Weekly Market Review 11-05-2004

Stocks rally on Bush win
By Rick Paler


The market posted excellent results this week due to a flood of positive news. Companies continued to report expanding earnings for the third quarter, oil prices eased, economic reports were positive and the election was over. The largest factor for the rally though was that President Bush had won and no terrorist event occurred.

On Election Day, early reports from exit polls indicated that Senator Kerry would win the election. This caused the market to begin a steep sell off. Within minutes the Dow Jones Industrial index had fallen over 100 points and the S&P 500 index fell 10 points. The next morning the results proved otherwise. Traders realized that President Bush had won the election and the market opened up 160 points and the S&P 500 opened 16 points higher.

The reason behind this rally is Wall Streets prospective that a Republican administration would be more pro-business. Multiplying this was that fact that the Republicans would control both the Senate and House of Representatives and that the Presidents tax cuts and specifically the dividend tax cut would stay in effect were seen as pluses. For the week just about all industry groups joined the rally with the energy, defense and health care sectors leading the way.

In corporate news, the third quarter is coming to a close and earnings for the quarter are expanding nicely. Currently it appears that the S&P 500 will post earnings growth of 16% for the quarter. Additionally corporate earnings guidance for the fourth quarter also appears to be strong.

Merck’s (MRK) bad news just seems to be getting worse. Questions now have surfaced as to when the company knew of the risks associated with Vioxx. Vioxx was pulled from the market due to cardiac risks associated with taking the drug. The Wall Street Journal reported that management might have known about potential issues with the drug as early as March of 2000. This could give the company even greater exposure to lawsuits.

Pfizer (PFE) shares also have come under pressure when it was announced that its arthritis drug Celebrex, which is similar to Merck’s Vioxx, might have contributed to 14 deaths in Canada. Dr. Maria Valois, director of marketed pharmaceuticals at Health Canada said that they were awaiting more information from the company and that they had set November 18th as the deadline for receiving the information. At this point Dr. Valois said “It’s still premature to conclude what intervention is required in this case.”

Retail stocks had a good week when Wal-Mart (WMT) indicated that its same-store sales for October rose 2.8% and that it saw its third quarter earnings coming in at the high end of the company’s guidance of $0.52 - $0.54 per share.

Discount retailer TJX Companies (TJX) reported that their same-store sales for October rose 7% exceeding the company’s own guidance of 4% - 5% and blowing away analyst estimates of only 4.2% sales growth. The company also sees its third quarter earnings to be inline with its prior guidance of $0.39 - $0.42 per share.

Qualcomm (QCOM) shares were under pressure when the company announced that their earnings for the quarter were $0.29 per share, matching street estimates. The company then warned about its future. The company lowered its first quarter 2005 outlook citing higher operating cost. They now expect to earnings of $0.24 - $0.26 per share. Analyst had expected earning of $0.31 per share for the first quarter.

Wachovia Corporation (WB) finalized its deal to acquire SouthTrust (SOTR). The merger took place effective November 1st and shareholders of SouthTrust received 0.89 shares of Wachovia common stock.

Estée Lauder Companies (EL) posted strong results as they saw profits rise 23% and raised their dividend 10 cents. The company posted earnings of $0.41 per share exceeding Wall Streets estimates of only $0.37 per share.

Economic new this week was very positive, showing that the economy continues to be strong despite higher energy cost. This biggest new for the week was the release of the much anticipated employment numbers. On Friday the report was released showing that a very impressive 337,000 jobs were created in October. Additionally the prior two months data was revised upwards by 113,000 new jobs. Economist had expected a rise of only 175,000 new jobs for October. Unemployment rose less than expected coming up only 0.03% to 5.46%. Economist had estimated that unemployment for October would rise to 5.5%.

The bond market sold off pushing yields higher for the week. This was due to the very strong economic data combined with traders moving from the pre-election flight to the safety of bonds back into the stock market. The economy at this point seems self secificiant and can maintain its growth without the Federal Reserves policy of accodimations. By the close of the week bond traders anticipated a 100% chance that the Federal Reserve would raise interest rates at their meeting next week by ¼ of a percent. The bond market is now also giving it an 80% chance that the Federal Reserve will also take action to raise rates in December. The 5 year Treasury closed yielding 3.46% and the 10 year notes yield was up to 4.17%. The 30 year Treasury bond closed yielding 4.89%.

Next week all of Wall Street will be watching the Federal Reserve when they meet on Tuesday to see if they in fact raise interest rates for the forth time this year. Companies releasing earnings next week are as follows; Abercrombie & Fitch (ANF), Cisco (CSCO), Starbucks (SBUX), Pixar Animation Studios (PIXR), Kohl’s (KSS), Tiffany & Co. (TIF) and Dell Inc. (DELL).