INVESTMENT QUARTERLY - ATGF · 2012-03-09 · INVESTMENT QUARTERLY Prepared by Feldman Securities...

INVESTMENT QUARTERLYPrepared by Feldman Securities Group, LLC

ATG Trust Company provides investment analysis and advice, estate planning, and trust administration for individuals, businesses, retirement plans, and institutional accounts through its network of trusted advisers in the legal community. Feldman Securities provides its services through ATG Trust Company and not to the public. To learn more about Feldman Securities and ATG Trust Company, contact ATG Trust Company at:

One South Wacker Drive, 24th Floor Chicago, IL 60606-4654

Phone 877.674.7878 or 312.338.7878 Fax 312.338.1594

E-mail [email protected] Website www.atgtrust.com

Second Quarter - 2008

Contents:

The Rambling Rhino Page 2

Synopsis of Research Wires Dated Feb. 1, 2008 through April 30, 2008

Page 4

Model Portfolio Page 5

Executive Summaries of Recommended Stocks Page 6

It should not be assumed that recommendations made by the Feldman Securities Group (FSG) in the future will be profitable or will equal the performance of the list of securities for which Buy, Hold and Sell ratings are made by FSG. Please see our full disclosures at the end of this publication. Visit fsgrhino.com to access past publications. Contact FSG at [email protected] or 800.676.1755 if you have any questions or need additional information.

Visit fsgrhino.com, e-mail [email protected], or call (312) 444-1755 for current disclosures

ATG Trust Company INVESTMENT QUARTERLY – SECOND QUARTER 2008

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The Rambling Rhino

A Beautiful Spring Day Buzzing the Treetops. The mighty United States economy appears to be shaking off the staggering blows of a bursting housing bubble, a financial crisis and rising fuel and food prices. And with the powerful support of the Federal Reserve, it might just trim the recessionary treetops before resuming an upward trajectory. The economy has indeed been losing altitude, growing at a barely visible but still positive 0.6 percent in the first quarter of 2008. Recession is defined as two consecutive quarters of negative real growth; as yet we have not experienced one down quarter, and with the Federal Reserve pouring money into the economy, we’re not sure that there will be even one negative quarter in the near term. The second half of 2008 is beginning to look better, and a good indication is the forward-looking stock market, which continues to build a base and climb the proverbial “wall of worry” that characterizes the beginning of bull markets. The Federal Reserve Pumps Steroids into a Weakening Economy The Federal Reserve has demonstrated the power it wields over the economy by employing a variety of tools, and it is especially focused on restoring the health of the flagging financial sector, which must get well so it can begin to finance economic growth again. Although important segments of the financial sector are doing well – such as trading, investment banking, and securities management – the bursting of the housing bubble and the subsequent implosion of the risky and leveraged securities used to finance it decimated the balance sheets of many banks. Many banks may have swung their lending pendulums too far to the conservative side leading to a credit crunch. One indicator of the size of the problem is that the share of sub-prime mortgages to total mortgage volume grew from 5 percent in 2001 to more than 20 percent in 2006. The Fed has its work cut out for it, and it will be a bumpy road to recovery. As an example of the damage suffered, the ABX-HEBB-06-2 index of sub-prime securities (and a mouthful in and of itself), fell to a low of 10 after trading at 100 in July 2006. The financial system is deleveraging big time, with some players selling securities at any price in order to deleverage their balance sheets and meet loan calls. Despite the headlines, many big players with plenty of cash on hand have been moving in and buying distressed assets and companies, which is a good sign for the economy and the markets. The Fed wants to help financial institutions rebuild their balance sheets so they can start lending again and finance economic growth. The central bank lowered interest rates to help financial institutions rebuild their capital bases, which were decimated by losses in sub-prime securities. The Fed is also getting involved at the micro level, and it supported JP Morgan’s purchase of Bear Stearns by guaranteeing $29 billion of Bear Stearns’ mortgage portfolio; the central bank’s motto appears to be, “Do whatever it takes.” The Fed has also been working in concert with foreign central banks because there is so much at stake in terms of the build-out of the global economy. The Fed reported last week that it will work with European central banks to build up a pool of emergency reserves available to U.S. banks. Side Effects Positive – The Perfect Storm? Two side effects of the Fed’s help-the-banks medicine is that liquidity is pumped into the entire economy, which history shows: (1) causes financial markets to rally, and (2) the economy to grow – each with a lag time, and each inevitably. This may be what is happening now. A lot of smart money is already invested, and that’s why we are optimistic. Many stocks are selling at bargain prices following the stock-market correction of 2007, and they may reward investors brave enough to ignore the headlines and take the plunge. If consumer confidence is at a 35-year low, then we say it is time to buy because such an aberration is not bound to last; in fact it is exactly the sort of atmosphere we want when we buy stocks. Looking at the situation in perspective, the Fed doesn’t pour money into the economy when everything is going well; it does so during times of financial panic, which are accompanied by panic selling and low stock prices. The perfect storm? We say, a beautiful spring day for investors. Buy the blue chips, such as PepsiCo, Philip Morris International, Johnson & Johnson, and IBM for healthy risk-adjusted total-return potential. Retail stocks are especially cheap, while selected well positioned and well managed financial stocks, such as Goldman Sachs, JP Morgan, US Bancorp, and Wells Fargo are not as risky as they might seem in the current media frenzy. Negative – Inflation Risk. A possible side effect of printing money, which is essentially what the Fed is doing, is a weakening of the dollar versus foreign currencies in countries with higher interest rates. And another, of course, is inflation. The Fed has decided to risk these side effects in order to restore the health of the economy and keep the global economic recovery


