A strong finish for an erratic week

Technology and Financial sectors help indices register their maximum gains on the last day of the week

Relatively strong earning reports helped US Market post sizable gains for the week ended Friday, 26th October, 2007. Trading remained extremely erratic almost every day of the week. But upbeat reports on the earnings front somehow helped erase the weak credit and subprime conditions in investors minds for the time being.

A big loss from the Merrill Lynch stable did upturn sentiments during the middle of the week. Weak existing home sale figures added further salt to injury. But strong reports from Technology sector and couple of other Dow components helped market make a U turn.

The Dow Jones Industrial Average gained 285 points for the week. Tech - heavy Nasdaq gained 79 points and S&P 500 gained 35 points.

The gains came in spite of crude oil prices touching an all-time high of $92/barrel, dollar sinking to an-all time low against its rival currencies, mainly the euro, and gold prices surging to a new twenty-eight year high.

But half of the Dow’s weekly gains came on Friday, 26th October, itself fuelled by earnings reports from Microsoft and Countrywide Financials, USA’s largest mortgage company. Dow itself gained 134 points on that day. Nasdaq and S&P 500 gained 53 points and 20 points respectively.

Quite a few big names came out with blowout earnings reports during the week. AT&T, Apple, American Express, Boeing, Amazon.com, Du-Pont, Merck, Microsoft, UPS - all declared earnings reports beating market expectations.

But of the above, Boeing and Amazon.com failed to impress market despite their good reports. Amazon stock plunged 14% the next day after the company announced its report as investors were concerned about the online retailer’s shrinking profit margins.

The subprime story once again started during the week after Merrill Lynch reported a larger loss than expected. The company reported write-downs of $7.9 billion across U.S. collateralized debt obligations and sub prime mortgages, significantly greater than the $4.5 billion write-down disclosed earlier.

Among other economic news hitting the market during the week, the National Association of Realtors announced on Wednesday, 24 September that September existing home sales slid 8% to an annualized rate of 5.04 million. The figure was much above market’s expectation of a 4.6% decline to an annualized rate of 5.25 million.

After staying almost unchanged on Wednesday, 24th October, the market edged slightly lower on Thursday, 25th October, as reports on new home sales and durable goods orders, as well as a batch of mixed earnings, weighed on investor sentiment.

The Commerce Department reported new home sales rose 4.8% in September from the August level. On the other hand, durable goods orders fell 1.7% in September, after a 5.2% decline in August, raising concerns about business spending.

U.S. retailers had some disappointing stories to tell during the week. Wal-Mart said that it plans to trim capital expenditures for the current fiscal year more than forecast. On the other hand, Target lowered its third quarter guidance.

Then on Friday, 26th October, Microsoft announced a 23% increase in third quarter earnings, boosted by strong sales of Windows, Office, and the new Halo 3 video game. Microsoft stock soared by more than 9% and provided overall support to the broader market.

On the other side, though, Countrywide reported a $1.2 billion loss in the quarter, the company said that it would turn a profit in the fourth quarter and this sent the stock almost 13% higher during the day.

Executive Summary

For the week, indices registered good gains – all more than 2%. DJIx was up by 2.1% and S&P 500 was up by 2.3%. Nasdaq was up by 2.9%. Trading was extremely erratic during the days of the week.

Strong earnings reports from powerful Dow components failed to un-nerve investors who could otherwise be carried away by loss reported by Merrill Lynch and Countrywide Financials. Technology and Financial sectors led the indices on the final day of the week and market registered its maximum gains on that day for the week.

Crude oil prices closed the week at $91.86 a barrel, higher by 5.6% for the week. For the year, Dow is up by 10.8%, Nasdaq is up by 16.1% and S&P 500 is up by 8.2%.

Next week, the main economic focus will be on the 31 October Federal Open Market Committee policy statement.