The College Investor’s Market Thoughts – October 28, 2011

It has been quite an interesting week!  Thursday was the best day in years, as the market celebrated a little more certainty in Europe.  Check it out:

So What Drove The Market This Week?

• Deal in Europe: European leaders on Thursday announced a deal that would hopefully prevent a Greek default from spreading and becoming another financial crisis like the one that occurred in 2008.  European governments are essentially backstopping bank losses at 50%.   What the deal signifies is that the government will not go down, and the neighboring governments will not go down, but banks are going to take a bath on the deal.
• Durable Goods: Overall, durable goods orders points to continued gains in manufacturing.  Transportation was weak, but all other categories were showing broad-based strength.  This signals an increasing likelihood of recovery in manufacturing.
• GDP: This report, along with Europe, is what sent the market higher.  Economic growth strengthened in the third quarter and the component mix was more favorable than expected.  GDP growth improved to a 2.5% annualized increase.  Demand numbers also improved as final sales of domestic product increased at an annualized 3.6%.  Strength was led by both business fixed investment and consumption expenditures.  Net exports also improved, once again highlighting improved manufacturing.  Economy-wide inflation also held steady at 2.5%, which equaled the forecast.

The College Investor’s Thoughts:

• Banks: Stay away from banks and other finance stocks for the next several months.  Although they won’t take total losses on any Greek debt, they will still take a bath on their investments.  While many US banks have stated that they don’t have much Greek exposure, the same thing that happened with Lehman is most likely to occur with Greece.  Many US banks have swaps and different investments with other European banks, and those investments and swaps will be in jeopardy should Greece default.
• Energy: I’ve said this over the past several months, but energy is a great sector to be in right now.  When thinking about how to prepare for inflation, investing in these stocks in a great strategy.  Exxon just posted great earnings again, as did BP, and Chevron is expected to report soon.  These companies pay great dividends, and should ride out any crises that may emerge.
• Tech: Tech stocks have encountered a bump in the road this past earning season.  However, the first rule of corporate finance is – if you’re going to miss earnings estimates in a quarter, it doesn’t matter if it is by $0.01 or $1.00 per share.  As such, you should take all of your possible losses, expenses, and accounting fixes at once to ensure great paper profitability going forward.  While I don’t usually do tech too much, I think Amazon may be nearing a solid buy point.  I doubt that they will repeat any earnings like the past quarter.

Readers, what are your thoughts about this past week and the fourth quarter?

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Robert – who has written 317 posts on The College Investor.

Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.

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