INVESTMENT QUARTERLY - ATGF · INVESTMENT QUARTERLY Prepared by Feldman Securities Group, LLC ATG Trust Company provides investment analysis and advice, estate planning, and trust

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

First Quarter - 2008

Contents:

The Rambling Rhino Page 2

Synopsis of Research Wires Dated Nov. 1, 2007 through Jan. 31, 2008

Page 4

Model Portfolio Page 4

Executive Summaries of Recommended Stocks Page 6

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

ATG Trust Company INVESTMENT QUARTERLY – FIRST QUARTER 2008

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The Rambling Rhino

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3½ percent. The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets. The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

— Statement from Jan. 22 by the board of governors of the Federal Reserve System The Federal Reserve Commits to Stimulating the Economy The Federal Reserve has ridden to the rescue. We believe it acted appropriately given the sudden downturn the economy experienced in December, and perhaps because more than one major financial institution can use the help following grievous losses taken on failed sub-prime mortgage securities. The Fed’s move also provides a major confidence boost for business people and investors, and it will work to soften any further blows the economy may suffer. Granted, changes in monetary policy can take up to a year to take hold on the economy, but they do increase the probability that any business slowdown will be shallow and short-lived – the ripple effect of the bursting of the historic housing bubble. Value Line places the odds of recession at one in two, or 50 percent, and most economists are predicting positive real growth for 2008 in the 1–2-percent range. Keep an eye on employment: A good gauge of economic strength continues to be the employment numbers, which were very weak in December, so January’s number will be greatly anticipated. In the meantime, we note that new orders for durable goods rose unexpectedly by 5.2 percent in December, twice as much as was forecast by economists. This strength is at odds with the weak employment number reported for the same month, and it muddies the picture a bit. Our sense is that December’s figure reflected business already in the pipeline, and that new orders will fall in the coming months, reflecting the sudden downturn in the overall economy experienced in December. Real short-term interest rates near zero percent. The real, inflation-adjusted federal funds rate is now 0.05 percent (3.50 percent less the 3.45-percent inflation rate as measured by the personal-consumption expenditure deflator in December), which is considerably lower than the 20-year average of 2.32 percent. The next rate cut, if there is one, will push the real Fed Funds rate below zero percent, increasing the stimulative monetary effect. The Fed mentioned in its Jan. 22 press release that inflation appears to be contained, so we look for the monetary authority to make an all-out effort, especially in this election year, as much is at stake politically. Fear on Wall Street Investors, and probably consumers to some extent, have been rocked by the media as it blitzed the headlines and TV screens with talk of recession. The trickle of uncertainty that began to leak into the stock market in late summer turned into a torrent of fear by year’s end, flooding the trading floors with sell orders as stock prices plummeted. The simple adage of “buy low and sell high” was once again forgotten in a deluge of emotion. While recession is becoming a growing possibility, global economic and business fundamentals remain sound, while stock valuations appear to be as low as they have this decade. Talk of America being mired in a funk has been bandied about, and it may be true to a degree, but the problem seems to be more social than economic, an accidental confluence of weakly related events where blame is placed erroneously. Looking at the country though the lens of long-term historical perspective, the current problems don’t even rate as a blip on the radar screen. So what’s the matter? Opinion polls rating the performance of the president and Congress are the lowest in recent memory, so that has something to do with it. News of soldiers killed and wounded in action add to a general feeling of unease. The economy is changing rapidly as the global build continues, leaving behind unskilled workers as the dynamics of the business evolution continue to unfold unrelentingly. Does the country lack direction? The polls indicate that the electorate can’t seem to agree on which candidate they want to run for president, on either side, which is telling. Workers seem to be in survival mode while they are pounded each day with recession warnings, and falling stock and home prices are exacerbating their defensiveness.


