Weekly Market Report 03-04-2005

Dow Jones Industrial surpasses 2001 levels

By Rick Paler


Despite a surge in oil prices this week, the Dow Jones Industrial index passed the 10,900 level for the first time since 2001. All the major indices were positive for the week yet the volatile NASDAQ continues to trade in the red for the year. Economic data for the week was fairly positive along with Greenspan’s comments before the House Banking Committee. Earnings came in strong for the week, but several companies gave earnings warnings. Biogen Idec along with Elan Plc got hammered by investors when it was announced that they would pull a drug from the market.

Oil prices continue to be a major concern on Wall Street, since higher oil prices act as a tax on the economy. This tax has the potential to slow the economy to the point of another potential recession. Even worse it could not only slow the economy, but cause a rapid spike in inflation. Do you remember the nightmare of the 1970’s and stagflation, when the economy did nothing while inflation was out of control? World demand is continuing to rise and the weaker dollar is not helping matters. This is because oil is traded in U.S. dollars and a weaker dollar makes foreign goods more expensive. To maintain purchasing power in Europe, oil producing countries have to raise the price of oil. OPEC’s Secretary General said he believes that oil will be trading at $80 dollars a barrel within the next two years and some analyst are projecting $100 dollars per barrel.

There was more bad news in the pharmaceutical sector when Biogen Idec (BIIB) and Elan Plc (ELN) announced that they would be pulling Tysabri from the market. This was announced after two patients taking the drug in combination with Avonex developed sever neurological problems and one patient died. Both companies stock got hammered on news.

Retail companies giant Wal-Mart (WMT) reported their February same-store sales numbers increased 4.1% and indicated that they expected the same or better numbers for March. The company also increased their dividend 15.4%.

TJX Companies also reported strong same-store sales increases. Same-store sales at the company increased 6% in February exceeding Wall Streets estimates of only a 5.1% increase. Total sales at the retailer also increased 12%. Giving guidance the company said that it expected to earn $0.32 to $0.34 per share for the first quarter.

Costco Wholesale Corp. (COST) reported same-store sales increased 7% and that earnings excluding items missed analyst’s estimates by a penny. The company reported earnings of $0.54 per share. Wall Street was also disappointed with the company’s future guidance.

American Eagle Outfitters (AEOS) reported that their February same-store sales surged upwards 32.4%. The company also had a very good earnings report for the fourth quarter. The clothing retailer reported earnings of $1.40 per share exceeding the streets estimates. The retailer also upped their guidance for the first quarter to $0.52 to $0.54 per share from the prior $0.43 to $0.45 per share.

H.J. Heinz (HNZ) reported earnings excluding items of $0.60 per share coming in above estimates of $0.59 per share as strong U.S. sales helped raise overall sales up 7.8%. Giving guidance for the next quarter the company said that it expected to earn $2.32 to $2.42 per share.

Merger mania continued this week with Johnson & Johnson agreeing to acquire Closure Medical Corp. (CLSR) for $27 in cash for each outstanding share. Federated Department Stores (FD) announced they are purchasing May Department Stores (MAY) for $17 billion including debt. Yellow Roadway (YELL) will purchase USF Corp (USFC) the transportation company will pay $1.37 billion in cash. Finally Quest (Q) has not given up on their effort to purchase MCI (MCIP). MCI has already agreed to be acquired by Verizon (VZ) yet Quest stated this week that they are willing to continue further negotiations.

In economic news this week, Alan Greenspan testified before the House Budget Committee and focused his comments on the budget deficit and Social Security reform. He continues to see the US economy expanding at a reasonable pace, but warned that the budget deficit could slow growth. He also said that he supports social security reform combined with private accounts. Mr. Greenspan commented that the current system for retirement needs to be revamped “sooner rather than later.”

This week we saw a stronger than expected Chicago Purchasing Managers Index, and a very strong February non-farm payrolls report. The report blew away economist estimates of 225,000 coming in at 262,000 new jobs. Given the current economic data economist are expecting the economy to continue with its solid growth through the first half of the year. Economist are now projecting the GDP growth of between 3 ½% to 4%.

Bond yields fell this week with the 5 year Treasury note closing the week at 3.95%. The 10 year Treasury note closed yielding 4.30% and the 30 year bond closed at 4.64%.

Once again, I will state that next weeks trading will revolve around oil prices and the fear that higher energy cost will cause the Federal Reserve to raise interest rates more aggressively to head off inflation. Expect to see more merger and acquisition announcements, stock repurchase plans and dividend increases in coming weeks since companies are sitting on record levels of cash.

Companies releasing earnings next week are; Checkpoint Systems (CKP), Tenet Healthcare (THC), The Kroger Co. (KR), and BASF (BF).