Weekly Market Report 04-22-2005

Earnings Strong, Economic Reports Poor

By Rick Paler


This week has been a rollercoaster ride for investors. As expected Wall Street continued to ignore positive earnings news and focus on economic reports that give indications on inflation and the economy. Mergers continued to be announced this week, giving some reason for the bulls to come out of hibernation.

One third of the S&P 500 companies have reported earnings for the first quarter. Earnings continue to come in very strong causing the street to up their estimates for the quarter. Just a few weeks ago analyst had expected the S&P 500 to post earnings growth of 7%. Now it stands at 8.6% and some analyst are expecting double digit growth year over year for the index. Strong earnings reports came from the likes of Coca-Cola, Johnson & Johnson, Pfizer, Amgen, Kinder Morgan Inc., and Sherwin-Williams. Each company beat the streets earnings estimates for the quarter.

Coca-Cola Co. (KO) beat analyst earnings estimates of $0.43 per share posting $0.47 per share excluding items, causing the stock price to jump 3.5% on the news. Revenues at the beverage company also rose 4% to $5.27 billion. Worldwide case volume increased 3% but North American sale remain soft.

Johnson & Johnson (JNJ) posted first quarter earnings of $0.97 beating the streets estimate of only $0.92 per share. Sales at the company grew a strong 11% to $12.8 billion. Additionally, the company upped their full year 2005 guidance.

Pharmaceutical giant Pfizer (PFE) reported first quarter earnings of $0.54 per share a penny ahead of Wall Streets estimates. Revenues at the company grew by 5% to $13.09 billion. Giving guidance for the full year, the company reduced its outlook to $1.04 from $1.16. The suspension of the company’s anti-arthritis drug Bextra and questions about Celebrex continue to hurt the company.

Amgen Inc.’s (AMGN) earnings came in higher then expected for the first quarter. Earnings came in at $0.72 per share and revenues grew to $2.83 billion or 21%. Revenue estimates for the company had been $2.88 billion. 2005 earnings guidance for the company is $2.80 to $2.90 per share.

Kinder Morgan Inc. (KMI) announced this week that they would increase their dividend to $0.76 per share or 8%. Additionally the company increased their share buyback program to $800 million from $750 million. Earnings for the first quarter were $1.16 per share, while revenues came in at $336.9 million. Analysts were looking for earnings of $1.15 per share.

Paint manufacture Sherwin-Williams Co. (SHW) continues to ride the housing wave. Net income at the company increased 62% for the quarter. The company earned $0.58 per share, besting estimates of only $0.55 per share. Sale increased to $1.54 billion or 17%.

Mergers news continues to excite investors as the New York Stock Exchange announced that they would acquire Archipelago Holdings (AX). The nation’s oldest exchange would become a publicly traded company if the deal goes through. By acquiring Archipelago the NYSE would move into electronic trading and possibly offer longer trading hours.

Adobe Systems Inc. (ADBE) announced a deal to purchase Macromedia Inc. (MACR) in an all stock deal estimated at $3.4 billion. Shareholders of Macromedia will receive 0.69 shares of Adobe.

The oracle of Wall Street Warren Buffett‘s company Berkshire Hathaway Inc. (BRKA) (BRKB) and Anheuser-Bush Cos. (BUD) this week announced that Berkshire Hathaway had taken a large position in the company. Neither company released any details, but said that Berkshire Hathaway had become a “significant” shareholder. Shares of Anheuser-Bush shot up 5.3% on the news.

Traders concerned about inflation and the economy had some very important reports to digest this week. The PPI, CPI and Federal Reserves Beige Book were all released. Starting the week off was a better than expected PPI report. The core rate of the Producers Price Index, an index which measures inflation at the wholesale level came in at 0.1% versus economist estimates of 0.2%. This gave the market a reason to rally since it appeared that inflation was under control. This was followed up by the CPI, which measures inflation at the consumer level. The CPI core rate showed the largest increase since October of last year. The March Consumer Price Index was up 0.6%, economist were looking for 0.5% and the core rate increased 0.4% versus estimated of only 0.2%. The Federal Reserves Beige Book, a report that gives insight into the economy had two bad comments that traders focused on. The report said that “upward price pressures have strengthened” and that “high energy prices were already, or could soon be, damping consumer demand”. Both the poor CPI and Fed Beige Book caused the market to give up the gains it had received from the good PPI report.

Bond rates for the week were higher on the short end and lower on the long bond as the yield curve continues to flatten. A flattening yield curve usually signifies that the market is expecting a slowdown in the economy. The 5 year Treasury closed yielding 3.91%. The 10 year’s yield increased to 4.24%, while the 30 year bond fell to 4.57%.

Next week will continue to be a volatile week. Again a flood of earnings reports will be released, but traders will again be looking for signed of inflation and a slowdown in the economy. Oil will be a major factor with the price of crude directing the market. President Bush will be meeting with Prince Abdullah of Saudi Arabia next week to discuss increasing production to help stem the price oil and gasoline.

Companies releasing earnings reports next week are Chubb Corp (CB), Du Pont (DD), Eastman Chemical (EMN), ITT Industries (ITT), Newell Rubbermaid (NWL), Northrop Grumman (NOC), Proctor & Gamble (PG), Stanley Works (SWK), Synovus Financial (SNV), Aflac Inc (AFL), Anheuser-Bush (BUD), Bristol-Myers Squibb (BMY), ConocoPhillips (COP), Fuji Photo (FUJIY), Estée Lauder (EL), ParternRe (PRE), Rayonier Inc (RYN), Telefonos de Mexico (TMX), Wm Wrigley Jr. (WWY), Black& Decker (BDK), Bright Horizons Family (BFAM), Cognizant Tech (CTSH), Kronos Inc (KRON), and SEIC Investments (SEIC).