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Is a Recession Looming? It really looks like the economy hit the wall in December, but did it? Or did the month represent a temporary flat spot on the gears of industry? The Federal Reserve’s Beige Book offers a clue, and what it reflected about the economy wasn’t nearly as bad as what Wall Street had expected. The data seemed to indicate that the economy continues to advance, albeit at a slower pace than the impressive 4.9 percent of the third quarter. The Fed said, “Activity increased modestly during the survey period of mid-November through December, but at a slower pace compared with the previous survey period.” Keep in mind that the previous survey period included November, when consumer spending and general economic activity advanced at a blistering pace. The Fed added that seven districts “reported a slight increase in activity, two reported mixed conditions, and activity in three districts was described as slowing.” This is not enough evidence to predict with much certainty that an $11 trillion economy is tilting into a recession. The most pessimistic parts of the Fed’s report were limited to the obvious issues like residential real estate, housing-related industries, and the automotive and transportation industries. Retail activity was described as being “subdued,” while reports on tourism were “positive.” Holiday sales were “generally disappointing” and the outlook for 2008 among retail merchants was “cautious.” Several banks suggested that business and consumer lending activity slowed in many districts, while residential mortgage lending continued to contract in all of the polled districts. On the positive side, the Fed noted that higher crop prices and favorable weather helped boost the agricultural and natural resources sectors. Export orders were “strong” and some districts reported increased demand for industries whose products compete against imports. In addition, “demand for non-financial services remained generally positive,” with “robust demand” reported in the healthcare, hospitality, legal and insurance industries. Financial Stocks As of press time, about half of the S&P 500’s 92 financial- services companies have reported fourth-quarter earnings, including all of the largest banks. Thus far, earnings are down by 40 percent from the year-ago quarter, reflecting the substantial impact of write-downs of sour sub-prime mortgages and hybrid securities. It appears likely that the financials sector as a whole lost money in the fourth quarter – no mean feat. The bright side is that much of the bad news is already out, and with the financial sector down about 30 percent in price since the last peak in mid-2007, some of the stocks look like bargains for long-term investors. Many bank stocks look cheap by historical measures, with prices close to reported book values and forward P/E ratios in the mid-to-high single digits. As history has taught us in past cycles, stocks begin to turn higher before earnings have bottomed, investors are scared, and blood is running in the streets. During the last significant U.S recession in the early 1990s, which interestingly enough was triggered by the savings-and-loan debacle, bank stock prices began to turn north several months before earnings bottomed. So is it time to buy? The answer lies in large part as to when the sector’s earnings bottom out, and nobody knows when that will happen. Investing is not a precision game, but rather one that counts on probabilities and judgments. In this vein we hearken back to the wisdom of the great economist (and successful investor) of the first half of the 20th century, John Maynard Keynes, who said he would rather be approximately right than precisely wrong. So is it time to jump into financial stocks with both feet? Not in our conservative world, but it is time to adjust the odds by increasing exposure to the financial sector to a market weighting of about 18 percent. We had recommended underweighting the sector in 2006 and 2007 due to high valuations – book values were at the high end of their historical range of about 3x; with that ratio knocked down to about 1x, we think the valuation is attractive. Dividend yields are above the market average for many bank stocks, giving investors good cash flow while they wait for the companies to get well and their stocks to recover. Please note that in one fell swoop the Federal Reserve lowered banks’ cost of money by 75 basis points, a significant percentage given the relatively low level of interest rates; this will raise profit margins for banks and help them rebuild capital eroded by the sub-prime securities monster. We note that the financials sector is leading the S&P 500 year-to-date:

Financials -3.5% Consumer Discretionary -4.4% Health Care -5.3% Materials -5.8% Consumer Staples -6.1% Industrials -6.7% S&P 500 -7.8% Utilities -9.0% Energy -11.3% Information Technology -13.7% Telecommunications -13.7%


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It is also interesting to note that last year’s second-worst performing sector, consumer discretionary, is the second-best performing sector so far this year, as retail stocks rebound from the deep slide they suffered as recession fears mounted in the fourth quarter. A slightly increased market weighting seems to make sense in this sector as well, as valuations look very attractive, and we doubt that American consumers will restrain their inherent right, and capability, to spend for long. Stocks Cheap Vs. Bonds An investor returning from a long trip to an isolated place with no access to world news would be confronted with the following investment choice:

