Chicago, IL – November 13, 2009 – Zacks.com announces the latest Industry Outlook. Today, Zacks Equity Research discusses the Steel Industry, including ArcelorMittal (MT), Steel Dynamics Inc. (STLD), AK Steel Holding Corporation (AKS), United States Steel Corporation (X) and Nucor Corporation (NUE).

ArcelorMittal (MT) is the world’s largest steel company with steel production of 103.3 million tons in 2008. Other major players in the industry are Steel Dynamics Inc. (STLD), AK Steel Holding Corporation (AKS), United States Steel Corporation (X) and Nucor Corporation (NUE).

The Asia-Pacific region, especially China and India, is witnessing higher production and consumption of steel. This is due to the per capita consumption reaching up to U.S./European levels, which could, theoretically at least, double steel demand in the longer-term. China has set up the largest steel industries in the world, driven by increasing demand for rapid urbanization and large infrastructure projects. The country accounted for nearly 50% of monthly total world production in August 2009.

China’s share is larger than the combined production of the U.S., the European Union (EU), Russia and Japan, which have historically been the largest producers of steel. In 2001, China's annual share of world production stood at 17%, while the EU accounted for the largest share at 18%. In eight years, China's share of world production has almost tripled, while other producers have seen their shares decrease. Ranked behind China are Japan and the U.S.

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It is indeed an old adage that while goods things are to be preferred over bad things it is possible to get too much of the former. Looking at recent comments from the governor of the Reserve Bank of Australia it is not difficult to imagine how these, albeit old and worn, pearls of wisdom may well have inspired Mr. Stevens in his effort to tiptoe the thigthrope between signalling the intention to raise rates into an expected economic recovery on the one side and trying to prevent the Aussie shoot of on helium into the sun with wings of wax on the other.

(quote Bloomberg)

Australia’s central bank Governor Glenn Stevens signaled a surge in the nation’s currency to near parity with the U.S. dollar has given him scope to slow the pace of future interest-rate increases.

Stevens, who yesterday became the first central banker in the world to raise borrowing costs twice in 2009, said the 28 percent gain in the currency this year may hurt exports and cool inflation, allowing him to “gradually” raise borrowing costs. Just last month, he warned it may be “imprudent” to keep rates at “emergency levels.” The local currency and bond yields fell as traders slashed bets on another quarter-point boost next month, after Stevens raised the overnight cash rate target to 3.5 percent from 3.25 percent. Investors have been driving the Australian dollar toward parity with the greenback, betting China’s economic growth will boost exports from Australia, the biggest shipper of iron ore used in making steel.

Policy makers “are probably glad for the parity talk as it reduces the amount of work they need to do with monetary policy,” said Matthew Johnson, an interest-rate strategist at UBS AG in Sydney. “A December move is a 50-50 proposition.” Traders are betting there is a 50 percent chance Stevens will increase the key rate by another quarter point on Dec. 1, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:22 p.m. today. Prior to Stevens’s comments, they had a 96 percent bet on such a gain.

Mr. Stevens' comments follows in the heels of the recent push by part of the Aussie towards parity with the US dollar reflected primarily in the fact that the RBA has already raised twice in 2009 (from 3.00 to 3.5%) as well as a growing risk sentiment which is a fundamental prerequistie, in the current market, for observing investors react to (growing) yield differences. In so many words, this is all about carry trade and more specifically about the fact that in a world where the G3 and others are still fiddling with quasi- or outright QE it takes a brave sould to initiate a hiking process since it will mean an immediate reaction in the currency market. This is especially the case when the liquidity anchor effectively constitutes the US and thus; while the US pump priming keeps a floor under risky assets and volatility at low levels it becomes a veritable turkey shoot to gun for those currencies whose central banks are on the hike (see more here).

Following Mr. Stevens' comments, the Aussie did lose a bit of its steam even if many currency punters still see it racing towards parity over the course of the coming year.

For example David Forrester who is currency economist at Barclays Capital expects the Aussie to test the parity level in 2010, a call based on the idea that the RBA will have hiked rates to a full 5.5% by the end of next year. Needless to say, in a world where risky assets continue to fly and risk aversion is kept in check this will provide a juicy interest rate differential vis-a-vis the G3 and thus the carry trade flows (be they actual carry trades or simply spot market piggy backing) will be plentiful. 

The question is of course; can you blame the RBA for wanting to raise rates?

As it turns out, not really and particularly not in light of global central banks' new found focus on asset prices in setting the policy rate. You know, it was all Greenspan's fault and all that jazz. Still, for those worried about a too rapid V-shaped recovery, Australian house prices seem to offer plenty of things to worry about.

From Q3-08 to Q1-09 the house price index (weighted for the 8 biggest cities) fell a modest 5.6%, a drop which has been decisively paired in Q2/Q3-09 with the index rising a cumulative 8%. This picture is repeated if we look at a general gauge for consumer spending in the form of a sector break down of retail sales.

Consequently, the annual as well as monthly flow of retail trade turnover never really went decisively into negative in the context of the financial crisis which has no doubt contributed to the fact that the RBA never really contemplated a move into ZIRP and QE.

What happens next then?

Well as I noted recently, the burden of rebalancing may be tough to carry for those economies who have central banks brave enough to raise interest rates. Ironically of course and if it is really asset prices you are worried about, the risk is naturally that you just end up sucking in liquidity as you which in itself defeats the purpose of the hiking campaign (see Edward's recent piece on Norway for a Scandinavian perspective on this). Naturally, you can retort to Brazil like capital controls, but in a world where capital flows freely and where the global economies are largely interdependent, this is like trying to stop a freight train with a VW Polo. Also, allow me to finish with a small quibble of mine in relation to the sudden urge by part of central bankers to target asset prices. I mean, this is fine and all and for those who know a little bit about monetary policy this is not something completely new. The problem is merely that targeting asset prices may not only be counterproductive in a world where asymmetric liquidity conditions and carry flows are the norm, by targeting asset prices also entail targeting a price which is considerable more volatile than traditional prices (because I assume that forecasting long term asset prices is not as easy as many believe). In this way, a steady gaze at asset prices may also conflict with central banks' general propensity to favor incremental and gradual moves.

Whether this is the case in Australia, only time will tell. Yet, from the lovely fjords of Oslo, to the beaches of Rio, and on to the Great Barrier Reef policy makers may soon learn that you can indeed get too much of a good thing.

• International Paper (NYSE:IP) reported third quarter results of 37 cents a share, 14 cents above Zacks estimates, on inline revenues of $5.92 billion, off 13.1%. According to the company, at the end of its third quarter, "we began to see some modest improvements in demand in some segments of our paper and packaging businesses"

• Yahoo's (NASDAQ:YHOO) analyst meeting is due to be held at 11:00 ET

• Arcelor Mittal (NYSE:MT), the world's largest steel company, reported a $903 million third quarter profit, noting "We have seen the first signs of recovery in the third quarter...We should continue to see further gradual improvement through 2010, although the operating environment remains challenging"

• United Microelectronics (NYSE:UMC) reported third quarter earnings of 8 cents a share, 5 cents above Zacks estimates on revenues of $853 million, above Zacks estimates of $801 million, up 11.1%

• WellPoint (NYSE:WLP) reported third quarter earnings of $1.78 a share, 38 cents above Zacks projections on inline revenues of $15.21 billion

Raw materials and packaging used in the company's business include tomato paste, grains, beef, poultry, vegetables, steel, glass, paper and resin. Many of these materials are subject to price fluctuations from a number of factors. Commodity inflation has been constricting the company's margins.

