As pointed out in our recent Q&A with emerging markets whiz Brad Durham (see story here), ETFs now have jumped to capture nearly a third of the assets in funds focused on those countries.

His breakdown of the world’s money flows between ETFs and mutual funds really makes me question the widely held view that investors coming into ETFs are largely ex-stock pickers.

Many fund industry veterans have been contending for years that ETFs’ gains aren’t coming at the expense of mutual funds. Perhaps that is true. Each year, I’ve taken a look at fund flows between active mutual funds, index mutual funds and ETFs. The last one, done in 2008, showed that ETFs were by far the percentage growth leaders.

But over an extended period, such research has reported that index mutual funds were also rising, whereas active mutual funds were on the decline in the short-term and have already hit a plateau (looking back over the past decade).

In such dicey times, it only makes sense that active fund managers are having particularly tough times stock picking in smaller global markets. I’d like to point our readers to another new piece of research by Credit Suisse’s Alex Redman. He has been gracious enough to let us reprint his latest study, which is the most thorough I’ve seen to-date, in the Research section of IndexUniverse.com.

One of the more intriguing aspects of the research piece is Redman’s analysis providing more in-depth reasoning behind why more investors are turning to emerging markets ETFs. He notes that “a vast majority of emerging market ETFs are aligned along regional or country geographies rather than sectors (in contrast to developed market ETFs, which are predominately sector oriented).”

Note: Funny he should mention that … today a third emerging markets sector ETF was launched. (You can read about that story here.)

“This will serve to self reinforce the tendency for active funds to invest by country rather than by sector and may significantly increase intra-country stock correlations rendering country selection (a top down macro approach) increasingly as important as stock selection in emerging market investing,” Redman noted.

He also found that pan-emerging market equity funds as a whole have attracted net inflows for all previous 10 weeks (the research piece is dated July 17). The only other occasion in this decade such a flow pattern has taken place, Redman adds, has been through the week of Nov. 7, 2007. He has also seen a record positive deviation in the MSCI EMF index above its 10-week moving average.

“We‘d caution that typically from these levels inflows and price momentum undergo a strong reversal,” wrote Redman.

But that’s just a tidbit. Enjoy …

Revenue was $693.7 million, again beating the Street's estimate as well as our expectations. Revenues last year were $688.9 million.

Book value per share, excluding accumulated other comprehensive income or loss (AOCI), grew from $30.74 at Jun 30, 2008 to $33.28 at Jun 30, 2009. Book value per share, including AOCI, increased from $29.90 at Jun 30, 2008 to $32.55 at Jun 30, 2009. Return on equity was 15% compared with 15.8% in the prior-year period. Net investment income rose 6.0% to $145.4 million.

The Insurance Services segment reported income before income taxes of $100.9 million, compared to $89.3 million last year. The Asset Management segment reported income before income taxes of $7.7 million, compared to $12.6 million last year.

The quarterly results reflected favorable claims activity in the Insurance Services segment, partially offset by decreased premiums in the group insurance business. However, a decline in equity values has curtailed earnings in the Asset Management segment.

The cost containment initiatives undertaken by management will cost $15–$20 million. However, given the stressed economic environment, we expect premiums and sales to remain constrained in the coming quarters. Thus, we retain our Hold recommendation on the shares of SFG.

Previously, Embraer expected a delivery of 35 to 40 Phenom jets during the third quarter and a total of 120 to150 jets during 2009. Hence, it planned to invest US$352 million and US$270 million on R&D and PP&E respectively in 2009. However, the number of deliveries in the third quarter may decline, which is likely to affect the total deliveries during this year.

Embraer’s backlog is too exposed to the U.S. and the European markets, which are expected to go through a difficult period throughout 2009. Moreover, the airline industry is very sensitive to oil prices and it should always be remembered that oil prices are very volatile. In this sense, the huge decline in oil prices from a peak of US$150 per barrel was very positive, but the recent increase in oil prices from $35 per barrel in March 2009 to US$65 per barrel currently has again put the airline industry under pressure. It is undeniable that currently airlines all over the world are facing difficulties, primarily due to the collapse of the global economy.

However, Embraer is attracting a lot of attention. Yesterday, French aircraft maker Dassault Aviation SA, (AM.PA) preferred to sign a contract with Embraer over Boeing Co. (BA) to build Rafale warplanes. BA’s defense unit, Jim Albaugh, also signed agreements with Embraer to supply components for its Super Hornet jetfighter. Thus, we reiterate our Hold rating Embraer.

Revenue was flat sequentially (down 0.2%) and down 15.3% from the year-ago period. Excluding the effect of acquisitions, pricing actions and currency, revenue was down 18% from the year-ago period.

