Transcript The Market and Utility Investments

The Market and Utility Investments
Carol Jones
Financial Advisor
New Mexico Investment Advisors
2041 1/2 South Plaza Street NW
Albuquerque, NM 87104
505.883.5779
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC
[email protected] www.NMinvest.com
The Economy
GDP
Real gross domestic product declined 0.7 percent in the second quarter
of 2009, following a 6.4 percent decline in the first quarter.
Source-Bureau of Economic Analysis
Unemployment Rate
Sept
20099.8%
1980 – 2009
Source – Bureau of Labor Statistics
Growth in Corporate Profits
Second-quarter corporate profits rose 3.7 percent at a quarterly rate.
Nonfinancial profits rose 4.7 percent, and financial profits rose 12.0 percent.
Source-Bureau of Economic Analysis
Inflation
 No
evidence right now
 Excess
capacity in the
manufacturing sector
 High unemployment
 No pricing power
 Fed
actions when economy
recovers key
Consumer Price Index
Source – Bureau of Labor Statistics
Real Estate
New Home Sales
New Home Sales for August disappointed — coming in at 0.7%
gain from the prior month, about half of consensus expectations.
Existing Home Sales
Existing Home Sales declined 2.7% month over month. They
improved 3.4% above the August 2008 levels,
Housing starts

U.S. housing starts rose from an upwardly revised
annual rate of 589,000 in July to 598,000 last month,
down 29.6 percent from a year ago and a full 74
percent below the peak of homebuilding activity in
January 2006.

Permits for new construction improved from the prior
month's upwardly revised rate of 564,000 to 579,000
in August, a decline of 32.4 percent from last year at
this time and down 74 percent from the September
2005 peak.
New home construction
S&P Case-Schiller home price indices
Change in home prices

Looking at the monthly data, the 10-City and 20-City
Composites and 18 of the 20 metros areas increased
in July.
 In addition, both Composites and 13 of the MSA have
had at least three consecutive months of positive
prints.
 These figures continue to support an indication of
stabilization in national real estate values.
 We do need to be cautious in coming months to
assess whether the housing market will weather the
expiration of the Federal First-Time Buyer’s Tax Credit
in November, anticipated higher unemployment rates
and a possible increase in foreclosures.”
Commercial Real Estate





Much is being made about possible defaults
and foreclosures in commercial real estate.
Commercial real estate, represents $5 trillion
in the economy relative to the $20 trillion
represented by residential real estate
Commercial real estate includes a large
residential component – condominiums, land
loans, and loans to homebuilders.
We’re not really overbuilt in the commercial
market, although there may be some defaults
Smaller banks at most risk.
Source - Raymond James’ Director of Real Estate Research Paul Puryear
Consumer sentiment
Consumer sentiment for September rose to 70.2, the highest since June, from
65.7 in August. This was above estimates expecting a reading of 67.3, and
roughly back to the level of September 2008, which was 70.3.
Consumer sentiment
Interest Rates
Interest Rates
2 Year Treasury Note
Source – Wall Street Journal
Retail Sales
Retail sales in August were up 2.7% - their largest monthly gain
since January 2006.
Retail Sales
August auto Sales up 11.9% from July due to “cash-for-clunkers.”
Government Stimulus
Housing and Economic Recovery Act of 2008
 Saving Fannie and Freddie
 $400 billion ($95.6 billion committed so far)
Emergency Economic Stabilization Act
 The TARP
 $700 billion ($477.7 billion committed so
far)
Government Stimulus
• Federal First-Time Buyer’s Tax Credit



The tax credit is equal to 10 percent of the home’s purchase
price up to a maximum of $8,000.
The tax credit is for first-time home buyers only and does not
have to be repaid.
The credit is available for homes purchased on or after
January 1, 2009 and before December 1, 2009.
• Cash-for-clunkers”


Officially known as the Car Allowance Rebate System
Congress had originally appropriated $1 billion for the
payments as part of the stimulus package, but the money was
quickly exhausted and another $2 billion added
Consumer-driven economic growth

