...the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

Do we really need to worry so much in the short term?

Six years ago, Jeff Frankel and I examined the implications of the borrow-and-spend policies of the Bush Administration [PDF]. We estimated the following relationship:

(1) i_t ^long = 0.001 + 1 × π_t + 0.077 E(d_t+2) + 0.280 (y_t-y_t^FE) + 0.005 i_t^* - 0.574 int_t

Adj.-R² = 0.51, N=17, Smpl 1988-2004. i is the long term interest rate on ten year bonds, π is the y/y inflation rate, E(d_t+2) is the two-year ahead expected debt-to-GDP ratio and (y_t-y_t^FE) is the output gap (both according to OECD), and i^* is the foreign interest rate, and int is foreign purchases of US Treasury debt. (This specification was also discussed in this March 2007 post.)

We can use these estimates to do a back of the envelope calculation of what happens in a year, going from end FY2009 to end FY2010, by taking the total differential of equation (1). The change will be given by:

(2) Δ i = Δ π + 0.077 Δ E(d_t+2) + 0.280 Δ (y_t-y_t^FE) - 0.574 Δ int

According to the August CBO Economic and Budget Outlook, public debt held by the public two years ahead will rise from 65.2 to 65.9 ppts of GDP (that is, end FY 2011 to end FY2012, in Summary Table 1). The OECD November Economic Outlook reports that the output gap in 2009 was -4.92 ppts of GDP, and is projected to be -5.36 in 2010. If East Asian bank purchases of Treasuries remain constant, then one finds that the inflation adjusted interest rate will rise by:

(0.659-0.652)×0.077 + (-0.0536+0.0492)×0.280 = 0.0005-0.0012 = -0.0007

That is, the interest rate would fall by 7 bps (holding expected inflation constant). In other words, real interest rates would stay roughly constant, ceteris paribus.

Now, what about foreign purchases of US treasury bills and notes? These ran about $333 billion through September [1], or about 2.3% of nominal GDP. Suppose this went to zero (!). Then real rates would rise 1.3%. Of course, one needs net foreign purchases to drop to zero, which seems to me unlikely.

Some caveats: These estimates were obtained using data that spanned a period without extraordinary Federal Reserve credit easing, and in the face of an unprecedented financial collapse. And, the relationship is not precisely estimated. But they're the estimates we -- or at least I -- have.

By the way, CBO predicts only a 0.8 ppts increase in the ten year rate going from 2009 to 2010, and an additional 0.3 ppts by 2011 (Summary Table 2).

I'll further observe that the article gives the impression that the jump in Federal debt was due to the stimulus bill. But in fact, as shown in this post, most of the debt accumulation has been accounted for by the decline in tax revenues associated with the recession.

No doubt, trouble on the fiscal front is real, and has long been brewing -- from the tax cuts of 2001 (if extended) to Medicare Part D. And, indeed, I argued for a lot more fiscal restraint when we were near full employment. [2] But, in my view, apocalypse not quite yet.

The strength in US dollar, based upon its safe-haven appeal, undermined investors' appetites for riskier, high-yielding assets such as equities as upside guidance from DJIA components Wal-Mart and Hewlett-Packard failed to stem the retreat.

The Dow Jones industrial average fell 94 points, or 0.9%, to close at 10,197.47.  The S&P 500 retreated 11 points, or 1%, to close at 1,087.24, after climbing to an intraday high of 1,101.97.  The tech-heavy Nasdaq composite index retreated 18 points, or 0.8%, to settle at 2,149.02.  On the New York Stock Exchange, declining issues outpaced those that advanced in price by a four-to-one margin as volume slowed to 828 million shares.

Twenty-six of the thirty Dow average components ended lower, with energy and financial shares leading the decliners.  The CBOE Vix volatility gauge jumped 5.21% to 24.24.  Gold prices fell $8 to $1106.60. 

On the S&P 500, shares of financial companies were the second-steepest decliners among the 10 industry groups, falling 1.8%.  Bank of America (NYSE:BAC) dropped 2.3% to $16.06 and JPMorgan Chase (NYSE:JPM) fell 2.3% to $43.30.  Energy shares slumped 2% and led the decliners among 10 groups.  The falling shares wiped off an earlier advance in tech shares that was fueled by Hewlett-Packard Co.’s (NYSE:HPQ) takeover of 3Com Corp. (NASDAQ:COMS).

