© St. Petersburg Times
Iraq attack's impact on market unpredictable.
Q. I am tentatively planning to take my money out of a stock index fund and put it into a short-term bond fund in anticipation of the stock market taking a serious hit when the United States attacks Iraq, which seems ever more likely in the near term. Do you think this is a feasible course of action? What impact would an attack be likely to have on the bond market?
My stock fund has taken a beating over the last two years, mostly because I was not knowledgeable enough to get into bonds much earlier. I want to prevent further erosion of my money.
A. If only predicting the future were simple!
I wish I knew what the stock or bond markets will do if the United States attacks Iraq. There is no question that the start of a war often has been bad for stocks. The Japanese attack on Pearl Harbor in 1941, the invasion of South Korea in 1950 and Iraq's invasion of Kuwait in 1990 all sent the markets down, as did the terrorist attacks on New York and Washington, D.C., last year.
But the U.S. strike against Iraq in January 1991 launched a strong market rally, with stocks going on to new highs that year. That reaction definitely was not expected. The headline on the stock market story published in the Times the day of the 1991 attack was "Markets likely to fall in first days." The next day's headline was "Battle brings out the bulls."
Like then, investors' expectations that Iraq will be attacked are depressing stock prices, said Timothy McIntosh, a St. Petersburg money manager who teaches finance at Eckerd College. But he says an actual attack won't necessarily have a big impact.
"If we start to lose or the war drags on, that could have a major negative impact on the market," he said. On the other hand, resolution of the conflict would be a positive. In other words, we don't know.
What about bonds? War and political uncertainty often spark a "flight to quality," which increases demand for government bonds while hurting prices of corporate bonds perceived to be riskier. However, a prolonged, expensive war that required the government to borrow more money could be negative for bonds. In 1991, interest rates fell and bond prices rose, but keep in mind that long-term Treasury bonds today yield half what they did back then.
It sounds to me as though you are not comfortable with the risks you are taking with your investments. If that is the case, you would be smart to bring down your risk level by diversifying your portfolio. Just don't count on being able to time the market's movements.
Q. I bought Philip Morris stock two years ago. Am I entitled to shares of the Kraft Foods spinoff that took place last year?
A. I'm afraid not. Philip Morris Cos. sold Kraft shares to the public through an initial public offering rather than distributing them to its own shareholders. If you are hungry to become a Kraft shareholder, you'll have to buy the shares.
Q. I am an Enron shareholder. Do these shares have any value under bankruptcy? Should I prepare to take this loss on my 2002 income tax return? If so, how do I do this?
A. Enron stock is still trading, most recently around 15 cents a share. That means two things. First, it means that some people are willing to bet that the stock still has some value. Second, it means that you will have to sell it to take a loss on your tax return. To take a loss without selling, a security must have become completely worthless.
Losses are claimed on Schedule D of your tax return. They are first offset against any capital gains. If you have more losses than gains, you can take up to $3,000 a year in losses against your other income. Unused losses can be carried forward to future years.
Ultimately, the value of Enron securities will depend on what happens in the company's bankruptcy case, which is a long way from being resolved.
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-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
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