Permanent Value

Weekly Update: October 4- 8, 2010

Michael La Salle
October 8th, 2010

Dow Back Above 11,000

Stocks were up this week as the Dow Jones Industrial Average gained 1.63%, closing above 11,000 for the first time in five months, while the S&P 500 was up 1.65% on the week.  Mexican stocks closed at an all-time high on Friday as the IPC, an index of the 35 most traded stocks rose 207.01 points to close at a record 34,464.82.

In economic news, the National Association of Realtors’ pending home sales index gained over four percent for the second straight month to 82.3 in August, indicating the housing sector is on its way back up across the country.  The jobs market also appears to be improving.  New unemployment claims fell for the sixth straight week, as new jobless claims fell by 11,000 in the October 2nd week to the 445,000 level, down nearly 25,000 from one month ago. 

In quarterly earnings news, Yum! Brands, Inc. beat analysts’ expectations on Wednesday after posting earnings of 73 cents per share, one-cent above expectations.  Costco Wholesale Corporation also slightly beat expectations after posting earnings of 97 cents per share, nearly 2% better than expectations.  The biggest surprise of the week came Friday as Alcoa Inc. posted earnings of 9 cents per share, 69.81% above analysts’ estimates. 

The New Pharma

For years now, big pharmaceutical companies have been making large profits from the most popular prescription drugs used by millions of people.  But as the patents for these drugs start to expire, cheaper generic will begin to be mass produced and sold at much cheaper prices, sometimes of 90% cheaper.

As the prices for these prescription drugs drop, emerging markets, which at the same time are becoming able to afford better health care, will begin buying these same drugs on a much larger scale.  According to IMS Health, global pharmaceutical sales will increase about $40 billion in 2011, and approximately half of these sales will come from emerging markets.

Another avenue for growth in the pharmaceutical sector, particularly in generics, is the new health care reform bill that became law in March.  With an approximately 32 million more consumers entering the health care market with the reform, that is potentially 32 million more prescriptions that may need to be filled. 

As many popular drugs begin losing their U.S. patents, more and more companies will enter the market.  Currently, approximately 75% of prescriptions in the U.S. are available in generic versions, and IMS Health predicts the number will increase to 80% by 2015, making “small” pharmaceutical companies a sector that may see growth.

Market Returns

  This Week Year to Date Last 12 Months Last 5 Years
S&P 500 1.65% 4.49% 9.35% -2.57%
Dow Jones Industrial Average 1.63% 5.55% 12.46% 6.94%


Next Week’s Economic Releases

October 14 – International Trade, Producer Price Index, Jobless Claims

October 15 – Consumer Price Index, Retail Sales, Consumer Sentiment