MARKETS SENSE: December 2008

There’s money to be made from poverty. That may sound uncharitable, especially at this time of year. But the fact is, when people lose their jobs, buy cheaper goods and default on their loans, someone has to do the dirty work — and those companies can get well paid for doing it.

So we at breakingviews.com developed the Poor Getting Poorer Index — a basket of 22 equal-weighted stocks that includes the retailers, white-label manufacturers, repossession agencies, dollar stores, pawnshops and other public companies poised to capitalize on rising poverty. This year the index would have generated a positive return of about 9 percent, easily outperforming the 40 percent decline of the Standard & Poor’s 500-stock index.

In 2005, Citigroup equity strategists coined the term “plutonomy” to describe economies powered by a relatively small number of rich people. They also devised their own basket of luxury stocks like Bulgari, Porsche and Sotheby’s. Now, with unemployment rising and wages weakening, the downward pressure on the American consumer seems a better bet than the ascent of the gilded class.

So where is gold to be dug from the widening mire? Let’s start with retailers. After all, notwithstanding the economic situation, shopping is an American pastime. Yet splurges at the fancier department stores that anchor malls are being replaced by carefully choreographed outings to discounters.

Among them, Dollar Tree and Family Dollar place great emphasis on how far a single greenback can go. Though Dollar Tree has already had a 60 percent gain in its shares, the stock trades at a relative low that is 15 times its 2010 fiscal year earnings estimates. Family Dollar fetches just 14 times next year’s earnings.

Not all discounters have performed as well, however. Big Lots, which sells leftover inventory at cut-rate prices, is down 8 percent this year and recently reduced its earnings guidance. But trading at around eight times earnings, it’s advertised as a bargain.

Similarly, shares of BJ’s Wholesale Club have been flat this year, but its focus on those farther down the socioeconomic chain could give it an edge over rivals.

Of course, in retail it would be foolish to ignore Wal-Mart, whose motto is, after all, “Save Money. Live Better.” The retailer’s market share gives it an unrivaled heft in cutting back suppliers’ prices. H. Lee Scott Jr., the departing Wal-Mart chief executive, recently said that demand for food storage items and frozen goods was rising, a sign that Americans are choosing to stay home rather than eat out.

That trend may benefit fast-food restaurants like Burger King, Jack in the Box and McDonald’s. Similarly, generic brands made by Ralcorp and Campbell’s canned soups are more likely to crop up on thriftier shopping lists.

Of course, even in a bad economy, people need to have fun. Expensive movie tickets can be replaced with a $14 monthly Netflix subscription that provides two CDs at a time with no monthly limit. And though leisure travel will take a hit, discount carriers like JetBlue will attract those willing to take 3 a.m. flights from obscure airports.

For the unemployed, retraining will be the buzzword of 2009. And there’s a good chance that federal money will be channeled their way. That could help publicly traded online educators like Apollo Group, Strayer Education and DeVry. As a result of high projected growth rates, all three have price-to-earnings ratios above 20 times consensus forecasts, representing hefty premiums to the overall market.

All of the aforementioned members of the breakingviews index are mainly the beneficiaries of consumers’ trading down. But there are others that prey on poverty and thrive on desperation. None are household names, at least not yet.

Rent-a-Center and Aaron Rents lease appliances and furniture to the down and out. America’s Car Mart specializes in selling cars to buyers with poor credit. EZCorp runs a chain of pawnshops and Cash Store offers payday advances. And once consumers do default, there is money to be made as well. Portfolio Recovery Associates collects and manages portfolios of defaulted consumer receivables. So even on the lowest rung of the American economic ladder, enterprising companies find ways to profit.
http://www.nytimes.com/2008/12/29/business/29views.html?_r=1&ref=business

The 50 Day (simple) Moving Average was taken out in Tuesday's FOMC rally.

DJI Daily Candle 2008

Compared to the 1929-1932 Bear we are at the point of the "arrow".

Dow Jones Industrial Average January 1929 -- December 1933

After the first bottom following the 1929 crash, the Dow retraced 52.3% of the loss and reached the 200-day moving average over a period of five months. The arrow shows our equivalent position, now that we have penetrated the 50-day moving average.

So far this time we have retraced 19% to 8985.42, reached on December 5. Tuesday's close at 8924.14 is 18.1% above the low and it is 25% below the 200-day moving average.

However, the 200 day moving average is coming down by roughly 2 points a day, so it will be somewhere in the vicinity of 11000 by mid-April, which is five months after the low.

So, if we copy the 1929 crash, we'll intersect the 200-day average approximately 45% above the low.

January 2007 - Present