Today’s session ends with record lows across the street. As new data poured out and the fate of automakers still a mystery, markets witnessed large chunks of selling. The Dow finished below 8000, after falling 5.07%. This will mark the first time the Dow has hit the mark since 2002. The S&P 500 closed at just above 800 points and lost 6.11% on the day. The Nasdaq proved to be the biggest loser finishing off at 1386 points and falling 6.53%.

The Federal Reserve may have had something to do with the day’s trading after it announced a forecast of lower economic activity, additional rate cuts, and higher unemployment for the next year. The Fed predicts next year jobless rates to range anywhere from 7.1% and 7.6%. Inflation is projected to decrease to lower levels due to the slump of commodity prices and a stronger dollar.

Core consumer prices declined at a record amount of 1% during the month of October, specifically hurting the housing, auto and retailing sectors. Home construction in the US also fell to 791,00 units, which are record lows not seen since 1959.

US crude is now at $53.62, a price that hasn’t been seen since the beginning of 2007. Crude supplies were originally expected to increase by 1.2 million barrels, but instead rose by 1.6 million barrels. Longer term projections are now hinting $40, after a summer where some believed oil to be at $200.

Financial took a royal beating today as Citigroup [C: 4.71, -1.69 (-26.41%)] and Bank of America [BAC: 11.25, -1.81 (-13.86%)] led the downward charge. After Wednesday, U.S. Bancorp becomes larger than Citigroup according to market value.

BJ’s Wholesale [BJ: 32.27, -1.15 (-3.44%)] saw profits rise by 24% and raised full year outlook. Yet, they also saw a dip in their stock price on the day.

Boeing [BA: 37.11, -0.37 (-0.99%)] announced that they would be making cuts in their defense unit of about 800 workers, which is nearly a quarter of the staff. This comes after a delay of the U.S. Air Force tanker replacement program and the completion of other projects.

Molson Coors [TAP: 42.52, -1.24 (-2.83%)] was one of the few stocks that saw a rise after announcing a $0.20 cent dividend, and that Vice Chairman Pete Coors will take the Chairman position when Eric Molson Steps down in 2009.

-Hassan Chaudhry

Disclosure- None

The Dot-Com Bubble

The Dot-Com Bubble was a speculative bubble caused by the emerging internet sector and its related fields. The Dot-Com Bubble got its name from the formation of many new Internet-based companies frequently referred to as “dot-coms.” The Dot-Com bubble experienced a combination of large and rapid increases in stock price and trade volume, speculation and available venture capital, creating an environment in which many of these dot-coms dismissed standard business models to focus on increasing market share at the expense of the bottom line. The Dot-com Bubble lasted roughly 6 years, spanning from 1995-2001. The Dot-Com Bubble reached its peak on March 10, 2000, when the Nasdaq ended the day at 5,048.62 and reached an all time high of 5132.52 during intraday trading. The bubble “burst” following this peak.

The Dot-Com Bubble Burst

The Fed increased interest rates from 1999-2000 which helped slow down the runaway economy at the time. The slowing of the economy along with market corrections, massive sell orders of IT bellwethers, and large position acquisitions caused the Nasdaq to fall 9% in six days following its peak. Also fueling the Dot-com Bubble burst were the huge declines in IT business spending as businesses made huge spending increases in 1999 in preparation of Y2K. In addition to Y2K preparation, companies had to ensure that they had all of the IT infrastructure and hardware they needed for the near future.

This decline in business spending, combined with market corrections, caused many dot-com companies to fold, freeze hiring andlayoff employees. Mass business consolidations were experienced worldwide, but especially within IT. During the resulting burst from the dot com bubble, many investors lost substantial sums of money on the dot-com bubble, helping to trigger a mild economic recession in the early 2000s and IT companies were plagued with U.S. IT spending decreases around 12%. This was not simply slowed IT spending growth as we are projected to experience today, but an actual 12% decline in business IT spending.

Current Situation- What’s The Deal?

Luckily for current IT companies this next series of business IT spending cuts is going to be much smaller in magnitude compared to the dot-com bubble burst. Worldwide IT spending is projected to grow by only 3-4% from 2008-2009, down from IT spending growth well over 5% from 2007-2008. Analysts project that the worst case scenario at this point would be an IT spending growth slowdown to 2% worldwide. U.S. IT spending is projected to grow by 2-3% from 2008-2009, but some analysts project this figure could drop as low as 0.9% growth. The U.S. experienced IT spending growth of a little over 5% from 2007-2008. Analysts expect IT spending to decline to a growth rate of 0.8% for 2009. In the Asia/Pacific regions IT spending is expected to increase by 8.3% fueled by increased needs for IT infrastructure. Over 75% of U.S. businesses are projected to decrease their IT spending budgets or keep them at current levels.

Undoubtedly the uncertainty of our current economic condition and looming concerns of a U.S. and worldwide recession will dramatically change and in many cases decrease IT budgets across the globe. However, Information Technology has shifted its position from a back-office cost efficiency, or behind the scenes, to a front-office business partner which makes IT spending harder to cut in the short term. This is a  major difference between the dot com bubble-inspired IT spending cuts and today’s IT spending cuts.

IT spending decreases usually lag the economy by at least two quarters so we will not initially see the full effect, if any effect, of IT spending cuts until early to mid-2009 at the earliest, but many IT companies are already beginning to tighten or decrease their revenue guidance and projections for the upcoming quarter and for 2009.

The Nasdaq has fallen nearly 43% and the S&P 500 Information Technology Composite has fallen over 45% due to the current credit crisis and economic uncertainties. However, I think we have yet to see the bottom of the IT sector and these upcoming IT spending cuts will propel the IT sector down even further. I think the IT sector will be the next sector to experience the same “bottoming out” that the Financials and Energy sectors are currently experiencing.

Who will be affected?

