Company Description

Gap Inc. is a global specialty retailer that sells clothing, accessories and personal care products for men, women, children and babies under the Gap, Old Navy, Banana Republic, Piperlime and Athleta brands. The company operates stores in the United States, Canada, the United Kingdom, France, Ireland and Japan.

Gap also has franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in many other countries around the world. Under these agreements, third parties operate or will operate stores that sell apparel, purchased from Gap, under Gap's brand names.

Estimates are Bullish Ahead of Earnings Announcement

Analysts polled by Zacks have been upbeat on GPS ahead of today's third-quarter report, pegging earnings at 43 cents per share for the third quarter. Last month, analysts were forecasting 37 cents.

For the current full year, the Zacks Consensus Estimate of $1.49 per share was increased from last month's $1.40.

For the following year, Zacks analysts boosted the earnings forecast from $1.53 per share to $1.62 over the past 30 days.

Rewarding Shareholders with Competitive Income

The company just declared a quarterly dividend of $0.085 per share, which translates into an industry-leading dividend yield of 1.5%.

The dividend is payable on January 27 to shareholders of record at the close of business on January 6.

Stellar Sales

Gap's October net sales of $1.14 billion came in 5% above last year's $1.08 billion. Comparable store sales spiked 4% year-over-year. Zacks Investment Research

Company Description

Gap Inc. is a global specialty retailer that sells clothing, accessories and personal care products for men, women, children and babies under the Gap, Old Navy, Banana Republic, Piperlime and Athleta brands. The company operates stores in the United States, Canada, the United Kingdom, France, Ireland and Japan.

Gap also has franchise agreements with unaffiliated franchisees to operate Gap and Banana Republic stores in many other countries around the world. Under these agreements, third parties operate or will operate stores that sell apparel, purchased from Gap, under Gap's brand names.

Co-founder Dies After a Long and Heroic Battle with Cancer

The company recently announced that Donald G. Fisher, co-founder of Gap, died after a long and heroic battle with cancer. He was 81.

Donald Fisher opened his first Gap store 40 years ago last month. A life-long resident of San Francisco, he was also known for his commitment to philanthropic and civic activities. Along with his wife Doris, Mr. Fisher believed that opportunities existed for a retail company that could provide consumers with a variety of fit and style options. In 1969, the Fishers raised $63,000 to launch a single jeans and music store called The Gap (named for "the generation gap") in San Francisco.

"Today we lost a friend, a mentor and a great visionary," said Glenn Murphy, CEO and Chairman of the Board of Gap Inc. "Don and Doris took a simple idea and turned it into a brand recognized as a cultural icon throughout the world and changed the face of retail forever. "

Solid Back to School performance at Old Navy

Gap posted net sales of $1.12 billion for the month of August, a 2% dip from the year-prior total. Comparable store sales slipped by 3% year-over-year.

"During August, customers responded well to our denim collections at Gap and Old Navy," said Sabrina Simmons, chief financial officer of Gap Inc. "We were especially pleased by the progress at Old Navy and its strong back to school performance, which helped support total company merchandise margins significantly above last year."

Old Navy sales came in 4% above the previous year's total.

Bullish Forecasts

Analysts polled by Zacks are bullish on earnings. Current full-year estimates of $1.37 per share up 2 cents in just the past week. For the following year, the Zacks Consensus Estimate of $1.48 per share was also bumped up by 2 cents over the past week.

Gap boasts an impeccable record of exceeding earnings projections. Dating back to December 2004, the company topped the Zacks Consensus every time with the exception of 1 match.

A Strong Second Quarter Helped Push Shares Higher

In mid-August, the company reported second-quarter earnings 33 cents per share, beating the Zacks Consensus Estimate by 3% and outpacing last year's 32 cents.

Net sales of $3.25 billion came in below the previous year's $3.50 billion. Comparable store sales declined 10% year-over-year. Online sales, however, showed an increase of 17% from the year-prior.

"We're proud to deliver second quarter earnings per share above last year, especially during a challenging environment," said Glenn Murphy, chairman and chief executive officer of Gap Inc. "Building upon two years of work improving our economic model, we're now putting further emphasis on changing the trajectory of our top line performance. Our focus is to find the right balance between maintaining our cost discipline and making appropriate, targeted investments to gain back market share."

Shares, which are nearing a 52-week high, climbed higher after delivering a stellar second quarter, outperforming the market by about 10%. For the past year, GPS is more than 20% ahead of the market.

GPS Stacks Up Well Against Industry Numbers

Gap, a Zacks #1 Rank (Strong Buy), has a solid balance sheet, showing no debt. The company's return on equity of 21% nearly triples the industry average of 8%. Its net profit margin of 7% eclipses the industry average of 1%. Gap also offers an industry-leading dividend yield of 1.6%. Zacks Investment Research

On the same day, the US agency gave its nod of approval to Invega Sustenna -- a once-monthly, injectable version of Invega to treat schizophrenia in adults. It will be marketed in the US by Janssen, a unit of Johnson & Johnson.

