Wall Street Trends, Speculation and Myths

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Wall Street Trends, Speculation and Myths

• Dave Parker
• Senior Utility Analyst

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What Drives Wall Street?

• Information
• World/National Events
• Economic Data
• Company/Sector Specific News
• The Rumor Mill Chat Rooms, etc.

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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

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INFORMATION
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Information Filter
Ignore Positive Trends
New/Old Economy
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Switching from Bear to Bull

• Credibility
• Accountability
• Predictability
• Irrational Pessimism
• Long-term investing dead?

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Buy and Hold/ Market Timing

• Buy SP 500 bottom/sell top - 400 actual 140

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Sleeping Easier
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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

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Utilities Outperform
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Big Change From Bull Market
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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

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Rewarding Back to Basics Strategy
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Rewarding Back to Basics
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Boring Utility Returns
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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

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Appendix
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Why Own A Utility Stock?

• Income
• Safety
• Predictable returns
• Widows and Orphans Stocks

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Distribution

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

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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

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Commodity

• Big swings in EPS performance with changes in
  electricity commodity prices
• Limited yield due to EPS volatility
• Trading like cyclical stocks, tracking economys
  ups and downs

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What Fuels Investors Optimism

• Substantial investment returns
• Long term quarter or two
• Key issues typically overlooked
• Risk for potential reward
• What goes up wont always go up
• What goes up will come down
• What goes down, can go up

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Deregulation Changes Landscape

• Limited regulation so significant upside
  potential as demand outpaced supply

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Deregulation Changes Landscape

• Limited regulation so significant downside
  potential supply outpaced demand

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Boring Is Good

• In a Bear market investors want certainty
• No news, better than average chance of meeting
  EPS estimates
• Yield Yes please

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Risk/Reward for Differing Strategies
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Outlook for Energy

• Investors expectations realistic again
• Evolution of business strategies from rate of
  return is value added
• Challenges
• Overcoming irrational pessimism
• Rebuilding confidence