Stock Market News for August 2005

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Stock Market: The Bulls Refuse To Bow
The blasts that roared through central London left more than 50 dead, with 20 or so people still missing, and hundreds injured. But the Brits refused to back down in the face of such acts of terror, and the bulls on both sides of the pond followed suit. Just one day after the deadly bombings of July 7, the Financial Times Stock Exchange (FTSE) 100 index of leading U.K. shares rose 1 percent, to almost reach the levels achieved before the bombers struck. Its U.S. counterpart, the Dow Jones Industrial Average, rose 146 points to 10449, and the NASDAQ Composite gained 37 to reach 2112 points.

For the most part, this resilience has continued. Even the trading pause in London on July 15, to commemorate those killed in the bomb attacks, did not deter the FTSE’s advance, which climbed 13.8 points to reach 5259.7 - the eleventh time in 12 days that the London-based exchange has posted a gain. U.S. investors’ confidence was not shaken, either. The bulls got a boost from a fairly upbeat jobs report showing employers adding 146,000 workers to their payrolls in June. In addition, they were cheered by the news that the June unemployment rate fell to 5.0 percent, down 0.1 percent from
May’s total.

Earnings Season
Earnings season kicked off in early July, providing investors with a positive start as Alcoa reported a 14 percent jump in second quarter earnings. Experts are expecting that profit growth for the Standard & Poor’s 500 Index (S&P 500 index) will be about 7.4 percent year over year - a more than respectable figure. They note that the profit growth for the S&P index won’t come close to the whopping 25 + percent growth in the second quarter of 2004, but they urge investors to remember that the 2004 numbers represented an extraordinary performance. It might be best to consider the more "normal" 7.4 growth rate predicted for this earnings season as a continuation of the stellar growth achieved in 2004 - a sign that profits continue to grow. Be aware that most companies usually are conservative in their earnings estimates, and that "beating the street" estimates often results in a welcome jump - sometimes short-lived -
in a company’s stock price.

Analysts expect the second quarter to look much like the first quarter, with energy and materials driving earnings growth. Not surprisingly, at a time when oil has reached (and surpassed) $60 dollars a barrel, the energy sector is expected to post an earnings growth of more than 30 percent. Also it comes as no surprise to see that defense contractors are expected to show solid performance overall - despite Boeing’s downturn.

Steady gains are expected from utilities and consumer staples. The technology companies in the S&P 500 are expected to post a growth rate of 11 percent - not bad, but a marked change from the glory days of the mid 1990s. The financial services sector, as a result of continued interest-rate hikes, is expected to be fairly flat.

Buying Opportunities
So where does this leave investors? What opportunities do these earnings expectations create? The bulls suggest various possibilities. Some who track corporate buy-backs suggest that the volume of buy-backs recently - significantly more than at comparative times during the last few years - suggests that those in the know think their stock is undervalued. It may be worthwhile to take a look at some of the blue chips that plan to reduce the shares they have outstanding. (A note of caution: make sure the buy-back actually happens. Not all companies follow through on their announced buy-back plan.) Among the various industry sectors, some gurus believe that rising interest rates have hammered the financial services sector, and that stocks of large financial institutions with diversified services may offer investors buying opportunities, as well as paying attractive dividends.

As always, your investment portfolio should reflect your needs and specific situation. Consult your financial advisor and tax professional before making any adjustment to your holdings.


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