The Economy and Earnings in the Week Ahead
October 08, 2012

Economy for the Week Ahead: Inflation and Consumer Sentiment!

Stock Market Earnings: ‘Unofficial’ Start Of The Third Reporting Season!

by Ian Harvey

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The Key Events in the Week Ahead

October 08, 2012

Introduction

With Alcoa Inc. (AA) scheduled to report quarterly results on Tuesday; the third-quarter earnings session should kick off in earnest in the week ahead. Wells Fargo & Co. (WFC) and J.P. Morgan Chase & Co. (JPM) are scheduled to report Friday.

Also, news for the economy in the week ahead, reports on small business and inflation, as well as the biggest group of initial public offerings in months, is expected.

Earnings in the Week Ahead

Alcoa’s (AA) release after the close on Tuesday will ‘unofficially’ kick-off the third reporting season, even though ‘officially’ results have been trickling in since last month. Companies like FedEx (FDX), Nike (NKE), Oracle (ORCL) and quite a few others have already reported third quarter results, but Alcoa’s report is typically considered as kick-starting the quarterly reporting cycle.

Also, in the week ahead there will be two major financial firms reporting earnings. As earnings session starts to heat up next week, two U.S. banking giants will weigh in with their latest third-quarter numbers on Friday. J.P. Morgan Chase & Co. (JPM) should give investors an early window into the recent strength of investment banking, while Wells Fargo & Co. (WFC) will provide a view of traditional banking's strength.

Webster Financial Corp. (WBS) and Bank of the Ozarks Inc. (OZRK) also are expected to report their latest results.

Alcoa’s first-to-report status notwithstanding, there have been third-quarter results from 24 companies in the S&P 500 (as of Friday, October 5th) so far – however, these results have not been that inspiring.

Total earnings are down 4.7% from the same period last year and only 41.7% of the companies beat earnings expectations. This is a weaker performance than what these same companies did in each of the last five quarters. Performance on the revenue side is surprisingly not that bad for these 24 companies, with total revenues up 1.2% from the same period last year and 11 coming ahead of revenue expectations.

But the big story on the earnings front is not what has come out already, but rather what’s in store from the 476 companies still to report results. There are 9 S&P 500 companies reporting results this week, which includes, besides Alcoa, Yum! Brands (YUM), Costco (COST), JP Morgan (JPM) and Wells Fargo (WFC). Total earnings for these 476 companies are expected to drop 3.4% from the same period last year, with revenues declining 2.3%.

The actual growth rates will most likely be better than these expectations, given how company managements have refined the art of under-promising and over-delivering quarter after quarter. Just to give you an idea of how good they are at anchoring expectations, roughly two-thirds of the companies in the S&P 500 would typically beat earnings expectations in any given quarter – it was 62% in the second quarter and 65% in the first quarter.

If we do get negative earnings growth this quarter as currently expected, that will be the first decline in quarterly earnings since the earnings recovery got underway after the end of the Great Recession in 2009. The earnings weakness is quite broad-based, with half of the sectors expected to have negative earnings growth.

As was the case in the second quarter, the Energy and Basic Material sectors are the weakest, with earnings declines of 23.5% and 25.5%, respectively. Energy and Basic Materials earnings were down 16% and 20.5% respectively in the second quarter, when total earnings for the S&P 500 as a whole were up 4%.

Only two sectors are expected to have double-digit earnings growth – Finance (up 17.3%) and Construction (up 37.6%). Construction doesn’t carry much weight in the aggregate picture as it contributes less than 0.5% of total S&P 500 earnings, but the Finance strength is making the aggregate growth rate look a lot better than it otherwise would be. Excluding Finance, total S&P 500 earnings in the third quarter would be down 7.1%.

Also, PetSmart (PETM) will be added to the S&P 500 after the close on Thursday, replacing Sunoco (SUN) following the latter's buyout by ETP. Cabela's (CAB) will take PetSmart's position in the S&P MidCap 400, while Acorda Therapeutics (ACOR) will replace Cabela's in the S&P SmallCap 600.