Going forward I expect small and mid-cap IT companies to take the biggest hit as a result of IT spending cuts; however, DO NOT think that a company is too big or too “strong” to be affected by potential IT spending cuts and the current economic conditions and possible recession. No company is immune to the effects of IT spending cuts and this is definitely made apparent in many recent public statements made by the CEO’s of four companies I consider to be large cap leaders within the IT sector, Microsoft [MSFT: 17.53, -0.76 (-4.16%)], Intel [INTC: 12.23, -0.26 (-2.08%)], IBM [IBM: 71.74, -4.23 (-5.57%)] and Google [GOOG: 259.56, -20.62 (-7.36%)].

Microsoft CEO Steve Ballmer stated, “Financial issues are going to affect both business spending and consumer spending, and particularly…spending by the financial services industry…We have a lot of business with the corporate sector as well as with the consumer sector and whatever happens economically will certainly effect itself on Microsoft…I think one has to anticipate that no company is immune to these issues.”

Intel just recently cut its fourth quarter 2008 revenue guidance by almost $1Billion due to current and forward looking economic problems and a weak global demand. Intel stated, “Current uncertainty in global economic conditions poses a risk to the overall economy as consumers and businesses may defer purchases in response to tighter credit and negative financial news, which could negatively affect product demand and other related matters…There could be a number of follow-on effects from the credit crisis on Intel’s business, including insolvency of key suppliers resulting in product delays.”

Google CEO Eric Schmidt said that the Web search giant “is not completely immune” to the U.S. economic downturn, but he said the shift in advertising towards cheaper, online methods like Google’s search business should intensify during hard times. This goes along with an increased focus for efficiencies as a way for companies to survive these cuts going forward, as noted below. However, it was also noted that Google could see lost business as their advertisers get hit from the current credit and economic crisis.

These CEOs are not the only ones issuing warnings and re-issuing guidance with lower revenue targets to take these potential negatives of the sector into account, but the fact that these IT bellwethers and large-cap IT companies realize they are not immune to IT spending cuts and the weakening economy definitely raises concerns about the IT sector as a whole going forward.

How will a company survive?

Although no company may be completely immune to the effects of IT spending cuts, some companies will fare better and perform better than most during the upcoming IT spending cuts and the weakening economy. These companies will need to possess a few key factors. Companies that have a diverse business mix, revenue breakdown and customer base will feel less of an impact from IT spending cuts. A diverse customer base by industry and not being too highly exposed to any one customer will make it so that industry specific IT budget cuts or IT budget cuts of one particular customer will not have as big of an impact. With that said in this environment I would prefer a company to receive no more than 10% of its revenue from any one customer. A wide array of product and service offerings along with innovative technologies will help minimize the impact of a revenue decrease of any one product or service due to IT spending cuts. I feel that a strong geographic revenue breakdown is also important. I do not feel that a strong geographic mix is as important as these other diversification factors, but it is definitely something important to watch going forward especially with the strengthening of the Dollar compared to other major currencies and the fact that IT cuts will be experienced worldwide.

Next, long term contracts are very important to the health of IT companies during spending cuts. Long term contracts make IT spending cuts very difficult to initiate in the short term and will at least provide some guaranteed revenue. This goes along with the shift of IT to a more active business partner within businesses. IT is now entrenched and running in almost every aspect of business which creates limitations on spending cuts in the short term. Also, increased need for technology related efficiencies could combat slowed spending growth. Businesses will continue to invest in improvements to internal processes to reduce costs, and will also look for new innovations to increase efficiencies. Businesses are also cutting jobs and could possibly look for ways to replace human labor with efficient technological solutions and services.

-Brian Clionsky

Disclosure: The mutual fund this author is associated with is long GOOG, INTC, and MSFT.

I want to begin by offering a brief overview of the foreign market and its importance in the global economy. The forex exchange market is one of the largest and most liquid securities exchanges in the world with over $3.2 trillion in average daily turnover. This equates to 10 times the average daily turnover of global equity markets and 35 times the average daily turnover of the New York Stock Exchange. The forex market is open 24 hours a day, 6 days a week, with the EUR/USD accounting for 27% of total turnover.  There is plenty of opportunity to make and lose money in currency exchange, as is evidence over the last 3-4 years as the Euro has risen to all-time versus the Dollar and more recently has faced intense selling pressure with the steep decline in oil prices and the global economic recession.

The Gold Standard No More

The gold standard era in the U.S. officially began with the passing of the Gold Standard Act in 1900. But it was not until World War II that brought about the need for a worldwide standard for currency values and exchange rates. The Bretton Woods Agreement in 1944 established two very important international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (now the World Bank). What came from this agreement was that all the world’s currencies would be pegged against the value of gold, and with the U.S. dollar on the gold standard, the U.S. dollar effectively became the world’s reserve currency. The value of gold was fixed at $35 per ounce until the gold standard was effectively withdrawn in 1971 as President Nixon ordered an end to the out-dated system and the price of gold was allowed to “float”. Now, every major currency is no longer on the gold standard but rather is referred to as “fiat” currency. This basically means that a country’s own currency is intrinsically worthless because it is not backed by any type of reserve, such as gold. The value each currency is therefore based citizen’s perception of their economy, supply and demand for money in general, and how their currency is compared to other country’s currency.

Something to think about though is 40 years ago, the world’s currencies used to be pegged against the price of gold and ultimately the Dollar.  Now it would not be a stretch to say that global currency is on an Oil Standard.  When the U.S. Government made a deal with Saudi Arabia and OPEC to only trade oil in U.S. Dollars, their “partnership” effectively gave the USD a monopoly over all other currencies when it comes to oil trading.

The Dollar/Oil/Inflation Revolving Door

The big thing to realize when it comes to comparing these three, is that when one moves the others will move as well.  There is really no way to explain one without going into detail about how they affect one another.  The perceived driving force behind all of this is commodities.