The Electrical Products segment was entirely responsible for the weak results. The segment, which generated 68% of revenue, declined 1.4% sequentially and 21.7% from the year-ago period. There was broad-based weakness across the residential, commercial and industrial markets, and both wiring and lighting product sales were weak. The high-voltage test equipment business was again the sole bright spot, growing on a year-over-year basis. Currency headwinds also contributed to the decline. We continue to believe that price realization will be difficult in this environment, and could even result in lost sales.

Power Systems sales increased 2.2% sequentially and 2.4% year over year. Acquisitions were the major driver here, contributing 12 percentage points of growth. The core business continued to be impacted by weakness on the distribution side, as utilities remained focused on transmission activities. Pricing actions generated some gains in the last quarter.

Gross margin for the quarter was 29.8%, up 130 basis points (bps) sequentially and down 62 bps from the year-ago quarter. The main reason for the year-over-year decline was lower volumes, which made cost absorption difficult.

The total operating expenses of $105.6 million were lower than the previous and year-ago quarters. The operating margin of 11.7% was up 162 bps sequentially, as both COGS and SG&A expenses declined as a percentage of sales. The operating margin declined 243 bps, as both COGS and SG&A were significantly higher than the year-ago quarter. Management initiated workforce reductions, and severance charges will continue to impact results for the next few quarters.

The Electrical Products operating margin increased 98 basis points sequentially, but declined 475 basis points from the June quarter of 2008. The Power Systems operating margin increased 274 basis points sequentially and 190 bps year over year.

The pro forma net income of $41.6 million, or a 7.1% net income margin, compares favorably with $36.1 million, or 6.2% in the previous quarter and $64.2 million, or 9.3%, in the prior-year quarter. Excluding stock based payments, the fully diluted GAAP EPS was 70 cents per share, compared to 60 cents in the previous quarter and $1.09 in the year-ago quarter.

The balance sheet improved. Inventories were down 12.7%, and annualized inventory turns increased from 5.2x to 5.9x. Days sales outstanding (DSOs) went down slightly from 52 to 51. Hubbell ended with a cash balance of $282.1 million, up 90.1 million from the first quarter. The company used roughly $19.7 million for dividend payments and did not repurchase any shares during the quarter. Capex was nil. Cash generated from operations was $107.7 million. Hubbell is highly leveraged, with $684.6 million in debt and other long-term liabilities, and a net debt position of $402.5 million.

Management did not provide a specific guidance for 2009. The decline in non-residential construction is expected to be sharper in the second half than in the first (in-line with our expectations). Utilities revenue is expected to decline 12-15%, driven by continued weakness on the distribution side.

We believe that the company's performance is in-line with the market and other companies in the electrical products sector, such as WESCO International (WCC), Anixter International (AXE), W.W. Grainger (GWW) and privately held Graybar Electric Company will report/has reported similar results and guidance.

Regions Financial Corp. (RF), Comerica Inc. (CMA) and ZION Bancorporation (ZION) reported losses in the quarter primarily due to continued strain in their loan portfolios, as the commercial sector continues to droop in the prolonged recession.

Along with continued losses in their residential mortgage, home equity and consumer loan portfolios, these banks are also showing continued distress in their residential and commercial development loans, as well as commercial real estate loans.

Large-cap center banks and brokerage firms like Goldman Sachs (GS), Bank of America (BAC) and JPMorgan Chase (JPM) were able to somewhat offset weak credit metrics by strong results in their investment banking and mortgage refinancing divisions.

Regional banks, however, are much more directly connected to the state of the economy and the interest rate spreads. Weak demand for lending as a result of a shaky economy can severely affect their profitability as borrowers, thereby increasing nonperforming assets.

The mounting credit concerns suggest that a majority of the regional banks reporting their earnings in the coming week will report losses. Banks reporting this week are Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), PNC Financial Services Inc. (PNC), SunTrust Banks, Inc. (STI), KeyCorp (KEY) and US Bancorp (USB).

Though commercial loan losses are seen as the final stage of a downtrend in a credit cycle, it still remains to be seen just how severe it turns out to be.

The growing acceptance of LTE technology has prompted the mobile handset makers to develop phones that will be compatible with this network. NTT DoCoMo will launch LTE handsets in 2011 compatible with its current 3G network, enabling the customers to access services even if they are outside an LTE coverage area. LTE is expected to achieve download transmission speeds of 300Mbps and offers several advantages over other wireless techniques. This includes spectral efficiency, lower costs, and solid integration with other open wireless standards.

Recent rumors within the broadband industry are suggestive of an expected deal between the legendary iPhone maker Apple Inc (AAPL) and Verizon Wireless (VZ) to introduce a new LTE-compatible iPhone. Nokia Corp (NOK), the largest mobile phone developer in the world, has also entered in the race and is expected on launch LTE-based mobile handsets by 2011.

Qualcomm Inc. (QCOM), one of the key developers of OFDMA (Orthogonal Frequency Division Multiple Access) based chipsets has decided to introduce the trial version of LTE-compatible chipsets during the second half of 2009. LG Electronics, on the other hand has already given a demonstration of LTE-based modem during the Mobile World Congress of 2009.

