For Flow Control, revenues of $1 billion declined 15% in the quarter with an organic revenue decline of 10%. Organic revenues declined 7% in the Valves business, 17% in Water and 12% in Thermal Controls. In Fire Protection Services, revenues of $904 million declined 11% in the quarter with an organic revenue decline of 7%. Service revenues declined 5% organically and installation revenues declined 8% driven by continued softness in the North American and EMEA regions. Revenues declined 45% in the Electrical and Metal Products segment and 25% in Safety Products on a year-over-year basis.
 
Operating income was $226 million in the quarter and the operating margin was 12.6%. Special items of $31 million resulted primarily from restructuring activities. The operating margin before special items improved 160 basis points to 14.3%, as cost-containment initiatives, restructuring activities and growth in ADT's higher-margin recurring revenue business more than offset volume declines.
 
Cash from operating activities was $985 million in the quarter. The company had free cash flow of $614 million, which included cash payments of $84 million for restructuring and legacy legal matters.
 
Cash and equivalents were $2.3 billion with long-term debt at $4 billion and shareowners’ equity at $12.9 billion.
 
The company’s large and growing service revenue base has provided stability and consistency to its performance in 2009 and now represents about 40% of its total revenues. A significant portion of service revenues is contractual recurring revenue in ADT, which grew 4% organically for the year with growth across all geographic regions.
 
Throughout the year the company was very active in executing cost containment programs, which resulted in charges of about $250 million. These actions, which are expected to provide incremental savings of $175 million in 2010, included staffing reductions as well as the consolidation of both back office operations and manufacturing facilities.

The company anticipates an organic revenue decline of 11% to 13% for the first quarter of 2010. Partially offsetting this decline will be the currency tailwind which is estimated at about 5% of revenue. This brings the total revenue for the quarter to approximately $4.1 billion Tyco expects earnings per share from continuing operations before special items in the first quarter to be between 48 and 50 cents. The Zacks Consensus Estimate is currently 52 cents.
 
Tyco is a diversified, global company that provides vital products and services to customers around the world. Tyco is a leading provider of security products and services, fire protection and detection products and services, valves and controls, and other industrial products. Major competitors include General Electric Co. (GE), Honeywell International Inc. (HON) and United Technologies Corp. (UTX).
 
We currently have an Outperform recommendation on TYCO.

Chicago, IL – November 12, 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: Macy’s Inc. (M), Nissan (NSANY), Priceline.com (PCLN), General Electric Co. (GE) and United Technologies Corp. (UTX).

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Here are highlights from Wednesday’s Analyst Blog:

Macy’s Raises Earnings Guidance

Macy’s Inc. (M) recently reported third-quarter 2009 results. The company posted a loss of 3 cents a share that outshined the Zacks Consensus Estimate loss of 9 cents, and improved substantially from a loss of 8 cents delivered in the prior-year quarter.

Effective inventory management and division consolidation to lower costs helped the company to post a narrower quarterly loss.

The better-than-expected results prompted management to raise its earnings guidance. Macy’s now expects full year 2009 earnings in the range of $1.01 to $1.06 per share, up from the previously anticipated 70 cents to 80 cents a share. For the fourth-quarter 2009, earnings are expected between $1.00 and $1.05 per share.

On a reported basis, including one-time items, Macy’s reported a quarterly loss of 8 cents a share, an improvement over a loss of 10 cents delivered in the year-ago quarter.

Nissan to Build World’s Cheapest Car

Carlos Ghosn, the Chief Executive of the alliance Renault and Nissan (NSANY), has revealed that the company will roll out a small car with its Indian partner, Bajaj Auto, that will be cheaper than any other car in India -- and in the world. The car, which is scheduled for launch in India in 2012, would beat India’s largest automaker Tata Motors’ Nano both in terms of pricing and fuel-efficiency, and become the world's cheapest car.

Presently, Tata Nano is the world's cheapest car. The car has a starting price of about Rs100,000 ($2,150). When Renault and Bajaj started discussing on their "ultra low-cost" car 2 years ago, it has been revealed that the car would have been priced between $2,500 and $3,000. However, at the World Economic Forum meeting in New Delhi, India, Mr.Ghosn announced that the ultra low-cost car would be cheaper than the Nano.

So far, India’s bottom-end motor vehicles market has been well known for motorcycles. After the hearty response to the Tata Nano, automakers around the world realized the huge market potential for small cars in India. Hence the initiative for the world's cheapest car.

Priceline Beats, Guidance Strong

Priceline.com (PCLN) reported very strong third quarter results, with earnings beating the consensus by 57 cents and revenue beating by 5.3%.

Revenue of $730.7 million was up 21.0% sequentially and 30.1% year over year. The significant increase from the year-ago quarter was helped by easier comps as the third quarter of 2008 was impacted by the recession, while the third quarter of 2009 benefited from strengthening demand.

Revenue growth was driven by significantly higher room night volumes, which offset the decline in average daily rates (ADRs). Room nights increased 14.1% sequentially and 56.3% year over year. Both airline ticket units and rental car days declined sequentially, although they were up 30.2% and11.6%, respectively from the year-ago quarter.

GE to Sell Security Systems

General Electric Co. (GE) is in talks to sell its security systems unit, most likely to United Technologies Corp. (UTX), for more than $1.5 billion in an effort to reshuffle its extensive portfolio and raise capital for strategic acquisitions.