Meanwhile, the US Treasury said budget deficit widened to $176.4 billion in October, the largest October shortfall on record and the fifth largest monthly deficit ever.  Economists had expected a $150 billion shortfall.

The Dollar

First, let's take a look at what a survey of approximately 50 banks and financial firms indicates, for the value of the dollar (Fed broad index) and the euro/dollar exchange rate.

The data are from FX4casts, which is the successor to Currency Forecasters Digest; Jeff Frankel and I used these survey data in our studies of expectations in foreign exchange markets [1] [2] [3]. Some additional results are reported in [4] and [5].

Both series are plotted in logs, and exchange rates defined such that up implies a stronger dollar. In both cases the 95 percent interval is shown. What is clear is the (geometric) mean forecast for the dollar implies relative stability. It's true that the lower bound implies some depreciation over the next year -- but no more than 5.6 percent decline (in log terms). That's hardly calamitous. But it would be helpful in terms of facilitating rebalancing (as I pointed out a few weeks ago [6] [7], dollar decline makes a lot of sense, perhaps even more than the 5.6 percent implied by the lower bound).

If one is more concerned about the dollar's value against major currencies (perhaps because of an interest in cross-border valuation effects on financial assets), one would want to see how the dollar evolves against the euro. Here, it appears the mean forecst implies strength over the medium term. Even the scenario for the weakest dollar implies no more than a 7.5 percent decline, at the 3 month horizon.

More from US Treasury's semi annual report and from Fred Bergsten in Foreign Affairs. Appendix I to the Treasury report discusses the dollar's reserve currency status, a topic discussed in a historical perspective by myself and Jeff Frankel here and here.

Double-dip Recession?

Anxiety remains (rightly so) that the economy will suffer a relapse, with the date perhaps in 2010 or 2011. The latest WSJ survey indicates little evidence of such fears.

The mean forecast suggests a story largely consistent with last month's forecasts. The biggest revisions (upward) came between the August and September surveys. Even then, it won't be until close to end-2010 that GDP reattains its previous peak. Forecast dispersion remains large, though, and the trimmed high (Dean Maki, Barclays) indicates reattainment around mid-2010.

The trimmed low (David Malpass) is, interestingly, kind of a "W", although not the typical discussed one; Malpass forecasts 0% SAAR growth in 2009Q4. Bart van Ark (Conference Board) has a drop in growth to 0.5% SAAR in 2010Q1.

Of course, these are conditional forecasts -- that is they incorporate assumptions regarding a certain combination of fiscal and monetary policies. I would guess most of them are assuming "reasonable" policy mixes. But some of the recent discussions of "W" relate to mistakes in policy making, such as a too-early monetary tightening (Roubini, Krugman) or inadequate stimulus (Krugman) or the time profile of the stimulus (Feldstein).

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), as a guest blogger.

"Once you've seen one financial market crisis...you've seen one financial market crisis."

-- Attributed to Federal Reserve Board Governor Kevin Warsh by former US Treasury Assistant Secretary for Economic Policy Phillip Swagel in The Financial Crisis: an Inside View, March 2009, p. 4.

The financial crisis has set a lot of records so far; it's certainly the worst US banking crisis of my lifetime. Some, as suggested by the above quote, see such crises as unique events; each one is singular and there's not much to be learned about how to handle one from looking at past crises. For example, there's no precedent that I know of for a banking crisis involves the failure of the biggest counterparties for credit default swaps.

I think a much smaller number of people see the crisis differently; they think of it as another potato, a big one. No two potatoes are exactly alike in size and shape, but they all taste pretty much the same and you can use the same recipe for most of them. For that reason, it's interesting to see to what extent the current crisis behaves like other crises, even if it has some unique features.

I think there's some interesting parallels between the current crisis, the Savings and Loan (S&L) crisis of the 80s and 90s, and the Long-Term Capital Management (LTCM) Crisis of 1998. But before I talk about that, let me talk about what a "typical" banking crisis looks like.

