Permanent Value

Weekly Update: May 24- 28, 2010

Michael La Salle
May 28th, 2010

Markets Mixed, Closing Worst May Since 2000

Stocks were mixed this week, as the worst May in 10 years comes to a close.  The S&P 500 gained 0.16% as the Dow Jones Industrial Average fell 0.56%.   This slight gain comes as China promised not to unload its European debt holdings on Thursday.

In economic news, the Conference Board’s consumer confidence index gained 6.6 points to 63.3 in May.  This comes in much higher than the expected increase of 1.9 points for the month.  Durable goods orders also beat expectations this week as new factory orders for durable goods rose 2.9% in April, topping analysts’ projections of a 1.5% rise.  Home sales also surprised as both existing and new home sales both topped analysts’ estimates.  Existing home sales jumped 7.6% month over month to an annual rate of 5.77 million, while new home sale surged 14.8% in April to an annualized rate of 504,000 units.   Gross Domestic Product disappointed on Thursday as the new estimate came in slightly down as the annualized rate came in at 3.0%, missing analysts’ forecasts of 3.5%.

In earnings news, Tiffany & Co. posted better than expected earnings as the luxury retailer posted earnings of 48 cents per share, coming in 29.73% higher than analysts’ expectations of 37 cents per share.  DSW Inc. also surprised as the U.S. retailer posted earnings of 67 cents per share, 36.73% better than estimates.  Borders Group, Inc. disappointed this week as the specialty retailer posted a loss of $1.02, much lower than the expected loss of 14 cents per share.  Shares dropped 7.94% on the news.

What opportunities are ahead?

May was a rough month for the overall stock market.  The market correction that began in the last week of April seems to be coming to a close, and has created a buying opportunity for investors.  As the bull market pushes forward and matures, we will be seeing a much different environment than we did in 2009.

When a bear market turns to a bull market, historically stocks of companies that were hit the hardest in the bear market tend to outperform those of companies that are higher quality and not beat up so badly.  As this bull matures, the trajectory of 2009 will not sustain, and we will see a more “normal” upward trend in the stock markets.

While the bull market is in the maturing stage, high quality stocks have a tendency to outperform the broad market.  High quality stocks can be considered stocks that consistently meeting of exceeding expectations of investors no matter the state of the economy, political environment, or other factors that may cause a market to fluctuate.

One of the most defining characteristics of a high quality company is a reliable dividend, and more importantly the ability to raise a dividend year after year.  Companies that consistently raise dividends are ones that have a predictable business with a diverse customer base, and strong financials.

With increasing proof that we are entering the maturing stage of the bull market, investors should be shifting their investments from sectors that generally have lower quality companies, like biotechnology or oil exploration, to sectors that are generally comprised of higher quality companies, like medical devices or consumer staples.

Market Returns

This Week Year to Date Last Year Last 5 Years
S&P 500 0.16% -2.30% 20.13% -9.12%
Dow Jones Industrial Average -0.56 % -2.79% 20.62% -3.85%

Next Week’s Economic Releases

June 1 – ISM Manufacturing Index, Motor Vehicle Sales, Construction Spending

June 2 – Pending Home Sales Index

June 3 – Jobless Claims

June 4 – Employment Situation