MEME: BLACK FRIDAY, THANKSGIVING/CHRISTMAS
Personal Observation: I normally go to work around 6AM being on the West Coast, so on Friday I decided that before going to work I would go to Gart Sports in downtown Bellevue to pick up a weight bench that was on sale for six hours beginning at 5:30AM.. To my shock, the parking lots around Bellevue were ALL FULL, and I had trouble finding parking at 6AM! The check out queues were deep and it was impossible to get a store clerk's attention. I can only extrapolate what is going on in the rest of the country! It should be a killer 1st week!

THEME: MEXICO VS CHINA
The falling dollar and implicit strengthening of the Yuan is beginning to cause stress on the international system. The only question is when it will create a crisis...

Mexico's peso fell to a record low on investor concern a split in the country's biggest opposition party will derail legislation before Congress aimed at boosting growth and investment in Latin America's biggest economy.

The peso was the worst performer this week and month of the most-traded currencies after Mexico's opposition lower house leader who has sought an accord with President Vicente Fox on his growth initiatives was called upon to resign by party members.

``This raises concerns we are moving toward an ungovernable situation,'' said Pablo Septien, who helps manage $150 million in fixed-income assets at Finaccess Mexico SA in Mexico City.

``The key problem the Mexican peso has now is that the economy remains flat on its back and the external sector shows little or no benefit from booming U.S. growth,'' said Callum Henderson, a currency strategist at Bank of America in London.

THEME: SCEPTICISM
In this market, its not the cream that rises to the top...

Schwab's 'F' stocks rise to top of the class

Investors who stumble across the recent results of Charles Schwab's stock-rating system are in for a surprise.
Schwab's computer-driven model divides about 3,500 stocks into five categories rated A (most likely to succeed) through F (poorest prospects). The system, which premiered in May 2002, performed as expected during its first year.

Although stocks in all five categories were down on average, stocks rated A and B declined about half as much as the broad market, while D-rated stocks fell twice as much and F-rated stocks were down three times as much. The new system won accolades when Schwab revealed those first-year results in May 2003.

Since then, a very different picture has emerged.

From May 6, 2002, through Oct. 20, 2003, Schwab's F-rated stocks did the best, with an average return of 30.09 percent. The D-rated stocks were second best, with a 25.4 percent increase. Stocks rated C and B were next, with an identical 23.3 percent average increase. In last place were the A stocks, which rose 22.4 percent.

(To calculate these returns, each week Schwab figures the performance for each of the five categories over the previous 52-week period. The numbers cited above are for 25 separate year-over-year periods ending Oct. 21, 2002, through Oct. 20, 2003.)

So what's out of whack: the model or the market?

Schwab says it's the market, not its model, that's out of kilter.

"The average A-rated stock is a lot less risky than the average F-rated stock," says Greg Forsythe, a Schwab senior vice president, who created the system.

"There are periods of time when investors seem to be risk-seeking. When those periods occur, we have seen that F-rated stocks will, at least temporarily, outperform A-rated stocks. For the last 12 months, we've been in one of those rare, but not unprecedented, environments," he says.

Schwab's A-rated companies tend to be bigger, with positive and growing earnings and cash flow. They also tend to be less volatile and have lower price-earnings and price-to-book-value ratios.

F-rated companies tend to be smaller and more volatile, with falling and often negative earnings and cash flow and higher valuations. "The times when risk pays off are few and far between," Forsythe says. "It happened during the bubble period. But you can't forecast when these rotations begin and end."

Forsythe says he would "always, always, always, always buy A-rated stocks. The research we have is that the vast majority of the time, the As will outperform."

Value Line, which has a stock-ranking system similar to Schwab's but much older, "has had the same sort of experience," says Samuel Eisenstadt, research chairman of Value Line Publishing.

"The stocks that have done the best since the beginning of this year are the stocks with the poorest earnings, the poorest prospects, selling at fractional prices. They went up half a point or a point and were the highest percentage gainers," he says.

Kathleen Pender writes for the San Francisco Chronicle.

Kathleen Pender commentary