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R I V E R P O I N T |
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R E P O R T |
July 2006
2006 - First Half Review
The
first half of 2006 has come to a close, and many
investors would say not a moment too soon as most major indices posted anemic
returns. The S&P 100 gained 2.8%
while the S&P 500 gained 2.7% and the NASDAQ lost 1.1%. Driving these disappointing results during a
time of double-digit corporate earnings was fear: fear of oil spikes, fear of
inflation, and fear of higher interest rates.
However, good news was soon to come.
July
marked the beginning of the second quarter earnings season. As of July 27th, 66% of the
S&P 500 companies, as defined by market cap, reported earnings of $22.00
vs. analysts’ expectations of $21.70.
This was due to stronger than anticipated growth in many sectors. Thus
far, earnings for S&P 500 corporations are up 18.8% year-over-year (15.4%
excluding energy). These earnings topped
consensus by more than 5%. In addition,
the July 28th GDP report indicated that the economy was cooling off
from previous stages of robust expansion.
The economy grew at a 2.5% pace, less than half of the 5.6% growth
registered in the previous quarter. This
was considered good news due to investors’ hopes that a slowing economy
would translate into a halt in interest rate hikes. Since June 2004, there have been 17 straight
rate increases. At RiverPoint, we
believe these increases will soon come to an end. The next Federal Reserve meeting is to be
held on August 8th.
Pleasant Surprises
Thus
far, the second quarter has given many equity investors a reason to
celebrate. Banc of America (BAC) shareholders
were pleased to find the financial giant reporting earnings of $1.22 vs.
expectations of $1.10. The company also raised its
dividend 12% marking 29 consecutive years of dividend increases. The stock is currently near a 52-week
high. United Technologies (UTX) posted a
14% increase in second-quarter earnings and raised its forecast for the year,
citing strong demand for its aerospace division. UnitedHealth Group
(UNH) reported earnings of $0.70 per share vs. consensus of $0.68. Omnicom Group (OMC) is near its high, beating
expectations of $1.38 by $0.04.
These
earnings surprises are signs that companies are adapting well to changes in the
current business environment (inflation, interest rates, and higher commodity
costs). Furthermore, the fact that these
increases are not shockingly high points to moderate growth in the
economy. This can be perceived as
further proof of slower, yet stable growth rates in the years to come.
The
Oil Scare
On
July 14th, crude oil futures hit an all-time high of $78.71 per
barrel on concerns over new and existing conflicts in the
Water,
vital medications, and electricity are examples of inelastic goods (products
that consumers are forced to buy no matter how high the cost). Oil is, under certain circumstances,
inelastic. There are times when a
consumer, not willing to buy more gas, will walk instead of driving or times
when a family will change vacation destinations in order to drive fewer
miles. Nevertheless, walking is less of
an option when a worker needs to get to his job 20 miles away. Filling up will
be required no matter what the cost.
This is where $3.00 a gallon has its consequences.
Discretionary
income is the amount of money left over when all the required costs of living
are paid out. Already in the second half
of 2006, retailers have cut their earnings guidance. Target,
Protect
Yourself
For years now, the public has
been warned that identity theft is a very real problem in this country. Thieves using credit card numbers, social
security information, even bank statements, have stolen from innocent
individuals with very little chance of being caught. This vulnerability was recently highlighted
when a laptop was taken from the home of a Veterans Affairs analyst in
While identity theft seems
ubiquitous, there are everyday practices that can lower your chances of
becoming a victim. Shredding all
documents that contain personal information is an obvious good start. Beyond that, checking your credit report
regularly can help determine if someone is abusing your finances. Use different passwords for web sites and do
not share them with anyone. Periodically
change your passwords to bolster security.
Last but not least, always log out after reviewing an account.
The FTC instructs consumers who
suspect their data to be compromised to follow four simple steps outlined
below:
1.
Contact the fraud department of Equifax, Experian, or TransUnion.
This move will require
creditors to contact you before making any
changes
to your account.
2. Close any accounts believed or known to have been compromised.
3. File a report with the police and submit a copy to
your creditors.
4. Inform the FTC of any known or suspected fraud.
It
is essential to stay on guard when contacted with a request for sensitive
information. In the past year, Treasury
officials have collected roughly 8,100 reports of bogus data requests from the
IRS. Promising a refund, the form
requires a social security number along with the individual’s name and
address. Once these figures are
collected, digital thieves are able to set up bogus credit card accounts and
begin living high on the victim’s dime.
It is important to recognize the dangers involved with identity
theft. In these cases, an ounce of
prevention is worth a pound of cure.
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Market Summary |
7/31/06 |
YTD Price Change |
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Dow Jones Industrial
Average |
11,186 |
+4.37% |
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Nasdaq Composite |
2,091 |
-5.16% |
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Standard &
Poor’s 500 Index |
1,277 |
+2.27% |
For information about
RiverPoint Capital Management or to view our report archive
visit us at www.riverpointcm.com.