Week Ahead: Stocks Move Higher With Q4 Earnings Season In Full Swing!
Stock Market: Apple Earnings, Housing Data!
Wall Street: Tech Earnings Results To Help Push The Rally?
by Ian Harvey
January 21, 2013
A flood of earnings reports, including major technology and industrial companies, should help continue the stock market's surprise January rally in the week ahead.
In the coming week, dozens of major companies reporting quarterly earnings, including Apple, Google, IBM, United Technologies, McDonald's and Microsoft.
Markets are closed Monday for the Martin Luther King holiday. There are just a few economic reports, including existing home sales Tuesday, weekly jobless claims Thursday and new home sales, on Friday.
President Barack Obama is inaugurated Monday. Then Congress returns, and the Republican-controlled House is expected to set a vote to extend the debt ceiling limit until April 15, in an effort to temper one battle royale and turn the budget debate to spending cuts. The plan would require both the House and Senate to pass budget resolutions by then, and members' pay would be withheld if they don't pass it by the 15th.
The Past Week
CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, fell to 12.46 Friday, its lowest point in more than five years.
Earnings Reports for the Past Week
The reports, mostly from financial companies, weren't bad but weren't uniformly great either. There were some notable disappointments, especially from Intel (INTC), Citigroup (C ) and American Express (AXP).
The good news this past week came from JPMorgan Chase (JPM ), Goldman Sach (GS ), Morgan Stanley (MS) and General Electric (GE). All beat estimates and suggested 2013 will be a decent year, thanks to modest U.S. growth. GE specifically cited an economic rebound in China.
Intel earnings fell 27 percent to $2.5 billion or $0.48 per share, and its revenues declined three percent. Intel was hurt by weak PC sales, and its stock fell 6 percent Friday.
Apple (AAPL) has been the big worry this quarter, and its stock has lost nearly 30 percent since its September high. It has been hounded by concerns about growth potential for its key iPhone and iPad products. Analysts expect the company to earn $13.41 per share, a decline from last year's $13.87, on revenues of $54.7 billion, according to Thomson Reuters.
Google (GOOG), which missed expectations last quarter, is expected to report earnings of $10.61 per share on revenues of $12.44 billion. The miss was blamed on weaker than expected internet advertising and losses at its recently acquired cell phone business, Motorola Mobility. Google earned $9.50 per share in the fourth quarter last year.
Thomson Reuters said Friday that 62% of the 66 Standard & Poor's 500 companies that have reported fourth-quarter results have beaten Street estimates. That's about average. About 67% have beaten revenue estimates. That's a touch better than expected. So far, revenue growth for S&P 500 companies is about 5.7% over a year ago.
There's a little improvement in terms of preannouncements. So far, 103 S&P 500 companies have warned earnings will disappoint, compared with 32 signalling better-than-expected results. That's a ratio of 3.2. That's down from the third-quarter ratio of 3.77 but up from a year ago's ratio of 2.68.
The March crude oil contract gained $1.50 per barrel last week, and continues to act well and stronger than the energy sector. The next major resistance is in the $100 area.
The SPDR Gold Trust (GLD) gained $2 last week and closed back above its 20-day EMA. In December, it hit a low of $158.39, which corresponded to the 61.8% Fibonacci support level from the June 2012 high as well as the equality target (100%) using the decline from the October highs to the November lows.
This could be an important low, but the daily technical studies have not yet given new buy signals. For example, the OBV did make lower lows, and has just barely broken its downtrend (line a). Therefore, one more new low is still possible, but I will be watching closely.
The Global X Silver Mines ETF (SIL) has started to turn lower, and closed weaker for the week.
Economic Reports in the Past Week
Last week's data on new home construction reflected the highest rate of construction since mid-2008. Retail sales were also better than expected, suggesting the consumer was willing to spend more than most thought in December. This optimism was dampened a bit last Friday, when the preliminary reading on Consumer Sentiment declined slightly after December's big drop.
The Empire State Manufacturing and the Philadelphia Fed Survey both reflected softness in the manufacturing sector, which is still a concern. On the other hand, the number of unemployment claims dropped to their lowest level since early 2008. The stock market responded strongly to this report.
Interest rates moved higher in the first few days of 2013, but have since been drifting lower. Though the short-term trend is still toward higher rates, the long-term downtrend remains intact. This is making it hard for investors, as those who recently purchased TIPs or inflation-protected T-Notes are currently set to get a negative return.
The Week Ahead
Earnings and Company News in the Week Ahead
The fourth quarter reporting season gets into high gear in the week ahead, with 253 companies coming out with quarterly results, including 83 S&P 500 companies. The earnings season thus far has been relatively uneventful, but we will have a better idea by the end of this week; by then we will have seen 30% of the total fourth quarter reports.
While last week was all about banks, the focus this week is on the Technology sector, particularly Apple (AAPL) which reports after the close on Wednesday and investors will be looking for another record-breaking quarter. So will analysts, a majority of whom believe the Cupertino, Calif.-based tech and consumer gadgets company had its best quarter ever.
Apple’s stock has been slipping in recent weeks, falling well below its all-time high of $705 recorded in September. The stock closed down $2.68 on Friday at $500.
Analysts say the company will need another blowout quarter to get that upward momentum working again.
A total of eleven components of the Dow Jones Industrial average will be reporting.
