Weekly Outlook: What Are Bottoms Made Of?

Which day in the next few weeks will be one of those days that the pundits warned us about?

Not one of those days, like many in the past few months, where the markets plunge hour after hour. I'm thinking about one of those days that we have been told cannot be missed if we as investors expect the kind of returns the markets have produced over time.

This is no buy and hold anthem. People who have investigated this "Don't Miss Best Days of the Year" theory have shown that actually missing the best AND worst days is what creates outperformance. But that maxim helps keep in mind the idea that while markets tend to slide slowly lower when it comes to significant tops, it is the sudden surge higher that tends to characterize markets at significant bottoms. Consider the end of the 2006 correction, or the corrections in the spring and fall of 2005, or even the big bottom in 2002-2003.

In the days to come, as we wait to find out whether or not the lows of this week hold, remembering how bottoms are really made is something anyone owning stocks, exchange-traded funds or mutual funds should keep in mind.

Countrywide Acquisition is Our Future

While the announcement did not result in immediately positive reaction by the markets, one cannot help but wonder if Bank of America's acquisition of Countrywide, one of the country's most troubled mortgage lenders, is a sign of things to come as finance gets its own house in order.

In the same way that creative destruction works on the way up, with superior companies outperforming weaker ones, so it does on the way down, as the weaker survivors are forced to join with stronger ones or perish. And while the sell-off that continued may appear to be a vote of no-confidence, investors should not be surprised if Bank of America's decision to go get Countrywide today will be mimicked by other stronger survivors tomorrow.

It has been said in recent weeks that part of the problem with the stock market is that it had become overly dependent on the Fed's largesse. But given the seemingly bottomless nature of the subprime mortgage debt mess -- and the fact that it was ahistorically low interest rates that helped make the subprime lending frenzy of the "awful aughts" possible in the first place -- it is easy to wonder if what it will really take to turn things around isn't more of the "hair of the dog". Instead, it may simply require Wall Street to start mopping up its own mess, preferably before the government does.

The Ol' Fed One-Two

That said, you can't blame the Fed for trying -- even belatedly. As they did last fall, the Fed trotted out one of its members to prepare the ground work a day before chairman Ben Bernanke stepped up to deliver the market soothing coup de grace. It may or may not have worked this time. But observers were quick to notice how much Bernanke was starting to become more Greenspanesque in his willingness to reassure the markets that the Fed stood ready as more than just the lender of last resort.

Specifically, Ben Bernanke said he would make "substantive additional action" to maintain the six-year old economic expansion. In addition to raising the odds that the Fed would cut the fund rate by 50 basis points, Bernanke's remarks helped send gold futures to $900. But as far as stock investors are concerned, saving the economy now and worrying about inflation later, remains the preferred course of action.

Stocks in the News

Stocks in the news this week included two eateries/restaurants going toe-to-toe over your morning coffee and afternoon latte, a great quarter from a smokestack stock and a biotech, and the usual lamentations from the world of mortgage-related finance.

McDonald's (MCD | Quote | Chart | News | PowerRating) made the news early this week with news of its stepped up effort to sell gourmet coffee to customers through coffee bars in its stores. Shares were lower toward the end of the week after an analyst said the stock was "fully valued."

Beginning the week on the defense with the McDonald's move into its gourmet coffee territory, Starbucks (SBUX | Quote | Chart | News | PowerRating) finished the week with news that company founder and chairman Howard Schultz would be taking over the role as chief executive officer.

Early in the week, AT&T (T | Quote | Chart | News | PowerRating) was being heralded by Deutsche Bank -- for whom the telecommunications company does an increasing amount of business -- as one of the best bets in large cap stocks. AT&T CEO Randall Stevenson returned the favor by announcing that he feared softening customer demand as evidenced by a growing number of customers unable to afford high-speed Internet services.

Alan Schwartz is the new CEO of Bear Stearns (BSC | Quote | Chart | News | PowerRating) following the ouster of James Cayne. The investment bank announced later in the week that it was closing yet another of its hedge funds that dealt in asset-backed securities.

Bank of America (BAC | Quote | Chart | News | PowerRating) announced on Friday plans to buy Countrywide [CFC | Quote | Chart | News | PowerRating] for $4 million. The completed deal would make Bank of America the biggest mortgage lender in the United States.

Cost-cutting was the key to the ability of Amgen (AMGN | Quote | Chart | News | PowerRating) to beat analyst estimates for 2007, according to Ken Sharer, CEO of the world's largest biotechnology company.

Alcoa (AA | Quote | Chart | News | PowerRating) made its biggest advance in years this week as the company reported a profit increase of 76%. Continued healthy prospects for raw materials companies seen also in DuPont's (DD | Quote | Chart | News | PowerRating) raising of its outlook for 2007 and 2008.

American Express (AXP | Quote | Chart | News | PowerRating) announced a $275 million charge for the fourth quarter as more and more consumers find themselves unable to pay credit card debts. Goldman Sachs downgraded the company, which reported that it would miss estimates for the first quarter of 2008, from "buy" to "neutral".

What to Look for Next Week

Monday: None
Tuesday: Chain, Retail Store Sales / PPI / Business Inventories / ABC, WaPo Consumer Confidence
Wednesday: CPI / Industrial Production / Capacity Utilization / Federal Reserve Beige Book
Thursday: Housing Starts / Jobless Claims / Philadelphia Fed Business Index
Friday: Michigan Sentiment Index / Conference Board Leading Indicators

Best Performing Stocks (PR 8-10) of the Last Five Days

Here are some of the best performing, high PowerRatings (for Investors) stocks of the past five days. This week, all the listed stocks have PowerRatings of 9 or 10.

Coca Cola (KO@KO | Quote | Chart | News | PowerRating). PowerRatings (for Investors) 10
Pfizer (PFE@PFE | Quote | Chart | News | PowerRating). PowerRatings (for Investors) 9
Abbott Laboratories (ABT@ABT | Quote | Chart | News | PowerRating). PowerRatings (for Investors) 9
Merck & Company (MRK@MRK | Quote | Chart | News | PowerRating). PowerRatings (for Investors) 9
Invitrogen Corporation (IVGN@IVGN | Quote | Chart | News | PowerRating). PowerRatings (for Investors) 9

Worst Performing Stocks (PR 1-3) of the Last Five Days

Here are some of the worst performing, low PowerRatings (for Investors) stocks of the past five days. This week, all the listed stocks have PowerRatings of 1 or 2.

Talbots (TLB@TLB | Quote | Chart | News | PowerRating). PowerRatings (for Investors) 2
MBIA, Inc. (MBI@MBI | Quote | Chart | News | PowerRating). PowerRatings (for Investors) 2
Dryships (DRYS@DRYS | Quote | Chart | News | PowerRating). PowerRatings (for Investors) 2
Beazer Homes USA PowerRatings (for Investors) 1
Seabridge Gold PowerRatings (for Investors) 1

David Penn is Senior Editor at PowerRatings.net