10-year U.S. Treasury note yield: 3.6% Earnings yield on S&P 500: 7.0%

Our erstwhile traveler would notice that the nearly 350-basis-point advantage for stocks is the greatest since 2000, and he or she would rationally determine that stocks are the investment of choice, or more colloquially, that they are cheap. “What happened?” our traveler might ask. “Is the stock market pricing in a recession?” The answer would be “yes,” whether recession actually happens or not. Such valuation imbalances occur historically, but generally they do not last for long, as rationality inevitably replaces emotion, and investors react accordingly, with the result that stock prices eventually converge on value. The 15-percent slide in the stock market presents investors with a good buying opportunity in our opinion, based on the valuations we see, and also based on the fact that the Federal Reserve is easing aggressively. Barron Rothchild said that he would let others take the bottom and top 20 percent of stock price moves, and keep the middle 60 percent for himself. In our opinion, the bottom 20 percent is behind us. Chronological Synopsis of Research Wires

Nov. 1, 2007 through Jan. 31, 2008

DATE COMPANY RESEARCH WIRE Nov. 14 Fiserv, Inc. Downgrade from BUY to HOLD Hewlett-Packard Initiate coverage at BUY IBM Initiate coverage at BUY Nov. 15 Eaton Corp. Initiate coverage at BUY Texas Instruments, Inc. Initiate coverage at BUY Nov. 19 Emerson Electric Add to Model Stock Portfolio at BUY Dec. 11 Anheuser-Busch Downgrade from HOLD to SELL

FSG Model Stock Portfolio

Jan. 31, 2008

Sector Rating FSG Weighting S&P 500 Weighting CONSUMER DISCRETIONARY 8.1% 8.7% Bed Bath & Beyond Buy 1.0% Best Buy Buy 2.4% Lowe’s Cos. Buy 1.7% Starbucks Buy 1.6% Williams-Sonoma Buy 1.4% CONSUMER STAPLES 10.4% 10.3% Altria Hold 1.9% CVS Corp. Buy 1.9% Estee Lauder Buy 1.9% Pepsi Buy 1.6% Procter & Gamble Buy 1.5% Wrigley Buy 1.6% ENERGY 12.7% 12.4% Chevron Buy 3.1% ConocoPhillips Buy 3.0% Devon Energy Buy 3.7% Noble Energy Buy 2.9%


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FSG Model Stock Portfolio

Jan. 31, 2008

Sector Rating FSG Weighting S&P 500 Weighting FINANCIALS 18.5% 18.5% Amer Int Gp Buy 2.1% Capital One Buy 2.9% JP Morgan Buy 3.3% Morgan Stanley Buy 3.5% U.S. Bancorp Buy 3.4% Wells Fargo Buy 3.3% HEALTHCARE 12.3% 12.3% Abbott Labs Buy 2.5% Johnson & Johnson Buy 3.0% Medtronic Buy 2.0% Stryker Corp. Buy 2.6% Wellpoint Buy 2.3% INDUSTRIALS 11.8% 11.4% Danaher Corp Buy 3.2% Emerson Electric Buy 2.5% Illinois Tool Works Buy 2.8% L-3 Commun. Buy 3.2% INFORMATION TECHNOLGY 15.9% 15.5% Adobe Systems Hold 1.3% Autodesk Buy 1.6% Cisco Systems Buy 1.5% Citrix System Buy 1.6% eBay Inc. Buy 1.6% IBM Buy 2.1% Microsoft Buy 1.7% Oracle Corp Buy 1.5% Texas Instruments Buy 1.5% MATERIALS Materials Select Sector SPDR Buy 3.4% 3.4% TELECOMMUNICATIONS Vanguard Telecom Service ETF Buy 3.3% 3.5% UTILITIES Utilities Select Sector SPDR Buy 3.7% 3.7%


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INVESTMENT QUARTERLY - ATGF · INVESTMENT QUARTERLY Prepared by Feldman Securities Group, LLC ATG Trust Company provides investment analysis and advice, estate planning, and trust