The Week Ahead: More Hustling Expected!
The Game Plan: Q1 Earnings Season In The Spotlight – Earnings, Earnings, Earnings!
Stock Market: Are Stocks Outpacing The Economy?
Wall Street: Ride The Bull To More Profit – A Year of Returns Before April!
by Ian Harvey
April 15, 2013
Earnings will be the focus, as markets in the week ahead, contemplate the economic soft patch that has spooked commodities investors and is driving buyers into Treasurys.
About a third of the Dow Industrials and 71 S&P 500 companies—across the banking, consumer, pharmaceutical, technology and industrial sectors—report earnings in the week ahead. Investors will mine those reports for any indication of what corporate America expects to see in the coming months, and whether it is confirming expectations for a short-term, mid-year dip in economic growth.
Earnings expectations are fairly flat but earnings could end up being about three percent higher this quarter for S&P 500 companies. Technology stocks may do well this quarter, since the expectations are already low and the stocks have been lagging.
There is a relatively light economic calendar, but the Empire state and Philadelphia Fed surveys will give a fresh look at regional activity, and the Fed releases its beige book on economic activity Wednesday.
• ‘The Past Week’
• ‘The Upcoming Week’
• ‘The Economy’
• ‘Earnings and Company News’
• ‘A List of Key Events’
• ‘The Spotlight on Certain Companies’
• ‘A Positive Outlook Still!’
• ‘Expectations for the Stock Market’
• ‘Sentiment Effect on Stocks’
• ‘The NYSE Composite’
• 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
There are many Federal Reserve officials speaking in the week ahead, with a good mix of hawks and doves. The Fed has been a major topic in markets since Fed officials began to talk about "tapering" their "Quantitative Easing (QE3)" program. Some Fed officials believe "tapering" the asset purchases could begin in the summer, and the program could be ended by the end of the year, sooner than the market expects.
However, Fed Chairman Ben Bernanke and other dovish Fed leaders have more than balanced that view with comments that the Fed is watching the economy and will do what it needs. The Fed is purchasing $85 billion in Treasury and mortgage securities each month.
The combination of those dovish comments and a recent batch of disappointing economic reports has steered market expectations' to expect the Fed will continue easing until there is a positive change in the economy and jobs outlook.
Economists expect to see a drop-off in growth in the second quarter, to a level under 2 percent, after growth of 3 percent or more in the first quarter. But some see a pickup coming in the third quarter, and most expect it by the fourth quarter.
Also, in the week ahead, the markets are watching saber-rattling in North Korea and the tone of news from Europe, particularly the situation in Slovenia – will it go the way of Cyprus?
The 10-year yield is down to 1.72, which means that the market has definitely priced in the fact that the data is not going to surprise to the upside anytime soon.
• The New York Fed’s Empire State survey with expectations of a modest pullback from the previous level.
• The April homebuilder sentiment index is expected to show an increase after coming up short the last two months.
• The CPI is expected to remain unchanged at the ‘headline’ level and increase by +0.2% on the ‘core’.
• Housing Starts are expected to grow at 936K pace, up from February’s 917K level. • Industrial Production is expected to grow at 0.2% pace after February’s strong 0.8% rate.
• Weekly Jobless Claims were down big last week after rising big the week before. It will be interesting to see if this key number will turn up in the week ahead.
• The April Philly Fed survey is expected to show an improvement from March’s level.
Earnings and Company News in the Week Ahead
The pace of reporting accelerates in the week ahead, with 178 companies coming out with Q1 results, including 71 S&P 500 members.
The earnings reports thus far have been mixed. It is perhaps premature to pass judgment on the Q1 earnings season at this stage, though the underwhelming results from J.P. Morgan (JPM) and Wells Fargo (WFC) do provide us with a good-enough preview of what to expect from the banking group this week. We’ll know more soon enough; by the end of this week we will have seen Q1 results from one-fifth of the S&P 500 members.
The week ahead’s reporting docket is heavy with Finance sector results, ranging from money-center banks like Citigroup (C) and Bank of America (BAC) to brokers like Goldman Sachs (GS) and Morgan Stanley (MS) and regional operators like US Bancorp (USB) and PNC Financial (PNC). But we have plenty of bellwethers from other key sectors on deck as well, which makes the week ahead reports a fairly representative sample.
