Permanent Value

Weekly Update: June 7- 11, 2010

Michael La Salle
June 11th, 2010

Markets Up Despite Disappointing Retail Sales

Stocks finished the week higher despite disappointing consumer spending reports.  The S&P 500 gained 2.51%, and the Dow Jones Industrial Average rose 2.81% on the week.

In economic news, weaker exports led an increase of the trade deficit in April.  The overall trade gap widened to $40.3 billion from $40.0 billion in March.  This comes as a surprise as economists estimated a widening to $41.0 billion in April.  Initial jobless claims disappointed Thursday as the new claims level increased to 456,000, modestly above the estimate of 448,000.  The biggest news of the week came Friday as consumer spending disappointed in May.  Retail sales were down 1.2% month over month, coming in far lower than the expected increase of 0.4%.   Offsetting the negative retail sales news was the jump in consumer sentiment as the University of Michigan Consumer Sentiment index mid-June reading rose to 75.5 from the May month-end reading of 73.6, marking the highest level in more than two years.

In earnings news, another slow week was capped off as Men’s Warehouse, Inc. beat analysts’ expectations, as the retailer posted earnings of 26 cents per share, coming in 85.71% higher than estimates of 14 cents per share.   

What opportunities are ahead?

On April 20th we learned of the BP Deepwater Horizon rig explosion that has come to cause the worst oil spill in U.S. history.  Since then there has been non-stop coverage on the spill and the environmental and economic devastation that has already begun.

BP stock has tumbled about 43% since the April 20th spill, sparking some investors to consider the stock oversold and therefore “cheap” and a buying opportunity.   A “cheap” stock with as many unknown risks as BP has, it is not actually cheap.  Although the stock has fallen 43% in about 6 weeks that does not mean it can’t fall another 57%.

Although we do not see BP as a buying opportunity at this point, the Deepwater Horizon spill has created buying opportunities elsewhere.  Often with disasters, stocks with no exposure to the actual risk associated with the disaster also see a decline in price.  This is true with many oil exploration companies at this time.

One company in this situation that stands out now is Petroleo Brasileiro.  Petrobras, as it is also called, is the world’s largest oil producer in waters deeper than 1,000 feet.  In 2009, the Rio de Janeiro based company pumped approximately 20% of all oil from deep water sources, and continues to explore deep waters off Brazil while companies drilling of the coasts of the U.S. have been stopped from doing so after a moratorium was imposed after the BP spill.

Although Petrobras is not completely insulated from the possibility of an oil spill or some other disaster, the company maintains quality and safety standards that exceed those of other drillers.  The Brazillian government also keeps much closer eye on the procedures that companies use while drilling of its coast than their U.S. counterparts.

As always, there are ways to invest in individual companies while keeping diversification in mind.  A few sectors with Petrobras exposure include the energy sector, oil and gas exploration, and Brazil.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 2.51% -2.11% 15.53% -8.89%
Dow Jones Industrial Average 2.81% -2.08% 16.42% -2.87%


Next Week’s Economic Releases

June 15 – Housing Market Index

June 16 – Housing Starts, Producer Price Index, Industrial Production

June 17 – Consumer Price Index, Jobless Claims