Permanent Value

Weekly Update: September 27- October 1, 2010

Michael La Salle
October 1st, 2010

Up Streak for Stocks Ends at Four

U.S. stocks were down this week, snapping a four-week winning streak as the Dow Jones Industrial Average dropped 0.28% and the S&P 500 fell 0.21%. The Securities and Exchange Commission and the Commodity Futures Trading Commission reported Friday they identified the sequence of events that led to the “flash crash” on May 6th where the Dow Jones Industrial Average fell nearly 1,000 in a matter of minutes, then recovered over 500 points in about 90 seconds.  The SEC announced that a single sale of $4.1 billion in futures contracts by a single mutual fund sparked the “flash crash.”

In economic news, the Conference Board’s Consumer Confidence index fell nearly five points in September to 48.5, marking the lowest level since the February 2010 reading.  Despite the drop in the Conference Board’s consumer confidence level, the University of Michigan’s Consumer Sentiment index had a nice jump for the second half of September.  The September month-end 68.2 reading was much better than the mid-month 66.6 reading, topping analysts’ expectations of a 67.0 reading.  Jobless claims surprised this week as initial claims fell 16,000 to 453,000, beating estimates of 458,000 claims.

In quarterly earnings news, Paychex, Inc. beat analysts’ expectations of 34 cents per share after posting earnings of 36 cents per share.  Family Dollar Stores, Inc. also beat estimates this week as the U.S. discount retailer posted earnings o f 56 cents per share, nearly 10% higher than expectations. 

Seeking Yield in Equities

During the past three years or so we have been in a low yield environment.  With three-year treasuries yields at less than three percent and money markets yielding less than one percent.  Investors have been looking to other investments to give them some yield.  One of the best places to seek yield as of late has been dividend paying equities.

Shortly after October 2007, when the U.S. stock market peaked, an increasing number of companies started cutting back on expenses and slowed the flow of money to investments, and began loading their balance sheets with cash and increasing dividend payments to shareholders.

As the economy fights it way back to where it once was, many of these companies are keeping this structure in place.  In fact, 15% of the companies in the Russell 3000 increased their dividends in the second quarter of 2010, almost double the average.

With many companies yielding between six and eight percent, it is no wonder the investing public has been shifting their investments to these companies.  The financial strength of these companies, paired with their ability to continue to raise dividends as the economy improves; we will also continue to watch the price of these companies grow.

Market Returns

  This Week Year to Date Last 12 Months Last 5 Years
S&P 500 -0.21% 2.79% 11.30% -6.72%
Dow Jones Industrial Average -0.28% 3.85% 13.89% 2.47%

 

Next Week’s Economic Releases

October 4 – Pending Home Sales Index

October 7 – Jobless Claims

October 8 – Employment Situation