Weekly Market Review 01-07-2005

Superstitious say 2005 will be a negative year
By Rick Paler


Despite Wall Streets high expectation for 2005, the market closed the first trading week of the year lower, posting loses across all major indices. The markets down turn this week was due to valuation concerns. The market bears were able to push the markets lower on fears that the market had gone too far too fast. In an industry filled with superstitions, this is an ominous sign of things to come for the 2005 trading year.

There are fortune tellers out there that believe that a negative first week of trading foretells the direction of the market for the year. I am not one of those individuals. I believe that predictions such as these fall into the same category as moon phases, woman’s skirt lengths, super bowl winners and others crazy theories. If you look hard enough, I bet you could also find next years best stock pick in a bowl of alphabet soup.

Going into 2005 the economy looks like it will continue to grow at a reasonable rate posting a GDP of around 3.5%. Inflation should also remain under control as the Federal Reserve continues to raise interest rates to a more neutral stance. If the Federal Reserve continues to raise rates slowly it should not upset the market. Corporate earning should continue to grow, but not at the blistering pace set in 2004. Overall, given the current indicators, I believe that the market should post signal digit gains for the year. With that being said, I believe like last year it will be a stock pickers market were active professional money management has the potential to outpace the returns posted by the indices.

This week in corporate news Merck (MRK), Taser International (TASR) and Krispy Kreme (KKD) all announced additional bad news. Economic data was not earth shattering and bond yields were pushed higher.

The ghost of Merck’s (MRK) Vioxx continues to haunt the company. It was reported this week by the Financial Times that a report will be released that indicates that Vioxx may have had more serious side effects than first reported. In the report due to be released, it suggests that up to 139,000 people in the U.S. have been injured or died from the drug. If the report hold true it could open the company up to substantial litigation. Merck shares are off close to 40% from their 52 week high.

Shares of stun gun manufacture Taser International (TASR) were lower on news that the SEC is looking into the safety of the guns after reports of several deaths and a distribution deal.

The once red hot Krispy Kreme (KKD) shares continued their downward slide this week. The company announced that they would restate their fiscal 2004 earnings due to accounting irregularities and confirmed that they might default on a $150 million dollar line of credit. The company also announced that it might not file its annual 10-k report in a timely manner.

Walgreen (WAG) reported that December same-store sales rose 4.2% and that its first quarter net income rose 31% to $332.7 million or $0.32 per share topping analyst estimates. Rival drug store chain Rite-Aid (RAD) reported December same-store sale declined -2.7%.

American Eagle Outfitters (AEOS) reported that their December same-store sales surged 32.8% well ahead of Wall Streets estimates of an 18.8% increase. The company also raised their fourth quarter profit guidance to $1.30 to $1.31 from $1.08 to $1.10 per share.

TJX Companies (TJX) also reported a good December sales report. The company announced that same-store sales increased 6% at its Marshalls and T.J. Maxx stores and for the five weeks ending January 3 sales rose 15% from a year ago. Analysts had expected same-store sales to increase only 2.8%.

The big economic news this week was the jobs report. The nonfarm payroll report for December indicated that 157,000 new jobs were created, while both the November and October reports were revised higher. This number was viewed positively by the market, since a higher number could lead the Fed to raise interest rates quicker than anticipated and a lower number would have caused concern about future economic growth. For the year 2.2 million new jobs were created and averaged 185,000 new jobs per month. This should put away fears of a continued jobless economic recovery.

Bond yields were slightly higher for the week. Traders are still anticipating that at the next FOMC meeting the Federal Reserve will raise interest rates another 25 basis points.
The 5 year Treasury note closed yielding 3.70% and the 10 year note closed at 4.26%. The 30 year bond closed with its yield up to 4.83%.

Next week should provide some market moving news. Traders have for several weeks been waiting for the fourth quarter earnings season. The season begins with Alcoa (AA) announcing their earnings after the market close on Monday, January 10th. The technology sector and NASDAQ markets could be moved next week by earnings reports from Intel (INTC), Apple Computer (AAPL), Sun Microsystems (SUNW) and Samsung Electronics LTD (SSNLF). Overall the fourth quarter is expected to post 15% earnings growth for the S&P 500.