The Basel View of "Typical" Banking Crises

If we set the way-back machine to 2004, a time long before terms like ARM, CDS, and AIG entered common conversation, we can see what people thought a typical bank crisis looked like. That's the year the guys in Basel who worry about such things published "Bank Failures in Mature Economies." They looked at the main banking crises in developed countries from 1980 to 2000 and asked themselves what they saw. To be sure, they saw some differences, but they also saw some patterns. Here's part of their main conclusions (note that "credit risk" is Banker for "bad loans").

Most of the widespread [banking] failures required some amount of public support, sometimes in very large amounts. All of the episodes that involved large amounts of public support were caused by credit risk problems. ...The widespread banking crises that involved credit risk were remarkably similar. A period of financial deregulation resulted in rapid growth in lending, particularly in real estate related lending. Rapidly rising real estate prices encouraged more lending, abetted by lax regulatory systems in many cases. When economic recessions occurred, inflated real estate prices collapsed, leading directly to the failures. (BIS, 2004, p.66)

That sounds a lot like what the US (and some other countries) experienced immediately afterwards. There had been some financial deregulation, which was followed by a period of very rapid growth in real-estate-related lending. Rapidly rising real estate values encouraged more lending. The biggest difference seems to be the last point; the recession did not cause real estate prices to collapse; they had peaked by 2006 and fell before the recession started. We could probably also argue about whether it was financial deregulation or "financial innovation that avoided regulations" that helped fuel the increase in real-estate lending. However, in this view the boom and bust cycle in real estate, the subsequent fallout for the banking sector, and the need for a major publicly-funded bailout is not remarkable; we've seen this kind of story before. In fact, Reinhart and Rogoff have gone so far as to tabulate what happens to government debt in the aftermath of a banking crisis. They find that real government debt increases by an average of 86% in the three years after the start of a crisis. So regardless of how you feel about the US government's spending during the crisis, it seems less remarkable when compared to what typically happens in a banking crisis.

Three American Financial Market Crises

More support for the view that banking crises follow similar patterns can be found by comparing the last three US banking crises; the S&L crisis of the late 80s and early 90s, the collapse of LTCM and the most recent crisis. The S&L crisis closely followed the pattern described by the BIS report quoted above; financial deregulation, followed by a rapid growth in real estate lending, creation of local speculative bubbles in real estate prices, and the failure of institutions as bubbles burst (For descriptions of the S&L crisis, see BIS (2004) or the GAO 1996 report). The General Accounting Office put the cost of the S&L bailout to US taxpayers at $132.1 billion, or a bit under 2% of GDP (United States General Accounting Office (1996) "Financial Audit: Resolution Trust Corporation's 1994 and 1995 Financial Statements," Table 3 and author's calculations). That may seem small compared to the size of TARP or this year's projected federal deficit, but it was shocking at the time.

At first glance, the LTCM crisis appears quite different; no bank failed (LTCM was a hedge fund), its failure was unrelated to real estate investment or credit risk, and the crisis was resolved at no cost to the taxpayer. However, the LTCM crisis showed that, as a result of deregulation, a systemic crisis could start outside the regulated banking system. Another GAO study noted:

The LTCM case illustrated that market discipline can break down and showed that potential systemic risk can be posed not only by a cascade of major firm failures, but also by leveraged trading positions. LTCM was able to establish leveraged trading positions of a size that posed potential systemic risk primarily because the banks and securities and futures firms that were its creditors and counterparties failed to enforce their own risk management standards. (US GAO (1999) p. 29)

The same report noted:

• Gaps in [US Government agencies'] regulatory authority limits their ability to identify and mitigate systemic risk (US GAO (1999) p. 24)
• Regulators did not identify weaknesses in firms' risk management practices until after the crisis (US GAO (1999) p. 16)
• Monitoring did not reveal the potential systemic threat posed by LTCM (US GAO (1999) p. 17)

and provided a variety of proposals (some of which are mentioned below) to reform the financial system by reducing systemic risks.

The success of those reforms can be judged by role of similar factors in the most recent US banking crisis. An important factor in the latter has been the role of trading in derivative securities, primarily mortgage-based securities and credit default swaps (CDS). Again, government oversight of this market was limited due to faith in the market's ability to manage its exposure to risk, and was further weakened by divided responsibilities between multiple agencies. Regulators and private lenders alike were again unaware of major firms' exposure to losses on derivative securities; this time even the heads of major financial institutions were not aware of the extent of their own exposures. Again, this was in part due to the lack of transparency, lack of clearing and high leverage afforded by trade in Over-the-Counter (OTC) derivatives (particularly those traded at Bear Stearns.) Again, weaknesses in firms' risk management practices became apparent only in hindsight. Again, major financial firms that were not regulated as traditional deposit-taking banks took on highly-leveraged positions and posed major systemic threats to the banking system. These included several investment banks (such as Bear Stearns, Goldman Sachs, Lehman Brothers, and CitiGroup) and the insurance company AIG.

