Permanent Value

Weekly Update: May 10- 14, 2010

Michael La Salle
May 14th, 2010

European Bailout Plan Pushes Stocks Higher

Stocks finished out the week higher as the European Union announced a nearly $1 billion bailout plan for struggling European countries.  The S&P 500 gained 2.23% and the Dow Jones Industrial Average added 2.31% on the week.  Stocks jumped Monday, but have since then given back a large amount of the gains as concerns over the European debt situation remain in the front of investors’ minds.

In economic news, the international trade deficit rose to $40.4 billion from the $39.4 billion in February.  The trade gap came in smaller than the expected $41 billion.  Retail sales also surprised as total sales rose 0.4% month over month in April, coming in higher than the expected rise of 0.2%.  The University of Michigan Consumer Sentiment Index disappointed as the index came in at 73.3, up .3 points from March, but less than the expected level of 73.8. 

In earnings news, Walt Disney Company topped expectations by 4.35% as the worldwide entertainment company posted earnings of 48 cents per share.  United States Steel Corporation also surprised this week as the Pittsburgh Steel company posted earnings of 64 cents per share, coming in 147.41% higher than the expected loss of $1.35 per share.

What opportunities are ahead?

After last week’s tumultuous week in the market, stocks roared back Monday as European leaders announced a $957 billion rescue plan to bail out the European Union’s highly indebted countries.  Monday was a huge day for European stocks as the Borsa Italiana, Italy’s national stock exchange, was up 11.27% and Spain’s principal stock exchange, the Bolsa de Madrid, was up 14.43%.  But as the week progressed and the excitement subsided, the Italian and Spanish exchanges gave back most of the gains from Monday. 

While most of the details of the bailout are still unknown, we do know that there will be $560 billion in loans from European Union governments, $320 billion from the International Monetary Fund, and $77 billion from the European Union loan fund.  With this wave of money being pumped into the struggling countries of the euro zone, investors are losing more and more confidence in the Euro, and the struggling economies in Europe.

The main problem with this massive lending in Europe is the lack of growth in the region.  Greece’s economy, for example, is projected to shrink by 3% in 2010 alone.  As economic growth stays stagnant, or decreases in this case, the taxes a government collects diminish making it increasingly more difficult to repay debts.  With the current social welfare systems set up in many European countries, like Greece, Spain, and Italy, the lack of economic growth along with the nearly a trillion dollars in additional debt will just perpetuate the current situation and cause more downward pressure on the Euro.

While the Euro as a currency declines in value there will be winners and losers in the investing world.  The obvious losers in this situation will be companies that have a large European presence that are being paid in a currency that is declining.  On the flip side, as investors lose more confidence in the Euro, they will continue to move money to the safety of the United States Dollar, thus giving companies that operate in U.S. Dollars a chance to gain momentum.

Market Returns

  This Week Year to Date Last Year Last 5 Years
S&P 500 2.23% 1.85% 27.17% -1.59%
Dow Jones Industrial Average 2.31% 1.84% 27.47% 4.73%


Next Week’s Economic Releases

May 17 – Housing Market Index

May 18 – Housing Starts, Producer Price Index

May 19 – Consumer Price Index

May 20 – Jobless Claims