The Week Ahead: J.P. Morgan, Wells Fargo, March Data, Fed Minutes
The Game Plan: Earnings Season Strategy -- Bright Outlook For Some Sectors!
Stock Market:! Bulls To Overcome Earnings Hurdle As Rally Slows!
Wall Street: Bearish Market Due To Economic Data!
by Ian Harvey
April 08, 2013
Signs that the economy has entered a soft patch could slow Wall Street's bulls but it may be earnings season that ultimately decides whether the stocks stumble or the rally moves forward in the week ahead.
First-quarter earnings reports will start to trickle out in the week ahead with just a few blue chip names reporting — Alcoa on Monday, and JP Morgan and Wells Fargo on Friday. There are also some important economic data, particularly retail sales on Friday, which could help show whether tax increases are pinching consumers and give some context to the weaker March economic reports, including Friday's dismal jobs number.
The addition of just 88,000 nonfarm payrolls in March was a game-changer for the markets, and chatter that the Federal Reserve may be moving to end quantitative easing sooner-than-expected abruptly faded.
The stock market's robust rally was slowing even before Friday's jobs report, but the red flag sent up by the weak payrolls data makes the path to more gains less secure.
Therefore, due to the poor economic readings in the past week, it means the bulls will have to look to earnings for a way to keep the rally going in the week ahead. The S&P 500 hit an all-time closing high on Tuesday last week, but lately defensive stocks have been leading the charge, and notable growth indexes are slipping.
This ”rotation” has many thinking the long-awaited market correction is nigh. A 3 percent decline in the Russell 2000 Index (RUT) this past week seemed to be a confirmation of the trend.
Momentum has been slowing a bit, and it will be interesting to see if this past week is just a one-week sell-off and the bulls are taking a breather.
In regard to consumer data, in the week ahead, retailers are expected to post a 1.9 percent rise in sales for last month, compared with a gain of 2.9 percent in March last year when same-store sales figures are published Thursday.
The Commerce Department posts its own retail sales figures on Friday, followed by the Thomson Reuters/University of Michigan survey of consumers.
• ‘The Past Week’
• ‘The Upcoming Week’
• ‘The Economy’
• ‘The Fed Ahead’
• ‘Earnings and Company News’
• ‘A List of Key Events’
• ‘The Spotlight on Certain Companies’
• ‘Pullback - Correction’
• Buy or Sell in April
• Pullback of Stock Market - Sell-Off Imminent!
• Market Rally Continues – Keep on Buying!
• Sectors Affected by an Extended Rally
• A List of Companies Reporting
• ”Bull Market To Continue Through 2013”
• Stock Market Correction Ahead - Providing Buying Opportunities!
• Stock Market Expectations in 2013
Traders will find more fuel for speculation in the week ahead when the Federal Reserve releases minutes from its last meeting. There are also more than a half dozen appearances by Fed officials in the week ahead, including Fed Chairman Ben Bernanke.
Bernanke will be at two forums, speaking Monday evening on the topic of maintaining financial stability at the Atlanta Fed's conference. His second address is Friday at the Fed's Community Development Research Conference, and his topic is creating resilient communities. Besides the Atlanta Fed conference, the Boston Fed holds an economic conference starting Friday.
San Francisco Fed President John Williams in the past week stirred concerns when he said the Fed could start tapering asset purchases this summer, several months sooner than anticipated by markets. But the string of weaker-than-expected data in the past week, capped by the sluggish jobs growth, changed the market tone dramatically.
However, it appears that the stock market is not down more due to the fact that the Fed is keeping its foot on the accelerator and for those who had been comforted by this monetary backstop of Fed easing, it doesn't look like it's going anywhere soon.
Introduction to the Week Ahead
Earnings season starts in earnest in the week ahead with two big banks, JPMorgan Chase & Co (JPM) and Wells Fargo & Co (WFC), reporting Friday. Details on Wells Fargo's earnings will be dissected for clues on the health of the housing market.
Meanwhile, more March retail data is expected to show economic weakness, the Fed is releasing its latest minutes and a handful of IPOs are slated to come out.
The earnings outlook for the current quarter is fairly weak, with growth expected to increase by just 1.6 percent, compared to 6.2 percent last quarter, according to Thomson Reuters. The quarter also has seen an unusually high number of negative warnings, with 107 negative revisions for companies in the S&P 500. Compared to the positive revisions, it is the worst pace in 12 years, according to Thomson Reuters.
However, most investors aren't expecting that the quarter is going to produce much more than single-digit figures, which is sort of good news as expectations are known -- investors are really waiting for the earnings season on balance to disappoint! The key will be company guidance and what they are saying about the rest of the year.