The commodities market includes trading everything from cotton and orange juice to corn and gold, but is ruled by those investors who are placing bets on where they think oil prices are going next. Prices of the most valuable commodity in the world tend to primarily change based on supply and demand factors, geo-political concerns, and most importantly for this article, the value of the U.S. dollar. With crude oil denominated in U.S. Dollars across the world, there is a clear negative correlation between oil prices and the value of the Dollar. Even before the oil is pulled from the ground, it has immense power that can easily influence the world’s currency markets. When countries go to the commodities markets and try and sell their oil, the purchaser must buy the oil with U.S. Dollars. If you have U.S. Dollar reserves to make the purchase then great, but if you don’t then you head to the forex and change your money, Euros for example, into Dollars. This is where the Euro/Dollar relationship takes flight. Over beginning of the 21^st century, the dollar depreciated against the Euro largely due to high supply of Dollars and low demand. This meant that as oil prices began to rise, it would have been wise for countries to keep their oil reserve money in Euros instead of Dollars, even though they needed to pay in Dollars. This can be understood by simply looking at the exchange rate between the Euro and the Dollar over the last ten years. As the USD gradually depreciated against the Euro and oil became nominally more expensive across the board, if you were buying oil strictly with Dollars, you would be paying a much higher real rate then if you had Euros and exchanged them for Dollars to buy the oil.

One way to combat currency exchange risk is to hold assets in the countries where you are planning on buying oil from because you will hedge yourself against future currency changes. For example, if the United States planned on buying oil from Australia in five years but was worried that their currency might appreciate against the USD, then the U.S. could buy Australian assets now and help offset a weaker USD with more valuable Australian assets. The other obvious way to hedge yourself is to simply buy Australian Dollars and minimize future losses tied to USD depreciation.

To get at inflation directly, I think it is necessary to point out the U.S. trade deficit.  As the U.S. continues to print money and buy more good than it exports, the attractiveness of the USD abroad is dwindling.  When foreign countries receive seemingly endless Dollars for their exports, our trade imbalance grows larger and larger, thus driving the value of the Dollar down further and further.  As the value of the Dollar falls, domestic as well as imported goods and services cost more as inflation rises.  This can be linked to the price in oil because if the value of the Dollar drops, oil producing countries such as Saudi Arabia raise the nominal price of crude because the dollars they are receiving for payment are worth less and less in the global market.  Some experts propose that crude oil should be traded with Euros instead of U.S. Dollars, and if that would happen, the USD would surely see steep price depreciation as oil-hungry countries could sell their USD for Euros.

Wrap-Up

Commodities are king these days, even after oil has plummeted from its record $147 per barrel price over the summer and gold prices have moderated some.  And with the global credit crisis and recession-like conditions in many countries, a lot of the world’s currencies will be trading under pressure and intense scrutiny as central banks across the world continue to meet and make decisions on the future.

This four part series about the forex market is a collaboration between myself and colleague Steve Murray. Look for part two of this series this weekend, which will focus on the recent flight to quality of U.S. treasuries ad how the new TARP program will effect the currency in the coming months.

- Chris Barrella

Disclosure: None

From the Beginning

The bailout plan originated as legislation sent to the House of Representatives seeking permission for the Treasury to purchase troubled mortgage related assets from banks in a reverse auction process. However, Congress rejected the idea and a new plan was drafted entitling the U.S. government to use $250 billion of the approved $700 billion in order to purchase stakes in the nation’s largest banks. The government began by taking preferred equity stakes in Goldman Sachs Group Inc. [GS: 52.00, -3.18 (-5.76%)], Morgan Stanley [MS: 9.20, -1.05 (-10.24%)], J.P. Morgan Chase & Co. [JPM: 23.38, -5.09 (-17.88%)], Bank of America Corp. [BAC: 11.25, -1.81 (-13.86%)], Citigroup Inc. [C: 4.71, -1.69 (-26.41%)], Wells Fargo & Co. [WFC: 22.53, -1.87 (-7.66%)], Bank of New York Mellon [BK: 24.36, -1.03 (-4.06%)] and State Street Corp[STT: 28.69, -1.64 (-5.41%)]. The plan stipulates that the investments will carry a 5 % annual dividend that rises to 9% after five years. In addition, the government will receive warrants and the senior preferred shares will qualify as Tier 1 capital. The direct infusion makes more sense as it helps the Treasury to avoid the difficult task of pricing illiquid assets. If the government would have paid too much for the assets they would have received criticism while paying too little would have forced banks to take more writedowns.

The rescue plan was quickly opened up to an increasing amount of financial institutions and it seems like almost every one wants to jump on board. Just last week, the Treasury announced a revision of AIG’s rescue and will now inject $40 billion into the giant insurer. Combined with the previous totals, the U.S. government will provide over $150 billion to the company. American Express [AXP: 17.23, -1.51 (-8.06%)] even made the transition into a bank holding company in order to gain access to the bailout plan. As a bank holding company, more of their assets will be under federal supervision and the bank will qualify for up to $3.6 billion, but customers are unlikely to notice a large change. CIT Group Inc [CIT: 1.86, -0.39 (-17.33%)] announced this week that they applied to become a bank-holding company as well, and the company is seeking up to $2.5 billion from the Treasury. There are some rules and regulations that these participants will be required to adhere to, including caps on executive salaries.

On Friday, the Treasury dished out over $33 billion more in capital to 21 more financial institutions. The capital injections have received some criticism, as people fear that the funds will not be effective in causing banks to increase lending activities and that many banks will only use the capital to make acquisitions and beef up their balance sheets. When PNC Financial Services Group Inc. [PNC: 44.77, -5.06 (-10.15%)] was allocated $7.7 billion from the Treasury, they quickly acquired National City Corp. [NCC: 1.59, -0.19 (-10.67%)] for just over $5 billion.

Funds are Limited and Competition is Heated

Requests for a bailout from Uncle Sam expanded beyond the financial sector quickly. As talks of a merger between General Motors Corp. [GM: 2.88, +0.09 (+3.23%)] and Chrysler LLC. began, the firms estimated that they would need at least $10 billion of capital from the government. U.S. auto makers, including Ford Motor Co. [F: 1.39, +0.13 (+10.32%)], continue to be downgraded, and many estimate that they could run short of money within the next year without government aid. Senate Democrats have introduced new legislation that would provide a bailout to the Big Three automakers by using a chunk of the $700 billion. However, the Bush administration recently stated that the auto makers should only receive funds from the $25 billion loan program, designed to emphasize an increase fuel efficiency, that already exists with the Department of Energy. White House officials announced this week that they do not want funds from TARP, which was designated to include solely financial companies, to be available to the auto companies. It will be interesting to see who wins the battle, but one thing is for certain; the government can only rescue so many firms. In my opinion, the auto makers do not deserve to be bailed out. Their business models are flawed and have been for years, their labor costs are high, and a bankruptcy would allow them to restructure and hopefully return to profitability in the future.

