

   MAJOR DATA POINTS

Top   

  • United States, Housing Starts, MoM, OCT: 1.290 M from prior 1.127 M
  • United States, Baker-Hughes Rig Count, WoW, wk11/17: 915 from prior 907
  • Kyrgyzstan, Industrial Production, YoY, OCT: -24.2% from prior -12.7%
  • Portugal, PPI, YoY, OCT: 2.7% from prior 2.7%
  • Canada, Core Inflation Rate, YoY, OCT: 0.9% from prior 0.8%
  • Malaysia, GDP Growth Rate, YoY, Q3: 6.2% from prior 5.8%

   MARKETS

Top   

Bonds – Investors are fleeing junk bonds in near record numbers, a troubling signal for the stock market

Though stock market prices have held up in November, investors generally are running from risk at a near-record pace. Judging from the flow of money out of high-yield bonds, investors are getting increasingly leery of a market that continues to hover around record levels, despite a handful of rough trading sessions in November and a rocky start Friday.

Funds that track junk bonds saw $6.8 billion of outflows over the past week through Wednesday, according to Bank of America Merrill Lynch. That’s the third-highest on record. Despite the stock market rally, returns for high-yield this year are muted, with the iShares iBoxx $ High Yield Corporate Bond ETF up just 1.1 percent. The ETF has seen $1.4 billion in outflows over the past month, according to FactSet. CNBC

Cryptocurrencies – Bitcoin’s Rivals Multiply Amid Battle for Crypto Dominance  

It’s getting tougher and tougher to keep track of all the different versions of bitcoin. New iterations of the cryptocurrency are multiplying as disagreements over bitcoin’s design persist and opportunities for making a quick buck prove hard to pass up.

The biggest offshoot, called bitcoin cash, appeared in August after it split from the bitcoin blockchain in a so-called hard fork. That spinoff, currently valued at almost $18 billion, was followed by a less successful fork to create bitcoin gold in October, while a major spinoff that was planned for this week, stemming from an upgrade of the bitcoin technology called SegWit2x, was suspended. Now, several other splits are being planned.

The proliferation of bitcoin breakup plans highlights the double-edged sword of the cryptocurrency’s decentralized design; it allows for experimentation where ultimately the market will pick each coin’s value and use, but it can also get confusing and messy for users. B  

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Cryptocurrencies – World’s First Bitcoin Short Notes Allow Bears to Ride Big Swings 

Bitcoin bears now have another way to bet on price falls. Swiss structured products houses Vontobel AG and Leonteq Securities AG started separate products on Friday that allow investors to profit if the price of bitcoin tumbles. Not that it has tumbled much lately. Bitcoin is trading at a record high and has soared more than 700 percent this year.

But the new certificates could usher in more two-way price movement in what has largely been a one-way market so far. Intraday price swings of 10 percent or more are not uncommon in bitcoin trading. The certificates, which will be listed on SIX Exchange AG today, come as the cryptocurrency starts to gain mainstream acceptance as a financial instrument after CME Group Inc., the world’s biggest exchange, said it would start bitcoin futures next month. B 

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Stocks – An Index Reshuffle Could Rip the FANGs Out of Your ETFs  

Watch out, FANG lovers. Some of your favorite stocks are poised to be recategorized, potentially removing them from exchange-traded funds that have held them for years. S&P Global Inc. and MSCI Inc., two of the world’s biggest index providers, plan to overhaul their industry classifications, merging some internet and media stocks with phone companies into a group called “communication services.” It would replace the existing telecommunication sector.

While the list of affected stocks may not be available until next year, CFRA, an investment research firm, estimates the change could send Google parent Alphabet Inc. and Facebook Inc. out of their current industry slot, technology. Netflix Inc. and Amazon.com Inc. may leave the space known as consumer discretionary, as both fall under the internet & direct marketing retail category. That industry will be combined into the new sector.

The shuffling would blend some of this year’s best-performing stocks with the worst. While the FANG bloc has surged 50 percent in 2017, more than triple the S&P 500, phone companies such as AT&T Inc. have dropped almost 20 percent as a group. It’s the latest effort by S&P and MSCI, which compete in marketing indexes but collaborate on some industry categorization, to match stock-market sectors to the evolving economy. B  

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  POLITICS & FISCAL POLICY

Top   

Defense – Pentagon Moves to Develop Banned Intermediate Missile 

The U.S. is laying the groundwork to build a type of missile banned by a Cold War-era pact unless Russia abandons its own pursuit of the weapons, U.S. officials said. The U.S. military’s preliminary research and development, previously undisclosed, is aimed at potentially reviving an arsenal of prohibited ground-based, intermediate-range missiles if Moscow continues violating the pact, the officials said.

American officials say they don’t want to end the Cold War-era accord, known as the Intermediate-range Nuclear Forces Treaty, or the INF, but rather bring Russia back into compliance. Washington hopes to show Moscow the kinds of new American weapons Russia’s armed forces would face if they don’t stop violating the INF, U.S. officials say. The U.S. told Russia of its research project in recent weeks, according to U.S. officials, but said was ready to abandon it if Russia returns to compliance, the officials said. WSJ  

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  REAL ESTATE

Top   

Homebuilders – U.S. Home Starts Reach Highest Level in a Year, Permits Rise 

U.S. new-home construction rebounded in October to the fastest pace in a year, partly reflecting recovery efforts in the hurricane-stricken South, government figures showed Friday. A pickup in permit applications for one- family dwellings indicates building will remain firm in coming months.

The report showed building permits for single-family homes improved in October to an 839,000 annualized pace, the fastest since September 2007. Construction spending, which subtracted from gross domestic product in the second and third quarters, may add to U.S. economic growth in the final three months of 2017 on the heels of rebuilding efforts. At the same time, the industry is dealing with a shortage of workers, higher materials prices and difficulty finding ready- to-build lots. Economists expect residential construction will keep expanding gradually. B  

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McAlinden Research Partners is currently offering a complimentary full month subscription of the DIB. Activate yours today – http://www.mcalindenresearchpartners.com/hc-trial.html

 

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