Weekly Market Report 01-14-2005

Merger mania continues
By Rick Paler


This week additional corporate mergers were announced and the final fourth quarter earnings season officially started. Economic reports released this week were mixed causing the long end of the bond yield curve to fall. Overall, market sediment for the week was negative causing the market to close lower again this week.

On the heels of several notable mergers occurring last year, including the headline making Oracle merger with PeopleSoft, Cingular and AT&T Wireless, and Sprint (FON) merging with Nextel Communications (NXTL) more merger activity was announced this week.

Consolidation within the wireless phone industry continued when early in the week Alltel (AT) reported they will purchase Western Wireless (WWCA) in a deal worth about $6 billion dollars. The deal will make the company the fifth largest in the country. Shareholders of Western Wireless will receive 0.535 shares of Alltel and $9.25 in cash.

Additionally in merger news, Movie Gallery (MOVI) agreed to purchase Hollywood Entertainment (HLYW) for $1.2 billion in cash and debt. Meanwhile News Corp. (NWS) offered Fox Entertainment Group (FOX) to purchase the remaining 18% of their outstanding shares for $6 billion. News Corp. will offer 1.6 shares of common stock for each share of Fox.

The final fourth quarter earnings season started off rocky when Alcoa (AA) and Genentech (DNA) both led off by missing their expected earnings numbers. While Alcoa also missed their revenue target citing higher energy cost and the weaker dollar.

This gave the bears a reason to sell while the rest of the market held their breath. The poor start of the week was then followed up by very positive earnings news in the technology sector. Chip maker Intel (INTC) reported fourth quarter earnings of $2.1 billion or $0.33 per share easily exceeding Wall Streets estimates of only $0.31 per share. The company also reported that revenues rose 13% to $9.6 billion also exceeding analysts’ estimates. The company reported that they had strong growth in every product area.

Intel’s performance was followed up by a spectacular report from Apple Computer (AAPL). The maker of the red hot iPod mp3 player and computers said that their fiscal first quarter net income surged by more than four times to $0.70 per share or $295 million. Revenues at the company rocketed upward 74% to $3.5 billion. The company cited their iPod sales the rose almost five times previous levels to $1.2 billion. The company also noted that sales of their Macintosh computers rose 33%.

In other corporate news Home Depot (HD) gave guidance for their fiscal 2005. The company said that they expect earnings to grow by 10% to 14% and sales to increase by 9% to 12% with same-store sales increasing 4% to 7%. The home improvement leader also announced that they would begin carrying LG Electronics new line of home appliances. For 2004 the company expects to report earnings of $2.26 per share up 20.2% from 2003.

Specialty retail Williams-Sonoma (WSM) announced that their revenues for the eight week holiday sales period jumped 7.3% to $775.9 million from year ago numbers, but that numbers had been impacted by weaker than expected sales from their Pottery Barn stores. Additionally the company reaffirmed their fourth quarter and fiscal 2005 guidance.

Newhall Rubbermaid (NWL) continued to streamline their business by selling Curver their European division. The sale allows the company to focus on its most profitable core businesses. The sale of the division to Jardin International Holding BV is not expected to impact the company’s 2004 results, but is expected to negatively impact their first quarter results due to charges affected by the sale.

Paychex Inc. (PAYX) and the American Bar Association announced this week that the company will be providing members of the ABA access to free mandatory continuing legal education. The continuing legal education classes will be held via live teleconferences and serves to strengthen the relationship and benefits Paychex provides to ABA members and the businesses they serve.

Pharmaceutical company Celgene (CELG) reported that they expect fourth quarter earnings to be inline with analysts estimated of $0.9 per share and 2004 yearly revenues to come in at $375 million up 38% from a year earlier. For 2005 the company gave guidance of earnings of $0.55 per share and revenues to jump 35% to 40% to $525 million.

Economic news reports released this week were mixed. The November trade deficit hit record levels as consumer demand and oil drove imports. The report indicated that the trade deficit had risen to $60.3 billion. Despite the weak dollar that should spur exports that U.S economy and demand is exceeding both the European and Asian economies.

The Producer Price Index which measures inflation came in better than expected. The December PPI fell more than expected showing a decline of 0.7%. This was the first decline in wholesale prices in six months. The core rate which excludes food and energy also came in better than expected rising only 0.1%. This subdued fears of inflation and the Federal Reserve taking a more aggressive stance on interest rates. Industrial production for December was better than expected rising the 2004 results of 4.1% to the best level in four years.

Bond rates fell on the positive economic news released this week indicating that the Federal Reserve would not have to take drastic action to stem inflation. The 5 year Treasury note closed unchanged from last weeks 3.7%. While the 10 year note and 30 year bond yields fell from the prior week to 4.21% and 4.72% respectively. Although this weeks economic news drove interest rates down it is still my belief that the Federal Reserve will continue with its policy of raising interest rates this year beginning with a 25 basis point hike in the Fed Funds rate at the February FOMC meeting.

Next week as a reminder the market will be closed on Monday in celebration of Martin Luther King’s day. Earnings will be the main focus of the week with many traders taking a wait and see attitude. Although we got off to a rocky start it is still my expectation that the S&P 500 will post earnings growth of 15% or better. Companies releasing earnings next week that are worth noting are 3M Company (MMM), Kinder Morgan (KMI), Motorola Inc. (MOT), US Bancorp (USB), Wells Fargo (WFC), Yahoo (YHOO), General Motors (GM), Pfizer (PFE), Qualcomm (QCOM), Wachovia Corp. (WB), Citigroup (C), Fortune Brands (FO), and General Electric (GE).