This week, the Treasury announced that $158.6 billion has been spent on 30 financial institutions thus far, including the first nine major banks; this means only just over $90 billion remains for capital injections. Now insurers, who have taken huge hits to their investment portfolios, are also trying to qualify for the government bailout funds by becoming savings-and-loans holding companies. Just this week, Genworth Financial Inc. [GNW: 0.99, -0.03 (-2.94%)] and Lincoln National Corp. [LNC: 5.07, -2.24 (-30.64%)] made plans to buy savings-and-loan institutions, following in Hartford Financial Services Group’s [HIG: 5.57, -1.31 (-19.04%)] footsteps. The argument for aiding the insurers is that they provide capital to other companies; life insurers hold well over $1 trillion of corporate debt on their books.

One of the many problems that still has not been addressed, which the plan was originally designed to target, is that firms still have bad assets which will cause them to have writedowns and incur losses. Treasury Secretary, Henry Paulson, has noted that the next step to resolve the issue is some type of lending facility to aid investors in buying these assets. Another idea proposed in tandem with the bailout is a policy that will help homeowners to avoid foreclosure; the FDIC has been a huge advocate of the idea. In my opinion, this type of program will be complicated and difficult to enforce effectively. Most recently, Paulson has announced plans to take a break from dispersing capital, leaving the remainder of the funds for the future administration in case of emergencies or use for various programs.

A Potential Threat to Capitalism

The injection plan undoubtedly produces concerns over how far the government should extend itself in order to rescue the economy. If the total spent on the TARP reaches $1 trillion it would be the equivalent of 7% of U.S. GDP. Over-regulation poses a serious threat to capitalism, and while some government aid is necessary to keep the economy afloat, too much regulation will surely affect free markets and hinder future economic growth. Currently, many questions are raised as to how long the government can wait before selling the investments and what will happen with the profits. The success of free market capitalism has been proved throughout history, and it is vital that it be restored as quickly as possible. However, I think that some have been too critical of the government’s approach to the financial crisis, and there are a few key points to remember.

The financial crisis we are experiencing is completely unprecedented due to the complexity of financial derivatives which were created by computer models and carried risk that was unfathomable to investment banks and other financial institutions. Secondly, regulators have had an extremely limited amount of time to develop a comprehensive plan that will benefit banks without decreasing shareholder value and costing taxpayers astronomical amounts of money. Historically, governments have waited much longer to respond until banks reached the point of insolvency. Finally, private sector solutions for the likes of Fannie Mae [FNM: 0.33, -0.05 (-13.16%)] and Freddie Mac [FRE: 0.49, -0.07 (-12.50%)] were infeasible, and failures of large, global financial institutions such as AIG would have broader implications for the economy, not just in the U.S. If there is one idea to take away from this whole plan to shore up the economy, it is that the plan may help going forward but cannot erase previous damage.

-Taylor DeStefano

Disclosure: The mutual fund the author manages is long PNC, GS, JPM, and BK.

After another day of volatile trading on Wall Street, all three major indices are push to positive levels. Markets were down a significant amount early in the day, especially the Dow which had lost about 130 points. The Dow did recover to gain 151 points and close out the day at 8424.75 points. While the S&P and Nasdaq gained 8.36 and 1.22 respectively. The S&P finished at 859.11 points and the Nasdaq finished at 1483.27 points. The Russell 2000 didn’t fare as well as its larger counterparts, by falling 18.95 points and closing at 432.35 points. In international trading the Nikkei fell 2.28%, and Britain’s FTSE 100 went up by 1.47 percent.

On Capitol Hill, Treasury Secretary Henry Paulson and Federal Reserve Chairmen Ben Bernanke defended the $700 Billion bailout plan that they crafted to avert financial destruction and chaos. Henry Paulson was quoted saying that the US has “turned a corner” in staving off a crisis, but that there is much more work still left.

Detroit’s automakers spent another day making their case for some sort of government aid amid the slow meltdown of their industry. Daimler [DAI: 24.45, -1.52 (-5.85%)] CEO Robert Nardelli warned the Senate Banking Committee today that his company may not be able to continue operations unless given financial support. He also said that the current economic conditions are to blame for their low amounts of cash and not underachieving management of the automakers.

In other corporate news Hewlett-Packard [HPQ: 31.83, -1.20 (-3.63%)] threw a curve ball by saying that 4^th quarter results should be better than what analysts have been predicting. This comes as a surprise, from a company in a sector which has been hit hard by the current slowdown. In a statement, HP attributes their confidence on “global reach, diverse customer base, broad portfolio and numerous cost initiatives.” 

Jerry Yang of Yahoo [YHOO: 8.95, -0.19 (-2.08%)] will step down from his post as the company’s CEO. This news comes after a rough year for Yang, who denied an offer from Microsoft [MSFT: 17.53, -0.76 (-4.16%)] earlier in the year because he felt the takeover price didn’t do Yahoo’s true value any justice.

Oil prices moved down today to $54.58 on the day. Gasoline futures fell to $1.14. Natural gas also finished lower at $6.52. Gold was down to $737.3, capping off a bearish session for commodities despite a mildly bullish finish for the indices.

-Hassan Chaudhry

Disclosure: The fund the author is associated with holds a long position with MSFT.

It is time to restructure your personal portfolio, and you should look to the Healthcare sector for some growth and value. It can get a bit overwhelming when trying to find that right holding in each sub-sector in order to effectively diversify yourself and hedge against risk. You may ask yourself, should I put my hard-earned money into Pharmaceuticals, Biotech, Medical Device, Insurers, or Generics? I will touch upon all of these sub-sectors and answer your much needed questions. The stocks that I will discuss below will provide additional protection on the downside, and some will take your portfolio to new levels.