Invega Sustenna has been developed using the proprietary technology NanoCrystal Technology, which is a registered trademark of Elan Pharma International Ltd, Ireland, a subsidiary of Elan Corp. plc (ELN). The FDA approved the drug on the basis of two international, randomized, double-blind placebo-controlled studies of schizoaffective disorder patients with acute symptoms.

Approximately, one percent of the world’s population suffers from schizophrenia, which prevents a person from thinking clearly and distinguishing between reality and imagination. While there is no cure for schizophrenia, the symptoms and the risk of relapse can be managed with appropriate treatment that includes continuous, long-term therapy with proper medications.

As a reminder, Invega was initially approved in December 2006 to treat schizophrenia. The drug’s predecessor, Risperdal -- which is used to treat schizophrenia and symptoms of bipolar disorder (manic depression) -- lost its patent in 2008.  Risperdal is available as a generic but Johnson & Johnson has been focusing on transferring patients to Consta (long-acting Risperdal) and the newer Invega product.

Total franchise sales were $3.8 billion in 2008.  Invega sales should continue to ramp in the coming years due to the label expansion, which includes the recent FDA approval.
 
We have a Buy rating on the company’s shares based on its diverse and deep product mix, lack of cyclicality, strong financial position, and consistent record of earnings growth.

Chicago, IL – July 31, 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: Telefonica (TEF), Vodafone (VOD), Deutsche Telecom (DT), Palm, Inc. (PALM) and China Unicom (CHU).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Thursday’s Analyst Blog:

Telefonica Outpaces Forecast

Telefonica (TEF) continues to experience declines across its domestic and European markets due to recession and intense competition which offset growth in Latin America. The company’s Spanish revenue declined 6.9% to €4.8 billion ($6.6 billion) in the second quarter while revenue from Europe decreased by 5.9% to €3.3 billion ($4.5 billion) partly due to negative currency exchange rate movements.

The company’s UK wireless operation (O2 UK) continues to struggle, with declining revenues as the operator contends with a weak economic condition and intense competition, especially from Vodafone (VOD) and Deutsche Telecom (DT).

Telefonica is currently benefiting from strong demand for iPhones, which has strengthened its cellular revenue base. Moreover, the company has recently received the right to market Palm, Inc.’s (PALM) Pre smartphone in the UK, Spain, Ireland and Germany. The company is also aggressively pursuing expansion initiatives into other emerging markets as the company aims to increase its foothold in China through a stake holding in China Unicom (CHU).

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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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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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That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments -- similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed both the S&P 500 year to date, as well as Zacks-covered banks in Europe and the United Kingdom, increasing 40.1% and 27.7%, respectively, versus gains of 3.3% for the S&P 500 and 10.6% for banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices to continue volatile, reflecting economic uncertainty in the coming months and headline risk.

OPPORTUNITIES

Specific banks that we like include Itau Unibanco Holding S.A. (ITUB) in Brazil, Banco Santander Santiago (SAN) in Chile and HDFC Bank Limited (HDB) in India.

ITUB is the largest bank in Brazil following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A., with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at year-end 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

There are currently three stocks in the Zacks covered non-US bank universe with a Zacks ranking of 1 (Strong Buy) -- Credit Suisse Group (CS), HDFC Bank Limited and ICICI Bank Limited (IBN) -- and three stocks that have a Zacks rank of 2 (Buy) -- Itau Unibanco Holding S.A., Banco Bradesco S.A. (BBD) and Deutsche Bank AG (DB).

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE). In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raise issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago.

There is currently one stock in the Zacks covered non-US bank universe with a Zacks ranking of 5 (Strong Sell) -- Banco Bilbao Vizcaya Argentaria, S.A. -- and one stock that has a Zacks rank of 4 (Sell)-- Mitsubishi UFJ Financial Group, Inc. (MTU).Zacks Investment Research

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments -- similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed both the S&P 500 year to date, as well as Zacks-covered banks in Europe and the United Kingdom, increasing 40.1% and 27.7%, respectively, versus gains of 3.3% for the S&P 500 and 10.6% for banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices to continue volatile, reflecting economic uncertainty in the coming months and headline risk.

OPPORTUNITIES

Specific banks that we like include Itau Unibanco Holding S.A. (ITUB) in Brazil, Banco Santander Santiago (SAN) in Chile and HDFC Bank Limited (HDB) in India.

ITUB is the largest bank in Brazil following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A., with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at year-end 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

There are currently three stocks in the Zacks covered non-US bank universe with a Zacks ranking of 1 (Strong Buy) -- Credit Suisse Group (CS), HDFC Bank Limited and ICICI Bank Limited (IBN) -- and three stocks that have a Zacks rank of 2 (Buy) -- Itau Unibanco Holding S.A., Banco Bradesco S.A. (BBD) and Deutsche Bank AG (DB).

