(November, 2003)
UTILITY SHARES STILL SHAKY
Utility stocks were for decades deemed the most
desirable among the categories deemed appropriate for widows and
orphans. Then came Enron, energy trading scandals, debt woes and
more—all which left relatively few companies unscathed.
Over the last year, the picture has seemed to brighten somewhat. Energy merchants like Calpine (a recent successful holding of ours, and one which may return later) and Dynegy have come back from both the dead and from share prices literally in the pennies. Larger companies have begun to work through debt and capacity issues, helped this year by some relief to the incredibly tight credit conditions suffered during 2001 and 2002.
However, it’s far too early to jump blindly into this sector, regardless of the more favorable tax treatment now given to most dividend income. According to an October 29 Reuters story by Nichola Groom, utility chiefs meeting in Orlando, Florida at a recent industry confab remain cautious on the future.
Overall, her story was of an industry still far more concerned about hunkering down, protecting credit ratings and maintaining dividends for shareholders. All these things, though—especially the first two—could result in lethargic earnings for some time to come. Groom illustrated how scared company execs remain about still-looming credit rating reductions. One quoted as an example was Dominion Resources’ C.F.O. Tom Chewning, who said, “If one objective should be ahead it is the credit objective first, the growth objective second,” as he discussed Dominion’s “unwavering commitment” to maintaining its credit rating, even at the expense of slower growth and, thus, its annual earnings targets.
In short, the picture for most utilities is that of a few more years’ worth of consolidation, cost-cutting, debt repayments and other things that have nothing to do with growth. Now you know why I jettisoned Duke Energy and Idacorp a while back (both at profits) and have favored only Atmos Energy among “pure” utility plays.
MORE MISLEADING RARE COIN PROPAGANDA
Predictably, the strength in the precious metals markets has spawned new waves of rare coin gimmicks and sales pitches. I have long warned about the many deceptive ways in which these antique coins (some, though, less “antique” than others) are pitched. One promotion particularly caught my eye lately, though.
It was particularly lavish and wordy, touting the historical performance of coins and claiming that a number of famous, wealthy (and now deceased) people had made much of their fortune on coin collecting. Fair enough. However, this pitch went on to talk about considerably more recent performance figures for rare coins, in making the case that such performance might be repeated if gold and silver continue going higher. The trouble is, the piece utterly failed to talk about how an enormous transformation in the rare coin business has made such heady returns (over 91,000% in 54 years was one particularly catchy figure cited) all but impossible.
Simply put—with the exception of those old uncirculated coins that are TRULY rare due to limited mintage, year and condition—most others are, by comparison, a “dime a dozen.” The inauguration in the mid-1980’s of independent grading organizations pulled previously unknown quantities of uncirculated gold coins in particular out from back yards, safes, shoe boxes and elsewhere, as their owners sought their true value. Thus, as the years have since gone by and the trading in most uncirculated coins has become as effortless and, normally, as liquid as that of bullion itself, a steadily-shrinking premium has been the result. Even after gold’s nearly 50% run from its lows, the overwhelming majority of coins deemed “rare” by their salesmen have little more than that to show for the effort. When you add in the usually grotesque commissions charged to buy and sell so-called rare coins as opposed to bullion, in fact, one is far better off in the latter.
DON’T BECOME COMPLACENT WITH LOWER CAPITAL GAINS TAXES!
A short time ago, I came across an article suggesting that vehicles such as variable annuities—increasingly popular these days given the financial markets’ shaky performance and these products’ unique safeguards—might be less attractive now due to recent tax law changes. The article specifically suggested that mutual funds owned outside a variable annuity (we’re assuming here in both cases that these holdings would be outside qualified retirement accounts) now have more of a leg up, since gains over time will be taxed at a rate of 15%. In contrast, future distributions above your original principal from an annuity are taxed at higher ordinary income tax rates.
On the surface, this is true. However, the case made by this particular writer assumes that it’s again safe to be a “buy and hold” investor, a supposition with which I disagree.
One attractive feature of a variable annuity is that funds can be moved from one sub-account to another with no current taxes on any gains generated. An owner of such a policy can move from stock funds to cash and back almost at will, and also avail himself, in some of the better policies, of funds that concentrate on various sectors. A couple of the best products have even recently added “bearish”-oriented funds, allowing for even more aggressive trading within a variable annuity policy; again, all without current taxes on any gains generated.
If we really have started a new long-term bull market, perhaps it will end up true that you can put money in any old stock mutual fund and let it ride for many years. I still tend to think, though, that we’ll at best be in a “sideways” market for many years to come. Thus, lower capital gains taxes on holding a mutual fund or not, I think the investment and market dangers of going back to a “buy and hold” strategy are not sufficient to go back to buying stock funds and forgetting about them, in the hopes of realizing long-term capital gains that might not materialize as much as you’d like!
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