Greetings from InterShow’s 2008 Washington, DC Money Show. This year’s event comes at a pivotal time in history for investors, with the global economy sliding and a presidential election only days behind us, as well as the globe in a full-scale effort to combat credit pressures that have literally frozen lending for several weeks.

Not surprisingly, attendees have come in full force with a full raft of very pertinent questions. Below, I’ve devoted this week’s Utility & Income to my answers.

This week has been an extensive reporting period for my recommended positions in Utility Forecaster. I’ll have an exhaustive review of these reports next week. The short story is that what’s been reported thus far is very encouraging. UF subscribers will find a full review of the sector’s credit exposure in the November issue, which is now available at www.utilityforecaster.com.

Question: President-elect Obama has promised to increase the tax rate on capital gains. Should we be selling now?

Answer: Capital gains have certainly been tough to come by in the current environment. But given the rhetoric of the [thankfully] ended campaign season, it’s no wonder long-term investors are worried about the future of whatever gains they have.

The actual Obama proposal is to bump up the maximum tax on capital gains and qualified dividends to 20 percent from the current 15 percent. That’s undeniably a worse rate than the current 15 percent. But there are three points I’d like to make.

First, the 15 percent rate was never permanent. Congress instead made it temporary and, while it was extended once, it’s slated to expire in 2010. The Obama plan would make it permanent, which would actually be pretty bullish. By the way, I don’t see a whole lot of new taxation or other burdens put on investors in the near term. The primary objective of this administration like every other is to get reelected, and the mandate of this one is to get the economy out of the ditch and new taxes always pose the risk of less investment and more contraction.

Second, a permanent maximum tax rate of 20 percent on dividends and capital gains would establish for the first time an investor friendly tax scheme. In my opinion, the 15 percent rate was never priced in to income stocks, for example, because it was never considered permanent. For one thing, Congress never really established what a qualified dividend was but left it up to the Internal Revenue Service [IRS], which in my view has been just running out the clock. If you assume that, a permanent rate at a lower level than ordinary income taxes would be very bullish.

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Last but not least, we need to ask ourselves is saving 5 percent on a maximum tax rate worth selling out in such a washed out market. No matter how big your potential capital gains liability from a good position, you’re only going to be paying an additional 5 cents in taxes on every $1 a stock or bond rebounds from these levels. Some may disagree. But I think you’re far better off focusing on what’s likely to rebound in this difficult environment than trying to save that nickel.

Question: Have we hit a bottom for oil and gas?

Answer: That’s very tough to say. Back in June, I wrote an article in one of my publications, titled The Case Against Oil and Gas, in which I recommended taking profits and postulated downside of $90 a barrel for oil and $8 per million British thermal units for natural gas. Obviously, we’ve well overshot those levels and energy has been battered in the financial crisis. But we’re now at levels where the non-conventional sources the world is coming to depend on is no longer economic to produce. You can’t “drill, baby, drill” at $60 oil or $7 gas.

In fact, existing projects are being scaled back as we speak. Sooner or later, prices have to rebound or else supply is going to severely contract. And of course, there’s nothing like a steep decline to discourage the very conservation, alternatives and new supply development to end this energy bull market. Energy is going to recover. There may be some more pain for holding on now, but it’s really only a matter of time.

Question: Has the market hit bottom?

Answer: The bear market has definitely moved from a credit crisis fear-driven fiasco into one that’s now more focused on more quantifiable economic concerns. I’m definitely encouraged by the fact that so many utilities and other essential service industries have posted such strong earnings in the fourth quarter.

Things could deteriorate in the fourth quarter, but management of most companies to report so far have given every indication that they’re still on solid ground. I think there are some vulnerable industries. But with utilities trading at 2003 prices and 180 degrees away from the risks of that time, I think this is a great value point for buying in. Prices may go lower and the market remains volatile. But anyone who buys or even holds now is going to be very happy. And in the meantime, there’s every indication that dividends are safe.

Question: Canadian trusts have been killed the last two months. Do we have any reason to hold on?

Answer: The best reason to hold is the solid third quarter earnings results the trusts are turning in. There are pressures certainly. But these are debt-averse, conservatively run companies that have their eye on long-term sustainability. And their access to capital has been restricted since the Halloween 2006 announcement they’ll be taxed in 2011.

We’ve had a 60 percent drop in oil and gas prices since mid-summer, so it’s no wonder trusts have had to adjust. But most of them used the spike in prices earlier this year to cut debt and spend on needed development. Coupled with their systematic hedging, they’re a lot less vulnerable than all but their insiders—who by the way have been major buyers—anticipate.

The other reason is these trusts are trading at the same share prices they held when oil was at $30. That’s pricing in a lot of bad news that hasn’t happened yet, nor is likely to happen. Holding an investment that’s fallen so far isn’t easy. But it’s the only thing that makes sense.

Question: Does coal have a future under an Obama presidency?

Answer: Certainly. For one thing, it’s half of America’s current power supply, and trying to get rid of it during a recession is positively suicidal. Rather, I think what we’re going to see is a combination of carbon regulation and spending on carbon sequestration, so we can use coal without emitting so much carbon dioxide blamed for global warming. It’s an immense undertaking, but again the government—no matter who is running it—has no choice.

I also think the large number of coal state senators and senators from states using a lot of coal—including many Democrats—is another major deterrent to dramatic action against coal, regardless of the statements made and alleged during the campaign. FYI: Illinois is a major coal state.

Question: Do utilities have significant exposure to the credit crunch?

Answer: There’s always exposure with capital intensive businesses. But utilities today are a far different industry than they were earlier in the decade. There’s far less debt, far less operating risk and far fewer refinancing needs. Credit spreads have risen but appear to be moderating, so I really expect relatively little impact on earnings and certainly none on dividends and solvency.

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Question: So you still like Enerplus Resources, Penn West Energy and other big trusts?

Answer: Absolutely, They’re trading where they were at $30 oil and are posting solid third quarter earnings as well. Enerplus has been around more than 20 years and has seen it all. Hold on, and if you haven’t yet purchased, buy.

Question: What about the Canadian dollar?

Answer: It’s followed oil and has been hit hard by the collapse of the so-called carry trade. But we’re already seeing signs of recovery. Keep in mind the Canadian government runs a surplus, Canada runs a trade surplus, and its resources are going to be in rising demand from Asia for a long time to come. I suspect all it takes for an even more pronounced rebound is a visible bottom for Chinese growth. Asia has become an increasingly important part of Canadian exports since the 1990s, evidenced by the fact that the US percentage share of Canadian exports is in the low 70s down from high 90s in the late 1990s.

Question: How will Verizon handle a potential unionization of its wireless labor force?

Answer: Obviously, it would rather not have its wireless labor force unionize the way its wireline force has been for years. But this is a company that actually used a strike to get its name changed from Bell Atlantic to Verizon in the public eye some years ago. They know how to deal with collective bargaining and have demonstrated that. If I was going to worry about a company with unionization it would be Wal-Mart, which--unlike Verizon shares--has risen this year. Verizon, by the way, is as cheap as it’s ever been relative to its explosive growth.

Join Our Cruise

We have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with me and my colleagues Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.