Weekly Market Review 10-22-2004

Eliot Spitzer causes market to slide
By Rick Paler



New York Attorney General Eliot Spitzer shook the market this week when he announced that he was widening his investigations into insurance industry practices and was now including the reinsurance business. Additionally, Mr. Spitzer announced that he would begin investigating the music industry; subpoenas have been issued to Universal Music, Sony BMG Music, EMI Group and Warner Music. Reports also circulated that there might be additional investigations into pension accounting, derivatives and managed care. This led investor to recall the corporate accounting and mutual fund scandals that hurt the stock market. This combined with the uncertainty of the outcome of the presidential election and oil prices hitting another record high caused trader to take money of the table.

Corporate earnings reports were mixed this week, along with the recent economic reports. For the week the big winner was the energy sector, while the loser was the insurance sector.

This week some big names reported earnings that did not meet analyst estimates. Some of the companies coming up shy of their earnings estimates this week were; J.P. Morgan Chase (JPM), Whirlpool (WHR), 3M (MMM), Wells Fargo (WFC), Countrywide Financial (CFC), Delta (DAL), Merck (MRK), Sears (S), and United Postal Service (UPS).

On the positive side of the third quarter earnings season, a majority of companies continue to meet or exceed their earnings estimates. The big surprise of the week was when Google (GOOG) reported earnings that blew away Wall Streets estimates. The internet search company reported earnings and revenues that doubled over the year ago period. Earnings came in at $0.19 per share or $52 million and revenues at $805.9 million. This sent the companies shares up more than 15% on Friday.

Fortune Brands (FO) reported earnings that surged 55%. The company reported earnings of $1.20 per share, above the Streets estimate of $1.18 per share. The company predicts earnings growth for 2004 to be in the double digits and is comfortable with earnings growth of 20% or more. The company said it has been “another excellent year.”

Genuine Parts Co. (GPC) reported earnings growth of 11%, when they announced income of $97.9 million, or $0.56 per share which was in line with analyst estimates. Chairman Larry Price said “We are pleased with this trend.”

ITT Industries (ITT) surpassed Wall Streets earnings estimates when they reported earnings of $1.16 per share, which was up over 20% from the year-ago period. Revenues for the company were up more than 21% to $1.67 billion. The company also said that it was confident it will achieve earnings at the top end of their forecast range of $4.45 - $4.50 per share.

Kinder Morgan Inc.’s (KMI) third quarter earnings surged 17% to $0.90 per share, analyst had expected earnings of only $0.88 per share. The company also raised its dividend 41% to $0.5625 cents per share from the prior $0.40 cents per share. The company said that they expect to beat its prior full-year earnings target of $3.71 per share.

Leggett & Platt Inc.’s (LEG) third quarter earnings grew by 58% as sales rose 16% to $1.34 billion. The company met earnings estimates when they reported earnings of $0.41 per share. The company said that they are aiming for 15% average earnings per share growth and 10%-15% sales growth each year. The company also raised their full year guidance to $1.35-$1.45 per share.

Coca-Cola Inc. (KO) reported net income of $0.39 per share down from $0.50 per share for the same period a year ago. World-wide case volume rose only 1%. CEO Neville Isdell said “Our performance has fallen short of the goals we have set for ourselves.”

McDonalds (MCD) reported third quarter earnings of $0.61 per share which was inline with their recently raised estimates. Sales rose 9% to $4.9 billion as the company continues to revamp their stores and menu.

Pfizer’s (PFE) earnings rose 15% to $0.55 per share topping estimates by Wall Street. Sale came in at $12.8 billion missing estimates of $13.2 billion. The company reaffirmed their full-year guidance of $2.12-$2.14 per share.

Microsoft (MSFT) beat earnings estimates of $0.30 per share, when they reported earnings of $0.32 per share. Sale grew 12% to $9.2 billion due to strong PC demand, but analysts were caught of guard when the company also reported that their deferred revenue fell more than expected. Analyst had expected deferred revenue to decline $250 million yet the company reported a $395 million decline.

Economic news for the week was mixed. The Philadelphia Fed’s Index of Business Activity blew away economist estimates. The index which measures economic activity in the Philadelphia area rose to 28.5, economists had expected a reading of only 18.0 and the prior month was only 13.4. A number greater than 1 indicates an expanding economy.

The Consumer Price Index, which measures inflation, increased 0.2% in September matching economist estimates, but the core rate that excludes food and energy increased more than expected. Year-over-year the CPI is up 2.5%.

Housing starts in September fell 6.0% to 1.898 million units below the estimate of 1.950 million units, yet building permits increased 1.8% to 2.005 million units versus the estimate of only 1.950 million.

Oil continues to rise with no end in site. Oil futures toped $55.00 per barrel this week hitting a new record high. The Department of Energy reported a smaller than expected rise in oil inventories. This led traders to fear low supply levels as winter nears. Higher oil prices continue to be a drag on the world wide economy and push the core rate of inflation higher.

The 5 year Treasury note closed yielding 3.24% and the 10 year note closed yielding 3.97%. The 30 year bond yield fell to 4.74% for the week.

As I have stated many times before, I believe that market will continue to trade within a narrow range as traders take a wait and see stance. The reason for this is the close presidential election with rumors of post election lawsuits, new investigations by Eliot Spitzer, oil supplies and the fear of terrorism.

Corporate earnings are running well ahead of the normal earnings growth rate for the S&P500 of 7%. This combined with lower stock prices have pushed PE ratios to more reasonable levels. This should be seen as a positive for the market long term.

Next week it will be all about earnings and the Third Quarter GDP, which will be reported on Friday. Companies of interest reporting earnings next week are; DuPont (DD), Procter & Gamble (PG), ExxonMobil (XOM), Plum Creek Timber (PCL), AFLAC Inc. (AFL), Arthur J Gallagher & Co (AJG), Chubb Corp. (CB), Anheuser-Bush (BUD), Northrop Grumman (NOC), Rayonier (RYN), and Fuji Photo Film (FUJIY).