Conclusion

Looking at recent events from this perspective, I still see the size of the losses as breathtaking, but the causes and dynamics seem much more familiar. What bothers me is that some of the suggested solutions sound pretty familiar too; make derivative trading more transparent, improve coordination among the regulators, give regulators more power to control systemic risk in new places, and so on. Despite that, not only was there another crisis, but it was much larger than the two previous crises combined.

This post written by Simon van Norden.

• Fannie Mae (NYSE:FNM) asked for an additional $10.7 billion cash infusion from the government, following its quarterly post of a $2.67 per share loss, or $15.2 billion

• NVIDIA (NASDAQ:NVDA) reported second quarter earnings of 7 cents a share, 9 cents ahead of estimates of a loss of 2 cents per share on revenues of $776.5 million, which beat estimates of $710.18 million

• Piper Jaffray (NYSE:PJC) upgraded shares of Crocs (NASDAQ:CROX) to "over-weight"

• Morgan Stanley (NYSE:MS) announced repurchase of $950 million of its warrants from the US Treasury, providing a 20% annualized return to US taxpayers

• CBS (NYSE:CBS) reported second quarter earnings of 8 cents a share, one penny ahead of estimates, on revenues of $3.01 billion

U.S. stock futures pointed to a lower open on Wall Street with Dow futures down 94 points, or 1.1%, at 8,696.

Friday saw a quiet trading week coming to a halt, in which the Dow Jones Industrial Average joined the S&P and Nasdaq in positive territory for the year.  The Dow, which has risen in 12 of the last 14 weeks, gained 28 points, or 0.3%, to close above its 2008 finish of 8,776.39.  The S&P ended the day flat and Nasdaq recorded a modest decline.  Decision by ten financial firms to repay US government funds was an indication that the worst of the credit crisis is over.  However, spiraling yields on government bonds and rising commodity prices kept sentiments under check. Dollar prices, however, got some boost following positive comments from Russia's finance minister and commodity-based stocks and oil prices declined.  

At the weekend meeting of G8 finance ministers in Italy, Russian finance minister Alexei Kudrin remarked that dollar's status as the world's main reserve currency was likely to continue in the near term.  The G8 finance ministers signaled that the worst of the financial crisis is over, raising the need for talks on central banks' upcoming exit strategies. However, they stopped short of painting a rosy picture, saying, "...the situation remains uncertain and significant risks remain to economic and financial stability". According to US Treasury Secretary Geithner, however, "I don't think we're at the place yet where we can say we have a recovery in place".

Hartford Financial (NYSE:HIG), which has asked for a $3.4 billion US Treasury aid, announced plans to raise $750 million through a stock sale to boost its capital position. 10-year government bond yields pulled back from their recent highs and declined to 3.75% from 3.80%.

Comments from the annual Paris Air Show pointed to an increasingly difficult environment for commercial aircraft manufacturers, with airlines looking at two straight years of losses.  Despite a contested election in Iran, profit-taking and positive US dollar statements from Japan and Russia sent commodity-based stocks lower this morning, as oil prices sank to $71 per barrel.

Key talks scheduled this week include Fed Governor Duke today on responses to the financial crisis; Fed Governor Warsh on economic policy Tuesday, Bernanke at the financial literacy summit on Wednesday, and Treasury Secretary Geithner Thursday on financial regulation.

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

3 Solid Picks

Franklin Real Return A (FRRAX) seeks to achieve total return that exceeds the rate of inflation over an economic cycle.

The fund generally invests a substantial portion of its assets in inflation-protected securities. It also has the flexibility to invest in other sectors of the market to increase real return (total return less inflation) potential and offer greater diversification.

T. Anthony Coffey has been lead manager at the fund since its inception in November 2004. The fund has an expense ratio of 0.90%.

