Permanent Value

Weekly Update: August 16- 20, 2010

Michael La Salle
August 20th, 2010

Stocks Down For Second Straight Week

Stocks were down this week for the second consecutive week as the S&P 500 lost 0.70% and the Dow Jones Industrial Average was down 0.87% on the week.  Typically light summer trading volume and soft economic news can be credited for the slight decline.

In economic news, housing improved in July, but came in well below expectations.  Housing starts in July rose 1.7% for the month after an 8.7% decrease in June.  Overall industrial production also jumped back in July after the index of industrial production gained 1% in July, well above the consensus estimates of a 0.6% gain.  Unemployment numbers continued to disappoint this week as initial claims came in at 500,000 for last week, pushing the 4-week moving average to the 482,500 level, marking the highest level since December 2009.

In earnings news, Home Depot, Inc. posted slightly better than expected earnings this week as the home improvement retailer posted earnings of 72 cents per share, one cent higher than analysts’ expectations.  Wal-Mart Stores, Inc. also slightly beat expectations by posting earnings of 97 cents per share, 1.04% higher than expectations.  Deere & Company beat analysts’ expectations as the agricultural machinery maker posted earnings of $1.44 per share, 16.13% higher than expectations.

What opportunities are ahead?

The last several years have been a time of strife for many investors.  As the global economy began deteriorating in 2007, many investors flocked to save haven instruments to protect their portfolios.  These investments included money markets, certificate of deposits, and treasury bonds.  At this same time central banks around the world continued cutting benchmark rates to fight of a lasting recession, thus driving down any yield investors were able to pull together.

With the economy still struggling to gain its strength, many investors are growing weary of this low-yield environment and are beginning to look outside of the government bond space for return.  For many investors, this search has led them to high yield bonds. 

A high-yield or speculative bond is one that has been rated low by a rating agency due to its relatively high chance of default.  With this higher chance of default comes a higher yield, thus giving the less risk-averse investor a fairly high-yield, many times more than 10%.

Through the first eight and a half months of 2010, there have been over 350 high-yield bond issues, raising about $175 billion, almost double that of the same time period in 2009.

With central bank benchmark rates looking as if they will not be raised through the end of 2010, investors will continue to flock to high-yield bonds as a source of some return in their portfolios.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 -0.70% -3.89% 6.38% -12.14%
Dow Jones Industrial Average -0.87% -2.06% 9.24% -3.27%

 

Next Week’s Economic Releases

August24 – Existing Home Sales

August 25 – Durable Goods Orders, New Home Sales

August 26 – Jobless Claims

August 27 – Gross Domestic Product, Consumer Sentiment