The U.S. markets leaped into the second quarter with the strongest start since 1938, as a rally in financial stocks led all three major indices to post gains of more than 3% on the first trading day in April.

It was a marked contrast to the first trading day of the first quarter when the Dow Jones Industrial Average Index suffered its weakest first trading day (in percentage terms) in the past 25 years and never looked back. 

For the first quarter:

• The blue-chip Dow lost 7.5%, its worst showing in 5.5 years (or just after the tech bubble burst). 
• The tech-laden Nasdaq Composite Index plunged 14.1%.
• And the broader Standard & Poor’s 500 Index dropped 9.9%.

Compare those dismal stats to the first three trading days of April as of yesterday’s close:

• The Dow has posted a gain of 363.14 points (3.0%), to close at 12,626.03.
• The Nasdaq has increased 84.20 points (3.7%), to reach 2,363.30.
• And the S&P 500 has gained 46.61 points (3.5%), to hit 1,369.31.

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According to Yale Hirsch’s The Stock Trader’s Almanac, on average since 1950, April has been the best performing month of the year for the Dow with an average gain of 1.8% for the month.

If April continues the way it has thus far, 2008 should prove no exception to that rule.

The first quarter of the year will likely be remembered for the U.S. Federal Reserve’s emergency bailout through JPMorgan Chase & Co. (JPM) of the fifth-largest domestic investment bank, The Bear Stearns Cos. Inc. (BSC), but the quarter was host to a bevy of negative news among financials as Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER) posted record losses and suffered through the worst quarters in their illustrious histories. 

In Lehman’s Terms

More recently, Lehman Brothers Holdings Inc. (LEH) has fought off speculation that it would be the next to falter and remained alive and kicking at quarter-end. 

Thus far in the second quarter, the financial sector has been playing a different tune. The sector is up over 5% for the month versus its near-12% decline in the first quarter.

Shares of Lehman Brothers are up over 17% after the firm announced it would offer $4 billion in convertible preferred stock. Investor response to Lehman’s offering has been overwhelmingly positive. Lehman stock has gained $5.68 in April to close at $43.32 yesterday (Thursday).

"It’s three times oversubscribed; people are interested in investing in Lehman," Art Hogan, chief market strategist at Jefferies & Co., told MarketWatch.

Meanwhile, UBS AG (UBS) also announced it would try to raise additional capital and despite estimating a $19 billion first quarter loss, U.S.-listed and European-listed shares rose on the news that Chairman Marcel Ospel would step down. Shares have gained $3.69 in the first three days of the new quarter to close at $32.49 yesterday.

"To the extent the market is comfortable that they’re able to add to their capital base, it means we are working our way through these problems," Alan Gayle, senior investment strategist at RidgeWorth Capital Management Inc., which oversees about $74 billion in Richmond, Virginia, told Bloomberg News. "There’s hope we’re seeing the end of the write-offs."

In early January, a WSJ.com poll showed that 42% of economists surveyed felt that the dreaded "R" word was inevitable. As the dire first quarter progressed, that number had jumped to over 70% by March, with many of those same economists now believing the country was already stuck in the midst of recession. 

By true definition, a recession is marked by two straight quarters of negative growth.  That means it’s quite possible that a recession can only be identified after the economy is working its way to the other "R" word – recovery.

In the fourth quarter of 2007, gross domestic product eked out a feeble 0.6% gain, far lower than the 4.9% growth rate experienced in the third quarter, but still ever-so-slightly positive. So while a textbook definition recession may have not reared its ugly head quite yet, many of those same "experts" anticipate first and second quarter GDP data to reflect flat growth or an economic contraction. 

But on an optimistic note (for a change), Ned Davis Research indicated that over the last 10 recessions, equity prices have soared on average 24% within just six months of hitting their lows. 

That means if we did hit "the" bottom in the first quarter, investors could be seeing some nice gains by the start of the fourth quarter.