Consumer spending has accounted for 65% to
70% of our national output — thanks in large
part to borrowing.
 Consumer debt, including credit card debt and
auto loans, has dropped by $109.3 billion
since peaking at $2.6 trillion in July 2008 —
the biggest percentage decline on record.
 The personal savings rate soared from just
0.8% in April 2008 to 4.6% in June 2009.
 Will the increased savings rate drag down
growth rates?
Source: Federal Reserve Board.
The Markets
What happened
What happened
The crash took world stock market capitalization down from a peak of $63
trillion, down to $25 trillion, lopping off some $38 trillion in equity value.
After the panic
We are now more than six months into
the global stock market rally.
 The move off the bottom has been the
largest in history, and Q3 was the best in
11 years.
 The US cut $11 trillion, plunging from
$19 trillion to $8 trillion.
 Since March, the world has recovered
$18 trillion, and the US $5 trillion.

Source – themadhedgefundtrader.com
Stock Market Contractions and Expansions
1973 – 2008
$100
• Contraction
• Expansion
• Stocks
10
1
0
355.1%
400%
279.6%
200
0
86.0%
-42.6%
87.0%
-14.3%
108.4%
71.5%
-16.5%
-29.6%
62.6%
-15.4%
-14.7%
-40.1%
-44.7%
-200
1973
1978
1983
1988
1993
1998
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative
purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials
©2009 Morningstar, Inc. All rights reserved. Used with permission.
2003
2008
Stock Performance During Recessions
2001
2008
1946 – 2008
$1,000
1974
1949
1954
10
1960
1958
1970
1980
100
1982
1990
Shaded Regions Denote Economic Recessions
1
0.10
1946
1956
1966
1976
1986
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Hypothetical value
of $1 invested at the beginning of 1946. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative
purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation
Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
1996
2006
Stock Performance After Recessions
1946 – 2008
80% Return
74.0%
70
60
• Small Stocks
• Large Stocks
50
47.7%
40
33.7%
30
20
20.1%
19.1%
11.4%
10
2.2%
3.8%
0
After 1 Month
After 6 Months
After 1 Year
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Cumulative returns of
large and small stocks after recessions 1946 – 2008. Note: The recession that began in Dec 2007 is still occurring and is not included in the
analysis. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson
Presentation Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
After 3 Years
The effect of dividends on returns
Dividends are now taxed at a favorable
rate of 15%.
 Higher tax rates as well as the risk of
increased taxes on dividends when the
Bush tax cuts expire in 2011
 Historically, the bulk of utility returns
have come from dividends.

Contribution of Dividends to Total Return
What happens from here?

The “New Normal”
The U.S. economy will languish in a climate
of slow economic growth.
 Profit gains will be muted.
 The dollar will continue to decline.
 Preserve capital rather than generate high
returns.
 Income generating securities such as
dividend-paying stocks and high-quality
bonds.

What happens from here?

The old normal
Growth will surprise on the upside.
 China’s savings rate is 40%
 Softer dollar great for multinational company
earnings
 Corporations lean and mean, loaded with
cash
 M&A activity will pick up,
 Stocks and commodities will perform well.

