Permanent Value

Weekly Update: July 5- 9, 2010

Michael La Salle
July 9th, 2010

Stocks Jump Ahead of Earnings Season

Although shortened by the July 4th holiday, the stock markets were able to close higher this week.  The S&P gained 4.92%, as the Dow Jones Industrial Average gained 4.78%.  These substantial gains came ahead of the second-quarter earnings season that begins next week.

In economic news, an extremely slow week of economic releases showed solid improvement in unemployment figures.  Initial jobless claims fell 21,000 to a level of 454,000 claims to the lowest level since early May.  Economists’ estimates were set at a total of 465,000 claims.

In earnings news, another slow week was highlighted by Family Dollar Stores, Inc. posting earnings of 77 cents per share, coming in 1 cent, or 1.32%, higher than analysts’ expectations. 

What opportunities are ahead?

Although the problems in Europe have seemed to subside recently, it looks as if the rescue package that the International Monetary Fund and the European Central Bank released in May might have only slowed the bleeding.  When Greece’s debt issues were thrust into the spotlight, the rest of the PIIGS – Portugal, Italy, Ireland, Greece, and Spain – were also brought into focus.  In particular, Europe’s fourth largest economy, Italy, has been brought forward as another problem spot in the Euro zone. 

Italy’s fiscal situation is by far the worst in the European Union.  Italy’s government debt was nearly $2.5 trillion in 2009, more than 115% of its Gross Domestic Product, and almost 10% higher than that of 2008.  It is also estimated by the Economist Intelligence Unit that Italy’s GDP will continue to rise to 120% in 2011.

Not only does Italy have an incredible amount of government debt, but it is also facing slow economic growth.  In the past, Italy was able to keep up with other stronger economies for various reasons.  Most importantly, Italy was able to devalue its lira against other currencies to remain a competitor with other countries.  Being part of the Euro zone, Italy no longer has the freedom to devalue their currency and make themselves a main player in the global economy.

Italy’s lack of economic growth paired with its increasing governmental debt puts them in an uphill battle to thrive in the near future.  With Italy’s debt being more than two and a half times the entire IMF and ECB rescue package, if they were to fall, they would take a large part of the Euro zone and the value of the Euro with it.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 4.92% -3.33% 22.12% -11.05%
Dow Jones Industrial Average 4.78% -2.21% 24.62% -2.41%

 

Next Week’s Economic Releases

July 13 – International Trade

July 14 – Retail Sales

July 15 – Producer Price Index, Industrial Production, Jobless Claims

July 16 – Consumer Price Index, Consumer Sentiment