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The U.S. markets had strong gains yesterday (Tuesday), marking the strongest second quarter start since 1938, as a rally in financial stocks led all three major indices to post gains of more than 3%.

At the New York close, the blue-chip Dow Jones Industrial Average Index had posted a gain of 391.96 points (3.20%), to close at 12,654.85. The tech-laden Nasdaq Composite Index increased 82.14 points (3.60%), to reach 2,361.24. And the broader Standard & Poor’s 500 Index rose 47.17 points (3.57%), to hit 1,369.87.

All sectors were up with the financial sector (up 4.47%), the services sector (up 3.29%) and the technology sector (up 3.18%) posting the biggest gains.

"The market’s getting a little more comfortable that the crisis is over," Henry Herrmann, president and chief executive officer of Waddell & Reed Financial Inc. (WDR) in Overland Park, Kansas, which manages $65 billion, told Bloomberg News. "It’s a rally associated with the presumed elimination of survival risk."

Shares of Lehman Brothers Holdings Inc. (LEH) were up over 17% after the firm announced it would offer $4 billion in convertible preferred stock. Investor response to Lehman’s offering has been overwhelmingly positive. Lehman stock gained $6.68 for the day to close at $44.32.

"It’s three times oversubscribed; people are interested in investing in Lehman," Art Hogan, chief market strategist at Jefferies & Co., told MarketWatch.

UBS AG (UBS) also announced it would try to raise additional capital and despite estimating a $19 billion first quarter loss, U.S.-listed and European-listed shares rose. Shares gained $4.23, an almost 15% increase, to close at $33.03.

"To the extent the market is comfortable that they’re able to add to their capital base, it means we are working our way through these problems," Alan Gayle, senior investment strategist at RidgeWorth Capital Management Inc., which oversees about $74 billion in Richmond, Virginia, told Bloomberg News. "There’s hope we’re seeing the end of the write-offs."

In overseas markets, Japan’s Nikkei Index reversed about half of yesterday’s losses with a 1% gain, adding 130.88 points to close at 12,656.42. Hong Kong’s blue-chip Hang Seng Index gained 288.26 points, to close at 23,137.46.

European bourses were up as much as 3% as bank shares rallied, leading the Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX to all post gains.

At the New York close, the dollar had gained ground against the euro (up 1.045%), the yen (up 3.030%) and the pound sterling (up 0.779%).

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Slovakia’s economy grew at an impressive 9.4% clip – or $21.5 billion – during the third quarter, driven largely by its surging manufacturing sector, the Statistical Office of the Slovak Republic announced yesterday [Tuesday]. Employment also rose 2.1%.

The government attributed most of the growth to the "manufacturing of machinery, electrical and transport equipment. From the expenditure side, the gross domestic product [GDP] growth was influenced mainly by the ongoing foreign demand and permanent growth of domestic demand." Two of the big foreign manufacturers in Slovakia are carmakers PSA Peugeot Citroen SA of France, and Kia Motors Corp., of South Korea.

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These fresh statistics dovetail nicely with last quarter’s economic figures – GDP growth of 9.4% and employment growth of 2%.

Such growth cements Slovakia’s case to join the Euro Zone in 2009. To gain admission, Slovakia must meet the financial standards [a maximum inflation rate, as well as standards for state spending and interest rates] of the Maastricht Treaty, though one of the main cases against its admission is the nation’s inflation growth.

According to the EU, Slovakia would need to keep its average 12-month inflation rate within the average of three EU countries with the slowest growth, plus 1.5 percentage points. Additionally, the country would also have to keep its budget deficit within 3% of its GDP.

The European Commission said Friday that Slovakia is on target to meet those standards, Reuters reported. But that’s not a guarantee, either.

"Under unchanged policies, for 2009 we estimate 3% [inflation growth]. So the question of sustainability should be carefully considered when we write our report next spring," EU Economic and Monetary Affairs Commissioner Joaquin Almunia told Reuters, refering to a report on Slovakia’s economic progress due in May.

