Weekly Market Report 03-18-2005

Energy prices concern market

By Rick Paler


This week was another down week for the market as oil prices continued to climb higher. Another blow to the market this week was General Motors (GM) earnings warning for the quarter and full year. Merger activity continued with its robust pace with several new announcements being made. Economic news was light this week with no earth shattering reports being released. On the earnings front earnings overall continue to impress overall.

Oil was the focus of the market this week with not many news making stocks reporting earnings and no major economic reports released. OPEC announced that it would increase their production by 500,000 barrels a day. This did nothing to curb oil prices, since some traders say that demand will continue to increase faster that supply. Some analysts are suggesting that there is no extra capacity available and that prices will continue to rocket higher. This is a huge drag on the market, since higher energy prices will at some point in the future cause a spike in inflation. Higher inflation will hurt corporate profits and companies will need to pass on cost to consumers. During this current economic recovery it has been consumer spending that has driven the economy from recession. If higher prices are passed on to consumers, this might lead to a slowdown in consumer spending and therefore cause a slowdown in the economy and economic growth. Oil closed the week at $56.72 per barrel up from $54.43 a week earlier.

General Motors (GM) dealt another blow to the market this week when the company announced that they expected a first quarter loss. The company slashed their first quarter target to a $1.50 loss and cut their full year earnings projection to $1.00 to $2.00 per share. The company had given prior full year guidance of a profit of $4.00 to $5.00 per share. The news also hit the bond market, since the company’s bonds are currently rated one level above junk bond status. Several rating agencies have put GM’s debt on credit review and this could lead to a downgrade to junk bond status.

Several mergers were in the news this week. Troubled toy retailer Toy’s “R” Us (TOY) is being purchased by three partners Bain Capital, Kohlberg Kravis Roberts & Co., and Vornado Realty Trust (VNO) for $5.6 billion. International Business Machines (IBM) announced that they would be purchasing Ascential Software (ASCL). Quest Communications (Q) will not take no for an answer. The company confirmed that they had made another bid for MCI (MCIP). The company is now willing to pay $26.00 per share or $8.45 billion up from $24.60. The new offer is well ahead of competitors Verizon Communications (VZ) offer of $6.7 billion.

In earnings news software maker Adobe Systems Inc. (ADBE) posted a 23% gain in their first quarter earnings. The company reported that their first quarter net came in at $151.9 million or $0.60 per share. Excluding items the company made $0.53 per share. Wall Street analyst had only expected the company to make $0.50 per share. The company also said that they planed a major product launch during the second quarter.

FedEx (FDX) posted fiscal third quarter net earnings of $1.03 per share up 51% from a year ago and well above the streets estimates of $0.98 per share. Revenues at the company rose 21% to $7.3 billion. Giving guidance for their fiscal fourth quarter the company expects to earn $1.40 to $1.50 per share.

In economic news, Net Foreign Security Purchases came in well above economist estimates. Purchases came in at $91.5 billion well above the $58.5 to $59.0 billion expected. A lot of worry has surrounded foreign purchases of U.S. debt due to the weakened dollar and deficit. If foreign investors stopped financing our debt interest rates would have to rise to attract investment. Looking closer at the numbers a majority of the investment came from private investors and off shore hedge funds and not foreign countries. Therefore I feel not much can be interrupted by these big numbers.

Oil, GM, and general fear of higher interest rates moved bond rates higher across the yield curve. The 5 year Treasuary note closed yielding 4.15%. Additionally the 10 year Treasury note and 30 year bond both closed at higher yields. The 10 year note yield closed at 4.50% and the 30 year at 4.80%.

Next week again will be light on earnings news. The main focus of the market will be again oil and interest rates. On Tuesday the Federal Reserve will meet and it it’s generally expected that they will raise interest rates for the seventh straight time. Expectations are for a ¼ point hike in rates. Major focus will also be on the policy statement and the possible removal of “measured” rate increases from the statement. Additionally PPI numbers will be released on Tuesday and CPI numbers on Wednesday. Poor reports have the potential to move the market lower.

Earnings reports that will be released next week are Paychex (PAYX), FactSet Research Systems (FDS), Oracle (ORCL) and Williams-Sonoma (WSM).