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It was an uneasy week on Wall Street, as investors and traders tried to decipher when the Federal Reserve would begin slowing down its bond-buying program. In testimony before Congress, Fed Chairman Ben Bernanke hinted that an end to massive asset purchases was on the horizon but that he needed to see "real and sustainable" progress before he would taper back purchases. At the end of the day, investors didn't mind Bernanke's steady approach, and the Dow Jones Industrial Average (DJINDICES: ^DJI ) fell just 0.33% for the week, while the S&P 500 (SNPINDEX: ^GSPC ) was down 1.07%.
The most important news of the week came on the earnings front. Hewlett-Packard (NYSE: HPQ ) reported a better-than-expected profit in the fiscal second quarter, and the stock jumped 13.8% this week. Revenue of $27.6 billion and net income of $1 billion, or $0.55 per share, both topped estimates, but it's important to note that these were big declines from a year ago. Revenue was down 10% as every business unit declined and net income was off 32% as every operating unit declined. I never like buying a company in operational decline, because it can be what investors call a "value trap" when a stock looks cheap but profits quickly disappear and a low P/E turns into a high P/E and a falling stock price almost overnight.
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Home Depot (NYSE: HD ) was also up on earnings news, although it gained a more modest 2.8%. In the most recent quarter, revenue was up 7% to $19.12 billion and earnings reached $1.23 billion, or $0.83 per share, from $0.68 a year ago. Recent data has shown some choppiness in new home construction, but people continue to put money into their existing homes, which is driving Home Depot's results. I think the stock itself is too expensive to buy at 22 times management's 2013 estimates, but strong home-improvement numbers are great for the rest of the market. Remember, it was housing that sparked the financial crisis, and it will be housing that drives a lot of the recovery as well.
Rounding out the top three stocks in the Dow is American Express (NYSE: AXP ) , which rose 2.7% this week. The slow but steady economic recovery and improving consumer confidence means electronic payments should continue to increase and defaults should fall. Unlike Visa or MasterCard, American Express takes on credit risk when customers use its cards, so when the economy is bad, a decline in purchases and increased defaults is a double-whammy to the company's bottom line. The good news is, when the economy is improving, the opposite is true. That has helped drive American Express near a 52-week high this week and in the long term will be the driver of the stock.