And because all this vague talk of a Euro Zone probability just isn’t as concrete as we’d prefer, two non-government Slovak organizations went as far as calculating specific odds the country will adopt the euro in 2009.

As of now, the INEKO organization and Club of Economic Analysts give the country a 71% chance of adopting the euro based on the government-approved state budget for 2008, which also meets euro adoption criteria.

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Banco do Brasil, Latin America’s largest bank, said profits rose 50% in the third quarter, due to borrowers taking advantage of record low interest rates.

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Farmers comprise a large portion of the government-controlled bank’s borrowers. High crop prices – particularly sugar cane for ethanol production – gave farmers more financial leverage to borrow more to expand their operations, Bloomberg reported.

"Banco do Brasil has the best position to capture all the activity generated by such a positive environment in the agribusiness," Regis Abreu, who helps manage $1.08 billion (1.9 billion Brazilian Reais) in assets at Mercatto Gestao de Recursos in Rio de Janeiro, told Bloomberg. "It’s the bank that has a long-time relationship with farmers who are making a lot of money now."

Down the road, Banco do Brasil may reap massive profits from its growing credit portfolio, which expanded 27% this quarter. Brazil and its surrounding countries are  promising emerging consumer markets where an increasing number of people will finance large-scale items such as cars and houses and sign up for credit cards for the first time.

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When Caterpillar Inc. (CAT) reported its third-quarter financial results earlier this month, the heavy-equipment giant was able to report record sales and profits – despite an 11% plunge in its U.S. revenue.

Its knight in black-and-yellow armor: Soaring overseas sales.

"The industries we serve are becoming increasingly global, and the investments we are making to achieve our 2010 goals have us well positioned to meet their needs," Jim Owens, Cat’s chairman and chief executive officer, said of the company’s third-quarter performance.

Indeed, while U.S. sales dropped 11% (a decline of $615 million), every one of Cat’s overseas divisions posted remarkable gains: Sales were up 36% in its Europe/Africa/Middle East unit (gaining $963 million), 30% in Latin America (adding $191 million) and 30% in the Asia/Pacific group (growing by $386 million). Caterpillar’s ability to distance itself from the fraying U.S. market was the only reason it posted record third-quarter results.

And yet, the Peoria, Ill.-based Cat still had to cut its earnings outlook for the rest of the year – citing the U.S. economic malaise as the reason.

During a third quarter in which the American economy was slowing, U.S.-based firms had to deal with such challenges as an imploding housing market, soaring energy and commodity prices, the collapse of the subprime mortgage market and an ensuing global credit crisis, and a threadbare greenback that’s fallen to lows not seen in 30 years.

Each of those factors attacked U.S. companies from a different angle, causing industry-wide problems competitors shared. A look into each industry shows how some of the companies that were first to report their quarterly numbers have fared – and how they are positioning themselves against the stormy weather they’ll face in the current quarter and in others to come.

A Dour Outlook for Financial Services

Banks and securities firms took a beating in the third quarter, and all indicators point to the credit crunch they created as the cause. It’s no surprise that more than 130,000 workers had already been terminated from companies in this sector through the end of September, making this year the worst ever for layoffs in the U.S. banking-and-brokerage firms.

Countrywide Financial Corp. (CFC) was the financial sector’s poster child of pain caused by the woeful credit market. Its quarterly earnings report capped off a three-month streak of bad news. During the quarter Countrywide:

• Announced the departure of 10,000 to 12,000 employees.
• Received a $2 billion capital injection from Bank of America Corp. (BAC).
• Watched one of its largest shareholders, AXA SA (AXA), cut its company stake from 11% to 4.1%.
• Was investigated by the Securities and Exchange Commission (SEC) about Chief Executive Angelo Mozilo’s conspicuous stock sales before the mortgage bubble burst in July.

Countrywide recently reported a third-quarter loss of $1.2 billion (or $2.12 a share), compared to a profit of $647.6 million (or $1.03 a share) for the comparable quarter last year. It marked the company’s first quarterly loss in 25 years.

