Week Ahead: Earnings to Bolster Bulls!
Stock Market: Financials in Focus!
Wall Street: Rally to Continue?
by Ian Harvey
January 14, 2013
Dozens of corporate earnings reports are expected in the week ahead, including J.P. Morgan, Citigroup, General Electric and Intel. While always important, the attitude of companies this quarter will be the major this to the direction of the stock market, and their assessment of future business prospects could provide an important tell about the course of not just the U.S., but the global economy this year.
That is, in part, due to the fact that U.S. companies put a stop on spending, as they awaited the year end outcome of the congressional debate over the "fiscal cliff." It was also because a slower China and a weak Europe during 2012 provided a feeling of unease.
But the view coming into 2013 is that things are changing, and there is guarded optimism that China may be beginning to turn and that Europe is stabilizing. Housing is helping the U.S. economy, but once again markets and the economy will be vulnerable during the next round of budget debates and debt ceiling showdown in Washington, expected in the next couple of weeks.
The first full week of earnings season is dominated by the financial sector - big investment banks and commercial banks - just as retail investors, free from the "fiscal cliff" worries, have started to get back into the markets.
Equities have risen in the New Year, rallying after the initial resolution of the fiscal cliff in Washington on January 2. The S&P 500 on Friday closed its second straight week of gains, leaving it just fractionally off a five-year closing high hit on Thursday.
An array of financial companies - including Goldman Sachs (GS) and JPMorgan Chase (JPM) - will report on Wednesday. Bank of America (BAC) and Citigroup (C) will join on Thursday.
The CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, is off more than 25 percent so far this month and it recently hit its lowest since June 2007, before the recession began.
The fiscal cliffhanger resolution, coupled with a strong start to earnings season, has fueled a strong stock market rally in the first full trading week of the year.
Stocks surprised the market skeptics last week because while most of the major averages showed little change, the market did not go down as most expected. The standout was the Dow Jones Transportation Average as it moved above the 2012 highs and is close to its all-time highs.
While the early 2013 stock market rally has been impressive, the sharp increase in some key interest rates has also caught investors' attention. The yield on the 10-Year T-Note just dropped slightly from the end of 2011 to the 2012 year-end yield of 1.765%.
But there were plenty of wide swings during the year as yields hit a high of 2.34% in March and a low of 1.39% in July. Since early in December, yields have risen from a low of 1.56% to close at 1.87% this week.
The daily chart shows a strong rally from the July lows, line c, and the break through resistance at the September highs (line b). The daily chart reveals quite a bit of resistance between 1.90% and 2.06% from early in 2012 with more important now at 2.31%, line a, which connects the late 2011 and early 2012 highs.
Though one might conclude from this daily chart that rates have bottomed, one must examine the recent action in terms of the long-term yield chart, which goes back to 1985 when the yield was 13.8%.
Since 1995, yields have been in a pretty well-defined downward channel, line d and e. The yield is still below the 20-month EMA as it has been since May 2011. The EMA is now at 2.01%. From the long-term chart, it would take much higher yields to suggest that this major trend has changed.
Mutual fund data indicates that since the start of 2009 over $1 trillion dollars has moved into bond funds with over $300 billion going into bonds in 2012. This compares with an approximate outflow from stock funds of over $150 billion. In fact, December 2012 was the 20th consecutive month that there were net outflows from stock funds.
There have been several times in the past few years when it looked as though the bond market may have topped. Just a minor outflow of funds from bonds to stocks could cause an explosive stock market rally.
Many bond fund holders only think about the yield not the potential for capital loss in bonds funds. Should they have to face a 10% loss in a bond fund they bought for its 5% yield, their attitudes could change dramatically.
The Week Ahead
Earnings and Company News in the Week Ahead
We will get fourth quarter earnings results from 69 companies, including 37 from the S&P 500 in the week ahead. The earnings reports thus far have been relatively improved, but after more than a tenth of the earnings reports out by the end of the week, we will have a better sample size to evaluate how this earnings season is unfolding.
The performances of the 27 companies that have already reported are better in all respects compared to what these same companies did in the third quarter. The growth rate is higher, more companies are beating, and the median surprise is higher -- both for earnings and revenues.
But with 95% of the reports still to come, the more important story on the earnings front pertains to expectations from the coming reports. And there has been no letup in the downward adjustments to those expectations. Last week’s foreclosure related banking settlement caused further negative revisions to estimates to a number of banks, particularly Bank of America (BAC).
Therefore, the second full week of January brings a barrage of earnings reports from U.S. corporations. In particular, investors will see results from most of the major U.S. banks including Citigroup (NYSE: C), Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS) in the week ahead.
It won't be all financials, though. Investors will also see how Intel (NASDAQ: INTC) and eBay (NASDAQ: EBAY) performed in the week ahead, as well as Freeport-McMoran (NYSE: FCX) and Lennar (NYSE: LEN).
IPO’s Scheduled for the Week Ahead
A handful of companies are scheduled to go public in the week ahead.
The largest among the week ahead prospective offerings comes from CVR Refining LP, which owns petroleum-refining assets. The Sugar Land, Texas, company said earlier this week it plans to sell 20 million common units for between $24 and $26 apiece. Its units, which trade like shares, are slated to list on the New York Stock Exchange under the symbol CVRR on Thursday. IPOs from energy-sector master limited partnerships have met strong demand of late, especially with interest rates low and investors hunting for yield.