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humming. The dollar fell during the Fed’s interest-rate cutting episode, which pushed oil prices higher in dollar terms and caused prices to inflate. Bernanke & Co. suggested that the recent quarter-point reduction in short-term interest rates would be the last in this cycle, which contributed to a rally in the dollar and could therefore eventually push down the price of oil in American dollars. This is a good sign, and it is a potential catalyst for the stock market. We are not as sanguine about bond prices, which have been pushed artificially higher by the recent flight to quality, and should trend lower as the recovery gains traction. The benchmark 10-year U.S. Treasury bond has already begun to gradually and almost imperceptibly lose ground, with the yield on the benchmark 10-year U.S. Treasury bond creeping higher towards 4 percent. Economic Data Better Than Expected We have been watching several key economic indicators for clues on the direction of the economy, and the most recent figures have been encouraging: Employment In a much anticipated report, the Labor Department reported that employers cut 20,000 jobs in April, which was much lower than the 70,000 jobs Wall Street had expected the economy to lose. Although this was the fourth straight month of net job losses, the magnitude suggested that the economy might not be falling into recession. Next up: the May unemployment report, which is to be released in June. Manufacturing Orders Rise The Commerce Department reported that U.S. manufacturers’ orders rose 1.4 percent in March, indicating a stronger industrial sector than economists had expected following declines in orders in February and March. Economists had been expecting a 0.2-percent increase in March. Exports Foreign demand for U.S. goods and services remains strong because emerging economies need our help to grow, and the dollar has been weak, making American goods cheaper than domestic goods. Exports – and by extension the global capitalist boom – are helping the U.S. economy maintain momentum, and they may continue to do so for many years to come. A Reliable Saying Economic indicators help investors make investment judgments – sort of like measuring the weather before we decide to take a trip; we don’t go skiing in July (unless we happen to be south of the equator) and we don’t play golf in January. This is a simplification, but why not try to keep it simple. Of all the economic indicators, there is one that trumps the rest, and if you want to follow only one, then this is it: “Don’t fight the Fed.” And at the moment, the Fed is on the side of the long investor. Recession or Not Whether or not the United States economy is heading into a recession, the economy did slow down and experience a serious credit crunch, while stock prices fell. The emotional impact on investors is therefore probably the same either way. So we thought it would be instructive and encouraging for our readers to see how the stock market performed during previous recessions. (The stock market experienced a 15-percent correction, so this could turn out to be one of those times when stock prices predict a recession that does not occur.) Northern Trust recently published a study on how the stock market reacted before, during, and after the last few recessions. Historical perspective is an important factor in honing investing skills, so we thought the following table would be useful:

