March 2010 Investment Newsletter

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LETTER FROM THE EDITOR

The broader market indices had a bumpy ride and closed positive for the month of February 2010 as a result of mixed signs of economic recovery in US and the debt crisis in Greece. The rally was mostly led by NASDAQ gaining over 3 percent for the month. After hitting the 13 month high in November 2009, the Dow Jones Industrial Average has remained range bound hovering around the 10,400 confidence level of the 50 day moving average. The Federal Reserve increased the discount rates by a quarter percentage point to 0.75%, a signal that the future interest rates are more likely to go up. And the consumer confidence index reported by the Conference Board tanked over 18% because of the household’s concern on unemployment rate and job losses.

Discount Rate Increase: The Federal Reserve announced the increase of the Federal Discount Rate by 25 basis points from 0.50% to 0.75%. This rate increase did not come as a surprise for most because Ben Bernanke had made it clear of his intentions and also hinted on the exit strategy from the bailout measure instated to help banks and other financial institutions to scale through the recession, during his speech after his re-election to the second term.

With the financial system back on its feet and the broader economy recovering, the Fed has been expected to remove some or all of the extraordinary measures that it put in place to counter the crisis. Raising the discount rate was one such measure that the Fed would be expected to pursue once conditions started stabilizing, and the Fed has been hinting on such moves for a couple of weeks now.

The Federal Discount Rate should not be confused with the Fed Funds Rate. The Federal Discount Rate is what the Fed charges banks for the short-term loans, and this rate is usually higher than the fed funds rate, making it the last resort for banks to borrow in times of difficulty. Before the financial crisis, the gap (spread) between discount rate and fed funds rate was a percentage point (100 basis points). In contrast, the Federal Funds Rate is the discount rate what banks charge other banks for short-term loans, which is also set by the Fed. Banks usually borrow for a very short period (maybe overnight or a day) to meet the reserve requirements set forth by the fed. The fed funds rate is more important than the discount rate because it is the building block for other interest rate in the broader economy. And it is the rate widely awaited by the participants in the financial markets. It would be interesting to read the article -“Understanding the Federal Reserve System” to gain a deeper understanding of the structure, policies, and tools of the Federal Reserve in the United States.

Consumer Confidence: A closely watched measure of consumer confidence, The Conference Board Consumer Confidence Index, tumbled in February after a three straight months of increase. In February the index stood at 46.0 points from 56.5 points in January, a month on month change of negative 18.60%. Consumer Confidence is an important metric observed by financial market participants because it is the driving force for Consumer Spending, which drives the two-thirds of the nation’s economic activity.

“The Consumer Confidence Index” is based on a monthly survey of a sample of 5,000 U.S. households asking them on how they feel about the economy. This index had a base value of 100 in the year 1985. An index level above 90 indicates a stable economy, and a level above 100 is an indication of stronger growth, but the recent estimate in February of 46.0 points has been the lowest since April 2009. Unemployment has been one of the main drivers of pessimism in the US households, pushing the confidence index downwards.

GDP: The United States government’s Bureau of Economic Analysis revised its third quarter GDP estimates upward from 5.7% (initial estimate) to 5.9%, on Friday, February 26, 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.

Greek Crisis: One of the main topics capturing the news on global markets is the debt crisis in Greece. The country that once produced Alexander the Great and Aristotle, is now in the verge of facing national bankruptcy. In 2009, Greece’s budget deficit reached 12.7% and the total debt 112.6% as a percentage of Gross Domestic Product (GDP). Recently, the yields on Greek government bonds peaked at 7.1%, which is the highest since the country joined the European Union in 2001, and it has been four percentage points above the German bunds (which is considered the safest investment in the euro zone). Greece has a long history of financial trouble. In the past, the fiscal trouble has been masked by the strong GDP growth of Greece. And after joining the European Union, the Euro has masked the real trouble behind the Greece fiscal policies.

Now either stronger countries (like Germany) in the EU or the IMF would have to bailout Greece. The Euro Zone countries would not be happy if the IMF comes to rescue Greece because their pride would be at stake and at the same time they also would not like other weaker countries to be shielded the problems with the Euro. The Euro has been tanking against the dollar from the diagram on the Euro-per-Dollar exchange rate. (Note: The images are courtesy of Economist.com).