In addition, the company operates in the highly competitive food industry and experiences worldwide competition in all of its principal products. This often forces the company to reduce its pricing, while increasing marketing or other expenditures, which in turn may have a material adverse effect on its profitability. Moreover, mounting competition - primarily from private labels - is creating pricing pressure across all product lines.

The company is also witnessing weak demand due to the global economic slowdown. Despite debt reduction initiatives by management, the debt position remains relatively high. The company has a debt-to-capitalization ratio of 72%.

However, Heinz's growth in domestic businesses, strengthening international operations, and focused resource allocation are optimistic factors for the company's outlook. Management is also strongly focused on the top 15 brands, which hold strong market positions and represent nearly 70% of total sales.

Furthermore, the company is restructuring by focusing on building the core portfolio, reducing costs to improve margins and generating cash flow.

For fiscal 2010, management plans to maintain sustainable profits through pricing and productivity gains (from its cost reduction efforts), which it expects will offset the 8% to 9% inflation in commodities.

Given, the near term concerns of lower volumes and higher commodity costs, we are downgrading our rating on the stock from Outperform to Neutral.

HNZ manufactures and markets processed food products worldwide. Its products primarily include ketchup, condiments & sauces, frozen food, soup, beans, meals & snacks, and infant foods.

Praxair’s highly efficient nitrogen-based system replaces its mechanically refrigerated freeze dryer with a system that is environmentally safer, more reliable and has greater processing capability. By utilizing the cooling value of ultra-cold liquid and gaseous nitrogen, the NCOOL system eliminates reliance on compressors and halogenated coolants (CFCs or other ozone-depleting substances). The system is used for precision cooling and temperature control of production lyophilizers, chemical reactors and other critical fluid cooling applications.

Based on the promising future prospects of liquid nitrogen cooling of pharmaceutical freeze dryers, Praxair (China) Investment Co. Ltd signed its first contract to supply liquid nitrogen.

China is showing solid signs of recovery. Infrastructure spending by the Chinese Government will create jobs and boost consumer demand in the short term. Thus, we expect growth to pick up in China this year and in 2010.

The auto, steel and chemical industries have announced a significant number of plant start-ups in the second half. Management thus expects its pipeline of new business to remain strong for at least the next five years. However, low natural gas prices have hurt the company’s top-and bottom-line results in the second quarter of 2009, which is likely to continue for the next couple of quarters.

The market for the design and installation of fire safety systems is served by numerous small firms. Of these, China Fire has emerged as the largest in the past five years. The company’s leading position in the domestic industry helped it to win a high percentage of bids, which is around 60%-70% of bids in the iron and steel industry.

China Fire is benefiting also from the Chinese iron and steel industry's Revitalization Scheme, which promotes production control, encourages industry consolidations and emphasizes the development of new technologies. This stimulus plan provides financial subsidies and loan discounts to leading iron and steel companies, allowing larger and more advanced steel producers to upgrade existing plants and develop new innovative facilities. China Fire sees huge growth potential for its Total Solutions business as the segment derives more than 80% of revenue from the iron and steel industry.

Although the company primarily serves the iron and steel industry, it is now looking to expand into other industrial sectors. In China, about three to five large-scale nuclear plants are expected to be built every year until 2020. This represents an attractive opportunity for China Fire to grow in a new industrial vertical as the Chinese government directs that at least 50% of the equipment used for new nuclear power plants should be sourced locally. As the largest industrial fire protection provider in China, China Fire will benefit from the government policy.

Given its brand reputation as a leading total solution provider and its comprehensive line of proprietary products, we believe China Fire is well-positioned to capitalize on the growth potential in China’s industrial fire protection market. We are upgrading our rating on the stock from Neutral to Outperform.

Chicago, IL – September 18, 2009 – Zacks.com announces the latest Industry Outlook. Today, Zacks Equity Research discusses the Coal sector, including Peabody Coal (BTU), Arch Coal Inc. (ACI), Rio Tinto (RTP) and Walter Energy (WLT).

The larger coal players with strong balance sheets will be able to capitalize on the current market environment in the form of acquisitions. With asset prices coming down from mid-'08 levels and smaller producers feeling the strain on margins, this represents opportunities to acquire reserves on the cheap.

In particular, we like companies with exposure to the international coal markets as well as the Powder River Basin (PRB) in the U.S. Companies like Peabody Coal (BTU) and Arch Coal Inc. (ACI) look attractive currently. Both have recently engaged in long-term growth acquisitions.



Peabody is the largest pure-play coal producer, with significant leverage to the Australian export market. Due to the high quality of coal produced and its proximity to Asia (emerging markets), Australian seaborne coal trades at a premium to all other coals.



Peabody would benefit especially when China and other Asian emerging markets begin to rebound. The stimulus packages enacted by the federal government during the recent months should start to pay dividends toward the end of '09.



Arch Coal has a significant amount of reserves and is a top-three producer in the PRB. In our opinion, PRB coal will be in great demand over the coming years. The significant coal-fired power plant build-out will increase annual thermal coal demand by more than 60 MM tons; approximately 50% of this new demand will be met by PRB supply. Its likely acquisition of Rio Tinto’s (RTP) Jacobs Mine will increase ACI's PRB market share while gaining operating synergies.



We also like companies with leverage to metallurgical coal markets. When the global economy starts to turn around, likely in the beginning of 2010, demand for steel and metallurgical coal should rise. Companies like Walter Energy (WLT) should fare well in this environment.



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Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5511.

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Mechel intends to increase the share of high-margin products manufactured under its Steel division. The company will process the cold-deformed reinforcement wire at its production unit in Moscow into quality wire rod highly demanded in construction. Mechel foresees an increase in demand for this new class of steel products. The company has already received an order for reinforcing wire of BMP production. 

Due to low carbon content and mechanical strengthening, the cold-deformed reinforcement wire has several advantages compared to hot-rolled reinforcement wire such as improved welding characteristics, increased toughness and durability, and lack of scale. Additionally, cold-deformed reinforcement wire has higher design resistance to expansion and compression allowing reduction of its expenditure at 10% to 15%.

Demand for steel in Russia is expected to be high in the coming years. Mechel and its subsidiaries have implemented a $5.2 billion investment program for 2008–2012, focusing on the development of its Mining and Steel businesses. About $3 billion would go to the Mining business, $2.2 billion to the Steel business, and $42 million to energy projects. Of this, $1.3 billion will be invested in the development of the Chelyabinsk metallurgical plant (Mechel’s primary steel production facility) until 2011.

The investments should increase total steel capacity by 35% to 6.5 million tons, besides cutting costs through a complete changeover to concasting. Chelyabinsk will increase its flat stainless sheet production by seven times to 300,000 tons and expand its range of construction and engineering steel. As a result, steel production should rise 12% and rolled products output should grow 26%.

Mechel is looking to invest $1.2 billion in the Mining segment. Part of the spending will be used to increase coal production at Southern Kuzbass by 47% to 21 million tons by 2011. Mechel recently obtained controlling stakes in the coal companies Elgaugol and Yakutugol (68.86% and 100%, respectively), paying $2.34 billion. The companies produce coal in the East Siberian region of Yakutia and had been the largest remaining standalone coal producers in Russia prior to their acquisition by Mechel. Their output is mainly high quality coking coal. Yakutugol produces 10 million tons of coal per year, most of which it has been selling to customers in Japan and Korea. The company plans to increase this output to 15 million tons and redirect it to the domestic market.

We maintain our Neutral recommendation on the stock.

