Chicago, IL – November 11, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Boston Scientific Corporation (BSX), Johnson & Johnson (JNJ), Medtronic Inc. (MDT), Abbott Laboratories (ABT) and St. Jude Medical Inc. (STJ).

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Here are highlights from Tuesday’s Analyst Blog:

BSX Settles, Lowers Results

Boston Scientific Corporation (BSX) settled its $296 million lawsuit with the U.S. Department of Justice (DOJ) related to product advisories issued by its Guidant subsidiary in 2005. The litigation pertained to alleged violations of the Food, Drug, and Cosmetic Act by Guidant. The allegations were reported prior to Boston’s acquisition of Guidant in 2006.

Boston has recorded the litigation expense in its third quarter of fiscal 2009 results and updated its income statement accordingly. The expense has lowered the company’s GAAP earnings per share by 19 cents into a loss per share of 6 cents in the third quarter of 2009. Adjusted figures remained unaffected by this charge.

Boston has also lowered its full fiscal 2009 GAAP earnings per share guidance to a range of 23 to 28 cents, compared to its prior guidance of 43 to 48 cents. The company’s adjusted earnings per share guidance remained unchanged at 75 to 79 cents.

Boston recently released its third quarter 2009 results. Adjusted earnings per share were 19 cents, beating the Zacks Consensus Estimate by 5 cents and the year-ago earnings by 3 cents. Net sales in the quarter were $2.0 billion, increasing approximately 2% year over year.

Boston Scientific is a manufacturer of medical devices and products used in a broad range of interventional medical specialties. The company faces significant competition across its product portfolio. The primary competitors include Johnson & Johnson (JNJ), Medtronic Inc. (MDT), Abbott Laboratories (ABT) and St. Jude Medical Inc. (STJ).

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Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

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(1) Capital adequacy. The key principle for preventing the "bank run" dynamics of the recent financial turmoil is to make sure that financial institutions have a sufficient cushion of equity capital to be able to absorb liquidation and delinquency losses on assets without sacrificing the institution's ability to repay short-term creditors. Equity capital is also a critical tool for addressing the core incentive problems arising from gambling with other people's money. As Chair Bernanke observed:

Through the course of the crisis, it became increasingly clear that many firms lacked adequate capital and liquidity to protect themselves as well as the financial system as a whole.

Professor Blinder elaborated:

the real leverage problems arose with (a) investment banks that operated (under a different regulatory regime [from commercial banks]) with 30 times leverage and more, and (b) gimmicks such as thinly-capitalized SIVs and conduits that (legally) avoided capital requirements...

Both Bernanke and Blinder further called attention to the problems with procyclical capital requirements. Standard capital requirements become looser when times are good, but that is exactly when it's most feasible and desirable for them to strengthen the equity cushion. Blinder advocated reverse convertible debentures proposed by Mark Flannery and the Squam Lake Working Group on Financial Regulation as a way to implement countercyclical capital requirements.

Though a conceptually different issue from equity capital, Blinder also favored requiring both mortgage originators and mortgage securitizers to retain 5% of any assets they create.

(2) Compensation. Blinder observed: "Pay plans that are structured in such a 'heads I win, tails I don't lose' way create powerful incentives for traders to go for broke gambling with OPM ('other people's money')." In his spoken remarks he added, "They did go for broke, and a lot of them achieved that objective."

Here were Bernanke's observations on the subject:

flawed compensation practices at financial institutions also contributed to the crisis. Compensation, not only at the top but throughout a banking organization, should appropriately link pay to performance and provide sound incentives. In particular, compensation plans that encourage, even inadvertently, excessive risk-taking can pose a threat to safety and soundness. The Federal Reserve has just issued proposed guidance that would require banking organizations to review their compensation practices to ensure they do not encourage excessive risk-taking, are subject to effective controls and risk management, and are supported by strong corporate governance including board-level oversight.

(3) Derivatives. Though Bernanke did not say much about the explosion of financial instruments such as credit default swaps and their role in propagating the crisis, Blinder highlighted the desirability of changes:

While the regulation of derivatives is fraught with peril, it is not hard to improve upon what we have now-- which is practically nothing. I have argued for years that the most important step the government could take would be to push as much derivatives trading as possible into organized exchanges....

The Treasury White Paper (p. 48) proposes to subject OTC derivatives to a "robust regime" of regulation that includes "conservative capital requirements," margins, reporting requirements, and "business conduct standards."

(4) Resolution mechanism. Finally, both Bernanke and Blinder stressed the need for a mechanism to supervise the liquidation of failing systemically important financial institutions. Blinder advocated:

we could develop a new resolution mechanism, perhaps patterned on what the FDIC now does with small banks (often before the bank's net worth goes negative), that would enable the authorities to wind down a systemically-important financial institution (including a non-bank) in an orderly fashion-- rather than just throwing it to the Chapter 11 wolves. This last idea is among the key ingredients of the Treasury's reform plan, has substantial support in Congress, and may well become law. If so, it would have several desirable effects.

