Every Wednesday, Legg Mason Wood Walker financial adviser
Jonathan Murray answers e-mail on your investments. To be included
next time, send
your questions.
> From: Goldstein, Jon W.
Sent: Tuesday, March 19, 2002
To: ‘Murray, Jonathan P.’
Subject: $
Hello Jonathan,
With this economy and stock market chugging along, how long will it be before the Fed is likely to raise interest rates? What will that do to the market?
From: Murray, Jonathan P.
Sent: Tuesday, March 19, 2002
To: Goldstein, Jon W.
Subject: RE: $
Although predicting the direction of rates is almost as
tough as predicting stock prices, I think that there is a decent chance of the Federal Reserve changing its policy going forward.
For the
past year or so, the Fed has been worried about the slowdown in the
economy. To help compensate for that underlying weakness, they lowered short-term interest rates 11 times last year, from 6 1/2 percent to 1 3/4 percent, in an
effort to stimulate the economy. Judging from recent economic data,
the strategy appears to be working, and the economy is finally
demonstrating some signs of strength. With those signs, I think the Fed will change their stance
to a more balanced one, looking out for inflation as well as weakness
within the economy.
The Tuesday meeting may have been one in which the Fed
discussed this more neutral stance and laid the groundwork for
future rate hikes to help stem the risks of inflation. Typically, a
neutral Fed funds rate stands closer to 4 percent. Currently, the rate is 1 3/4 percent, so
the Fed might want to be preemtive and move rates higher, possibly
beginning as soon as the May or June meeting.
What does this mean for the market? Higher rates can lead to
greater competition for stocks, which may be a negative for the
market. On the other hand, it is also a sign that the Fed sees indications
of better economic growth, which could lead to higher corporate
earnings; a real positive for equities.
The key will be inflation. If it
stays in check, and energy prices remain stable, I think the Fed should be
able to slowly raise interest rates without spooking the market, especially
with the positive backdrop of higher corporate profits, tame
inflation, improving consumer sentiment, and tax refunds totaling over $74
billion, up 17 percent from last year.
> From: Goldstein, Jon W.
Sent: Tuesday, March 19, 2002
To: ‘Murray, Jonathan P.’
Subject: $
What would your advice be to stock owners of BGE and/or Constellation? Do you think they will make it? When will
the dividend increase again? I’ve really been hurt financially
from the drastic dividend cut and don’t know what to do.
Thanks for your advice,
Liz
From: Murray, Jonathan P.
Sent: Tuesday, March 19, 2002
To: Goldstein, Jon W.
Subject: RE: $
Dear Liz,
My advice to holders of Constellation Energy depends on the client. When discussing CEG (or
any other stock or fund, for that matter) I would need to ask questions like the
following: Do you need the income? What is your cost basis? Are the shares
held in a taxable or a tax-deferred account? What percentage of your
assets are in CEG stock? Do you hold other electric utility stocks? How
diversified are you between other asset classes, industries, sectors? How
old are you? How risk-averse are you? Do you need growth, as well as income?
So, as you can see, it’s not as simple as telling you
whether every person in the world should buy, sell or hold a particular stock.
It might make sense for one person, and not another.
That said, if you are someone whose primary need is income,
and you had been relying on BGE to provide that to you, the old dividend
yield of 7 percent or so probably helped. Today, CEG’s dividend is only 3 percent or
so. While current management has made mention of increasing the
dividend, it may take time. So, even though the value of the stock and the
dividend may grow, you might not have time to wait. For alternative
income-producing ideas, try looking into some high-quality REITs, bonds, CDs
and preferred stocks. You’ll likely find some investments that pay income
between 5 and 8 percent.
Good luck!
> From: Goldstein, Jon W.
Sent: Tuesday, March 19, 2002
To: ‘Murray, Jonathan P.’
Subject: $
I would like to add to my Roth IRA but I have been told I must have a W2 with at least as much earnings as I invest. Since
I am retired, I do not have any earnings but would like to add to my Roth
IRA using interest income. Can I do this?
Dave
From: Murray, Jonathan P.
Sent: Tuesday, March 19, 2002
To: Goldstein, Jon W.
Subject: RE: $
Dear Dave,
First make sure that adding to your Roth is a good idea,
now that you are retired. I don’t know how old you are, or what your
income tax bracket is, but perhaps you don’t need tax-free growth as much as
you did when you were working and making decent income.
If you (and your
accountant) deem additional Roth contributions appropriate, and you qualify
for the Roth, then you need to find some earned income to support your
contribution. You can’t use dividend or interest income. However, you MAY use
your spouse’s earned income to contribute to your Roth. And, depending on
your age, you may be eligible for the “catch-up provision,” allowing you contribute up to $3,500 to the Roth in 2002.
One of the advantages of the Roth IRA vs. the traditional
IRA is that the Roth does not have required minimum distributions beginning
at age 70 1/2, and contributions may be made after age 70 1/2, thus
potentially extending the tax advantages over a longer period.
> From: Goldstein, Jon W.
Sent: Tuesday, March 19, 2002
To: ‘Murray, Jonathan P.’
Subject: $
Thanks Jonathan.
Talk to you next week.