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE). In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raise issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago.

There is currently one stock in the Zacks covered non-US bank universe with a Zacks ranking of 5 (Strong Sell) -- Banco Bilbao Vizcaya Argentaria, S.A. -- and one stock that has a Zacks rank of 4 (Sell)-- Mitsubishi UFJ Financial Group, Inc. (MTU).Zacks Investment Research

BT Group’s aim is to become the leading provider of networked IT services to mid and large-sized businesses and the public sector in general in Ireland. Vodafone will become the number-two player in the fixed broadband market and enjoy a 15% market share of the fixed broadband market. The value of the gross assets that are the subject of this transaction was 4.8 million euros at the end of March 2009.

In all its business segments, BT Group has been transforming itself from being a traditional telecom operator to a innovative provider of telecom solutions, and it is now taking advantage of future growth prospects, as it moves away from traditional businesses and into what it calls “New-Wave" businesses, such as broadband, Voice over Internet Protocol (VoIP), Wireless Internet Access, Networked IT services and IPTV. We believe BT Group’s New-Wave businesses are the drivers behind any growth the company will experience in the coming years, and BT Group understands that it has to constantly evolve with technology in order to stay ahead in the telecommunications business.

BT Group is an incumbent phone company providing fixed-line and data services to the United Kingdom. It owns or has stakes in operations in North America, the Asia/Pacific region, and Western Europe. BT Retail is the largest communications service provider by market share to consumers and businesses in the United Kingdom. It supplies a wide range of communication products, including voice, data, Internet, and multimedia services. The BT Wholesale segment provides network services and solutions within the United Kingdom, including its Asymmetric Digital Subscriber Line (ADSL) and Integrated Services Digital Network (ISDN) to BT Retail and BT Global Services, as well as to other communication companies, fixed and mobile network operators, and service providers.

Openreach was established in January of 2006 in response to OFCOM (UK Office of Communications) strategic review of the communications industry in the UK, and operates the physical assets of the local access and backhaul networks and provides the services which use those networks to communications providers, both internally and externally, and was spun out of BT Wholesale to become a completely independent entity from BT, although it remains wholly-owned by the BT Group. BT Global Services is BT Group’s managed services and solutions arm, serving multi-site organizations. 

We continue to maintain our Hold rating on BT Group.

Chicago, IL – July 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: Telefonica (TEF), Palm Inc (PALM), Apple Inc (AAPL), Sprint Nextel (S) and Vodafone (VOD).
Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Tuesday’s Analyst Blog:

Telefonica Wins Palm Pre

On July 7, 2009, top Spanish telecom operator Telefonica (TEF) announced that it has been awarded the exclusive right to distribute Palm Inc’s (PALM) recently released smartphone “Pre" in the selected European markets.

The company’s wireless arms O2 and Movistar will exclusively sell the premium handset when it becomes available in specified European countries during the holiday season in December 2009. O2 has received the right to market Pre in the UK, Ireland and Germany, while Movistar will have exclusivity in Spain.

Like Apple Inc’s (AAPL) iPhone 3G (and the latest 3GS version), Palm Pre is equipped with the most advanced cellular technology and embedded features available in the 3G handheld market today. The high profile handset was launched in the U.S. on June 6, 2009 with Sprint Nextel (S) being the exclusive dealer. Palm Pre has generated strong market response, having sold 90,000 to 100,000 units in the first week of the launch.

Telefonica’s Spanish and European wireless operations are currently struggling with declining revenues and lower subscriber growth levels reported in the most recent quarter as weak economic conditions across these key markets are affecting customer usage levels supported by intense competition. Additionally, reduced tariff rates imposed by Spanish and European regulations are tightening wireless revenue per user.

Palm Pre represents the second most significant handset deal for both O2 and Movistar as they are already the exclusive distributors of iPhones (including 3GS) in Britain and Spain, respectively. The ability to market two of the most sought after handset brands will strengthen O2’s competitive position over its biggest rival Vodafone (VOD).

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About Zacks Equity Research

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=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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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

Chicago, IL - June 26, 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: Sanofi-Aventis (SNY), Biogen-Idec (BIIB), Marathon Oil Corporation (MRO), Shell (RDS.A) and StatoilHydro (STO).

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Here are highlights from Thursday's Analyst Blog:

Sanofi Doing Deals

Sanofi-Aventis (SNY) posted EPS of e5.36 in 2008, an increase of just 2% from 2007. Revenue fell 1% in 2008 as a number of products experienced significantly declining sales including Ambien, Tritace and Copaxone.

For 2009 we expect revenue growth to return, as generic erosion is more than offset by strong growth of Taxotere, Lantus, Avapro and the vaccines business. We expect revenue growth of 6% in 2009 and EPS of e5.93 ($4.10), up 11% from 2008. EPS should continue to benefit from strong contributions to royalty income from U.S. Plavix sales and operating margin improvement as a result of cost-cutting. We also expect foreign exchange to benefit both revenue and EPS in 2009 as the U.S. dollar strengthens against the Euro.