(Editor’s Note: The following is an excerpt from an article in the Exchange-Traded Funds Report in July. Subscribers to ETFR can read the complete piece here.)

Specialty-sector ETFs—also called “thematic” ETFs—have emerged as a major force in the ETF industry.

These ETFs run the gamut of investment possibilities, but have one thing in common: They look past traditional size and sector designations to carve out new investment areas, often driven by a single investment thesis.

Clean energy, infrastructure, nuclear power—by our count, there are now more than 40 of these unique ETFs on the market, with more than $10 billion in assets under management.

Investment manager Van Eck Global has been one of the most successful companies in carving out a foothold among specialty ETFs. Its Market Vectors Gold Miners ETF (NYSE Arca: GDX) is the largest specialty ETF of all, with almost $5 billion in assets.

“We’re looking for compelling investment themes that we believe in for the long term, where the ETF basket approach can be a great tool for market participants,” said Adam Phillips, managing director of Market Vectors, “whether that be for the buy-and-hold investors or the trading community.”

Of course, some investors see things differently.

Rick Ferri, founder of the advisory firm Portfolio Solutions and author of “The ETF Book,” calls thematic ETFs “gimmicky.”

“We don’t use any thematic funds in our management here,” said Ferri. Ferri, a former broker himself, believes thematic ETFs are less popular with independent advisers than they are with brokers for a simple reason: story. He says they are an easy sale to clients who can relate to specific areas like clean water or other environmentally motivated ETFs.

“They come out when they happen to be popular in the news,” Ferri said. He believes they do well as brokers buy them up (sometimes driving the actual price of the ETF up) but that they tend to fall off six to 18 months later.

Roger Nusbaum, portfolio manager and chief investment officer for financial planner Your Source Financial, disagrees.

“In terms of long-term investing and the context of diversified portfolios, I absolutely think there’s utility [in them],” he said. Nusbaum uses them, as well as individual stocks, in his sector-based approach to portfolio construction. He has used the PowerShares Water Resources Portfolio (NYSE Arca: PHO) in client accounts since its launch, for instance, saying he tends to incorporate it as part of the allocation to industrials.

With regard to price run-ups, Nusbaum says some specialty sectors can be “faddish” in their behavior. If a fund covering solar energy jumps by 50%, and you know the industry is not going to fully develop for years to come, he suggests it might be time to reduce your exposure until the price becomes more reasonable.

Slicing & Dicing Themes

One of the most common questions asked by investors is, “Which ETF covers this?” Indeed, it’s often hard to even know what specialty-sector ETFs are available, as by definition they fall into narrow categories unlikely to be highlighted as an “asset class” in the pages of the Wall Street Journal. With so many fund launches, it can be a challenge to simply keep up with what products are on the market.

With that in mind, we have compiled an overview.

Alternative Energy

Last year’s run-up in energy prices and rising concerns about peak oil have combined to dramatically increase investor interest in energy alternatives. From relatively diversified funds to those targeting just solar or wind, investors can now use ETFs to access energy alternatives in practically any flavor they like.

Largest ETF: The PowerShares WilderHill Clean Energy Portfolio (NYSE Arca: PBW) was the first and is still the largest of these ETFs, with $743 million in assets under management. Some consider its exclusive focus on U.S.-listed names limiting, as much of the alternative energy industry is focused abroad. But the fund gains some exposure to these markets via ADRs.

Coal

Coal is the cheapest source of BTUs on the planet, easily beating oil, gas, wind, solar, hydro and nuclear. In addition, both China and the U.S. have huge domestic supplies of coal, and spiking oil prices are encouraging further development of the resource.

Largest ETF: The largest coal ETF by far is the Market Vectors Coal ETF (NYSE Arca: KOL), with $277 million in assets under management. The ETF holds a global portfolio of coal companies, primarily focused on the mid-cap miner space. It is 49% exposed to U.S. companies, with other significant positions in China (23%) and Indonesia (15%).

Nuclear

The long-term case for nuclear energy is clear and clean: The underlying fuel is so plentiful that we will never run out of it, and, when operating safely, nuclear power plants produce zero emissions. Once built, nuclear power is also the cheapest kind of energy on the planet.

Largest ETF: Three ETF companies offer nuclear energy ETFs. The largest is the Market Vectors Nuclear Energy ETF (NYSE Arca: NLR), with $166 million in assets. The fund has a large position in uranium miners (40% of the portfolio), with other concentrations in power generators and plant construction companies.

Commodities

The commodities boom raised the profile of “stuff” as an investment, and ETFs have made the area more accessible. Specialty-sector funds often focus on companies that produce commodities, like water or steel, that do not have liquid futures contracts.

Largest ETF: The largest hard assets ETF is the Market Vectors Agribusiness ETF (MOO), with nearly $1.5 billion in assets under management. Close behind is the PowerShares Water Resources ETF (NYSE Arca: PHO), with $1.2 billion in assets. Other areas of the market include steel, timber and broad-based commodity stocks.

Infrastructure

The term infrastructure is nearly as sweeping as commodities; it covers everything from companies involved in the construction and repair of roads and bridges to those that build and maintain power grids, telecommunications networks, and sewage systems. There’s no denying that infrastructure is a big deal these days: Developed countries desperately need to restore aging systems, and emerging markets need to actually build theirs. As with alternative energy, government stimulus funds can only add to the attraction of this sector.

Largest ETF: The iShares S&P Global Infrastructure Index Fund (NYSE Arca: IGF) is the largest infrastructure ETF available today, with $267 million in assets. See Murray Coleman’s feature on page 6 of this issue for a complete review of the infrastructure ETFs.

Transportation

If oil is the lifeblood of the industrialized world, transportation is the circulatory system. It’s no accident that the world’s (arguably) first stock index was the Dow Jones Transportation Average. And it’s also no surprise that there are a few ETFs focused on transportation.

Largest ETF: The Claymore/Delta Global Shipping ETF (NYSE Arca: SEA) is the largest transportation ETF, with more than $70 million in assets. SEA is sometimes seen as a leading indicator both of economic activity and commodities demand, since rising rates for ships mean incipient increases in industrial production on the receiving end of those shipments.

Green

Not only are there clean energy ETFs, but there are also ETFs that take environmentally friendly approaches in other ways. Two funds and an ETN—the only one in this survey—focus on ecological innovation, such as combating global warming.

Largest ETF: The largest ETF of the bunch is the PowerShares Cleantech Portfolio (NYSE Arca: PZD), which invests in a variety of companies whose products help improve productivity while minimizing the consumption of natural resources. PZD has $123 million in assets.

Miscellaneous

And finally, there’s the “miscellaneous” catch-all category. The funds falling into this category include the only available gaming ETF, a fund covering luxury items and another tracking the Chinese real estate market.

Largest ETF: The largest ETF of the bunch is the Market Vectors Gaming ETF (NYSE Arca: BJK), which invests in gaming (read: gambling) companies around the world. It has roughly $108 million in assets.

All major steel producing countries like China, Japan, Germany, the U.S., Brazil, Turkey, Russia and Ukraine showed peak monthly figures so far this year. Production in the Middle East, where demand was buoyant last year due to booming infrastructure spending, edged up by 2.5% in July. Monthly steel output in China, the world’s biggest producer and consumer of steel, climbed 12.6% to 50.7 million tons. Steel production in India also increased, but only by a modest 4.3% to 4.7 million tons during the month.

