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February 5, 2007

A little bit of positive reinforcement from the Federal Reserve helped investors regain their confidence last week.

Not only did the Federal Reserve leave rates unchanged during its Federal Open Market Committee meeting, it also signaled that it may not need to increase rates in the near term because inflation appears to be easing, according to Bloomberg.com. Data released last week showed that economic growth was robust during fourth quarter, consumer spending was strong, and employment was weaker than expected—an indicator that inflation pressure may be easing.

Growth actually was stronger than most people expected. According to Barron’s Online, many economists thought our Gross Domestic Product (GDP) would grow more slowly during 2006 than it had during 2005 because the housing market bubble had popped and a slew of Fed rate hikes slowed growth. Contrary to expectations, GDP for 2006 was up 3.4% compared to 2005’s 3.1% increase.

The economy’s resilience continues to surprise and helped drive markets higher last week. With worries about inflation set aside, investors seemed focused on the potential for growth during 2007.

DO YOU LIKE TO LOOK AT THE WORLD FROM THE TOP DOWN or the bottom up? No, I’m not asking whether you prefer the North Pole or the South Pole. I’m referring to a system for evaluating information. Top down strategies for information processing focus on the big picture and then consider the parts; bottom up strategies focus on the parts and then work up to the big picture. These techniques are used in many industries from computer science to architecture. They are also used by analysts in the financial industry.

When financial analysts take a top down approach to investing, they consider the big picture. They look at world and regional economies, countries, industries, and sectors. Once they’ve decided which regions of the world look most promising, and which industries should grow most quickly, they will scrutinize individual investment opportunities.

Bottom up analysts, on the other hand, focus primarily on individual companies. They may consider a firm’s management, finances, competitive advantages, business model, growth prospects, and other specific characteristics. Bottom up analysts believe that superior companies will outperform regardless of other factors, like how the economy of the country in which they do business is performing.

WHAT IS AN EMERGING MARKET? ‘Emerging market’ is another name for a developing country. The developing countries of the world hold about four-fifths of the world’s population yet they account for less than one-fifth of the world’s Gross Domestic Product, according to the Economist. Some economic theories predict that poorer countries, like these, are positioned to grow more quickly than developed countries, which generally are richer.
The emerging markets with the fastest growing markets during 2006 were China, Malaysia, India, Saudi Arabia, and Pakistan, according to GlobalEdge.com. Of course, the fact that a market is growing quickly doesn’t necessarily make it a good investment opportunity. You also need to consider factors like the country’s political stability, commercial infrastructure, market size, and more.

By 2008, U.S. cities with more than 10,000 citizens will be required by the Environmental Protection to prevent water that’s contaminated with grease or oil from flowing into lakes, rivers, and other bodies of water. That means cities will need to treat rainwater runoff from city streets.

Instead of building multi-million dollar filtration plants, some cities are considering Smart Sponge filtration technology, according to Fortune Small Business magazine. Smart Sponges can be shaped to fit the basins, drains or pipes in cities’ current sewer systems. The sponges are made out of the same plastics as your dashboard and running shoes, and they absorb oils, PCBs and other toxins permanently. When they’re saturated—every two or three years—they can be thrown away or recycled, according to AbTech Industries, the company that makes them.

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Best Regards,

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.