• The TBTF doctrine would morph into “too big to be put into Chapter 11," but not "too big to be seized and its management thrown out." That change alone would go a long way toward reducing moral hazard.
• Taxpayers would (mostly) be relieved of the burdens of costly bailouts....
• Regulators would no longer have to keep large "zombie banks" (and non-banks) on life support for fear of the systemic consequences of shutting them down.

Bernanke endorsed this reform as well:

the Congress should create a new set of authorities to facilitate the orderly resolution of failing, systemically important financial firms.... In light of the experience of the past year, it is clear that we need an option other than bankruptcy or bailout for such firms.

A new resolution regime for nonbanks, analogous to the regime currently used by the Federal Deposit Insurance Corporation for banks, would permit the government to wind down a failing systemically important firm in a way that reduces the risks to financial stability and the economy. Importantly, to restore a meaningful degree of market discipline and to address the too-big-to-fail problem, it is essential that there be a credible process for imposing losses on the shareholders and creditors of the firm. Any resolution costs incurred by the government should be paid through an assessment on the financial industry and not borne by the taxpayers.

One detail I'd stress is the need for integration of the approaches to items (3) and (4) above. One of the problems that makes bankruptcy messy for these institutions is that outstanding derivatives contracts can assume a life of their own, sucking assets out of the firm as the market moves against the firm's bets and in practice giving these contracts seniority over conventional debt. From the perspective of society's best interests I don't think such seniority can be justified. I agree with the assertion in Blinder's spoken remarks that the economic costs of the latest recession exceed the cumulative potential efficiency benefits of what he referred to as "fancy finance."

I would propose that instruments such as the credit default swaps entered into by any systemically important financial institution should be subject to a regulatory stop-loss provision. In a standard clearinghouse mechanism, each party delivers collateral against the possibility of the market moving against their original bet. If the market moves too much, the loser either must add collateral or their position is wiped out. If the institution continues to deliver new margin capital, it can become like the compulsive gambler doubling down as the firm's equity cushion essential for financial stability bleeds away. Like the referee protecting a staggering boxer, the regulator needs the authority to declare "no mas" on an institution's commitment of new capital to such positions.

Bernanke concluded with the following:

we cannot lose sight of the need to reorient our supervisory approach and to strengthen our regulatory and legal framework to help prevent a recurrence of the events of the past two years.

To which I would only add, Amen!

Walgreen’s strong balance sheet has enabled it to grow its business through acquisitions even in the midst of recession. The company generated $852 million in the fourth quarter and $4.1 billion for the year in cash flow from operations, an increase of 55% and 35%, respectively driven by strong drugstore performance, including improved working capital. At the end of the last quarter, Walgreen had $2.1 billion in cash and cash equivalents. We had expected earlier that the company would use the available funds for suitable acquisitions as well as rewarding its shareholders with generous dividend payments.

In order to make the best use of available resources, Walgreen has scaled down its plan of opening stores from the current level of 9% to 4.5%-5% in 2010 and 2.5% - 3% in fiscal 2011. This is evident from the decline in opening of new stores during the quarter. During the fourth quarter, the company opened 149 new drugstores compared with 162 in the third quarter and 199 in the year-ago quarter. We believe this decision will benefit the company as new stores take 2-3 years to become profitable.

The current economic scenario is a major challenge for Walgreen but we expect it to withstand it based on its strong cash balance and vast network of retail stores. The current U.S. government’s agenda of reforming the healthcare system will affect the company on its margin and reimbursement front. However, the inclusion of about 47 million uninsured people under the insurance net will increase the prescription volume manifold, which should help boost the top-line. We have a Neutral rating on the stock.

Perspective 1: Everybody just panicked

The first interpretation of what went wrong is that financial markets were pricing risk correctly in 2006 but began to overprice risk in 2007. Keister and McAndrews analyzed a situation in which banks out-of-the-blue stop lending to each other, while Gorton interpreted events in terms of a classic bank run, in which the liquidation value of entities is feared to have fallen below their short-run liabilities, creating an incentive for lenders to refuse to renew short-term credit. In the benign version of this theory, the troubled entities would in fact be solvent if it were not for the "fire-sale" prices at which distressed assets must be sold in such an environment. If allowed to proceed unchecked, these fears could prove self-fulfilling and result in a rapid collapse of credit.

In terms of appropriate policy responses to this problem, I would distinguish between actions that might have helped if implemented earlier in the decade and options that were available if we begin the analysis in the fall of 2007. If we are looking at what might have been done years earlier that could have helped, the obvious answer is to consider regulatory reforms that might have prevented financial markets from reaching a point at which the liquidation spiral could be set off in the first place. Bank panics are not an inevitable result of private financial intermediation. The key principle for avoiding them is to ensure that the liabilities of financial institutions consist not just of short-term borrowing, but also of equity contributed by the owners. As long as this equity cushion exceeds potential liquidation losses, there is no incentive for short-run creditors to rush to get their cash back, and no insolvency for the bank in the event that the bank does experience a run. It was a regulatory failure to allow an explosion of off-balance sheet entities that borrowed short and lent long but were immune from bank capital requirements.

