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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