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, December 4, 2001
To: ‘Murray, Jonathan P.’
Subject: $
Good morning Jonathan,
We’ve got readers asking today about BGE’s stock and safe retirement investment bets.
First off, can you shine any light on what happened with Enron? How
could the country’s seventh largest company fall so fast? Also, what should investors do if they are unlucky enough to still be holding shares?
Thanks,
Jon
From: Murray, Jonathan P.
Sent: Tuesday, December 4, 2001
To: Goldstein, Jon W.
Subject: RE: $
The sudden collapse of Enron, the former natural gas powerhouse that has lost $26 billion in value since mid-October, is prompting more questions than answers so far. As to the biggest question, “How could this happen so fast?” Enron will go down in history as an example of what can go wrong if
a company loses its accounting credibility.
In October, when the company restated $586 million in earnings and announced possible conflicts of interest among some executives, it blindsided everyone from employees and Wall Street analysts to ratings agencies and independent auditors. There are significant questions about disclosure (and the lack thereof) that need to be asked.
In a nutshell, Enron had more debt — a lot more debt — than people realized.
Apparently, some of this debt was held in off-balance sheet partnerships by
Enron executives, making the balance sheet look more solid than it actually
was. When the ratings agencies realized this, they lowered their rating on
Enron debt from investment-grade to “junk” status. This move forced an
immediate prepayment of around $1 billion in debt, and prompted Dynegy to
call off its merger agreement with Enron. Left in the dust by Dynegy, Enron
was forced to declare Chapter 11 bankruptcy.
Yesterday Enron announced that it obtained $1.5 billion in financing to continue
operations, but it has fired nearly half its employees, the stock has fallen
from $85 to 50 cents, and the legal proceedings surrounding this case are
likely to go on for years.
For current shareholders of Enron, you can do one of three things: you can
hold your shares and hope that they regain at least some of their former value;
you could sell your shares in a taxable account and use the loss to offset
capital gains elsewhere in your portfolio (then, if you want, you can buy the
shares back in 31 days, if it’s still trading) or, if you are very aggressive and
can afford to lose 100 percent of your money, you could buy more shares and lower
your cost basis, hoping that the company doesn’t go under.
> From: Goldstein, Jon W.
Sent: Tuesday, December 4, 2001
To: ‘Murray, Jonathan P.’
Subject: $
I presently have about 500 shares of Constellation Energy Group. I am dependent upon a decent dividend and, as you know, the dividends are almost zero.
What advice can you offer about this stock and what to do?
Many
thanks for your opinion.
From: Murray, Jonathan P.
Sent: Tuesday, December 4, 2001
To: Goldstein, Jon W.
Subject: RE: $
BGE (now Constellation Energy) doesn’t pay the dividend that it used to. However, given the many changes taking place at the company, it is possible
that they may reinstate a higher dividend–I don’t know–that’s a question
for management.
If you need the income immediately, perhaps you don’t want
to wait for their answer. You may be forced to look for an alternative
income-providing source, but if you can hold on, it might make sense for you
to see what the new management team decides with respect to the dividend
policy. Especially if you have held these shares for a long, long time, it
would be a shame to sell, incurring a large capital gain, only to learn
afterward of the company’s decision to increase the dividend.
Either way,
make sure that the sources of your income are diversified, and that you
don’t rely on just one stock to provide it.
> From: Goldstein, Jon W.
Sent: Tuesday, December 4, 2001
To: ‘Murray, Jonathan P.’
Subject: $
I am less than 2 years from retirement. Considering my holdings and their losses over the past few months, I am thinking about purchasing a large — approximately $100,000 — CD at retirement so that a monthly
income from its interest would be available. Thus, regardless of the
market’s fluctuations, I would be assured of set amount each month as
income.
What problems do you see with this idea?
Thanks,
Joe
From: Murray, Jonathan P.
Sent: Tuesday, December 4, 2001
To: Goldstein, Jon W.
Subject: RE: $
There’s nothing wrong with your logic, but you may be disappointed in the
amount of income currently being paid by CDs. With the aggressive easing by
the Fed, interest rates are at multi-year lows.
Certainly, if you are two years
away from retirement, some of your assets should be invested in fixed income
instruments like CDs, bonds, money markets, Treasuries, munis, etc. Don’t
just buy the highest-yielding instruments, as often they often have longer
holding periods, as well as greater interest rate volatility.
Keep in mind,
too, that we’re all living much longer now, so it’s not uncommon to be
retired for as long as you’ve been working. Because of this, it’s important
that some of your assets keep up with inflation. Don’t rule out stocks
entirely, as, over time, they are one of the only asset classes to keep pace
with inflation. Look for some dividend-paying companies, and perhaps some
preferred shares, which pay a higher income than common shares.
> From: Goldstein, Jon W.
Sent: Tuesday, December 4, 2001
To: ‘Murray, Jonathan P.’
Subject: $
Thanks Jonathan,
Talk to you next week.
