Weekly Market Report 12-10-2004

IBM sells its PC division
By Rick Paler


Not much happened this week as Wall Street prepares for the end of the year and 2005. This week Johnson and Johnson announced the largest purchase in the company’s history and IBM sold its PC to a Chinese based company. Oil continued its decline from record highs and the PPI number was higher than economist estimated.

It was a quite week in regards to corporate news with the only major news coming from Johnson & Johnson and IBM. It was revealed this week that Johnson & Johnson (JNJ) was in advanced talks with Guidant Corp. (GDT) to purchase the company. The board of directors of each company will be meeting over the weekend to work out the final approval of the deal and it is expected to fetch $75.00 per share for shareholders of Guidant. The purchase of Guidant would help Johnson & Johnson in the fast growing market of defibrillators, pacemakers and should help their coronary stent business. The deal would be the largest in the 118 year history of Johnson & Johnson.

As I had written about last week International Business Machines (IBM) announced that they were selling their PC division to China’s largest PC marker Lenovo Group (LNVGY) for $1.75 billion. IBM would still maintain an 18.9% stake in Lenovo. Once the deal is completed it would make Lenovo the third largest PC maker behind Dell (DELL) and Hewlett-Packard (HPQ). Lenovo said that they would move their headquarters from China to New York City. The move allows IBM to further enhance its higher margin businesses.

Proctor & Gamble (PG) confirmed that it was comfortable with analyst earnings estimates for the company’s second quarter of $0.71 to $0.72 per share and 2004 earnings of between $2.25 and $2.35 per share. The company also reaffirmed its long term sales growth target of 4% to 6%. Chairman, President and CEO A.G. Lafley said “We’re confident we have the strategies, brands, innovation pipeline and new market opportunities to sustain our strong growth.” Proctor & Gamble has 16 brands that have sales of a billion dollars and another 10 that have sales over one-half billion in sales.

Another consumer product company was in the news this week. Colgate-Palmolive (CL) announced that they would cut their work force by 12% or approximately 4,440 employees. The move is expected to save the company $250 million to $300 million after taxes annually by the fourth year. The company also reaffirmed its fourth quarter 2004 and full year 2005 guidance.

In economic news oil continued its decline from all time highs above $50.00 per barrel a short time ago, by closing the week lower at $40.70. This despite word from OPEC that it would cut production by 1 million barrels a day. Some energy analysts are suggesting that oil prices could drop lower in coming weeks.

Final Non-farm productivity for the third quarter came in below economist estimates of 2.0%. The released number showed that productivity grew at 1.8%. Productivity gains have been strong in past months. This has allowed companies to raise wages and limit hiring while not having to raise prices.

A large than anticipated rise in the November Producers Price Index, which measures inflation, had traders concerned. But after reviewing the core rate which excludes energy and food, trader’s fears of run away inflation were subdued. The PPI for November rose 0.5% after October’s sharp rise. Economist had expected an increase of just 0.1%. Year over year the PPI is up 5.0%, which is the largest increase in 15 years.

Next week, the Federal Open Market Committee will be meeting on Tuesday and after the release of this week PPI numbers the Federal Reserve will more than likely continue their policy of raising interest rates. I would anticipate the Federal Reserve to raise the Fed Funds rate another 25 basis points bringing the rate to 2.25% from this the low earlier this year of 1.0%.

Bond yields were oddly lower this week even with the streets anticipation that rates will be raised next week. The 5 year Treasury note closed at 3.51% and the 10 year note closed yielding 4.13%. The 30 year bonds yield was also lower closing at 4.81%.

Next week Wall Street will be watching the FOMC meeting on Tuesday. Additional economic news due to be released next week are Retail Sales which could effect retail stocks and the Consumer Price Index or CPI. Companies that are releasing earnings are; Oracle (ORCL), Bed Bath & Beyond (BBBY), Best Buy (BBY), Biomet (BMET), FedEx (FDX), and Nike (NKE)