1. Gilead Sciences Inc. - Biotechnology

A few months ago I wrote an article about the concerns many investors had over Gilead [GILD: 41.53, -1.67 (-3.87%)] missing earnings in the 2nd Quarter. Well, my predictions were true that the concerns would not last too much longer. Analysts said, “Too much saturation in the market” and “Historical growth can’t continue.” So what happened in their most recent earnings? Gilead reported 3rd Quarter EPS of $0.55 versus analyst consensus of $0.52 EPS. Product sales increased 39% to a record of $1.34 billion primarily lead by their “best in class” antiviral franchise. The largest contributors to the antiviral business were Truvada and Atripla, increasing 34% and 77% respectively for the quarter. In the past year or so, Gilead has intensified their marketing initiatives and has been able to effectively penetrate the European Union, which has been a main factor contributing to such a large hike in sales revenue. Huge news came in August when the FDA approved Viread for the treatment of chronic HBV in adults, and Gilead remains committed to working with physicians in an attempt to switch patients from similar but less effective therapies to Viread. Probably the most impressive aspect of Gilead, aside from their complete dominance in the HIV/AIDS market, is the superb fundamentals.  Return on Equity of 51.61%, Return on Assets of 30.01%, low Debt/Equity of 0.32, and a projected EPS Long-Term Growth Rate of 26.43%. As you can see by some of these numbers, Gilead will offer a great return on your investments and a huge upside as noted by the LT EPS growth rates through their continuous penetration of the United States and international markets.

• Market Cap: $43.20 Billion
• Trailing P/E: 24.55
• Forward P/E: 19.71
• ROA: 30.01%
• ROE: 51.61%
• Debt/Equity: 0.32
• LT EPS Growth Rate: 26.43%

2. Abbott Laboratories - Pharmaceuticals

By now you know that I am not a huge fan of pharmaceuticals, especially the large-caps; however, Abbott Laboratories [ABT: 50.35, -4.17 (-7.65%)] is definitely an exception. Abbott is strategically broken down into three major business segments depending on how you specifically dissect the firm.  Within the Medical Products segment are Abbott Vascular, Diagnostics, and Diabetes Care. Abbott is notarized for its blockbuster drug, HUMIRA, which in the most recent quarter showed sales increasing 50% to $1.2 billion including 67% international growth. HUMIRA is primarily used for psoriasis, where it is quickly approaching 30% total market share, but is also approved for five other uses (rheumatoid arthritis, polyarticular juvenile idiopathic arthritis, psoriatic arthritis, ankylosing spondylitis, and Crohn’s disease). The company expects full year 2008 global sales for HUMIRA of more than $4.4 billion. The market for all HUMIRA indications is now estimated to exceed $20 billion by the year 2012. Abbott’s Diagnostics segment grew more than 15% in the most recent quarter led by strong growth in each of their three segments: core diagnostics, molecular diagnostics, and point of care diagnostics. I have always been a strong supporter of heavy R&D into diagnostics because I believe it is the future of healthcare. As we continue to face many difficulties with the FDA initiating additional warning labels on drugs due to adverse reactions, we must invest in personalized medicine, and that is exactly where diagnostics and ABT comes into play.

• Market Cap: $85.43 Billion
• Trailing P/E: 18.89
• Forward P/E: 14.96
• ROA: 11.46%
• ROE: 26.02%
• Debt/Equity: 0.55
• LT EPS Growth Rate: 12.00%
• Dividend Yield: 2.60%

3. Genentech Inc. - Biotechnology

You might wonder why I am presenting to you another biotech play when I wrote “5 Healthcare Stocks to Diversify your Portfolio.” Well, you should have exposure to two different areas in this sub-sector for growth reasons. Since you have Gilead to provide you with HIV/AIDS treatment, Genentech [DNA: 73.03, -5.04 (-6.46%)] has some of the best cancer drugs on the market. If you have followed even the least bit of healthcare news in the last year, you will have heard of Avastin, Genentech’s leading cancer drug. Avastin had sales in the U.S. of $704 million through the first nine months of this year.  Currently, it is approved for use against colon, lung, and breast cancer.  More importantly, DNA is awaiting FDA approval for the use of Avastin to treat Glioblastoma, or brain cancer.  Studies showed that with Avastin as a single agent in the Phase II trial, the cancer did not advance after six months in 43% of patients and 28% of patients saw tumors decrease in size by at least 50%, according to the company. On the flip-side, talks of a higher bid from Roche have penetrated the markets quite heavily since this past July. Roche bid for DNA at $89.00 per share and Genentech’s Board immediately shot it down, stating that it severely undervalued the company. Rightfully so, I believe. Avastin itself will bring in a couple billion per year in revenue (don’t forget their stellar pipeline as well). DNA has 21 drugs in Phase I, 12 drugs in Phase II, and 12 drugs in Phase III, and each drug has numerous uses. The pipeline, along with Avastin, further solidifies Roche’s need to increase their bid for the remaining 44.10% of DNA which it does not currently own.

• Market Cap: $85.84 Billion
• Trailing P/E: 27.85
• Forward P/E: 20.71
• ROA: 16.39%
• ROE: 25.90%
• Debt/Equity: 0.21
• LT EPS Growth Rate: 19.33%

4. Teva Pharmaceutical Industries Ltd. - Generics

Teva [TEVA: 41.91, +0.11 (+0.26%)] is the world’s largest generic drug maker, with revenues ahead of Sandoz (division of Novartis) and Mylan (which acquired Merck’s Generic division). Teva has operations in about 60 countries and continues to expand rapidly. Their main drug, Copaxone, continues to be the number one MS therapy in both the U.S. and international markets, reaching sales of $562 million in its most recent quarter. Shlomo Yanai, president and CEO of Teva, said, “This was a very good quarter for Teva. In the midst of these turbulent economic times, we experienced once again the benefits of our balanced business model…We entered into a new strategic partnership in Japan, the world’s second largest pharmaceutical market; closed our acquisition of Bentley in Spain; and secured the necessary financing for our acquisition of Barr Pharmaceuticals, a deal which we expect to close by the end of this year.” Even more importantly, as of October 28th, Teva had 145 products awaiting FDA approval, including 41 tentative approvals. The branded products of these applications had annual U.S. sales of over $96 billion. The global presence that Teva has is astounding, and smaller companies such as Mylan have gone out of their way in order to increase their global presence. None of the competitors has yet shown the strength required to stand up to Teva.