Mozilo, one of those CEO’s who’s never been one to hold his tongue, said this year’s housing market was the worst since the Great Depression, but emphasized that the company was positioned to return to profitability in the fourth quarter.

[On Monday, however, Mozilo and KB Home CEO Jeffrey Mezger both said that the worst was yet to come for the U.S. housing market. The two executives were part of a panel discussion on the economic impact of the subprime mortgage meltdown that was sponsored by the Milken Institute].

Other lenders have experienced woeful quarters of their own during the third quarter. While Countrywide posted an actual loss, a number of top financial-services companies recorded massive declines in profit. For instance, profits declined:

• 57% at Citigroup Inc. (C).
• 61% at The Bear Stearns Cos. Inc. (BSC).
• 17% at Morgan Stanley (MS).
• And 10% at Wachovia Corp. (WB).

These big profit declines – coupled with the massive layoff figures – haunted pre-market headlines, and the ensuing doom and gloom weighed on day trading and further propagated the problem. Many consider the credit market the economy’s bellwether because it gauges how much money we can spend. Defaulting loans means borrowers have less money, and banks, in turn, go bust.

Really, the only good news to come out of this sector in the third quarter was the surprise 79% profit by Goldman Sachs Group Inc., (GS), the largest U.S. securities firm by market capitalization. Not only was it the company’s second-highest revenue figure ever, it was achieved in the face of this summer’s severe market turbulence.

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But even Goldman Sachs has some investors worried [For a report analyzing a new accounting regulation that could force firms such as Goldman to take additional write-offs, please click here. The report is free of charge].

Lenders aren’t anticipating sunny times anytime soon. The housing market may not turn completely around until 2010, by some estimates, a dour reality that will certainly restrict consumer spending. Continued subprime defaults, coupled with the fallout from mortgage "resets," will spill into the broader credit markets and force interest rates up – boosting borrowing costs and squeezing corporate profits. That, in turn, could slash corporate spending and even bring about a serious slowdown in mergers and acquisitions. Corporate profits, business spending and M&A deals have been major factors in the advance of the major market indices over the past year; a decline here, coupled with a housing-market-spawned reduction in consumer spending could combine to spell problems for stock prices.

Some speculate emerging markets and their rising middle classes as potential saviors.  Others see the share-price escalations in some of those markets – especially China – as the world’s next financial bubble.

Third-Quarter Food-Sector Follies

Surges in the prices of food-related commodities, including wheat, corn, coffee and dairy, have punished virtually every link in the food chain – the food-manufacturing chain, that is. Consumers, farmers and manufacturers are all feeling the pinch. Needless to say, earnings were affected.

Milk prices creamed Hershey Co. (HSY), which saw third-quarter profits drop 66%. The snack food and chocolate candy maker also forecasted declines in full-year set sales and diluted earnings per share.

On the surface, London-based candy and beverage maker Cadbury Schweppes (CSG) posted solid year-over-year revenue growth of 10% for the third quarter, but some analysts think the company will have trouble breaking into the emerging markets, slowing its long-term growth rates. In the near term, thanks to high corn prices and its reliance on corn syrups to sweeten its drinks – Dr. Pepper, 7-Up, Hawaiian Punch, Canada Dry and Snapple – Hershey will experience additional profit pressures.

Rivaling beverage makers Coca-Cola Co. (KO) and PepsiCo Inc. (PEP) are simultaneously battling corn prices, and each other, in a bid to serve China’s collective sweet tooth. Neither can claim victory, yet, but the battle yielded terrific third-quarter profit growth for each – 13% for Coca-Cola and 17% for Pepsi. Both companies benefited heavily from rocketing sales in their international markets.