United Technologies Corp. is a diversified company whose products include Carrier heating and air conditioning, Hamilton Sundstrand aerospace systems and industrial products, Otis elevators and escalators, Pratt & Whitney aircraft engines, Sikorsky helicopters, UTC Fire & Security systems and UTC Power fuel cells. The company has been lately looking to expand its security business.

GE’s move to sell its fire alarms and security division comes as it is finalizing a bigger deal to hive off its NBC Universal television and movie unit into a joint venture controlled by the cable operator Comcast. Strategically, GE wants to raise funds to expand its core businesses – which include infrastructure, oil and gas equipment, and energy – partly by hiving off peripheral divisions.

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United Technologies Corp. is a diversified company whose products include Carrier heating and air conditioning, Hamilton Sundstrand aerospace systems and industrial products, Otis elevators and escalators, Pratt & Whitney aircraft engines, Sikorsky helicopters, UTC Fire & Security systems and UTC Power fuel cells. The company has been lately looking to expand its security business.

GE’s move to sell its fire alarms and security division comes as it is finalizing a bigger deal to hive off its NBC Universal television and movie unit into a joint venture controlled by the cable operator Comcast.  Strategically, GE wants to raise funds to expand its core businesses – which include infrastructure, oil and gas equipment, and energy – partly by hiving off peripheral divisions.

The security services unit operates in more than 26 countries around the world and caters to individuals, companies, governments and the military. The Florida-based division expanded when GE bought Edwards Systems Technology, a maker of fire detection equipment, from the US group SPX in 2004 for $1.4bn in cash.

Addition of GE’s security division could fulfill the United Technologies’ ambition to expand in a sector that it estimates to be worth $100 billion.

GE operates as a technology, media, and financial services company worldwide. Major competitors include Citigroup Inc. (C) and Siemens AG (SI).

We currently have a Neutral recommendation on GE.

The desalination plant in Victoria will play a key role in meeting the needs of the drought-prone areas of southern and eastern Australia by turning sea water into 40 billion gallons of drinking water per year. This will reach 3.5 million people in Melbourne and adjoining areas. Under the $120 million contract, Tyco Flow Control will supply 6,200 mild steel pipes, stretching across 53 miles and connecting the desalination plant to the Melbourne water supply system.

Tyco Flow Control's innovative flow management technology enhances the safe and efficient delivery of water to homes, schools and communities. The superior quality of materials to be used will safeguard the pipeline for decades while reducing the energy needed for pumping water. The pipes will also be manufactured on a newly completed state-of-the-art production line that incorporates 'green' improvements such as reduced energy and water consumption.

Tyco International Ltd. emerged from the July 1997 acquisition of the namesake Massachusetts corporation by ADT Ltd., a public company organized under the laws of Bermuda. ADT changed its name to Tyco International Ltd. On June 29, 2007, Tyco International Ltd. completed the spin-offs of Covidien and Tyco Electronics, formerly its Healthcare and Electronics businesses, respectively, into separate, publicly traded companies in the form of a distribution to Tyco shareholders.

Effective March 17, 2009, the company discontinued its existence as a Bermuda corporation but remains a Swiss-domiciled entity. Its major competitors include General Electric Co. (GE), Honeywell International (HON) and United Technologies Corp. (UTX).

We currently have an Outperform recommendation on Tyco International.

This subsidiary of United Technologies Corp. (UTX) will close down its Cheshire, Connecticut, plant by early 2011. From the second quarter of 2010, it will begin shifting some operations from the East Hartford facility to Columbus, Georgia, Singapore and Japan. Pratt & Whitney, which is suffering due to sagging demand from airlines, employs 35,000 workers worldwide, with 11,000 in Connecticut.

The company rejected an offer that the Machinists union valued at more than $80 million in wage and other concessions and a state plan proposing $100 million in economic assistance over five years. Pratt & Whitney has vastly scaled back operations in the state since the 1960s, when more than 20,000 workers were employed.

Pratt & Whitney is a world leader in the design, manufacture and service of aircraft engines, industrial gas turbines and space propulsion systems. The company’s 38,577 employees support more than 9,000 customers in 180 countries around the world. It builds engines for front line fighters, like the F-15 Eagle, F-16 Fighting Falcon, F-22 Raptor and F-35 Joint Strike Fighter, as well as the C-17 Globemaster III military transport.

United Technologies provides high technology products and services to the building systems and aerospace industries worldwide. Its Otis, Carrier and UTC Fire & Security (collectively referred to as the commercial businesses) serve customers in the commercial and residential property industries worldwide. Carrier also serves commercial, industrial, transport refrigeration and food service equipment customers.

Pratt & Whitney, Hamilton Sundstrand and Sikorsky (together called the aerospace businesses) primarily serve commercial and government customers in both the original equipment and aftermarket parts and services markets of the aerospace industry; Hamilton Sundstrand and Pratt & Whitney also serve customers in certain industrial markets. Its major rivals include General Electric Co. (GE) and Boeing Co. (BA).

We currently have a Neutral recommendation on UTX.

The weak market condition has created the necessity for such consolidation. The combined entity will create the largest publicly listed aircraft leasing company, controlling about 5% of the total leased market. With 358 commercial aircraft and 83 engines that are either owned, on order, under contract or letter of intent, or managed, the combined company is expected to significantly contribute to the recovery of the industry. It will also have 116 airlines as clients, with a lease portfolio value of about $6 billion.

