Weekly Market Report 11-19-2004

Greenspan warns and markets fall
By Rick Paler


This week started off well but ended lower for the week, on comments made by Federal Reserve Chairman Alan Greenspan. Earnings continue to come in strong as the third quarter earnings season comes to a close. This week three Dow components exceeded their earnings targets Wal-Mart, Home Depot and Disney. Economic news was good but provided a reason for the bears to sell.
Alan Greenspan during a meeting in Frankfurt Germany warned that the current trade and budget deficits could cause foreign investors to seek higher interest rates elsewhere and continued weakening of the dollar as investors diversify into other currencies. His comments that investors need to hedge against higher interest rates cause a large sell off in the market and pushed bond yields higher for the week. Many traders now think it is certain that the Federal Reserve will raise interest rates again in December.
Retailer made most of the corporate headlines this week, as many of the heavy hitters released their earnings results giving a window into what Wall Street expects to be a good holiday sales season.
Home Depot (HD) reported terrific results for the quarter when the company reported this week that they have achieved record earnings and sales. The company reported that earnings for the quarter ending October 31 was up 20% to $0.60 per share and that sales were up 13% to $18.86 billion. "The strength of our core retail business, coupled with our growing services and professional supply businesses, is delivering solid returns," Chairman, President and Chief Executive Robert L. Nardelli said on Tuesday. The company also announced that it expects earning per share growth of 19% to 20% for the fiscal year or $2.24 to $2.26 per share. Wall Street had estimated earnings of $2.22 per share for 2005.
Wal-Mart Store (WMT) notched up another record quarter for earnings and sales, as their third quarter net rose 13% and sales increased 9.7%. The world’s largest retailer reported net earnings of $2.29 billion or $0.54 per share. This was up from $0.46 per share a year earlier. Sales rose to $68.52 billion, but fell short of the streets estimates of $69.22 billion. The company also announced that it expects to earn $0.73 to $0.75 per share for the fourth quarter.
Kmart (KMRT) which recently emerged from bankruptcy, surprised analysts when it was announced that the company will acquire Sears (S) for $11 billion. The new company will be called Sears Holdings Corporation and will become the third largest retailer behind Wal-Mart and Target. Shareholders of Sears have the option of receiving $50.00 per share or 0.5 shares of the new company. Kmart shareholders will receive one share of the new company. The acquisition is expected to be completed by March 2005.
PETsMART (PETM) reaffirmed their full year guidance of $1.19 to $1.20 per share after releasing their third quarter results. The company reported earnings in line with estimates of $0.24 per share or $35.9 million, which was a 21% increase over the previous period. Sales rose 13% to $826.8 million.
TJX Companies (TJX) reported net income of $0.41 per share or $201 million, which was a 14% increase over the prior year. Sales for the retailer increased 13% for the third quarter to $3.8 billion. Edmond English President and CEO said “We are pleased with our third quarter performance.”
Walt Disney Co. (DIS) citing strength from its troubled television networks announced earnings that beat analysts’ estimates by a penny. Earnings for the entertainment company came in at $0.19 per share. Revenues missed estimates coming in at $7.54 billion. The company reaffirmed its previous guidance of double digit earnings growth through 2007.
Google (GOOG) the high flying internet search company announced this week that its current revenue growth rate can not be maintained due to increased competition. This announcement was made, as million of shares held by insiders will become available to sell in the open market.
In economic news, economists were surprised when the October PPI numbers were released showing that wholesale prices increased more than expected. The PPI come in at 1.7%, when economist had estimated an increase of only 0.6%. This led to fears of inflation that were quickly blamed on the 6.8% increase in energy prices.
After the surge in the PPI numbers, economists were nervous when the CPI numbers were released. The CPI for October came in higher than expected at 0.6%, but the core rate which excludes food and energy was up a modest 0.2% putting fears of run away inflation to bed.
Bonds sold off after the release of both the PPI and CPI numbers, combined with Mr. Greenspan’s comments. Traders now anticipate the Federal Reserve will raise interest rates another 25 basis points in December to bring the Fed Funds Rate up to 2.25%. The Federal Reserve has already indicated that they will raise interest rate to a more neutral stance, since the economy seems to be self sustaining at this point. Bond yields were higher across the yield curve for the most part. The 5 year Treasury note closed higher yielding 3.56%. The 10 year note closed the week yielding 4.20% and the 30 year bond yield was slightly lower from the previous week closing at 4.88%.Next week the bears will continue to look for reasons to take profits in view of the markets recent run up. Corporate earnings will be released by Campbell Soup (CPB), Toys R Us (TOY), H.J. Heinz (HNZ), Deere & Co. (DE), Hormel Foods (HRL) and Patterson Dental (PDCO).