united technologies

J.P. MORGAN CHASE & CO. $38.07, New York symbol JPM, fell 10% this week after the company said it would write down the value of its mortgage-backed investments by $1.5 billion due to the ongoing liquidity problems in the credit markets. That’s 36% more than its second-quarter writedowns of $1.1 billion. To put these figures in context, Morgan earned $2.0 billion or $0.54 a share after writedowns in the three months ended June 30, 2008. The company also holds $5 billion in auction-rate securities. The interest rate on these securities depends on bids that buyers submit during periodic auctions. However, demand for these securities is slowing, which hurts their liquidity. Due to pressure from regulators, Morgan has now agreed to buy back $3 billion of these securities that it sold to retail investors. Morgan will probably realize a pre-tax loss of about $400 million on the repurchase. Further writedowns are possible. However, we feel that Morgan’s wide sources of income and broad geographic operations cut its overall risk. As well, its recent purchase of Bear Stearns strengthens its brokerage operations, and should eventually add $1 billion to its annual earnings....

DIAMONDS TRUST SHARES $112 (American Exchange symbol DIA; buy or sell through brokers) hold the 30 stocks that make up the Dow Jones Industrial Average. Currently, the fund’s top 10 holdings are IBM, 3M, Boeing Co., United Technologies, Caterpillar, McDonald’s Corp., Chevron Corp., Johnson & Johnson, Procter & Gamble and Exxon Mobil. Expenses are about 0.18% of assets. Diamonds Trust Shares are a buy.

We still think high-quality mutual funds with a long-term focus will beat indexes over long periods. If funds invest as we advise — sticking with well-established companies and spreading their assets out across the five main economic sectors — they will tend to lose a lot less than the market indexes in periods when the indexes fall sharply. That’s because big market slides are particularly hard on the hottest, most popular stocks of the preceding market rise, and investing as we do leads you to avoid excessive investment in the hot stocks. Index funds, in contrast, do tend to load up on the hottest, most popular stocks as they rise. That’s because, as they rise, these stocks make up a rising proportion of the index. The most recent example is Potash Corporation of Saskatchewan., which now has the highest market cap on the Toronto exchange on the strength of soaring fertilizer and agriculture prices....

NVIDIA CORP. $12.49, Nasdaq symbol NVDA, fell over 30% this week after it cut its revenue forecast for its second fiscal quarter ending July 27, 2008, from $1.1 billion to between $875 million and $950 million. The company blames the revision on a slowing economy, competitive pricing and delays in launching a new product. Nvidia will also take a one-time charge of $150 million to $200 million to cover the costs of replacing and repairing certain graphic chips in notebook computers. Nvidia earned $211.8 million, or $0.36 a share before unusual items in the three months ended April 27, 2008. These chips use older technology than its newer models, so these problems should not affect future earnings. Nvidia continues to spend about 17% of its revenue on research, which will help it maintain its leading share of the graphic chip market. Nvidia is still a buy, but only for highly aggressive investors....

MOODY’S CORP. $34.16, New York symbol MCO, fell over 20% this week due to accusations that it deliberately inflated the credit ratings of some complex debt securities. A media report alleges that after the company discovered a computer error in early 2007, it changed its rating methodology instead of downgrading these securities. Moody’s has denied the allegations. Rating agencies like Moody’s have come under fire in the past few months over the high ratings they assigned to securities backed by subprime mortgages and other risky loans. We have no reason to doubt Moody’s integrity. As well, the securities in question represent a tiny fraction of Moody’s business. However, this situation will likely spark further class-action lawsuits and greater regulation over the ratings industry....

DIEBOLD INC. $37 (New York symbol DBD; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 65.8 million; Market cap: $2.4 billion; WSSF Rating: Average) fell from $54.50 in July 2007 to $23 in January 2008 due to a dispute with the SEC over the way it recognized revenue from certain ATM sales contracts. The company has now changed its policy, and expects to file updated statements in the second quarter of 2008. The new policy should have little impact on Diebold’s earnings. Meanwhile, strong demand for Diebold’s ATMs in China and India is helping to offset weaker sales in the United States. As well, its new ATMs are faster, interact with more computer systems and cut operating costs. The recent shift of its European ATM manufacturing to a low-cost facility in Hungary should also improve its long-term profits. Diebold’s stock is trading below United Technologies’ $40.00-a-share offer, which suggests a competing offer is unlikely....

UNITED TECHNOLOGIES CORP. $70 (New York symbol UTX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 980.2 million; Market cap: $68.6 billion; WSSF Rating: Above average) has five main businesses: Carrier makes heating and air conditioning equipment (27% of 2007 revenue, 18% of profit); Otis makes and services elevators (22%, 31%); Pratt & Whitney makes aircraft engines (22%, 27%); Flight Systems makes helicopters and aircraft controls (19%, 18%); and UTC Fire & Security provides security and fire protection services (10%, 6%). The United States government, United’s biggest customer, accounts for 15% of its annual revenue. The company has fueled its growth in the past few years with acquisitions, which is riskier than internal growth. However, United Technologies has a strong history of successfully integrating new businesses, which cuts the risk of the unpleasant surprises that can come with any purchase. Its latest target is Diebold Inc. (see box this page). United Technologies is offering $40.00 a share, or roughly $3 billion in total. To put that in context, it earned $4.27 a share (total $4.2 billion) in 2007, up 15.1% from $3.71 a share ($3.7 billion) in 2006. Revenue grew 15.1%, to $54.8 billion from $47.8 billion....

The markets rattled many investors this week with steep one-day drops. At times like this, it’s good to remember that even when a further decline lies ahead, high volatility generally signals that it’s “a good time to buy”, rather than “a good time to sell”. It’s also encouraging to see that despite the steep one-day drops, most major market indexes are still at or above the lows they hit in January. UNITED TECHNOLOGIES INC. $67.49, New York symbol UTX, has launched a hostile offer to buy DIEBOLD INC. $37.51, New York symbol DBD. United Technologies is offering $40.00 a share in cash, or roughly $3 billion in total. United had cash flow of $5.1 billion ($5.16 a share) in 2007, so it can comfortably afford this purchase. Diebold’s building security operations would be good fit with United Technologies elevator, ventilation and fire alarm businesses. Diebold also gets 60% of its revenue from automated teller machines (ATMs). While big writedowns of mortgages at banks have hurt demand for new ATMs, United Technologies feels its large international operations will help it expand ATM sales in fast-growing countries such as China and Russia....

DIAMONDS TRUST SHARES $124 (American Exchange symbol DIA; buy or sell through brokers) hold the 30 stocks that make up the Dow Jones Industrial Average. Currently, the fund’s top 10 holdings are IBM, 3M, Boeing Co., United Technologies, Caterpillar, Altria Group, Coca-Cola Co., Johnson & Johnson, Procter & Gamble and Exxon Mobil....

We think high-quality mutual funds with a long term focus will beat indexes over long periods. If funds invest as we advise — sticking with well established companies and spreading their assets out across the five main economic sectors — they will tend to lose a lot less than the market indexes in periods when the indexes fall sharply. That’s because big market slides are particularly hard on the hottest, most popular stocks of the preceding market rise, and investing as we do leads you to avoid excessive investment in the hot stocks. Index funds, in contrast, do tend to load up on the hottest, most popular stocks as they rise. That’s because, as they rise, these stocks make up a rising proportion of the index. Index funds are a better deal than the majority of funds now available, however. So if you merely want to equal the indexes, here are some of the best deals available in ETFs. We’ve also analysed one we don’t like....