Generic competition will continue to be a concern, however. While we expect new product launches to make significant revenue contributions in the early part of the next decade, they will not be enough to compensate for increased generic erosion. Gross margins will likely contract now that Lovenox and Plavix (E.U.) sales are at or near peak levels, combined with softer pricing on current and soon-to-be off-patent drugs.

We expect Sanofi to continue look to contain operating costs in order to grow EPS in the face of weakening sales of some of its biggest products. This should help keep EPS at positive, albeit modest, growth over the next few years.

We also expect the company to look to grow revenue through additional partnering deals and acquisitions. We expect Sanofi to look for a small-to-mid sized deal in the high-growth biotech space in order to help plug revenue holes left by patent expirations. We believe Biogen-Idec (BIIB) makes the most sense as an acquisition candidate.

Marathon Leaving Irish Project

On Wednesday, June 24, 2009, Texas-based Marathon Oil Corporation (MRO) announced the sale of its interest in the Corrib offshore natural gas development project on Ireland's northwest coast, a joint-venture between Shell (RDS.A), StatoilHydro (STO) and Marathon. The company has reached an agreement in this regard with Alberta-based oil and gas company Vermilion Energy Trust.

Per the agreement, Marathon will sell its wholly owned Irish subsidiary, Marathon International Petroleum Hibernia Ltd. (having an 18.5% interest in the Corrib development) to Vermilion in a deal worth between $235 million and $400 million, subject to the timing of first commercial gas at Corrib.

Under the terms of the deal, Vermilion will pay Marathon an initial payment of $100 million at the closure of the transaction, expected during the second half of 2009, subject to government and regulatory approvals. The remaining portion will be due at the time of first production from the site, which is expected between late 2010 and late 2011. Additionally, Vermilion is slated to invest up to $300 million to complete the facilities needed to reach the gas.

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About Zacks Equity Research

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=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.

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

Follow us on Twitter: http://twitter.com/ZacksInvestment

Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts

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

Anyways, I shall not belabor you with the hardware details of my new rig, but rather point your attention to some recent comments made by the German finance minister Peer Steinbrueck in the context of the increasing risk of further downgrades of European sovereigns following the decision by Standard and Poor to downgrade Ireland's debt rating for the second time in 2009. As I think a bit about what it actually is Mr. Steinbrueck is saying I cannot help but feel that our good Finance minister is perhaps feeling a bit too smug here. Now, as Mr. Steinbrueck points out and as has been the source of wide debate, this is an issue which reflects itself in the widening of sovereign yield spreads among economies in the Eurozone (picture coutersy of Ibex Salad).

Now I am not sure that Mr. Steinbrueck really intended to come off as smug. In truth he may just be concerned, and rightfully so, about Germany fellow Eurozone members and perhaps even the ability of the Eurozone to weather the incoming crisis as one entity. However, I do think the following is rather complacent when you think that it comes from the finance minister of an economy with more than a few problems, not least on the fiscal front.

“What’s going to happen to our friends in the European Union that are not getting the same conditions” as Germany when borrowing money from capital markets, Steinbrueck said in Lecce, Italy, where he’s meeting counterparts from the Group of Eight nations. “I’m hinting at this now so that nobody asks in half a year or so whether I was blind and whether that wasn’t an issue in international discussions.”

Ok, fair enough Mr. Steinbrueck. I for one will not accuse you of being blind further down the road, but I do think a bit of humble pie is in order here. Consequently, there are two risks here. On the one hand there is the narrative Steinbrueck is latching on to in the form of the periphery acting in such a reckless way that they risk pushing themselves so far into the mire that it risks the future of the Eurozone or, if we move the predictions down a nudge, their own economic prosperity. The other risk however is a much more sinister one. Consider then the idea that the threat towards economic stability in the Eurozone comes not from the periphery but from the very core of the edifice in the form of a German economy whose growth model is extremely vulnerable to the current conditions and which has no meaningful defense. The idea here is simple enough. As bad as the crisis in the periphery is, bad indeed it is, what happens when markets wake up to the fact that the weakness and dysfunctional economic edifice stretches into the very heart of the Eurozone? Specifically, what happens to those much hailed better conditions in the context of Germany Steinbrueck points towards?

Clearly, there is ground for more than a little food for thought here and especially so in the context of Germany who has now definitive lost the source of its hitherto export driven growth in the form of a faltering CEE as well as a severe crisis in its main Eurozone trading partners.

But, by no means does Mr. Steinbrueck stop here.

Steinbrueck signaled disappointment that the G-8 failed to choose stronger language today on “exit strategies” to the financial and economic crisis, such as scaling back government borrowing and withdrawing monetary policy stimulus.

“More was not to be expected” on exit strategies, Steinbrueck told reporters after the meeting when asked whether he was happy with the outcome. “At the moment we’re still occupying ourselves with crisis management, but the question of fighting inflationary developments in a timely fashion plays an important role.”