Berwyn Income (BERIX) was incepted in September 1987. The fund is designed for investors, who want a high level of current income while maintaining some potential for capital appreciation.

While the majority of its portfolio is invested in bonds, the fund may invest up to 30% of its assets in dividend-paying common stocks. Its balanced, income-oriented approach affords a greater level of price stability than an all equity portfolio.

Unit holders have to make a minimum initial investment of $3,000 to enter this Zacks#1 Rank ("Strong Buy") fund. The fund distributes dividends and capital gains, if any, annually.

Gabelli ABC (GABCX) seeks total returns that are attractive to investors in various market conditions without excessive risk of capital loss. The fund is non-diversified.

The fund primarily invests in securities of domestic and foreign issuers that are expected to yield opportunities for appreciation or investment income. It may invest in value-oriented common stocks, convertible securities and virtually risk-free U.S. Treasury Bills.

The fund's top holdings include Wyeth (WYE), Schering-Plough Corp. (SGP) and CV Therapeutics Inc. (CVTX). The fund has outperformed the total returns of its benchmark index in the last 1-, 3- and 5-year periods.

Discover Many More Funds

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

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

New reports put BlackRock's deal for BGI at $13 billion.

During the weekend, several new articles appeared in British papers reporting that BlackRock Inc. is closing in on a deal to acquire Barclays Global Investors, the parent company of iShares, in a transaction worth up to US$13 billion.

But not all the reports were as definitive as the one coming out of the US late last week. Pensions & Investments magazine, on its Web site, broke the news late Friday afternoon after markets had closed in the US. It quoted unnamed sources as saying that the groundwork for a deal was in place and that an announcement would be forthcoming.

The story also had estimates that a BlackRock purchase of BGI would surpass $10 billion. (See related story here.)

However, in a story over the weekend, a report out of London by the Financial Times said that Barclays isn't expected to reach a decision until early this week on who will purchase its asset management division.

Also, more details are leaking out about the complexity of such a transaction.

Barclays is expected to acquire a stake of 20% in BlackRock. Meanwhile, BlackRock is likely to rely on financing from Middle Eastern sovereign wealth funds. And Barclays’ president, Bob Diamond, is supposedly rumoured to be considering joining the board of the US-based BGI.

Larry Fink, BlackRock’s founder and chief executive, met the Kuwait and Qatar Investment Authorities last week to seek funding, according to the Financial Times.

The deal, if confirmed, would set a record for the acquisition of an asset management company, dwarfing the US$ 8.5 billion paid by BlackRock for Merrill Lynch’s fund arm in 2006.

It would also trigger a payout of US$ 585 million for the 200 employees of BGI with stakes in the company, with Diamond set to receive around US$ 30 million.

Although weekend press reports suggested that a new deal is close to being reached, Barclays has another 10 days until the June 18 deadline for seeking further bids for iShares and other related businesses.

This was set as part of the US$ 4.2 billion May agreement to sell iShares to CVC Capital Partners. CVC will receive a US$ 175 million break fee if Barclays concludes a transaction with a third party, as now seems likely.

A BlackRock acquisition of BGI would mean intensifying competition in the fixed-income ETF market, according to some observers. Last week Pimco, BlackRock’s biggest riva,l initiated its ETF range with a 1- to 3 -ear US Treasury bond tracker, undercutting the equivalent iShares fund with a 9 basis point annual fee.

-- IndexUniverse.eu's Paul Amery submitted this report. IU.com's Murray Coleman also contributed.

As the credit crisis intensified through a tumultuous year, Hartford lost $2.7 billion for writing down the value of mortgage-related assets and corporate debt in 2008.

In October, faced with concerns over the company's capital levels, Ayer accepted a $2.5 billion cash investment from German peer Allianz SE (AZ).

Even then, the downward trend in equity markets continued to drag the Connecticut-based firm along with it. All three key credit ratings agencies downgraded Hartford. To meet rising challenges, Ayer cut jobs, slashed the company's dividend by 84% and appealed for funds under the US Treasury's Troubled Asset Relief Program (TARP).

Last month, Hartford won preliminary approval for $3.4 billion in government bailout along with six other insurers. However, even though most insurers rejected the proposal for federal support to sustain themselves, Hartford and Lincoln National Corp. (LNC) are likely to accept those funds. Ayer said last week that he was "finalizing details" with the government regarding TARP money.

