Weekly Market Report 02-04-2005

Safe Iraqi elections allows market to rise
By Rick Paler


Sunday’s historic elections in Iraq went off without the terrorism that some expected. Turnout for the election was very high as voters risked being killed to participate in democracy. Initial figures indicate that close to 60% of the nations citizens voted. This was the same percentage of U.S citizens that voted in our last election and we did not have to worry about being killed when we voted. The smooth election removed traders concerns about heavy casualties occurring during the election and allowed the market bulls to push the market higher for the week.

The election alone was not the only factor affecting the markets this week. Additionally we saw a decline in oil prices and OPEC announced that they would leave production at current levels. We continue to see great corporate earnings combined with good economic reports. Ads to this, an increase in merger and acquisition activity and you have a recipe for a higher market.

Earnings continued to come in and this week we saw 93 of the 500 companies that make up the S&P 500 report. To date operating earnings are on target to show 18% growth for the fourth quarter exceeding the streets prior estimates of only 15% - 16%. So what is preventing the market from taking off like a rocket? It is my feeling that corporate guidance for 2005 indicates that the S&P 500 will have earnings growth of around 7%. This is not a bad number and puts growth closer to historical norms. Also expectations are that the Federal Reserve will continue with their policy of rising interest rates. These two factors combined with the continued threat of a terrorist attack are the causes for the cautious sentiment in the market.

M&A activity continued this week with the announcement that SBC Communications (SBC) has agreed to purchase AT&T (T) for $16 billion. Share holders of AT&T will receive 0.77942 shares of SBC common stock or about $18.41 per share and a $1.30 cash dividend.

Quest Communications (Q) has thrown its hat into the ring, when it was reported that the company was making an offer to purchase MCI (MCIP) for $6.3 billion. Verizon Communications (VZ) has been reported to also be in talks to purchase the company.

MetLife (MET) announced that they would acquire Citigroup’s (C) insurance group Travelers Life & Annuity Co. and all of their international insurance business for $11.5 billion.

As a point to note, in January alone $120 billion dollars worth of M&A deal have been announce along with over $30 billion worth of stock repurchase programs. This is a positive for the market and should continue for some time, since corporations are sitting on record amounts of cash. I would also expect more companies to raise their dividends this year to pay out some of this cash.

In corporate earnings news this week Northrop Grumman (NOC), PepsiCo (PEP), Disney (DIS), Google (GOOG), Chubb Corp (CB), Sherwin Williams (SHW) and AFLAC (AFL) all exceeded analyst earnings estimates.

Google (GOOG) surprised the street when they announced an eightfold increase in their fourth quarter net income. The company’s fourth quarter net rose to $204 million or $0.71 per share. Excluding items the company reported earnings of $0.90 per share well ahead of Wall Streets estimates of only $0.77 per share.

Chubb Corp (CB) report that their net income increased six times to $467.6 million or $2.39 per share ahead of analyst estimates. The company also reported that their full year 2004 net income increased 91% over the prior year to $1.55 billion or $8.01 per share. The insurance company also gave 2005 operating income guidance of $7.60 - $8.00 per share.

Paint manufacture Sherwin-Williams (SHW) reported earnings of $82.5 million or $0.57 per share, which is a $16.5% increase over the same period last year. The company earned $393.3 million or $2.72 per share for the full 2004 year. Both results beat Wall Street estimates by a penny.

In other news ConocoPhillips (COP) announced plans to repurchase up to $1 billion of the company’s stock over the next two years. The company’s repurchase plan is to offset dilution from the company’s stock based employee compensation plan.

Adobe Systems Inc. (ADBE) raised their first quarter revenue guidance to $450 million to $470 million from a prior $435 million to $455 million. The company also increased their earnings outlook to $0.47 to $0.51 per share from $0.45 to $0.48 per share. The company cited strong demand for their products including their newly release Acrobat 7.0.

In economic news it was no surprise when it was announced that the Federal Reserve raised interest rates for the sixth time. The increase of 25 basis points puts the Federal Funds rate at 2.50%. The closely watch policy statement remained unchanged indicating that the Federal Reserve would continue with its measured policy of interest rate increases. Indications are that a natural Fed policy would bring rates up to the 3.25% range.

Bond traders pushed rates lower along the yield curve this week. The 5 year Treasury closed yielding 3.66%. The 5 year note ending yielding 4.07% and the 30 year Treasury bond closed at 4.48%.
Next week companies to watch are Bp PLC (BP), Cisco Systems (CSCO), MetLife (MET), Cognizant Technology (CTSH), Dell (DELL), and Unilever (UN).