Likewise, the food companies with a heavy international presence were the ones that have so far posted the biggest profit gains. McDonald’s Corp. (MCD) credited its growth in Asia for its 27% gain in profit. Similarly, Yum! Brands Inc. (YUM) posted an overall profit gain of 17% – thanks to massive growth in China, but no thanks to U.S. consumers still scared by a Taco Bell e-coli outbreak.

Boeing Soars, Throttles Back Expectations

Caterpillar wasn’t the only exporter of big-ticket wares that posted mixed earnings. The Boeing Co. (BA), the world’s second-largest producer of commercial airliners, said profits climbed 61% in the third quarter, its best showing in four years.

The results smashed forecasts, but the company doused any exuberance by cutting its 2008 revenue estimates because of delays in launching its new Boeing 787 Dreamliner.

However, Boeing this week said its board of directors approved a new plan to buy back up to $7 billion of the company’s common stock. The company has repurchased approximately $8 billion of common stock since resuming its stock-buyback program in 2004. The Boeing board last authorized buybacks in August 2006, when it announced plans to repurchase $3 billion worth of shares. That buyback plan is almost finished, Boeing said this week.

The share repurchases will be made on the open market, or in privately negotiated transactions, and the company said the number of shares purchased, as well as the timing of any buybacks, will depend on corporate cash balances, business, and economic conditions, and other factors, including investment opportunities.

Boeing’s directors also declared a regular quarterly dividend of 35 cents a share. That dividend is payable Dec. 7 to shareholders of record as of Nov. 9, the company said.

The High-Tech Haven

Like Pepsi and Coke, rivals Apple Inc. (AAPL) and Microsoft Corp. (MSFT) posted strong quarterly numbers.

Apple reported a 67% increase in profits ($904 million net profit) for its fiscal fourth quarter. Interestingly, while the Apple iPhone has been a near-ubiquitous news story, it’s the publicity about the phone has helped boost sales of Apple’s computers and iPod music players that’s turned out to be the real story. Although Apple sold 1.1 million iPhones during the quarter, they only generated $118 million in revenue – sales of computers and iPods accounted for the bulk of the company’s growth.

Microsoft stole Apple’s thunder just a few days later when it announced that its quarterly sales results crushed analyst forecasts, coming in more than $1 billion over projections. The catalysts: Microsoft’s Vista software and its immensely popular "Halo 3" video game for the company’s Xbox 360. Profit soared 23% ($4.29 billion), while sales advanced 27% ($13.8 billion).

The results sent Microsoft’s shares to a six-year high the day they were released.

Retailers Revise Forecasts

Retailing giants Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT) release their third-quarter this month, but each dropped clues about their quarterly performance in their monthly sales reports.

Target reported an 11.6% sales increase in August and a 6.2% increase in September. The latter was below guidance.

Archrival Wal-Mart reported 9.3% sales increase in August (not surprisingly, the results included a 15.1% increase at Wal-Mart International stores), and a 9.7%-sales increase in September (including a 20.1% increase at Wal-Mart International stores). And though Wal-Mart moderately increased its quarterly earnings guidance, the retailer shared Target’s reasons for lower-than-expected sales.

"Overall, apparel and home remain soft," Wal-Mart said about its September sales statistics. "Company research reinforces that customers remain concerned about their finances, especially the cost of living…  In addition, unseasonably warmer weather in much of the country, coupled with tighter consumer spending, negatively impacted key seasonal categories."

Wal-Mart is combating customer concern about the U.S. economy with a new, empathetic slogan: "Save Money. Live Better."

While the outlook may be a bit on the sluggish side for Wal-Mart and Target, it appears that real trouble looms for The Home Depot Inc. (HD), which plans on reducing outstanding shares by 165 million and 290 million, respectively, in the third and fourth quarters. In the third quarter, while the company stock’s plunged 6.91 points (or 17.56%), it sold its HD Supply unit.

Commenting on the company’s second-quarter financial performance – which included a 15% decline in profits – Chairman and CEO Frank Blake said that "housing and home improvement markets will remain soft into 2008 …  we will continue to invest thoughtfully for the long-term health of the business."