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Company Earnings and News in the Week Ahead


Tuesday, October 09

• Aluminum maker Alcoa (AA) will kick off the third-quarter earnings season when it reports after Tuesday’s closing bell.
While the company’s operating surprisingly well, earnings will be hurt by a glut of high cost Chinese aluminum. The Chinese sell aluminum well below cost and it kills all of the other producers.
Nevertheless, Alcoa sells into “some very hot markets,” such as the aerospace and automobile industries. It also sells to the construction industry, which has been struggling.
So without big construction and with huge exposure to the sagging European market, as well as the awful Chinese market, Alcoa’s going to be hard pressed to get to the mid-teens.

• Also, restaurant operator Yum! Brands (YUM) will deliver its quarterly results Tuesday.
Yum! operates the Kentucky Fried Chicken restaurant chain, which does a sizable amount of business in China. Being as China’s economy has slowed; the worry is that KFC might not have sold that much chicken. Still, the stock looks good in the low $60s.

• Meanwhile, Federal Express (FDX) will hold an analyst meeting on Tuesday and Wednesday. Maybe the package delivery company might actually have something positive to say – there is plenty of negative analyst commentary going into [the meeting], so even some tepidly positive projections could be welcomed warmly.

Wednesday, October 10

Discount retailer Costco Wholesale (COST) is scheduled to announce earnings before Wednesday’s opening bell.
The Issaquah, Wash.-based company recently reported better-than-expected September sales at stores open at least a year, helped by higher gasoline prices and stronger dollar. Its same-store sales rose by 6 percent while some analysts expected an increase of 5.7 percent, including the impact of fuel prices, according to published reports.

Thursday, October 11

• Grocer Safeway (SWY) will report earnings on Thursday. This food store’s stock is a danger -- so many people have tried to call the bottom in this stock.

• After Thursday’s closing bell, look for earnings results from JB Hunt Transport Services (JBHT). JB Hunt can move the transport index and the transport index can move the overall market by confirming any advance -- and unlike FedEx or United Parcel Service (UPS), the U.S.-based trucker isn't as greatly impacted by the slowdowns in the economy in Asia or Europe.

Friday, October 12

J.P. Morgan Chase & Co. (JPM) is expected to post higher earnings, benefiting from a favorable comparison to a lackluster quarter a year earlier. The company earlier this year posted billions in losses from a derivative-trading debacle known as the "London Whale," though it has signaled that most of the losses are behind it.

• Meanwhile, analysts predict Wells Fargo (WFC) will report improved profit on the continued strength of its mortgage-banking business, notably from homeowners refinancing for lower rates. Investors will also be looking to see if the company's commercial lending business remains strong.

Earnings to Watch in the Week Ahead


IPOs Slated for the Week Ahead

There are nine initial public offerings scheduled for the week ahead, the most since the week of March 26, according to Dealogic. Workday Inc., Shutterstock Inc. and Realogy Holdings Corp. are among the group.

Realogy, the largest residential real-estate services firm in the country, owns and franchises residential real-estate brokerages, including Century 21, Coldwell Banker, ERA and Better Homes and Gardens Real Estate.
The company is seeking to go public some five years after Apollo Management LP took it private at the height of the housing market in a highly leveraged $8.5 billion deal. It has been rough sailing for Realogy since then as its business deteriorated in the housing bust.

Workday provides business-management software for payroll, financial management, time tracking and employee expense management.

Shutterstock, a photography agency, sources content from videographers and photographers and licenses it to businesses, advertisers and media organizations.


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Economy in the Week Ahead

The week ahead will present varied reports on the economy which will cover small business, the trade deficit and inflation. Small business owners have been a prime focus of the presidential election given smaller firms' large share of job creation.

The state of small business will be reported Tuesday by the National Federation of Independent Business. The U.S. trade deficit and inflation readings are due Thursday, and Friday, the producer price index is presented.

