Weekly Market Report 05-06-2005

GM’s bonds at junk status

By Rick Paler


Overall it was a decent week for the markets. Corporate earnings continue to come in very strong and economic reports indicate that the economy is still growing, while inflation seems to be under control. In corporate news both General Motors and Ford had their debt downgraded by Standard & Poor’s. The big news economically this week was the Federal Reserve’s meeting and the Non-farm payroll numbers.

General Motors (GM) hit the headlines twice this week, first when it was announced that Kirk Kerkorian’s Tracinda Corp. offered to purchase 28 million shares of GM at $31.00 per share. Shares of the company moved higher on the news. Upon completion of the deal Tracinda Corp will double its holdings of GM to 8.8%. Then GM hit the news again when Standard & Poor’s downgraded the company’s debt to junk bond status. The rating agency also announced that Ford Motor Company’s (F) debt was also lowered to junk status. Both companies are being hurt by out of control pension and healthcare cost.

Tyco International (TYC) shares fell sharply after the company reduced their full year guidance at the high end from $1.98 to $1.93 per share. The company also reported that their fiscal second quarter earnings came in at $0.48 per share on revenues of $10.5 billion.

Abercrombie & Fitch Co. (ANF) reported that their April same store sales grew 16% well ahead of the streets estimate of 12.2% growth. Total sales at the company grew an impressive 31% to $159.4 million.

American Eagle Outfitters Inc. (AEOS) also reported very good April same store sales. The hot retailer saw same store sales rise 20% for April and total sales rose 30.3% to $142.5 million. The retailer also increased their first quarter earnings guidance to $0.34 per share.

Berkshire Hathaway Inc (BRKA) (BRKB) saw a decline in earnings for the first quarter. Warren Buffet’s company reported earnings of $886,000 per share of class A common. Revenues at the company rose to $17.63 billion. The company also announced that its General Re unit had received a Wells Notice from the SEC. The SEC is looking into transactions between General Re and American International Group Inc. (AIG).

In economic news this week all eyes were on the FOMC meeting to see if the Federal Reserve would raise interest rates for the eighth straight time. The Federal Reserve did raise interest rates a ¼ percent increasing the Fed Funds rate to 3.0%. Also of importance was the Feds wording. Traders had feared that the Fed would remove the policy statement of “accommodation”. Removal of the statement would indicate that the Federal Reserve would act more quickly in raising interest rates to head off inflation. Some economists now believe that the Federal Reserve will continue to raise interest rates until the Fed Funds rate is at 3 3/4% to 4% by year end.

Non-farm payrolls surprised economist on the upside this week. Expectations for the April employment report were for 175,000 new jobs. The actual figure came in at 274,000 new jobs, signaling continued economic growth.

On a side note the Treasury Department announced that an advisory committee was reviewing the return of the 30 year Treasury bond. The bond had been discontinued back in 2001.

Treasury yields rose across the yield curve with the 5 year notes yield closing at 3.94%. The 10 year note closed at 4.26% and the 30 year bond closed at 4.62%.

Earnings for the quarter have been very strong and now stand at 14% growth for the S&P 500 as a whole. Expectations are also good for the second quarter with analyst estimating earnings growth of 8% for the S&P 500.

This week the following companies will be releasing earnings reports. Bayer (BAY), Cisco Systems (CSCO), Walt Disney (DIS), Dell Inc. (DELL), Kohl’s (KSS), Wal-Mart Stores (WMT), and Tiffany & Co. (TIF).