Analyst Upgrades

• Abercrombie & Fitch (ANF) to outperform from market perform at Wells Fargo.
• Trinity Industries (TRN) to buy from hold at BB&T.
• Cameron (CAM) to outperform from sector perform at RBC Capital.
• Expedia (EXPE) to positive from neutral at Susquehanna.
• Micron (MU) to buy from hold at Lazard Capital.

In these times of economic uncertainty many investors are taking a closer look at bonds and bond funds. But if individual investors are looking for a safe place to grow their savings, they should select funds carefully.

As the New York Times observed in a December 26 piece, Older Investors Should Examine the Risks in Bonds, "Because conditions may worsen before they improve, older investors should check that their bond investments are indeed what they thought they were--and that they fit their tolerance for risk." The article quoted Financial Counselors bond manager Gary Cloud: "We are in a 2 to 3 percent world, and if they want to earn more than that they need to proceed cautiously."

A WSJ January 4 piece In Search of Wall Street Bargains, carried Morningstar analyst Lawrence Jones' assessment of 2008 as an "absolutely brutal year" for most bond investors and observed: "Bond prices tumbled as investors anxious about the economic slowdown dumped corporate bonds and other obligations that carry the risk of default." Meanwhile, Treasury securities and the funds composed of them "delivered strong returns as investors bid up the prices of these safe havens."

Also on January 4, a Chicago Tribune piece, Bonds may be a shield, but they're still risky, echoed this theme. Noting that Steve Savage, editor of No-Load Fund Analyst, has advised individual investors to consider corporate bond funds and even high-yield bond funds, the Tribune warned, "Whenever yields are high, there is a good chance that financially stressed companies won't be able to repay their debts. In other words, bonds would default and investors would lose money."

Morningstar.com (NASDAQ: MORN) Morningstar Investment Conference for financial advisors begins June 25.

MORN is expected to report Q2 EPS during the August option calendar cycle.

MORN July and August option implied volatility of 40 is below its 26-week average of 43 according to Track Data, suggesting decreasing price fluctuations.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Morningstar (NASDAQ: MORN), a provider of independent investment research, is scheduled to report Q4 EPS after the market close on Feb. 21.

MORN call option volume of 1,289 contracts compares to put volume of 795 contracts. MORN March option implied volatility of 45 is near its 26-week average of 42 according to Track Data, suggesting slightly larger price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Before the bell: Stock futures soar ahead of Bush, Bernanke speeches

Home Depot (NYSE: HD) said it completed the sale of its wholesale supply business, HD Supply, to buyout firms for $8.5 billion and would would pay $325 million to keep a 12.5% stake in the supply business. HD shares are up 1.2% in premarket trading (7:39 a.m.).

Chevron Corp (NYSE: CVX) said its Chevron USA Inc and Chevron Credit Bank units agreed to sell their respective proprietary credit card businesses. Chevron also said it has chosen GE Money Bank, a unit of General Electric Co (NYSE: GE), to own and operate its Chevron- and Texaco-branded consumer credit cards, and FleetCor Technologies Operating Co to own and operate its branded commercial credit cards. These are still subject to regulatory approvals.

Sears Holdings Corp. (NASDAQ: SHLD) was downgraded by Bear Stearns from Outperform to Peer Perform.

Dell Inc. (NASDAQ: DELL), which beat estimates when reported earnings yesterday, earned a price target increase at two firms. UBS, which according to Briefing.com has a Sell on Dell, upped the target price from $30 to $35 (update: Briefing.com just contacted me to notify me the UBS price change was incorrect as I've noted that it didn't make any sense). Friedman Billings, with its Market Perform rating upped the target price from $26 to $28. (This doesn't make much sense, perhaps the targets were confused between the two firms).

NBC Universal, which is controlled by General Electric Co (NYSE: GE), will not be renewing its contract to sell digital downloads of television shows on Apple Inc's (NASDAQ: AAPL) iTunes after failing to come to an agreement on pricing, the New York Times reported.

Amazon.com Inc (NASDAQ: AMZN) has tentatively set a mid-September target for the launch of its music service, the New York Post reported.

Joe Mansueto, chairman of investment research company Morningstar Inc (NASDAQ: MORN), has emerged as the top bidder for Time Inc's tech-oriented Business 2.0 magazine, the New York Post reported. Time Inc is a unit of Time Warner Inc (NYSE: TWX).

The observer effect states that the act of observing a system changes that system. The Hawthorne Effect discusses the tendency of experiment subjects who are being observed to change their behavior to impress the observer. A fascinating column by MarketWatch's Chuck Jaffe takes a fascinating look at this problem in the mutual fund industry, although he doesn't specifically refer to the observer or Hawthorne effects.

The piece, titled The Downsides to Morningstar's Popular Fund Tools discusses the issue of fund managers manging with a focus on their Morningstar ratings and fitting into a particular quadrant of the Morningstar "style box", which is understandable given that over 80% of money invested in mutual funds flows to those given 4-5 stars. Jaffe writes:

The problem is that the financial advisory community has turned the boxes into straitjackets for money managers. They want a fund confined to a certain box, so that the adviser can build a portfolio certain in the knowledge that the fund represents a certain geography. When a manager moves from one box to the next, some investors bail out, fearing style drift.

Understandably, many fund managers are now allowing the style boxes to dictate their investment decisions. This reduces flexibility, and puts the focus on the wrong issue: Money managers should be looking to minimize risk and maximize returns, not fit into the right quadrant!

This is a pretty interesting issue, and not one that has been discussed extensively. Morningstar (NASDAQ: MORN) is a publicly-traded company with a $2 billion market cap, largely on the strength of its mutual fund research. But could its research actually be serving to hurt returns?

Oakley (NYSE: OO) volatility and volume elevated prior to anticipated LUX deal. Luxottica Group SpA (NYSE: LUX), the world's largest manufacturer of eyewear, agreed to buy OO for $2.03 billion. I reported uncharacteristic OO activity on 5/31/07 and 6/6/07. OO option volume was heavy on 6/20/07. OO July option implied volatility of 43 was above its 26-week average of 35 according to Track Data, suggesting larger price fluctuations.

Morningstar (NASDAQ: MORN) option implied volatility Stable. MORN, a provider of independent investment research, closed at $47.57. MORN's 2007 Morningstar Investment Conference will feature leading mutual fund managers and industry leaders-discussing current topics and industry issues beginning June 27th in Chicago. MORN over all option implied volatility of 30 is near its 26-week average according to Track Data, suggesting standard deviation price risks.

Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.