However, global steel production was down 19.9% to 652.9 million tons for the first 7 months of 2009 compared with the same period a year ago. North America posted a 41.6% fall in year-to-date steel production while Europe saw a drop of 42.1% during the same period. Steel output in Asia was down 6.1%, with Japan posting a production decline of 38.5%.

Key steel consuming industries like auto, shipbuilding and construction experienced weak demand in the last quarter, forcing global steel makers to cut production levels. U.S. Steel Corp. (X) had slashed production by almost 62% during the second quarter, while Korean steel maker POSCO (PKX) cut production by about 15% during the period. The operating environment deteriorated so sharply that POSCO was forced to lower production for the first time in its history in December last year.

Given our expectations for weak steel demand through the rest of 2009, we believe that global steel production will continue to be lower compared to last year. On the other hand, given the declining inventory levels, we believe the rate of deterioration in steel production will moderate in the coming months.

Demand for U.S. Steel’s flat-rolled steel has improved after bottoming in April and May, this year and is likely to improve going forward. The largest steel producer in the U.S. expects mill-operating rates to exceed 50% in the current quarter, up from 32% in the prior period.

U.S. Steel acquired the Hamilton and Nanticoke plants in Ontario from Canadian peer Stelco Inc. for about $1.1 billion in 2007. The Hamilton operation has an annual production capacity of about 2 million tons. The facility also consists of galvanizing lines and a cold mill. However, the company does not plan to restart these for now.

U.S. Steel had closed the Hamilton blast furnace in November 2008. It suspended the remaining operations at Hamilton and the Nanticoke operation in March 2009 due to a drop in demand. Both the facilities were running below half of their capacity. The shutdown resulted in lay offs of about 1500 workers. However, the company recalled about 800 to 950 employees at the Hamilton plant in July.

A day before, workers of U.S. Steel approved Lakeside’s bid to acquire the Ontario production unit. Lakeside Steel is a steel pipe and tubing manufacturer in Welland, Ontario.

The Canadian government has alleged U.S. Steel of failing to meet commitments on production and employment. While acquiring Stelco in 2007, U.S. had agreed to produce 3.95 million tons of steel per year and employ about 3,100 workers through Nov. 1, 2007 to Oct. 31, 2010. A federal court in the U.S. will evaluate these charges today.

We maintain our Neutral recommendation on the stock.

Yesterday, fifteen of the thirty DJIA components closed higher; 245 of the S&P500 closed up and 42 of the NASDAQ100 finished on higher ground.  Trading was subdued with NYSE volume of 1.05 billion well below last year's average of 1.49 billion.  The DJIA gained 4 points to close virtually flat at 9543; the NASDAQ and S&P500 each recorded gains of 0.01%.  Declining issues beat those that advanced eight to seven.  Treasuries were mixed after the government successfully auctioned $39 billion in five-year notes.  The Treasury is scheduled to auction $28 billion of 7-year notes today.

Five of the S&P500 sectors recorded gains.  The consumer services sector, which advanced 1.2% yesterday, edged up 0.5% on improved expectations for the consumer segment due to better-than-projected housing numbers and confidence report.  Healthcare shares issues were off 0.2%.

Basic material and industrial shares each declined 0.7% on Chinese Premier Wen Jiabao's comments regarding economic difficulties in that country, particularly domestic consumption.  The Chinese cabinet reportedly is assessing steps to control overcapacity in steel and cement production. US Steel (NYSE:X) and Nucor (NYSE:NUE) each dropped 2.4%. 

DJIA components 3M (NYSE:MMM) fell 1.7%, Caterpillar (NYSE:CAT) was off 1.2%, and General Electric (NYSE:GE) declined 1.3%.  Housing news, nevertheless, continued to signal a leveling off in the sector, with DR Horton (NYSE:DHI) up 5.7%, Beazer Homes (NYSE:BZH) up 5.0%, and Lennar (NYSE:LEN) up 4.1%.  Hovnanian Enterprises (NYSE:HOV) rose 43 cents, or 9.4%, to $5

Three months later, the trend continues. Production levels, particularly in the North Sea and the Middle East, are increasing. Costs continue to be reined in. And analysts are raising their full-year profit forecasts further. During the past few weeks, 292 profit forecasts have been increased.

Commodity Prices Playing A Role

Rising oil prices are helping. Though significantly down from last year (crude peaked at $147.27 on Jul 11, 2008), crude rebounded throughout the second quarter. Furthermore, given the likelihood of economic expansion in the coming months, it is probable that a floor for oil prices has been set.

Natural gas prices may have hit a bottom. Natural gas started the year at $6.50 per million BTU and fell to under $4.25 by the end of the first quarter. The second-quarter drop was less severe, however, with natural gas ending June at about $4.

While there is still some weakness, a bottom seems to be setting.

Expenses Are Being Controlled

The biggest benefit to the E&P companies, however, has been costs.

CFOs have limited expansion to only what cash flows allowed. In addition, they've also worked to limit overhead costs.

The other positive factor is drilling costs. Apache's (APA) North American President, John A. Crum, noted on the conference call that his company "can drill and complete a well today for roughly two-thirds of last year's costs." In addition to higher demand last year for parts and services, several other commodities, such as steel, were also in a bubble.

Analysts May Have Been Too Pessimistic

Though conditions do seem to be improving for the industry, overly pessimistic profit forecasts are contributing to the upward revisions. Brokerage analysts factored in crude prices that were too low, underestimated cost reductions and incorrectly projected production rates.

We saw the impact of this with both the number of positive second-quarter surprises and the resulting increases in full-year earnings estimates:

• Apache (APA) beat by 31 cents with earnings of $1.31 per share. Analysts subsequently raised their 2009 profit projections by 66 cents, resulting in a Zacks Consensus Estimate of $4.85 per share.
• Concho Resources (CXO) beat by 15 cents with adjusted earnings of 34 cents per share. Analysts subsequently raised their 2009 profit projections by 25 cents, resulting in a Zacks Consensus Estimate of $1.12 per share.
• Noble Energy (NBL) beat by 11 cents with earnings of 66 cents per share. Analysts subsequently raised their 2009 profit projections by 40 cents, resulting in a Zacks Consensus Estimate of $2.82 per share.
• St. Mary Land & Exploration Company (SM) topped expectations for breakeven results with profits of 24 cents per share. Analysts subsequently raised their 2009 profit projections by 42 cents, resulting in a Zacks Consensus Estimate of 47 cents per share.
• Newfield Exploration (NFX) beat by 20 cents with earnings of $1.28 per share. Analysts subsequently raised their 2009 profit projections by 43 cents, resulting in a Zacks Consensus Estimate of $4.47 per share.

CXO is a Zacks #1 Rank ("strong buy") stock. NBL, NFX and SM are Zacks #2 Rank ("buy") stocks. APA is a Zacks #3 Rank ("hold") stock. (Apache's rating is hurt by the fact that nearly one-third of the covering analysts have yet to adjust their profit forecasts. This, however, does leave open the possibility of more positive estimate revisions occurring over the next several weeks.)

All of these stocks belong to the Oil-US Exploration & Production industry group.