Fundamental Analysis vs. Technical Analysis
What is Fundamental Analysis?
What is Technical Analysis?
1.
2.
3.
4.
5.
1.
2.
3.
4.
5.
What to Buy
Company Management
Earnings Quality
Price/Earnings Ratio
Product Acceptance
© Dorsey, Wright & Associates 2009
When to Buy
Trend Analysis
Relative Strength
Momentum
When to Sell
Chart Source: www.dorseywright.com
© Dorsey, Wright & Associates 2009
NYSE Bullish Percent January 2007-September 2009
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
NYSE Bullish Percent
© Dorsey, Wright & Associates 2009
Chart Source: www.dorseywright.com
Dow Jones Industrial Average
Bullish Pct For All Stocks
Updated Through- 10/02/2009
The Utility Industry
Utilities have trailed the market
Bull Market Performance
Sector Performance Relative to the U.S. Market
• Outperformers
• Underperformers
40% Return
Energy
30
Utilities Industrial
Telecom
Materials
Hardware
Business Services
20
Software
U.S. Market: 16% Return
Consumer
Goods
Financial
Services
Health Care
10
Consumer Services
Media
0
5% Risk
10
15
20
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • The bull market
in this example occurred from October 2002 through October 2007. • This art is for illustrative purposes only and not indicative of
any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc.
All rights reserved. Used with permission.
25
30
Bear Market Performance
Sector Performance Relative to the U.S. Market
• Outperformers
• Underperformers
-15% Return
Consumer Goods
Health Care
Utilities
-25
Consumer Services
Energy
Telecom
Business Services
-35
U.S. Market: -36% Return
Software
Media
Hardware
Industrial Materials
-45
Financial Services
-55
10% Risk
15
20
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • The bear market
in this example occurred from November 2007 through December 2008. • This art is for illustrative purposes only and not indicative
of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials ©2009 Morningstar, Inc.
All rights reserved. Used with permission.
25
30
Risk and Return Comparison
1992 – 2008
12% Return
Energy
Software
Financial Services
8
Consumer
Goods
Health Care
Hardware
Utilities
Industrial Materials
Consumer Services
Business Services
Media
4
Telecom
0
5% Risk
10
15
20
25
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative
purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation
Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
30
35
40
Annual Sector Winners and Losers
High and Low Returns 1999 – 2008
Software
100%
97.0%
80
Hardware
Utilities
65.3%
60
55.5%
Energy
Energy
Energy
40
33.0%
34.4%
35.6%
37.2%
Consumer
Services
20
9.0%
10.4%
0
Telecom
-11.2%
Consumer
Goods
Telecom
-3.8%
Hardware
-4.1%
Utilities
-20
7.9%
-11.0%
Health
Care
-15.9%
Media
Financial
Services
-32.9%
Hardware
-46.2%
-40
Consumer
Goods
-22.9%
-41.3%
Hardware
-51.3%
Software
Financial
Services
-60
1999
2000
2001
2002
2003
2004
2005
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative
purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation
Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
2006
2007
2008
Sector Performance: Rising Versus Declining Markets
1992 – 2008
• Positive
Percentage of Positive/Negative Returns During Up Markets
100%
• Negative
87%
87%
86%
85%
83%
81%
81%
78%
78%
78%
73%
72%
13%
13%
14%
15%
17%
19%
19%
22%
22%
22%
27%
28%
Business
Services
Industrial
Materials
Financial Consumer
Services
Goods
Telecom
Software
Hardware
50
0
Media
Consumer
Services
Health
Care
Utilities Energy
Percentage of Positive/Negative Returns During Down Markets
100%
38%
31%
31%
28%
24%
24%
23%
20%
20%
18%
18%
9%
62%
69%
69%
72%
76%
76%
77%
80%
80%
82%
82%
91%
Software
Telecom
Hardware Consumer
Services
Financial
Services
Industrial
Materials
Business
Services
50
0
UtilitiesConsumer
Goods
Energy
Health
Care
Media
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative
purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation
Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
Historical View of Returns by Industry
1992 – 2008
Range of 12-Month Rolling Returns
150%
124.9%
100
50
0
97.0%
39.7%
-23.9%
40.4%
47.7%
-36.2%
55.0%
55.3%
55.5%
-32.6%
-30.1%
-28.8%
-47.1%
70.2%
70.6%
-53.4%
-56.9%
74.2%
55.5%
-38.0%
-46.5%
-60.0%
-50
-68.3%
• Positive
• Negative
Percentage of Positive/Negative 12-Month Returns
100%
50
22%
0
27%
Consumer Business
Goods
Services
20%
28%
Industrial Consumer
Materials Services
26%
24%
22%
24%
Health
Care
Utilities
Energy
Financial
Services
32%
32%
28%
23%
Telecom
Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative
purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation
Materials ©2009 Morningstar, Inc. All rights reserved. Used with permission.
Media
Software
Hardware
Issues for the utility industry

The economy


Power demand
has dropped
about 4% in the
past year.
Interest Rates
Cost of money
 Dividend
investors

Issues for the utility industry

Capital Spending
Rebuild power grids
 Construct new transmission lines
 Open new plants.


