Weekly Market Review 09-24-2004

Market ends lower for the week
By Rick Paler



Last week the markets decided to a breather and ended lower as traders took profits amidst a string of earnings warnings. Crude oil prices not help matters, but compounded fears that higher prices would affect the economy. Economic news for the week was mixed and bond traders flattened out the yield curve.

The string of recent earnings warnings continued last week with several companies lowering their earnings guidance for the upcoming quarter. This week it was CarMax (KMX), Colgate-Palmolive (CL), Ethan Allen (ETH), The New York Times (NYT), PMC Sierra (PMCS), RF Micro Devices (RFMD), UT Starcom (UTSI) and Wendy’s (WEN), Colgate-Palmolive (CL) said that their earnings for the second half of the year would be far below analyst estimates. The company cited marketing expenses and higher material cost. The company now expects third and fourth quarter earnings to be $0.57 - $0.59 per share. Wendy’s (WEN) shares fell when the company slashed their full year earnings guidance. The company announced that their full year earnings expectations would be $2.25 - $2.30 per share. Analyst had expected the company to earn $2.32 - $2.37 per share.

Although over the last two weeks we have had a string of earnings warnings, earnings for the quarter are expected to come in at a growth rate of 14.3% for the S&P 500. Additionally the negative –to-positive ratio is currently at 1.9. Both of these are better than their historical averages of 7% and 2.0 respectively.

Crude oil prices continue to climb and last Thursday hit a new high at $49.00 per barrel. Supply concerns continue as world wide demand increases due to the global economic recovery. Also pressuring prices higher are the string of hurricanes in the Gulf Coast. The hurricanes have caused many refineries to close down. Not helping prices are continuing problems at Yukos (YUKOY), Russia’s largest oil exporter continues to battle the Russian government over taxes. The company announced this week that they had suspended exports of oil to China and Lithuania. The company also continues to warn of bankruptcy.

In corporate new last week AutoZone (AZO) announced net income of only $2.83 per share. This included a $0.12 per share gain from warranty negotiations, missing Wall Streets estimates of $2.56. Sales for the period only grew by 0.3% and same store sales declines 3%.

American International Group, Inc. (AIG) announced that AIG and its subsidiary company AIG Financial Products Corp. (AIGFP) were informed that the SEC is considering bringing action against the companies for alleged violations of federal securities laws.

General Electric (GE) issued a statement following the SEC Order that found that proxy statements and Form 10-k “failed to fully describe the substantial benefits that Welch would receive as part of the agreement”. The company statement said that GE cooperated fully with the SEC’s informal investigation into former COE Jack Welch’s Employment and Post-Retirement Consulting Agreement. The agreement allowed Mr. Welch to use GE aircraft, offices, apartments and financial services for life.

ConocoPhillips (COP) approved a 16% increase in the company’s dividend rate. The new quarterly dividend rate will be $0.50 per share. In separate news, Vagit Alekperov CEO of OAO Lukoil Holdings (LKOH.RS) said that company has not discussed the possibility of selling a stake to Conoco. Reports had been circulating that Conoco plans to win the privatization auction with a 7.6% stake in Lukoil and plans to increase the stake to 20%.

Walt Disney Co.’s (DIS) board of directors reaffirmed their support for embattled CEO Michael Eisner. A shareholders group led by Roy Disney wants Mr. Eisner to resign before next years annual shareholders meeting. Mr. Eisner recently announced that he would resign at the end of his current contract that expires in 2006.

General Mills (GIS) posted earnings of $0.55 per share, which was below analyst estimates of $0.60 per share. The company cited higher commodity prices but reaffirmed their full year earnings guidance.

In economic news, the highlight for the week was the FOMC meeting. As expected the Federal Reserve moved interest rates higher. It was the third time the Federal Reserve raised interest rates this year as they attempt to head off inflation as the economy continues to recover. The closely watch minutes on the meeting stated that the slowdown in the economy was temporary and that their long term view was that the economy would continue to expand. In their statement they said “The Committee believes that policy accommodation can be removed at a pace that is likely to be measured.” The Federal Funds rate now stands at 1.75% up from 1.50%.

Housing starts for August were up 0.6% to an annual rate of 2.0 million units versus the estimate by economist of 1.93 million units. Building permits missed expectations in August coming in at 1.952 million units. The expectation was for 1.985 million units.

The Leading Index, an index that measures economic activity in the future fell 0.3% in August below economist estimates of a 0.2% drop. This was the third consecutive drop, which suggests economic growth is slowing.

Bond traders have flattened out the yield curve as short term interest rates rise quicker than long term rates. It may also be an indication that traders feel the economy is slowing down. The 5 year note closed at 3.31%. The 10 year Treasury note closed lower on the week yielding 4.02%, while the 30 year bond also closed lower for the week yielding 4.79%.

Next week, I would expect the markets to continue to trade within the narrow rage that has established over the last few months. This is due to traders waiting for the third quarter earnings season, the uncertainty of the presidential election and the threat of a terrorist attack in the United States before the election.

Companies releasing earnings next week include the following: Walgreen (WAG), PepsiCo (PEP), Constellation Brands, Inc. (STZ).