Now, if I feel that Mr. Steinbrueck was coming off as a bit too complacent on the first account I seriously think he is moving ahead of himself on this one. I don't know where this comes from, I really don't. Perhaps it is all the talk about rising yields on the long end of the yield curve in the US and the subsequent prediction that the Fed will soon head north to reflect better than expected conditions (and thus inflation). Consequently, I can't for the life of me understand why a German finance minister would be talking about exit strategies at this point in time. Surely, I respect being ahead of the curve as much as the next guy, but not to the extent that you start making assumptions about a recovery which is clearly not in the offering. Put differently, yes James, I do see what you see but not everybody does it seems. Sorry, but I cannot stress hard enough that talks about exit strategies and inflation fighting seem to me to be rather counter productive at this point in time; especially in the context of the Eurozone and Germany.

Too Smug for His Own Good?

Well, perhaps I am being a bit unfair here. I mean, here I am trying to find something to blog about a late Sunday afternoon and my gaze falls upon Mr. Steibrueck's latest escapades. The biggest issue here I think is really that Germany may not be as "safe" as everyone beliefs. The idea of Germany as the Eurozone anchor is about to be tested now and I have my doubts that the narrative will hold up for scrutiny. Of course, a couple of quotes ripped from Bloomberg are not exactly a solid foundation but, in this context, I would still venture the claim that Mr. Steinbrueck is being a bit too smug here.

In another reduction of alternative indexes that use different valuations and business fundamentals to weight companies, Claymore Advisors is seeking to switch an existing exchange-traded fund to a more traditional market-cap size weighted benchmark.

But that isn't all.

In a filing dated May 21, the trust for the Claymore/Great Companies Large-Cap Growth ETF (NYSE: XGC) is asking the Securities & Exchange Commission to let it invest in much smaller companies. And while listed largely on U.S. exchanges, they'd be foreign-based businesses.

The new fund would be called the Claymore/BNY Mellon International Small Cap ETF.

The document notes that the new ETF's "investment objective is not fundamental" in nature. It clearly states the change will revert to a strictly passive indexing approach. (See filing here.)

The request to regulators by Claymore comes on the heels of PowerShares' decision to close 19 of its ETFs, a dozen of which were based on fundamental indexes created by Rob Arnott's Research Affiliates. (See related story here.)

While the existing XGC also follows an index, it's based on an investment approach by Great Companies Inc., a Tampa Bay, Fla.-based money management firm. Its managers rank companies by such factors as price-earnings growth rates, or PEG ratios, and various debt measures for assessing profitability.

Great Companies uses computers to crunch fundamental data to compare value characteristics against growth metrics for domestic large-cap names. Stocks are ranked and added to the ETF's underlying index according to the adviser's composite scoring system.

When it was launched in April 2007, XGC came with an expense ratio of 0.60%. It hasn't changed since then and it had slightly more than $3.7 million in assets through Tuesday.

Higher Price Tag 

When it was first coming to market, a Great Companies' portfolio manager acknowledged that XGC's price tag was higher than rival large-cap funds such as Vanguard and iShares. "But we're providing more of a managed-account product than a classic index-fund product," he said in a MarketWatch.com story at the time. (You can read the story here).

The new small-cap international ETF would face stiff competition as several newcomers have jumped into the asset class in the past few years. But one bone of contention for U.S.-based investors in often illiquid foreign waters is that it can be difficult to follow small-cap names held by their funds.

The new Claymore offering would address that concern by predominately investing in overseas firms with listings on major U.S. exchanges. The fund would hold mainly companies with American depositary receipts or global depositary receipts and market caps of $250 million to $2 billion.

At the end of March, such a makeup gave the underlying index a definite slant to emerging markets. The BNY/Mellon benchmark consisted of 92 stocks. The weightings by country then were: Brazil 21.37%; China 19.20%; India 7.28%; United Kingdom 6.88%; Chile 5.59%; Mexico 4.19%; Russia 3.64%; Japan 3.40%; Israel 3.10%; Netherlands 2.78%; Greece 2.64%; South Africa 2.57%; Italy 2.14%; Argentina 1.98%; Switzerland 1.96%; France 1.89%; Korea 1.79%; Australia 1.68%; Ireland 1.61%; Colombia 1.51%; Hungary 1.00%; U.S. 0.82%; Indonesia 0.50%; Hong Kong 0.46%; Denmark 0.45% and Germany 0.41%.

No expense ratio is listed in the filing. But if the new fund were in the same neighborhood as XGC's, it would seem to have a better fighting chance when competing in the small-cap international arena.

Prices for rival ETFs range from around 0.40% and up. For example, the group's granddaddy is the WisdomTree International SmallCap Dividend Fund (NYSE: DLS). Meanwhile, Vanguard entered the field in March with an ETF charging 0.38%. (For a more complete breakdown on competing international small-cap ETFs, see stories here and here.)

