Weekly Market Review 09-17-2004

The S&P500 post gains for the sixth straight week
By Rick Paler


This week the S&P 500 posted a modest gain for the week. It was the sixth consecutive weekly gain. Trading volume remained low, which indicates the gains might not be long lasted. Typically a market gain with heavy volume indicates that the rally can be sustained.

During the week oil prices continued to rise and economic data was mixed. Several companies warned about their earning this week. While bond traders wait for next weeks Federal Open Market Committee meeting next week.

This week oil prices rose as hurricane Ivan hit the Gulf Coast, causing oil facilities in the area shut down. Yukos Oil (YUKOY) the largest exporter of oil in Russia revealed that it was close to bankruptcy and would stop exporting oil to China. Oil ended up 6.5% to $45.59 a barrel for the week.

In economic news several reports were released this week showing that the economy, which had began to slow down is still growing strongly. The weakest report of the week was the Philadelphia Fed Business Activity Index for September came in at 13.4, below economist expectations of 25.0. The index measures economic activity and any number above zero reflects economic growth.

This came on the back of a very strong Empire Manufacturing Index. The index surged in September to 28.3 from 13.2 the prior month. The reading blew away economists expectations of 20.0 for the New York area.

A favorable CPI report for August showed that both the total and core-CPI numbers came in low at 0.1%. Since inflation is under control, the Federal Reserve should be able to raise interest rates at a measured pace. What is not being spoken about is the Federal Reserves deceleration in the money supply. This indicates that the Federal Reserve’s monetary policy is tighter than at first glance. Next week the Federal Open Market Committee meets on Tuesday. It is my expectation that they will raise interest rates another 25 basis points bringing the Fed Funds Rate to 1.75%. I expect the Federal Reserve to raise rates slowly until interest rates are at a more neutral stance at 3.75%.

In cooperate news this week several companies warned that their third quarter earnings would not meet analyst expectations. Companies issuing warnings this week were Coca-Cola (KO), Cardinal Health (CAH) Office Depot (ODP) and Nortel Networks (NT).

Coca-Cola (KO) issued earnings guidance for the third quarter that disappointed the Street. The company issued guidance of $0.46 - $0.48 per share, below previous estimates of $0.54 per share. The company cited rain and cooler weather in Europe and volume trends in the United States. CEO Neville Isdell said “They are symptoms of problems that demand strong corrective actions and initiatives that will put this company firmly on its proper growth course. That is my unmistakable and immediate objective”.

Cardinal Health (CAH) said that they made a request to the SEC for an extension in filing its Form 10-k for 2004. The company said they would have to restate earnings for 2001 – 2003 and the first quarter of 2004. The company also announced that their net income for the first quarter 2005 would fall 25% and 10% - 15% for the first half of 2005.

Walt Disney Company’s (DIS) Michael Eisner, the embattled CEO, last week said that he would be stepping down from his position in 2006 when his current contract expires. Shareholders led by Roy Disney and Stanley Gold were able to get Mr. Eisner to step down as Chairman earlier this year. They are now demanding the Mr. Eisner be removed as CEO by the company’s 2005 annual meeting.

Patterson Companies (PDCO) the dental, pet veterinarian and rehabilitation supply company announced a 2-for-1 stock split and authorized the repurchase of 3 million shares or 6 million shares post split.

Delta Airlines (DAL) may be going the way of US Airways (UAIRQ). US Airways recently declared bankruptcy and now Delta Airlines auditor Deloitte & Touche LLP expressed doubt about the company’s ability to continue as a going concern.

Qualcomm (QCOM) was under pressure, when the company announced that they are reviewing how the company accounts for royalty payments. They also announced that they see earnings coming in at $0.28 - $0.30 per share. Wall Street analyst had expected earnings of $0.29 per share.

Bond trading was light this week in front of next weeks FOMC meeting. The 5 year Treasury note closed at 3.32%. The 10 year note and the 30 year bond closed at 4.11% and 4.90% respectively.

The market should continue its slight rally into the election as long as the polls show that President George W. Bush has a sizable lead over Senator John Kerry. This is because the market does not like uncertainty, not because the market likes one over the other. With President Bush, the market knows his policies, whereas with Senator Kerry it is an unknown.

The third quarter earnings season is right around the corner. I expect the strong earnings trend to continue. Earnings growth for the S&P 500 will not be in the mid 20% range like the last few quarters. I expect earnings growth for the S&P 500 to be close to 15%. The long term average earnings growth is 7%. Currently, the negative-to-positive preannouncement ratio is running at 1.7, which is below the historical level of 2.0.

Next week all eyes will be on the FOMC which will meet Tuesday to discuss raising interest rates. Companies releasing earnings are the following: Nike (NKE), General Mills (GIS), AutoZone (AZO), Goldman Sachs (GS), Bed Bath & Beyond (BBY) and FedEx (FDX).