Mergers and Acquisitions

R.R. Donnelley agreed to buy Bowne & Co.

R.R. Donnelley, a printing services company, agreed to buy Bowne & Co., a New York-based shareholder and marketing communications company, for $ 481 Million in cash. The deal is expected to close by the second half of 2010. As per executives of R.R. Donnelley, acquiring Brown & Company would help them to expand their current offerings and sell its existing products to Browne customers. In addition, the earning of RR Donnelley is expected to increase in the first year after the acquisition.

Wal-Mart agreed to acquire VUDU, Inc.

Wal-Mart, the world’s largest retailer based in Bentonville, AK, agreed to buy VUDU, Inc. a Santa Clara, CA – based provider of digital technologies and services, from its venture capital firms Benchmark Capital and Greylock Capital. The deal is expected to close by the first quarter of 2010, and financial terms of the deal were not disclosed. This deal is expected give Wal-Mart a lift to sales of Internet-ready televisions and disc players. And using these products will allow viewers or customers to watch movies and shows over the Internet, bypassing the traditional cable or satellite services.

Fairfax to buy Zenith National for $1.3 Billion

Fairfax Financial Holdings, a Canadian insurer engaged in property and casualty insurance, reinsurance, and investment management, agreed to buy Zenith National Insurance, a Woodland Hills, CA – based worker compensation insurance specialist, for $ 1.3 Billion in cash. The deal is expected to close by second quarter of 2010. The Bank of America Merrill Lynch is the financial advisor and Dewey & LeBoeuf LLP is the legal counsel to Zenith.

Walgreen agreed to buy Duane Reade for $1.1 Billion

Walgreen Company, a Deerfield, IL – based national pharmacy chain, agreed to buy Duane Reade Holdings, a 257 drug store chain in New York City, for $ 1.1 Billion. Walgreen will pay $618 million in cash and assume $457 million in Duane Reade debt. The deal is expected to close by August 2010. “Duane Reade is a compelling strategic acquisition that will immediately provide Walgreens with a leading position in the largest drugstore market in the U.S.” said in a statement the Walgreen chief, Mr. Gregory D. Wasson.

Fortress Investment Group agreed to buy Logan Circle Partners

Fortress Investment Group, a New York – based private equity and hedge fund investor, agreed to purchase Logan Circle Partners, a Philadelphia – based $ 12 Billion bond investment manager, for $21 Million in cash. The deal is expected to close by the second quarter of 2010 and after the deal closes, Fortress would manage about $ 32 Billion in assets. “While our investment approach and the day-to-day operations of Logan Circle will remain the same,” Mr. Driscoll (founder of Logan) said in the statement, “Fortress’s size and global infrastructure, along with its intellectual capital and transaction flow will meaningfully enhance our ability to build our platform.”

Yara International agreed to buy Terra Industries for $4.1 Billion

Yara International, a Norwegian fertilizer produces, agreed to buy Terra Industries, an Iowa –based firm, for $ 4.1Billion. This deal will help Yara to increase its presence in the United States. The enlarged company would have about 30 percent share in the United States fertilizer market and an 8 percent global market share. Yara said it expected some $60 million annual savings from the deal. The chief executive of Terra, Michael L. Bennett will become an executive vice president of Yara and head the Norwegian company’s North America division.

FirstEnergy to buy Allegheny for $4.7 Billion

FirstEnergy, an Akron, OH - based diversified electric company, agreed to buy Allegheny Energy, a Greensburg, PA - based electric utility company, for $ 4.7 Billion in stock. The deal is expected to close in the next 12 to 14 months. Mr. Alexander will remain chief executive, while Paul J. Evanson, the chairman and chief executive of Allegheny will become the executive vice chairman of the combined company. “The combination of our companies is a natural fit that will accelerate our efforts to strengthen the operating performance of our generating fleet while building on our long-standing dedication to customers, shareholders and employees,” said in a statement Mr. Anthony J. Alexander, FirstEnergy’s chief.

