Morning Coffee - Pre-Market Wall Street News

Bears drive markets lower

By Rick Paler


Despite continued positive earnings reports and good economic news the market ended the week lower. Oil prices also should have helped the market, since the price per barrel continued its decline but the market was unfazed by the decline. The NASDQ was helped by Cisco and Dell who both reported good earnings reports. Economic reports released were better than what economist had expected. Yet three of the four major indices posted losses for the week.

In general news, mergers continue to be announced. This week Ameritrade Holdings Corp. (AMTD) shares soared when it was reported that E*Trade Financial Corp. (ET) had expressed interest in buying the company. CEO and founder Joseph Moglia stated that the company was not for sale and that “we are confident in our management team and its strategy.” Wall Street analysts believe that the merger would be a good thing for both companies.

Duke Energy (DUK) announced that they were going to acquire Cinergy Corp (CIN) in an all stock deal for $9 billion. Additionally Duke raised its dividend 12.7% to $1.24 per share.

Quest Communications (Q) will not just go away. It was reported this week that Quest was taking its bid for MCI Inc. (MCIP) directly to the MCI shareholders. Their attempt is to block rival Verizon Communications (VZ) bid for the company.

All eyes were on Cisco Systems (CSCO) this week, since a good earnings report would give support to the technology sector. Cisco did not disappoint traders when they reported better than expected fiscal third quarter earnings. The tech bellwether reported earnings of $0.32 per share which was a penny better than expectations. Revenues grew 10% at the company to $6.19 billion. Additionally the company said that orders topped shipments for the first time in two years.

Dell (DELL) gave an upbeat outlook this week when it posted earnings inline with analyst estimates. The company earned $0.37per share on revenues of $13.42 billion. The company also said that it sees revenue growth of between 16% and 18% for 2005.

Tiffany & Co. (TIF) posted better than expected results. The company reported first quarter earnings of $0.26 per share on revenues of $510 million. The company cited strong U.S. sales. They also reaffirmed their 2005 guidance of $1.45 to $1.55 per share.

Target (TGT) announced that their first quarter income rose 26% to $494 million or $0.55 per share a penny ahead of the streets estimates. Revenues at the retailer grew 12.7% to $11.5 billion and same store sales grew a healthy 6.2%.

In economic news, the March trade deficit unexpectedly narrowed. Economist had expected the deficit to rise to $61.9 billion instead it came in at a low $55 billion. Imports declined to $157.2 billion or 2.5% while exports rose to $102.2 billion or 1.5%. It seems as if the weaker dollar is finally spurring exports while higher oil prices have slowed U.S. consumer demand. This is based on this week’s preliminary University of Michigan consumer sentiment for May. Economist had expected to rise in sentiment to 88.2 from last months 87.7 instead it fell to surprising 85.3.

April retail sales were much stronger then economist had expected. The Commerce Department reported that April sales rose 1.4% the largest gain in over seven months. Wall Street economist had estimated a gain of only 0.7%.

Bond yields slipped this week across the yield curve. The 5 year Treasury note fell to 3.81%. While the 10 year note fell to 4.11% and the 30 year bond closed at 4.46%.

The stock market continues to be volatile despite good fundamentals. The economy continues to grow nicely and the first quarter GDP will likely be revised upward from the original 3.1%. Oil prices have caused some of the volatility along with the fear of inflation and the possibility that the Federal Reserve will raise rates to quickly thereby causing the economy to stall. The positive I see in the recent volatility has been the strong corporate earnings. The strong earning combined with a sideways market has caused the overall P/E ratio for the S&P 500 to fall from a lofty 20.2 to a more reasonable 16.8. Given the current conditions it is still my expectation the market will post positive numbers by years end.

Next week traders will be watch for the release of two economic reports. Both the PPI and CPI will be released and any signs of unchecked inflation will cause a sell off in the market. While a lower than expected number could spark a rally.

Companies releasing earning next week that are of interest are the following. Lowe’s Companies (LOW), Abercrombie & Fitch Co. (ANF), Deere & Co. (DE), Hewlett-Packard (HPQ), Home Depot (HD), and The TJX Companies (TJX).