Regulation
Rate increases
 Renewable energy

Hybrid Vehicles
Issues for the utility industry

Cap-and-trade





A cap-and-trade market allows carbon emitters to buy and sell
allowances the right to emit carbon dioxide (CO2) on an open
exchange.
The framework for this market has already been laid out in the
Waxman-Markey Cap & Trade Bill (H.R. 2454), which passed
the House on June 26 and now awaits Senate review.
The Waxman-Markey bill aims to reduce CO2 emissions to
17% of 2005 levels by 2050.
Coal- and natural gas-burning electrical utilities, which
produce 39% of US CO2 emissions, are the primary target of
the legislation.
PNM has quit US Chamber of Commerce citing chamber's
opposition to the bill
Source - www.advisorperspectives.com
Nuclear Power







The US has 104 Nuclear Power Plants representing
25% of the power grid
Plants are running at 90% capacity at a cost of 3 cents
per KWhr
The most recent plant was commissioned in the 70’s
All have been refurbished to extend their original 40
year lifetimes
More than 20 applications for new large nuclear power
plants in the works in the US
More than 300 new builds on the books in the rest of
the world
China building 2 major plants per year
Source Gilbert Zigler Senior Scientist/Engineer Alion Science and Technology
Solar
 Solar
stocks have been incredibly
volatile this year.
 Things will remain challenging for
both thin-film and photovoltaic
sector solar companies.
 New polysilicon plants coming on
line as demand is down.
 Supply greatly outstrips demand.
Source – Barron’s
Wind Energy
US wind energy industry installed 8,500
megawatts of new generating capacity in
2008
 Total capacity now 25,300 MW
 American Recovery and Reinvestment
Act of 2009 includes three year
extension of renewable energy
production tax credit.
 85,000 people employed by the industry.

Source – American Wind Energy Association
Coal and Natural Gas

OMG...OFOs!
The U.S. is running out of gas storage
capacity.
 Pipelines start issuing critical storage days
and operational flow orders (OFOs).
 Producers will need to shut-in production
and natural gas prices will likely fall sub
$2/Mcf

Source – Raymond James Financial Services
Coal and Natural Gas
One reason why coal is down the most is because, where available,
power producers have switched to the recently more affordable natural
gas alternative.
Source – Raymond James Financial Services
Growth of Electric Generation Industry
Source EIA
The Local Utilities
Unisource Energy





Price 30 Dividend Yield 3.8% Market Cap 1.06B
UniSource Energy Corp., parent of Tucson Electric
Power Company, supplies electricity and gas service
in Tucson, Arizona and the surrounding area
Non-utility subsidiaries engage in plant construction,
fuel supply, and related businesses.
Revenue sources: residential, 44%; commercial, 26%;
industrial, 21%; other, 9%.
Fuels: coal, 93%; gas, 7%. ’08
Pinnacle West

Price 31.6 Dividend 6.6% Market Cap 3.29B
 Pinnacle West Capital Corporation is a holding
company for Arizona Public Service Company (APS),
which supplies electricity to 1.1 million customers in 11
of 15 Arizona counties.
 SunCor real estate subsidiary has properties in
Arizona, New Mexico, Utah, and Idaho.
 Electric revenue breakdown, ’08: residential, 45%;
commercial,39%; industrial, 6%; other, 10%.
 Generating sources, ’08: coal, 35%; nuclear, 23%;
gas, 17%; purchased, 25%.
XCEL Energy



Price 19.2 Dividend 5.1% Market Cap 8.81B
Xcel Energy Inc. is the parent of Northern States
Power, which supplies power to Minnesota, Wisconsin,
North Dakota, South Dakota, Michigan, & gas to
Minnesota, Wisconsin, North Dakota, & Michigan;
Public Service of Colorado, which supplies power &
gas to Colorado; & Southwestern Public Service,
which supplies power to Texas & New Mexico
Customers: 3.4 mill. electric, 1.9 mill. gas. Electric
revenue breakdown, ’08: residential, 28%; commercial
& industrial, 53%; other, 19%.
El Paso Electric

Price 17.66 No Dividend Market Cap 817M
 El Paso Electric Company provides electric
service to 365,000 customers in an area of
approximately 10,000 square miles in the Rio
Grande valley in western Texas (68% of
revenues) and southern New Mexico (19% of
revenues), including El Paso, Texas and Las
Cruces, New Mexico
 Generating sources, ’08: nuclear, 42%; gas,
24%; coal, 6%; purchased, 28%.
PNM Resources






