Weekly Market Review 10-01-2004

Third Quarter Ends
By Rick Paler



On Thursday last week, the third quarter officially ended and Friday started the fourth quarter. It was a very positive sign for the market that the week ended on an up note. Looking back the market actually performed quite well. The market was able to post positive results for the quarter despite record energy prices; terrorist attacks, the war in Iraq and the uncertainty of the out come of the presidential election. This should provide additional traction going into the fourth quarter as earnings continue to improve and the world wide economy, including the United States continues to expand.

Next week, we begin the third quarter earnings season with Alcoa (AA) reporting their results on Thursday. I estimate that overall quarter versus quarter earnings growth for the S&P 500 to be in the 14% range. This is not as high as the prior quarters 20% plus growth, but still very respectable. The historical average earnings growth for the S&P 500 is only 7%.

Last week in corporate news Merck (MRK) made headlines. The company announced that their blockbuster drug Vioxx would be pulled from the market, after a study confirmed that the drug led to an increase of heart attack and or strokes. The drug was responsible for approximately $3 billion in sales a year. In the announcement the company lowered their earnings guidance by $0.50 - $0.60 per share for 2004. Wall Street analysts expect this to impact 2005 earnings also, since the drug was not scheduled to go off patent until 2006. Shares fell 24% on the news.

ConocoPhillips (COP) as expected announced that they would acquire a 7.6% stake in Lukoil (LUKOY) for $2 billion dollars. The purchase represents the sale of the Russian governments remaining stake in the company. This gives the company access to the Russia’s vast oil reserves and potential access to Iraq’s yet developed oil fields. Wall Street expects Conoco to raise their stake in the company to 20% over time.

PeopleSoft (PSFT) announced that they fired Craig Conway as President and CEO, citing that the board of directors had lost their confidence that he could lead the company. Replacing Mr. Conway will be Dave Duffield, PeopleSoft’s founder and Chairman.

PETsMART’s (PETM) board of directors approved a new stock repurchase program replacing the existing $35 million per year program. The new plan allows for the purchase of $150 million of the company’s common stock. CEO Philip Francis stated “This move demonstrates our confidence in the fundamental strength of our business model, our strategy, and our people, and we’re confident about the future.”

Walt Disney Co. (DIS) former board members Roy Disney and Stanley Gold announced that they support the boards move to retain an independent search firm to select a new CEO. Embattled CEO Michael Eisner will be stepping down in 2006 when his contract expires.

PepsiCo (PEP) reported third quarter earnings of $0.66 per share beating estimates by $0.01. Revenues grew 6% to $7.3 billion. The company cited strong international demand and said that it expects demand to be strong heading into the fourth quarter.

Coca-Kola (KO) said that it may take two years to regain the growth and performance associated with the brand. The company will establish a new marketing campaign to spur the growth. The company had earlier warned that they would not meet earnings expectations for the quarter.

In economic news crude oil prices reached a record high before moving back below the magic $50.00 per barrel price for the week. Fears continue about supply, as violence in Nigeria intensifies, causing Royal Dutch (RD) to pull its workers from the country.

Economic reports for the week were generally upbeat. The final second quarter GDP was revised upward more than economist had expected. The report showed that the economy grew by 3.3%, while economist had expected 3.0% and the preliminary number was 2.8%.

Consumer spending which accounts for two-thirds of the economy came in better than expected. The Personal Consumption Expenditures Index increased 2.1% year over year. While the University of Michigan Consumer Sentiment Index for September came in at 94.2, which was below analyst estimates as energy prices dampened consumers outlook.

The ISM Purchasing Managers’ Manufacturing Index came in above economist expectations at 58.5. The number confirmed that labor as well as production continues to expand.

The Treasury market had higher yields across the yield curve from the prior week. The 5 year Treasury note closed yielding 3.42%. Bond traders also moved the yields on the 10 year note and 30 year bond higher for the week. The 10 year note closed at 4.18% and the 30 year bond closed yielding 4.94%. The yield curve continues to flatten out, as short term yields respond quicker to the Federal Reserves increase in the Fed Funds rate a few weeks ago.

Next week marks the kick-off of the third quarter earnings season and trades will be watching closely at companies posting result. In economic news, retail same store sales will be released and the important September employment numbers will finish up the week.

Companies releasing earnings next week are; Yum! Brands (YUM), Genentech (DNA), Monsanto Company (MON), ALCOA Inc. (AA), Costco Wholesale (COST), and General Electric (GE).