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Wall Street Trends, Speculation and Myths

Wall Street Trends, Speculation and Myths. Dave Parker Senior Utility Analyst. What Drives Wall Street?. Information World/National Events Economic Data Company/Sector Specific News The Rumor Mill – Chat Rooms, etc. Efficient Market?. Yes, short term

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Wall Street Trends, Speculation and Myths

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  1. Wall Street Trends, Speculation and Myths Dave Parker Senior Utility Analyst

  2. What Drives Wall Street? • Information • World/National Events • Economic Data • Company/Sector Specific News • The Rumor Mill – Chat Rooms, etc.

  3. Efficient Market? • Yes, short term • Information overload can create knee jerk reactions • CNBC effect • The Sky Theory • Trees rarely grow to the sky • The sky rarely falls

  4. INFORMATION

  5. Information Filter Ignore Positive Trends New/Old Economy

  6. Switching from Bear to Bull • Credibility • Accountability • Predictability • Irrational Pessimism • Long-term investing dead?

  7. Buy and Hold/ Market Timing • Buy S&P 500 bottom/sell top - 400% actual 140%

  8. Sleeping Easier

  9. Investors’ Perspective • Sky is going to fall. Why? Uncertain • Terrorism, War, US/World political Uncertainty, Inflation, Deflation, Rising Interest Rates…. • Directionless market a plus for utility stocks

  10. Utilities Outperform

  11. Big Change From Bull Market

  12. Sector Positives • Significant investment needed to improve reliability and keep up with demand growth • Regulators are lowering risk by pre-approving projects • Improving financial fundamentals reflecting Back-to-Basics strategy • Sector again focused on what they do well

  13. Rewarding Back to Basics Strategy

  14. Rewarding Back to Basics

  15. Boring Utility Returns

  16. Near-Term Challenges • Stock prices at upper end of expected trading range • Mild weather most likely will pressure 3Q04 EPS • Kerry not a fan of lower taxes on dividends • Short interest is at record highs

  17. Appendix

  18. Why Own A Utility Stock? • Income • Safety • Predictable returns • Widow’s and Orphan’s Stocks

  19. Distribution • Highly regulated provides slower but steady EPS growth • Higher yields • Lower risk • Returns in line with historical utility returns

  20. Diversified Services • EPS growth above utility average, EPS can have peaks and valleys • More price volatility but tracks ups and downs of utility sector • Appeals to investors looking for some yield but understand total return = yield + price appreciation

  21. Commodity • Big swings in EPS performance with changes in electricity commodity prices • Limited yield due to EPS volatility • Trading like cyclical stocks, tracking economy’s ups and downs

  22. What Fuels Investors’ Optimism • Substantial investment returns • Long term – quarter or two • Key issues typically overlooked • Risk for potential reward • What goes up won’t always go up • What goes up will come down • What goes down, can go up

  23. Deregulation Changes Landscape • Limited regulation so significant upside potential as demand outpaced supply

  24. Deregulation Changes Landscape • Limited regulation so significant downside potential supply outpaced demand

  25. “Boring” Is Good • In a Bear market investors want certainty • No news, better than average chance of meeting EPS estimates • Yield – Yes please

  26. Risk/Reward for Differing Strategies

  27. Outlook for Energy • Investors’ expectations realistic again • Evolution of business strategies from rate of return is value added • Challenges: • Overcoming irrational pessimism • Rebuilding confidence

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