-- This report was submitted by IndexUniverse.com's Murray Coleman. 

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments, similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising, and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed the S&P 500 year-to-date, increasing 19.2% and 10.0%, respectively, versus a 0.7% gain in the S&P 500, and compare to a 2.0% decline for Zacks-covered banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices will continue to be volatile, reflecting economic uncertainty and headline risk in the coming months.

OPPORTUNITIES

Specific banks that could outperform include Itau Unibanco Banco Multiplo S.A. (ITU) in Brazil, Banco Santander Santiago (SAN) in Chile, and HDFC Bank Limited (HDB) in India.

ITU is the largest bank in Brazil, following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A. (or Itau), with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at yearend 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE).

In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raises issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago. Zacks Investment Research

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments, similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising, and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed the S&P 500 year-to-date, increasing 19.2% and 10.0%, respectively, versus a 0.7% gain in the S&P 500, and compare to a 2.0% decline for Zacks-covered banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices will continue to be volatile, reflecting economic uncertainty and headline risk in the coming months.

OPPORTUNITIES

Specific banks that could outperform include Itau Unibanco Banco Multiplo S.A. (ITU) in Brazil, Banco Santander Santiago (SAN) in Chile, and HDFC Bank Limited (HDB) in India.

ITU is the largest bank in Brazil, following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A. (or Itau), with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at yearend 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE).

In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raises issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago. Zacks Investment Research

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Here are highlights from Friday's Analyst Blog:

Lloyds Still Expects a Loss

Today in its first quarter trading update, Lloyds Banking Group plc (LYG, or Lloyds) announced that it still expects to post a loss for full-year 2009 (excluding an accounting gain from negative goodwill) on the back of rising loan impairment charges due to continued economic deterioration.

Lloyds now expects a 50%-plus increase in corporate impairments, largely from commercial real estate losses in the UK and Ireland, in addition to significantly higher impairments in the retail secured and unsecured loan portfolios.

CBS Ad Revs Tumble As Expected

CBS Corporation (CBS) reported that as expected it lost $0.08 per share in 1Q09, a sharp drop from the $0.36 per share it earned in the year-ago quarter.

Two-thirds of the company's revenues come from advertising, which has been falling sharply for several quarters in all medias, with the Internet providing the lone engine of growth -- and even that began to slide in 4Q08.

Revenue slumped 13% to $3.16 billion, as falling revenue in the company's TV, radio, outdoor and publishing businesses was partially offset by the acquisition of CNET Networks. EBITDA plunged disproportionately -- down 42% to $249 million-- eviscerated by heavy fixed costs.

Somaxon - Too Much Risk

Somaxon Pharmaceuticals (SOMX) is running dangerously low on cash. Management exited the second quarter with $4.4 million in cash and restricted cash. Based on our financial model, Somaxon will run out of cash in July 2009. Therefore, the company plans to enter into a financing in May or June 2009.

The company noted on its first quarter conference call that this financing will be enough to fund operations through the FDA review of Silenor. Therefore, we believe management will seek to raise roughly $10 million in new capital. Given the current market value of only $9 million, we see the upcoming financing as potentially 100% dilutive.

ALXA's Symphony Allegro Squeeze

Management at Alexza Pharmaceuticals (ALXA) is focused on completing the necessary non-pivotal safety and supportive work, as well as the chemical and manufacturing scale-up on AZ-004 in preparation of the planned NDA filing in early 2010.

The only clinical trial program that will run in 2009 is the recently initiated phase IIb program on AZ-104. No clinical work is being done on AZ-007 or AZ-001 at this point. Besides the preparation that is being done for the AZ-004 new drug application (NDA), management will also focus on partnering opportunities for AZ-004 and AZ-001.

NGSX's Qutenza Nearing Approval

NeurogesX, Inc. (NGSX) filed a new drug application (NDA) on Qutenza (formerly NGX-4010) for post-herpetic neuralgia (PHN) in October 2008. The filing includes data from 2,300 patients and two positive phase III trials, C116 and C117, discussed below.

The FDA accepted the application in December 2008 and established a PDUFA action date of August 16, 2009. However, in recent discussions with the FDA, NeurogesX was asked for additional information around the topical anesthetic used in the phase III program.

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Ed Yardeni is president of Yardeni Research  Inc., a provider of independent investment strategy research and data. He has worked as chief investment strategist at Deutsche Bank, Prudential Equity Group and Oak Associates. Yardini has also served as chief economist for C.J. Lawrence, Prudential Securities and E.F. Hutton.  

His resume also includes working as an economist with the Federal Reserve Bank of New York. He also held positions at the Federal Reserve Board of Governors and the U.S. Treasury Department.

Earlier this week, IndexUniverse.com's Murray Coleman caught up with the market-oriented economist and investment analyst Thursday afternoon to find out his take on macrotrends going forward.