• Market Cap: $33.38 Billion
• Trailing P/E: 18.71
• Forward P/E: 14.12
• ROA: 8.90%
• ROE: 15.70%
• Debt/Equity: 0.31
• LT EPS Growth Rate: 15.36%
• Dividend Yield: 1.20%

5. Stryker Corporation - Medical Instruments & Supplies

Although Stryker [SYK: 36.48, -2.35 (-6.05%)] has shown some weakness in this current market, it offers great upside potential in the next few years given its current trading price and the favorable sub-sector trends. Stryker operates in two segments: MedSurg equipment and Orthopedic implant. MedSurg, which comprises 41% of total revenues, is made up of three different product categories: Instruments (18%), Endoscopy (14%) , and Medical (9%). The growth that Styker has seen internationally within these product segments has been tremendous. Even with the recent strength of the U.S. Dollar, over the long-run will these segments will be able to hold up. This fact is made more concrete when observing the new implementations made by the Fed and Treasury to increase liquidity in the markets and bailout countless firms. I tend to think that the Dollar will not hold up strongly in the long-run, and we can see the foreign exchange benefits that these multinational firms have experienced for quite some time. For Instruments, Endoscopy and Medical, international revenues grew at 18%, 35%, and 77% respectively in the most recent quarter. The Orthopedic implants segment represents 59% of sales and grew by 12% in the past quarter. When looking at the competitors for this division, Zimmer Holdings initially comes to mind. Stryker has more of the market share and a great diverse stream of new product launches in this area. Stryker has key developments within the spine, hips, knees, and trauma, all of which have great potential. Investors are worried that SYK might not be able to grow in the double digits during this recession; however, remember you are a long-term investor and when constructing a diversified portfolio SYK is a necessity.

• Market Cap: $18.00 Billion
• Trailing P/E: 16.24
• Forward P/E: 13.27
• ROA: 15.88%
• ROE: 21.02%
• Debt/Equity: 0.00
• LT EPS Growth Rate: 18.29%
• Dividend Yield: 0.70%

The five stocks mentioned above are in different sub-sectors and provide both growth and value. It is extremely difficult to pick only a certain amount of healthcare equities because there are some areas I was not able to mention. I feel confident in those segments mentioned above as they have shown and will continue to show resilience in turbulent times, as well as out-performance in a bull market.

-Ryan Savitz

Disclosure: The mutual fund that the author is associated with is long DNA, GILD, and SYK.

Wall Street continued to dig the hole deeper, especially in the last hour of the session, as markets fell for another day. The Dow took a 2.63% hit and fell to 8,273.50 points for the day. The S&P 500 also fell, losing 2.58% and finishing the day at 850.75 points. The Nasdaq was not far behind losing 2.29% on the day, ending at 1,482 points. Markets seemed to be snowball selling in the final hour of trading after being positive for a short time earlier in the day; a pattern that has occurred more times than not in the past few months.

Congress is debating the rescue of Detroit’s automakers and where the aid will be coming from. Congressional republicans are pushing for the use of a $25 billion loan that was given to the industry for increased fuel efficiency. Democrats are asking for a portion of the already sought after $700 billion bailout money to go towards the automakers. One fact that is agreed upon by both sides is that a fix must come soon because the industry is close to a collapse.

In international news, Japan became the next victim of achieving the academic definition of recession. GDP for Japan retracted for the past 2 quarters by .4% and 3.7% respectively. The Nikkei 225 shrugged off that news closing slightly in the green by 0.7%.

Citigroup [C: 4.71, -1.69 (-26.41%)] said today that they will be making the 2^nd largest cut in jobs by any company in history, handing out 53,000 pink slips. This initiative is combined with a plan to cut costs by 20% and sell off troubled assets. Citi’s employee base after the cuts will be approximately 300,000.

Alcoa [AA: 6.85, -1.31 (-16.05%)] fared terribly today after UBS [UBS: 8.44, -0.84 (-9.05%)] cut their recommendation to neutral from buy. Analysts blamed a rising dollar and lessening in demand for aluminum.

Gold fell to $742 on Monday, as crude also dipped to $55 on the NYMEX. The dollar also saw a slight decline against other major currencies.

- Hassan Chaudhry

Disclosure: None.

Leading up to the Bailout

AIG looked as if they successfully turned their company around after a series of fraud investigations by the SEC and other government agencies. The investigations surrounded AIG’s former CEO, Maurice “Hank” Greenberg, in regards to an accounting scandal which ultimately led to the end of Mr. Greenberg’s leadership of AIG in early 2005. Succeeding Mr. Greenberg was Martin Sullivan, who led the company until he was fired in June 2008 because of AIG’s large financial losses and falling stock price. Mr. Sullivan was then replaced by Robert Willumstad, who was ultimately replaced by Edward Liddy in mid September of 2008.

AIG’s share price is down over 90% from their 52-week high of over $70. For the first half of the year, AIG had write offs of over $13 billion stemming from poor financial assets. The financial losses plaguing the company resulted from bad bets in their Financial Product division. The company decided to get involved in insurance contracts on collateralized debt obligations, or CDO’s. These insurance contracts are also known as credit default swaps, or CDS’. These CDS’ that AIG wrote protected investors against the possibility of a default on various CDO’s. A more in-depth explanation on credit default swaps can be found in my previous article. The insurance contracts that AIG wrote have become detrimental to the company’s financial strength, as they have been forced to pay back clients who purchased the protection. The underlying CDO’s were often made up of the worst tranches of sub-prime residential mortgages. These sub-prime loans have plunged in value due to homeowners defaulting on their loans. A lot of the CDO’s have virtually zero value because there are no buyers in the market. Originally, AIG secured over $440 billion worth of AAA securities, of which $57 billion were structured around sub-prime assets.