Related ETFs

Though there are several energy-related ETFs, iShares Dow Jones U.S. Oil & Gas Exploration & Production (IEO) provides the best exposure. The fund has a good combination of focusing on the E&P companies and a high level of average daily trading volume.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Sector Rank as of Aug 12
Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY09 Revisions Ratio	FY09 Estimates Revised Up	FY09 Estimates Revised Down
Consumer Staples	2.65	2.67	3.12	405	130
Conglomerates	2.67	2.78	1.15	62	54
Retail-Wholesale	2.74	2.75	2.21	711	321
Computer and Technology	2.87	2.87	1.69	1692	1002
Consumer Discretionary	2.93	2.90	1.32	475	359
Auto-Tires-Trucks	2.93	3.04	1.04	88	85
Medical	2.95	2.94	1.91	1311	685
Oils-Energy	2.97	2.99	1.19	762	640
Business Services	2.97	2.98	1.49	234	157
Utilities	3.04	3.00	0.74	168	227
Basic Materials	3.08	3.11	1.00	325	326
Industrial Products	3.10	3.07	1.09	317	291
Finance	3.14	3.12	1.06	1433	1357
Construction	3.18	3.17	1.04	161	155
Aerospace	3.20	3.28	0.70	88	125
Transportation	3.36	3.45	0.57	213	371

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

Zacks Investment Research

Peabody has sufficient liquidity with $446 million of cash in hand at the end of the second quarter of 2009. This will help the company to explore earnings accretive investment opportunities in high-growth markets, particularly at a time when valuations are depressed.

However, Peabody’s profitability in recent quarters got affected by lower demand of coal. Decreased demand for steel and electricity caused by a global slowdown has pushed coal prices down from its highs of 2008. The Energy Information Administration (EIA) estimates that the U.S. coal consumption will be down 2.6% in 2009, while electricity demand will shrink 1.6%.

Uncertainty surrounding the depth and span of the current global downturn still remains. Although recent rhetoric may suggest a bottoming or stabilization of markets, definitive signs of recovery are yet to be seen. Going forward, Peabody’s performance will depend upon how fast coal prices recover following the global economic recovery.

The table below comes from Railfax, which tracks activity on the nation's rails http://railfax.transmatch.com/. It shows very little change in activity. Look at the 4-week rolling average (the weekly numbers can contain a lot of noise, the 4-week average smoothes them out) relative to the year-to-date numbers. For total rail traffic, there has been only a 0.2% difference in the year-over-year rate of decline, down 18.6% instead of down 18.8%.

The amount of rail traffic is not just important to the big railroads like Norfolk Southern (NSC) and Union Pacific (UNP). They are a measure of how much stuff is being shipped. If stuff is not moving, the economy is not moving. While there has not been that much improvement in overall traffic, there has been some positive (less negative) movement in most of the categories.

Six of the eight categories are showing lower year-over-year declines (note there are other things carried by rail that are not in one of the 8 categories shown, so some of that miscellaneous traffic could be down).

The major area of weakness is in intermodal traffic, which are the truckloads carried long distance by the rails and then transferred to 18 wheelers for final delivery. This tends to be the highest value cargo carried by the rails. It is also the area where rail competes most directly with trucks, and it is possible that the rails are losing share to the truckers.

There have been fairly dramatic improvements in other areas. Most notably in Autos, which on a year-to-date basis are down 49.6%, but, over the last four weeks, are down just 39.6% and the latest week (remember volatile from week to week so take with a grain of salt) down just 32.2%. This meshes with the success of the Cash for Clunkers program, and the much smaller declines in auto sales registered in July than earlier this year (an actual increase for Ford (F).

The Food and Grain numbers could be a reflection of harvest conditions as much as final demand, but both are major U.S. exports, so the lower declines could be indicating some more improvement on the trade front.

Coal is largely used for producing electricity, and so far this has been a relatively cool summer, so I would not read too much into the minor deterioration in the coal traffic for the last four weeks relative to the year-to-date numbers.

The improvement in Metals shipments is noteworthy, since they are primary inputs for other products. If manufacturers are ordering more steel and copper than previously, it is probably because they are planning on making something with it. The alternative is that their inventories got drawn too low.

While the overall traffic number is essentially stable, and rail traffic down year over year in the high teens is pretty ugly, digging deeper in the numbers does show some signs of hope that things might be starting to get better, and, at least, it looks like things are no longer getting worse.

Chicago, IL – July 24, 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: WESCO International (WCC), Anixter International (AXE), W.W. Grainger (GWW), United Parcel Service, Inc. (UPS) and Hershey (HSY).

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:

WESCO Misses, Guidance Down

WESCO International (WCC) announced second-quarter results that missed the consensus revenue estimate by 15.5% and the EPS estimate by 12 cents. Results appear weaker than the peer group, which includes Anixter International (AXE), W.W. Grainger (GWW) and privately-held Graybar Electric.

Revenue of $1.16 billion was down 1.7% sequentially and 27% year over year. Excluding the impact of currency, revenue was down 25.4%. The sequential decline was due to seasonality and the impact of the recession. Lower commodity prices (especially copper and steel) were responsible for 30% of the year-over-year decline. Recession-related weakness accounted for the rest. Revenue per employee declined around 18% from the year-ago period, but was up 2.8% sequentially.

UPS: Revenues Fall

Today, United Parcel Service, Inc. (UPS) posted diluted EPS of 49 cents per share before non-operating items, down 44% year over year, from 85 cents per share earned a year ago. The results matched the consensus estimate, but were below our 51-cent estimate due to lower-than-expected revenues.

Revenues dropped 17% to $10.8 billion from $13.0 billion in the prior-year-quarter and compare to a consensus estimate of $11.02 billion and our estimate of $11.18 billion. Reflecting the global economic slump, consolidated volume declined 4.7% to 914 million, while average revenue per piece fell 10.5% to $9.78, due to lower fuel surcharge revenues, a reduction in package weights, and the negative impact of currency.

Hershey Stuns; Raises Guidance

Hershey (HSY) reported robust results for the second quarter of 2009 and beat consensus by $0.08. Quarterly earnings (excluding the impact of unusual charges) were $0.43 per diluted share, up a strong 48.3% from $0.29 reported in the year-ago quarter.

Net sales increased 5.9% year-over-year to $1.17 billion driven by favorable pricing and international sales growth, which were partially offset by volume declines associated with pricing elasticity and unfavorable foreign exchange. Further, management stated that core brands such as Kisses are responding to the investments in advertising, in-store programming and merchandising. The Easter season and the kick-off of the annual S’mores promotion contributed positively to the top-line. In the channels measured by syndicated data, U.S. market share during the second quarter as well as year-to-date periods increased 0.5 points.

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

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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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Revenues were down 49% year-over-year to $1.80 billion. The company attributed the decline to weak demand for steel and coking coal as well as foreign exchange losses.

The Steel segment generated 55% of revenues, which slipped 50% year over year to $643.20 million in the first quarter. Unfavorable market conditions and low demand for steel from the end consumer markets -- especially auto, construction and machinery -- resulted in the decline.

Net loss in the segment amounted to $358.10 million as against net income of $184 million in the year ago quarter. Production of steel was down 30% to 1.10 million tons and that of rolled products was down 22% to 1.00 million tons when compared to the production level of the year ago period.

In 2009, Mechel foresees demand for steel from the Middle East and Southeast Asia. The company plans to operate facilities at 100% capacities. By May 2009, Mechel had increased steel-making capacity utilization to 94%, metallurgical commodity products capacity utilization to 95%, including rolled products capacity to about 99%, hardware capacity to about 74%, while forgings and stampings crossed 58%.

The Mining segment generated 29% revenues. Sales in the segment plunged 60% year-over-year to $344.20 million driven by a sharp decline in demand for coking coal. EBIDTA margin in the segment was 10.6% compared with 48.8% in the year-ago period driven by higher production costs. Reckoned year over year, production of coal and coking coal more than halved to 3.40 million tones and 1.00 million ton, respectively. Production of steam coal was down 19% year-over-year to 2.40 million tons.

