Strong earning reports from Oracle and RIMM help market finish higher for the week
It was with clear help from the technology stocks that the US Market managed to end higher for the week that ended on Friday, 21 December, 2007. The week witnessed volatile trading as persisting concerns about the economy and a troubling outlook for the financial sector continued to bother the US Market. But strong earnings report from Oracle on Thursday, 20 December and Research in Motion (RIMM) on Friday, 21 December guided market for a strong end.
Credit market jitters continued in its own way. Investment bank Bear Stearns reported its first ever quarterly loss and announced an additional $700 million in write-downs for mortgage-related securities. Morgan Stanley reported more than expected losses for the fourth quarter. The larger than expected loss was due to $5.7 billion in additional mortgage-related write-downs. But news of $5 billion Chinese investment in the company sent smile to investor’s face.
On the other hand, FedEx, which is considered as proxy of economy, reported fiscal second quarter results ahead of analysts' lowered expectations. But the company provided disappointing guidance for the current quarter. Among other earnings reports, Goldman Sachs and Bestbuy – both topped expectations. But Goldman Sachs issued a cautious near tem outlook in 2008.
Nevertheless, with the help of technology stocks, the Dow Jones Industrial Average gained 110 points for the week. Tech - heavy Nasdaq gained 56 points. S&P 500 gained 16 points.
During the week, the Fed proposed new consumer protections for mortgage borrowers. The proposal would require mortgage broker to disclose to borrower any incentives from the lender. The new mortgage rules will "apply to all mortgage lenders," not just those supervised by the Fed.
Also, the European Central Bank surprised market with an unprecedented $500 billion two-week injection to the banking system. Estimates suggested that the operation was about twice the size technically needed.
Market suffered losses during the first and middle of the week. All the three indices closed lower on Monday, 17 December, 2007. But on Wednesday, 19 December, Dow and S&P 500 closed lower but Nasdaq registered some gains. Other than that, indices ended in green in all other trading sessions.
A tepid outlook for bond insurers weighed on sentiment during the middle of the week. Standard & Poor's cut the credit rating of ACA Financial Guaranty and placed Financial Guaranty Insurance on watch for a downgrade, given their exposure to risky debt securities.
Moody's also announced during the week that it was considering downgrading the debt ratings of several bond insurance companies as strain in the credit market continues to take its toll on the financial sector. Also, weighing on the financial market was the news that bond insurer, MBIA has $8.6 billion in collateralized debt obligations.
Market rallied on Thursday, 20 December, 2007 and on Friday, 21 December, 2007. On Friday, Dow gained more than 205 points after RIMM announced above expected earnings after Thursday’s close. Also, news that Merrill Lynch might sell a stake to Singapore based investment fund help market fuel a good rally.
On the economic front during the week, November housing starts dropped 3.7% and housing permits slipped 1.5%. The data show a continued weak housing market. But the data were largely in line with expectations.
Also, the regional manufacturing report reported that the New York Empire State Index stood at 10.3 for November. While a number above zero reflects growth, the reading was well below the prior month's reading of 27.7 and the consensus estimate of 20.
Third quarter real GDP was unchanged at a 4.9% annual growth rate. Core PCE rose 2% quarter over quarter and the GDP Price Index rose 1%. The report was just the final revision, so it did not have much of an impact on the market. The weekly initial jobless claims for the week ended 15 December rose to 346,000 from 335,000 the week before.
Executive Summary
For the week, indices registered modest gains. DJIx and S&P 500 closed up by 0.8% and 1.1% respectively. Nasdaq outperformed the market gaining 2.13%. Though market started off on a weak note, strong earning reports from a couple of tech bell weathers took market to new highs and helped the indices register modest gains for the week.
Oracle and RIMM were the companies in focus which came out with stronger than expected earning reports. Other than that, Goldman Sachs and Fed Ex also came out with good reports, though both issues cautious guidance for FY 2008.
For the holiday shortened week in the coming week, market will mainly focus on the holiday sales figures. For the year, Dow is up by 7.9%, Nasdaq is up by 11.5% and S&P 500 is up by 4.7%.