Also of interest, American Airlines pilots on Tuesday will make their case against an immediate and unilateral overhaul of their employment terms while they appeal the bankruptcy court ruling that gave the airline the right to implement the changes.

In fighting to delay the judge's ruling from taking effect, the pilots will square off against the unsecured creditors of American parent AMR Corp. (AAMRQ). The creditors say the pilots aren't likely to succeed in their appeal, so there is no need for any delay.


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Here is a brief list of some of the key events in the week ahead.

All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

Banks and bond markets are closed on Monday for the Columbus Day holiday, but stock markets are open.

Earnings: AngioDynamics (ANGO)

Economy:

• No major reports on the economy for Monday

Tuesday

Earnings: Alcoa (AA), Chevron, Yum! (YUM)

Economy:

• 7:30 am September Small Business Survey
• 1:00 pm Three- year note auction
• 8:30 pm Fed Vice Chair Janet Yellen on sovereign risk at IMF annual meting, Tokyo

Wednesday

Earnings: Costco Wholesale (COST), Host Hotel & Resorts, Progressive Corp. (PGR), OCZ Technology Group (OCZ), and Ruby Tuesday (RT)

Economy:

• 10:00 am August wholesale inventories
• 10:00 am JOLTS
• 1:00 pm Ten-year note auction
• 2:00 pm Beige Book

Thursday

Earnings: Winnebago, Fastenal (FAST), Safeway (SWY), and J.B. Hunt Transportation (JBHT)

Economy:

• 3:30 am Fed Vice Chair Yellen on Japan and the global economy, Tokyo
• 8:30 am Initial claims
• 8:30 am International trade
• 8:30 am Import prices
• 11:30 am Fed Governor Sarah Bloom on growth inequality in Deauville, France
• 12:30 pm Philly Fed Governor Charles Plosser on the economic outlook in Hartefeld, PA
• 1:00 pm 30 Year bond auction
• 2:00 Federal Budget

Friday

Earnings: JP Morgan (JPM), Wells Fargo (WFC), Webster Financial and Infosys (INFY)

Economy:

• 8:30 am Producer Price Index
• 9:55 am U-Michigan Preliminary Consumer Sentiment Index

CLICK HERE for a complete list of companies reporting in the week ahead.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
TORTOISE CAP RS TTO 0.96 -0.07 -120 Monday BTO
ANGIODYNAMICS ANGO 0.09 0.08 11.11 Monday AMC
E2OPEN INC EOPN -0.06 999 N/A Monday N/A
YUM! BRANDS INC YUM 0.97 0.83 -4.29 Tuesday AMC
GIVEN IMAGING GIVN 0.17 0.13 6.67 Tuesday AMC
MISTRAS GROUP MG 0.14 0.11 -16.67 Tuesday AMC
ALCOA INC AA 0 0.14 0 Tuesday AMC
EXFO INC EXFO -0.09 0.03 -200 Tuesday AMC
COSTCO WHOLE CP COST 1.3 1.08 0 Wednesday BTO
HELEN OF TROY HELE 0.86 0.74 -15.91 Wednesday BTO
PROGRESSIVE COR PGR 0.26 0.24 -25.93 Wednesday BTO
HOST HOTEL&RSRT HST 0.21 0.16 3.03 Wednesday BTO
MATERIAL SCI CP MASC 0.2 0.29 58.33 Wednesday BTO
ADTRAN INC ADTN 0.17 0.56 0 Wednesday BTO
MISSION WEST MSW 0.13 0.13 -21.43 Wednesday AMC
VOXX INTL CP VOXX 0.13 0.16 7.69 Wednesday AMC
RICHARDSON ELEC RELL 0.06 0.05 100 Wednesday AMC
RUBY TUESDAY RT 0.06 0.05 -16 Wednesday AMC
AUGME TECH INC AUGT -0.06 -0.08 0 Wednesday BTO
OCZ TECHNOLOGY OCZ -0.18 -0.04 -46.15 Wednesday AMC
HUNT (:JB) TRANS JBHT 0.67 0.57 0 Thursday AMC
BANK OZARKS OZRK 0.55 0.57 5.77 Thursday AMC
SAFEWAY INC SWY 0.43 0.38 2.04 Thursday BTO
FASTENAL FAST 0.37 0.33 2.7 Thursday BTO
ZEP INC ZEP 0.35 0.24 5.41 Thursday N/A
WINNEBAGO WGO 0.17 0.12 8.33 Thursday BTO
API TECH CORP ATNY -0.01 -0.04 80 Thursday BTO
JPMORGAN CHASE JPM 1.2 1.02 55.13 Friday BTO
WELLS FARGO-NEW WFC 0.87 0.72 1.23 Friday BTO
INFOSYS LTD INFY 0.74 0.72 0 Friday BTO
WEBSTER FINL CP WBS 0.45 0.45 0 Friday BTO
IGATE CORP IGTE 0.34 0.14 -40.74 Friday BTO
KMG CHEMICALS KMG 0.33 0.1 0 Friday BTO
DIAMONDROCK HOS DRH 0.19 0.16 0 Friday BTO

