Weekly Market Review 10-08-2004

Third Quarter Earnings Season Begins
By Rick Paler



This week officially kicked off the third quarter earnings season when on Thursday ALCOA Inc (AA) released their earnings. The company announced that they had earned $0.34 per share, which was inline with Wall Streets estimates. Traders were disappointed with the number, since the company failed to capitalize on higher demand and prices for metal.

All eyes will be focused on earnings for the next few weeks as market moving companies release their earnings for the quarter. Some traders are uneasy about the number of negative earnings preannouncements over the last few weeks. Wall Street expects the overall third quarter earnings growth for the S&P 500 to be between 14% to 16% year-over-year. While the number is below the last four quarters growth rate of over 20%, it would still be a very healthy number. There has not been five consecutive quarters with 20% growth for over 40 years and the average historical growth rate of earnings for the S&P 500 is only 7%.

In corporate news, the health care sector continued to get hammered. Last week Merck (MRK) announced the withdrawal of their arthritis drug Vioxx and the bad news continued to roll in this week. Pfizer (PFE) shares were pressured, when it was announced that an upcoming article in The New England Journal of Medicine will state that drug companies need to prove that their arthritis drugs, such as Pfizer’s Celebrex do not pose the same risk as Merck’s Vioxx. Pfizer’s medical director Dr. Gail Cawkwell said that the drugs are safe and that “there is no evidence” of increased risks of heart problems associated with Celebrex.

Chiron (CHIR) shares were sharply lower when it was announced that British health authorities suspended the company’s manufacturing license for three months. The action was taken after it was revealed that the company’s flu vaccine FluVirin had been contaminated. This caused the company to withdrawal their prior earnings guidance.

General Electric (GE) reported earnings that matched Wall Streets estimates. The company announced that their net income for the third quarter was $0.38 per share. CEO Jeffery Immelt said that “The economy we see continues to be very strong” and that “We also remain confident that we will achieve 10% to 15% earnings-per-share growth in 2005. The company also adjusted their full year earnings guidance upward to $1.57 to $1.60 per share for 2004.

Krispy Kreme (KKD) announced that the SEC has begun a formal investigation into the company’s repurchases of some franchises.

American International Group Inc. (AIG) also announced that the SEC is looking into bringing charges against the company related to press releases that allegedly violated federal securities laws.

American Eagle Outfitters, Inc. (AEOS) raised their third quarter guidance to $0.67 to $0.69 per share as September same-store-sales increased 22.7%.

In economic news this week, oil prices continue to climb to record highs. This week alone, oil jumped 8% in price to $53.31 per barrel. Traders continue to worry about supplies; as weaker than expected oil inventories in the U.S. were announced, peace talks in Nigeria broke down, Gulf Coast refineries continue to be impacted from the hurricanes, Yukos (YUKOY) battles the Russian government, Norway workers might go on strike, OPEC is near its producing capacity, and a colder winter might further drain supplies. This caused the stock market to decline for the week, since higher oil prices have the potential to slow the economy and hurt corporate profits.

The Labor Department reported this week that September Nonfarm payrolls rose by 96,000 versus the 148,000 increase in jobs that economist had expected. Some analyst blamed the shortfall on the hurricanes that hit Florida.

On the positive side Philadelphia Federal Reserve President Anthony Santomero said he sees the Gross Domestic Product growth through 2005 to be 3.5% to 4.0% and anticipates continued growth in the labor markets. He also stated that he expects inflation to be kept in check.

In bond news the 5 year Treasury note closed yielding 3.38%. The 10 year note closed with a yield at 4.13% and the 30 year bond closed at 4.90%.
Next week, we will be flooded with earnings. Potentially market moving reports will come from; Johnson & Johnson (JNJ), Yahoo Inc. (YHOO), Citigroup (C), Nokia (NOK), Stryker (SYK), Genuine Parts (GPC), Intel (INTC), Bank of America (BAC), and General Motors (GM). As a reminder the bond markets will be closed on Monday for Columbus Day.