According to the deal, Genesis shareholders will receive one AerCap ordinary for each Genesis share, at $8.81 per share, representing an average premium of 45% over the price during the 30-day trading period from July 31 to Sept. 11. Based on Genesis' assets, the deal was valued at $1.75 billion.

Over the next two years, AerCap will get access to $200 million of unrestricted cash of Genesis. Also, about $1.1 billion of Genesis’ debt facility will be transferred to AerCap.

Genesis was rolled out of General Electric Co.'s (GE) aircraft leasing unit in 2006, with GE Capital Aviation Services (GECAS) acting as servicer for the portfolio. GECAS will continue to provide most asset management services for Genesis in the near term. However, as part of the agreement, AerCap will also buy 13 aircraft from GECAS.

Among others, American International Group Inc. (AIG), Royal Bank of Scotland Group Plc (RBS) and CIT Group Inc. (CIT) are mulling the sale of their aircraft-leasing businesses as the financial crisis has made funding hard to come by.

Citigroup Inc. (C) advised Genesis on the deal, while Morgan Stanley (MS) and UBS AG (UBS) acted as financial advisors to AerCap.

Pending shareholder and regulatory approval, the deal is expected to close in the fourth quarter of 2009. We expect more consolidation in the industry in the upcoming quarters.

Intelligent power grids, or smart grids, are based on the conventional power grids which transport electricity from large power plants to individual households. However, digital technology allows individual households or businesses to manage their electricity more efficiently, allowing them to receive, or deliver back to the grid, electricity from other sources like wind or solar power facilities, or even from batteries in electric cars.

According to studies, more than a billion tons of carbon dioxide (CO2) emissions could be abated with intelligent power networks by 2020. Smart Grids are essential for integrating renewable power sources into power networks and for ensuring stable power supplies from solar and wind energy.

Overall, the Smart Grid market has three primary components: Smart Metering (intelligent billing), Grid Intelligence (the grid infrastructure and its controls) and Utility IT (intelligent data management). Siemens is active in all three areas and is already the global market leader for grid intelligence.

Smart Grids have enormous growth potential worldwide. They are, for example, a prerequisite for reaching the EU’s 20-20-20 climate goals aimed at reducing CO2 emissions by 20% and increasing the share of renewable energies in the European grid by 20% by 2020. In addition, Smart Grids are included in many of the economic stimulus programs throughout the world.

The US government plans to invest around 3 billion Euros here in the coming years. Siemens expects to receive orders worth around 15 billion Euros from these programs by 2012. Out of these, 40% or roughly 6 billion Euros is likely to be for green technologies from the Siemens Environmental Portfolio.

A slew of companies across the globe are pushing to secure their share in this projected growth market, ranging from blue chips like Siemens, General Electric Co. (GE) and Cisco Systems Inc. (CSCO) to various start-ups offering related components and services.

Energy-efficient and flexible power grids are a key cornerstone for the launch of electric cars on a broader scale, as they can be designed to meet specific needs for the supply, demand and storage of electricity.

Volkswagen AG, Europe’s largest automaker by sales, said in July that it would launch an electric version of its upcoming New Small Family car in 2013. Other auto makers, including Nissan Motor Co. Ltd and General Motors Co., are also pressing ahead with developing fully electric cars for the mass market. 

Energy-efficient, resource-conserving Smart Grids are part of the Siemens Environmental Portfolio, which generated a quarter of its total sales in fiscal 2008.

Siemens is a German industrial conglomerate with interests in information services, automation and controls, medical equipment, power generation, transportation systems, automotive electronics, lighting and many other areas. With a focus on electronics and electrical engineering, the company is a major multinational with over 430,000 employees in more than 190 countries.

We currently have a Neutral recommendation on Siemens.

StrionAir has been the provider of Carrier's residential Infinity Air Purifier since 2006, and has also developed, marketed and sold over 6,000 commercial systems. StrionAir is headquartered in Louisville, Colorado and was founded in 1997.

This acquisition will enable Carrier to incorporate Infinity Air Purifier into its products as well as provide an opportunity for accelerated product development for both residential and commercial applications.

Carrier has consistently been the leader in developing energy-efficient, environmentally sound solutions in home and building comfort and indoor air quality. Carrier, headquartered in Farmington, Connecticut, is the world's largest provider of heating, air-conditioning and refrigeration solutions, with operations in more than 170 countries.

United Technologies was incorporated in Delaware in 1934. It provides high technology products and services to the building systems and aerospace industries worldwide. Operating units include businesses with operations throughout the world. Otis, Carrier and UTC Fire & Security – collectively referred to as the commercial businesses – serve customers in the commercial and residential property industries worldwide. Carrier also serves commercial, industrial, transport refrigeration and food service equipment customers. Its major competitors include Boeing Co. (BA) and General Electric Co. (GE).

We currently have a Neutral recommendation on United Technologies.

Discovery's main payload is the Leonardo Multi-Purpose Logistics Module, which is carrying extra supplies and equipment to help establish a six-astronaut crew capacity on the space station. The payload includes science and storage racks, a treadmill and a crew quarter.