Price 11.16 Yield 4.5% Market Cap 1.02B
Parent of Public Service Company of New
Mexico.
Sold PNM Gas January ’09 reducing debt
Acquired TNMP in June 2005
First Choice projected earnings contribution
increased
Fuels: coal, 36%; nuclear, 15%; natural gas
35%.
Utility investments
More happening than ever before –
dynamic!
 Electric utility stocks have
underperformed this year.
 Year to date S&P is up about 15%, utility
index is even
 The industry’s average yield of 5% is
more than twice the market mean plus
some dividend-growth potential.

Disclosures
Investing in small-cap stocks generally involves greater risks and, therefore, may not
be appropriate for every investor.
International investing involves special risks, including currency fluctuations, different
financial accounting standards, and possible political and economic volatility.
U.S. government bonds and Treasury bills are guaranteed by the U.S. government
and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S.
government bonds are issued and guaranteed as to the timely payment of principal and
interest by the federal government. Treasury bills are certificates reflecting short-term
(less than one year) obligations of the U.S. government.
Standard deviation measures the fluctuation of returns around the arithmetic average
return of investment. The higher the standard deviation, the greater the variability (and
thus risk) of the investment returns.
Diversification does not ensure a profit or guarantee against a loss.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally
considered representative of the U.S. stock market.
Continued on next slide
March 1, 2009 • Source: Created by Raymond James using Ibbotson Presentation Materials © 2009 Morningstar, Inc. All rights reserved.
Used with permission. 2009 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC • 2009 Raymond James
Financial Services, Inc., member FINRA/SIPC
Disclosures
(continued)
Holding stocks for the long-term does not insure a profitable outcome. Investing in
stocks always involves risk, including the possibility of losing one's entire investment.
High-yield (below investment grade) bonds are not suitable for all investors. The risk of
default may increase due to changes in the issuer’s credit quality. Price changes may
occur due to changes in interest rates and the liquidity of the bond. When appropriate,
these bonds should only comprise a modest portion of your portfolio.
There is an inverse relationship between interest rate movements and bond prices.
Generally, when interest rates rise, bond prices fall and when interest rates fall, bond
prices generally rise.
Municipal bond interest is not subject to federal income tax but may be subject to AMT,
state or local taxes. Income from taxable municipal bonds is subject to federal income
taxation; and it may be subject to state and local taxes. Municipal securities typically
provide a lower yield than comparably rated taxable investments in consideration of
their tax-advantaged status. Investments in municipal securities may not be appropriate
for all investors, particularly those who do not stand to benefit from the tax status of the
investment. Please consult an income tax professional to assess the impact of holding
Continued on next slide
such securities on your tax liability.
March 1, 2009 • Source: Created by Raymond James using Ibbotson Presentation Materials © 2009 Morningstar, Inc. All rights reserved.
Used with permission. 2009 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC • 2009 Raymond James
Financial Services, Inc., member FINRA/SIPC
Disclosures
(continued)
Commodities and currencies investing are generally considered speculative because
of the significant potential for investment loss. Their markets are likely to be volatile
and there may be sharp price fluctuations even during periods when prices overall
are rising.
Correlation is a statistical measure of how two securities move in relation to each
other. Perfect positive correlation (+1) implies that as one security moves, either up or
down, the other security will move with it. Perfect negative correlation (-1) means that
if one security moves in either direction, a security that is perfectly negatively
correlated will move by an equal amount in the opposite direction. If the correlation is
0, the movements of the securities are said to have no correlation; their performance
relative to each other is completely random.
Investing in emerging markets can be riskier than investing in well-established foreign
markets.
Ratings are subject to change and do not remove market risk.
Specific sector investing can be subject to different and greater risks than more
diversified investments.
March 1, 2009 • Source: Created by Raymond James using Ibbotson Presentation Materials © 2009 Morningstar, Inc. All rights reserved.
Used with permission. 2009 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC • 2009 Raymond James
Financial Services, Inc., member FINRA/SIPC