Weekly Market Report 05-20-2005

Beginning of a summer rally?

By Rick Paler


What a great week we had. All the major indices were up as traders flocked into the market not wanting to be left behind. Wall Street was highlighted by lower oil prices, lowered expectations for inflation, M&A activity, and strong earnings. This allowed the bulls to stampede into an oversold market looking for bargains.

In corporate news this week H.J. Heinz Company (HNZ) announced that its Board of Directors approved a 5.3% increase in the company’s dividend. William Johnson Chairman, President and CEO at Heinz said “This increase reflects the health of our core business, both U.S. and abroad and our strong cash performance. It also represents our commitment to return 45% to 50% of our earnings to shareholders in the form of a dividend.” The new dividend yield puts Heinz in the top 20% of S&P 500 companies paying dividends.

Home Depot’s (HD) earnings blew past Wall Streets estimates when the retailer announced that they had earned $0.60 for the quarter. Analysts had expected earnings to come in at only $0.55 per share. Sales grew a healthy 8.1% to $19.29 billion, which also exceeded estimates. These results include the poor weather experienced in March, which competitor Lowe’s Cos (LOW) citied when it missed their earnings target.

Abercrombie & Fitch (ANF) reported better than expected earnings. The apparel retailer posted earnings of $0.45 per share or $40.4 million. Analysts on average had expected $0.42 per share. Same store sales increased 19%, while their trendy Hollister stores that cater to a younger hip crowd saw their sales jump 71%.

M&A news continues to spring up almost daily. I have mentioned on several occasions that corporations are flooded with cash and are looking for places to put the cash to use. This week United Parcels Services (UPS) announced that they would acquire Overnight Corp. (OVNT) at a 45% premium over the previous day’s closing price. The all cash deal is valued at $1.25 billion. Wall Street applauded the deal by pushing UPS shares higher.

Appliance manufacture Maytag Corp. (MYG) is being acquired by a private equity group led by Ripplewood Holdings LLC. The group offered $14.00 per share or $2 billion with the assumption of debt for the company.

Continental AG (CON.XE) a German tire manufacture and parts supplier denied rumors that it was interested in purchasing Autoliv (ALV). Traders had speculated that the company had been interested after an analyst report stated that the company would make a bid for Autoliv.

Economic news this week helped to easy fears of uncontrolled inflation. Both the Producers Price Index and the Consumers Price Index were released this week and neither indicated that inflation was a problem. The PPI came in fractionally higher than anticipated. The April reading was 0.6% versus an estimate of 0.4%. The core rate which excludes food and energy came in at 0.3%. The April CPI number was 0.5% with the core rate at 0.2%. Just a few weeks ago many on Wall Street thought that inflation was picking up and these reports dispelled those thoughts.

The economy does appear to be cooling off in the manufacturing sector. The May Empire Manufacturing Index fell into negative territory. The index which measures manufacturing in the New York region dropped into negative territory with a reading of -11.1. Economist had estimated manufacturing in the region to grow to 11.7. This was the first negative reading since April 2003.

This was followed up by a worse than expected Philly Fed’s Business Activity Index. The index fell from 25.3 in April to 7.3 in May. Economist had anticipated a decline in the region but only to 17.3.

It is my belief that the economy is in fact cooling off. The Federal Reserves interest rate hikes appear to have slowed the economy and hedge inflation. The question is has the Federal Reserve raised rates to much? The bond market thinks so and it is indicated by the flat yield curve. As a general rule it takes six to nine months before an interest rate hike is felt in the economy. I do believe that at the next FOMC meeting the Federal Reserve will raise rates again another 25 basis points. Although after the June meeting I believe that the Federal Reserve will take a breather and wait before taking additional action.

The 5 year Treasury note closed yielding 3.86%. The 10 year Treasury note was yielding 4.12% at the close this week and the 30 year bond ended with a yield of 4.43%.

Next week the street will be watching to see if the market can continue this rally. Traders will also be waiting for the release of the Fed’s minutes from the last FOMC meeting. Companies releasing earnings are as follows; Campbell Soup (CPB), Toro (TTC), PETCO (PETC), Costco Wholesale (COST), H.J. Heinz Company (HZN), Hormel Foods Corp. (HRL), Patterson Dental (PDCO) and Toll Brothers (TOL).