Weekly Market Report 01-21-2005

Markets decline three weeks in a row
By Rick Paler

The recent decline in the market has many scratching their heads trying to analyze the cause. Nothing has fundamentally changed in the last three week. Any negative news should have already been priced into the market, such as the decline in the value of the dollar, the Federal Reserves continuation of their policy of raising interest rates, Iraq, terrorism, the rise in commodity cost and the slowing earnings growth estimated for 2005.

Overall the markets tend to be nervous at the beginning of each earnings season causing many traders to sit on the sidelines and take a wait and see attitude. This combined with last years late rally is causing some to book their profits ahead of earnings announcements. My expectation is that this downward trend has the potential to reverse itself as some to the market leaders post respectable earnings growth.

In earnings news Yahoo (YHOO) posted great numbers. The internet search company increased their earnings 62% in the fourth quarter posting earnings of $0.13 per share exceeding Wall Street estimates of only $0.11 per share.

Drug maker Pfizer (PFE) announced that their fourth quarter net income quadrupled to $0.38 per share. The company cited strong sales growth both in their cholesterol-fighting drug Lipitor and their arthritis drug Celebrex.

Bellwether giant General Electric (GE) beat Wall Street estimates by a penny reporting earnings of $0.51 per share as revenues came in at $43.7 billion jumping 18%. The company cited an excellent global economy for their results. For 2005 the company also said that it was confident that it could post earnings growth of 10% to 15%.

II-VI Inc. (IIVI) reported their fiscal second quarter results this week. Net earnings were $0.39 per share or $5.7 million dollars up from only $0.23 per share or $3.4 million dollars a year ago. The company said “record revenues and bookings for the second quarter attest to the continued strong worldwide demand for II-VI products.”

Fortune Brands (FO) net income rose 59% to $249.5 million or $1.68 per share. Wall Street estimates had been for the company to earn only $1.21 per share. The consumer brands company and maker of such brands as Moen, Titleist, and Jim Beam said that sales increased 15% to $1.91 billion for the period. The company also said that they expect earnings growth in the double-digits for both the first quarter and 2005.

Johnson & Johnson (JNJ) announced that they would take advantage of the American Jobs Creation Act of 2004 by repatriating $11 billion of overseas earnings back into the United States. The Act allows corporations to repatriate earnings from overseas at the reduced tax rate of 5.25% versus the maximum 35%. It is expected that over $300 billion in corporate profits will flow back into the United States before the tax break expires at the end of 2005.

Shares of online auction company eBay (EBAY) were hit hard this week when the company reported disappointing fourth quarter earnings and first quarter guidance. The company reported earnings of $0.33 per share, which was a penny below analyst estimates. First quarter guidance also missed their mark. The street was expecting earnings estimates of $0.37 per share and the company gave guidance of only $0.34 to $0.35 per share.

In economic news the New York Empire State index which measures manufacturing activity missed economist estimates but continued to show strong economic growth for the region. Real estate continues to surprise on the upside. Housing Starts jumped 11% to 2.0 million and building permits rose to 2.0 million, both exceeding estimates. The Consumer Price Index for December fell 0.1% indicating that inflation at the consumer level remains under control. Economist had expected the CPI to come in unchanged.

The current yield curve for bonds remains flat as interest rates on the short end of the yield curve are expected to rise throughout 2005. Bond rates were lower across the board this week. The 5 year Treasury note closed yielding 3.63% and the 10 year and 30 year closed yielding 4.14% and 4.64% respectively.

Next week traders will continue to focus on earnings. Company missing earnings will be greatly punished by the market and those meeting or exceeding estimates will for the most part be greeted with cautious enthusiasm. I am currently still expecting earnings for the S&P 500 to post growth of 16% then return to more normal levels of growth for the first quarter. Companies in the earnings spotlight next week are Rayonier Inc. (RYN), Johnson & Johnson (JNJ), Merck (MRK), DuPont (DD), Electronic Arts (ERTS), Black & Decker (BDK), Amgen (AMGN), Getty Images (GYI), Microsoft (MSFT), Estée Lauder (EL), and Procter & Gamble (PG),