February 2010

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LETTER FROM THE EDITOR

The broader market indices had a choppy ride during the last two weeks of January 2010 and closed more than a negative four percent for the month as a result of concerns on economic recovery and high unemployment data.  The debate in the Senate on approving Ben Bernanke to serve a second term as the chairman of Federal Reserve coupled with Mr. Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, statement recommending the fed on increasing the fed funds rate raised concerns and uncertainty in the private sector leading the broader market indices to a blood bath.  After hitting a bottom in March 2009, the Dow Jones Industrial Average had a strong bull run by earning over 50 percent for the remaining part of the year and closing above the 10,000 point confidence level.  However, the beginning of the New Year did not continue to support the bull-run, despite some strong earnings news.  The jobless claims during the month did not face much of a change, but the federal government remains committed on improving the jobs market scenario by allocating a major portion of their $3.8 Trillion 2010 budget to improve the employment scenario.

GDP:  The United States economy expanded faster than expected at a rate of 5.7 percent during the fourth quarter of 2009 as reported by the United States Department of Commerce on January 29, 2010.  The reported real GDP growth rate for the last three months (fourth quarter) of 2009 beat the expected rate of 4.8 percent and making it the fastest growth rate since 2006.  The positive fourth quarter growth rate is the second consecutive positive economic growth number after the economy came out of recession in the third quarter of 2009.  The economy grew at 2.2 percent (final revised figure) in third quarter after shrinking at a rate of 6.4 percent in the first quarter and 0.7 percent in the second quarter.  The released figure will give us an estimate of the Annual GDP rate for the year 2009 which is a negative 2.4 percent, the biggest decline in several decades.

The increase in GDP growth during the previous quarter (fourth quarter) was primarily due to the positive contributions from few factors like the increase in personal consumption expenditure, increase in private inventory investment, acceleration of exports, deceleration of imports, and an upturn in non-residential fixed investment.  Although the increase in inventory investment does not gain more attention from the media, it is one of the sure signs of confidence in the private sector.  Many businesses that had cut down on inventory buildup due to slow demand are now increasing to build up inventory to meet the expected incremental demand.  There were many question raised when the government agency came up with a positive figure in the third quarter like - If the increase in economic growth will be sustainable in the future?  Is the government going to intervene in the markets like it did during the third quarter by providing credits for first time home buyers and introducing the cash for clunkers program to boost automobile sales.  But this time around, it was the inventory investment that contributed a larger proportion.  To get more specifics about the real GDP figure for the third quarter, follow the link: Bureau of Economic Analysis.  The below table shows a decomposition of the contributing factors that led to a growth rate of 5.7 percent.

4th Quarter GDP Growth Rate Decomposed (percentage points)

The Federal Reserve: The Senate approved Bernard S. Bernanke for a second four-year term as the chairman of the Federal Reserve on Thursday, January 28th, 2009.  Although Mr. Bernanke was criticized for not doing more to prevent the financial crisis, he received an eventful vote of 70-30.  President Barrack Obama welcomed the Senate vote and said in a statement – “As the nation continues to face the consequences of the worst recession in a generation, Ben Bernanke has provided wisdom and steady leadership in the midst of the financial and economic crisis”.

One of the biggest tasks for Mr. Bernanke in his second term would be figuring out an exit strategy from the emergency measures that helped put in place to support the economy and financial markets.

Despite the intensity surrounding Mr. Bernanke’s appointment, Time Magazine named him as its Person of the Year and citing his role in leading the economic recovery.  In 2005, Mr. Bernanke was originally named by President Bush to succeed Alan Greenspan as the Fed chairman.

The Federal Reserve Open Market Committee (FOMC) left its fed funds target rate ( a rate that banks charge each other for obtaining short terms loans) unchanged to near zero during its periodic meeting and also commented that they will keep the interest rates low for extended period of time to support the shaky recovery.  The Fed also states that it will continue to wind down the $1.25 trillion program to support the mortgage market by March 2010.  This news about interest rates came after Mr. Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, was arguing that "conditions had changed sufficiently" and wanted the Fed not to keep the interest rates low anymore.

Regulation:  President Obama announced a new set of rules designed to limit the size of large financial firms and the activities to restrict specific activities of these institutions.  On January 21st, Mr. Obama stated –“Banks will no longer be allowed to own, invest or sponsor hedge funds, private-equity funds or proprietary-trading operations for their own profit unrelated to serving their customers”.  The players in the industry feel that the new rule is of a very broad nature and are still waiting to hear more specifics.  The new rule may possibly bring back the repealed Glass–Steagall Act that separated commercial banks and investment banks, an idea strongly supported by Mr. Volker, a senior advisor on economic recovery to the President Obama.
Once the new rule has been passed by the Congress and Senate, the big names like Goldman and JP Morgan may have to sell their private-equity businesses and stop investing in buyouts.  Although this rule tries to break big banks like Goldman and JP Morgan to reduce its size, it would provide plenty of opportunity to the smaller players in this arena.