This compares to a net loss of $488 million, or $1.09 per diluted share, in the prior quarter and $1.13 billion, or $2.71 per diluted share, in the prior-year quarter.

Results were hurt by cash and deemed preferred stock dividends of $164 million, or 28 cents per share (after-tax), paid in connection with TARP funds and additional common equity raised. The downside also resulted from a $313 million sequential increase in loan loss reserve to $2.5 billion (pre-tax), representing 3.53% of total loans and 114% of non-performing loans.

Tax-equivalent net interest income decreased 3.6% sequentially to $598 million. This decrease was a result of a 10 bps decrease in NIM to 2.67%.

Non-interest income for the quarter increased 30.7% year-over-year to $715 million. The increase was primarily attributable to repositioning of the securities portfolio, net gains on leased equipment which more than offset a $63 million reduction in income from investment banking and capital markets. Non-interest expense for the quarter increased 12.0% year-over-year to $870 million.

Provision for loan losses from continuing operations was $850 million, compared to $647 million in the prior-year quarter. It exceeded net loan charge-offs by $311 million as the company continued to add to its reserves.

Credit quality metrics worsened significantly during the quarter. Non-performing assets as a percentage of portfolio loans, other real estate owned assets, as well as other nonperforming assets increased 88 bps sequentially and 199 bps year-over-year to 3.58%. Net charge-offs, as a percentage of average loans from continuing operations, increased 34 bps sequentially and 24 bps year-over-year to 2.99%.

Capital ratios continued to exceed all regulatory benchmarks as the company raised additional equity during the quarter. KEY's tangible equity to tangible assets ratio was 10.16% at the end of Jun 30, 2009, compared to 9.23% at the end of the prior quarter and 6.98% in the prior-year quarter. Tier 1 risk-based capital ratio was 12.42%, compared to 11.22% in the prior quarter and 8.53% in the prior-year quarter.

Though the company has taken steps to reduce its exposure to the Commercial Real Estate (CRE) home builders segment, we anticipate further reserve building as a result of higher losses in the CRE portfolio in the coming quarters.

Further, we expect elevated provision requirements combined with high overhead costs and weak net interest to put significant pressure on the company's profitability in the intermediate term.

As such, we maintain our Sell rating on the shares of KEY.

As per the agreement, IBM will be acting as a reseller and original equipment manufacturer (OEM) for switches and routers that will help transfer data across networks with greater speed and efficiency. The company expects the demand for network equipments to increase 16x by 2020.

In collaboration with Barcode, IBM has introduced IBM Converged Switch B32 and 10Gb Converged Network Adapter (CNA) for IBM System x. This is the company's first Fibre Channel over Ethernet (FCoE) offerings. We believe this technical collaboration will help them produce advanced quality products, which are expected to create a niche market, in the networking arena.

The company's collaboration with JNPR will allow IBM to rebrand and sell selected Juniper EX and MX switches and routers. This combined product from IBM and Juniper will be available late this year, and will help Juniper to market its product with a new identity.

IBM will enable Cisco's Systems & Technology Group sellers and partners to resell the Cisco Nexus 5000 Series Switches. These are high-performance, networking switches, used for data center networks, and supports Fiber Channel connectivity over Ethernet (FCoE). We feel this collaboration will bring out products with enhanced features and resolve the fiber optic connectivity issues to a greater extent.

We believe all the aforementioned agreements will create value for IBM, and help the company to market its products and project better brand value. On the other hand, Juniper, Brocade and Cisco will get the brand name of IBM, and will be better positioned to satisfy customer needs. We reiterate our Buy rating on IBM.

Total revenue of $814.3 million in the second quarter was an improvement of 5% year over year as well as 4.6% sequentially. This was primarily due to impressive contribution from the Amnet & Navega division and the African region. Acquisition of Amnet Telecommunications Holding Ltd., a leading provider of fixed broadband and cable television services in various Central American regions has started generating solid revenue as fixed broadband service has become the fastest growing segment within the communications sector in both Central & South America. This is also the most significant revenue generating region for Millicom. Adjusted diluted EPS (excluding special charges and discontinued operations) during the same quarter was $1.12 compared to $1.22 in the prior-year quarter.

EBITDA during the second quarter was $371 million and EBITDA margin was 45.6%, up 3.4% year over year. This was more than management’s long-run target of 45%. Millicom guided EBITDA margin to remain near 45% during fiscal 2009, a respectable level for telecommunications carriers.

The company is exploring all options to improve its highly leveraged balance sheet. Management has taken several decisions, the first of which is to reduce its capital expenditure. Millicom had approximately $2.23 billion of total debt and $833 million of cash & marketable securities at the end of the second quarter of 2009. Since a major part of fiscal 2008 capital spending was earmarked to improve network coverage, it is expected that the company will now benefit from service expansion.