Recession Data S&P Price Return

Recession Started Recession Ended Duration Six Months Prior During Recession One Year After

Linked Returns

Returns Annualized

June 30, 1953 June 30, 1954 4Q -9% 21% 41% 54% 22% Sept. 30, 1957 June 30, 1958 3Q -4% 7% 29% 33% 15% June 30, 1960 March 31, 1961 3Q -5% 14% 7% 16% 7% Dec. 31, 1969 Dec. 31, 1970 4Q -6% 0% 11% 4% 2% Dec. 31, 1978 March 31, 1970 5Q -6% -15% 23% -1% 0% March 31, 1980 Sept. 30, 1980 2Q -7% 23% -7% 6% 3% Sept. 30, 1981 Dec. 31, 1982 5Q -15% 21% 17% 21% 8% Sept. 30, 1990 March 31, 1991 2Q -10% 23% 8% 19% 10% March 31, 2001 Dec. 31, 2001 3Q -19% -1% -23% -39% -17% AVG. 3.4Q -9% 10% 12% 13% 5%

Sources: Bloomberg and National Bureau of Economic Research (NBER); table completed by the Northern Trust Company


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The table indicates that, on average, stocks lose 9 percent of their price in the six months leading up to a recession. If a recession started on the following dates, then the respective six-month prior returns on the S&P 500 (price only) would be:

Dec. 31, 2007 2% Jan. 31, 2008 5% Feb. 29, 2008 9% March 31, 2008 15% April 30, 2008 8% May 2, 2008 6%

So if the economy has entered a period of negative real growth, (but not a recession, which requires two consecutive quarters of negative growth, and the first-quarter of 2008 was positive), then to-date the odds are that it did so around the end of March, which showed the lowest six-month prior returns. We won’t know this for sure until second-quarter GDP growth is reported in July. Six months is the traditional forecasting time frame, so if you are interested in who will win the election in November, stock market action in May and June could provide a clue. Interestingly, and perhaps counterintuitively, stocks on average actually post positive returns during recessions. So stock prices can sometimes forecast both recessions and recoveries. Dow Theory Reprise Several months ago we reported that the Dow Jones Transportation Average had preceded the decline of the industrial and broader market by several weeks as it started to taper off last July, ahead of the industrials. Although this report was in retrospect and therefore instructional rather than predictive, it makes sense that companies that ship goods would be a good indicator of new orders and demand trends. The transportation index was essentially flat in January and February, two months that also reflected rising unemployment, weak factory orders and rapidly rising fuel costs. The index began to take off in March, rising 5 percent from its 2007 close, as compared to a 5-percent loss for the industrials index (which had lost 8 percent by the end of February). The rise in transportation stocks accelerated substantially in April, with the index ending the month 13 percent higher than its year-end close, while the industrials began to close the gap, yet still ending the month 5 percent lower than at year’s end. The transports tacked on another 140 points (2.7 percent) the first two days of May, pushing the index 14.5 percent higher than at the close of trading in 2007; the industrials gained 1.8 percent those two days. Summer Rally? So the transportation stocks are being propelled higher and at a faster rate of acceleration than the industrials. If the theory – and much of history – holds true, then the industrials will eventually follow suit, suggesting that a powerful stock market rally is in the offing; a summer rally, if you will. Chronological Synopsis of Research Wires

Feb. 1, 2008 through April 30, 2008

DATE COMPANY RESEARCH WIRE March 17 Altria Upgrade from HOLD to BUY American Int’l Group Downgrade from HOLD to SELL Kohl’s Initiate coverage at BUY Morgan Stanley Downgrade from BUY to HOLD Staples Initiate coverage at BUY Williams-Sonoma Downgrade from BUY to HOLD April 4 Philip Morris Int’l Initiate coverage at BUY April 28 Visa Initiate coverage at BUY April 29 Wrigley, Wm. Jr. Co. Downgrade from BUY to HOLD