Mechel is banking on Asian markets, particularly, China, Japan and South Korea. In June 2009, Mechel through its subsidiary Mechel Trading AG signed a long-term contract with South Korean Hyundai Steel to supply 300,000 tons of coking coal per annum from 2010. The company has a total supply contract of 2.00 million tons of coking coal and 2.30 million tons of steam coal in 2009 produced at its Yakutugol and Southern Kuzbass mines.

The Power segment produced 12% of revenues, which totaled 138.20 million, down 28% from the same quarter of the previous year. Net income was negligible at $0.20 million compared with net income of $15.00 million in the year ago quarter. The economic crisis resulted in an overall demand for electricity. Moreover, Mechel’s power is expensive as compared with the liberalized electricity in Russia.

The Ferroalloy segment yielded 4% of revenues, or $53.9 million. Net loss of $328.70 million was driven by higher production costs and lower product prices. Mechel is increasing its output of high quality ferrochrome, an alloy required to produce stainless and special steels.

Mechel has a large capital-spending program. It reported capital expenditures of $96.10 million in the first quarter of 2009. Total debts were $5.8 billion in the quarter. Higher debts resulting in greater interest burden are a drag on the company’s profitability.

Mechel has not provided any financial guidance for the rest of 2009. There is no update on the refinancing the $1.5 billion bridge loan and a $2.0 billion loan which had been used to acquire the Yakutugol coal mine in 2007.  We maintain our Hold rating on the stock.

Mechel OAO (MTL), one of the leading Russian mining and metals companies, signed a contract to supply coking coal concentrates and steam coal of various grade to companies in China, Japan and South Korea. Mechel will supply about 2 million tons of coking coal concentrates and about 2.3 million tons of steam coal of various grades to the companies (not disclosed) in 2009.The coking coal and steam coal exports will be performed by Mechel Mining OAO's subsidiary, Yakutugol OAO. The company has not provided any financial details associated these contracts.

Mechel has established itself as one of the largest producers of coking coal in the world by acquiring 100% interests in the U.S. entities Bluestone Industries, Inc. and Dynamic Energy, Inc. (both West Virginian corporations) and JCJ Coal Group, LLC, a Delaware limited liability company and some of its West Virginia affiliates. These companies are engaged in the mining, processing and sale of premium quality hard coking coal. These acquisitions have helped Mechel integrate backwards. The company is capable of internally sourcing 100% of the coking coal, 92% of the iron ore and 55% of the nickel requirements in its steel business. In addition, the company is the only specialty steel manufacturer in the world capable of internally sourcing most of these raw materials. Mechel controls 23% of the coking coal capacity in Russia.

Mechel is confident about its operations in China inspired by a strong demand for iron ore and coking coal concentrates as well as ferroalloys in the Chinese steel industry. In contrast, Mechel is witnessing declining demand for its products in the domestic markets. Earlier, during a conference call in the beginning of June 2009, the company had stated that Mayr-Melhnof Karton Ag (MMK) and Novolipetsk Steel (NLMK), its key customers in Russia were no longer purchasing its coking coal. This apart, Mechel's large capital-spending program and high debt leading to a greater interest burden are matters of concern. Although the company received a credit line totaling $1 billion from Gazprombank OAO to manage its short-term liabilities, we remain concerned about Mechel's high debt, in view of its tight cash position.

Thus, we rate the shares a Hold and set a six-month target price of $9.50.

Chicago, IL - June 25, 2009 - Zacks.com announces the latest Industry Outlook. Today's outlook from Zacks Equity Research analyst Neil Malkin discusses the Coal sector. Highlighted stocks include: Peabody Coal (BTU), Arch Coal Inc. (ACI), Rio Tinto (RTP) and Walter Energy (WLT).

The larger coal players with strong balance sheets will be able to capitalize on the current market environment in the form of acquisitions. With asset prices coming down from mid-'08 levels and smaller producers feeling the strain on margins, this represents opportunities to acquire reserves on the cheap.

In particular, we like companies with exposure to the international coal markets as well as the Powder River Basin (PRB) in the U.S. Companies like Peabody Coal (BTU) and Arch Coal Inc. (ACI) look attractive currently. Both have recently engaged in long-term growth acquisitions.

Peabody is the largest pure-play coal producer, with significant leverage to the Australian export market. Due to the high quality of coal produced and its proximity to Asia (emerging markets) Australian seaborne coal trades at a premium to all other coals.

Peabody would benefit especially when China and other Asian emerging markets begin to rebound. The stimulus packages enacted by the federal government during the recent months should start to pay dividends toward the end of '09.

Arch Coal has a significant amount of reserves and is a top-three producer in the PRB. In our opinion, PRB coal will be in great demand over the coming years. The significant coal-fired power plant build-out will increase annual thermal coal demand by more than 60 MM tons; approximately 50% of this new demand will be met by PRB supply. Its likely acquisition of Rio Tinto (RTP) Jacobs Mine will increase ACI's PRB market share while gaining operating synergies.

We also like companies with leverage to metallurgical coal markets. When the global economy starts to turn around, likely in the beginning of 2010, demand for steel and metallurgical coal should rise. Companies like Walter Energy (NYSE: WLT) should fare well in this environment.

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Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5511.

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As stated in earlier outlook summaries, benchmark metallurgical prices for fiscal 2009 have been set around $120/mt -- off markedly from the $300/mt level seen in 2008 but still above historical met price levels. This means that in 2010, producers will still realize triple digit average prices for met coal. This also represents a more long-term indication of what the implied floor for metallurgical coal prices are due to the perfect storm of negative economic data that pervaded the global markets during pricing for this year.

OPPORTUNITIES

The larger coal players with strong balance sheets will be able to capitalize on the current market environment in the form of acquisitions. With asset prices coming down from mid-'08 levels and smaller producers feeling the strain on margins, this represents opportunities to acquire reserves on the cheap.

In particular, we like companies with exposure to the international coal markets as well as the Powder River Basin (PRB) in the U.S. Companies like Peabody Coal (BTU) and Arch Coal Inc. (ACI) look attractive currently. Both have recently engaged in long-term growth acquisitions.

Peabody is the largest pure-play coal producer, with significant leverage to the Australian export market. Due to the high quality of coal produced and its proximity to Asia (emerging markets) Australian seaborne coal trades at a premium to all other coals. Peabody would benefit especially when China and other Asian emerging markets begin to rebound. The stimulus packages enacted by the federal government during the recent months should start to pay dividends toward the end of '09.

Arch Coal has a significant amount of reserves and is a top-three producer in the PRB. In our opinion, PRB coal will be in great demand over the coming years. The significant coal-fired power plant build-out will increase annual thermal coal demand by more than 60 MM tons; approximately 50% of this new demand will be met by PRB supply. Its likely acquisition of Rio Tinto's (RTP) Jacobs Mine will increase ACI's PRB market share while gaining operating synergies.

We also like companies with leverage to metallurgical coal markets. When the global economy starts to turn around, likely in the beginning of 2010, demand for steel and metallurgical coal should rise. Companies like Walter Energy (WLT) should fare well in this environment.

WEAKNESSES

Appalachian producers continue to face productivity problems via shortage of skilled labor, MSHA inspections, and other permitting and regulatory hurdles relating to the Clean Water Act. While the falling cost of steel and fuel will reduce the cost of direct materials, these other issues will more than offset them. If the global economy -- particularly regarding its demand for steel -- is slow to recover, this could mean prolonged price suppression for CAPP and NAPP coal, which could lead to reduced production, idled mines and higher unit costs.