Micron Technology agreed to buy Numonyx Holdings for $1.27 Billion

Micron Technology announced that it was acquiring Numonyx Holdings in an all-stock deal worth about $1.27 billion. “Acquiring Numonyx brings together two memory leaders and positions Micron to offer the most comprehensive, cost-competitive solutions in the industry to a broad range of customers and end-markets,” said in a statement Mr. Steve Appleton, Chairman and CEO of Micron.

Monster Worldwide to buy Hot Jobs from Yahoo for $ 225 Million

Monster agreed to buy its rival employment website from Yahoo, the Hot Jobs, for $ 225 Million. A price is a significant discount from Yahoo’s purchase price of Hot Jobs in 2002 $ 439 Million. Under the terms of the deal, Monster would provide job listings and other career related information for Yahoo’s home page in the United States and Canada for the next three years. And in return Monster will pay Yahoo $20 million to $31 million a year for Yahoo to redirect traffic to its site. Stone Key Partners and Bank of America Merrill Lynch were financial advisers to Monster on the Hot Jobs deal.

Bank of New York to Buy PNC Unit for $2.3 Billion

Bank of New York Mellon to buy the global investment servicing unit from PNC Financial Services Group for $ 2.3 Billion. “This acquisition significantly strengthens our service offering and market share with asset managers and financial advisers, while delivering attractive returns to our shareholders,” Robert P. Kelly, Bank of New York’s chief executive, said in a statement. “We expect the transaction to accelerate our growth, deliver economies of scale and strengthen our leadership position for asset servicing and Pershing.”

WHAT IS NEW?

February 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 February? Here is the short list.

•    We have worked on an agreement with Mr. John Lounsbury, Ph.D., CFP, to provide Investor Concepts readers on macro-economic analysis and issues influencing investment asset returns. Mr. Lounsbury is a practicing investment consultant and financial planner. His background includes 25 years in corporate management, 11 years of teaching at the college level and 17 years in his current profession.
•    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.
•    We have worked on an agreement with NASDAQ to provide their business and financial news on InvestorConcepts.com. We are strongly committed to bring all the relevant information to manage your investments at one place. And this content set would be integrated soon.
•    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 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: Events, 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 February we had a number of very interesting articles published on our site, many of which deal with investment opportunities, macro-economic analysis, 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 January visit our Monthly Content Archive.

“Time to Take a Fresh Look at the Business Cycle” by John Lounsbury
In this article, Mr. John Lounsbury, Ph.D., CFP, a financial planner and investment consultant, discusses and explains the business cycle and its five stages of growth, peak, recession, trough, and recovery. In addition, he also points out to the contrasting views of the traditional definition of business cycle and the business cycle in reality. He also adds some of his observations from historical macro-economic data.

“Five Critical Questions to Ask When Investing in ETFs” by Michael Johnston
In this article, Mr. Michael Johnston, the founder and senior analyst of ETF Database, writes about the little known nuances of ETF investing. Exchange Traded Funds have emerged as a fastest growing asset class and portfolio tool that provides investors with a convenience of investing in multiple countries and asset classes in a single transaction. This article is must read for investors who are looking to invest in ETF to diversify their portfolio and gain exposure to foreign and emerging markets. This article says that investors should not just stop after looking at the name and the expense ratio of funds, but dig more into the details about the portfolio composition and strategy of the ETF.

“Understanding the Federal Reserve System” by Vinod Thomas
This article talks about the Federal Reserve System in the United States. This is a good article to understand the structure, monetary tools, and policies of the Fed. It helps us to know how different tools impact the financial markets and investment portfolio. Activities or tasks of the Fed has tremendous influence on the financial and business participants in the US and global markets.

“Employment Data ABC's” by John Lounsbury
In this article, Mr. John Lounsbury, Ph.D., CFP, a financial planner and investment consultant, discusses and explains about the basic metrics, assumptions, and calculations that go into the computation of the Unemployment number published by the Department of Labor. This is a good article for investors or analysts’ who intent to understand the real idea behind the lagging economic indicator, unlike the media which exaggerates the real number and its effects.