From Google (GOOG), IBM (IBM), Intel (INTC) and others in the Technology sector to Coke (KO) and Pepsi (PEP) in Consumer Staples and Transportation bellwethers like Union Pacific (UNP) and CSX Corp (CSX) and many more, the week ahead reports span the full spectrum of the economy. As such, it wouldn’t be unfair to characterize this as the make-or-break week for Q1 earnings season. The trends established in the week ahead will likely carry through the rest of this reporting cycle with only minor changes.
The aggregate earnings picture for the 471 S&P 500 reports still to come is for earnings decline of -3.5%, which compares to +1.1% earnings growth for the same group of companies in the preceding quarter. The composite view is showing total earnings decline of -1.6% on -0.5% drop in revenues. This compares to +2% total earnings growth in 2012 Q4 on roughly equivalent revenue gains.
It is expected that if this earnings season turns out to be along the lines of what we saw in the last two reporting seasons, then it wouldn’t change the market’s recent trajectory.
The recent ‘norm’ has been that about two-thirds of the companies would beat expectations, earnings and revenue growth would be essentially non-existent and the overall tone of guidance would be on the weak side. If we see a repeat performance, then estimates for Q2 (currently for up +3.5%) will come down, but estimates for Q3 (currently at +7.5%) and Q4 (currently at +14.5%) will hold up.
Anything different than this ‘norm’ -- significantly better or worse -- will likely have an impact on the market – either positive or negatively. Expect the Q1 earning season to be not much different from what we have been seeing in recent quarters, but the odds of a materially weak earnings season are better than the alternative.
• Intel (NASDAQ: INTC) is set to kick off semiconductor earnings on Tuesday, April 16 after the close. Intel is expected to report first quarter EPS of $0.41 vs. $0.53 a year ago. On the top line, analysts are expecting $12.61 billion in revenue compared to $12.91 billion in the same period a year ago.
• Internet giant Google (NASDAQ: GOOG) is expected to report first quarter results Thursday, April 18 also. Google is expected to report first quarter EPS of $10.69 vs. $10.08 a year ago. Revenue is expected to have grown to $14.22 billion from $8.14 billion in the same period a year ago.
Analysts at Goldman Sachs published their view on the company ahead of the report. "We are modeling consolidated revenue and non-GAAP EPS of $14.58bn and $10.69. We are forecasting Google standalone revenue of $13.29bn vs. consensus of $12.95bn. For Motorola we are modeling $1.29bn vs. consensus of $1.39bn. We are modeling non-GAAP operating margin of 30.2% vs. consensus of 30.3%."
"Overall, we expect Google standalone revenues roughly in line with consensus if not slightly ahead, as our checks indicate ad spend came in largely as expected for the quarter. That said, we continue to view Motorola as a potential downside risk as Google works off the legacy Motorola product pipeline."
"We continue to expect gross and operating margins to face ongoing pressure due to the increasing portion of mobile queries along with investment in smartphone and tablet offerings. Our 12-month price target remains $760 (DCF, P/E, EV/sales). At around $790 Google trades at 18X our 2013E non-GAAP EPS of $43.35 (consensus: $45.51)."
• Wrapping up the large technology earnings in the week ahead, eBay (NASDAQ: EBAY) is expected to report first quarter results after the close on Wednesday, April 17. Analysts are expecting eBay to report EPS of $0.62 vs. $0.55 a year ago. Revenue is expected to rise to $3.76 billion from $3.28 billion in the same period a year ago.
"With the bullish, long-term-focused analyst day close behind us, we expect eBay's Q1 report to focus mostly on near-term trends," said analysts at Canacord Genuity. "We note that the setup for this quarter continues the trend of consensus at the upper end or above guidance. In general, we believe estimates are reasonable for Q1 and Q2."
"We believe expectations for Q1 are reasonable as we model y/y revenue growth deceleration to 14% from 18% in Q4. We note that from the analyst day, the outlook for Payments volumes and revenue was ahead of our model and seemed to be among the more optimistic of management's projections. Our price target is unchanged at $67 and is based on 20x our 2014 EPS estimate of $3.34."