Pratt & Whitney Rocketdyne Inc., a part of Pratt & Whitney, is a preferred provider of high-value propulsion, power, energy and innovative system solutions used in a wide variety of government and commercial applications, including the main engines for space shuttles, Atlas and Delta launch vehicles, missile defense systems and advanced hypersonic engines.

Pratt & Whitney is a world leader in the design, manufacture and service of aircraft engines, space propulsion systems and industrial gas turbines. United Technologies, based in Hartford, Connecticut, is a diversified company providing high technology products and services to the global aerospace and commercial building industries. Its major competitors include General Electric Co. (GE) and Boeing Co. (BA). We currently have a Neutral recommendation on the stock.

It will now be possible for Siemens to build Israel’s first commercial solar farm in the region between the Dead Sea and the Red Sea. The company will handle project management including engineering and construction of the photovoltaic plants. It has signed a framework agreement to build plants with a total output of 40 megawatts (MW). The first project will be construction of a plant with an output of up to 4.9 MW at Kibbutz Ketura, in the southern desert of Israel.

Areva Power was founded in 2006 and is headquartered at Kibbutz Ketura/Eilat. This subsidiary of Global Sun Power Ltd. has 20 employees. The equity investment in Areva is aimed at strengthening the Siemens’ environmental portfolio. Last year, Siemens’ environmental technologies generated sales of 19 billion Euros, roughly one-fourth of the company’s total revenue.

By 2010, Siemens plans to increase the share of environmental technologies to around 25 billion Euros. It is investing in Areva through its equity investment company Siemens Project Ventures GmbH (SPV).

Together with its partners, SPV has been involved worldwide in the development of infrastructure projects, particularly in the energy, transport and telecommunication sectors. SPV is a Group company of Siemens Financial Services GmbH (SFS), an international provider of financial solutions in the business-to-business area.

Major competitors of Siemens include ABB Ltd. (ABB) and General Electric Co. (GE). We currently have a Neutral Recommendation on the stock.

Siemens has a leading position in China, the world’s largest market for power transmission equipment. The company has involvement as a provider of innovative energy technologies in numerous major infrastructure projects, including projects in the field of high-voltage direct current transmission.

Siemens is a German industrial conglomerate with interests in information services, automation and controls, medical equipment, power generation, transportation systems, automotive electronics, lighting, and many other areas. With a focus on electronics and electrical engineering, the company is a major multinational with over 430,000 employees in more than 190 countries.  Its major competitors are ABB Ltd. (ABB) and General Electric Co. (GE).

We currently have a Neutral recommendation on Siemens.

The measures undertaken by the company include engineering changes, which might require government investment in some cases, extensive efforts to cut supplier costs and improve the production process of engines.

The estimated price for Pratt engine was slated to rise to $8.3 million per engine from $6.7 million, the biggest increase since 2001.

While the company’s efforts could result in prices dropping below the third lot of low-rate production engines, it would not be as low as the price after production of 250 engines.

Pratt & Whitney is trying to improve the quality of certain engine parts but the overall acceptance level is currently around 97%. Certain parts like the fan blades and turbines are particularly difficult to manufacture and result in a lower acceptance rate of around 70% to 80%.

United Technologies is closely following the ongoing argument between the Obama administration and the Congress over the funding of an alternate F-35 engine being developed by General Electric Co. (GE) and Britain’s Rolls-Royce Group Plc.

United Technologies was incorporated in Delaware in 1934. The company provides high-tech products and services to the building systems and aerospace industries worldwide.

We currently have a Neutral recommendation on United Technologies.

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Growth/Income Equity Funds.

3 Flourishing Funds

AIM Income Allocation A (ALAAX) seeks a high level of current income with growth of capital as a secondary objective. It is a "fund of funds" and invests its assets in other underlying mutual funds.

The fund seeks to meet its objective by investing its assets in a selection of underlying funds which primarily invest in international or domestic equities, fixed income securities or real estate investment trusts (REITs).

Gary Wendler has been lead manager at the fund since its inception in October 2005. The fund has an expense ratio of 0.28%.

Teberg Fund (TEBRX) seeks capital appreciation plus income. It has a major emphasis on managing risk, preserving capital and achieving steady growth.

The fund primarily invests in shares of other no-load and load-waived mutual funds. Some of the underlying funds invest in the stocks of large, medium and small capitalization companies, while others invest in fixed income securities. The fund is non-diversified.

Unit holders have to make a minimum initial investment of $5,000 to enter this Zacks#1 Rank (“Strong Buy") fund. The fund distributes dividends and capital gains annually.

Pacific Advisors Income & Equity A (PADIX) was incepted in February 1993. The investment seeks current income and, secondarily, long-term capital appreciation.

The fund invests primarily in investment grade fixed income securities of U.S. corporations and in dividend paying common stocks. As of March 2009, its portfolio turnover was 39%.

Johnson & Johnson (JNJ), General Electric Co. (GE) and Frontier Communications Corp. (FTR) are among the fund’s key stock holdings.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

The total-market Russell 3000 Index has seen some sizable changes in its sector weightings, although the top 10 remain very much the same. Figure 1 shows the new 2009 sector weightings according to the Russell sector classification system. Not surprisingly, financial services is no longer the largest sector: It now takes second place to technology, which is weighted at 16.19% versus financials at 15.27%. In 2008, those sectors were reversed, with financials at 17.24% and tech at 14.19%.