Investing For Profit in the U.S. Market

Although a key Money Morning mantra has been "go global, or get left behind," investors will clearly also want to invest in some U.S.-based companies. Our panel of investing experts says the best bets are companies that are major exporters, or that do a major slice of their business overseas.

Companies that meet those qualifications, have been covered by Money Morning, and warrant additional research by investors include:

• Yum! Brands Inc. (YUM).
• PepsiCo Inc. (PEP)
• The Coca-Cola Co. (KO)
• MGM Mirage (MGM)
• McDonald’s Corp. (MCD)
• The Boeing Co. (BA)
• General Electric Co. (GE).
• Berkshire Hathaway Inc. (BRK.A, BRK.B).

A number of Money Morning News stories and research reports on these firms are listed below. You’ll also find our searchable news archive to be a useful tool in your research, as you lookup up some of our past coverage.

Good Investing

The Staff of Money Morning

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Coca-Cola Co. (KO), the world’s biggest soft drink maker, released better-than-expected third-quarter results yesterday (Wednesday), attributing the upside surprise to its worldwide growth.

Overall, the company posted a 13% gain in profits, a 19% jump in net revenue and a 15% increase in earnings per share.

Other highlights from its quarterly report include:

• A 24% increase in net revenue growth in Eurasia (Russia, India, Turkey, Pakistan and Eastern Europe).
• 28% net revenue growth in Latin America.
• And 21% net revenue growth in North America, despite a 1% decline in soda consumption.

"Once again, this strong performance was led by our international business," Neville Isdell, Coca-Cola’s chairman and chief executive officer, said in a company statement. "Emerging market growth, combined with sequential improvement in North America, resulted in our third consecutive quarter of 6% unit case volume growth."

Coke shares jumped $1.33 each, or 2.3%, to close at $59.09, after setting a new 52-week high of $59.43 yesterday. The stock is at its highest point in six years. Before yesterday, Coke shares had climbed 20% for the year, eclipsing the 15%-advance for archrival PepsiCo Inc. (PEP), Bloomberg News reported.

Contradictions Over Costs

But beneath Coke’s results are some interesting trends, which hint at a possible shift in the competitive landscape a few years in the future.

Coke gets 70% of its sales outside North America.

Net revenue growth in its "Pacific" region (China, Japan, and Philippians) was a meager 6%, despite a 20% increase in unit case volumes to China. The company said slow growth in the region is "partially offset by unfavorable country mix," but the numbers say that demand wasn’t as high as the company expected.

Adding to the pain, U.S. futures for corn – a primary ingredient in soda sweeteners – are up 27% from a year ago, according to Reuters. This especially hurts Coca-Cola because 80% of its revenue comes from soda sales. Only 20% of the sales of rival PepsiCo Inc. (PEP) come from soda, Bloomberg reports.

Coke Chief Financial Officer Gary Fayard told analysts and journalists on a conference call that the company sees a moderation in such commodity costs as corn syrup and aluminum that affect beverage companies.

"We believe the worst is behind us," Fayard said.

 However, many experts would disagree with that assessment, predicting instead that demand from China, India and other growing markets around the world will keep commodities demand – and long-term prices – on an upward trajectory.

Indeed, while Coke yesterday said raw materials prices would be flat to slightly down this year, Pepsi last week actually predicted that raw materials prices would be higher. However, Pepsi’s mix of raw materials does differ a bit, including grains for Quaker oatmeal, and cooking oils for its salty snacks, for instance.

Battleground Asia

Coke brought Isdell out of retirement three years ago to jump-start growth, and the company has been making some moves away from its long-too-predictable game plan. The company introduced its highly successful Coke Zero soda, and in an effort to reduce its sweet tooth – its high reliance on soda sales for revenue – Coke bought Vitaminwaters-maker Glaceau for $4.1 billion.