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Reports for the Economy to Watch in the Week Ahead
Monday, October 01

The week will begin with a look at German industrial production. On Monday, the Economy Ministry in Berlin will release its industrial output data for August.
Nobody wants to see weak numbers as they mean pain and job loss in the economy. But the European cooperation [on the region’s sovereign debt crisis] began when pathetic data from poorer countries caught up with the richer countries and they realized that they aren't immune to the crisis.
In other words, weak reports on the economy, such as the industrial production data from Germany means the country is more likely to solve Europe’s debt woes in a timely fashion.

Tuesday, October 02

The National Federation of Independent Business will release its small-business optimism index on Tuesday. The index is based on a survey of small businesses which are asked whether they plan to hire or invest in their operations. The results are a gauge of whether small businesses feel confident enough to hire additional employees and grow through expansion.
The optimism index is expected to rise to 93.5 in September, from 92.9 in August, says the median forecast of economists surveyed by Dow Jones Newswires.

Wednesday, October 03

The Mortgage Bankers' Association will release purchase applications data on Wednesday. The index measures applications at mortgage lenders and gauges activity in single-family home sales and housing construction.

Also Wednesday the Federal Reserve Board will release its Beige Book, which describes the various conditions about the economy within the Fed’s 12 separate regions throughout the U.S. The Fed uses these reports to set policy during its monthly meeting of the Federal Open Markets Committee.

Thursday, October 04

The U.S. trade deficit is presented Thursday. Mostly because of higher oil prices, economists think the August deficit widened to $44.3 billion from $42.0 billion in July.

inflation readings will be released -- economists think higher oil prices pushed up total import prices by 0.8% in September.

Friday, October 05

The Producer Price Index -- inflation measures are being closely watched because of the Fed’s loose fiscal policies, which have pumped trillions of dollars into the U.S. economy since the financial crisis of 2008.
Fed Chairman Ben Bernanke has said frequently that the Fed is keenly aware of the potential for runaway inflation given the Fed’s easy money and low-interest policies, but that inflation has remained at or below the Fed’s target rate of 2%.

Also due next Friday is the University of Michigan’s consumer sentiment survey, which should get a boost from today’s better-than-expected jobs report. The U.S. unemployment rate fell to 7.8% from 8.1% primarily because many self-employed and part-time workers were included in the data. Nevertheless, the decline in the closely-watched unemployment rate is sure to give consumers a bit of optimism that the recovery is gaining traction.

Conferences in the Week Ahead

Among the conferences scheduled for next week are:-

• Banco BTG Pactual SA Latin American Conference from Tuesday to Thursday in New York City, and
• Deutsche Bank Leveraged Finance Conference from Tuesday to Thursday in Scottsdale, Ariz.

Other Important Articles Relating to the Week Ahead

1. The Past Week Stock Market Results – October 08, 2012

2. The Week Ahead in the Stock Market – October 08, 2012

3. The Major ETFs in the Week Ahead – October 08, 2012


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