Permanent Value Inc. - Registered Investment Advisor

Weekly Update: August 9- 13, 2010

Economic News Drag Stocks Down

Stocks were lower this week as the Dow Jones Industrial Average lost 3.29% and the S&P 500 fell 3.78%.  Stocks fell widely due to negative economic news.

In economic news, the overall U.S. trade deficit jumped to $49.9 billion in June from $42.0 billion in May.  The deficit jump in June was much larger than the expected rise to $42.5 billion.  The employment situation continued to worsen this week as initial jobless claims for this week came in at 484,000, much higher than the expected 460,000.  The 484,000 level marks the highest level since February.  Inflation rose for the first time in three months in July as the consumer price index rose 0.3% for the month, matching economists’ estimates.  July retail sales were up 0.4% month over month although analysts called for a 0.5% gain, indicating the recovery is slowing, but not weak enough to confirm at double dip recession.  Consumers are feeling better about the economy as the University of Michigan’s Consumer Sentiment Index increased to 69.6 for August from 67.8 in July.

In earnings news, Walt Disney Company beat analysts’ expectations Tuesday, as the worldwide entertainment company posted earnings of 67 cents per share, 15.52% better than the expected 58 cents per share.  Macy’s Incorporated also surprised this week as the retailer posted earnings of 35 cents per share.  Estimates were set at 29 cents per share.

What opportunities are ahead?

As the economic woes in the U.S. and abroad continue to take their toll on the stock markets we must also be cognizant of the effects it will have on national debts and therefore the strength of currencies around the globe.

Over the past 40 years, the U.S. national debt has grown from $370.92 billion in 1970 to an estimated $13.7866 trillion in 2010.  That is over 37 times growth.  GDP in the same time period has grown from $1.0383 trillion to an estimated $14.6239 trillion in 2010, or just over 14 times since 1970.  That means that over the past 40 years the U.S. national debt has grown at a rate of 264% faster than the U.S. economy.

The United States is not the only country seeing similar results.  Comparable trends have been seen in Europe, in particularly in Greece, Spain, and Portugal, all countries that have been cast into the spotlight recently.  As the national debt increases, these governments resort to printing more money and taking on even more debt just to stay afloat.  As more and more money is pumped into the economic system, the value of the currency diminishes and we enter an inflationary environment.

There are multiple ways to protect against inflation and currency weakness, including investing in gold.   Gold, unlike other commodities, has very few industrial uses, therefore can also be considered a currency.  And as a currency that cannot be printed by any government, consequently it is a currency of last resort.  So as the dollar, euro, or any other currency decreases in value, the price of gold will increase.

Market Returns

Next Week’s Economic Releases

August 16 – Housing Market Index

August 17 – Housing Starts, Producer Price Index, Industrial Production

August 19 – Jobless Claims

Weekly Update: August 2- 6,2010

Stocks Higher, Jobs Report Disappoints

Stocks finished the week higher as the S&P 500 gained 1.82% and the Dow Jones Industrial Average was up 1.79%.   This comes as the most recent jobs report shows the private sector is still wary of hiring employees.

In economic news, the Institute For Supply Management reported that its manufacturing index fell to 55.5 in July from 56.2 in June, signaling the manufacturing sector’s, who led the economy out of the recession, strength may be fading.  Overall U.S. personal income in June was unchanged over the previous month, keeping the year over year personal income at an increase of 2.6%.  Disappointing news came on Friday as the July jobs report showed weakness particularly in the government sector.  Nonfarm payrolls declined 131,000 jobs in July, much higher than the expected loss of 70,000 jobs.  Despite the disappointing news in nonfarm payrolls, average hourly earnings improved to up 0.2%, and the average workweek for all workers rose to 34.2 hours from 34.1 in June.

In earnings news, Oshkosh Corporation beat analysts’ expectations as the U.S. specialty vehicle manufacturer announced earnings of $2.31 per share, 20.31% higher than expectations.  Pfizer, Incorporated announced earnings of 62 cents per share.  Expectations were set at 52 cents per share.  Proctor & Gamble Company disappointed this week as the conglomerate announce earnings of 71 cents per share, missing analysts’ estimates of 73 cents per share.

What opportunities are ahead?

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

Next Week’s Economic Releases

August 11 – International Trade

August 12 – Jobless Claims

August 13 – Consumer Price Index, Retail Sales, Consumer Sentiment

Weekly Update: July 26- 30, 2010

Stocks Unchanged as Stocks Finish Best Month in a Year

Stocks ended the week mostly unchanged as the S&P 500 lost 0.1% and the Dow Jones Industrial Average gained 0.4% on the week.  July became the best performing month in over a year with the S&P 500 and the Dow Jones Industrial Average both rising nearly 7% for the month.

In economic news, consumer confidence dipped again in July over worries of the jobs picture as the Conference Board announced the consumer confidence index fell to 50.4 in July from the 54.3 reading in June.  Durable goods orders also disappointed in June as the new orders slipped 1% month over month, estimates were set at a 1% boost.  The big news came on Friday as second quarter GDP came in at an annualized 2.4% growth.  Estimates were set at a 2.5% quarter over quarter annualized growth.

In earnings news, Aetna Inc. beat analysts’ estimates of 74 cents per share by posting earnings of $1.05 per share.  Lockheed Martin Corporation also beat expectations this week as the Maryland-based global security company reported earnings of $1.96 per share, 10.11% higher than analysts’ expectations of $1.78 per share.  Las Vegas Sands Corporation beat analysts’ expectations by 88.89% after posting earnings of 17 cents per share; estimates were set at 9 cents per share.  About 75% of the roughly 300 companies in the S&P 500 that have reported earnings so far have beat expectations.

What opportunities are ahead?

Friday’s gross domestic product number missed expectations with a 2.4% annualized expansion rate, showing U.S. economic growth slowed for the second quarter of 2010.  Although these numbers prove economic growth has been a little tepid, the importance of the GDP number lies in the fact that this is the fourth straight quarter of growth for the U.S. economy since the end of our most recent recession.

 When looking at GDP and its effect on the investments investors choose, it is important to understand the different stages in an economic cycle.  The four major stages of an economic cycle include:  slowdown, recession, recovery, and expansion.  Each of these four also includes their own phase including early, middle, and late stages.

As investors, we need to be able to identify which sectors are the best to invest in each phase of the economic cycle.  Taking into consideration that we have had four straight quarters of economic growth, it is safe to say that we are in the economic recovery stage of the cycle.

Since most economies are driven by consumer demand, this is where most of the economic growth will come from during the recovery stage.  The consumer discretionary and the retail sectors are historically both places where investors see growth during this stage of the cycle.

Thinking towards the future, we must also be able to identify what investments tend to outperform in the next stage of the cycle, economic expansion.  During the expansion phase, GDP has started to grow at a robust pace, of approximately 4-6% quarterly growth.  In this stage, companies see a recovery in their revenues and profits.  This sparks investment in large infrastructure projects and longer-term assets like machinery, computers and other capital goods.  In this phase of the cycle investors tend to see growth in the industrials, materials, and semi-conductors sectors.

Having an understanding of where an economy is at any given time can be a great way for investors to have a better idea of where there investments should be.  Although the length of each cycle and the length of each stage of the cycle vary, using certain economic indicators, such as GDP, can be a way that investors can identify certain sectors to look deeper into when choosing an investment.

Market Returns

Next Week’s Economic Releases

August 2 – ISM Manufacturing Index

August 3 – Personal Income and Outlays, Pending Home Sales

August 6 – Employment Situation