“Europe Has Problems” by Monty Guild
In this article, Mr. Monty Guild, founder and investment manager at Guild Investments, discusses the problems faced by some European Countries as a consequence of high debt levels. In addition, he presents his investment outlook on Gold, Currencies, Global Stocks, and Oil; given the current economic scenario.

"How Expensive Is Your Job? Taxes, Travel and Social Expenses Could Eat Your Earnings Away" by Liz Davidson
In this article, Ms. Liz Davidson, the chief executive officer of Financial Finesse discusses on how to evaluate the costs and benefits of having your existing job. Ms. Davison is a well renowned professional in educating professionals in personal financial planning.

“Bad Karma for Homebuilders: Starts Up, Sales Down” by John Lounsbury
In this article, Mr. John Lounsbury, Ph.D., CFP, a financial planner and investment consultant, discusses and explains the housing market situation in the United States after the housing crisis in 2007 and 2008. In addition, he also explains the reasons why the sales have been low at this time.

“Anatomy of a Financial Crisis: Some Steps to Prepare for the Next Bubble or Personal Financial Crisis” by Liz Davidson
In this article, Ms. Liz Davidson, the chief executive officer of Financial Finesse discusses on how to gear ourselves for the next bubble or crisis and plan our personal finances.

“The Intrinsic Value of Nothing, Part One” by Paco Ahlgren
In this article, Mr. Paco Ahlgren, a financial analyst and writer discusses on the effects of monetary supply that is not backed by gold. And also discusses the consequence of the artificial money supply on the economy.

MARKET PERFORMANCE RECAP

February 2010 turned out to be profitable for the stock markets with mixed signs of economic recovery and high unemployment levels.

•    Dow Jones Industrial Average +1.37%
•    NASDAQ Composite +3.09%
•    Standard & Poor’s 500 +1.40%
•    Russell 3000 +1.69%
•    Dow Jones Wilshire 5000 Composite +1.76%

INDUSTRIES

Most Bullish

1.    Manufacturing +5.85%
2.    Specialty Retail +5.58%
3.    Internet +5.10%
4.    Wholesale +4.21%
5.    Retail +4.14%

Most Bearish

1.    Utilities -2.10%
2.    Automotive -0.58%
3.    Energy -0.53%
4.    Telecommunications -0.34%
5.    Material & Constructions 0.0%

SECTORS

Most Bullish

1.    Toy & Hobby Stores +24.29%
2.    Toy & Games +12.70%
3.    Medical Practitioners +11.74%
4.    Industrial Equipment Wholesale +11.67%
5.    Textile Manufacturing +11.50%
6.    Broadcasting – Radio +11.03%
7.    Trucking +10.99%
8.    Security & Protection Services +10.33%
9.    Electronics Wholesale +9.55%
10.    Processing Systems & Products +9.15%
11.    Major Airlines +8.84%
12.    Movie Production – Theatres +8.75%
13.    Internet Service Providers +8.75%
14.    Recreational Goods-Others +8.67%
15.    Education & Training Service +8.65%
16.    Appliances +8.62%
17.    Entertainment – Diversified +8.48%
18.    Tobacco Products-Other +8.38%
19.    Home Furnishing Stores +8.35%
20.    Department Stores +8.3

Most Bearish

1.   Personal Service -12.14%
2.   Computer Based Systems -9.06%
3.   Heavy Constructions -6.38%
4.   Dairy Products -5.00%
5.   Information & Delivery Service -4.91%
6.   Publishing-Periodicals -4.76%
7.   Long Distance Carriers -4.74%
8.   Resorts & Casinos -4.42%
9.   Shipping -4.40%
10.   Electronic Stores -3.90%
11.   Electronic Equipment -3.89%
12.   Telecom Services-Foreign -3.57%
13.   Manufactured Housing -3.44%
14.   Aluminum -3.44%
15.   Wholesale-Others -3.26%
16.   Major Integrated Oil & Gas -3.16%
17.   Regional-Pacific Banks -3.02%
18.   Electric Utilities -2.95%
19.   Foreign Regional Banks -2.94%
20.   Foreign Utilities -2.93%

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