Overall, S&P 500 earnings are expected to have risen 1.5 percent last quarter, down from a 4.3 percent gain expected at the start of the year, according to Thomson Reuters data.
Companies have caught up on the lowered expectations, and negative outlooks have been predominant ahead of earnings season. In fact, the negative-to-positive guidance ratio from S&P 500 companies is at its highest since the third quarter of 2001, according to Thomson Reuters data.
At 4.7, the ratio is the sixth-highest among 69 readings dating to 1996.
The Economy in the Week Ahead
Economists expect the parade of weak March data to continue into the week ahead with a reading on retail sales.
Despite higher taxes biting into paychecks, shoppers showed unexpected spending power to start the first quarter. But economists think the spending spree ended in March as miniscule job growth and flat hourly pay kept a lid on income growth.
As the second quarter got underway this past week, it became clear from ISM manufacturing and services-sector data that growth was a bit slower than the first quarter. The jobs report reinforced that so any clue to the state of the slump will be important.
Prior to the past week, many economists were concerned that interest rates would rise and that earnings would be a problem, with interest rates being of bigger concern. But after a batch of soft economic data and a bond-market rally, which drove the 10-year yield below 1.7 percent, this concern has now shifted to earnings.
Economists expect the second and third quarters to be the slowest period of the year after a stronger first quarter, which could see growth of more than 3 percent. They also see no near- term change in the Fed's monthly purchases of $85 billion in Treasurys and mortgage securities, and some expect Fed comments to be more dovish following the disappointing jobs report.
It seems that the key data, for the week ahead will be retail sales, which is expected to be flat when reported Friday.
Markets will also stay on high alert for news from North Korea, which has sent ripples through markets in the past week.
• On Wednesday the minutes from the Federal Reserve’s March meeting will be released and investors will be looking for clues as to how determined board members are to maintain the current loose fiscal policies.
Fed Chairman Ben Bernanke and his easy money allies on the board have promised not to raise interest rates or curtail bond buying programs until the unemployment rate reaches 6.5% or the inflation rate hits 2.5%. Neither of those thresholds seems likely any time soon.
But inflation hawks on the board say historically low interest rates and cash flooding the market through bond purchases is sure to drive up inflation.
• Several key inflation gauges are due in the week ahead, including a measure of import and export prices on Thursday and the Producer Price Index on Friday.
• March retail sales figures will be released on Friday, as will an index of consumer sentiment. Total retail sales are forecast to fall 0.2% in March. Excluding autos, store receipts probably also declined 0.2%, says the median projection of economists surveyed by Dow Jones Newswires.
The Fed in the Week Ahead
The Federal Reserve could be the week ahead wild card. Indications of renewed support for loose monetary policy - or the slightest hint in the direction of tightening - will trigger wild moves in the market.
The minutes of the March 'Federal Open Market Committee - FOMC' meeting are due on Wednesday and market participants will look for insight into the debate regarding the amount and duration of bond purchases the U.S. central bank is executing monthly.
The hawkish argument - a reduction of stimulus - was dented by Friday's job report, so any mention of it in the minutes may not trigger panic. But more than a dozen speeches by various Fed officers in the week ahead could stir things up.
Currency investors will also be closely watching for the publication in the week ahead of the minutes from the Federal Reserve's latest policy meeting, which may provide some clarity on when the central bank will begin to ratchet down its bond buying.
While the Federal Open Market Committee voted to maintain its monthly purchases of $85 billion a month in securities at the March meeting, Fed Chairman Ben Bernanke said in his press conference that some participants discussed the costs of maintaining the program.
Earnings and Company News in the Week Ahead
This week brings in earnings reports from 34 companies, including 9 S&P 500 members. We will get Alcoa’s (AA) report after the close on Monday, but will have to wait till Friday morning to get the week’s key reports from J.P. Morgan (JPM) and Wells Fargo (WFC).
This earnings season could be full of upside surprises, judging from earnings and revenue trends in recent quarters.
That could mean that Estimates could continue to be conservative as this time around we're coming off the fiscal cliff!
The telecom and consumer discretionary sectors are expected to lead earnings growth, while energy and industrial stocks are expected to weigh down the S&P. Among the consumer discretionary stocks reporting in the week ahead are Bed Bath & Beyond (BBBY) and Ruby Tuesday (RT).
With overall sector trends in mind, Vanguard Telecom Services ETF (VOX) and Consumer Discretionary Select Sector SPDR (XLY) are expected to see an upward trend, while Energy Select Sector SPDR (XLE) and the Industrial Select Sector SPDR (XLI) are expected to take a hit.