On the other hand, if we ask what policy options were available after we had entered the fall of 2007, this particular policy prescription is of no help, as the horses were already out and the barn had no capital. Since there are profound negative externalities from simply watching asset prices and lending collapse, there would seem to be a clear case for the Fed to fulfill the function of lender of last resort, lending and buying assets where others won't until the panic subsides and rational valuations return, and trying to do so in such a way that otherwise solvent enterprises were shielded from a panic bankruptcy.

Perspective 2: The core problem in credit markets preceded the crisis

An alternative perspective is that risk was incorrectly priced in the years leading up to the crisis with rationality only returning in 2007-2008. During 2004-2006 there was $2.7 trillion in new subprime and alt-A mortgage debt generated; (Ashcraft and Schuermann). Much of this was extended without documentation of the borrowers' income, little or no money down, negative amortization, and called for huge increases in the borrowers' monthly payments a few years into the loan. Yet somehow through the magic of securitization, this debt was repackaged into tranches that overwhelmingly received AAA credit ratings.

Such massive capital flows only made sense if one believed that house prices would continue to expand rapidly. Because this process was funneling such huge sums into the U.S. housing market, for a while house prices did just that, more than doubling between 2000 and 2005 according to the Case-Shiller 20-city house price index. U.S. household mortgage debt tripled in a little over a decade. According to this second interpretation, when house prices inevitably came crashing down, they brought with them defaults not just on the hybrid subprime and alt-A mortgages, but also put many otherwise sound borrowers underwater.

If it is claimed that the run-up in house prices and mortgage debt were a horrible miscalculation, what were the market failures that produced it? There is a long list of contributing factors. The originate-to-distribute model left the loan originators and securitizers with profits and lesser-informed buyers with the losses, creating agency problems; (Ashcraft and Schuermann). Intra-firm compensation schemes left decision-makers personally with the upside and stockholders with the downside, inducing excessive risk-taking; (Diamond and Rajan; Bebchuk and Spamann). The public-private GSEs Fannie Mae and Freddie Mac were woefully undercapitalized, giving private players the upside and the taxpayers the downside, and perhaps emboldening private securitizers to take even bigger risks (Hamilton). Both the compensation and procedures of the ratings agencies may have contributed to inaccurate perception of the safety of MBS (Ashcraft and Schermann), as did the mistaken perception that entities like AIG had the ability to insure against aggregate default risk. Moral hazard problems induced from the (ex post correct) belief that the U.S. government would absorb the downside on such gambles may have been another factor inducing excessive risk-taking.

If this perspective is the correct one, we can again distinguish between policies that would have made sense earlier in the decade and policies that were realistic options once we entered the crisis phase in 2008. If the above list of contributing market failures is correct, obviously addressing these with regulatory reforms before we reached the crisis point would have been the first-best option. On the other hand, if we condition on previous policy mistakes and ask what could have been done with options available in the fall of 2008, I disagree with those who reason that the way to correct the moral hazard problem is to hang tough in this situation and simply watch the losers go down. There are huge macroeconomic externalities from the resulting collapse of credit, which is why the government claiming it will not bail out the gamblers is not a credible strategy. Instead, this perspective suggests that the key policy question once we find ourselves in the fall of 2008 is how to allocate the necessary capital losses among lenders, stockholders, and the taxpayers in a way that minimizes the disruptive externalities of a credit collapse. If this is the correct perspective, the primary effect of targeted liquidity measures is simply to allocate these potential losses to the Federal Reserve. It is far from clear that this is the appropriate way for a democratic society to answer the question of who should bear the losses.

Finding the middle ground

I laid out the two perspectives above as diametrically opposed views. I nevertheless believe that the correct interpretation of events would acknowledge that each account contains some truth. It is hard to deny that there was some degree of misallocation of capital in the explosion of house prices and mortgage debt or that the resulting real estate price collapse was a key cause of the devaluation of securities and loss of bank equity that precipitated the banking panic phase. The remarks I presented at the Jackson Hole conference in August 2007 laid out precisely this scenario. We might disagree on how much of that $2.7 trillion in new subprime and alt-A debt represented a malfunctioning capital market, and characterize the middle ground between the two views in terms of choice of a number between 0 and 2.7. If that number is big enough, it may be that no realistically feasible level of bank equity would have been sufficient to assure solvency in the face of a deterioration of confidence, and there is certainly the potential for fire-sale asset price deterioration and a necessary role for the Federal Reserve to fulfill its role of lender of last resort. But obviously from this hybrid perspective, the Fed is performing a combination of liquidity provision and residual loss absorption through these operations, and would want to undertake the latter only with extreme care and thoughtfulness.

Conclusions

Participants in this session were asked to address two basic questions. The first is whether the Fed's targeted liquidity operations were necessary and effective. My answer is probably yes, though I would have a hard time persuading someone if they were not already convinced of that. The second question is whether such operations should be considered an important part of central banks' arsenal of tools in the future. To that my answer is categorically no. From virtually any perspective of our current problems, it would have made far more sense to address these problems with proper regulatory supervision prior to the crisis instead of targeted liquidity operations after the crisis unfolds.

You can view my complete set of comments prepared for the conference here.

Chicago, IL – October 8, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Iron Mountain Incorporated (IRM), Equifax (EFX), R.R. Donnelley & Sons (RRD), Dun & Bradstreet Corp. (DNB) and Hewitt Associates, Inc. (HEW).