Management has stated that capital spending will decrease to $750 million in 2009 compared to $1.43 billion in the previous year, improving the company’s ability to generate sizable positive free cash. During the first half of 2009, Millicom generated $191.6 million of positive free cash (cash flow from operations less capital expenditures). Disinvestment of Asian operations will reduce capital expenditures by $100 million per annum and is also likely to provide $500 million - $700 million of cash to the company.

However, we remain concerned with weak global economic conditions and lingering foreign exchange rate volatility that may impact near-term prospects of Millicom.  This is particularly important as the company operates mainly in untapped networking regions of Central & Latin America, and Africa. Precipitous appreciation of the U.S dollar with respect to the local currencies may hinder financial performance.

Millicom is facing stiff competition from several global telecom operators like America Movil (AMX), Telekom Argentina (TEO), Telefonica S.A. (TEF), and Telefonos de Mexico (TMX). As a result, Millicom has been contending a meaningful decline of ARPU (average Revenue per User).  In the second quarter of 2009 ARPU was $9.7 compared to $9.9 in the previous quarter and $12.6 in the year-ago quarter. We maintain our Hold rating for Millicom.

Net revenues for the quarter were $5.4 billion, compared with $6.1 billion in the second-quarter 2008. The consensus estimate called for a loss of 49 cents per share.

The results were in contrast to very strong results from competitors like Goldman Sachs (GS) and JP Morgan (JPM), which have adopted a more aggressive approach and have been gabbing market share after the financial crisis.

The results were negatively affected by a $2.3 billion, or $1.32 per diluted share, accounting charge related to the tightening of its credit spreads (improving credit worthiness) and an $850 million or 74 cents per diluted share, negative adjustment related to TARP repayment.

Investment banking delivered strong results with underwriting revenues up 19% year-over-year to $855 million. There were strong gains in both equity and debt underwriting. During the quarter, many companies (mostly financial companies) have tapped equity and debt markets to raise capital, which helped the results of Morgan Stanley and its competitors.

The company also saw improvements in prime brokerage, cash equities as well as in investment grade and distressed debt trading and in wealth management. However, there was weakness in other key areas of fixed income trading and in asset management.

The company recorded $700 million in charges related to losses on its investments in real estate. It's exposure to the Commercial Real Sector, which is deteriorating rapidly, will remain a cause for concern in the coming quarters.

Net revenues for the quarter were $5.4 billion, compared with $6.1 billion in the second-quarter 2008. The consensus estimate called for a loss of 49 cents per share.

The results were in contrast to very strong results from competitors like Goldman Sachs (GS) and JP Morgan (JPM), which have adopted a more aggressive approach and have been gabbing market share after the financial crisis.

The results were negatively affected by a $2.3 billion, or $1.32 per diluted share, accounting charge related to the tightening of its credit spreads (improving credit worthiness) and an $850 million or 74 cents per diluted share, negative adjustment related to TARP repayment.

Investment banking delivered strong results with underwriting revenues up 19% year-over-year to $855 million. There were strong gains in both equity and debt underwriting. During the quarter, many companies (mostly financial companies) have tapped equity and debt markets to raise capital, which helped the results of Morgan Stanley and its competitors.

The company also saw improvements in prime brokerage, cash equities as well as in investment grade and distressed debt trading and in wealth management. However, there was weakness in other key areas of fixed income trading and in asset management.

The company recorded $700 million in charges related to losses on its investments in real estate. It's exposure to the Commercial Real Sector, which is deteriorating rapidly, will remain a cause for concern in the coming quarters.

Revenue in the quarter declined 5.3% to $901 million from $951 million reported in the second quarter of 2008. Volume gains in both its segments were more than offset by unfavorable pricing related to lower raw material costs.

The Consumer Products segment reported a 1% decline in second quarter sales to $356 million from $358 million in the comparable quarter of 2008. The company witnessed volume gains in all the product categories in this segment. However, volume growth (+6%) was offset by unfavorable pricing (-7%).

Revenue in the Foodservice/Food Packaging business was down 8% year over year at $545 million as volume gains (+3%) were more than offset by unfavorable pricing (-9%) and negative impact of foreign exchange translation (-2%).

The company posted strong margins in the quarter as it benefited from lower raw material costs, lower logistic and utility costs, as well as improved productivity. Gross margin in the second quarter was 36.2%, compared to 26.0% percent last year. Operating margin increased to 19.9% from 13.8% in the second quarter of 2008.

For the full year, the company expects sales to decline 6–7% (previous guidance was 10–12%) on a year over year basis. This forecast is based on the assumption of 2–3% volume gains, 8–9% lower pricing, and unfavorable foreign exchange impact of 1%.

The company raised its earnings guidance range to $2.37–$2.45 per share, compared to the previous guidance of $2.15–$2.25 per share. Also, the company provided EPS guidance of $0.47–$0.51 for the third quarter.