Lehman Brothers was forced to declare bankruptcy on September 15^th, sending the financial markets into a tailspin, which I don’t think we have recovered from or will recover from for a long time. This historic failure, which was the largest ever in U.S. history, had more effects than many people thought. AIG’s management knew that they had to do something quickly in the face of the market conditions. It was later noted in an article by The New York Times that AIG had valued its Alt-A and sub-prime MBS at 1.7 to 2 times the rates that Lehman used. Originally, the Federal Reserve shot down the idea to lend AIG money. AIG’s stock price fell over 60% that Monday because of the deteriorating outlook on the company and the Fed’s denial of funds.

The Original Bailout

The Fed quickly changed their mind after they realized that they had to react quickly to protect against the failure of AIG because of the possible implications that event would have. On September 16^th, the Fed announced that the New York Fed would provide AIG with a 24 month loan, allowing the company to draw up to $85 billion in exchange for warrants for a 79.9% equity stake in AIG. The deal also gives the Fed the right to suspend the payment of credit facilities and freeze dividend payments to common and preferred shareholders. The loan was also collateralized by AIG’s assets and had an interest rate of 850 basis points over 3 month LIBOR. This $85 billion number was staggering at the time, but wouldn’t be enough to help out the troubled insurer. The credit spread of 850 basis points was extremely high and would have placed AIG into a junk credit rating in normal market conditions. The Fed decided to lend the money at this harsh rate to give incentive to AIG to sell off their assets as quickly as possible. Although the credit facility helped them shore up their balance sheet in the near term to pay off clients and meet margin calls from other large financial institutions like Goldman Sachs [GS: 52.00, -3.18 (-5.76%)] and J.P. Morgan Chase [JPM: 23.38, -5.09 (-17.88%)], the terms of the spread did not help the company with selling off their assets. The deal changed potential buyers’ minds, as it signaled that there would be more problems to come.

It was soon realized that the original $85 billion would not be sufficient. AIG drew down over $28 billion within two days of the facility’s existence. The Fed decided to add an additional $37.8 billion in an effort to make sure AIG was adequately capitalized for the time being. AIG was still running through the cash quicker than anticipated and used over $90 billion out of the total $122 billion by October 24^th. Hank Greenberg opposed the deal, describing the bailout as a nationalization of AIG.

The Upgraded Bailout

The U.S. government needed to clean up their mess of the original deal that provided AIG  with capital. In my opinion, the deal was haphazardly put together to ensure the financial markets that they would not allow AIG to fail. The positive result from the deal was that AIG did not fail. The negative is that the deal only put a band-aid on a wound that needed surgery. The Fed announced on November 12^th that they have re-structured the terms of the previous deal and set up new facilities to help AIG. The new $150 billion package includes money from the previous deal made in September and adds additional capital to the company. The Fed re-structured the interest rate that AIG has to pay on their loan to around 6% from over 10%. AIG will have to pay 10% interest on the $40 billion capital infusion from the Treasury.

The re-structured deal includes the creation of two new entities that will take some of the garbage assets on their books. The government will buy over $52 billion of distressed assets from AIG to aid in the healing process. This helps AIG by getting rid of these assets, but may hurt them in the long run as they are being forced to sell these securities and will be giving up any potential gains that they could incur.

Earnings

Since the government owns about 80% of AIG, the American Taxpayers took a hit last week when AIG reported a $24.5 billion quarterly loss, or $9.05 per share, and took another $7.1 billion in write-downs on its credit derivatives portfolio. This loss was larger than expected by many analysts on the street, as they didn’t accurately foresee AIG’s deteriorating business conditions.

In their third quarter press release, CEO Ed Liddy stated: “Third quarter results reflect extreme dislocations and volatility in the capital markets and significant charges related to restructuring activities. Reported earnings are not indicative of the underlying core earnings power of our insurance businesses, which remain solidly capitalized. Retention of our customers remains strong and reflects the support and loyalty of our long-term partners, intermediaries and sponsors.”

Outlook

Although the stock is down over 90% from a year ago, the outlook is not positive for AIG over the next 6-9 months. The management shuffles that have taken place over the past year only hurt AIG and their ability to return to profitability. Although the new government plan may seem like a cure-all to the current situation, especially with the two new entities that will buy everything, I still don’t think that this is the end. Over the past year, I have learned that there is no such thing as a “perfect solution” or “last write-down” in the financial sector. The terms of the deal are still much better than the original deal, but will still cause problems for AIG in the short-term. Increased regulation is also likely to come out of all of this, to protect the government and taxpayers to hopefully not have to deal with a similar situation in the future. And lastly, don’t rule out a hostile takeover of some kind (probably management) by Hank Greenberg. He has been in the picture a few times in the past couple of months commenting on AIG. He still has not only ownership interests in the firm but also personal interests.

-Steve Murray

Disclosure:  The mutual fund the author is associated with is long GS and JPM

So What’s the Problem?

PepsiCo is a leading company in the food and non-alcoholic beverage industry that now faces the problem of marketing a new style of snack and beverage.  It is responsible for producing, marketing, and distributing numerous popular brands.  Its 2007 revenue of $39.474 billion was higher than both Coca-Cola and Kraft [KFT: 24.87, -1.12 (-4.31%)] for the year. However, PepsiCo faces a new challenge: becoming a major player in the market of healthier snacks and beverages.  It is no secret that people are moving more and more towards healthier food and beverage items.  There is a new product out seemingly every day and new stores are being opened all the time that focus on this market.  PepsiCo is faced with this innovation problem as it hurries to position itself as a leading provider of healthy snacks and beverages.  If the company is unable to do so, then it will undoubtedly suffer significant revenue decline in the coming years.  On top of this, the company needs to maintain the same prestige that it has held for so many years while making this transition.  The company has to market its new products both quickly and efficiently to convince consumers that it is a leading provider of healthier alternatives.  Truly, Pepsi is not there yet. However, their success to date makes one believe that they will not have many problems moving into the future.

How Do They Address It?