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Here are highlights from Wednesday’s Analyst Blog:

Iron Mountain Remains Solid

Boston, MA-based Iron Mountain Incorporated (IRM) is a leading provider of information protection and storage services in North America, Latin America, Europe and the Pacific Rim. We are encouraged by the company’s continuous momentum through 2007 and 2008, driven by strength in the storage segment, which has grown at a compound annual growth rate (CAGR) of 22%.

Through operational execution combined with record center optimization, the company expects to achieve over $20 million in cost savings. With an encouraging second half, steady recurring revenue, strong margins, strengthening capital structure and impressive cash flow, the company’s fundamentals remain strong.

Iron Mountain reported good second quarter results, with earnings exceeding the Zacks consensus estimates. We are encouraged by the continuing strength in the information protection and storage services business, which has driven steady profits for IRM. As a leader in record management and data protection services, it has further strengthened its position through acquisitions and international expansion.

While positive on the company’s prospects, we would like to caution investors about the high level of debt. Iron Mountain has a significant amount of debt (over 50% of its total asset balance) and low liquidity. At the end of the second quarter, the company reported $3.2 billion in total debt (including the current portion, yielding a debt-equity ratio of 1.65. Iron Mountain competes against Equifax (EFX), R.R. Donnelley & Sons (RRD), Dun & Bradstreet Corp. (DNB) and Hewitt Associates, Inc. (HEW).

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Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=5517

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5518.

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The payment will be made to Johnson & Johnson's subsidiary, Cordis Corporation. Boston will report a substantial portion of the payment as a special item in the fourth quarter of 2009.

Boston is a market leader in the stent market. A stent is a metal tube used in surgical operations to open-up blocked arteries. Some of these fourteen settled lawsuits are related to Boston's famous Palmaz-NIR suit, particularly the NIR suit.

We think that despite the huge settlement charges Boston will benefit from settling these long-pending litigations, which had created an overhang on the company's operations. Furthermore, the company has already hedged itself against such expenses by creating a legal reserve. Boston reported revenues of $2,074 million in the second quarter of 2009, an increase of roughly 2% year over year.

Boston Scientific is a manufacturer of medical devices and products used in a broad range of interventional medical specialties. The company faces significant competition across its product portfolio. The primary competitors include Johnson & Johnson, Medtronic Inc. (MDT), Abbott Laboratories (ABT) and St. Jude Medical Inc. (STJ). Based on the company's performance, we have assigned a Neutral recommendation to the stock.

The payment will be made to Johnson & Johnson's subsidiary, Cordis Corporation. Boston will report a substantial portion of the payment as a special item in the fourth quarter of 2009.

Boston is a market leader in the stent market. A stent is a metal tube used in surgical operations to open-up blocked arteries. Some of these fourteen settled lawsuits are related to Boston's famous Palmaz-NIR suit, particularly the NIR suit.

We think that despite the huge settlement charges Boston will benefit from settling these long-pending litigations, which had created an overhang on the company's operations. Furthermore, the company has already hedged itself against such expenses by creating a legal reserve. Boston reported revenues of $2,074 million in the second quarter of 2009, an increase of roughly 2% year over year.

Boston Scientific is a manufacturer of medical devices and products used in a broad range of interventional medical specialties. The company faces significant competition across its product portfolio. The primary competitors include Johnson & Johnson, Medtronic Inc. (MDT), Abbott Laboratories (ABT) and St. Jude Medical Inc. (STJ). Based on the company's performance, we have assigned a Neutral recommendation to the stock.

Do our well-used Greek letters help us make sense of the investment landscape, or do they actually hamper us in managing money? As James Montier, formerly of Societe Generale’s asset allocation team, now with Boston-based fund manager GMO, pointed out in an article published in 2007, as soon as you use the terms “alpha” and “beta,” you are invoking the spirit of the capital asset pricing model.

And, unfortunately, CAPM doesn’t actually work in practice.

Why not? Apart from some questionable assumptions about frictionless trading and investors having identical goals, the key problem with CAPM is that it assumes that stock returns are normally distributed. In other words, the theory requires that stock prices follow a random walk, with the price movement in one period entirely independent from that in all previous periods, and having no bearing on the future, either. This “Brownian motion” assumption produces the famous bell curve of statistics when one measures the percentage gains and losses over many time intervals.

However, while the bell curve accurately maps many phenomena in nature—people’s heights and weights, for example—many studies have now shown that it is inaccurate when describing financial market movements. Stock prices, which reflect the collective mood of millions of people, move according to far wilder trajectories, and there is plenty of evidence that markets have “memory”—which shows up in the serial correlation of returns. Even volatility tends to occur in “clusters.”

By viewing the world through the lenses of “alpha” and “beta,” you are automatically assuming a linear relationship between risk and return, with risk measured only according to a bell curve framework. Take away the framework, and the terms have no real meaning at all. So why do we persist with them? Part of the reason for the continuing popularity of the Greek letters is that we use them as a kind of shorthand—beta for passive, systematic, indexed; and alpha for active, more subjective, discretionary. And, of course, in the fund management world, while beta has meant (relatively) low fees, the claim of being able to source “alpha” has been the road to riches for fund providers.

