Weekly Market Report 03-25-2005

Federal Reserve raises interest rates

By Rick Paler


There was not much news this week to hold up the market. Traders anxiously awaited the Federal Reserves announcement on interest rates to provide direction. Earnings news again was light and the economic news for the week was the PPI and CPI numbers.

As expected on Tuesday, the Federal Reserve raised interest rates another 25 basis points to 2.75%. Wall Street had already priced the move into the market, but anxious traders waited to see if the policy statement would be changed. Since the Federal Reserve began raising interest rates the policy statement has included wording indicating that they would raise rates at a “measured” pace to hedge against inflation. Some traders anticipated that with the expanding economy and higher energy prices the Federal Reserve would remove the wording “measured.” The policy statement this time retained the wording “measured,” but also included wording about increasing inflationary pressures. Added to the policy statement was the following wording “pressures on inflation have picked up in recent months and pricing power is more evident.” The addition of this wording caused many to fear increased inflation in coming months and the market sold off in response.

Another merger deal was announced this week, this time in the internet sector. IAC Interactive (IACI) announced that they were buying Ask Jeeves (ASKJ) for $28.24 per share, a 15% premium over the prior days close. The company that already owns Expedia.com, Ticketmaster and Match.com will have additional presence on the web with the acquisition of the fifth largest internet search engine. The total value of the deal is estimated at $1.85 billion.

The only major earnings release this week was Oracle (ORCL). The company disappointed the market when they released their fiscal third quarter results. Revenues at the company increased 18% to $2.95 billion, but their net income declined 15% to $540 million. Earnings came in at $0.16 per share a penny ahead of estimates. Oracle also raised their full year guidance to $0.62 to $0.64 per share.

Home builders continue to rack up the profits. This week, KB Home (KHB) posted a 65% gain in their first quarter earnings when they announced that they had earned $2.82 per share or $122.7 million. This was well ahead of Wall Streets estimates of $2.58 per share. Revenues at the company also rose 21% from a year ago to $1.6 billion. The builder of moderately priced homes also raised their guidance for 2005 to $15.75 up $1.25 from their prior guidance.

Home builder Lennar (LEN) announced their first quarter net income also easily beat analysis estimates of $1.01 when they posted results of $1.17 pre share. Sales also increased 29% to $2.4 billion. Full year 2005 guidance was also raised at the company.

Williams-Sonoma (WSM) announced earnings excluding items of $0.95 per share matching estimates from analyst. Revenues at the company came in at $1.08 billion up 7.9%. For the first quarter 2005 the company gave guidance of between $0.18 per share and $0.20 per share, which is in line with estimates from Wall Street. Full year guidance from the company stands at $1.83 to $1.87 per share.

FactSet Research Systems Inc. (FDS) announced that their fiscal second quarter revenues increased 24.6% to $76.5 million from a year ago. Net income increased to $0.34 per share or $17.2 million meeting estimates. The supplier of financial and economic data cited strong demand in Europe and the Pacific Rim for their results.

Electronic Arts (ERTS) surprised the street, when the videogame maker announced earnings warnings. Citing slow sales of their top games and game consoles shortages the company announced that they now forecast earnings of $1.70 to $1.72 per share. Down from the prior $1.90 to $1.95 per share. The company also lowered their full year 2005 guidance.

In economic news the only reports of interest this week besides the increase in the Fed Funds rates was the release of the PPI and CPI numbers. February PPI came in at 0.4% exceeding economist estimates of a 0.3% increase. The core rate which excludes food and energy met estimates of a 0.1% increase. Year over year the core rate is up 2.8% which is the highest increase in ten years. CPI also topped estimates showing a 0.4% increase versus estimates of a 0.3% increase. The core rate also increased more than expected coming in at 0.3%. On the consumer level prices have increased 3.0 % and the core rate is up 2.4% year over year. In coming month economist will be watching closely to see if higher energy cost will cause a spike in these numbers.

Bond interest rates rose across the yield curve this week on the Federal Reserves hike in interest rates and that addition to their policy statement. The 5 year Treasury notes yield increased to 4.29%. The 10 year note increased its yield to 4.59% and the 30 year bond yield closed at 4.84%.

Next week the street again will be watching for any signs of inflation and will sell off on any signs of it. No major companies will be releasing earnings next week to give the market direction. Because of this the market bears once again will have the upper hand.

Companies releasing earnings are Walgreen (WAG), Veritas (VTS), Freddie Mac (FRE) and Best Buy Co. Inc. (BBY).