Other companies scheduled to go public in the week ahead are limited partnerships SunCoke Energy Partners LP and USA Compression Partners, cruise-line operator Norwegian Cruise Line Holdings Ltd. and data-center business CyrusOne Inc.
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.
Earnings: PPG Industries
• 11.55 am San Francisco Fed President John Williams
• 12.40 am Atlanta Fed President Dennis Lockhart
• 4.00 pm Fed Chairman Ben Bernanke discusses economy/policy at University of Michigan
Earnings: Burberry, Forest Labs, Lennar, Commerce Bancshares, Linear Technologies
• 8.00 am Boston Fed President Eric Rosengren
• 8.30 am Retail sales
• 8.30 am PPI
• 8.30 am Empire State survey
• 8.50 am Minneapolis Fed President Narayana Kocherlakota
• 10.00 am Business inventories
• 12.30 pm Philadelphia Fed President Charles Plosser
Earnings: Goldman Sachs, JP Morgan, Bank of NY Mellon,Northern Trust, Charles Schwab, US Bancorp, First Republic, Comerica, KinderMorgan, Sallie Mae, eBay
• 7.00 am Mortgage applications
• 8.30 am CPI
• 9.00 am Treasury international capital flow data
• 9.15 am Industrial production
• 10.00 am NAHB home builders sentiment survey
• 10.00 am Kocherlakota speaks on policy
• 2.00 pm Beige book
• 6.30 pm Dallas Fed President Richard Fisher
• 8.00 pm Kocherlakota speaks on policy
Earnings: Bank of America, Citigroup, Blackrock, PNC Bank, Intel, People's United Financial, Capital One, Fastenal, BB&T, Taiwan Semiconductor, United Health, Amphenol, Fifth Third
• 8.30 am Initial claims
• 8.30 am Housing starts
• 10.00 am Philadelphia Fed
• 12.05 pm Lockhart
Earnings: General Electric, Morgan Stanley, Schlumberger, State Street, Johnson Controls, SunTrust Banks,Progressive, McMoran Exploration, Parker Hannifin, Rockwell Collins, FirstHorizon Financial
• 9.55 am Consumer sentiment
Conferences in the Week Ahead
Among the significant conferences next week are Needham Growth Conference Tuesday through Thursday in New York, the ICR XChange Conference Tuesday through Thursday in Miami and the North American International Auto Show in Detroit Monday through Jan. 27.
Sentiment Effect in the Week Ahead
The sentiment numbers jumped last week with 46.5% of the individual investors bullish, up from 38.7% the prior week. These numbers can still go quite a bit higher but it is likely setting the stage for a sharper correction in the next month or so. Newsletter writers are now over 51.1% bullish with just 23.4% bearish.
|Company||Ticker||Current Qtr||Year-Ago Qtr||Last EPS Surprise %||Report Day||Time|
|MATERIAL SCI CP||MASC||0.21||0.34||-40||Monday||BTO|
|PPG INDS INC||PPG||1.53||1.3||1.36||Monday||BTO|
|FOREST LABS A||FRX||-0.13||1.04||-16||Tuesday||BTO|
|LENNAR CORP -A||LEN||0.43||0.16||25.93||Tuesday||BTO|
|LINEAR TEC CORP||LLTC||0.4||0.4||0||Tuesday||AMC|
|PINNACLE FIN PT||PNFP||0.33||0.17||10||Tuesday||AMC|
|BANK OF NY MELL||BK||0.54||0.48||16.67||Wednesday||BTO|
|BOSTON PRIV FIN||BPFH||0.17||0.14||11.76||Wednesday||AMC|
|EL PASO PIPELIN||EPB||0.55||0.51||10||Wednesday||AMC|
|FIRST REP BK SF||FRC||0.73||0.68||2.86||Wednesday||BTO|
|KINDER MORG ENG||KMP||0.67||0.55||0||Wednesday||AMC|
|AMER EXPRESS CO||AXP||1.05||1.04||0||Thursday||AMC|
|ASML HOLDING NV||ASML||0.77||1.13||0||Thursday||BTO|
|ASSOC BANC CORP||ASBC||0.26||0.23||4||Thursday||AMC|
|BANK OF AMER CP||BAC||0.02||0.15||-100||Thursday||BTO|
|CAPITAL ONE FIN||COF||1.63||0.89||16||Thursday||AMC|
|FIFTH THIRD BK||FITB||0.42||0.33||0||Thursday||BTO|
|PEOPLES UTD FIN||PBCT||0.19||0.17||0||Thursday||AMC|
|PNC FINL SVC CP||PNC||1.56||1.39||1.86||Thursday||BTO|
|TESSCO TECH INC||TESS||0.56||0.59||33.33||Thursday||AMC|
|FIRST HRZN NATL||FHN||0.17||0.13||-5.56||Friday||BTO|
|STATE ST CORP||STT||1||0.93||3.13||Friday||BTO|
|WEBSTER FINL CP||WBS||0.49||0.43||4.35||Friday||BTO|