But, just as it’s possible (and indeed, statistically likely) for the self-proclaimed alpha-seeker to deliver below-market performance, it’s just as likely that well-thought-out, entirely model-driven systematic approaches can generate superior returns over time.

At this week’s Terrapinn ETF conference in London, Chris Sutton of Watson Wyatt predicted a change in trend in the investment management industry, away from the artificial separation of alpha and beta and towards a more holistic approach. Sutton also argued that the ETF world needs to move from a period of product proliferation to one of increased innovation in index design.

I agree wholeheartedly with this, and would like to see a great deal more systematic strategies offered to investors in ETF format. As ever, the challenge will be to make these investment approaches understandable and transparent, without losing their competitive edge. But there are surely great opportunities out there for those who can hit the correct fund design. Isn’t it time to send at least two of our friendly “Greeks” back to the language classroom?

Boston Properties had earlier promised to provide free public-performance space on the first floor of Russia Wharf, its 854,000 square feet mixed-use development project along Boston’s waterfront. In exchange, the company was allowed to exceed the 155-feet height regulation for construction on the waterfront. The project is currently designed to be 400 feet high.

However, the Boston Harbor Association alleged that the company backtracked from its promise and was planning to reserve the space for a restaurant. The state agency said that Boston Properties had already sought permission to reduce the size of a ground floor “Town Square" by 200 square feet to 6,100 square feet. The company is trying to relocate a “Multi-Media Presentation Area" of 3,800 square feet from the first floor to the second floor, making it relatively invisible from the street.

Furthermore, Boston Properties plans to add a 2,800 square feet space in the outdoor terrace for a “Multi-Media Presentation Area" that would make year-round lectures and screenings virtually impossible. The modifications in the construction plan have to be approved by the state Department of Environmental Protection, which grants license for waterways development.

Although Boston Properties declined to comment on the proceedings, it has reportedly gone back to the drawing board to revert to its original building plan. The company will unveil the final iteration of the construction plan by next week and the Department of Environmental Protection is expected to make a final decision by mid-October.

Boston Properties develops, redevelops, acquires, manages, operates and owns a diverse portfolio of Class A office, industrial and hotel properties in the U.S. A bulk of the company’s income comes from office properties, which are primarily concentrated in large, high-barrier urban markets that usually fare better in a faltering economy.

Fidelity Investments already has its toe into the exchange-traded funds market. Apparently, that's about as far as it's willing to go, at least for now.

The president of the Boston-based mutual funds giant, known for its star manager system, let it be known last week that he was seeking a replacement. In the course of giving interviews to papers and news wires, the executive -- Rodger Lawson -- also made it clear that the firm was never interested in ETF's dominant player, Barclays Global Investors, when it was put on the market.

That led Sue Asci of InvestmentNews to ask Fidelity representative directly if the company wasn't going to pursue expanding its ETF presence. “We have no current plans to expand proprietary ETFs,” Fidelity spokesman Vin Loporchio told the magazine. (You can read the full story here.)

In 2003, the firm introduced its lone ETF, the Fidelity Nasdaq Composite Index ETF (NasdaqGM: ONEQ). With the explosive growth of ETFs and last year's record outflows from mutual funds, Fidelity has become increasingly tied to smaller ETF sponsors such as WisdomTree Investments.

Earlier this month, IndexUniverse.com reported that sources familiar with the situation had placed a team of Fidelity executives meeting with Wall Street investment bankers and key brokerage houses exploring the possibility of making a full-scale move into ETFs. (See story here.)

At the time, IU.com also talked to knowledgeable industry veterans who questioned whether Fidelity could overcome the expected objections from some of its star managers about the increased transparency issues presented by ETFs. It seemed unlikely, according to our sources, that Fidelity would be interested in a strictly passive, index-based family of ETFs.

Competitive obstacles were also a big reason why many analysts questioned how much of a force active ETFs would prove to be in the market. The partnership between Grail Advisors and American Beacon earlier this year touted the creation of the industry's first qualitative active mutual fund (i.e., one that feels and acts like a traditional fundamental-based mutual fund).

But it utilizes a team management approach, something that would go against the Fidelity style (although there are certainly some exceptions to that rule).

Did transparency kill the deal with Fidelity? Other issues also appeared to loom on the horizon, but the current regulatory environment and competitive landscape would also seem to figure into the equation.

At the time of our last report, we also heard that if Fidelity moved forward it would probably have to push for advancement of so-called "black-box" formulas. Those methodologies essentially ask the Securities and Exchange Commission to relax guidelines on daily reporting of holdings to let managers provide a sample portfolio -- not the whole enchilada.

So far, we haven't heard of any advancement in the SEC's green-lighting of such practices. So the next big issue facing Fidelity might come down to whether its decision is permanent. Or, if regulators wind-up approving some sort of actively managed process that allows for partial non-disclosure, will Fidelity reconsider its decision to stick with traditional mutual funds?