PepsiCo has a long way to go, but they have already started down the right path.  Earlier this year in February, the company announced the release of “Pepsi Raw” in the United Kingdom.  It is made of all natural ingredients such as apple extract and coffee leaf and has reduced the calorie content for a 300ml bottle from 120 calories to 90 calories.  On top of this, the lower sugar content is overall healthier and less harmful to one’s teeth.  Although it remains to be seen how successful this product will be, it is a positive sign that PepsiCo has developed a completely new beverage to cater towards those that seek healthier options.

Apart from developing new beverages, PepsiCo has made an effort to gain significant market share in the healthier snacks market.  They have done so with a number of products such as Sun Chips and baked chips.  Sun Chips contain very little sodium, 18 grams of whole grain, and 30% less fat than the typical potato chip.  This has been met with extreme praise and success so far in the United States.  Sun Chips delivered double digit volume growth in the United States in 2007 and looks to continue this into the future.  Another healthier alternative are baked chips compared to the typical fried ones.  Baked Walkers crisps contain 70% less fat and only 90 calories per pack.  Consumers’ reaction to this product has been unanimous, as Baked Walkers crisps was named the “New Product of the Year” by Marketing Week magazine in the United Kingdom.  This is a great honor and shows that PepsiCo is headed in the right direction in terms of new product development.

Pepsi also understands the importance of marketing this new alternative.  They spent $2.9 billion in advertising and marketing in 2007.  This is a 7.4% increase from the year before, and can be expected to grow this year and in 2009.  CEO Indra Nooyi discussed in the company’s most recent earnings call her plan to revitalize the face of its business in 2009.  It will be interesting to see how they do this and what impact it will have on the company’s success in the healthier beverage and snack industry.

Will They Be Successful?

Producing a successful product is only half the problem for a company in the food and beverage industry.  The other half is marketing the product and convincing customers that it is the best product one can buy.  The company needs to convince customers that it is still the same extremely successful corporation that it has always been, while shifting the entire focus of the company.  PepsiCo has had no problem making this transition so far, and is positioned extremely well to continue this success into the future.  When the company reveals its new marketing strategy at the beginning of 2009, it will be interesting to see how people react to it.  If Pepsi is able to market its healthier products effectively, then it is fair to expect this company to continue its greatness even as consumer tastes and preferences are changing.

-Mark Kinsella

Disclosure: The mutual fund the author is associated with is long KO.

Quick Earnings Recap

Microsoft, operating on one of those awkward fiscal years, reported Q1 2009 earnings in late October, with an EPS of $0.48 with revenue growth of 9% from Q1 2008 as annual sales grew by 20%. Management did mention that many customers are looking to spend less while milking out more from their current computing assets. Expect this trend to continue for the next year as IT spending is flat with end users looking to cut costs by postponing some of their IT related capital expenditures. Enough of the general IT commentary, the important issue at hand is how Microsoft is going to rekindle their growth and assuage any concerns over their plethora of products.

Office for Free?

Microsoft announced late October that their coveted star, Microsoft Office, will be available for free online. This maybe shocking for many who realized that the Business Division, of which Office is apart of contributes roughly 31% to their top line, but this is a strategic move to compete with GoogleApps. This form of computing is known as SaaS, or Software as a Service, which often times is powered by a cloud. Refer to my previous article about the investors perspective on cloud computing for more details. This strategic shift could possibly lure more users from rival Google’s [GOOG: 259.56, -20.62 (-7.36%)] products and back to the legacy office tools. The SaaS approach has caught on as end users do not have to devote valuable system resources to common processes, but instead access them through a web browser. I think this shift by Ballmer and his team can offer much upside potential, as users can access Office files from any machine linked to the Internet, a true business solution. I would not be surprised to see Office sales increase as more businesses utilize Office Live for its convenience and access anywhere feature.

The Future of Windows

IT headlines have been buzzing about news regarding Microsoft’s next operating system, Windows 7. For investors this is a great sign, however this may be a time to rip a page from the techie handbook and reflect on Microsoft’s past. Although past performance does not dictate the future, Microsoft has been notorious for rushing several operating systems, from WindowsME to Windows Vista. The lack of end user acceptance for Windows Vista has seriously hurt Microsoft, the product is not of high quality that consumers and businesses alike require from the IT powerhouse. Windows 7, the next planned system, will be a make or break product for the company when released in 2010. The next generation OS is supposed to provide greater flexibility and component compliance while not being a resource hog like Vista. Microsoft is said to be working closely with the likes of Intel [INTC: 12.23, -0.26 (-2.08%)] and AMD [AMD: 1.91, -0.21 (-9.91%)] to ensure that the OS works well with the underlying processing units. Although this will battle compatibility issues faced with Vista, I do not think it is in the best interest of Windows 7’s to be dependent on the underlying hardware architecture that Intel provides with the new Nehalem. I believe any cross compatibility that Windows can offer in regards to hardware and peripheral devices will be beneficial over the long run. I am looking forward to Windows 7 because of its importance to Microsoft’s business due to the fact that Vista was such a bust.

Windows Azure, A Computing Evolution

Microsoft revolutionized computing with the introduction of Windows and furthered their reach with their cutting edge enterprise information solutions. Windows now has the capability to change the computing world once again. Cloud computing, a term I have been raving about, will change technology and more importantly change business in the next decade due to its cost benefits and efficient use of next generation computing systems. Azure has been released to a limited amount of users and will be released for all to license and use next year according to Chief Software Architect Ray Ozzie. The pricing will be competitive, although I am unsure what that means since this is the first cloud platform released for general use. The costs will depend on resource usage and will have various pricing tiers to offer customers the best deals. Ozzie believes that the development of the offering will change computing for the next 50 years. I believe that this will allow Microsoft to rekindle its stagnant growth assuming it is a quality. Paired with the release of Windows 7, I believe Azure can lead to big things for the tech titan.

Microsoft has been around through many monumental events and I believe they will be around for a while longer. Although they need to revitalize their business, this company is a must for anyone interested in investing in IT. The solid dividend and strong management are among many things that make this company attractive. I believe that Microsoft can really experience success if their new products are of high quality and exceed customer expectations.  An an IT investor, be sure to stay on top of the stock market news for updates on their new offerings.