Health Care saw its weighting increase to 13.41% from 11.52%, popping it up to the third position from No. 5. It displaced energy, which fell from the third slot to the fourth, declining to 11.97% from 13.42%; presumably, declining oil prices had something to do with that. Consumer discretionary also fell: It was the fourth-largest sector after the 2008 rebalance, at 12.94%, but is now the fifth-largest, with a weighting of 11.86%. Producer durables, consumer staples, utilities and materials & processing maintained their same positions (six through 10, respectively).

The top 10 stocks in the Russell 3000 are by and large the same, except for one: ConocoPhillips was displaced by JPMorgan Chase & Co.—a financial company, of all things. Of course, JP Morgan did acquire two former giants in the field of finance last year: Bear Stearns and Washington Mutual. And it has been one of the least-scathed of the financial services companies.

While the other members of the top 10 remained largely the same, some of their positions did not. ExxonMobil is still at the top of the heap, like it was last year, but General Electric fell from the second-largest weighting in the Russell 3000 to the tenth-largest, with a weighting of 1.27%. Microsoft moved up from the third slot to the second, with a weighting of 1.87%. And Johnson & Johnson jumped to No. 3, befitting its strong performance.

Russell 2000

In the Russell 2000, financial services is still the top sector, increasing its weight to 21.10%. A surprising result, perhaps, but the sector was boosted by having hard-hit banks move out of the Russell 1000 and into the smaller index. Technology claims the second-largest slot, with a 16.75% weighting, displacing consumer discretionary, which falls to the No. 3 position, with a 14.68% weighting. That’s down from 17.65% in 2008. Energy only fell one spot, to No. 9, and saw its weighting nearly halved, falling from 8.60% to 4.52%, further emphasizing the differences between the large- and small-cap worlds.

The graph below shows inventory investment as a percentage of U.S. GDP since 1947. There's been an improvement over time in inventory management, which I captured with a downward-sloping linear time trend. [Incidentally, this graph and many of the calculations that follow are constructed using the original nominal magnitudes. You can make mistakes looking at a number like the ratio of real inventory investment to real GDP since the respective deflators are different, whereas the ratio of two nominal magnitudes is always in correct natural real units, namely, percent of GDP.]

Black line: 100 times the ratio of additions to inventories (nominal dollar value) to nominal GDP, 1947:Q1 to 2009:Q1. Data source: BEA Table 1.1.5. Blue line: linear time trend. Shaded regions: NBER recessions.

The typical pattern is for inventory investment to fall well below trend during an economic downturn. The cumulative drawdown of inventories since the current recession began in 2007:Q4 amounts to 0.58% of one year's GDP. The time trend suggests that, in the absence of a recession, we might have expected inventory investment to have been about 0.22% of GDP, and building inventories at that normal rate would have justified an increase in inventories over the last 6 quarters whose value would amount to 1.5 x 0.22 = 0.33% of one year's GDP. In other words, according to these calculations the level of inventories is lower than you would have expected in the absence of a recession by about 0.33 + 0.58 = 0.91% of one year's GDP. Add that restocking to the normal 0.21% inventory investment that we'd expect from the time trend as of 2009:Q3, and you get a possible contribution of inventory investment of 0.91 + 0.21 = 1.12% of GDP during the first year of the recovery.

If we are looking at the growth rate of real GDP, which is how we usually think about these numbers, the potential contribution of inventory investment is even more dramatic. If inventory investment goes from subtracting 0.49% from GDP (as it did over the last 4 quarters) to adding 1.12% to GDP (as I'm arguing it could well over the first four quarters of the recovery), the contribution to the growth rate of real GDP would be 1.12 - -0.49 = 1.61%.

How plausible is such a number? The table at the right reports the average contribution of inventory investment to real GDP growth over the first 4 quarters of each of the previous 10 expansions. Inventories made a positive contribution in every case, giving an average kick to real GDP growth of 2.1%. However, that average is heavily influenced by the outlier associated with the Korean War. Leaving 1950 out, inventories contributed an average of 1.6% to real GDP growth in the first year of previous expansions, exactly the amount I'm claiming they might be expected to contribute this time as well. That calculation reflects both the fact that the inventory liquidation this time has been more significant than in an average recession (on which basis you'd expect inventory restocking this time to be bigger than average) and the time trend's presumed decrease in the desired ratio of inventory investment to GDP (on which basis you'd expect inventory restocking this time to be smaller than average). From my quick calculations, those two factors exactly balance each other out, and I would expect inventory investment to be able to make the same significant contribution it has made in previous recoveries.

I have reviewed this potential for inventory investment, but similar dynamics also apply to a number of other components of GDP. For example, recent sales levels for motor vehicle appear to be significantly below normal scrappage rates, and this is another area where a big rebound effect is quite possible.

So why would anyone predict anything other than a robust rebound? General Electric Co. Vice Chairman John Rice expressed the core concern:

We see a world where good companies and good consumers can't get all the credit we would like," Rice said. "Companies with lots of cash on their balance sheet are worried about whether they will get what they need for working capital" and are cutting spending. "Until that changes I don't think you will see a significant rebound," Rice said. "We are preparing for 12 or 18 months of tough sledding."

