U.S. Equity Market Diary (October 4, 2010)

US Equity Market Diary (October 4, 2010)

The figure below shows the performance of each sector in the S&P 500 Index for the week. Three sectors gained and seven declined. The best-performing sector was energy, up 2.5 percent. Other better-performing sectors included telecom services and utilities. The three worst-performing sectors were financials, technology and consumer discretion.

Within the energy sector the best-performing stock was EQT Corp, up 8 percent. Other top-five performers were Cabot Oil & Gas Corp., Diamond Offshore Drilling Inc., Baker Hughes Inc. and Occidental Petroleum Corp.

Strengths

• The healthcare facilities group was the best-performing group, up 7 percent, led by its single member, Tenet Healthcare Corp. An article in The Washington Post maintained that the trend of consolidation in the hospital industry results in higher healthcare prices and other benefits for hospitals.
• The retail drug group outperformed, rising 6 percent. Walgreen Co. reported quarterly earnings above the consensus estimate. The company’s gross profit margin increased year-over-year. Pharmacy margins benefited from new generic drug introductions. General merchandise margins increased due to pricing, promotions and improved efficiencies.
• The airlines group gained 5 percent on the strength of its single member, Southwest Airlines Co. The company announced that it has entered into a definitive agreement to acquire all of the outstanding common stock of AirTran Holdings, Inc., the parent company of AirTran Airways.

Weaknesses

• The fertilizer & agricultural chemicals group was the worst-performer, down 11 percent, led by Monsanto Co. The world’s largest seed company fell amid concerns that its new corn seeds are not performing as well as expected.
• The food distributor group lost 5 percent. The stock of its single-member, Sysco Corp., was downgraded from “Buy” to “Hold” by a major brokerage firm, saying that the competitive front remains intense, and that this could offset top-line momentum and limit margin expansion.
• The retail internet group underperformed, losing 4 percent, led down by Amazon.com Inc. A brokerage house analyst cut his rating on the stock from “Buy” to “Hold” on a valuation basis.

Opportunities

• There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2010. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition on a reasonable time frame, it could be a threat to stock prices.
• As governments around the world begin to wind down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for stocks.