Permanent Value Inc. - Registered Investment Advisor

Weekly Update: August 30- September 3, 2010

Stocks Jump on Economic News

Stocks finish the week higher as good economic data pushed the Dow Jones Industrial Average up 2.93%, and the S&P 500 up 3.75%.  Burger King Holdings Inc. agreed to sell itself to investment firm 3G Capital for $3.26 billion this week, giving the second largest U.S. fast food chain a chance to fix its business to close the gap with McDonald’s Corporation.

In economic news, consumer income and spending were both up in July as personal income rose 0.2% and spending was up 0.4%.  Consumer confidence was in August as the Conference Board’s index rose 2.5 points for the month to a level of 53.5.  Expectations were estimated at the 51.0 level.  The Institute for Supply Management’s manufacturing index came in at a stronger-than-expected level of 56.3 for a 0.8 gain from July.   The four-week new jobless claims average fell 2,500 to 485,000 after initial claims for the August 28^th week came in at 472,000.  Positive news came from the housing sector this week as the National Association of Realtors Pending Home Sales Index rose 5.2% in July to end a two month down streak.  Closing out the week, overall employment fell for the third straight month despite a gain in the private sector.  Overall payrolls fell 54,000 jobs in August as private payrolls were up 67,000 for the month.  Expectations were set at a drop of 90,000 and a rise of 40,000 respectively.

In earnings news, a very slow earnings week was highlighted as Borders Group reported disappointing earnings.  The U.S. book seller posted a quarterly loss of 74 cents per share, far worse than the expected loss of 13 cents per share. 

What opportunities are ahead?

When the recession hit in late 2008, companies around the globe had to tighten their belts and cut some of their capabilities and some ultimately had to file for bankruptcy.  During the same time, other companies were able to cut costs enough to survive the downturn.  Now that the economy is revving up, those companies that were able to survive the recession now have any even stronger position than they had before.

One sector that this is apparent is the semiconductor industry, where stronger companies were able to cut production significantly instead of working at full capacity while the recession was still going strong.  By doing this, many companies kept their inventories down and in turn, there was no extra supply for the companies to sell when the economy began to bounce back.

Now that the global economy is improving, consumers and companies around the world looking for newer devices, and virtually anything you can think of has a semiconductor in it.  From the computers we work on, to the phones we communicate with, to the cars we drive all have semiconductors in them.

In fact, the chairman and CEO of the world’s largest manufacturer of semiconductors, Zhongmou Zhang, forecasts the global semiconductor industry production value will grow by 22% in 2010, and another 7% in 2011, giving investors an opportunity to benefit for the years to come.

Market Returns

Next Week’s Economic Releases

September 6 – Labor Day – All Markets Closed

September 9 – International Trade, Jobless Claims

Weekly Update: August 23-27, 2010

Stocks Fall on Disappointing Economic News

Stocks closed the week out lower as the Dow Jones Industrial Average fell 0.62% and the S&P 500 lost 0.66%.  A rally was ignited Friday as Fed Chair Ben Bernanke stated the Fed is not “impotent” and ready to defend the U.S. economy.

In economic news, existing home sales fell 27.2% in July to a 3.83 million annual rate for the lowest level since 1995.  Expectations would have placed the annual rate at 4.65 million for July.  Despite the extremely slow pace of sales, prices only were down 0.2% for the month.  New home sales for July also fell to a new record low as the annualized rate dropped to 276,000.  Durable goods orders also disappointed this week as new orders were up 0.3% for July, significantly below expectations of a 2.5% jump.  Better news came later in the week as jobless claims surprised on the upside as the new claims level rose to 473,000, well below the anticipated 495,000 level.  Gross domestic product also came in higher than expected as the, although low, quarter over quarter growth was 1.6%.  Expectations were set at a growth rate of 1.3% for the second quarter.

In earnings news, an extremely slow week was highlighted as Barnes & Noble disappointed as the specialty retailer reported a loss of $1.02 per share, well below the expected loss of 80 cents per share.  Burger King Holdings, on the other hand, surprised on the upside as the company posted earnings of 36 cents per share, 5.88% higher than analysts’ estimates.

What opportunities are ahead?

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 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.

If  you or someone you know would benefit from having a stress test done, contact us for our complimentary Portfolio MRI.

Market Returns

Next Week’s Economic Releases

August 30 – Personal Income & Outlays

August 31 – Consumer Confidence

September 1 – ISM Manufacturing Index

September 2 – Jobless Claims, Pending Home Sales

September 3 – Employment Situation

Weekly Update: August 16- 20, 2010

Stocks Down For Second Straight Week

Stocks were down this week for the second consecutive week as the S&P 500 lost 0.70% and the Dow Jones Industrial Average was down 0.87% on the week.  Typically light summer trading volume and soft economic news can be credited for the slight decline.

In economic news, housing improved in July, but came in well below expectations.  Housing starts in July rose 1.7% for the month after an 8.7% decrease in June.  Overall industrial production also jumped back in July after the index of industrial production gained 1% in July, well above the consensus estimates of a 0.6% gain.  Unemployment numbers continued to disappoint this week as initial claims came in at 500,000 for last week, pushing the 4-week moving average to the 482,500 level, marking the highest level since December 2009.

In earnings news, Home Depot, Inc. posted slightly better than expected earnings this week as the home improvement retailer posted earnings of 72 cents per share, one cent higher than analysts’ expectations.  Wal-Mart Stores, Inc. also slightly beat expectations by posting earnings of 97 cents per share, 1.04% higher than expectations.  Deere & Company beat analysts’ expectations as the agricultural machinery maker posted earnings of $1.44 per share, 16.13% higher than expectations.

What opportunities are ahead?

The last several years have been a time of strife for many investors.  As the global economy began deteriorating in 2007, many investors flocked to save haven instruments to protect their portfolios.  These investments included money markets, certificate of deposits, and treasury bonds.  At this same time central banks around the world continued cutting benchmark rates to fight of a lasting recession, thus driving down any yield investors were able to pull together.

With the economy still struggling to gain its strength, many investors are growing weary of this low-yield environment and are beginning to look outside of the government bond space for return.  For many investors, this search has led them to high yield bonds. 

A high-yield or speculative bond is one that has been rated low by a rating agency due to its relatively high chance of default.  With this higher chance of default comes a higher yield, thus giving the less risk-averse investor a fairly high-yield, many times more than 10%.

Through the first eight and a half months of 2010, there have been over 350 high-yield bond issues, raising about $175 billion, almost double that of the same time period in 2009.

With central bank benchmark rates looking as if they will not be raised through the end of 2010, investors will continue to flock to high-yield bonds as a source of some return in their portfolios.

Market Returns

Next Week’s Economic Releases

August24 – Existing Home Sales

August 25 – Durable Goods Orders, New Home Sales

August 26 – Jobless Claims

August 27 – Gross Domestic Product, Consumer Sentiment