Despite an expected drop in sales in 2009, Pactiv is confident of posting earnings growth as the impact of soft demand conditions on the company’s earnings is expected to be offset by strong margins. We maintain a Hold recommendation on the stock.

Large banks, including WFC, Bank of America (BAC), Citigroup (C) and JP Morgan (JPM), have benefitted from the surge in mortgage refinancing during the last two quarters. However, this revenue source is expected to taper off as the rates are creeping up now. WFC reported mortgage banking income of $3.0 billion.

Credit quality deteriorated further and losses rose sharply during the quarter. The bank expects credit losses and nonperforming assets to increase further, though some moderation was visible. Net charge-offs rose to $4.4 billion (2.1% of average loans) from $3.3 billion (1.54%) in the prior quarter. Nonperforming assets grew to $18.3 billion (2.2% of loans) from $12.6 billion (1.5%) in the prior quarter.

Credit-loss provisions were $5.09 billion, up 69% from a year earlier and 11% from the prior quarter. The allowance for credit losses totaled $23.5 billion at Jun 30, 2009, compared with $22.8 billion at Mar 31, 2009.

Due to its integration with Wachovia, WFC is heavily exposed to the still-deteriorating housing sector (large portfolio of option adjustable-rate mortgages) and sharply weakening commercial real estate sector. As a result we expect higher credit losses in the coming quarter. We also think that the reserve build by the bank should have been larger to cover the future losses.

The bank said that it intends to pay back TARP funds "at an appropriate time while maintaining strong capital levels". It has so far generated $14.2 billion towards the $13.7 billion capital buffer required after the stress test, and expects to generate additional capital internally in the third quarter.

ArvinMeritor will provide parts and components of power transmission and basic braking systems to Yutong for the production of Yutong buses and chassis. Under the agreement, in addition to continually providing high-end axle products to Yutong, ArvinMeritor will also offer differential carriers and brake calipers made in its production plant in Wuxi, China, for application in Yutong’s self-made axles.

The final product will be assembled at Yutong's plant in Zhenzhou, China. As part of this partnership, ArvinMeritor and Yutong will also sell and distribute standard aftermarket service kits for its products.

The project will commence at the end of 2009 and the investment is expected to exceed $50 million in the next five years. Meanwhile, both parties will also further strengthen the cooperation in a wider area.

ArvinMeritor expects the alliance to consolidate its position in the Asian markets and strengthen its existing partnership with Yutong. The company has been focusing on low cost countries across Asia and South America. It aims to achieve revenues of $1 billion in Asia in the next 5 years.

ArvinMeritor also plans to open new plants in leading cost-competitive countries, including India and Mexico. It plans to open a plant in Pune, India in the near term to support light vehicle customers. Recently, ArvinMeritor opened a new production facility in Monterrey, Mexico. The new plant will provide the infrastructure to support targeted growth areas in off-highway components and the CVS market. The new plant is expected to reduce costs and provide flexibility to meet higher demand anticipated in North America in 2009.

In South America, the company is growing by winning several significant business propositions in Venezuela.

We rate the shares a Hold with a six-month target price of $4.00.

Net losses were 43 cents per share, which was narrower than our expectations for a loss of 53 cents. However, the company had reported a profit of $1.29 in the year-ago period. Operating loss of $72.5 million in the quarter was marginally lower than the estimated loss of $75 million to $80 million.

Net sales for the quarter plunged 64% to $793.6 million on shipments of 740,600 tons, higher than the expected shipments of 725,000 tons in the quarter. But on a year-over-year basis, shipments were down about 57% from 1,737,800 tons. The average selling price for the second quarter was $1,072 per ton, a 17% decrease over the second quarter of 2008. AKS had expected the selling price to decline 3%-4% per ton.

AK Steel provided its guidance for the third quarter of 2009. Shipments are expected to be approximately 940,000 tons, up 27% over the second quarter of 2009. The average per-ton selling price in the third quarter is anticipated to be similar to that in the second quarter of 2009. AKS also sees planned maintenance costs at $6 million in the third quarter, related to a planned blast furnace maintenance outage at its Middletown Works.

AK Steel expects to benefit from lower operating and raw material costs in the third quarter, compared to the second quarter. The company plans to breakeven in operating profit, representing an improvement of about $70 million or about $100 per ton over the second quarter.

Weak demand in the auto industry, which forms about 40% of AK Steel's business, has been affecting its operations. Production cuts at major customers, such as General Motors Co. and Chrysler LLC, have pressured demand for the company's products. The global business environment remains challenging for the carmakers.

AKS is a leading producer of flat-rolled carbon, stainless, electrical steel and tubular products.

In addition, St. Jude has received both the FDA and European CE Mark approval for the technology used in these pacemakers, version 4.0 of the Merlin.net Patient Care Network (PCN).