The question is whether our financial system is willing and able to extend the credit that would fuel the recovery. The key battering ram so far has been the deterioration in the value of residential-mortgage-backed securities aggravated by the collapse in real estate prices, which collapse could easily continue. Calculated Risk doesn't share the enthusiasm over the latest house price numbers:

So house prices were falling at about a 10% annualized rate in April-- and that apparently feels like "stabilization"!

And there are other shoes yet to drop on the financial system, including commercial real estate as 1 in 5 U.S. hotels may default and credit card debt.

Will we see a robust recovery? I can't rule it out. But personally, I'll believe it when I see it.

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Asset Allocation Balanced Funds.

3 Well-balanced Picks

Columbia LifeGoal Income A (NLFAX) was incepted in September 2003. The investment seeks current income, consistent with relative stability of principal.

The fund actively allocates its assets among fixed income and income-oriented equities, convertibles and REITs by investing in Columbia Funds and individual securities. It is designed to be part of a fixed-income portfolio to enhance returns in all interest rate environments.

Anwiti Bahuguna has been lead manager at the fund since February 2009. The fund has an expense ratio of 0.67%.

Hartford Income Allocation A (HINAX) seeks current income and, as a secondary objective, capital preservation. It typically invests in a combination of fixed income funds.

The fund uses a "fund-of-funds" approach, investing in a diversified group of the Hartford mutual funds, known as underlying funds. It may invest in funds with varying credit quality.

Unit holders have to make a minimum initial investment of $1,000 to enter this Zacks#1 Rank ("Strong Buy") fund. The fund declares and pays income dividends periodically and distributes net capital gains, if any, annually.

ING Index Plus LargeCap Equity IX A (IXSAX) seeks to outperform the total return performance of the S&P 500 index, while maintaining a market level of risk.

The fund normally invests at least 80% of net assets in stocks that are part of the S&P 500 index. It may invest in derivative instruments, including but not limited to futures contracts and options.

The fund's top holdings include ExxonMobil Corp. (XOM), Procter & Gamble Co. (PG) and General Electric Co. (GE)

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Asset Allocation Balanced Funds list.

3 Top Performers

ING Principal Protection X A (IPXAX) was incepted in August, 2004. It seeks to participate in favorable equity market conditions while preserving at least the principal amount of the Fund as of the inception of the guarantee period.

The fund seeks to outperform the total return performance of the S&P 500 index during the index plus large cap period. It allocates assets appropriately to the equity component and to the fixed component during the guarantee period.

Unit holders have to make a minimum initial investment of $1,000 to enter the fund. The fund pays dividends annually. ExxonMobil Corp. (XOM), Procter & Gamble Co. (PG) and General Electric Co. (GE) are among the fund's top holdings.

Dreyfus Global Absolute Return A (DGPAX) was incepted in December, 2007. and seeks total return. The fund is not managed to a benchmark index.

The fund seeks to provide returns that are largely independent of market moves. It will seek to achieve investment exposure to global equity, bond and currency markets primarily through long and short positions in futures, options and forward contracts.

The fund is non-diversified. Its investments are focused among the major developed capital markets of the world, such as the United States, Canada, Japan, Australia and Western Europe.

Accessor Income Allocation A (AILAX) was incepted in September 2003. The fund seeks high current income and some stability of principal.

The fund generally invests in a combination of the Underlying Fixed-Income Funds and the Underlying Money Market Fund, and may invest in a limited amount of the Underlying Equity Funds and the Underlying Alternatives Funds.

The fund uses a conservative asset allocation strategy and is designed to provide income for investors with a low risk tolerance and a 1-3 year investment time horizon. Unit holders have to make a minimum initial investment of $5,000 to enter the fund.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our new mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=4579.

Here are highlights from Friday's Analyst Blog:

GE Down, but Not Out

General Electric Co. (GE) reported first-quarter earnings of $0.26 vs. $0.43 a year ago, but better than the $0.21 consensus expectations. The only real area of strength for the firm was in its Energy Infrastructure business, where segment profits increased by 19%. The most significant areas of weakness were at NBC Universal, which was hit hard by weak advertising revenues (something shared by almost all media companies) and the GE capital unit.

Investors are probably most concerned about the Capital unit. The good news is that the unit was still profitable, and it has shrunk its asset base. The bad news is that the profits are down 58% and the credit trends look awful.

Citi Results: Any Reason to Cheer?

Citigroup Inc. (C) today announced that it made a net profit of $1.6 billion, compared with a net loss of $5.1 billion a year earlier. But after taking into account the conversion and dividend on preferred stock, the loss was $0.18 per share for common shareholders, which was better than the consensus estimate of a loss of $0.34 per share.

The results benefited from strong trading income and favorable accounting rules.

Like Goldman Sachs (GS) and JP Morgan (JPM), Citigroup also benefited strong revenues in fixed income trading, resulting from high volatility and wider spreads in many products. The fixed income markets group had revenues of $4.7 billion. However, of this revenue, a net $2.5 billion came from an accounting rule adopted in 2007, which allowed the company to benefit from the widening of its credit default swap (CDS) spreads.

U.S. Video Games Sales Drop

Yesterday, the NPD Group reported that US video game sales in March dropped more than expected. Sales of hardware, software and accessories fell 17% year-on-year to $1.43 billion. For the first quarter, sales were flat at $4.25 billion. The double-digit decline was larger than expected. Most forecasts expected software sales to be flat to down slightly.

