Merrill: Finger Pointing Delays CA Solution

Merrill Lynch urged investors in energy marketing stocks to "proceed with caution" during this period of "finger pointing" in California. "Outrageous claims and ignorance appear to be the themes of the day," the Wall Street analysts said in a bulletin titled "Santa Claus, the Tooth Fairy and Leprechauns Do Exist - Just Ask California."

"California only has itself to blame...," said Merrill Lynch analysts Donato Eassey, Carl Kirst, Steve Fleishman and Peter Staples. Instead of blaming marketers for the energy crisis, legislators and end-users should welcome them with open arms as saviors from imminent market collapse and utility bankruptcy.

"At a time when Californians should be encouraging investor sentiment to stimulate interest in attracting capital to build out much needed power and natural gas infrastructure facilities, certain factions continue their witch hunt for a scapegoat. This is as unfortunate today as it's been for the past several months, where instead of attacking the real problems and recognizing the reality to raise prices, they bury their heads in fairyland."

The analysts said they remain confident the courts will "bring some sanity/reality" to the situation, but they believe the basic problems will not be solved until state lawmakers call on the marketers to help them out.

"The point is that the very companies being accused of market issues are the ones capable of meeting the problems head on and helping to solve them. We think the level heads will ultimately prevail and that the likes of [Dynegy, Enron, El Paso, Sempra Energy and The Williams Companies] and others will get out of the doghouse and into the rescue/heroes mode, once California's leadership comes to grip with the reality that energy costs across the nation, and for that matter around the entire globe have risen sharply, and just like the misguided gasoline gouging charges which faded into the sunset, we think these issues will as well."

The Merrill Lynch analysts noted that Californians on average pay relatively low rates (in the bottom 25%) per capita. Only when they have to deal with real price signals will they begin the "long road to recovery," the analysts said.

"We suggest investors stay vigilant and keep in mind that until California returns to reality, many of our names are likely to be impacted by event-driven issues (such as nuance lawsuits and the like), versus industry fundamentals." Rocco Canonica


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