Even though Ayer has defended the measures he undertook to handle the crisis, investors believe he could have done better. The Hartford board will now begin the search for an immediate and external successor.

Shares of Hartford (HIG), a Zacks #4 Rank ("Hold") company, are up nearly 2%.

Bond giant Pimco launched its first exchange-traded fund on Tuesday with the debut of the Pimco 1-3 Year U.S. Treasury Index Fund (NYSE Arca: TUZ) on NYSE Arca.

The Newport Beach, Calif.-based asset manager originally filed to enter the ETF market last July, targeting an intermediate-term bond index (see related story here). A few months later as markets were heavily stressed by the ongoing credit crisis, Pimco decided to go with the short-term Merrill Lynch Treasury benchmark to base its first ETF on. (See related story here.) 

TUZ will charge just 9 basis points (0.09%) in expenses, reflecting a 0.13% fee waiver that is contractually in place for at least a year. At 0.09%, TUZ becomes the lowest-cost fixed-income ETF on the market, undercutting the previous low-cost leaders, the Vanguard Short-Term Bond ETF (NYSE Arca: BSV) and the Vanguard Total Bond Market ETF (NYSE Arca: BND), by 2 basis points (0.02%).

"Our objective is to offer investment products that are competitively priced," said Tammie Arnold, managing director and head of global wealth management for Pimco. "In the case of TUZ, we're offering a temporary fee waiver that brings down the ER for at least two years. That's an acknowledgment of the current level of yield at the short part of the curve."  

Currently, the largest direct competitor for TUZ is the iShares Barclays 1-3 Year Treasury Bond ETF (NYSE Arca: SHY), which has $7 billion in assets and charges management fees of 0.15%. If TUZ can attract sufficient liquidity to support low-cost trading, it will be a serious challenger to SHY.

PIMCO also says that its ETFs are designed with a focus on creating an ultra-liquid underlying basket, to help ensure that the ETF is easy for market-makers to hedge, which should help keep the fund's share price in line with its net asset value.

"We've been very thoughtful in the selection of bonds that will populate the portfolios, to ensure that the liquidity of the underlying securities is robust," said Don Suskind, head of Pimco's ETF product team. "That should translate into liquidity for the ETF itself." 

In related news, Pimco also filed papers with the Securities & Exchange Commission to launch six additional fixed-income ETFs:

•  Pimco 3-7 Year U.S. Treasury Index Fund
•  Pimco 7-15 Year U.S. Treasury Index Fund
•  Pimco 15+ Year U.S. Treasury Index Fund
•  Pimco Broad U.S. TIPS Index Fund
•  Pimco Short Maturity U.S. TIPS Index Fund
•  Pimco Long Maturity U.S. TIPS Index Fund

The last two would be the first ETFs to break the TIPS market into short- and long-term categories. Currently, all existing TIPS ETFs (such as the iShares Barclays TIPS Bond Fund (NYSE Arca: TIP)) simply provide broad exposure to the TIPS market.

The filing is available here. 

There is no word yet on when the additional funds will launch. The filing confirms, however, that Pimco is making a significant move into the ETF market, and aims to present a full slate of fixed-income offerings to the ETF market.

The company has more than 30 years' experience managing fixed-income mutual funds, and is the largest fixed-income manager in the world. Arnold says the company would leverage its existing distribution capabilities to push the ETFs out into both the institutional and retail markets.

"The segment that is newly accessible to us with ETFs is the institutional money manager segment, and we're excited about tapping into that market," he said. 

-- This article was submitted by IndexUniverse.com's Matthew Hougan. 

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

3 Fine Samples

Changing Parameters (CPMPX) seeks total return. The fund invests primarily in futures contracts, options on futures contracts, swap contracts, exchange-traded funds ("ETFs") and U.S. Treasury instruments.

The fund is non-diversified. It typically invests in U.S. Treasuries with maturities of any duration, or their derivatives, and the allocation of its investments between equity and fixed income market segments may vary without limitation.

Robert Levenson has been lead manager at the fund since October 2006. The fund has outperformed the total returns of its benchmark index in the last 1-year period.

Gabelli ABC (GABCX) was incepted in May 1993. It seeks to achieve total returns that are attractive to investors in various market conditions without excessive risk of capital loss.