Unlike the rest of retail, video games sales have held up extraordinarily well during this economic downturn. Video games are cheaper form of entertainment than other activities like going to the movies or going to a sporting event. The games are played in the home, which ties in with the trend of consumers wanted to stay home more to save money. That makes the March sales decline important data that could point to weakness finally spreading into the video games industry.

The NPD's March sales report is giving GameStop Corp. (GME) investors a reason to sell the stock. GME shares are down about 10% since the news was released yesterday. In response, GameStop management is out this morning trying to assuage investor fears. The retailer updated its financial outlook for its first quarter and fiscal year 2009. Management is still seeing strong sell-thru of new video games released in February and March, such as Street Fighter IV, Resident Evil 5, and Halo Wars and the launch of Nintendo DSi.

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The company earned 26 cents per share, 3 cents ahead of analysts' expectations.

Sales were down or flat in every unit except GE's energy business. GE Energy's segment profit climbed 19% to $1.27 billion on revenue of $8.24 billion.

However, total sales for the quarter dipped 9% to $38 billion.

GE shares are up approximately 1.2% on volume of 139 million, compared to the average of 146 million.

The current-year average earnings estimate has declined to $1.07 per share from last month's $1.13, as 4 out of 16 analysts revised downward. Next-year's estimate is pegged at $1.04 per share, down from $1.07 over the same period.

GE is a Zacks #4 Rank ("Sell") company.

GE said on Thursday that it expects to earn a profit in the range of $2.0 billion and $2.5 billion under the Federal Reserve's assumptions for the U.S. economy this year. It had earlier projected earnings of $5.0 billion.

Meanwhile, the company assured investors that its financial unit is sound despite a weak economic climate.

"We have sufficient capital and alternatives to weather the tough environment," said Mike Neal, head of GE Capital.

GE is a Zacks #3 Rank ("Hold") company.

Even a few months ago, India promised to be more resilient in the global downturn than other battered economies. After Satyam Computer's (SAY) revelations of a $1 billion accounting fraud, however, it looks far from possible. It has been a week since India's biggest corporate scandal came to light and the markets are still reeling from the shock.

The Indian IT sector, which generates more than half of its revenue from outsourced work from the United States, has taken the worst hit. Already grappling with the effects of the recession, it may see delay in large contracts from global firms after the Satyam fiasco.

The Securities and Exchange Board of India (SEBI), now faced with the challenge of avoiding such fraud in future, will review papers of auditors who cover stocks listed on the Sensex 30 and Nifty 50.

While some companies are apprehensive about overscrutinization, more skeletons are bound to tumble out of the closet. Outsourcing giant Wipro has already revealed that like rival Satyam, it was also blacklisted by the World Bank in 2007.

Indian shares fell more than 3% today, their lowest close in over 5 weeks, while Wipro tumbled as much as 12% to a three-month low. Satyam investors however saw a ray of hope after Indian Trade Minister Kamal Nath said the government may provide financial aid to the company.

Satyam shares fell more than 82% to $1.66 on the New York Stock Exchange on the back of multiple class-action lawsuits and speculation on the exodus of high-profile clients like General Electric Co. (GE)

Even a few months ago, India promised to be more resilient in the global downturn than other battered economies. After Satyam Computer's (SAY) revelations of a $1 billion accounting fraud, however, it looks far from possible. It has been a week since India's biggest corporate scandal came to light and the markets are still reeling from the shock.

The Indian IT sector, which generates more than half of its revenue from outsourced work from the United States, has taken the worst hit. Already grappling with the effects of the recession, it may see delay in large contracts from global firms after the Satyam fiasco.

The Securities and Exchange Board of India (SEBI), now faced with the challenge of avoiding such fraud in future, will review papers of auditors who cover stocks listed on the Sensex 30 and Nifty 50.

While some companies are apprehensive about overscrutinization, more skeletons are bound to tumble out of the closet. Outsourcing giant Wipro has already revealed that like rival Satyam, it was also blacklisted by the World Bank in 2007.

Indian shares fell more than 3% today, their lowest close in over 5 weeks, while Wipro tumbled as much as 12% to a three-month low. Satyam investors however saw a ray of hope after Indian Trade Minister Kamal Nath said the government may provide financial aid to the company.

Satyam shares fell more than 82% to $1.66 on the New York Stock Exchange on the back of multiple class-action lawsuits and speculation on the exodus of high-profile clients like General Electric Co. (GE)

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But it’s the first time China’s commercial airplane sector has a long-term flight plan to follow.

Roughly $4 billion deals involving 102 aircraft were signed during the six-day event, which was attended by representatives of 600 aviation companies from 35 countries, officials from the Airshow China Organizing Committee told the People’s Daily newspaper.

But the real news was that China has set a timetable for its proposed “jumbo” jet, a passenger aircraft China plans to design and build domestically to compete directly with commercial jetliners built by industry…

More from Jason in Money Morning:

Last month, the iconic investing guru once again displayed his enthusiasm for railroad stocks by adding to his already sizeable stake in Burlington Northern Sante Fe Corp. (NYSE:BNI). After picking up 7.85 million shares of Burlington in early October, Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B) last week added another 825,000 shares to its holdings at a price of $79.65 apiece

Buffett has been bullish on railroad stocks for the past year. Buffett made his…

This from Money Morning:

Although bank-to-bank loan rates fell for the sixth-straight day yesterday (Monday) – decreasing fears that the corporate-lending market was going to seize up – a new reality has emerged: As the song says, “only the strong will survive.”