The better-than-expected FFO figures were primarily due to lease termination fees associated with the vacancy of Lehman Brothers and General Motors Corporation – both being casualties of the bankruptcy filings. During the quarter, Boston Properties recorded $0.10 per share income due to lease terminations. Lehman Brothers occupied 437,000 net rentable square feet of space at 399 Park Avenue, New York, while General Motors occupied 120,000 square feet of office space at 601 Lexington Avenue, also in New York.

During the quarter, the company placed in service 184,000 net rentable square feet office space in Rockville, Maryland, and a 299,000 net rentable square feet office space in Chevy Chase, Maryland. While the former property is currently 20% leased, the latter is about 91% leased. Also, during the quarter, Boston Properties obtained construction financing of $215 million collateralized by its Atlantic Wharf development project (an 815,000 net rentable square feet mixed-use project) in Boston, Massachusetts.

The company issued 17.25 million common shares during the quarter at $50.00 each, raising net proceeds of $842.0 million. Boston Properties utilized a part of the proceeds to repay the outstanding balance of its $100 million revolving credit facility, and $30.1 million mortgage loan secured by Ten Cambridge Center property in Cambridge, Massachusetts. During the quarter, the company also repaid a mortgage loan of $47.8 million collateralized by Reservoir Place property in Waltham, Massachusetts, utilizing cash in hand.

However, Boston Properties is gradually feeling the heat of declining fundamentals in most of its markets. Overall portfolio occupancy decreased to 92.5% at the end of the quarter, down from 95.6% in the prior-year quarter. With increased vacancy rates across the portfolio, occupancy is further expected to decline in the coming quarters.

Due to weakening demand for office space, the company reduced its FFO guidance for full year 2009 from $4.65 - $4.80 per share to $4.55 - $4.63. The company also reduced its dividend from $0.68 per share to $0.50 in order to increase its liquidity in the current credit-constrained market.

Despite a rapidly deteriorating market, two of the largest markets of the company – New York and Washington DC are still two of the best office markets in the US. Boston Properties should be able to withstand the current downturn in the US economy, as its office space is concentrated in large, high-barrier urban markets, which usually fare better in a faltering economy. We reiterate our Hold rating of the company.

Being the longest available DES at 38 mm, TAXUS Liberte should not only help simplify the operating procedures, it should also help control costs by reducing the total number of stents required in surgery. Boston plans to launch the product in the U.S. in August.

A drug-eluting stent is a coronary stent placed into diseased coronary arteries that prevents restenosis (reblockage of the artery). Currently marketed DESs are bare metal stents that are coated with a drug that is designed to reduce the formation of blocking scar tissue in the artery.

In clinical trials, the restenosis rate for DES was approximately 10.5%, or about one-third the rate compared to bare metal stents.

We expect the new approval to boost Boston's top-line. DES constitutes roughly 20% of the company's total revenue. The company is a manufacturer of medical devices and products used in a broad range of interventional medical specialties.

Boston Scientific competes in the cardiovascular, endosurgery and neuromodulation markets. All three segments are experiencing strong sales growth and should remain relatively insulated from the current economic crisis. The company has historically grown through acquisitions, which had led to earnings-quality concerns.

Boston Scientific faces significant competition across its product portfolio. Primary competitors include Johnson & Johnson (JNJ), Medtronic Inc. (MDT), Abbott Laboratories (ABT) and St. Jude Medical, Inc. (STJ).

Boston Scientific has several attributes that differentiates it from competition, such as the ability to create and acquire scientifically-advanced technology, receive timely approval from the regulators, apply technology in a cost-effective manner with superior quality across product lines and markets, attract and retain skilled development personnel, obtain patent or other protection for its products, obtain required regulatory and reimbursement approvals, continuously enhance the quality of the systems, manufacture and successfully market the products and supply sufficient inventory to meet customer demand.

Boston's first quarter of fiscal 2009 results were in line with our estimates. The stock is reasonably valued considering the company's dominant position in the industry and the inelastic demand profile of its products.

We believe the recent approvals and launches will improve its 2009 outlook. Additionally, the pipeline of new products in the cardiovascular segment offers the potential for outperforming 2009 expectations. As such, our recent report has a Buy rating for Boston Scientific.

The project originally did not qualify for federal stimulus funds as it was not included in the required state list. However, in May 2009, the project was added to the state Transportation Improvement Plan, and became entitled for federal aid.

About $50 million of the total federal aid would be received from the state's Infrastructure Investment Incentive Program, which finances significant new public infrastructure improvements necessary to support major new private development. The remaining $15 million would be received as federal stimulus funds.

The mixed-use project includes office, retail, hotel, and residential space spanning 5 million square feet. The first phase of the project will feature a new IKEA store, a new roadway, and open spaces along the waterfront.

With the federal stimulus funds, the development work of the project is expected to accelerate. The project is also anticipated to create large employment opportunities, leading to long-term economic growth in the region.

Federal Realty owns, manages, develops and re-develops retail, mixed-use and street-retail properties. Its community and neighborhood shopping centers are anchored by supermarkets, drug stores or high-volume, value-oriented retailers.

The company has a well-diversified tenant base with some of the strongest and most profitable retailers in the country. Furthermore, Federal Realty owns shopping centers in high income, infill areas of the country, with a concentration of assets in Washington DC, Boston, Philadelphia and California.

