Weekly Market Report 04-15-2005

Stocks get whacked

By Rick Paler


Thank goodness this week is over, since it was a bloody one for traders. Stocks were pummeled across the board as the market bears firmly took hold of market sentiment. An earnings report from IBM and a warning from Ford did not help. Economic reports and the FOMC minutes from the March 22 meeting added to the bear’s arsenal.

The Dow was off over 373 points by weeks end and the NASDAQ was down 91 points for the week. Stocks were off across all sectors this week. The week started off with Ford Motor Co. (F) cutting their full year guidance citing energy prices, steel prices and health care cost. The company now expects earnings of $1.25 to $1.50. Their prior guidance had been $1.75 to $1.95. Not helping was Standard & Poor’s when they cut the rating on their corporate debt to negative from stable. The debt rating was maintained at the BBB- level for now, but that might change in the future if things do not turn around for the company. Both Ford and General Motors are being killed by the escalating cost of union employee benefits and a lack of inspirational vehicles.

International Business Machines (IBM) caused a large sell off in the technology sector. The company reported that their first quarter earnings fell short of the street estimate by a wide margin. Earnings came in at $0.85 per share versus the streets expectation of $0.90 per share. Revenues also fell short by close to a billion dollars. Revenues came in at $22.9 billion.

Financial giant Citigroup (C) missed Wall Streets earnings estimates of $1.02 per share, reporting earnings of $0.99 per share. Revenues also missed coming in at $21.53 billion. Citigroup’s board of directors increased the company’s repurchase program by $15 billion. The total authorization to repurchase shares now stands at $16.3 billion.

General Electric (GE) had a positive report when they announced that they had earned $0.38 per share, beating analyst estimates by a penny. Revenues also grew to $39.4 billion up 19% from the prior year. Additionally, the company announced that it was upping their 2005 full year guidance to $1.78 to $1.84 per share.

United Health Group (UNH) upped full year 2005 guidance and beat earnings estimates. The health care provider earned $1.16 per share versus the streets estimate of only $1.13 per share. Full year guidance now stands at $4.85 to $4.90 per share. Wall Street 2005 estimate had been $4.82 per share.

PepsiCo (PEP) posted nice numbers for the first quarter. The diversified snack and beverage producer reported earnings of $.053 per share beating estimates by two cents. The company also upped their full year guidance by a penny to $2.56 per share.

BB&T Corp. (BBT) reported a 20% increase in their first quarter earnings. Citing “excellent credit quality, disciplined expense control and reasonably strong loan growth”, the company reported earnings of $415.8 million or $0.75 per share. Credit quality at the bank was the best in four years.

In general corporate news game maker Electronic Arts (ERTS) announced they had signed an exclusive agreement with Collegiate Licensing Co. to manufacture college football video games. The agreement covers all videogame systems and allows them to use the college teams and their stadiums. This comes right after the announcement of a similar deal with the NFL. Both deals lock out all competitors from producing the popular football video games.

In economic news, several closely watched economic indicators shook the markets confidence along with a worrisome interpretation of the release FOMC minutes. The trade deficit widened to a record level exceeding economist estimates by a wide margin. The deficit rose to $61.0 billion up from $58.5 billion. Exports barely increased coming in at $100.5 billion, while imports rose to $161.5 billion. The increase was not due to consumer demand, but was caused by higher oil prices.

Preliminary University of Michigan’s Consumer Confidence Survey for April fell to 88.7 from 92.6 in March. The expected number was a decrease to 91.5. Additionally, the New York Empire State manufacturing survey dropped to 3.1 from 20.2 in March. A reading above zero indicates growth, but the number suggests that economic growth in the region is slowing. The March industrial production report was not any better. The report indicated the production grew 0.3%, but the core manufacturing component indicated almost zero growth coming in at 0.1%.

On top of this the markets digested the release of the March FOMC minutes and did not like what they saw. The market focused on the statement that “the required amount of cumulative tightening may have increased.” The statement by some indicates that the Federal Reserve will raise the Fed Funds rate higher than they had expected.

These reports could indicate a perfect storm brewing in the economy. One in which consumer spending and manufacturing slows, while interest rates rise. Remember the stagflation of the 1970’s? A sharp slowdown in the economy with higher interest rates could also become the pin that pops the housing bubble. People have been flocking to adjustable rate mortgages to get the lower rates they provide. This has allowed many to qualify to purchase homes they would otherwise not be able to afford. If interest rates continue to rise and the economy slows these people will see the interest rate on the mortgages increasing their monthly payments y to a level they can not meet. This has the potential to become a disaster.

Several weeks ago Alan Greenspan while testifying before Congress said that it was a conundrum why yields on the long end of the yield curve had not moves higher, but in fact had come down. The market is always forward looking and the answer appears to be that bond traders feel that the economy is slowing causing the yield curve to flatten. The question now becomes are they right and will the yield curve continue to flatten until we have an inverted yield curve? An inverted yield curve is one in which short term rates yield more the long term rates. This week the 5 year Treasury note closed at 3.86%. The 10 year Treasury note yield fell to 4.23% and the 30 year bond yield fell to 4.59%.

Next week will be a big week for earnings, but traders might focus only on the economic reports due to be released. Both the April PPI and CPI are to be released giving an indication on inflation. The Fed’s Beige Book report, that reports national economic conditions is also due to be released. All of these reports have the ability to move the markets. Overall, I do feel that the economy is slowing and that the Federal Reserve might note raise rates at their next meeting. I also feel that overall this quarter’s earnings season will be a positive one. These conditions might lead to a buying opportunity in the future.

Companies that are releasing earnings next week that will be watched are Coca Cola (KO), Johnson & Johnson (JNJ), Pfizer (PFE), US Bancorp (USB), Amgen (AMGN), Autoliv (ALV), and Fortune Brands (FO).