Strong companies will navigate the uncertainties of the markets in the months and years go come; weaker players will falter, fall into bankruptcy, and get gobbled up by larger, more-healthy companies.

“This…

This from Money Morning:

Although bank-to-bank loan rates fell for the sixth-straight day yesterday (Monday) – decreasing fears that the corporate-lending market was going to seize up – a new reality has emerged: As the song says, “only the strong will survive.”

Strong companies will navigate the uncertainties of the markets in the months and years go come; weaker players will falter, fall into bankruptcy, and get gobbled up by larger, more-healthy companies.

“This…

At the New York close, the blue-chip Dow Jones Industrial Average Index plunged 508.39 points, or 5.11%, to close at 9,447.11. The tech-laden Nasdaq Composite Index plummeted 108.08 points, or 5.80%, to close at 1,754.88. And the broader Standard & Poor’s 500 Index dived 60.66 points, or 5.74%, to finish the day at 996.23.

The S&P 500 closed below 1,000 for the first time since 2003.

The Dow is down 29% year-to-date, while the S&P 500 is down over 32% over the same time period. With such huge declines, 2008 marks the worst year for the domestic markets since 1937, Bloomberg News reported.

“Capital markets are very tight right now,” Douglas Christopher, a partner at Crowell Weeden & Co. in Los Angeles, told Bloomberg. “Companies that need external financing or are perceived to need external financing are going to be given a discount in the current environment.”

The Fed’s Latest Gambit

The new Commercial Paper Funding Facility (CPFF) will provide a backstop to the commercial paper market that has been brought to a standstill, even for those firms far removed from the financial sector.

“The immediate threat to the real economy is that large corporations are having difficulty obtaining funds via the commercial paper market,” Mark Gertler, a New York University economist, told Bloomberg.

The commercial paper market reached a three-year low of $1.6 trillion as money-market fund managers, typically huge buyers of commercial paper, became extremely risk averse after a handful of funds “broke the buck.” In a flight to quality mainly into U.S. Treasuries, money market funds liquidated commercial paper holdings by $200.3 billion, or 29%, in the final two weeks of September, according to data compiled by IMoneyNet Inc., Bloomberg reported.

Auto manufacturers, utilities and others make use of short-term lending in the commercial paper market – borrowing money for periods ranging from just overnight to three months – to cover occasional gaps in daily cash flows. The commercial paper market is vital to the ongoing operations for many large corporations, which use the short-term funds to make payroll or pay bills.

“By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market,” the U.S. Federal Reserve said in a statement released yesterday (Tuesday) morning.

“An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households,” the statement concluded.

The CPFF will remain in place until Apr. 30, 2009, at which point the Fed Board of Governors would need to vote to extend it if necessary.

“While we have continued to fund without disruption, the Fed announcement today is an important development that will help restore confidence in the market and facilitate more lending,” General Electric Co. (GE) spokesman Russell Wilkerson said, Bloomberg reported. “This is a positive move and we applaud the Fed’s decisive action.”

GE is the largest domestic commercial paper issuer through GE Capital, its financial subsidiary.

Gloomy Economic Outlook

Speaking yesterday afternoon at the National Association for Business Economics 50th Annual Meeting in Washington, D.C., Fed Chairman Ben S. Bernanke tried to strike a reassuring tone that the recent economic measures enacted by the government would have the intended effect, while also acknowledging the dire economic data.

“Over all, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased,” Bernanke said in his speech.

Some analysts felt this was an indication that the Fed would move to cut interest rates at the next Federal Open Market Committee meeting slated for Oct. 28 – 29.

“The steps being taken now to restore confidence in our institutions and markets will go far to resolving the current dislocations in the markets. I believe that the bold actions taken by the Congress, the Treasury, the Federal Reserve, and other agencies, together with the natural recuperative powers of the financial markets, will lay the groundwork for financial and economic recovery,” Bernanke said.

Britain’s Own Bank Bailout

Meanwhile, the global impact of the credit crisis is hitting British banks hard. In the United Kingdom, Prime Minister Gordon Brown’s government is preparing a rescue package in response to diving British bank shares. Royal Bank of Scotland PLC (ADR: RBS) Barclays PLC (ADR: BCS), HBOS PLC (OTC ADR: HBOOY) and Lloyds TSB Group PLC (ADR: LYG) are all in need or recapitalization, The Wall Street Journal reported.

It is unknown if Britain’s largest bank, HSBC Holdings Ltd., would need government assistance. Its capital position is currently seen as the strongest.

The U.K. government plans to announce its plan today (Wednesday).

Source: Federal Reserve to Buy Commercial Paper to Free Up Frozen Market

General Electric Co (GE) cut its guidance for the third quarter and fiscal 2008 last week, as volatility in the credit markets hurt its finance arm GE Capital. The segment contributes about 45% to GEÂ’s earnings. Most brokerage analysts covering the stock adjusted their profit estimates and are now looking for 45 cents per share in the third quarter. The Zacks #4 (Sell) company has missed consensus in 2 of the last 4 quarters. GE is scheduled to report on Friday, Oct 10, before the start of trading.

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