UNEDITED

Earnings season finally comes to a close this week. Retailing companies are about the only group that is left to report fourth quarter earnings. Overall, fourth quarter earnings are extremely strong. First Call estimates that fourth quarter earnings will increase by 19.8%. This is quite a bit higher than the 15.2% at the beginning of the year and quite impressive considering earnings during the fourth quarter last year increase 28.3%. Additionally, earnings of each of the ten S&P sectors have increased more then were forecasted on January 1. Unfortunately, the outlook for earnings growth for this year, and especially this quarter, is much more muted. There have been 95 companies in the S&P 500 have issued guidance for the first quarter of 2005, 60% of these were negative pre-announcements and only 28% were positive. This 2.1 ratio is the highest since the third quarter of 2003, and the percent of companies guiding down earnings is the highest in at least eight quarters.

Digging a little deeper into the earnings growth, the rise in oil has had a dramatic effect on earnings growth for the S&P 500. Energy companies only comprise 9% of the earnings, but since earnings for the energy companies have doubled from last year, they account for nine percentage points of the 19.8% growth rate. Exxon Mobile earned $1.5 billion more than analysts were forecasting and just its "surprise" accounts for an extra one percentage point of growth. Materials companies account for only 3% of the index earnings, but combined with its 88% earnings growth, this sector accounts for about 2.6 percentage points of growth. In other words, the soaring commodity costs account for about half the earnings growth of the S&P 500 during the fourth quarter.

Cisco Systems reported fiscal second quarter earnings that met Wall Street expectations, but the networking company said that first quarter revenue would advance only 8%-10% with the midpoint representing sales of $6.13 billion. This is about $100 million less than the $6.23 analysts were forecasting. This would also represent the slowest year-over-year growth rate in the past six quarters. Wall Street is currently forecasting that third quarter earnings will increase only 15.8% from year ago levels. This would be the slowest growth rate since the quarter that ended July 2003.

Taubman Centers, which owns and operates shopping malls, announced fourth quarter results that were better than analysts' estimates. Funds from operations benefited from an 8.2% increase in sales per square foot and a 270 basis point increase in occupancy. These results might predicate good earnings from retailers, which report results later this month. During the conference call the company commented on what areas were performing best:

"The strongest sales categories were women's specialty where Gucci, Louis Vuitton, Coach and Victoria Secret all performed very well in our centers. Unisex apparel where American Eagle, Hollister and Banana are copying well and electronics where Apple has posted record productivity increases and Sony is off to a great start. In addition, fast food is continuing to do well which is indicative of the foot traffic in our centers."

Marriott reported stronger than expected fourth quarter earnings, earning $0.79 per share, 14.5% higher than last year and four cents better than analysts forecasted. The hotelier benefited from a 6.1% increase in its daily room rate. This was the largest increase since December 2000. The company also raised its guidance for 2005 RevPAR (Revenue Per Available Room) to a 7 to 9 percent increase. In October it forecasted it would increase as much as 7%. The increase in RevPAR has been universal. A recent report from PricewaterhouseCoopers LLC found that RevPAR increased by 7.5% in 2004 for US hotels.

Toll Brothers released its first quarter results for contracts and home building revenues on Tuesday. Once again the homebuilder reported amazing results. Contracts increased by over 60% to $1.44 billion. Backlog jumped to $4.89 billion, 66% higher than a year ago. Lastly, revenue increased over 68% to $989 million. The average price of house delivered increased 14.5% from last year and will likely keep increasing as the average price of contracts signed jumped 11% to $664,000. Sales have remained strong during the first week of the current quarter. The company said. "In addition, this first week of our second quarter saw the highest per community deposits for this comparative week since we went public in 1986."

Clorox is yet another company that expects to raw materials to remain high. While higher prices did not impact profitability during the its fiscal second quarter, it expects gross margins to decline 50-100 basis points for the full fiscal year that ends June 2005. During the conference call the company said it expects that these challenges will continue and expect price increases to offset a part of these pressures.

"First, we anticipate the significant commodities cost pressures in the second half of this fiscal year will continue impacting us in FY '06. Even if the energy costs moderate, the continuing effects of higher demand and supply capacity issues are anticipated to continue pressuring many commodities. To help offset the rising cost of commodities, we previously announced a 12 to 13% price increase on portions of our Glad business effective February 1st, and we continue to evaluate additional pricing actions to help offset some commodity pressures in fiscal 2006."

It is also interesting that the company would not provide any details regarding its forecasts or hedging plans for higher commodity costs. The company said, "we've had some issues as we've gotten into renewal discussions with a number of our suppliers, given the level of details that we've provided in the past."

Retailers are the last group to report fourth quarter earnings. While sales were lackluster during the first part of the quarter, sales were much stronger during the week prior to Christmas and for the few weeks following the holiday season. Sears is one of the first retailers to report earnings and its gross margins Sears fell by 200 basis points, however, results were better than analysts' forecasts. Investors already have low expectations for retailers' fourth quarter earnings. Earnings at Wal-Mart are expected to increase only 11.8%, which is the slowest growth since the quarter end that ended January 2002. With lowered expectations, it will be more difficult for retailers to disappoint investors.