Also, in terms of earnings growth, the banks are facing tough comparisons, as results in the first quarter of 2012 were very strong. The challenge for the group is to balance the net interest margin pressures and muted loan growth with continued momentum on the mortgage side and a healthy enough capital markets business. Wells Fargo and J.P. Morgan are both among the better-placed of their peers; many others are not so well positioned.
We will have to wait another week to get a good sense of banking sector results, but expectations are for total Finance sector earnings to decline by -3.8%, which would come after the sector’s +10.3% +23.3% earnings growth in the preceding two quarters, respectively. Tough comparisons are a major culprit here -- the first quarter of 2012 was the strongest quarter for the sector since 2009.
In absolute dollar terms, the Finance sector’s profitability level in the first quarter of 2013 is the second best after the first quarter of 2012. The unfavorable comparison aspect is particularly pronounced for AIG (AIG) and Bank of America (BAC). Excluding these two companies, total Finance sector earnings would look better.
Total earnings for companies in the S&P 500 are expected to be down -2.6% from the same period last year, which reflects -2.4% declines in revenues and essentially flat margins. Tough comparisons account for the bulk of the weak growth outlook for the first quarter – the first quarter of 2012 still remains the highest point for quarterly earnings since the start of this earnings cycle in 2009. Total earnings were up +2% in the fourth quarter.
Unlike the concentrated weakness in Finance, the -5.7% decline in Tech sector earnings is relatively broader-based, but is still heavily concentrated in Apple (AAPL), Intel (INTC) and Seagate Technology (STX), partly offset by strength at Microsoft (MSFT). But even if we exclude these four companies from the Tech sector’s first quarter tally, earnings growth would still be negative at -2.9%.
Investors don’t seem to be overly concerned about lack of earnings growth in the first quarter as they are looking ahead to the resumption of growth later this year. The consensus view is that earnings growth in the first half of 2013 will be flat, but they are looking for +9.5% growth in the back half of 2013 and full-year 2014. And as long as that outlook remains intact, they will remain content with a weak growth pace in the first quarter.
But it will likely get harder to stick to that outlook if companies can’t provide reassuring guidance for the rest of this year. We haven’t seen much positive guidance over the last two quarters, but companies will have to do a bit better this time around if current expectations for the remainder of the year are to hold up.
Among a group of retailers reporting in the week ahead are Bed Bath & Beyond Inc. (BBBY), Rite Aid Corp. (RAD), CarMax Inc. (KMX), Family Dollar Stores Inc. (FDO) and Pier 1 Imports Inc. (PIR).
• J.P. Morgan Chase & Co. (JPM), the nation's largest bank by assets, has worked to put its "London whale" trading debacle behind it after the incident cost the firm at least $6.2 billion in losses and damaged its reputation as one of the industry's best risk managers.
To that end, the company slashed Chief Executive James Dimon's 2012 pay and came through with a 53% rise in income to $5.69 billion for its fourth quarter. Analysts surveyed by Thomson Reuters expect the bank to post 7% higher earnings for its first quarter report next Friday, though a 5% reduction in revenue.
• Wells Fargo & Co. (WFC) also will be reporting Friday, with the market expecting an 18% rise in its bottom line.
• Alcoa Inc. (AA), generally known as the harbinger of earnings season, reports Monday and is expected to post weaker earnings. The aluminum company's recent results have been hampered by persistently low aluminum prices, due in part to weak demand in Europe.
Constellation Brands Inc. (STZ)., maker of Robert Mondavi wines and Svedka vodka, has become a bigger player in Anheuser-Busch InBev's (ABI.BT, BUD) $20.1 billion bid to buy out Mexican brewer Grupo Modelo SAB de CV's (GPMCY, GMODELO.MX), after the Justice Department sued to stop the tie-up. Constellation had been set to take Grupo Modelo's stake in beer supplier Crown Imports LLC for $1.85 billion. Under new terms reached last month, Constellation now stands to acquire Modelo's Piedras Negras brewery in Mexico, as well as perpetual U.S. licensing rights to five Modelo brands, raising its purchase by $2.9 billion. The beer companies said the revised deal would preserve Modelo as an independent competitor and address the issues raised by the government.
• Rite Aid, the No. 3 U.S. drugstore, in December said it swung to a quarterly profit for the first time in five and a half years, as shoppers filled more prescriptions and stuck around to buy more items in renovated stores. It has also benefited from cost-cutting efforts, refinancing billions in debt and a general improvement in same-store sales. However, analysts expect the company to post a loss for its fourth quarter on Thursday, as same-store sales declined in recent months.