But it’s no surprise that China will real battleground between Coca-Cola and Pepsi. And Pepsi’s bold move to "go red" in China is paying off. Pepsi introduced a red soda can that looks strikingly like Coke’s, which could cause brand confusion in the still-nascent soda market of China, giving Pepsi a chance to gain ground.

Last week, Pepsi announced a 17% gain in net profit  - both larger than Coke’s and more closely linked to China’s soaring growth rate. Also, Pepsi has a broader platform of products (from soda to juice to snacks) that could open up more revenue streams and help protect the company from some of the escalating cost of corn (although that’s a key ingredient in some of its snacks, too).

Coca-Cola can still boast better name recognition around the world, but Pepsi is only 15% smaller than Coca-Cola in terms of market capitalization. It also has a better EPS, forward P/E and dividend than Coca-Cola. If the companies’ numbers continue, especially in Asia, Pepsi might be able to mount a serious charge and wrest away a chunk of Coca-Cola’s overseas market share over the next few years.

Could it actually overtake its larger and better-known rival? That’s a very tall order. And only time will tell.

But that would definitely be some tough new reality for Coca-Cola to swallow. And don’t expect that a "spoonful of sugar" – or even a shot of high fructose corn syrup – will help that bitter medicine go down.

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• Bloomberg:
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PepsiCo Inc. (PEP) ended its third quarter with big numbers – a 17% gain in net income, a 19% increase in earnings per share, and an 11% gain in revenue – largely because of its continually growing international presence.

The global beverage-and-food company has been ramping up operations in China, where Pepsi’s risky color change is gaining ground in its Olympic-sized cola war with Coca-Cola (KO).

Pepsi’s four main divisions all posted net revenue growth: Frito-Lay North America was up 6%, PepsiCo Beverages North America up 3%, Quaker Foods North America up 2%, and PepsiCo International up 22%, an impressive increase fueled by double-digit growth in China, Russia, Pakistan and the Middle East.

Overall, Pepsi reported net income for the quarter ended Sept. 8 of $1.74 billion, or $1.06 cents a share. That compares with net income of $1.49 billion, or 89 cents a share, for the comparable quarter a year ago.

And all this was accomplished even though the price of corn – a major ingredient of its soda and snacks – soared 21% this year on the Chicago Board of Exchange.

"Our third quarter performance was very strong, with double-digit revenue and operating profit growth," PepsiCo Chairman and CEO Indra Nooyi told the Wall Street Journal. "All of the company’s operating divisions successfully navigated through an environment of higher input costs in order to deliver balanced top- and bottom-line performance."

The Upside of the Falling Dollar

But underneath the numbers, the currency shift and diminishing value of the dollar has given Pepsi – and many other globally focused U.S. companies – a strong and steady tailwind. The dollar’s fall against currencies around the world is driving down the overseas prices of U.S. exports, and driving up export sales. That’s helped stabilize the U.S. manufacturing job base.

For Pepsi, "favorable foreign currency upsides allowed us to reinvest in several international markets in the quarter," Nooyi said in a company statement.

And the falling dollar opens many other doors for U.S. investors to profit. Not just riding the coattails of internationally moving American companies like Pepsi, Yum! Brands Inc. (YUM) and Exxon Mobil Corp. (XOM), but by investing in exchange traded funds (ETFs) and in foreign currencies gaining on the dollar.

News and Related Story Links:

• Money Morning Investment Analysis:
  Pepsi ‘Goes Red’ in China.

• Wall Street Journal:
  PepsiCo’s Net Climbs 16%.

• Money Morning Investment Analysis:
  Eleven Ways to Profit from the Falling U.S. Dollar.

Companies raised more than $12.5 billion via initial public offerings (IPOs) in the U.S. financial markets during the third quarter. That’s 67% more than the $7.5 billion raised in the third quarter a year ago, Dealogic said. The third quarter is typically the slowest of the four quarters because of a summer lull from the middle of August to the middle of September.

But there was a wild card this year – or, rather, two of them – as in $4 billion worth of offerings from U.S. brokerage firm M.F. Global Ltd. (MF) and software maker VMware Inc. (VMW).