The company is one of the best-positioned strip mall REITs with a strong portfolio and solid balance sheet. We reiterate our Hold rating on Federal Realty.

Declining real estate values, challenged mortgage markets and the consequent decline in business and consumer confidence and increased unemployment globally have precipitated a recession in many of the regions in which MFC does business, including the United States and Canada. All operating divisions of the company have incurred losses related to segregated fund guarantees and reduced capitalized future fee income on equity-linked and variable universal life products, reduced fees due to lower levels of assets under management and shared in the credit losses.

The recent substantial declines in the global equity capital markets have had an adverse impact on MFC’s earnings and capital ratios primarily due to variable annuity and universal life insurance products, particularly because the guarantee risk in a substantial majority of its in-force business is not reinsured or hedged.

Earlier during March 2009, the financial strength and credit ratings of MFC’s operating subsidiaries were downgraded by two notches by Moody’s, moving to Aa3 from Aa1, with a negative outlook.

Among its peers, Prudential Life Insurance (PRU) and Lincoln Financial's (LNC) ratings were upgraded last month by Moody’s and S&P, respectively. Prudential Life Insurance was moved to stable from negative while LNC was also confirmed “Stable" from “Negative." Capital raising by both the companies led to ratings upgrade.

MFC expects to release second quarter results on August 6, 2009. Manulife has experienced large reported Canadian GAAP net losses in each of the last two reporting quarters. We expect further delay in the recovery of global equity markets and as such we anticipate no significant improvement over prior period results. Thus we recommend to Hold the shares.

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Here are highlights from Monday's Analyst Blog:

Penske Automotive Buys Saturn

Penske Automotive (PAG) today announced that it will be purchasing the Saturn brand, including the rights to sell parts and cars through the Saturn dealerships.

There may be little cash involved, as no inventory is being transferred. The company also may outsource production to a lower-cost producer once an initial GM manufacturing period ends.

The keys to this deal are finding an Indian or Chinese producer to lower Saturn's costs, and also pushing more and varied product through the Saturn dealerships. Ultimately, this is a "dealership acquisition" by Penske. We think the deal will be successful and is well timed. Auto sales have bottomed and may be poised for a slow recovery.

U.S. Workforce's Changing Nature

Prolonged unemployment means that the long-term growth rates of sectors like retail are likely to be greatly diminished even after the recession is officially over. As such, even if firms like Macy's (M), Saks (SKS) and Nordstrom (JWN) are able to stay in the black through aggressive cost-cutting (and most have been doing a very good job of that, hence better-than-expected earnings), those earnings should get a lower multiple in the market. Also, jobs should be slow to return in retail.

The sectors that have been growing are the ones that are least susceptible to the twin forces of globalization and technology. However, technology and globalization are starting to impact even previously safe sectors through outsourcing.

Leisure and Hospitality is probably still safe, since it is hard to have a bartender in Bangalore pour you a drink when you are in Boston. The same is not true for Professional and Business Services. Those jobs are not going to follow Manufacturing right away, but they will not show the sort of growth seen in the last three upturns in the economy.

Euroseas Down But Still Afloat

In 2009's first quarter, Euroseas Ltd. (ESEA) posted diluted EPS before nonoperating items of $0.06, down 85% from the $0.43 earned in the prior-year period. This was above our estimate of a $0.05 loss per share, mainly due to lower-than-expected depreciation, the result of the sale of two vessels (adding $2.0 million to the bottom line), as well as a change in accounting for the useful lives of vessels (adding $1.6 million to net earnings).

We are raising our 2009 diluted EPS estimate to a loss of $0.06 per share from a loss of $0.28 per share, mainly to reflect the first quarter overage and a reduction in our estimates for depreciation expense. Our initial 2010 estimate is a $0.35 loss per share.

Going forward, we expect spot rates to continue at sharply lower levels, which will have a negative impact on revenues and earnings as part of the fleet is exposed to the spot market, and the renewal of expiring contracts is challenging. In fact, the company laid up three of its vessels in 2009's first quarter, rather than employ them at a loss.

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Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

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Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=4580.

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While industry experts are still pondering if the recent flurry of successful initial public offerings indicates a broader recovery, Kohlberg Kravis Roberts on Monday agreed to sell shares of its private-equity companies through Fidelity Investments.

Under terms of the agreement, Fidelity's retail customers will get access to the IPO shares. Until now, such offerings mostly went to institutions and wealthy investors. Again with private equity firms looking to expand their reach, KKR will not only get a distribution channel but also exclusive access to the Boston-based mutual fund giant's clients.

As financial markets have been murky over the last few years, KKR has not taken any of its portfolio companies public since the IPO of Sealy (ZZ) in 2006. While it still considers buying out the Amsterdam-listed KKR Private Equity Investors LP in order to go public, that IPO has also been on hold for at least 2 years.

While IPO investments are traditionally seen as risky ventures, capital markets have gained pace of late. Among successful IPOs in the recent past were Rosetta Stone (RST), Bridgepoint Education (BPI), DigitalGlobe (DGI), SolarWinds (SWI), OpenTable (OPEN) and ChangYou (CYOU).