IndexUniverse.com: Does this rally have legs?

Ed Yardeni:  I think it does. It has already traveled a fair distance. I think 1,000 on the S&P 500 is likely. We're probably going to take-out the Jan. 6 high for the year fairly soon, which was 934.70.

IU: Do you see more bumps in the round?

Yardeni: Yes, but they're the same bumps we've seen in the bear market. The banking system still has its issues as evidenced by the most recent stress test given by the government. And unemployment is still a concern. But there's a sense that these problems might not stop the economy from recovering after all.

IU: Do you see a pullback coming, though?

Yardeni: I don't try to be a technician. But sure, there could be a pullback. Remember, though, that we're coming back from a huge fall. What is encouraging is that stock prices in many industries are gaining back their losses from the September 2008 levels. That's when Lehman and AIG really hit the fan and panic took over.

IU: What sectors seem the best-positioned at this point?

Yardeni: Being defensive doesn't make much sense with a global recovery in sight. So I think materials and industrials should do well. The price of oil has done well recently. It should continue to rise. In the next six- to 12-months, prices could get up into the $75-$80 per barrel range. The metals and mining as well as specialty chemicals also look attractive now. Diversified chemicals still appear rather sluggish and I don't see a lot of upside in that industry.

IU: Do you think gold has more room to run?

Yardeni: Not necessarily. Gold and the trade-weighted U.S. dollar have been flight-to-safety plays. We've seen more interest in risk-taking lately. If that continues to be the case, the trade-weighted dollar and gold may go nowhere fast. I'm not enthusiastic about either one at this point.

IU: How about emerging markets?

Yardeni: They've had a great run and I think they'll continue to outperform from here. We started to see at the beginning of this decade a great global boom. That was interrupted by the credit crisis, but it looks like global growth might be resuming again. China, India and Brazil look best at this point. Asia will be the region that really leads the global economy out of this recession, more so than the U.S., Japan or Europe.

IU: How do you see Europe?

Yardeni: It's going to be a slow-growth story. They don't have much going on over there in terms of domestic demand. The demographics are against them with an aging population. And on the whole, they tend to have a more conservative consumer base. Other than in Spain, the U.K. and a scattering of other countries, Europe hasn't seen the kind of housing boom in recent years as the U.S. underwent this decade. Eastern Europe seems to continue to be mired in some of the credit excesses they've been through in recent years.

IU: What do you see taking place in those markets where housing did spurt before the credit crisis?

Yardeni: Now that we've seen the housing bubble burst, economies that used to have very active real estate markets -- such as Spain, the U.K. and Ireland -- are going to slow even more.

IU: Which markets appear in relatively better shape in Europe?

Yardeni: France and Germany have been heavily reliant on exports. But they should show better strength than other European countries because a global recovery will provide a lift to their exporting capabilities. That should put them in a better relative position than Spain, Ireland and the U.K.

IU: What sort of chance to do you see for a turnaround in Japan?

Yardeni: Not much. The main hope for Japan is strong growth in China. They've got one of the worst demographic situations of any industrialized economy. And they don't have any real serious domestic demand. They're working on their second lost decade. Japan stands to lose much of their economic influence in the next decade.

IU: What about the U.S.?

Yardeni: This is going to be the first global recovery not led by the U.S. Our economy will recover, but it will be lackluster and take some time to complete. The good news is that the U.S. remains a very dynamic economy. We've still got plenty of entrepreneurs who are going to make money even with the government playing a larger role in the private sector. But even once employment growth builds, we still could be looking at a recovery about half the strength of what we've seen in the past.

IU: What other types of investments are you recommending to institutional investors these days?

Yardeni: Corporate bonds, junk bonds and leveraged loans all look interesting. If you can get involved in funds that invest in companies benefitting from TALF, those would seem to be an attractive way to invest right now. That's assuming that you think that we're on a course heading towards a global recovery. I certainly do, which makes me believe that some sectors considered at the moment to be more risky look very attractively priced. This would seem to be a good time to take advantage of some of those opportunities.

The almost trivial outcome of today's council meeting in Frankfurt was actually the decision to push the main nominal interest rates down 25 basis points to 1%. If anything, risks to this decision seemed to come from the upside in the sense that all the talk of impending green shoots and second derivatives would make the ECB pause. What was always going to be much more interesting at this meeting would be whether the ECB would announce a series of those famous unconventional monetary measures, and if so; what they would be. In their comment leading up to today's decision, Danske Bank economist Frank Øland pointed out that he expected some form or measure of buying paper or assets. For my own part, I mused a bit on what the heck the ECB was saying in the first place conceding that talks about unconventional measures were indeed popping up in the statements of council members.

Consequently, the ECB brought three things to the table today in the form of longer term refinancing operations, the decision to let the European Investment Bank become eligible counterparty to the Eurosystem's monetary policy operations and most importantly a decision to, in principle, start buying covered bonds of which 60 billion euros was mentioned as the headline figure.