More recently there have been several debates regarding the effectiveness of "cap-and-trade." Basically designed to impose a per-ton expense on carbon dioxide emissions, the coal and utility industries have been opposed to this system, claiming that it will drive up the cost of coal and put an effective tax onto people living in the Midwest U.S.

The cap and trade system may pose long-term problems for the coal industry as it would increase the cost of coal, thereby decreasing its competitiveness as an energy source (and decreasing demand for it) and would force businesses to use less reliable and more expensive forms of energy.

Assumptions for 2009 Average Prices:

Thermal Coal Prices: $60- $75 per ton Metallurgical Prices: $110 - $130 per tonZacks Investment Research

As stated in earlier outlook summaries, benchmark metallurgical prices for fiscal 2009 have been set around $120/mt -- off markedly from the $300/mt level seen in 2008 but still above historical met price levels. This means that in 2010, producers will still realize triple digit average prices for met coal. This also represents a more long-term indication of what the implied floor for metallurgical coal prices are due to the perfect storm of negative economic data that pervaded the global markets during pricing for this year.

OPPORTUNITIES

The larger coal players with strong balance sheets will be able to capitalize on the current market environment in the form of acquisitions. With asset prices coming down from mid-'08 levels and smaller producers feeling the strain on margins, this represents opportunities to acquire reserves on the cheap.

In particular, we like companies with exposure to the international coal markets as well as the Powder River Basin (PRB) in the U.S. Companies like Peabody Coal (BTU) and Arch Coal Inc. (ACI) look attractive currently. Both have recently engaged in long-term growth acquisitions.

Peabody is the largest pure-play coal producer, with significant leverage to the Australian export market. Due to the high quality of coal produced and its proximity to Asia (emerging markets) Australian seaborne coal trades at a premium to all other coals. Peabody would benefit especially when China and other Asian emerging markets begin to rebound. The stimulus packages enacted by the federal government during the recent months should start to pay dividends toward the end of '09.

Arch Coal has a significant amount of reserves and is a top-three producer in the PRB. In our opinion, PRB coal will be in great demand over the coming years. The significant coal-fired power plant build-out will increase annual thermal coal demand by more than 60 MM tons; approximately 50% of this new demand will be met by PRB supply. Its likely acquisition of Rio Tinto's (RTP) Jacobs Mine will increase ACI's PRB market share while gaining operating synergies.

We also like companies with leverage to metallurgical coal markets. When the global economy starts to turn around, likely in the beginning of 2010, demand for steel and metallurgical coal should rise. Companies like Walter Energy (WLT) should fare well in this environment.

WEAKNESSES

Appalachian producers continue to face productivity problems via shortage of skilled labor, MSHA inspections, and other permitting and regulatory hurdles relating to the Clean Water Act. While the falling cost of steel and fuel will reduce the cost of direct materials, these other issues will more than offset them. If the global economy -- particularly regarding its demand for steel -- is slow to recover, this could mean prolonged price suppression for CAPP and NAPP coal, which could lead to reduced production, idled mines and higher unit costs.

More recently there have been several debates regarding the effectiveness of "cap-and-trade." Basically designed to impose a per-ton expense on carbon dioxide emissions, the coal and utility industries have been opposed to this system, claiming that it will drive up the cost of coal and put an effective tax onto people living in the Midwest U.S.

The cap and trade system may pose long-term problems for the coal industry as it would increase the cost of coal, thereby decreasing its competitiveness as an energy source (and decreasing demand for it) and would force businesses to use less reliable and more expensive forms of energy.

Assumptions for 2009 Average Prices:

Thermal Coal Prices: $60- $75 per ton Metallurgical Prices: $110 - $130 per tonZacks Investment Research

Chicago, IL - June 16, 2009 - Zacks Equity Research highlights Maxim Integrated Products (MXIM) as the Bull of the Day and Sonic Innovations (SNCI) the Bear of the Day. In addition, Zacks Equity Research provides analysis on Valero (VLO), Tesoro (TSO) and ConocoPhillips (COP).

Full analysis of all these stocks is available at http://at.zacks.com/?id=2676.

Here is a synopsis of all five stocks:

Bull of the Day:

Maxim Integrated Products (MXIM) is an OEM of semiconductor analog and mixed signal ICs. March quarter results were short of consensus estimates, although they were in-line with management's own expectations.

Forward guidance is for a revenue increase of 3-12% in the June quarter. Order rates started picking up in three of the four end markets, and the fourth market is expected to see increase in Q4.

We are reiterating our Buy rating on MXIM shares, given recent market share gains, healthy product pipeline, diversity in the company's markets, strong cash generating capabilities and cheap valuation.

Bear of the Day:

Sonic Innovations (SNCI) announced that its shareholders at the annual shareholder meeting approved a name change of the company to Otix Global, Inc, where Otix Global is to become the parent company of Sonic Innovations. SNCI filed with the Securities and Exchange Commission its Form 10-Q for the quarterly period ended March 31, 2009.

Revenue from SNCI's German subsidiary is at risk of declining from unsuccessful attempts at renegotiating insurance contracts that is required as a result of new legislation passed by the Federal Council of Germany in Nov. 2008 that became effective April 1, 2009.

Our price target of $0.80 per share is based on a price-to-sales multiple of roughly 0.3x our FY09 sales estimate.

Latest Posts on the Zacks Analyst Blog:

Refiners Lose Out in Cap & Trade

While there are many important changes that this 946-page tome is aiming to bring about, we are focusing here on one central part of the proposed legislation -- the Cap & Trade regime. The bill creates winners and losers among different energy producing and consuming sectors through its initial free awards of emission permits.

Approximately 85% of the permits are doled out for free, with the rest auctioned off. According to a preliminary estimate by the EPA, a permit to emit one ton of carbon dioxide or equivalent will be worth $11-$15 in 2012, with the value of all permits at around $60 billion in 2012. By the 2025, the value would be higher, according to EPA estimates, rising to $22-$28, with the total value at around $113 billion.

Oil producers and refiners, such as Valero (VLO), Tesoro (TSO) and ConocoPhillips (COP) are clearly on the losing side, having been allocated a very small portion of the permits (2%). This forces them to purchase permits on their own account. Electric utilities and other consuming industries such as steel, cement and paper manufacturers benefiting from the giveaways.

Get the full analysis of all these stocks by going to http://at.zacks.com/?id=5507.

About the Bull and Bear of the Day

Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.

About the Analyst Blog

Updated throughout every trading day, the Analyst Blog provides analysis from Zacks Equity Research about the latest news and events impacting stocks and the financial markets.

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 analyst 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 by visiting http://at.zacks.com/?id=5508.

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=5509.

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
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While there are many important changes that this 946-page tome is aiming to bring about, we are focusing here on one central part of the proposed legislation -- the Cap & Trade regime. The bill creates winners and losers among different energy producing and consuming sectors through its initial free awards of emission permits.

Approximately 85% of the permits are doled out for free, with the rest auctioned off. According to a preliminary estimate by the EPA, a permit to emit one ton of carbon dioxide or equivalent will be worth $11-$15 in 2012, with the value of all permits at around $60 billion in 2012. By the 2025, the value would be higher, according to EPA estimates, rising to $22-$28, with the total value at around $113 billion.

Oil producers and refiners, such as Valero (VLO), Tesoro (TSO) and ConocoPhillips (COP) are clearly on the losing side, having been allocated a very small portion of the permits (2%). This forces them to purchase permits on their own account. Electric utilities and other consuming industries such as steel, cement and paper manufacturers benefiting from the giveaways.

