The markets were down for the week ending August 27th, 2010, because of light market activity and poor economic news. Is this the time to sell? Of course not. We maintain it is the time to buy. Merger and acquisition activity is progressing, which we view as a very healthy sign for the market. Corporations have cash and they are looking to buy other companies. On August 16th, Dell Inc. (NASDAQ: DELL) offered to purchase data storage company 3PAR Inc. (NYSE: PAR) for $1.15 billion equaling $18 per share, This past Monday however, Hewlett-Packard Company (NYSE: HPQ) launched a rival bid for 3PAR with a bid of $1.6 billion. By Thursday, we saw Dell back in the running, raising their per share offer to $24.30. On Friday, Hewlett-Packard offered $2 billion or $30 per share. In the Basic Materials sector, Potash (NYSE: POT) has refused BHP Billiton Limited’s (NYSE: BHP) $130 per share offer. With Potash’s shares trading around $150, this implies the market expects a higher offer either from BHP or an unrelated third party.
As for earnings this week, Medtronic (NYSE: MDT) met fiscal first-quarter earnings expectations, but weak demand worldwide pushed management to cut earnings expectations for 2010. Shares of the medical technology company dropped 10% on the announcement. Big Lots (NYSE: BIG) reported net income jumped 37% and that revenue rose 5%. Earnings beat expectations, but sales narrowly missed. Despite increasing its full-year outlook, the closeout retailer’s shares fell nearly 3%.
The Labor Department reported new applications for unemployment benefits dropped for the first time in a month, falling 31,000. While the drop was expected, a 6.15% drop was a pleasant surprise for the markets.
New home sales figures for July were released Wednesday, decreasing 12.4% from the previous month to a seasonally adjusted annual rate of 276,000. This marked the lowest level of sales on record since 1963. Additionally, existing home sales hit its lowest level in 15 years, plunging 27.2%. However, we feel this report reinforces our view that the homebuyer tax credit is still skewing housing data. We feel the Obama Administration pushed those who were on the edge when it came to home purchases into buying a home early. With an $8,000 federal tax credit—and for some an additional state tax credit—it was the time to buy. Now that the tax credit has expired, the three-month moving average has returned to the January 2010 level for new homes.
That is not to say we are not watching housing. Housing was a huge problem during the peak. If it fell 10% in 2006, it would have had a third more impact on gross domestic product. Now with the housing market a third of the size, a 10% drop has less impact.
Some bright news reported this week was the average credit card debt dropped 4.1% for a fifth straight quarter. Even more amazing is that credit card delinquencies—those 90 days behind—dropped to 0.9%. Consider last quarter that figure stood at 17%, and last year it was near 21%. Saving and reducing debt are perfectly normal reactions for the American consumer. While it hurts in the short run as consumers are not buying Xboxes or televisions, saving money puts the consumer in a much better financial position.
What concerns us most is what the consumer is doing with their savings. Many are buying fixed-income securities at historically low rates. If you believe the “small investor” is always wrong, now would be the time to buy common stocks. If you have cut back on stocks, even in your 401(k), rebalancing your investment mix to 20% stocks and 80% bonds, we feel this is a serious mistake. It would be the equivalent to buying all-in on tech stocks on March 24, 2000, at the peak of the bubble. We suggest that now is the time to buy common stocks.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