Now, all this about principles of course is open to a wide range of interpretations and Trichet certainly had to dodge a lot bullets at the press conference regarding whether this constituted quantitative easing or not. In the dying minutes of the conference Trichet himself used the words credit easing, and I will let be up to my readers to decide what this means. The president also snubbed FT reporter Ralph Atkins in his question of whether he was allowed to write that the ECB is printing money or, as it were, sterilizing the purchases. The more interesting bit here of course is why exactly the ECB would be buying covered bonds, of all assets. In order to understand this, you basically need to go to Spain and recount the story about cedulas hipotecarias, what they mean for the Spanish financial system and the stress her banks are currently suffering. Start with this one by Edward and then this, this, and this. And if that is not enough, you can go chew on the role of the German Phandbrief. Basically, I think there is a sound economic rational behind the ECB's decision to begins its asset purchase program on this front and whether we call it quantitative easing or not is of little matter I think. It will be most interesting next meeting to see what exactly the ECB is planning in the detail.

With respect to the economic outlook and the level of interest rates and its future change, we were served the regular bout of newspeak from the council which essentially is a reflection of the fact that the journalists were trying to get Trichet to pre-commit to an interest rate floor. Their endeavors were unsuccessful and in stead we got a rather conflicting message in the sense that while Trichet pointed out how 1% constituted no such thing as a floor, he also highlighted the idea that the current stance was appropriate and had also taken into account future weaker signals on the economy. In this light, we can only guess as to how forward looking the council believes the 1% nominal interest rate really is. Personally, I think that the extent to which the green shoots/second derivative punt continues the ECB will stand pat at its next meeting.

Economic Outlook

(click on graphs for better viewing)

Turning to the specifics of the economic situation the ECB rightfully recognised the severity of the situation in the introductory statement and pointed out that risks are still skewed to the downside even amidst green shoots.  It is rather obvious that the downturn is in full force and the recession is now also biting, as it were, on the real economy. This is most obvious from the quick deterioration on the labour market as well as the general slowdown in the real sector.

In terms of inflation, the message was a bit unclear in so far as I think the fundamental discourse is counter intuitive. There is a natural reason as to why this is though in the sense that the ECB would like to be worried about deflation at the same time as it wants to be adamant about anchoring inflation expectations and ever so pointing out that whatever unconventional measures taking are temporary.

There can be no doubt that the Eurozone is teetering on the brink of deflation but since this is also primarily a base effect from a very sharp reduction in commodity prices, the ECB is happy to stick with the standard argument that although inflation should turn negative in mid year it will rebound in subsequent quarters. The fact that headline inflation is adding negatively to the overall HICP can be seen from the negative sign of the graph plotting the spread between core and the main HICP index. it is interesting to observe how the ECB is now confident that energy prices won't lead to an entrenchment towards deflation when we all remember how the bank was terrified of second round effects from higher energy prices a year ago. Perhaps this asymmetry in the famed argument of nominal rigidities and how this may prevent the Eurozone from deflation is what disturbs me the most. Add to this of course that Trichet still maintains that the council is represent 329 million European citizens which apparently means that he does not see, or wants to mention, the fact that places such as Ireland and Spain are already well and truly bogged down in deflation. On the other hand of course, and given recent signs  that commodity prices are beginning to sneak back up, we should expect the ghost of second round effects to emerge once more.

Finally, it is interesting to look briefly at financing and credit conditions where it was noted by Trichet how lending to households and non-financial corporations are still falling. Also, if we look at the annual rate of growth in the much allured M3 measure it has also fallen back steadily. Now, just as I don't care much about the M3 when it running at 10+% I am not sure I care much now since the creation of money/deleveraging may have a life of its own beyond the M3.  Of course, as Danske Bank points out basing their analysis on the lending survey there may also be a second derivative here too, but this would only echo the general sentiment expressed by Trichet in the sense that whatever stabilization we are observing it is situated at very low if not negative levels.

Turning to the evolution of credit the picture is similar. The figure which is actually underestimating the trend because of the one year moving average clearly shows though how the flow as derived by the total stock is on a clear downtrend. In both Q4-08 and Q1-09, the evolution of the stock of household loans was negative. Moreover, Danske Bank's fine analysis of the lending survey suggests that a lot credit tightening is still clogged up in the pipeline even if the trough may have been reached. The interesing thing here will the extent to which the second quarter will see some improvement over a Q4-08 and Q1-09 which were clearly utterly abysmal. Note also that the chart to the right is an average which is of course ripe with generalizations. Basically, some economies such as Spain and Ireland are experiencing a much faster rate of contraction in credit than can be derived from this chart. Also and given the fact that this is after all a unique crisis, we really don't know much the overall stock needs to be capped before we are "done".

In summary, today was a quite significant meeting if there ever was one and the thing to watch is how the ECB will conduct itself in the covered bond market. As noted above, I am thinking cedulas and Spanish cajas as the main key words.