Weekly Market Report 12-03-2004

Major Retailers Disappoint
By Rick Paler


The much anticipated holiday retail season has kicked off. The season which began on the Friday after Thanksgiving is vastly watched by Wall Street. This is due to the fact that strength in sales over the holiday weekend might give indications on how profitable the overall holiday season will be to retail stores. Many retail stores depend on the holiday season, and a poor sales season can make the difference between posting a profit or loss for the year.

Analysts are expecting a very strong holiday sales season. According to ShopperTrak retail sales jumped 10.8% on the Friday after Thanksgiving versus last year. Visa USA also reported that their credit card holders increased charging by over 14%, while debit card usage increased 20.3%. This gave traders a reason to celebrate, since the initial figures confirmed that the holiday sales season was off to a fast start. On Monday the numbers were in and were being interrupted by the analysts.

The seemingly strong start on Friday was interrupted on Monday when several major retailers reported disappointing sales. The largest disappointment came from the likes of Wal-Mart Stores (WMT) when they announced that November same-store sales would rise just 0.7%.

A sharp drop in the price of crude oil helped to cancel out negative sales announcement and rallied the market to post positive gains for the week. Oil started the week over $50.00 per barrel and by weeks end had dropped 13% to $42.54 per barrel. Some energy analysts are now stating that oil prices could drop further. Cheaper energy cost translates to lower production cost for corporations thereby improving their bottom line. It helps consumers also, since they have more money to spend on other items rather than energy and gasoline bills.

Overall news this week was light. Corporate news was focused on the retail sector; technology stocks received a boost from Intel (INTC) and IBM (IBM), while economic news was mixed.

Shares of Wal-Mart Stores (WMT) were hit hard on Monday, when they reported that their November same-store sales would rise just 0.7%. Wall Street had expected sales growth between 2% to 4%. Sales at Wal-Mart stores increased a miserable 0.3% and Sam’s Club sales increased 2.5%. In response to the slower sales officials at the company said that it would cut prices on popular Christmas items and heavily advertise the cuts to lure shoppers back. The company also said that it estimates December same-store sales to increase only 1% - 3%.

The TJX Companies (TJX) announced that November same store sales were up 2%, while overall sales at the company were up over 10%. President and CEO, Edmond English “we will be flowing fresh gift assortments to our off-price stores at great values right up until the Christmas holiday, a strategy that we believe will serve us well again this year.”

American Eagle Outfitters Inc. (AEOS) projected their November same-store sales to increase 22.7%. This tops analyst estimates of only 17% sales growth. Citing their strong November results the company forecast earnings of $1.08 to $1.10 per share for the fourth quarter. Wall Street had expected earning for the fourth quarter of $1.05 per share.

The NASDAQ market hit multi-year highs as the index hit the highest level since July 2001. Fueling the advance this week was Intel (INTC). The company released a very upbeat midyear update. Citing strong demand for the company’s microprocessors the company upped their fourth quarter guidance sharply. The company now expects revenues of $9.3 billion to $9.5 billion. Analysts had expected fourth quarter revenues of $8.8 billion. A spokesman also said that gross margins should be in the upper half of their prior guidance and that they expected their inventories to decline by several hundred million dollars.

International Business Machines (IBM) the maker of the first personal computer back in 1981 is putting their PC division up for sale according to the New York Times. According to the report the company is in negotiations with China’s largest PC maker Lenovo Group Ltd. (LNVGY) and another unnamed company. The division is expected to sell for between $1 billion and $2 billion.

This week the National Association of Securities Dealers (NASD) fined 29 brokerage firms. The fines were similar to the ones leaved against Morgan Stanley (MWD) earlier this year. The companies involved were supposed to keep the records of their brokers updated through the filing of Form U4 and U5. The U4 form reports any regulatory actions against the broker, customer complaints, settlements, and criminal charges and convictions. Form U5 reports when a broker is no longer employed by the company. Merrill Lynch (MER) and American Express Financial Advisors (AXP) were two of the companies fined. In addition to the fine, Merrill Lynch and Wachovia Corp. (WB) were prohibited from registering new brokers for five days.

Economic news this week was mixed. The Non-farm payrolls and Consumer Confidence disappointed, when both missed prior estimates. Non-farm payrolls for November came in well below what economist had expected. Economist had expected payrolls to climb by 200,000 and only 112,000 new jobs were created. The slow growth in jobs could lead to moderation in the economic growth.

Consumer Confidence also came in below estimates. The Index reading fell to 90.5 versus the consensus of 96.0. Lower consumer confidence could curtail holiday spending.

The Personal Income and Consumption data was strong for October and the GDP numbers for the third quarter were revised upwards. The revised GDP came in at 3.9% up from the prior 3.7%. Economists now estimate that the fourth quarter GDP growth will come in at 4.0%, which bodes well for the economy and stocks.

Bond yields continue to rise in anticipation of the Federal Reserve raising interest rates at their next meeting and the continued weakness in the dollar. Yields were higher for the week and for the month of November. The 5 year Treasury note closed yielding 3.59% versus last months 3.32%. The 10 yr Treasury note ended the week at 4.25% up from 4.07% the month before. The 30 year Treasury bond closed at 4.92% compared to 4.82% a month ago. A continued rise in interest rates could pressure stocks in coming months.
Since one way of valuing stocks is to compare the earnings yield of stocks to the yield on bonds.

Next week Wall Street will continue to watch retail sales, energy prices and the dollar. Overall, given the current market conditions I believe that the market is fairly valued at these current levels. Given that, I believe that December has the potential to post positive gains for the month. A positive return for the month of December could keep the spark alive in this rally going into next year.