Its Not a Bail Out

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"There have been three great inventions since the beginning of time.
The fire, the wheel, and central banking."
Will Rogers (1879-1935) Actor, Comedian, Radio Personality

March 19, 2008

See Note below for chart explanation.

Editor's Corner
It's Not a Bail-Out
Ron Rowland - Editor

Contrary to popular opinion, the Fed did not bail out Bear Stearns (BSC). It was more of a foreclosure. Perhaps a more accurate description would be a "forced sale in lieu of foreclosure and bankruptcy." Shareholders were not bailed out. Employees were not bailed out. They felt the full impact of watching their stock fall from $170 to less than $6. Using JP Morgan Chase (JPM) as a conduit and providing a guarantee against loss, the Fed essentially placed $30 billion of questionable securities onto their own books. Some analysts are suggesting that the Fed could potentially turn a profit on this transaction. It was another unprecedented move by a Fed not afraid of trying alternative approaches.

Lost among the other weekend financial headlines was the fact that the Fed made an intra-meeting cut in the discount rate from 3.5% to 3.25%. They also opened the "discount window" to some securities dealers, instead of just tightly regulated banks. At Tuesday's FOMC meeting, they reduced the discount rate even more, dropping it to 2.5% while at the same time announcing a 0.75% reduction in the Fed Funds target rate to 2.25%. The yield on 10-year Treasury securities did not display much reaction to the latest Fed moves and continued to drift lower. They are presently trading at 3.4%.

Equity markets were strong on Tuesday but did not display any enthusiasm today. Commodity markets are correcting today, but it is much too early to declare that capital is rotating out of commodities into equities.

Sectors

It was a wild ride for the Financial sector this past week. The Financial Sector SPDR (XLF) plunged -14% from last Wednesday (March 12) through Monday morning on an intraday basis. It then proceeded to rally +17% to this morning's intraday high. Industries within the Financial sector, such as mortgage finance and securities brokers have been even more volatile. Individual stocks have produced historic movements: Bear Stearns (BSC) plunged -47% on Friday only to be followed by an -84% wipeout on Monday. Lehman Brothers (LEH) surged +46% on Tuesday. These would be large moves for an entire year of trading; for single day moves they are astronomical. Somehow through all of this, the Financial sector was able to show a slight improvement in its momentum reading this past week -- downside momentum has eased. The Materials sector had a good week and once again joins Energy on the positive side of the intermediate-term momentum ledger.

Styles

Small Cap Value is now atop our style rankings. Small Cap Growth is near the bottom of our rankings, indicating a significant divergence between Value and Growth. Although it was a volatile week, all style categories exhibited improvement.

International

International markets reacted to events in the US this past week with day-to-day moves mirroring the action in domestic markets. Although they were taking their cues from the US, international stocks fell far short of matching Tuesday's upside enthusiasm on the NYSE and Nasdaq.

Note:

The chart above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value. Long-term and short-term strength
may be significantly different than what is represented here.

Pick of the Week
Why Wrigley? Why Now?: WWY
Brandon Clay

If ever there was an uncertain market, we have one today. Keep in mind, investment banks like Bear Stearns (BSC) don't capitulate every week. In addition, the Fed doesn't cut discount rates 100 basis points every month. Volatility rules in this market. Cash may be the best position for the majority of your portfolio. Still, it's not the only place to go. Defensive sectors are usually good places to turn during market volatility. This week, we really like one defensive sector: consumer staples.

Although the sector looks solid, one stock in particular caught our attention: William Wrigley, Jr. Company (WWY). A company that recognizes it's unique "recession-resistant" position, WWY stands to benefit in the current market environment. Such was the case with its founder.

In 1891, William Wrigley came to Chicago with $32 and a drive to succeed. A consummate salesman, Wrigley first tried promoting soap. When he found baking powder selling better than soap, he switched wares. But Wrigley isn't known for his baking powder. Wrigley is remembered for a line of products he started in 1893: gum.

Juicy Fruit was Wrigley's first product in the gum market. Two months later, he introduced Spearmint. These edible icons of Americana earned Wrigley an well-loved reputation for generations. Even today, Wrigley's Doublemint is the #1 selling gum worldwide. Aside from Wrigley's commendable legacy, there's more in a stock than just a brand.

For one, sugar prices are stabilizing, even declining. Since the gum/candy business is correlated to sugar prices, Wrigley should be able to realize a better profit in the near future. This would be in line with company guidance for 2008.

Second, Wrigley's exposure to foreign markets is more than adequate. Not dependent on struggling U.S. consumers buying Altoids in the Wal-Mart checkout lane, WWY's largest region is EMEIA (Europe, Middle East, India, & Africa). Last year, Wrigley's EMEIA increased sales by 26%. More growth is expected outside domestic markets.

Third, Wrigley is looking toward the future. As they benefit from world-wide sales, they're also focused on improving market share in the U.S. WWY plans new packaging for its best selling gum. Since stick-gum accounts for a third of their revenue, this should be a boost to their bottom line in the near-future.

Finally, Wrigley's chart looks great. After a brief correction and consolidation, Wrigley broke out today with a strong close. We expect this to be a resumed uptrend. WWY has the potential for a strong 10% move in the next few months. Keep your eyes peeled on this one. WWY is a good pick for volatile times.

All the best.

Note:

Keep in mind that the Pick of the Week is usually intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell.

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