KKR and Fidelity are now banking on the strength of these deals to remain optimistic and put up a platform that would help them to jump in once things heat up. As, Mark Haggerty of Fidelity Capital Markets said, "When the IPO market returns, our distribution network is going to be very interested in getting back involved."

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Here are highlights from Tuesday's Analyst Blog:

REITs Continue Their Run

Equity REITs are now trading closer to the value of their assets. Although as a group, REITs are still trading below net asset value. Although, underlying fundamentals cannot be ignored. 1Q results among companies we cover were generally unspectacular and operations are deteriorating in all major property types: apartments, office, retail, and lodging.

Most property indexes still show large y/y declines in property values and commercial loan delinquencies are increasing every quarter. As property values fall, so does the value of property REITs, although the selloff last that began last year was an overreaction and values were brought down to unrealistic levels.

We think the REIT rally has more room to run -- not much, though. Fundamentals cannot be ignored, and we expect more companies than not to lower estimates over the next couple of quarters. Two larger-cap names we still like are Avalon Bay (AVB) and Boston Properties (BXP). The yields of both companies are below average but appear safe, and both have low relative leverage.

Retail - Q1 Recap, Q2 Outlook

For most of the industry, sales were down significantly year-over-year. But the decline in sales was at a slower rate than in the second half of 2008.

Retailers that actually increased sales were Carter's (CRI), which sells baby apparel; O'Reilly (ORLY), which sells auto parts; and 99 Cents Only (NDN), which is a discount store. The retail stocks that outperformed within the group were the lowest priced stocks with the worst-looking balance sheets. The laggards were the defensive retailers like supermarkets and wholesale clubs and those with the best balance sheets.

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Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=2677

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=4580.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact:
Mark Vickery
Web Content Editor
312-265-9380
Visit: www.zacks.com

The first comes from a conference on financial markets held at the start of this month at the University of Illinois in Chicago. Last fall, V.V. Chari, Larry Christiano, and Pat Kehoe received a lot of attention (e.g., Tabarrok, Avent, Economist, Kwak, Bonddad, and Thoma [1], [2], [3],) for noting that aggregate lending by banks was in fact increasing during the period in which many analysts were describing it as sharply curtailed. At the Chicago conference, Federal Reserve Bank of Boston economists Ethan Cohen-Cole, Burcu Duygan-Bump, Jose Fillat, and Judit Montoriol-Garriga argued that those aggregate numbers conceal some very significant compositional trends, namely, previously existing lines of credit were being drawn on by borrowers and a sharply increased fraction of lending was consumed by securities originally intended for securitization but which banks were forced to hold on their own books.

Another interesting conference was held two weeks later at the Federal Reserve Bank of Atlanta, from which I found the paper by Gary Gorton quite interesting. (You can also find it discussed by Falkenblog, Cowen, Kling, and Klein). Gorton views the recent problems as an ongoing banking panic. Here are some excerpts:

A banking panic means that the banking system is insolvent. The banking system cannot honor contractual demands; there are no private agents who can buy the amount of assets necessary to recapitalize the banking system, even if they knew the value of the assets, because of the sheer size of the banking system. When the banking system is insolvent, many markets stop functioning and this leads to very significant effects on the real economy....

The current crisis has its roots in the transformation of the banking system, which involved two important changes. First, derivative securities have grown exponentially in the last twenty-five years, and this has created an enormous demand for collateral, i.e., informationally-insensitive debt. Second, there has been the movement of massive amounts of loans originated by banks into the capital markets in the form of securitization and loan sales. Securitization involves the issuance of bonds ("tranches") that came to be used extensively as collateral in sale and repurchase transactions ("repo"), freeing other categories of assets, mostly treasuries, for use as collateral for derivatives transactions and for use in settlement systems.... [R]epo is a form of banking in that it involves the "deposit" of money on call (as repo is short-term, e.g., mostly over night) backed by collateral. The current panic centered on the repo market, which suffered a run when "depositors" required increasing haircuts, due to concerns about the value and liquidity of the collateral should the counterparty "bank" fail....

Securitized asset classes, e.g., mortgages, credit card receivables, auto loans, may be examples of relatively informationally-insensitive debt, created by the private sector without government insurance....

A "systemic shock" to the financial system is an event that causes such debt to become informationally-sensitive, that is, subject to adverse selection because the shock creates sufficient uncertainty as to make speculation profitable. The details of how that happens are discussed below, but in summary, fear of the resulting lemons market can cause the (inefficient) collapse of trading in debt and a stoppage of new credit being issued.

A classic bank run, you say? Hmm, where have I heard that before? But I think there's more that needs to be said about the regulatory environment that is supposed to prevent this kind of thing.

Gorton's paper might offer some support for those who think that we just got stuck on the bad side of a structure with multiple possible equilibria. An alternative and more pessimistic perspective is developed in a recent note by Federal Reserve Bank of San Francisco economists Reuven Glick and Kevin Lansing. Glick and Lansing view the problem as more structural and fundamental, resulting from an unsustainable run-up of household debt. Their analysis was also highlighted by Thoma and Bloomberg.

Technorati Tags: macroeconomics, economics, Federal Reserve, bank panic, credit crunch