the market and utility investments carol jones financial advisor new mexico investment advisors 2041...

The Market and Utility Investments

Carol JonesFinancial Advisor

New Mexico Investment Advisors2041 1/2 South Plaza Street NW

Albuquerque, NM 87104505.883.5779

Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC [email protected] www.NMinvest.com

mailto:[email protected]

http://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

Source – Bureau of Labor Statistics

1980 – 2009

Sept 2009-9.8%

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 nowExcess capacity in the

manufacturing sectorHigh unemploymentNo 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 Expansions1973 – 2008

0

1

10

$100

20082003199819931988198319781973

• Contraction• Expansion• Stocks

0

200

400%

-200

86.0% 87.0%

279.6%

71.5%

355.1%

62.6%108.4%

-42.6% -14.3% -16.5% -29.6% -14.7% -15.4%-44.7% -40.1%

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.

Stock Performance During Recessions1946 – 2008

Shaded Regions Denote Economic Recessions

0.10

1

10

100

$1,000

1946 1956 1966 1976 1986 1996 2006

1949

1954

1958

1960

1970 19

74

1980 19

82

1990

2001

2008

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.

Stock Performance After Recessions1946 – 2008

3.8%

20.1%

33.7%

74.0%

2.2%

11.4%

19.1%

47.7%

After 3 YearsAfter 1 YearAfter 6 MonthsAfter 1 Month

0

10

20

30

40

50

60

70

• Small Stocks• Large Stocks

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.

80% Return

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 normalGrowth will surprise on the upside.China’s savings rate is 40%Softer dollar great for multinational company

earningsCorporations lean and mean, loaded with

cashM&A activity will pick up,Stocks and commodities will perform well.

Fundamental Analysis vs. Technical Analysis

1. What to Buy2. Company Management3. Earnings Quality4. Price/Earnings Ratio5. Product Acceptance

1. When to Buy2. Trend Analysis3. Relative Strength4. Momentum5. When to Sell

What is Fundamental Analysis? What is Technical Analysis?

© Dorsey, Wright & Associates 2009

© Dorsey, Wright & Associates 2009

Chart Source: www.dorseywright.com

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 PerformanceSector Performance Relative to the U.S. Market

0

10

20

30

40% Return

5% Risk 10 15 20 25 30

U.S. Market: 16% Return

• Underperformers• Outperformers

Health Care

ConsumerGoods Financial

ServicesConsumer Services

Media

Utilities IndustrialMaterials

Business Services

Software

Energy

Telecom Hardware

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.

Bear Market PerformanceSector Performance Relative to the U.S. Market

-15% Return

10% Risk 15 20 25 30

-25

-35

-45

-55

U.S. Market: -36% Return

• Underperformers• Outperformers

Consumer Goods

Consumer Services

Financial Services

Energy

Industrial Materials

Health Care

Utilities

Media

Software

Telecom

Hardware

Business Services

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.

Risk and Return Comparison1992 – 2008

0

4

8

12% Return

5% Risk 15 20 25 30 35 4010

Telecom

Media

Software

Hardware

Financial Services

Business Services

Health Care

Consumer Services

Utilities Industrial Materials

Energy

ConsumerGoods


Annual Sector Winners and LosersHigh and Low Returns 1999 – 2008

-60

-40

-20

0

20

40

60

80

100%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

FinancialServices

Utilities

Software

Hardware

Hardware

Telecom

Hardware Media

Software

Utilities

ConsumerServices

ConsumerGoods

Hardware

EnergyEnergy Telecom Energy

-11.2%

-46.2%

-32.9%

-41.3%

9.0%

-11.0%

7.9%

97.0%

55.5%

10.4%

-4.1%

65.3%

33.0% 34.4% 35.6%

-15.9%

37.2%

ConsumerGoods

-51.3%

-22.9%

-3.8%

HealthCare

FinancialServices


• Positive

0

50

100%

0

100%

ConsumerGoods

IndustrialMaterials

ConsumerServices

HealthCare

Utilities Energy MediaSoftware Telecom

50

IndustrialMaterials

HealthCare

Utilities EnergyMedia Telecom Hardware

87% 87% 86% 85% 83% 81% 81% 78% 78% 78% 73% 72%

38% 31% 31% 28% 24% 24% 23% 20% 20% 18% 18% 9%

13% 13% 14% 15% 17% 19% 19% 22% 22% 22% 27% 28%

62% 69% 69% 72% 76% 76% 77% 80% 80% 82% 82% 91%

Sector Performance: Rising Versus Declining Markets1992 – 2008

BusinessServices

FinancialServices

ConsumerGoods

ConsumerServices

FinancialServices

BusinessServices

Software

Hardware

Percentage of Positive/Negative Returns During Up Markets

Percentage of Positive/Negative Returns During Down Markets

• Negative


Historical View of Returns by Industry1992 – 2008

• Positive• Negative

0

50

100%

-50

0

50

100

150%

BusinessServices

27%

-36.2%

40.4%

ConsumerGoods

22%

-23.9%

39.7%

ConsumerServices

28%

-32.6%

55.0%

HealthCare

26%

-30.1%

55.3%

FinancialServices

24%

-53.4%

70.2%

IndustrialMaterials

20%

-47.1%

47.7%

Software

23%

-60.0%

97.0%

Telecom

32%

-56.9%

70.6%

Utilities

24%

-28.8%

55.5%

Energy

22%

-38.0%

55.5%

Hardware

28%

-68.3%

124.9%

Media

32%

-46.5%

74.2%

Percentage of Positive/Negative 12-Month Returns

Range of 12-Month Rolling Returns


Issues for the utility industry

The economyPower demand

has dropped about 4% in the past year.

Interest RatesCost of moneyDividend investors


Capital SpendingRebuild power grids Construct new transmission linesOpen new plants.

RegulationRate increases Renewable energy

Hybrid Vehicles


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 MWAmerican 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

Source – Raymond James Financial Services

One reason why coal is down the most is because, where available, power producers have switched to the recently more affordable natural gas alternative.

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.

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.

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

Continued on next slide

Disclosures

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 such securities on your tax liability.


Disclosures (continued)

Continued on next slide

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.


Disclosures (continued)

the market and utility investments carol jones financial advisor new mexico investment advisors 2041...

Documents

real estate slide

key slide

new home construction

economic analysis slide

percent decline

new home sales new home

national real estate

home prices