Accent and Anthem pacemakers use Radio Frequency (RF) telemetry that enables secure and smooth flow of data between the pacemaker and the clinician thereby enhancing the patient care. These devices use Merlin.net PCN technology that captures and records information about the performance of the pacemaker and the patient heart rhythm and subsequently send the data to a hospital’s Electronic Health Records system.

The new approval will add to St. Jude’s ever increasing top-line and bolster its position in the cardiovascular segment. St. Jude is a leading medical device manufacturer that designs, manufactures and distributes medical devices to treat cardiovascular and neurological conditions. The company holds the #2 market position for ICDs and pacemakers behind Medtronic (MDT) but ahead of Boston Scientific (BSX). This segment is the company’s largest in terms of revenue. St. Jude also holds the #2 market position behind Medtronic in neuromodulation.

St. Jude remains relatively insulated from the recent economic fallout as a result of its life-sustaining product portfolio. In our latest report, we have assumed that the stock should trade at a 25% premium to the comparables’ mean P/E/G multiple. Based on this, we have reiterated our ‘Buy’ rating for this stock. We think investors stand to benefit by adding this stock to their portfolio. 

The third emerging markets sector exchange-traded funds launched on Wednesday, this time adding top stocks from a composite index of 10 sectors spanning 15 countries.

The name of the new ETF is a mouthful – the Emerging Global Shares Dow Jones Emerging Markets Titans Composite Index Fund (NYSE Arca: EEG).  Its sponsor is Emerging Global Advisors, which is responsible for coming to market in May with the first sector-focused emerging markets ETFs so far.

Those are: the Emerging Global Shares Dow Jones Emerging Markets Energy Fund (NYSE Arca: EEO); and the Emerging Global Shares Dow Jones Emerging Markets Metals & Mining Titans Index Fund (NYSE Arca: EMT).  You can read more about those ETFs here.

EEG is designed to track the Dow Jones Emerging Markets Titans Composite Index. That benchmark includes the 100 top names by market capitalization sizes in major sectors across the developing marketplace. The sector weightings are modified in that no one name can have more than a 10% exposure in the fund.

The ETF will charge an annual expense ratio of 0.75%.

EEG differs in both its geographical complexion as well as its sector exposures in several subtle, yet possibly significant ways, from broader-based emerging markets ETFs.  For example, take the iShares MSCI Emerging Markets Index (NYSE: EEM). It has roughly the same in financials (23.89%) as EEG’s benchmark had at the end of the second quarter (22.35%).

But financials are the second-biggest sector in EEG, whereas it’s No. 1 in EEM. Oil and gas was the Dow Jones index’s largest sector weighting at slightly more than 29% (again, through June).  EEM has less than 16% in energy right now.

“Since we don’t include Taiwan, Korea and Israel – we don’t consider them emerging markets – our fund will have a little bit more exposure to the BRICs. That means we’ll have less in areas like telecom and a little more in resource-related sectors,” said Richard Kang, EGA’s research director.

Kang and the firm’s chief executive, Bob Holderith, discussed in detail how a composite sector emerging markets ETF might work – along with the company’s other plans to launch 10-plus related sector ETFs – in this Q&A story which ran at IndexUniverse.com in June.)

Entering the third quarter, the underlying benchmark for EEG had the following country makeup:

• China Offshore: 20.43%

• Brazil: 20.29%

• India : 18.15%

• Russia: 14.24%

• Mexico: 10.07%

• South Africa: 8.30%

• Chile: 2.74%

• Malaysia: 1.85%

• Indonesia: 1.53%

• Kuwait: 1.04%

The fund’s sector weightings of its underlying benchmark showed the following breakdown:

• Oil & Gas: 29.02%

• Financials: 22.35%

• Basic Materials: 11.36%

• Telecommunications: 10.70%

• Industrials: 5.55%

• Consumer Goods: 5.20%

• Technology: 4.93%

• Consumer Services: 4.80%

• Utilities: 4.25%

• Health Care: 1.84%

In terms of business segments: Orthopaedic Implants sales were roughly flat year over year at $1,014.2 million. The company witnessed strong U.S. sales buoyed by higher shipments of reconstructive, trauma, spinal and craniomaxillofacial implant systems. However, international sales were lower due to currency headwinds. MedSurg Equipment sales declined 11% year over year to $620.1 million. This segment was hurt by the global economic slowdown with patients delaying their surgical operations. Lower shipments of surgical equipment and surgical navigation systems, endoscopic, communications and digital imaging systems etc. were witnessed across this segment.

On a geographic basis, the U.S. represented approximately 64% of net sales in the quarter and was roughly flat on a year over year basis. The company’s international operations declined 11%.
 