Mergers and Acquisitions

General Motors to sell its Saab unit to Spyker

General Motors agreed to sell its Saab unit to Spyker, a Dutch automaker of high-end sports cars, for $74 million in cash and $326 million in preferred shares from the new Saab-Spyker entity.
Although the deal is expected to close by mid-February 2010, it still depends on a final clearance from European Union for a loan of 400 million Euros (US $562 million) from a European Investment Bank that will guaranteed by the Swedish government.

Medtronic to buy Invatec for $500 Million

Medtronic, a Minneapolis, MN – based medical technology firm agrees to purchase Invatec and its two affiliates, Fogazzi and Krauth Cardiovascular, for $ 500 Million. Invatec, a European firm founded by Andrea Venturelli and Stefan Widensohler in 1996, employs around 900 people, predominantly in Italy and Switzerland.

Liberty Global to sell Jupiter Telecommunications of Japan to KDDI Corporation for $4.0 Billion

Liberty Global, a US-based communication company, agreed to sell its subsidiary Jupiter Telecommunications of Japan to KDDI Corporation, a Japanese wireless operator, for $ 4 Billion in cash. Liberty and its affiliates would be selling 37.8 percent stake in Jupiter. The sale of Jupiter’s stake was advised by JP Morgan.

BlackRock, Inc. agreed to acquire Helix Financial Group LLC

Blackrock Incorporated, a giant money manager with over $3.2 trillion assets under management (as of September 2009), agreed to acquire Helix Financial Group, a Charlotte, North Carolina based company that provides analytics, valuation, and advisory to commercial real estate investors and lenders. “Since its founding in 2004, Helix Financial has underwritten over $100 billion of commercial real estate loans and in aggregate has served over 80 clients,” said officials at BlackRock.  The transaction was closed on January 15th, 2010, and no other specifications about the deal were released.

Shiseido agreed to buy Bare Escentuals for $1.7 Billion

Shiseido Co., Ltd., a Japanese cosmetics giant, agreed to buy Bare Escentuals, Inc., a San Francisco, CA-based company for $1.7 Billion through an all-cash tender offer.  “This is an exciting day for all of us at Bare Escentuals and I couldn’t be more pleased to be joining forces with the team at Shiseido. Together with Shiseido, we look forward to bringing our mineral-based beauty products to even more women worldwide,” said Ms. Leslie Blodgett, chief executive officer of Bare Escentuals. Bare Escentuals was advised by Goldman Sachs and the law firm Ropes & Gray.  While, Shiseido was advised by Bank of America and Merrill Lynch with the law firm Shearman & Sterling.

Yahoo agreed to sell Zimbra to VMware

Yahoo agreed to sell its email service Zimbra to VMware in an effort to focus on its Internet services that generates more revenues. Zimbra manages over 55 million e-mail boxes for different businesses, universities and internet service providers. The deal is expected to close by the end of March 2010. Both firms did not disclose the financial terms of the deal. 

Heineken agreed to buy Femsa Beer Unit for $7.6 Billion

Heineken, a Netherland-based brewer, agreed to buy the beer operations of Femsa, one of Mexico’s biggest brewers, in an all-share transaction that values the business at $7.6 billion.  “It will make Heineken a more competitive player in Latin America, one of the world’s most profitable and fastest-growing beer markets,” said Mr. Jean-François van Boxmeer, the chairman and chief executive officer of Heineken.  Heineken also stated that it expected this transaction would provide a cost savings of 150 million Euros (equivalent of $218 million) per year, within the next three years.

Royal Bank of Scotland sells its fund operations unit to Aberdeen Asset Management

Royal Bank of Scotland agreed to sell the Investment Strategies Fund of Funds division to Aberdeen Asset Management for $ 135 Million in an effort to recover from the financial crisis. The divestment of RBS is expected to complete by March 2010, subject to regulatory approval.  The Investment Strategies Fund of Funds (the division in the transaction) was established in 1998 and the assets under management totaled to around 13.5 Billion pounds as of September 2009.

Apple agreed to buy Quattro for $ 300 Million

Apple Incorporated agreed to buy Quattro, a Mobile Ad Company, for $300 million.  This is considered to be Apple’s first move into the advertising business. Apple will face direct competition with Microsoft, Google, and Yahoo in the mobile advertising market space.

WHAT IS NEW?

January 2010 was an eventful month for us here at Investor Concepts. We are on an aggressive growth path and intend to remain that way for the foreseeable future. What this means to you “our reader” is lots of new and relevant content and tools integrated into our website that is made with a purpose of equipping you to be a smart and sophisticated investor to make the right investment decisions.

 So what have we accomplished during the month of January? Here is the short list.