The fund invests in securities of domestic and foreign issuers that provide attractive opportunities for appreciation or investment income. It may invest in value-oriented common stocks, convertible securities and virtually risk-free U.S. Treasury Bills.

Genentech Inc. (DNA), Wyeth (WYE) and Schering-Plough Corp. (SGP) are among the top equity holdings at the fund.

Berwyn Income (BERIX) is designed for investors seeking a high level of current income while maintaining some potential for capital appreciation. The fund's balanced, income-oriented approach affords a greater level of price stability than an all equity portfolio.

While the majority of its portfolio is invested in bonds, Berwyn Income fund may invest up to 30% of its assets in dividend-paying common stocks. The fund distributes dividends and capital gains quarterly

Unit holders have to make a minimum initial investment of $3,000 to enter this Zacks#1 Rank ("Strong Buy") fund. It has an expense ratio of 0. 73%.

Discover Many More Funds

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

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

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

Here are highlights from Thursday's Analyst Blog:

Consolidated Banking, Maybe?

Clearly the cobbled-together oversight from various federal agencies was ineffective to contain the current financial crisis that all but swallowed the U.S. last year -- institutions such as but not limited to Citigroup (C), Bank of America (BAC), JP Morgan Chase (JPM) and AIG (AIG) -- and it remains in fairly close proximity to do so again.

Several weeks ago, U.S. Treasury Secretary Timothy Geithner sent to Congress a proposal to potentially to overall the current supervision of financial markets. While much is still up in the air, it is now expected as early as mid-June 2009 that the Obama Administration will make a formal recommendation to Congress for the creation of a single banking regulator to oversee the entire sector. It would be hoped that if such a proposal were sent to Congress it woud be finalized by the end of the year to help resolve the current quagmire.

Currently, a disconnected grouping of state and federal regulators oversee financial institutions throughout the country. It is not anticipated that the Obama Administration will propose the elimination of this so-called "Dual Banking System."

The new regulator would serve as primary regulator for the nationally chartered banks and thrifts, serve as a secondary oversight for the more than 5,000 state-regulated banks and the primary regulator for the nationally chartered banks and thrifts, and help to streamline supervision of banks and make it harder for banks to game the system by shopping for the lightest form of oversight.

UTStarcom - Big Opportunities

We expect UTStarcom, Inc. (UTSI) , a provider of IP-based telecom equipments, to receive further demand for its IPTV solutions as mobile TV systems become increasingly popular in China and India due to nationwide deployments of 3G wireless networks.

UTStarcom's transformation from a mobile handset developer to an IPTV and optical transport solutions provider has been favorably implemented.

Moreover, the company's current valuation is below its net cash position. At the end of the first quarter, the company had approximately $2.41/diluted share of cash position with no outstanding debt.

On the other hand, the markets for IPTV solutions and intelligent switching products are highly competitive and this, together with global economic weakness, may hinder efforts to improve the company's earnings power.

Want more from Zacks Equity Research? Subscribe to the free Profit from the Pros newsletter: http://at.zacks.com/?id=2649.

About Zacks Equity Research

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

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

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

About Zacks

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

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

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

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

The U.S. Treasury is expected to extend more than $7 billion in fresh aid to GMAC LLC in a move that could turn the government into a majority stakeholder in both the auto lender and its parent General Motors Corp (GM).

Last week, federal stress tests indicated that GMAC needs to raise $11.5 billion to plug capital holes in order to endure a deepening recession. GMAC has already received more than $5 billion in government bailout last December.

After several weeks of holding talks to secure additional capital, the government's new aid will allow the firm to revive its battered balance sheet from rising home foreclosures and defaults in its auto finance unit. A large part of these funds will be used to provide financing to customers for buying Chrysler and GM vehicles.

After rescuing several large banks from definite failure, the government is now trying to drag Detroit automakers out of doomsday by encouraging more lending. Thus, Treasury Secretary Timothy Geithner recently said that the administration will provide substantial support to GMAC.

After Chrysler's filing last month, it is increasingly looking like GM will be ushered into bankruptcy as well. It remains uncertain if the government will ever get back the funds it has injected or is in the process of putting into these company. The Treasury's investment in GMAC already bought it 5 million preferred shares in December. The Obama administration may push for a conversion of its GMAC stake into common equity after the new capital infusion.