Gross margin was 67.2%, a decline of 170 basis points (bps) year over year, due to higher investments made by the company in its compliance initiatives and slowdown in some of its manufacturing plants as a result of the present economic turbulence. Selling, general and administrative expenses (SG&A) as a percentage of total sales declined 180 basis points year over year due to the various cost control initiatives adopted by the company in response to the slowing economy. Lowered operating expenses, as a percentage of sales, resulted in higher operating margin (↑50 bps year over year) at 23.9%. However, lower non-operating income ultimately dragged down the company’s net margin (↓10 bps year over year).

Management expects EPS for 2009 in the range of $2.90 to $3.10, compared to an adjusted EPS of $2.83 last year. Furthermore, it expects net sales for the year to decline roughly 2% to 3% on a reported basis and to increase 1% to 3% on a constant-currency basis.

For the next year, management expects net sales to decline roughly 1.5% to 2.5% on a reported basis. 

Stryker faces competition from major players like Zimmer Holdings (ZMH), Conmed (CNMD), Smith & Nephew (SNN), Johnson & Johnson (JNJ)/DePuy, and Wright Medical (WMGI). The company has faced several headwinds of late. They include the current economic uncertainty, delayed capital spending by hospitals, an increase in the uninsured population stemming from higher unemployment, and weaker foreign exchange and pressures from international markets.

Based on the company’s performance in the quarter, we continue to rate Stryker a ‘Hold’.

In May, Honda Motor (HMC) indicated that it will source the remanufacturing of automatic transmissions from within, by winding down the transmission business with ATC by the year end. The transmission business accounted for 10% of company revenues and 29% of Drivetrain segment revenues. Following this, the company revealed in June that it will record a pre-tax goodwill impairment charge of $37 million or $1.32 per share after tax in the second quarter of 2009.

The additional restructuring actions will result in pre-tax charges of approximately $1.5 million or $0.05 per diluted share after tax in the second half of the year for severance and related costs.

Apart from restructuring actions, ATC has been awarded two new contracts, which will help the company to partially mitigate the impending loss of Honda remanufactured transmissions. The company’s two existing customers, Chrysler and Subaru, awarded contracts to ATC to supply remanufactured engines and related components in North America in support of both warranty and customer-pay programs.

The remanufacturing for the new contracts – scheduled to launch during the third quarter – will take place at the Oklahoma City facility. These are anticipated to contribute approximately $15–$17 million in annualized revenue. However, for 2009, they are expected to contribute $7–$8 million in revenue with no impact on segment profit due to projected inefficiencies related to their launch and start-up.

Overall, the new programs are expected to help the Drivetrain segment to generate revenues of $147–$150 million in 2009, higher than the June forecast of $140–$144 million. Considering the loss of the transmission business with Honda, restructuring actions, and contribution from the new engine programs, ATC expects the Drivetrain business to achieve adjusted segment profit margin in the low single-digit range for the rest of 2009 and in 2010.

We continue to recommend ATAC as Buy with a six-month target price of $35.00

Revenues from U.S. Mining Operations (up 4.7% year-over-year) improved slightly, whereas Australian Mining Operations (down 40.9% year-over-year) and Trading & Brokerage Operations (down 21.0% year-over-year) remained under pressure. U.S. revenues per ton rose to $20.71 from $19.85 a year ago – because of higher priced Midwestern contracts signed last year and change of mix toward higher-priced Western coal. Australian revenues per ton fell to $61.81 from $94.24 a year ago – due to reduced metallurgical coal volumes and lower annual pricing for both metallurgical and thermal coal-supply agreements commencing in April.

Peabody views U.S. coal demand to remain subdued in the near future – due to reduced economic activity, lower exports and higher nuclear, natural gas and hydro generation. However, the company is optimistic about the energy-starved emerging Asian economies, especially China and India. China, the largest producer as well as consumer of coal in the world, is importing coal at a record rate. Coal demand is seen further rising in China as the Government’s 4 trillion-Yuan ($586 billion) stimulus package restores the third largest economy of the world. Power plants in India are operating under critically low stock levels due to supply constraints. Peabody perceives India to become the fastest-growing coal importer going forward as the country continues adding electricity generating capacities.

Peabody is looking forward to capitalize on the Asia-Pacific growth story – leveraging its strong balance sheet, global platform and low-cost operating base. Of late, the company has acquired a 50% stake in Peabody-Polo Resources joint venture to expand its presence in China and Mongolia. Peabody has also inked an agreement with Shanxi Lu'an Mining Group to jointly explore, develop and operate the latter’s Shaxi Mine in North-western China. It will continue to evaluate take over and joint venture opportunities particularly in the Asia Pacific region. Moreover, Peabody plans set up a new Asia Pacific trading hub in South East Asia.

Peabody estimates sales volume of 225-245 million tons and earnings per share (continuing operations) of $1.00-$1.40 for full year 2009. We stay positive about the long term view of the coal industry and perceive Peabody as a premium player in this space due to its access to the emerging Asian markets. Moreover, global metallurgical coal prices have recently gained strength and the steep forward curve for thermal coal prices indicates strong future demand. We reiterate our Buy recommendation for the company.

