Weekly Market Report 11-12-2004

Bulls stampede into the market
By Rick Paler



This week the bulls were out in force again pushing the market to a new three year high. Since the election the market has been on a tear the Dow Jones Industrial has risen over 5% and the S&P 500 has risen 4.7%. Historically the market does perform well during the period of November through January. Wall Street calls this the Santa Clause Rally and this year it looks like it might have come a little early. This was due to the pent up demand as investors sat on the sidelines fearing another 2000 election debacle or a terrorist attack similar to the one Spain experience prior to their election. There are some on Wall Street that say are now in what looks like the beginning of a secular bull market rally.

Overall corporate earnings have been growing at a blistering pace. Economic conditions have been positive and the economy has been growing. So it did not come as a surprise when the Federal Reserve announced that they were going to raise the target Fed Funds rate by ¼ of one percent. This brought the Fed Funds rate from 1.75% to 2.0%. The market had anticipated the rate hike and therefore did not react when the announcement was made. This weeks Fed action marked the fourth time this year that the Federal Reserve raised interest rate in an attempt to keep inflation at bay. Since that market anticipated the rate hike the all important policy statement was closely watched to provide incite into the health of the economy and possible future actions by the Fed. The Federal Open Market Committee statement indicated that output is expanding while inflation continues to remain tame. It looks as if the soft patch in the economy has ended, since the FOMC said that the economy “regained some vigor.”

As the third quarter earnings season come to a close, the street will be focusing on corporate guidance for the forth quarter. Currently the negative-to-positive ratio is 2.2, which is in line with the historical ratio, but above last quarters 1.8. Analysts are expecting another strong quarter for earnings growth. Earnings for the S&P 500 for the forth quarter are expected to grow by 15.3%.

Merck (MRK) continues to be in the news unfortunately it has all been unpleasant. This week the company disclosed that it had been subpoenaed by the Justice Department regarding its handling of Vioxx. The company pulled the drug several weeks ago, after it was linked to possible deaths. The SEC has also launched an informal investigation into the company.

Pfizer (PFE) announced this week the company was under investigation by New York and Connecticut attorney generals office. This investigation is focusing on whether the company marketed drugs for uses not approved by the FDA.

Cisco Systems (CSCO) reported earning that matched the streets estimates of $0.21 per share. But the maker of switched and routers disappointed the street, when their revenues came in at $5.97 billion. The street had expected revenues of $6.20 billion. The company also disappointed with future sales guidance, which was well below what analyst had expected. The company also reveled that they were increasing their stock repurchase program by $10 billion.

PeopleSoft (PSFT) was in the news when the company’s board of directors rejected Oracle’s (ORCL) bid to purchase the company. Oracle had previously said that their current bid of $24.00 per share was their last and final offer.

Dell’s (DELL) earnings grew by 27%, as the company’s earnings came in at $0.33 per share matching estimates. The company said that it sees strong world wide demand and expects to hit its sales goal of $60 billion by 2006 a full year ahead of schedule.

The big economic news for the week was the FOMC raising interest rate for the fourth time since June of this year. In the committees policy statement it appears that the Federal Reserve is willing to continue to raise interest rates “keyed to incoming data.” Currently, Fed Funds futures now give an 80% chance that the Federal Reserve will raise interest rates again in December. At this point the economy appears to be self sustaining and the FOMC can begin to remove its extremely accommodative stance.

The preliminary University of Michigan consumer sentiment for November rose to 95.5 from the prior months 91.7 topping economist estimates of 93.1. The positive result might be from the stronger than expected October payrolls report.

Oil continues to decline in price losing another $2.00 per barrel. Some analysts are now thinking oil prices could continue to decline into the $40.00 per barrel rage. This would have a positive effect on the economy. This is because higher energy prices can lead to inflation, low consumer sentiment, hurt corporate earnings and slow down economic growth.

In bond news Treasury yields were lower across the yield curve. The 5 year note closed yielding 3.50%. The 10 year notes yield was 4.17% and the 30 year bonds yield closed at 4.89%.

Companies releasing earnings this week are; Lowe’s Companies (LOW), Ross Stores (ROST), Home Depot (HD), The TJX Companies (TJX), Wal-Mart Stores (WMT), PetsMart (PETM), Gap Inc. (GPS), and Walt Disney (DIS).