Industry insiders belive that after its merger with Chrysler's financial arm, GMAC under government ownership would have the power to offer better loan terms to buyers of GM and Chrysler vehicles. This will not only pave the way for healthy competition with rivals like Ford (F), but also resuscitate the beleaguered auto sector.

Pre-market futures suggest a higher opening on the Wall Street, following better-than-expected earnings from Home Depot (NYSE:HD), which reiterated full-year guidance and reported a 44% jump in profit despite lower sales.

On Monday, U.S. stocks rallied as Lowe's (NYSE:LOW) improved earnings outlook fueled optimism of a rebound in housing sector.  Chief Executive Robert Niblock advised, "Encouraging signs in recent weeks that suggest perhaps the worst is behind us."  Lowe's (NYSE:LOW) jumped 8.1%. Shares of Home Depot (NYSE:HD) also rallied on the news and ended the day with a 6.6% gain.  Lowe's results beat Street expectations and the firm's full-year guidance was ahead of consensus views. Goldman (NYSE:GS) added Macy's (NYSE:M) to "conviction buy" list, citing its $400 million cost savings plan and a likely recovery in profits as the economic situation rebounds.

On Monday, the S&P 500 gained 3% to 909.71 for its steepest gain in two weeks. The Dow Jones Industrial Average added 235.44 points, or 2.9%, to 8,504.8.  The NASDAQ led the indices with a 3.1% advance to 1,732.

The National Association of Home Builders' latest Housing Market Index which rose to 16 from 14 in April suggested home builders are growing increasingly confident. Citigroup (NYSE:C) raised its rating on Lennar (NYSE:LEN) from "hold" to "buy;" Lennar (NYSE:LEN) shares jumped 13.7%.  Taking the cue, DR Horton (NYSE:DHI) rose 8.8%; Centex (NYSE:CTX) 8.4%, and KB Home (NYSE:KBH) 8.2%.

The 3-month LIBOR declined 4 basis points to 0.79%, its steepest fall since March 19 and market's volatility index, the CBOE Vix, plunged 8.70% to 30.24.  On the NYSE, advancing issues outpaced declining stocks by a seven-to-one margin.  Volume was relatively moderate at 1.42 billion.

Of the thirty DJIA components, twenty-nine closed higher on Monday.  Financials were the leading gainers, up 6.7%, followed by a 4.8% jump in basic materials stocks, 3.9% in consumer services, and 3.4% surge in oil and gas and industrial sector shares.

Among financial components, Bank of America (NYSE:BAC) led the advancing issues with a 9.9% gain, followed by a 7.8% jump in American Express (NYSE:AXP), and a 6.7% advance in JP Morgan (NYSE:JPM) stocks.  Morgan Stanley (NYSE:MS) shares jumped 8.2%, Goldman Sachs (NYSE:GS) added 6.5%, and Wells Fargo (NYSE:WFC) surged 8.3%.  Financials got a boost after Goldman Sachs (NYSE:GS) added Bank of America (NYSE:BAC) to its "conviction buy" list, citing confidence in the banks' ability to come out of the current credit crisis, as well as expectations of improved second quarter results due to strength in refinancing and capital markets.  Citigroup (NYSE:C) raised its price target on Goldman Sachs (NYSE:GS) shares 10% to $160, citing improved debt and equity underwriting activity.

Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) applied for permission to repay TARP funds worth $45 billion.  State Street (NYSE:STT) shares jumped 8.5% in spite of news the firm would take a $3.7 billion loss putting conduits on its balance sheet.  The company said it will sell stocks to pay back funds borrowed under TARP.  However, after the markets' close, American Express (NYSE:AXP) announced plans to cut 6% of its global workforce, or 4000 jobs, citing increased defaults generated by the weak economy.

Today's economic posts include the 8:30 AM ET housing releases on building permits and housing starts. Both the posts are expected to show modest improvements.  April permits are expected to have risen to 530,000 from 516,000, and starts to 527,000 from 510,000. Minneapolis Fed President Gary Stern speaks at 1:15 PM ET on financial conditions. Crude prices hit $60 this morning, following yesterday's 4.8% increase, upon reports of a Sunoco (NYSE:SUN) refinery fire impacting Northeastern US supplies, and Nigerian militant threats to block waterways.