Oil's Slippery Slope

Oil's Slippery Slope
by Sam Collins 04/23/08

We are approaching the apex of the Q1 earnings season, and yesterday a number of key companies failed to meet analysts' estimates. Others met expectations but voiced concern about earnings and sales for the remainder of the year.

Both chemical giant DuPont Inc. (DD) and fast-food king McDonald's (MCD) fell even though they exceeded analysts' Q1 estimates. However, both said that the rest of 2008 would present challenges to their prior expectations and DD said that weakness in the construction and auto-parts markets would hurt growth this year.

Even key technology stock Texas Instruments (TXN) was hit hard, off 5.79%, following its Q1 earnings that met expectations but the stock floundered like the others after the company acknowledged that Q2 looked weak and the rest of the year is in question. In apparent sympathy, both Yahoo! (YHOO) and Apple Inc. (AAPL) were down, though YHOO reported earnings after the close that beat analysts' expectations by 2 cents and AAPL reports today.

UAL Corp. (UAUA), the parent company of United Airlines, was pummeled after reporting disappointing earnings due to the high cost of aviation fuel. It didn't help matters that crude oil prices hit another new high early in the session yesterday due to supply problems in Nigeria and a workers' strike in the U.K.

A report from the National Association of Realtors stated that housing sales in March were again lower, prices dropped and inventories rose. Re-sales have sunk 19.3% in the past year, which is down 33% from the peak in 2005.

So with a dearth of good news and lots to create anxiety, the Dow Jones Industrial Average (DJI) fell 105 points to 12,720. The S&P 500 (SPX) was off 12 points to 1,376, and the Nasdaq (NASD) lost 31 points and closed at 2,377. The New York Stock Exchange traded just under 1.4 billion shares with decliners ahead of advancers by more than 2-to-1. On the Nasdaq, decliners were ahead by 3-to-1 and 825 million shares were traded.

Crude oil prices (May contract) rose again to close at $118.56 a barrel, up $1.93, and the Amex Energy SPDR (XLE) closed at $84.58, up 4 cents. June gold futures rose $7.60 to end the day at $925.20 per troy ounce and the PHLX Gold/Silver Index (XAU) fell 55 cents, closing at $185.81.

What the Markets Are Saying

It was tough yesterday to find any kind of good news and stocks responded with broad selling. That's all very normal -- especially following a big run-up in a volatile market where profit-taking has become the sport of the day.

But behind the stock market's difficulty moving ahead is a serious concern about the impact of higher fuel costs on almost every industry.

Yesterday's earnings from a number of companies, and not just the obvious ones like airlines such as UAL Corp. (UAUA), were impacted by higher fuel and crude-oil-based price increases. Big blue chip companies like DuPont (DD), which has been able to offset some of the costs by demand for agricultural chemicals, are now feeling the pressure. Even McDonald's (MCD) registered concern over energy costs.

Company after company is reporting that higher fuel costs will impact their future earnings since they are quickly approaching the point where it is getting harder to pass these costs on to consumers without having higher prices negatively affect sales.

But despite that, Standard and Poor's reports that the price-to-earnings ratio (P/E ratio) of the S&P 500 (SPX) is at 14.8 of this year's forward estimated earnings. This time last year, the P/E was at about 17.5 -- in other words, stocks are generally "cheaper" than this time last year.

That is, of course, due to two reasons: Stocks are lower in price, and earnings have been steadily improving even though many companies have adjusted their forecasts lower.

Although stocks are "cheaper," the spike in crude oil prices during the past couple of days appears to be the reason that the market has turned away from a burst through the immediate overhead. Momentum has turned down sharply on the Dow (DJI), the S&P 500 (SPX), the NYSE Composite (NYA) and less so on the Nasdaq (NYA).

Support for the immediate future is at Dow (DJI) 12,600, S&P (SPX) 1,360 to 1,368 and Nasdaq (NASD) 2,339 to 2,357 with Nasdaq showing an open gap down to 2,348 (likely to be closed) and another at 2,291 (less likely to be closed). So again, a word of caution: Buy only those stocks that you placed on your buy list several weeks ago, and only buy them on a pullback.

Today's Trading Landscape

Earnings to be reported include:

Advance America (AEA), Advanced Energy Industries (AEIS), Affiliated Managers Group (AMG), Aflac (AFL), Air Products & Chemicals (APD), Alcon (ACL), Allegheny Technologies (ATI), Alliance Data Systems (ADS), AllianceBernstein Holding (AB), Allstate (ALL), Aluminum Corp. of China (ACH), Amazon.com (AMZN), Ambac Financial Group (ABK), Amerigroup (AGP), AmerisourceBergen (ABC), Anheuser-Busch (BUD), Apple (AAPL), Arkansas Best (ABFS), Arrow Electronics (ARW), ATMI (ATMI) and Axsys Technologies (AXYS).