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FSG Model Stock Portfolio

April 30, 2008

Sector Rating FSG Weighting S&P 500 Weighting CONSUMER DISCRETIONARY 10.0% 8.7% Bed Bath & Beyond Buy 1.1% Best Buy Buy 1.8% Kohl’s Buy 2.0% Lowe’s Cos. Buy 1.9% Staples Buy 1.7% Williams-Sonoma Buy 1.3% CONSUMER STAPLES 9.0% 10.4% CVS Corp. Buy 1.9% Estee Lauder Buy 1.5% Pepsi Buy 1.6% Philip Morris Int’l Buy 1.3% Procter & Gamble Buy 1.5% Wrigley Hold 1.2% ENERGY 14.7% 13.6% Chevron Buy 3.5% ConocoPhillips Buy 3.2% Devon Energy Buy 4.6% Noble Corp. Buy 3.4% FINANCIALS 15.5% 17.5% Capital One Fin’l Buy 3.0% Goldman Sachs Hold 3.3% JP Morgan Chase Buy 3.0% U.S. Bancorp Buy 3.0% Wells Fargo Buy 3.1% HEALTHCARE 11.2% 11.3% Abbott Labs Buy 2.8% Johnson & Johnson Buy 3.1% Medtronic Buy 2.2% Stryker Corp. Buy 3.1% INDUSTRIALS 11.6% 11.8% Danaher Corp Buy 3.2% Emerson Electric Buy 2.4% Illinois Tool Works Buy 2.8% L-3 Commun. Buy 3.2% INFORMATION TECHNOLGY 17.4% 16.1% Adobe Systems Hold 1.5% Autodesk Buy 1.3% Cisco Systems Buy 1.6% Citrix System Buy 1.5% eBay Inc. Buy 1.7% Hewlett-Packard Buy 1.6% IBM Buy 2.0% Microsoft Buy 1.6% Oracle Corp Buy 1.6% Texas Instruments Buy 1.4% Visa Buy 1.7% MATERIALS Materials Select Sector SPDR Buy 3.6% 3.5% TELECOMMUNICATIONS Vanguard Telecom Service ETF Buy 3.4% 3.5% UTILITIES Utilities Select Sector SPDR Buy 3.5% 3.6%


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Current Disclosures

Feldman Securities Group, LLC reserves the right to change a stock rating at any time. The Feldman Securities Stock Rating System is a relative ranking system based on valuation - the more attractive a stock in terms of total return potential, the higher the rating. Once a stock has qualified under our Financial Strength and Earning Power criteria, Valuation is the primary determining factor, meaning that the stock price is of critical importance. Significant changes in estimated valuation can trigger a change in our rating. Feldman Securities Group, LLC’s Stock Ratings are defined as:

BUY – The current price suggests that the stock is likely to produce a total return that is greater than the relevant benchmark over the next 12 to 24 months. HOLD - The current price suggests that the stock is likely to produce a total return that is about the same as the relevant benchmark over the next 12 to 24 months. SELL - The current price suggests that the stock is likely to produce a total return that is less than the relevant benchmark over the next 12 to 24 months.

Over the past calendar quarter, the ratings breakdowns of stocks actively followed by FSG were: BUY: 67.7% HOLD: 31.6% SELL: 1.6% Research Analyst Bradley W. Young and Household invest in common stocks some of which are on FSG’s approved list of stocks. The recommendations herein reflect solely the professional opinion of Bradley W. Young and in no way influences his compensation. FSG does not make a market in nor underwrites any security. FSG does not take proprietary ownership in any stock covered in this report. Factual materials obtained from sources believed to be reliable but cannot be guaranteed. Part II of Form ADV is available upon request. For further information please contact FSG at 800.676.1755 or [email protected].