Among the bellwether companies scheduled to report in the week ahead include Google (NASDAQ: GOOG), Travelers (NYSE: TRV), Johnson & Johnson (NYSE: JNJ) and Verizon Communication (NYSE: VZ) on Tuesday; McDonald’s (NYSE: MCD) and Netflix (NASDAQ: NFLX) on Wednesday; AT&T (NYSE: T), Bristol-Myers Squibb (NYSE: BMY) and Microsoft (NASDAQ: MSFT) on Thursday.
While Google and IBM are expected to show earnings growth, Microsoft’s earnings are expected to be below the year-earlier level.
The overall earnings picture for the Tech sector doesn’t look very inspiring. Total earnings for the 13% of total Tech sector companies that have already come out are down -11%. This is mostly due to the 27% drop in Intel (INTC) earnings in the quarter, but there is no shortage of earnings declines among the sector players that have reported results.
For the 87% of the Tech sector companies still to report results, total earnings are expected to be down -3.5%. The composite earnings growth rate, where we combine the companies that have already reported with those still to come, for Tech is for a decline of -3.3% in the fourth quarter, which compares to the sector’s actual earnings growth of 0.2% in the third quarter and 7.9% in the second quarter.
The key earnings to watch for in the week ahead will come from cyclical companies -- United Technologies (UTX) reports on Wednesday while Honeywell (HON) is due to report Friday.
Martin Luther King Day
Inauguration of President Barack Obama
Earnings: DuPont, Johnson and Johnson, Travelers, Verizon, IBM, Google, Kansas City Southern, TD Ameritrade,Advanced Micro Devices, Cree, CSX, International Game Technology, Norfolk Southern, Texas Instruments
• 10:00 am: Existing-home sales
• 10:00 am: Richmond Fed survey
Earnings: Apple, McDonald's, United Technologies, Abbott Labs, Air Products, Baker Hughes, Coach, General Dynamics, Motorola Solutions, Novartis, Praxair, Quest Diagnostics, St. Jude Medical, SAP, Siemens, Textron,Unilever, WellPoint, Altera, Amgen, F5 Networks, Lam Research, LSI, Netflix, Noble, Raymond James, Stryker, Sandisk,Symantec, Teradyne, Western Digital
• 9:00 am: FHFA home prices
Earnings: 3M, AT&T, Microsoft, Starbucks, Airgas, Alaska Air, AmerisourceBergen, Avnet, Baxter, Bristol-Myers Squibb,Brunswick, Celgene, Cypress Semiconductors, KeyCorp, Lockheed Martin, Nokia, Rayonier, Raytheon, Southwest Air,Stanley Black and Decker, Union Pacific, Xerox, ETrade, Juniper Networks, Tempur-Pedic, VeriSign
• 8:30 am: Initial claims
• 8:58 am: Markit manufacturing PMI
• 10:00 am: Leading indicators
• 11:00 am: Kansas City Fed survey
Earnings: Procter and Gamble, Halliburton, Honeywell, Kimberly-Clark, Oshkosh, Weyerhaeuser, Prosperity Bancshares, Covidien
• 10:00 am: New-home sales
Sentiment Effect in the Week Ahead
The action was mixed in the sentiment numbers last week. While individual investors became a little less bullish, the financial newsletter writers moved up slightly, to 53.2% bullish with just 22.3% bearish. These numbers are still not at danger levels, but are getting closer.
Cash to Stocks -- Housing Data a Key Component in the Week Ahead
Perhaps the strongest support for equities in the week ahead will come from the flow of cash from fixed income funds to stocks.
The recent piling into stock funds -- $11.3 billion in the past two weeks, the most since 2000 -- indicates a riskier approach to investing from retail investors looking for yield.
Housing stocks .HGX, already at a 5-1/2 year high, could get a further increase in the week ahead as investor’s eye data expected to support the market's perception that housing is the sluggish U.S. economy's bright spot.
Home resales are expected to have risen 0.6 percent in December; data is expected to show on Tuesday. Pending home sales contracts, which lead actual sales by a month or two, hit a 2-1/2 year high in November.
The new home sales report on Friday is expected to show a 2.1 percent increase.
The federal debt ceiling negotiations, a nagging worry for investors, seemed to be stuck on the back burner after House Republicans signaled they might support a short-term extension.
Concerns and Comparisons
For the past two weeks, the majority of the major averages have made little upside progress, though the market internals and some stocks have done much better.
The bias is clearly to the upside, even though much of Wall Street ponders the impact of the debt ceiling and voices their concerns over the stock market. Comments from House Republicans late last week suggests they may not force a showdown right now over the debt ceiling.
This performance chart of four key markets since the stock market low in March 2009 shows a comparison of returns. The Spyder Trust (SPY) and the iShares MSCI Emerging Markets Index (EEM) are about even, gaining 114% and 111% respectively. In April 2011, EEM was up 138% before it dropped sharply. The percentage chart for gold still shows an uptrend, but some are likely disappointed by the 77% gain.
Many investors are wondering whether 2013 will be another stellar year for junk bonds, which were up 15% for 2012. The chart from The Wall Street Journalbelow, shows the dramatic rise of the Barclays US Corporate High Yield Bond Index in 2012, and the further gains in early 2013.
The fact that $75 billion of junk bonds were sold in the first quarter of 2012 is pretty impressive, but many are alarmed that a large number of junk bonds are trading well over par. For the first time ever, the average yield has fallen below 6%, after spiking to 10% in late 2011.
Given the high price and lower yield, many of these bonds are becoming callable at prices below their current levels. The consensus view is that junk bonds are likely to return 6% to 8% in 2013.