Weekly Market Report 12-17-2004

Interest rates, mergers and Pfizer dominate market
By Rick Paler


This week we saw the Federal Reserve raise interest rates as I had projected. Corporate mergers continue to be announced, which is a positive for the market. The biggest news of the week, although negative was Pfizer. Economic data was favorable and continues to show an expanding economy.

On Tuesday the FOMC had their meeting and as I had expected they continued with their policy of interest rate hikes to fend off inflation. The Federal Reserve raised interest rates another 25 basis points bringing the Federal Funds rate to 2.25%. The closely watched policy statement said “Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.” This was the fifth increase since June of this year. Going into next year it is my expectation that the Federal Reserve will continue with removing its policy of accommodation at a measured pace. The next FOMC meeting is in February and based on the current economic data I anticipate another 25 basis point increase in the Fed funds rate.

Mergers seem to be the in thing to do. After last weeks announcement that Johnson & Johnson (JNJ) would be purchasing Guidant (GDT), Sprint (FON) announced that they have agreed to acquire Nextel Communications (NXTL). The $35 billion dollar deal would make Sprint the third largest wireless carrier behind Cingular Wireless and Verizon Wireless (VZ). Additionally a Vodafone (VOD) spokesperson denying rumors, said they were not planning to make a bid for Sprint.

It was reported this week that Symantec Corp. (SYMC) has been in negotiations for the last month to purchase Veritas Software (VRTS) for more than $13 billion. Shareholders of Veritas would receive 1.1242 shares of Symantec in the all-stock deal.

After a heated battle that began over a year ago Oracle (ORCL) signed an agreement to purchase PeopleSoft (PSFT) for $10.3 billion or $26.50 per share. The deal topped what they had called their final bid of $24 per share. The deal should close early next year. Additionally Oracle announced that their second quarter net income surged 32% to $815 million or $0.16 per share, well ahead of Wall Streets estimates of $0.13 per share. The company issuing third quarter guidance said it expects earning per share of $0.14 - $0.15 per share. Analysts are projecting $0.14 per share.

I view the recent increase in merger activity as a positive for the market and just the beginning of what might be an on slot of consolidation. After cutbacks in corporate spending, increases in productivity and slow hiring, during a period of expanding earnings corporations are flush with cash. Companies can do several things with the large amount of cash they are sitting on. They can use it to improve their operations infrastructure, retire long term debt, increase the dividends paid out to share holders, buy back their company shares or go shopping for acquisitions.

We have already seen corporations increasing their dividends and share buy back programs. It is my belief that many corporations are also looking for acquisition targets that would improve their market place share and provide overall cost savings.

The big corporate news this week was the announcement that Pfizer’s (PFE) arthritis drug Celebrex had been linked to increased heart risks when taken in very large doses. The study was based on patients taking between 400mg and 800mg of the drug. Most patients are taking only 100mg to 400mg and in very rare instances are given the amount used in the study. The study does put into question the entire class of Cox-2 inhibitors that are manufactured by several drug companies. Merck (MRK) had recently pulled their Cox-2 inhibitor Vioxx from the market.

Wal-Mart Stores (WMT) continues to disappoint as the company maintained their sales forecast for December of only 1% to 3% growth. The company said that their food sales remain strong but their general merchandise was not as strong. Wal-Mart recently lowered prices on many holiday gift items in an attempt to spur sales after the company started of the holiday sales season poorly.

Best Buy (BBY) reported that their net income increased 21% to $148 million or $0.45 per share which was ahead of analysts estimated by a penny. The company also announced their forth quarter guidance of $1.56 to $1.66 per share. Analysts are expecting earnings of $1.62 per share.

In economic news, retail sales for November were better than expected. The report said that retail sales for November increased 0.1% while economist had estimated a drop of 0.1%. The October number was also revised upwards from the original report of a 0.2% increase to a 0.8% increase.

This week both the Empire Manufacturing Index and the Philadelphia Fed’s Business Activity Index for December showed strong gains, coming in well above what economist had estimated. The strong numbers show that the economy is strong and continues to expand. Based on the overall all strong economic data reported for the fourth quarter I would expect the fourth quarter GDP number to come in around the 4.0% range which could provide additional stimulus for the market going into 2005.

In bond market news traders reacted after the Federal Reserve increased the Fed Funds rate by pushing bond yields higher on the short end of the yield curve, while the long end was down fractionally. This is because the shorter maturities bonds react quicker to interest rate changes. The 5 year Treasury note closed yielding 3.56% and the 10 year note was also yielding more at the close of the week, closing at 4.17%. The 30 year bond closed at 4.80% down from last week’s close of 4.81%.

Next week should be another slow week since many traders are leaving early for the holidays. There are no earnings announcements scheduled for the week and a few economic reports. Some of the economic reports due to be released are the final third quarter GDP, and Consumer Confidence report.

In closing, I would like to wish you and your family a wonderful holiday and prosperous New Year.