Every Wednesday, Legg Mason Wood Walker financial adviser Jonathan Murray answers e-mail on your investments. To be included next week, send your questions.
> From: Goldstein, Jon W.
Sent: Tuesday, November 13, 2001
To: ‘Murray, Jonathan P.’
Subject: $
Good morning Jonathan,
I’ve got great questions on BGE, real estate and preferred shares for you today. First of all, Wall Street hit airline stocks hard again this week after the American Airlines crash in Queens. Many of these stocks we already pretty depressed after the terror attacks in September. This is an industry in the throes of such tremendous change, would buying shares at these low prices be foolish?
Thanks,
Jon
From: Murray, Jonathan P.
Sent: Tuesday, November 13, 2001
To: Goldstein, Jon W.
Subject: RE: $
I have never been a big fan of investing in airline stocks for the long
haul, because so many things are out of their control. If the price of oil
goes up, their costs (due to jet fuel) escalate. They have labor
uncertainties, price wars (never a good thing for underlying businesses to
commoditize,) and, sadly, when a tragic event like 9/11 or yesterday occurs,
it makes travelers fearful of flying.
That said, the stocks can be
interesting trading opportunities. You can buy them low and sell them high,
if you’re lucky. But, I think long-term investing is very different from
speculating, and I tend to be more of a long-term investor.
There’s no question that these stocks appear inexpensive. American is at a
52-week low. The others look like they’ve had a 2:1 stock split! But,
investors should be careful. There’s a chance that not all carriers will
make it, despite the Airline Security Act. If you are an aggressive trader,
you could probably make some money buying the right airline stock down here,
but be very careful–they are extremely volatile stocks.
> From: Goldstein, Jon W.
Sent: Tuesday, November 13, 2001
To: ‘Murray, Jonathan P.’
Subject: $
Dear Mr. Murray,
I recently inherited shares of BGE Stock. My grandmother assigned them to me on May 3, 1998. She recently passed away and I was given the original stock certificates. I did some research and found out that the shares were worth $31.50 on May 3, 1998. I do not have any other stocks and I have been told that I cannot take the capital loss for the year of 2001 because I have to take a capital loss against a capital gain.
I know that BGE is now Constellation Energy Group. I looked at the historical value and see that the stock has taken a major hit since the middle of June 2001 going from a high of around $50 per share then to about $20 today.
Can you tell me what caused this nosedive and what you think that I should do?
My wife and I have talked about this and I am thinking about selling them. I want to wait till the shares get back to $31.50 to break even if I cannot take the capital loss. My wife and I do not plan to go into the market due to other financial obligations.
Please tell me what you prognosis is for this stock and what my options could be.
Thank You
From: Murray, Jonathan P.
Sent: Tuesday, November 13, 2001
To: Goldstein, Jon W.
Subject: RE: $
You are using language that confuses me. You say you “inherited” BGE shares, but
later, say that they were “assigned” to you.
Not to be a nit-picker, but the
tax treatment on these shares when you sell them will depend upon whether
the stock was inherited by you when you grandmother recently passed away, or
whether she “gifted” the shares to you back in 1998. If she gifted them, you
take on her original cost basis–what she paid for the shares–not the price
on the day of the gift. If, however, you inherited shares on her death, you
get a “stepped-up basis” , and your cost becomes the price of the stock on
your grandmother’s date of death. So, before you sell them, make sure you
ascertain how you received the shares, and see a tax adviser to give you the
best tax advice.
As far as its performance, BGE (now Constellation Energy) has been going
through a Sybil-like personality disorder. Management hired Goldman Sachs
to help them split into 2 companies, then they decided against that, and
paid Goldman hundreds of millions of dollars to go away. They really damaged
their credibility with many Wall Street analysts, who threw in the towel.
There are many questions that have yet to be answered at Constellation. Are
they a growth company or a staid, electric utility? Will they pay a handsome
dividend or not? What is [New CEO] Mayo Shattuck’s role going forward?
Because of these questions, the stock is likely to be in a trading range for
a while. If it represents a large portion of your portfolio, you may want to
lighten up a bit to help meet your “other financial obligations,” since no
stock is suitable for immediate-term needs. Just make sure you consult your
CPA first regarding the tax treatment of any sales.
> From: Goldstein, Jon W.
Sent: Tuesday, November 13, 2001
To: ‘Murray, Jonathan P.’
Subject: $
How good of an investment is real estate in what has been a seller’s market? A lot of homes have sold well above list price. Is overpaying for a house in a booming market worth it to get a plum mortgage rate?
–Harried House Hunter Part Deux
From: Murray, Jonathan P.
Sent: Tuesday, November 13, 2001
To: Goldstein, Jon W.
Subject: RE: $
There’s no doubt that today’s mortgage rates are exceptionally attractive.
The rate on a 30-year fixed has dropped from the 8 percent range in the past year
or two, to around 6.5 percent today.
Much of that decline is attributable to last
week’s Treasury Department decision to eliminate the 30-year Treasury Bond. This resulted in a “new” long bond, the 10-year note. As buyers scrambled to
get the 10-year, it drove down its yield, from which many mortgage rates
take their cue.
However, you are smart, I believe, for recognizing that this red-hot housing
market will not last forever. The economic slowdown and the resultant loss
of hundreds of thousands of jobs will prompt many people to sell their
homes to downsize (many of which were built on dreams of dot-com riches.)
So, I would not pay an outrageous price on a house at this point. Do a good
search, talk to real estate experts, friends, and spread the word that if
the right deal comes along, you’re interested. But don’t wait too long,
because these rates will not stay low forever.
I’ve always adopted the
approach that you should buy a house not for an investment, but because you
and your family love it. We all work too hard, and are too frantic, running
around like crazy…we need a quiet, cozy place to relax and be together
with our loved ones. 9/11 reinforced that. Whether your house goes up 8 percent per
year is, in my opinion, secondary.
> From: Goldstein, Jon W.
Sent: Tuesday, November 13, 2001
To: ‘Murray, Jonathan P.’
Subject: $
One more:
Hi!
A little help, please! Where can I find a list of preferred stocks
together with their symbols? This bit of investment information is
conspicuous by its absence in almost all quarters. Why?
Thanks for you assistance
From: Murray, Jonathan P.
Sent: Tuesday, November 13, 2001
To: Goldstein, Jon W.
Subject: RE: $
Preferred stock is not as widely held as common stock, so it’s tougher to
track. It’s not listed in most newspapers due to the relatively small volume
traded. You can see preferreds listed in the weekly publication, Barron’s.
You’re smart for looking into Preferred shares, however, because they often
have very attractive yields. And today, when money market rates and bond
rates are so low, yield-hungry investors will find preferred stocks more
appealing. Be aware, however, that they have interest rate risk, and are not
guaranteed. If rates go higher, the price/share of most preferreds will
decline.
> From: Goldstein, Jon W.
Sent: Tuesday, November 13, 2001
To: ‘Murray, Jonathan P.’
Subject: $
Thanks again Jonathan.
Talk to you next week.
