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Utilities cheer the heat
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August 8, 2001: 11:03 a.m. ET
Nation's hot spell is steaming up demand for power stocks; respite at weekend
By Staff Writer Parija Bhatnagar
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NEW YORK (CNNfn) - For many in the East and Midwest, the most obvious respite from this week's blistering heat comes from cranking up air conditioners round-the-clock -- instant relief that's bad on the wallet but great for the utility industry.
"The big demand in weather such as this would be on the utilities, from AC manufacturers to power suppliers -- anything related to a cooling demand," said Jon Davis, a meteorologist for Salomon Smith Barney in Chicago.
Stocks for a heat wave
The temperatures in the 90s and 100s, matched by increased power consumption in the hottest states, have helped drive up prices of utility stocks over the last few days, The Philadelphia Utility Sector Index (UTY), a broad gauge of the sector's performance, has risen 6 percent since July 27, with many of the stocks on the index getting an enthusiastic response on Wall Street.
AES Corp. (AES: down $1.22 to $36.77, Research, Estimates), American Electric Power Inc.(AEP: down $0.49 to $44.46, Research, Estimates), FPL Group (FPL: down $0.19 to $54.27, Research, Estimates),DTE Energy (DTE: down $0.45 to $42.94, Research, Estimates), Entergy Corp. (ETR: up $0.20 to $37.96, Research, Estimates) are some of the hot stocks on the index, sustaining gains through the first week of August.
Relief from the heat wave should come by Friday, Davis said.
"This is a brief stint," he said. "We are going to get four days of real heat. It should cool down dramatically by the end of the week, and the weekend should be nice and cool in the Northeast."
But what is a weatherman doing at a brokerage firm?
"I'm in the firm's commodities sector and my primary responsibility is to forecast weather for agricultural traders and weather-sensitive energy commodities," he said. "That includes sectors such as coffee, cocoa, power, heating oil, et cetera."
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Chicago declared two heat emergency warnings as temperatures sizzled near 100 degrees. (Source:AP) | |
Economists agree that an abbreviated heat spell is unlikely to affect any significant macroeconomic trend.
"You have to remember it's only exceptional and prolonged heat that changes trends, since the Commerce Department seasonally adjusts out all typical heat," said John Ryding, economist with Bear Stearns in New York. "The game is to try to figure out if the weather is seasonally abnormal. Except for this week, we've had a pretty normal summer in the Northeast."
Other sectors in for a burst of gains from the dog days of summer are the food and beverage, entertainment and retail categories.
But according to Ethan Harris, a senior economist with Lehman Brothers in New York, the warm weather could slow down projects in the construction industry. "It might also affect shopping behavior, as more people may spend time indoors at a mall," he said. "This in turn will boost consumer spending."
Click here to check on utility stocks
"But the obvious effect is on utility consumption, which will affect industrial output in the economy." said Harris. "People consume more electricity, that places more demand on natural gas, coal, power, and electrical systems."
A shortage in any one of these commodities from excess demand on electric utilities could create the kind of power crunch that hit California this year, nearly bankrupting the state's utility companies.
"It's not like this heat is going to last for one or two months. This is not going down in the books as a hot summer," Davis said. 
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