Here are the salient features of the Cap & Trade system as proposed in the bill:

• Starting in 2012, industries would be required to reduce their emissions to specific targets through the middle of the century. The cap-and-trade system comes completely into force by 2016.
• The bill aims to cut emissions by 17% below the 2005 level by 2020 and 42% by 2030. By 2050, emissions are expected to drop by 80% below the 2005 level.
• The bill requires companies to buy permits to be allowed to emit carbon dioxide and other polluting gases. If a company cuts its emissions by more than the statutory limit, then it can sell the extra permits. Conversely, a company needing extra permits can purchase those.
• If a company's emissions exceed its permits, it would be fined two times the value of the permits it should have purchased.

As an investor, I realize that you are less concerned with the details that economists seemingly over-analyze and more concerned with what the report means to your portfolio. So, today, I'm going to show you where some of the investment opportunities and risks lie in the current environment.

Consumers Opened Their Wallets

The biggest positive surprise in the report was that Personal Consumption Expenditures ("PCE") actually contributed 1.50 points to GDP.

Clearly, in the first quarter, consumers took advantage of discounted prices. The much higher than expected PCE is part of the reason that the retailers and restaurants have been earning so much more than was expected. Almost every retailer and restaurant in the S&P 500 that has reported so far has come in with higher than expected earnings. Given the need to rebuild savings and the mounting levels of unemployment, I am skeptical that the strong PCE levels can be sustained.

Inventory Levels Plunged

On a forward-looking basis, perhaps the best part of the GDP report was that inventory investment subtracted 2.79 points from growth (versus -0.11 in Q4). Large inventory draw downs in one quarter have a tendency to be reversed in the next quarter. When the shelves are bare, people start to order more to restock them, causing output to rebound.

The destocking of inventories has contributed to the cash flow of the retailers, but the restocking will reverse that. On the other hand, restocking the shelves will increase orders for manufacturers, both here and abroad. The report is not detailed enough to say where exactly the biggest inventory draw downs were, so it does not give that much guidance as to which manufacturers might benefit the most from the restocking.

A Bad Trend for Equipment Makers and Software Developers

Essentially all investment in the real economy, both fixed and inventory, residential and non-residential, came to a screeching halt in the quarter. While ugly contributions from inventories are a good thing, the same cannot be said about fixed investments. There bad is bad, and this was real bad.

Fixed investments, particularly non-residential fixed investment is what drives increases in the productive capacity of the economy (along with investments in education which is counted as part of PCE and state & local spending). In other words, it is the engine of future growth, not just a part of the current growth. The stunning declines in all forms of fixed investment mean that businesses are in effect eating their seed corn. However, given the huge amount of idle capacity in the economy right now, it is easy to understand why businesses are cutting back.

Until we see a large rebound in capacity utilization, it is unlikely that businesses will start to spend more for equipment and software. Capacity utilization is at a post WWII low, and is below 70% for the first time since it has been tracked. As a general rule of thumb, 80% is normal, 85% is a boom and 75% is a nasty recession. This is obviously not good news for more traditional equipment manufacturers, such as Parker-Hannifin (PH) or Ingersoll-Rand (IR), nor is it good news for software firms like Microsoft (MSFT) or Oracle (ORCL).

Expect this part of the economy to remain weak for at least several more quarters. This is particularly true on the structures side. I suspect that most of the spending we did see in the quarter was simply finishing off projects that were started in earlier quarters. The Commercial Real Estate ("CRE") bust is just getting started and will last at least another year. Investment in structures has only started to decline and was a major contributor to GDP up until the third quarter of last year.

This means that demand for the basic materials that go into building large structures, steel, glass and cement, are likely to remain depressed for at least the next year. Not exactly bullish for Nucor (NUE), PPG Industries (PPG) or Cemex (CX).

Vacancy rates going up and effective rents are going down in almost all areas of commercial real estate. I would be very cautious about investing in REITs here. Commercial foreclosures are going to become a much bigger story over the next year. This will hurt the banks, particularly the mid-sized banks (between $1 and $10 billion in assets). The Wall Street titans do have as much exposure (relative to their overall size) to CRE.

The decline in equipment and software has been unusually steep (it was down 33.8% in the first quarter, following a 28.1% decline in the fourth quarter), and it now represents the smallest share of the economy since the mid 1960s. The decline will probably continue, but is may be at a slower rate in coming quarters.

At some point it will turn up again since equipment wears out and software becomes obsolete. I would focus on those equipment makers where the product most obviously decays over time. For example, spending on transportation equipment was 61% lower in the first quarter of 2009 than it was a year ago. This means that there is some potential pent up demand for firms like PACCAR (PCAR) that is building up.

Residential Investment Still Slumping

Perhaps the most surprising number on the downside in fixed investment was the subtraction of 1.36 points from Residential Investment ("RI"). RI is now only 2.7% of GDP, down from a peak of 6.3% in the Q4 of 2005.

RI turning up is a classic signal that a recession is ending, and there is no sign that it is happening yet, but it seems unlikely that RI will fall to zero. Normally the rebound is very sharp, but I have my doubts that it will be so this time around, given the huge inventory of unsold houses, both new and used and the second wave of foreclosures that is starting to crash upon the shore.

I have long been very bearish on the Homebuilders like D.R. Horton (DHI), however at this point I am becoming more neutral since it is hard to see how much lower residential investment can go as a percentage of GDP. That does not mean that I expect a big rebound anytime soon, but the worst of that particular storm may have passed.

Net exports helped prevent the quarter from being a total disaster, adding 1.99 points to growth. This was however not due to a surge of exports, but rather a collapse of imports.

The decline in imports was stunning, contributing 6.05 points to growth. (Imports are a subtraction from GDP, so when they fall GDP goes up). Put another way, if we had continued to import in the first quarter at the rate we had in the fourth quarter, then GDP would have crashed at an annualized rate of over 12% in the first quarter.

When inventories are drawn down, we buy less from China as well as less from domestic manufacturers. In case you have not noticed a lot of the stuff on the shelves of Wal-Mart Stores (WMT) and Target (TGT) comes from overseas. If PCE can continue its surprising strength going forward, the decline in imports is unlikely to continue. That, however, is a big IF.

No industry is more exposed to a decline in world trade more than the shipping industry. There are lots of ships that were ordered during the boom times that are just putting to sea. It will be a while before enough ships are scrapped to bring capacity into line with demand, thus keeping shipping rates very low. Ships represent very large capital investments and having them idle is very expensive. While the group has been hammered, I would still avoid those firms for anything but a very short term trade.

Understand that the longest recession since the Great Depression is not over by a long shot, but it will not last forever. We are past the steepest rate of decline, but are still going down.

The U.S. consumer is once again proving to be the Rasputin of the world economy, he is very hard to kill thanks, in part, due to some extraordinary measures taken by Dr. Bernanke. This is probably the key reason for the better than expected PCE numbers.

As I said earlier this week, there are still very substantial risks out there that could cause the rate of decline to accelerate again, most notably the prospect of long messy bankruptcies in Detroit, and the worst fears of the Flu epidemic coming true (almost impossible to tell at this point). However, the seeds of recovery have been planted. Inventory will need to be restocked and eventually businesses will have to replace some of their equipment and will start to spend again. However, I would not expect a bumper crop from those seeds. The recovery, when it comes, is likely to be very anemic.

Best of Luck,
Dirk van Dijk, CFA
Director of Research,
Zacks Equity Research

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