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The S&P Quality Ranking System assesses in a single symbol the growth and stability of a company’s earnings and dividends history. Rankings are generated using a computerized system based on earnings per share and dividend records over the past 10 years. The following is a list of Quality Rankings with letter classifications and a brief description: Letter Description A+ Highest A High A- Above Average B+ Average B Below Average B- Lower C Lowest D In Reorganization LIQ Liquidation The following is a list of fundamental research metrics listed on the stock profile and their definitions: Metric Definition Market Value ($ bil.) The dollar amount at which the public values all the shares outstanding of a publicly traded

company. Formula: Shares Outstanding x Price.

Debt/Total Capital Debt with a maturity of a 1 year or greater expressed as a percent of total capitalization. Formula: LT Debt / (LT Debt + Stockholders Equity).

Net Profit Margin A measure of profitability; it answers the question of how much a company retains from each dollar of revenue after deducting all operating, interest, & tax expenses. Formula: Net Income / Revenue.

5-Year Avg. ROE Avg. of last 5 yrs ROE. ROE = after tax profits earned for all the shareholders expressed as a percentage. Formula: Latest 4 Quarter EPS / (((Latest quarterly total Stockholders Equity from the Balance Sheet + Stockholders Equity 4 quarters ago from the Balance Sheet) / 2) / Shares Outstanding).

2005e EPS Mean estimated earnings for the company’s current fiscal year 2005.

2006e EPS Mean estimated earnings for the company’s next fiscal year 2006.

2005e P/E Price to Estimated Earnings ratio for Fiscal 2005. Formula: Current Price / Sum of quarterly earnings and earnings estimates for fiscal year 2005.

2006e P/E Price to Estimated Earnings ratio for Fiscal 2006. Formula: Current Price / Sum of quarterly earnings and earnings estimates for fiscal year 2006.

5-Year Sales The slope of the Least Squares Regression Line which is fitted to the data. The data is expressed in terms of a 4 Quarter Moving Average.

E 5-Year Sales The consensus revenue estimate for revenue growth rate over the next 5 years.

5-Year EPS The slope of the Least Squares Regression Line which is fitted to the data. The data is expressed in terms of a 4 Quarter Moving Average.

E 5-Year EPS The Long Term Secular Growth Rate estimated for a period of five years.

Div. Amt (LTM) The sum of regular dividends paid for the last four quarters.

Div. Yield (LTM) The dollar amount of the latest 12 months of dividends / Previous day’s closing price.