The bonds are collateralized by two pools of assets valued at $800 million each. The asset pool consists of about 60 shopping centers across the country. The properties generate a stable cash flow as they are occupied by discount retailers that tend to attract more customers during a recession.

On completion, the deals would be the first noteworthy CMBS (commercial mortgage backed securities) offerings to take advantage of the Term Asset-Backed Securities Loan Facility (TALF program). The TALF was created by the Fed to support the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.

With the bond sales, DDR would be able to raise significant capital to increase its liquidity and strengthen its balance sheet. Currently, the company has $103 million of debt maturing in 2009, and $800 million debt maturing in 2010 (excluding the $127 million consolidated joint venture debt).

DDR specializes in the acquisition, ownership, development, redevelopment, leasing, and management of shopping centers and business centers. The company owns and manages over 700 retail operating (including joint ventures) and development properties spanning approximately 153 million square feet of real estate in 45 states in the US, and Puerto Rico, Brazil, Russia, and Canada.

Shares of DDR have fallen by over 83% in the past one year due to a general sector sell-off and company-specific problems like high debts. We like the steps taken by the company to raise cash and pay off debt, although the company still faces significant debt maturities over the next couple of years. Shares appear cheap relative to NAV (net asset value). We reiterate our Hold rating of the company.

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

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

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

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

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

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

LX1032 is the first drug candidate for which Lexicon has received the orphan drug status from the EMEA. It already has fast track designation from the US FDA. With this status, the company will get many incentives in the form of regulatory assistance, reduced regulatory fees associated with marketing approval application and assistance with clinical trial design. A major advantage that comes with orphan drug status is that the product will enjoy ten years of marketing exclusivity once it is approved.

Apart from LX1032, Lexicon has other candidates in various stages of development including LX1031, LX2931 and LX6171. Additionally, the company has other candidates in the preclinical stage targeting autoimmune disease (LX2932), diabetes (LX4211/4212), Glaucoma (LX7101), dyslipidemia (LG482/483, Genentech alliance) and metabolic syndrome (LG985).

Lexicon has a program called Genome5000 for the discovery of the physiological and behavioral functions of 5,000 genes that are considered to be pharmaceutically important. The company has made significant progress with this program and has completed more than 82% of the analysis of the pharmaceutically important genes.

We are impressed with Lexicon’s “gene knockout" technology and its 10TO10 (advancing 10 drug candidates into human clinical trials by 2010) clinical program. We see the gene knockout technology as a viable platform having advantages over traditional drug discovering technology for identifying novel drug targets. These advantages will lead to better target selection resulting in higher success of Lexicon’s drug discovery and development efforts.

Lexicon derives its revenue mainly from collaborations and subscription from its genetic information. The financial position of the company is quite strong especially after the collaboration with Invus Group and Symphony Capital Partners. At the end of the last quarter, Lexicon had $145.5 million in cash and investments.  But the 10TO10 program requires substantial financial investment as new candidates are moved into clinical trials.  We believe Lexicon’s “gene knockout" technology will continue to attract more partners, going forward. Any kind of partnership will boost the top-line in the form of upfront and milestone payment as well as royalties. We maintain our Buy recommendation.

INCB18424 is being developed for the treatment of patients with different types of myelofibrosis. Myelofibrosis is a serious bone marrow disorder in which the bone marrow develops extensive scarring causing swelling of the liver and spleen. Currently, there is no treatment for the disease in the U.S.

COMFORT-I (COntrolled MyeloFibrosis Study with ORal JAK Inhibitor Treatment), the pivotal phase III study, will compare the safety and effectiveness of the drug with a placebo. The efficacy will be judged on the basis of the proportion of treated patients achieving a 35% or more reduction in spleen volume compared to the group receiving placebo. The secondary endpoint will measure with the duration of such reduction along with the proportion of patients achieving 50% or more reduction in symptoms as measured by a specific assessment form. Assuming positive results from the trial, Incyte expects to file NDA in late 2010 or early 2011.

The FDA’s decision of a single primary endpoint (spleen reduction) is good news for the company as this would shorten the overall duration of the trial. Additionally, we are confident of the company meeting its primary endpoint as earlier data presented have shown proven the effectiveness of the drug in this regard. Since at present, no treatment is available for myelofibrosis, this drug has the potential to help the company achieve profitability.

While we are encouraged to see the company moving ahead with the development of its pipeline candidates, we remain concerned about the cash position at Incyte. At the end of last quarter, the company's total consolidated debt was $421.8 million, with cash and cash equivalents of $139.1 million. The company is looking for suitable alliances with established companies in order to take care of the rising costs as many of its drugs are moving to phase III trials. We believe the SPA could help the company to get a partner. Upfront and milestone payments from potential partners should ease the cash position. We maintain our Hold rating on the shares of Incyte.