Although the dollar value of the IPOs soared dramatically, the volume of offerings only rose modestly, with 43 new issues coming to the market in this year’s third quarter, up from 40 a year ago.

That huge dollar jump despite the moderate increase in the number of deals demonstrates "how a couple of large issues can dominate the sector," Francis Gaskins, president of IPO research firm IPOdesktop.com, told Reuters.

Finance companies raised the most cash, with nine IPOs raking in proceeds of $4.3 billion during the quarter.

MF Global, spun off by hedge fund firm Man Group PLC raised $2.9 billion in July in the second-largest IPO in 2007, after private equity giant Blackstone Group’s (BX) $4.7 billion IPO in June, according to Dealogic’s data.

Software and Solar Energy

But where finance deals raised the most cash, technology deals were the most plentiful. There were 12 new issues in the sector, raising $2.5 billion.
VMware, the year’s fifth-largest IPO – and a deal that’s been closely followed by both Money Morning and its sister publication, The Money Map Report – led the charge, raising $1.1 billion with a sensationally performing IPO.

VMware caters to a new sector known as "computer virtualization." One use of this new technology actually solves a problem that has confounded computer users since the dawn of the Mac vs. DOS debate. On a computer network, the software enables a computer to reconfigure itself to run whatever operating system is needed at a particular moment. For instance, a server might be running Windows N/T one moment, Linux the next, and Apple the moment after that. It makes computers and networks more efficient, and saves money, too, since a company doesn’t have to operate different networks for each computer language it utilizes.

VMware is expected to reap $1 billion in revenue this year. And the overall computer virtualization market is projected to double and reach $12 billion in revenue in five years.

The software maker has also posted robust gains since its IPO. Its stock closed on Thursday at $85 a share, up 193% from its IPO price of $29 per share. That stellar return ranks VMware as the second-best performing IPO stock this year, trailing only JA Solar Holdings Ltd. (JASO), a China-based solar-energy-technology company whose shares have more than quadrupled in value since its Feb. IPO. In fact, rival Chinese solar companies LDK Solar Co Ltd (LDK) and Yingli Green Energy Holding Co Ltd (YGE), were the No. 3 and No. 4 best-performing IPO stocks so far this year. [To see related story on China-based solar-energy-technology companies that have gone public this year, please click here].

Lululemon Athletica Inc (LULU), a Canadian retailer of yoga apparel, rounded on the top-five best-performing IOPS of 2007.

Concerns about "global warming" – caused by a big spike in the use of fossil fuels and by the scorching growth rate in China – has caused a big uptick in interest in alternative energy sources. And it’s not just the environmental impact that concerns investors and consumers alike – the spiraling costs are also a huge concern. That is part of what helped drive the widespread development of the China-based solar-energy companies – more than a half dozen of them this year alone.

IPO Market Rises 40%

Through the first three quarters of 2007, IPOs in the U.S. market raised $43.5 billion – nearly 40% more than the $31.2 billion raised during the first nine months of last year. The number of IPOs rose 21%, from 156 in the first nine months of 2006 to 188 in the first three quarters of 2007. A fairly full pipeline has boosted optimism for the rest of this year: 171 companies have filed for IPOs with securities regulators, a set of deals that could raise $35 billion, if they come to fruition.

Said IPOdesktop’s Gaskins: "The Dow is up, Nasdaq is up: The appetite is there for companies that have a solid income statement. But people are looking more critically at income statements now, as a ripple effect" from the subprime-mortgage crisis and the evolving worldwide credit crunch.

News and Related Story Links:

• Reuters:
  
  Value of U.S. IPOs soar in Third Quarter, Year to Date.

• Money Morning News:
  U.S. Tech Firm Boosts its IPO Offering, Despite Volatile Stock Markets.

• Money Morning News:
  VMware Tech Shares Soar 76% in IPO Trading Debut.