Permanent Value

Weekly Update: June 14- 18, 2010

Michael La Salle
June 18th, 2010

BP Still in the Spotlight as Stocks Move Higher

Stocks closed up this week as the S&P 500 gained 2.37% and the Dow Jones Industrial Average gained 2.35% on the week.  Tony Hayward, BP’s chief executive officer, was grilled for about seven hours on Thursday by Congress over the Gulf of Mexico oil spill, prompting his removal as head of its oil-spill cleanup effort on Friday.  A spokesman for BP announced Robert Dudley, a BP managing director, as his replacement.

In economic news, housing starts disappointed this week as May’s annualized pace of 593,000 units came in well below the market projection of 650,000 units.  Despite the disappointing housing starts numbers, industrial production came in better-than-expected as the report showed a 1.2% month over month change for May, higher than the expected gain of 1.0%.  Consumer Price Index inflation declined in May 0.2%, matching expectations.

In earnings news, Best Buy Co, Inc. disappointed this week as the electronics retailer posted earnings of 36 cents per share, coming in 28% below analysts’ expectations of 50 cents per share.  FedEx Corporation surprised slightly on the upside on Wednesday as the shipper reported earnings of $1.33 per share.  Expectations were set at $1.32 per share.

What opportunities are ahead?

Over the past six month or so, investors have been very weary of the situation in Europe.  Starting in the beginning of December 2009, when Fitch cut Greece’s long-term debt rating from A- to BBB+, the Euro currency has dropped over 15% against the U.S. dollar, and the S&P Europe 350 Index is down about 2.5%.

Although the attention of investors has been cast across Europe as a whole, the reality is only the governments of Europe are in a debt crisis.  With all the uncertainty with the governments of Europe, many private European companies have taken a hit to their stock prices although their balance sheets remain strong.  As these stock prices fall, their dividend yields raise, so now many high quality European companies have yields higher than government bonds, a strong indicator of a “cheap” stock.

In addition to higher yields, many of the strongest European companies will benefit from the drop in the Euro.  Since many of these companies get most of their business from out of Europe, sales to other countries will rise now that the products are now cheaper in other currencies.

All in all, the situation in Europe is mainly a governmental problem, and not a problem for the companies based in Europe, particularly strong companies.  After nearly half a year in the spotlight, many stock prices of these strong companies have taken a beating, providing investors with a great buying opportunity for some high quality stocks.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 2.37% 0.22% 21.68% -8.17%
Dow Jones Industrial Average 2.35% 0.22% 22.15% -1.62%


Next Week’s Economic Releases

June 22 – Existing Home Sales

June 23 – New Home Sales

June 24 – Durable Goods Orders

June 25 – Gross Domestic Product, Consumer Sentiment