Baldor Electric (BEZ), Barrett Business Services (BBSI), Becton Dickinson (BDX), Biogen Idec (BIIB), BioSphere Medical (BSMD), Boeing (BA), Boston Private Financial Holdings (BPFH), C.R. Bard (BCR), Candela (CLZR), Celadon Group (CLDN), Charlotte Russe Holding (CHIC), Chipotle Mexican Grill (CMG), Citrix Systems (CTXS), CNX Gas (CXG), Cohen & Steers (CNS), Columbia Bancorp (CBBO), Complete Production Services (CPX), Core Laboratories (CLB), Covanta Holding (CVA), Crown Castle International (CCI) and CyberOptics (CYBE).

Delta Air Lines (DAL), Dover (DOV), DPL (DPL), Electronics For Imaging (EFII), EMC (EMC), Energen, EPIQ Systems (EPIQ), Equinix (EQIX), Extreme Networks (EXTR), F5 Networks (FFIV), FBR Capital Networks (FBCM), Fidelity National Financial (FNF), First Community Bancshares (FCBC), First Industrial Realty Trust (FR), First Midwest Bancorp (FMBI), First Potomac Realty Trust (FPO), FMC Corp. (FMC), Foundation Coal Holdings (FCL) and Freeport-McMoRan (FCX).

Gardner Denver (GDI), General Dynamics (GD), Genzyme (GENZ), GlaxoSmithKline (GSK), Glimcher Realty Trust (GRT), Graco (GGG), GSI Commerce (GSIC), Harmonic (HLIT), Health Management Associates (HMA), Hilb Rogal & Hobbs (HRH), Host Hotels & Resorts (HST) and Huaneng Power International (HNP).

Infineon Technologies (IFX), Insignia Systems (ISIG), International Coal Group (ICO), Kirby (KEX), Knight Transportation (KNX), Lam Research (LRCX), LaSalle Hotel Properties (LHO), Lennox International (LII), Level 3 Communications (LVLT) and LSI (LSI).

Marine Products (MPX), McClatchy (MNI), Medicines Co. (MDCO), Mercury Computer Systems (MRCY), Methanex (MEOH), Monaco Coach (MNC), Moody's (MCO), Mothers Work (MWRK), MTS Systems (MTSC), New York Community Bancorp (NYB), NewMarket (NEU), Nidec (NJ), Noble (NBL), Northwest Airlines (NWA) and NutriSystem (NTRI).

Omega HealthCare Investors (OHI), P.F. Chang's China Bistro (PFCB), Pactiv (PTV), Parametric Technology (PMTC), Pepsi Bottling Group (PBG), Philip Morris International (PM), Plexus (PLXS), Praxair (PX), Precision Drilling Trust (PDS), Provident Financial Services (PFS), Pulte Homes (PHM) and Qualcomm (QCOM).

Range Resources (RRC), Regis (RGS), Rockwell Automation (ROK), Rollins (ROL), Ryder System (R), Ryland Group (RYL), Sanmina-SCI Corp. (SANM), Schering-Plough (SGP), Sierra Pacific Resources (SRP), Silgan Holdings (SLGN), SK Telecom (SKM), Skechers USA (SKX), Spectranetics (SPNC), Stamps.com (STMP), Stericycle (SRCL) and SurModics (SRDX).

Teledyne Technologies (TDY), Terex Corp. (TEX), Tractor Supply (TSCO), TriQuint Semiconductor (TQNT), Tyler Techologies (TYL), UnionBanCal (UB), United Parcel Service (UPS), Varian (VARI), Varian Medical Systems (VAR), VCA Antech (WOOF), Vignette (VIGN), Vitran (VTNC), W.R. Grace (GRA), Wavecom (WVCM), WellPoint (WLP), Xilinx (XLNX), XTO Energy (XTO) and Zoll Medical (ZOLL).

The only economic report today is the April 18 MBA Mortgage Application Survey Refinancing Index.

A host of earnings will be reported today and some came in this morning, including Yahoo! (YHOO), which reported 2 cents better than expected, but Ambac (ABK) missed the mark and so did WellPoint (WLP). However, there are some hefty gains: Yum! Brands' (YUM) net income jumped 31%, beating earnings estimates by 10 cents, and Lockheed (LMT) exceeded estimates by 11 cents.

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