Permanent Value

Weekly Review: July 12- 16, 2010

Michael La Salle
July 16th, 2010

Stocks Lower as Earnings Season Revs Up

Stocks closed this week lower despite positive news coming from the beginning of earnings season.  The S&P 500 dropped 1.21% and the Dow Jones Industrial Average fell 0.98% on the week.  The biggest news of the week came on Thursday as BP announced it stopped the flow of oil from its leaking Gulf of Mexico well for the first time since the spill started in April.

In economic news, disappointing international trade news came on Tuesday as the trade gap unexpectedly worsened in May. The overall U.S. trade deficit expanded to $42.3 billion from $40.3 billion in April, far worse than the economists’ forecast of a total deficit of $39 billion.  Retail Sales figures also disappointed this week as the June month over month change came in at 0.5% decline.  Economists’’ estimates were set at a 0.2% decline for the month.  The disappointing economic news continued on Friday as the University of Michigan Consumer Sentiment index fell 9.5 points to a 66.5 reading that pushes the index back to the lows of the year.

In earnings news, the season started with a bang this week as Intel Corporation beat analysts’ expectations by posting earnings of 51 cents per share, 18.6% better than the expected earnings of 43 cents per share.  Advanced Micro Devices, Inc. also beat expectations by 83.33% this week as the U.S. semiconductor company posted earnings of 11 cents per share.  Bank of America, Citigroup, and JPMorgan Chase all beat analysts’ estimates this week as well.

What opportunities are ahead?

Over the past three years we have seen some extreme ups and downs in the stock market.  Beginning in October 2007, the S&P 500 dropped about 55% through March 2009, followed by a recovery of over 65% through April 2010.  With all of the volatility over this time period many investors have searched for an investment that can minimize the ups and downs while still being able to have some return on investment.

Many investors have moved their money to money market or CDs, but with money markets yielding about one-tenth of a percent, and one-year CDs yielding a little over one percent.  With an average annual inflation rate of about two and a quarter percent of the last three years, these investors are actually losing purchasing power by being in these instruments.

One area of the market that will protect you from drastic swings in the stock market, but will also earn you a solid return is investment-grade corporate bonds.  An investment-grade bond is one that has a credit rating of “BBB” or better by Standard and Poor’s.  These high credit ratings signify a strong ability to pay debt and therefore are a lower risk vehicle.

The main risk associated with all bonds is a raising rate environment.  With interest rates at extreme lows, they Federal Reserve will inevitably have to begin raising rates, and at a rapid rate to combat inflation.  Since the Fed has stated that they will not be raising rates “an extended period,” bonds will remain a strong investment for the foreseeable future.

With many investment-grade bonds yielding more than five of six percent, investors can earn returns that are nearly double the rate of inflation while keeping their exposure to volatility down.

Market Returns

This Week Year to Date Last Year Last 5 Years
S&P 500 -1.21% -4.50% 13.20% -13.28%
Dow Jones Industrial Average -0.98% -3.17% 15.91% -5.10%

Next Week’s Economic Releases

July 19 – Housing Market Index

July 20 – Housing Starts

July 22 – Jobless Claims, Existing Home Sales