•    We are working with few practitioners in the investment industry to provide valuable investment insights to our Investor Concepts readers through articles.
•    Now you can follow all of Investor Concepts content on social networking sites.  To follow or become a fan of Investor Concepts follow the links:  Facebook, Twitter, Digg, and Tumblr.
•    Now our contributing authors and bloggers can tweet their articles and blogs on Twitter by making changes to the edit section on their IC account profile.
•    We have worked on an agreement with our new authors - Mr. Michael Johnston and Mr. Paco Ahlgren, who are practitioners in the industry to write articles on potential investment opportunities and economic analysis for our readers.
•    We have integrated the largest financial glossary to our Investor Concepts website that currently has meanings and definitions to 8,799 financial and business terms written by Mr. Campbell Harvey, Ph.D., a well renowned professor of finance at Duke University, in addition to our in-house authors.
•    We have expanded a few content areas: Concepts, Books, and Investor Tools.
•    We still continue to expand our Concepts section by including concepts in Spanish.
•   We have licensed with PR Newswire, one of the largest news distribution agency, to provide timely financial and business news articles to our readers on Investor Concepts.
•    Added content categorization feature that allows tagging and topical navigation of published articles.
•    Expanded the Events calendar to include a variety of online and offline financial, technology, and entertainment events.

FEATURED ARTICLES

During the month of January we had a number of very interesting articles published on our site, many of which deal with financial planning, investor education, commodity trading, and technical analysis. We’ve also had some primary research published and are beginning to see some forecasts. Below is a list of articles that caught our attention and we recommend reading them. For a complete list of published content for the month of December visit our Monthly Content Archive.

“Bank ETFs in Focus Following Obama Plan” by Michael Johnston
In this article, Mr. Michael Johnston, the founder and senior analyst of ETF Database, provides analysis on the potential opportunities of investing in ETF’s that focus on banking sector.  He also highlights on the new rules proposed by President Obama on banks and firms that own banks would not be allowed to invest, own, or sponsor a hedge fund or private equity funds. The new rule proposed by Obama is just the beginning of a wave of regulations that would impact the financial sector.

“Market Outlook for the Year 2010” by Matthew Bradbard
In this article, Mr. Matthew Bradbard, the president of MB Wealth, write about the outlook and potential opportunities in the commodities sector or asset class.  He touches upon his market forecast on agriculture, metals, energy, currencies, financials, and livestock.

“Gold is Safer than Treasuries as Hedge Against Inflation” by Paco Ahlgren
In this article, Mr. Paco Ahlgren, a portfolio manager and financial analyst, writes on his recommendations of using the Gold as an investment to hedge against Inflation as opposed to using Treasuries.

“Which India ETF Is Best?” by Michael Johnston
In this article, Mr. Michael Johnston, the founder and senior analyst of ETF Database, provides analysis on the potential opportunities of investing in India.  Emerging Markets like China, India, and Brazil have had tremendous growth and still continue to grow by offering great investment returns.  His article talks about prominent ETF that track Indian stock market indices that offer investments at low cost.

“The Three Key Metrics in Measuring Macroeconomic Activity” by Investor Concepts
This article talks about the key metrics most practitioners, investors, and government agencies use in measuring macro economic activity in order to evaluate the performance of the economy for a period of time. This article talks about Gross Domestic Product, Gross National Product, and Net National Product and the computations and assumptions that go into it. 

“2010 International Consumer Electronics Show (Las Vegas, Nevada | January 07th to 10th, 2010)” by Investor Concepts
The Event Report for the 2010 International Consumer Electronics Show in Las Vegas, Nevada talks about interesting technology trends in the consumer electronics industry.  We wanted to share with you, our readers, about the next generation consumer electronics equipments and gadgets that interested us at the tradeshow.  And this was the first time Investor Concepts covered this event for our readers because we wanted to bring the best of the relevant information right to your desktop.

“Swing Trading Applied to Commodities” by Matthew Bradbard
In this article, Mr. Matthew Bradbard, the president of MB Wealth, talks about Swing Trading - a trading practice in which an underlying instrument is bought or sold at or near the end of an up or down price swings caused by daily or weekly price volatility.  Mr. Bradbard discusses Swing Trading in the context of Commodities.  This is an excellent educational material for commodity traders.

“Do Leveraged ETFs Have a Place in Client Portfolios?” by Michael Johnston
In this article, Mr. Michael Johnston, the founder and senior analyst of ETF Database, talks about the controversies and misconception surrounding the Leveraged Exchange Traded Funds.  He also discusses the suitability of the Leveraged funds in the client portfolios.

“Three Investment Phases for the Year 2010” by Monty Guild
In this article, Mr. Monty Guild, founder and investment manager at Guild Investments, discusses the outlook for currency and commodity markets. He talks about the three investment phases he believes to happen in year 2010.

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MARKET PERFORMANCE RECAP

January 2010 turned out to be a blood bath for the stock markets with concerns on economic recovery and high unemployment levels.

•    Dow Jones Industrial Average -4.27%
•    NASDAQ Composite  -5.62%
•    Standard & Poor’s 500 -4.57%
•    Russell 3000 -4.56%
•    Dow Jones Wilshire 5000 Composite -4.41%

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