Weekly Market Review 08-20-2004

The Crude Reality
By Rick Paler


I am now starting to sound like a broken record, but once again Wall Streets focus remains fixated on oil. This week oil hit another record high when it reached $49.40 on Friday before dropping back to close at $47.86. Supply concerns continue to linger as violence increased in Iraq. Shiite militants related to Muqtada al-Sadr attacked a pipeline lending some traders to question the stability of Iraq’s output. The Department of Energy also announced a larger than expected decline in gasoline inventories.

Higher oil prices will continue to be a drag on the market going forward. Higher crude prices act as a tax on the world wide economy, thereby slowing down economic growth. Currently, it is my belief that the market has already priced in $50.00 per barrel oil prices. Although continued violence in the middle-east, increasing world wide demand, and the possibility of terrorism have the ability to push prices even higher.

Overall the market was able to pull off a stealth rally ending the week higher on low volume. Earnings reports were mixed this week. While Google began trading and economic data was mixed.

Overall earning this quarter continues to be very strong as the second quarter earnings season slows down. Home Depot (HD) the world’s largest home improvement retailer posted earnings of $0.70 per share topping estimated of $0.64per share. Sales surged 11% to $20 billion. The company cited strong average ticket growth in every selling category. The company also increased their fiscal year guidance saying they expect earnings to grow 14% - 17% up from 10% - 14%.

Estee Lauder (EL) reported that their fourth-quarter net income surged 34% and sales rose 15% to $1.4 billion on strong international sales. The company posted earnings of $0.31 per share missing analyst estimates of $0.32 per share. The company announced that they project to earn $1.88 - $1.93 per share for fiscal 2005 which would match Wall Streets estimates of $1.91 per share.

Hormel Foods Corp (HRL) reported that their fiscal third quarter earnings were $0.32 per share a penny below expectations. Sales jumped 15% to $1.16 billion from last years $1.01 billion. The company lowered guidance for the full year. The company cited higher grain prices. The company now is expected to earn $1.46 - $1.52 per share, from the prior street estimate of $1.62 per share.

PETsMart (PETM) net income for the second quarter rose 21% to $0.23 per share which matched analyst estimates. Sales rose to $806 million or 11%. The company credited strong demand for its higher margin services. The company also reaffirmed its full year earnings guidance of $1.18 per share up from $0.95 per share a year ago.

Google (GOOG) the internet search company began trading this week. The much anticipated IPO had numerous analysts questioning the company’s decision to bypass Wall Street by offering shares through a Dutch auction format. After problems with the offering, the company priced the shares at $85.00, which was below their initial price target of $108 - $135 per share. At the close of trading on Friday the company’s shares ended at $108.31.

In general corporate news ITT Industries Inc. (ITT) announced that it had received a $24.9 million dollar contract from the U.S Navy. The company will provide engineering software support for the tactical aircraft-warfare program.

Symantec Corp. (SYMC) announced the release of its latest line of consumer and home office internet security solutions. The leader of information security and makers of Norton AntiVirus, Norton Personal Firewall and Norton Internet Security said that the new versions for 2005 are designed to address the newest and most rampant online threats. Matthew Moynahan, Vice President of Consumer Products and Solutions said “Symantec’s new security products provide powerful, proactive defense to aggressively handle today’s most common and highly developed Internet threats, all with easy-to-use automated convenience for optimal computing in a connected world”.

Coca-Cola (KO) announce that basketball star LeBron James has worked with the company to produce a new POWERade drink. The new drink will be called FLAVA23 and have a unique “sourberry” flavor and burgundy color. The company stated that James was directly involved with every aspect of the creation of FLAVA23. In conjunction with the new drink POWERade commissioned DC Comics to produce a new comic titled “King James” that will feature LeBron James superhero-caliber basketball skills. The comic will be available for free with three purchases for the new drink.

Economic news this week was mixed. The closely watched CPI report for July came in at -.01% with the core rate at just 0.1%, both were below economist expectations and indicate that higher oil prices have not had an effect on inflation to date. The Philadelphia Fed’s Business Activity Index for August came in below estimates at 28.5. Economist had expected a decline to 30.0 from 36.1 for July. This came on the back of a very disappointing Empire Manufacturing Index earlier in the week. Each index measures business growth activities in their region.

It was a slow week in the Treasury market this week with yields lower across the yield curve for the week. The 5 year Treasury note closed yielding 3.40%. The 10 year note closed at 4.23% and the 30 year Treasury bond closed yielding 5.02%

This week should be a slow week with little volume as many traders try to get in a vacation before the school year begins. Analyst will continue to watch oil prices for market direction. If the U.S. military and the Iraq government can eliminate Shiite cleric Muqtada al-Sadr we could see a market rally.

Stocks to watch this week include the following companies: H.J. Heinz (HNZ), Williams-Sonoma (WSM), Chico’s FAS (CHS), and Patterson Companies Inc. (PDCO)