Permanent Value

Weekly Update: September 20- 24, 2010

Michael La Salle
September 24th, 2010

Stocks Extend Winning Streak to Four Weeks

U.S. stocks gained for the fourth-straight week following positive economic and earnings news.  The Dow Jones Industrial Average gained 2.38% and the S&P 500 rose 2.05% on the week.

In economic news, housing starts showed an unexpected gain in August as the seasonally adjusted annual start rate jumped to 598,000 homes from 546,000 in July.  Economists estimated a small rise to 550,000 starts.  Existing home sales also jumped in August as the National Association of Realtors announced a 7.6% month over month gain to an annual rate of 4,130,000, well above the expected 4,050,000 sales.  New home sales, on the other hand, came in slightly lower than expectations for the month of August at 288,000 sales, unchanged from July and slightly lower than the expected rise to 290,000 sales.  The jobless claims level rose 12,000 to a higher-than-expected level of 465,000.  The jump is attributed to the Labor Day Holiday.  Good news came from the durable goods report Friday as nondefense capital goods orders (excluding aircraft) were up 4.1% in August, indicating businesses have continued increasing their investments in equipment.

In quarterly earnings news, Carnival Corporation surprised on the upside this week as the Florida-based cruise line posted earnings of $1.62 per share,  10.35% higher than expectations.  In software, Adobe Systems also beat estimates of 49 cents per share this week by posting earnings of 54 cents per share.  The biggest earnings news of the week came Friday as Nike, Inc. posted earnings of $1.14 per share, topping analysts’ expectations of $1.00 per share by 14%.

Low Interest Rates and Small-Cap Value Stocks

By Nathaniel T. Ritchison, CFP®

You’ve probably heard the saying, “There’s an investment opportunity in every economy.”  With our historic low interest rates and a slow economic recovery, investors are finding ways to take advantage of current opportunities.  One asset class in particular has an advantage at this stage of the recovery: the small-cap value stocks (aka small moderate growth companies).

In low interest rate environments, publicly traded companies have some unique advantages relative to other asset classes.  For one, companies are able to borrow at the lowest rates in decades, making borrowing costs for reinvestment and growth extremely affordable.  Also during a recovery, investors may choose stock investments as an alternative to low interest rate investments such as bonds.  Both of these advantages are available to stock investors regardless of the company size, so why then are small-cap value stocks particularly attractive?

Small-cap companies, defined as companies with a market valuation between $300 million and $2 billion, are particularly attractive during a recovery. They provide larger companies with an acquisition opportunity because it may be cheaper to add complementary products by acquisition rather than grow internally. Buyouts also are attractive to large companies as a way to put idle cash to work and boost revenue, especially those value companies whose stock is cheap relative to its earnings.  A recent survey (Sept 2010 Merrill Datasite) of 119 large-cap companies found that 51% expect to make an acquisition in the second half of 2010, and that of those, 71% expect to acquire smaller companies costing less than $500 million.  The main reason for this increased activity is the belief by large companies that small-cap acquisitions will drive revenue growth without much increase in overall risk to their company.

So as the recovery continues over the next few months (or years), we will be looking to find the best investment opportunities for you that are both appropriate for your financial situation as well as fit well in the current economy.

Market Returns

  This Week Year to Date Last 12 Months Last 5 Years
S&P 500 2.05% 3.01% 9.32% -5.48%
Dow Jones Industrial Average 2.38% 4.14% 11.88% 4.23%


Next Week’s Economic Releases

September 28 – Consumer Confidence

September 30 – Gross Domestic Product, Jobless Claims

October 1 – Motor Vehicle Sales, Personal Income & Outlays, Consumer Sentiment, ISM Manufacturing Index, Construction Spending