• Residential Capital LLC will seek bankruptcy-court approval to pay out some $7 million in bonuses to more than 100 employees, including eight executives.
ResCap, which has used its Chapter 11 case to sell its mortgage-servicing operations and loan portfolio in deals that brought in more than $4 billion, said the employees are critical to its efforts to transition its assets to their new owners. It will ask the Manhattan bankruptcy court to approve the bonuses at a Thursday hearing.
ResCap sought Chapter 11 protection last May and has sold its mortgage-servicing platform to a subsidiary of Ocwen Financial Corp. (OCN) and Walter Investment Management Corp. (WAC). Berkshire Hathaway Inc. (BRKA, BRKB) purchased a portfolio of ResCap's loans.
• Home builder Taylor Morrison Home Corp. will be among a handful of initial public offerings slated to come out in the week ahead, as it looks to sell 23.8 million Class A shares for between $20 to $22 each.
With home prices, sales and construction all trending higher, new stocks tied to the housing market have been in strong demand. TRI Pointe Homes LLC (TPH)--the first builder to launch an IPO since 2004--and building-materials company Boise Cascade Co. (BCC) have both seen their stocks rise substantially since their debuts.
• Also, Puerto Rico-based transaction-processing company Evertec Inc. plans to offer 21.1 million shares at $18 to $20 a share.
A List of Key Events for 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: Alcoa
• 8:30 am Cleveland Fed President Sandra Pianalto on economy
• 7:15 pm Fed Chairman Ben Bernanke at Atlanta Fed on financial stability
• Earnings: PriceSmart
• 7:30 am NFIB small business survey
• 9:30 am Richmond Fed President Jeffrey Lacker
• 10:00 am Job opening data
• 10:00 am Wholesale inventories
• 1:00 pm Atlanta Fed President Dennis Lockhart
• 1:00 pm $32 billion 3-year note auction
• Earnings: CarMax, Constellation Brands, Fastenal, Progressive, Bed Bath and Beyond, Ruby Tuesday, Chevron (interim results)
• 7:00 am Mortgage applications
• 8:20 am Atlanta Fed's Lockhart
• 8:30 am Minneapolis Fed President Narayana Kocherlakota
• 1:00 pm $21 billion 10-year note auction
• 2:00 pm FOMC minutes
• 5:00 pm Dallas Fed President Richard Fisher on economy
• Earnings: Commerce Bancshares, Pier 1 Imports, Rite Aid, JB Hunt Transport
• Monthly chain store sales
• 6:00 am Philadelphia Fed President Charles Plosser
• 8:30 am Initial claims
• 8:30 am Import prices
• 8:30 am St. Louis Fed President James Bullard
• 1:00 pm $13 billion 30-year bond auction
• Earnings: JPMorgan Chase, Wells Fargo, Infosys, Shaw Communications
• 8:30 am PPI
• 8:30 am Retail sales
• 8:45 am Boston Fed President Eric Rosengren at conference
• 9:55 am Consumer sentiment
• 10:00 am Business inventories
• 12:30 pm Fed Chairman Bernanke at Fed's Community Development Conference
International Economic Reports in the Week Ahead
Monday - Chinese inflation numbers, Germany reports industrial production and the equivalent of the Japanese Federal Reserve minutes.
Tuesday - The China Merchandise Trade Balance
A Pullback – Correction!
Many strategists see an overdue pullback for stocks, but belive it should be a shallow three- to five-percent move because of the large amount of cash waiting to come into the market, and the fact that the Fed remains supportive. They see the S&P 500 at 1650 by year end.
This situation will become clearer after retail sales in the week ahead, and the consumer sentiment report from University of Michigan is presented. Also, company earnings in the previous quarter were good in the sense that they were soundly beating expectations, but as for earnings growth, they weren't so positive. And we could also start to see the (impact of) tax increases, which hadn't hurt consumer behavior initially.
There could also be an expected delayed reaction to some of the tax hikes. It's not necessarily the end of the world. It's a bump in the road -- as there was enough money waiting on the sidelines that they might see this as a buying opportunity so if the markets come off, there are still positives in the underlying data. With the housing market doing okay -- it's a slow road to recovery!
Conclusion for the Week Ahead
Stock markets have defied economic trends in recent months with major markets moving higher despite mixed data in housing, labor and retail. The markets got a jolt on Friday when the March jobs report came in well below expectations, leading to a selloff.
Earnings would have to be extraordinarily disappointing in an array of sectors for it to impact the months-long rally on Wall Street, and that’s not likely to happen this quarter.