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Historical company rating changes by the Feldman Securities Group The last rating change is provided for all stocks that have been on FSG’s Approved List over the last 12 months. Also, if a company’s rating changed more than once in the previous 12 months, all ratings over the last 12 months are shown. Company Ticker Rating Date of Rating Change Price at Rating Change Price on 5/20/08 ABBOTT LABORATORIES ABT Buy 1/10/06 39.46 54.68 ACCENTURE ACN Hold 9/18/06 28.64 37.87 ADOBE SYSTEMS ADBE Hold 2/2/07 38.97 41.66 AUTODESK ADSK Buy 1/19/07 42.23 39.61 AFLAC AFL Hold 10/26/06 44.00 67.11 AMER INT’L GROUP AIG Hold 2/12/08 44.74 38.12 AMER INT’L GROUP AIG Sell 3/17/08 39.80 38.12 AMGEN AMGN Hold 10/26/06 75.98 42.45 BED BATH & BEYOND BBBY Buy 7/24/02 31.39 32.42 BEST BUY BBY Buy 6/15/05 45.08 43.34 CAPITAL ONE FIN’L COF Buy 1/19/07 77.62 49.76 CONOCOPHILLIPS COP Buy 11/17/00 25.81 93.55 CISCO SYSTEMS CSCO Buy 7/17/07 29.73 25.85 CITRIX SYSTEMS CTXS Buy 2/2/07 31.90 35.45 CVS/CAREMARK CVS Buy 10/26/06 31.05 42.69 CHEVRON CVX Buy 5/3/06 57.96 103.09 DANAHER DHR Buy 5/8/01 28.66 78.2 DEVON ENERGY DVN Buy 5/3/06 62.19 124.36 EBAY EBAY Buy 10/6/06 29.36 30.61 LAUDER (ESTEE) EL Buy 11/10/05 32.63 47.27 EMERSON ELECTRIC EMR Buy 6/13/07 47.15 57.24 EATON ETN Buy 11/15/07 87.42 89.44 FISERV FISV Hold 11/14/07 52.88 51.89 GENERAL ELECTRIC GE Hold 10/26/06 33.97 31.72 GOLDMAN SACHS GROUP GS Hold 10/26/06 191.41 182.43 HEWLETT-PACKARD HPQ Buy 11/14/07 48.91 46.46 INT’L BUSINESS MACH IBM Buy 11/14/07 102.63 125.18 ILLINOIS TOOL WORKS ITW Buy 10/5/05 38.22 54.26 JOHNSON & JOHNSON JNJ Buy 2/16/00 34.38 66.15 JPMORGAN CHASE & CO JPM Buy 10/3/07 46.21 43.7 COCA-COLA KO Hold 10/26/06 45.36 57.09 KOHL’S KSS Buy 3/17/08 39.97 47.5 L-3 COMM TITAN LLL Buy 3/21/05 68.19 108.89 LINEAR TECHNOLOGY LLTC Hold 11/19/07 30.35 36.71 LOWE’S COMPANIES LOW Buy 2/20/04 28.43 23.76 MCDONALD’S MCD Hold 10/26/06 39.78 59.68 MEDTRONIC MDT Buy 9/18/06 45.77 48.96 ALTRIA GROUP MO Buy 3/17/08 21.58 22.44 ALTRIA GROUP MO Hold 4/2/08 25.98 22.44 MORGAN STANLEY MS Hold 3/17/08 36.17 44.8 MICROSOFT MSFT Buy 9/15/06 26.20 28.76 NOBLE NE Buy 6/6/07 46.15 66.89 ORACLE ORCL Buy 7/17/07 20.38 22.16 PEPSICO PEP Buy 7/1/02 44.31 67.46 PFIZER PFE Hold 10/26/06 25.07 20.05 PROCTER & GAMBLE PG Buy 10/26/06 61.53 65.86 PHILIP MORRIS INTL PM Buy 4/4/08 51.37 52.91 STARBUCKS SBUX Buy 3/31/06 37.63 16.84 SLM SLM Hold 1/19/07 45.17 20.78 STAPLES SPLS Buy 3/17/08 20.77 23.61 STRYKER SYK Buy 2/3/05 50.84 62.3 TARGET TGT Hold 10/26/06 58.32 54.29 TEXAS INSTRUMENTS TXN Buy 10/3/07 35.76 32.17 U.S. BANCORP USB Buy 8/5/04 24.14 33.3 VISA V Buy 4/28/08 75.63 82.74 VANGUARD TELECOM ETF VOX Buy 4/16/07 76.68 67.9 WALGREEN WAG Hold 9/18/06 48.68 36.08 WELLS FARGO WFC Buy 7/24/02 18.75 28.05 WELLPOINT WLP Buy 1/24/07 76.00 52.44 WAL-MART STORES WMT Hold 10/26/06 50.14 55.95 WILLIAMS-SONOMA WSM Hold 3/17/08 22.91 26.06 WESTERN UNION WU Hold 10/2/07 20.97 23.62 WRIGLEY (WM) JR WWY Hold 12/31/99 28.65 77.62 SPDR MATERIALS SELCT XLB Buy 4/16/07 38.56 46.03 SPDR UTILITIES INDEX XLU Buy 4/16/07 39.80 41.52 EXXON MOBIL XOM Hold 5/3/06 61.32 94.56

INVESTMENT QUARTERLY - ATGF · 2012-03-09 · INVESTMENT QUARTERLY Prepared by Feldman Securities...

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Transcript of INVESTMENT QUARTERLY - ATGF · 2012-03-09 · INVESTMENT QUARTERLY Prepared by Feldman Securities...