Permanent Value

Weekly Update: October 11- 15, 2010

Michael La Salle
October 15th, 2010

Stocks Up Slightly, Fed to Buy Treasuries

Stocks closed out the week slightly higher as the Dow Jones Industrial Average gained 0.51% and the S&P 500 rose 0.95%.  The Fed chairman, Ben Bernanke, announced Friday that the Fed is considering the option to resume buying treasury bonds to stimulate the economy, but was still debating the size and pace of the purchases.

In economic news, the U.S. trade deficit increased sharply in August to $46.3 billion from $42.3 billion in July.  Economists were expecting a smaller increase to only $44.3 billion.  The overall producer price index rose 0.4% in September, matching the rise in August and well above analysts’ forecasts of a 0.1% increase for the month.  The consumer price index on the other hand only rose 0.1% in September, coming in slower than economists’ estimates of a 0.2% increase.  After improving for five of the last six weeks, initial jobless claims raised 13,000 claims last week.  New claims were expected to drop to 443,000 from 449,000 from the previous week.  Retail sales were up 0.6% month over month in September, led by motor vehicle sales, indicating consumers are starting to spend more on high price items. 

In quarterly earnings news, Intel Corporation posted better-than-expected earnings this week as the U.S. chipmaker posted earnings of 52 cents per share. JPMorgan Chase announced earnings of $1.01 per share, beating estimates by 12.35%.  Google, Inc. also beat analysts’ expectations after posting earnings of $7.64 per share.  The biggest earnings news of the week came Friday as Advanced Micro Devices, Inc. posted earnings of 15 cents per share, topping analysts’ expectations by 138%. 

Stress Test Your Portfolio

Investing in today’s economic environment can be very confusing.  Many investors jump around from investment to investment with little thought of the implications of the trades they place.  Without a sound investment strategy to follow many investors see returns that are inconsistent and surprising.  Since the most common reason for investing is to create a source of income by having money work for you, it is not in the investor’s best interest to have a portfolio that is scattered and unpredictable.

When developing an investment strategy, it is imperative to understand the tradeoff between risk and return for each individual investment and the effects it will have on the entire portfolio.  Although we all know the old disclaimer, “past performance is not an indication of future results,” there is no reason we cannot use historical information to give us an idea of how certain investments react in certain market environments and how they move in relation to each other in these environments.

Using certain tools, investors are able to perform a “stress test” on their portfolios.  Just like when you go to the doctor and they hook you up to a few machines and have you run on a treadmill, a portfolio “stress test” will also give you an idea of how your investments will hold up when it is under market pressure.  Using a Monte Carlo Simulation, which provides a sophisticated method to analyze the risk of your portfolio, you are able to see what you can realistically expect from your portfolio in many different market conditions.

After analyzing the information gathered by the Monte Carlo Simulation you should be able to reasonably predict the best, worst, and a median return that can be expected with its current allocation.  In addition to the possible returns your portfolio may return, the Monte Carlo can also give you information like the Sharpe Ratio, which is a measurement of the expected return per unit of risk, in other words, is the return you are expecting from good investment decisions or from simply taking more risk.

Without a sound investment strategy investors are often guilty of making emotional decisions that are often not in line with their long-term objectives for their portfolio.  By developing a strategy and putting your portfolio through the ringers of a “stress test” you can give yourself the best chance of realizing your financial goals.

Market Returns

  This Week Year to Date Last 12 Months Last 5 Years
S&P 500 0.95% 5.48% 7.26% -0.87%
Dow Jones Industrial Average 0.51% 6.09% 9.94% 7.54%


Next Week’s Economic Releases

October 18 – Industrial Production, Housing Market Index

October 19 – Housing Starts

October 21 – Jobless Claims