Permanent Value

Weekly Update: August 9- 13, 2010

Michael La Salle
August 13th, 2010

Economic News Drag Stocks Down

Stocks were lower this week as the Dow Jones Industrial Average lost 3.29% and the S&P 500 fell 3.78%.  Stocks fell widely due to negative economic news.

In economic news, the overall U.S. trade deficit jumped to $49.9 billion in June from $42.0 billion in May.  The deficit jump in June was much larger than the expected rise to $42.5 billion.  The employment situation continued to worsen this week as initial jobless claims for this week came in at 484,000, much higher than the expected 460,000.  The 484,000 level marks the highest level since February.  Inflation rose for the first time in three months in July as the consumer price index rose 0.3% for the month, matching economists’ estimates.  July retail sales were up 0.4% month over month although analysts called for a 0.5% gain, indicating the recovery is slowing, but not weak enough to confirm at double dip recession.  Consumers are feeling better about the economy as the University of Michigan’s Consumer Sentiment Index increased to 69.6 for August from 67.8 in July.

In earnings news, Walt Disney Company beat analysts’ expectations Tuesday, as the worldwide entertainment company posted earnings of 67 cents per share, 15.52% better than the expected 58 cents per share.  Macy’s Incorporated also surprised this week as the retailer posted earnings of 35 cents per share.  Estimates were set at 29 cents per share.

What opportunities are ahead?

As the economic woes in the U.S. and abroad continue to take their toll on the stock markets we must also be cognizant of the effects it will have on national debts and therefore the strength of currencies around the globe.

Over the past 40 years, the U.S. national debt has grown from $370.92 billion in 1970 to an estimated $13.7866 trillion in 2010.  That is over 37 times growth.  GDP in the same time period has grown from $1.0383 trillion to an estimated $14.6239 trillion in 2010, or just over 14 times since 1970.  That means that over the past 40 years the U.S. national debt has grown at a rate of 264% faster than the U.S. economy.

The United States is not the only country seeing similar results.  Comparable trends have been seen in Europe, in particularly in Greece, Spain, and Portugal, all countries that have been cast into the spotlight recently.  As the national debt increases, these governments resort to printing more money and taking on even more debt just to stay afloat.  As more and more money is pumped into the economic system, the value of the currency diminishes and we enter an inflationary environment.

There are multiple ways to protect against inflation and currency weakness, including investing in gold.   Gold, unlike other commodities, has very few industrial uses, therefore can also be considered a currency.  And as a currency that cannot be printed by any government, consequently it is a currency of last resort.  So as the dollar, euro, or any other currency decreases in value, the price of gold will increase.

Market Returns

This Week Year to Date Last Year Last 5 Years
S&P 500 -3.78% -3.21% 6.57% -12.28%
Dow Jones Industrial Average -3.29% -1.20% 9.63% -2.80%

Next Week’s Economic Releases

August 16 – Housing Market Index

August 17 – Housing Starts, Producer Price Index, Industrial Production

August 19 – Jobless Claims