• McDonald's is expected to report first quarter results pre-market Friday, April 19. McDonald's is expected to report EPS of $1.27 vs. $1.23 a year ago on revenue of $6.59 billion vs. $6.55 billion a year ago.
Analysts at Morgan Stanley commented on the results, noting currencies could pose a risk to results. "Recent weakening of currencies (esp GBP, JPY) compel us to modestly lower FY13e to $5.75 from $5.78."
"Our $1.28 EPS est is roughly in line with consensus ($1.27) but is still just +3-4% Y/Y, in line w last Qs growth. Our estimate reflects margin pressures from delevering (EBIT margins down 60 bp on a global comps down 1%, the first neg Q since '03). Japan, which is a JV and only 2% of op inc., nonetheless also had a poor 1Q, further exacerbated by a 12% Y/Y decline in the Yen. We'd note that both sales comparisons as well as EPS growth compares ease substantially in the coming quarters, and we'd expect commensurate EPS growth acceleration."
"In Europe, we expect Mar comps to be flattish, but the Q will be down ~1%, and margins will likely be under pressure form that plus higher commodity costs. With Japan comps down ~10%, APMEA is likely to see -4-5% comps for the Q though March did improve. Lowering FY13e to $5.75 from $5.78, but just on currencies; similarly FY14e to $6.29 vs $6.33 prior. Rolling base case over to 16x '14e, or $101."
• Chipotle Mexican Grill is expected to report first quarter EPS of $2.14 vs. $1.97 a year ago on Thursday, April 18 after the close of trading. Revenue is expected to grow to $724.87 million from $640.6 million a year ago.
Analysts at Morgan Stanley expect modest results for the quarter but see future guidance as key. "We like CMG's set up into the 2H13 as pricing is added, catering layers in and comparisons ease. Comp momentum exiting Q & related commentary likely more relevant to shares than headline 1Q numbers, which could be skewed. We estimate ~0% comps for the Q."
Seven IPOs are on tap for the week ahead, looking to raise $1.9 billion.
• HD Supply Holdings (12 percent owned by Home Depot) filed for a large ($1 billion) IPO. The company went private for $8.5 billion in 2007.
• Payment processing company Evertec (to be traded under the symbol "EVTC") priced 25.3 million shares at $20, the high end of the price range of $18 to $20 a share.
• Rally Software ("RALY") priced 6 million shares $14. That is above the initial share count of 5.75 million and above the price talks of $11 to $13 a share. Rally provides cloud-based systems for Agile software development projects, which is a methodology for best practices in developing software.
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: Citigroup, Charles Schwab, First Republic Bank
• 8:30 am: Empire State survey
• 9:00 am: TIC data
• 10:00 am: NAHB
• Earnings: BlackRock, Coca-Cola, Goldman Sachs, Johnson & Johnson, Intel, CSX, Yahoo, Comerica, Northern Trust, U.S. Bancorp, TD Ameritrade, W.W. Grainger, Linear Tech
• 8:00 am: New York Fed President William Dudley
• 8:00 am: Chicago Fed President Charles Evans
• 8:30 am: CPI
• 8:30 am: Housing starts
• 9:15 am: Industrial production
• 12:00 pm: Fed Gov. Elizabeth Duke
• 4:00 pm: Minneapolis Fed President Narayana Kocherlakota
Earnings: Bank of America, American Express, eBay, Bank of NY Mellon, Burberry, St. Jude Medical, PNC Financial, Mattel, Abbott Labs, Sandisk, SLM, Textron, Huntington Bancshares, Crown Holdings, Noble, Quest Diagnostics
• 7:00 am Mortgage applications
• 9:30 am St. Louis Fed President James Bullard
• 12:00 pm Boston Fed President Eric Rosengren
• 2:00 pm Beige book
• 4:00 pm Treasury Secretary Jack Lew on global economy at Johns Hopkins
Earnings: Google, Microsoft, IBM, Morgan Stanley, PepsiCo, Philip Morris, Advanced Micro Devices, Capital One, Intuitive Surgical, ETrade, Chipotle, United Health, Verizon, Nokia, KeyCorp, AutoNation, Blackstone, Sherwin-Williams, Fifth Third, PPG, Sherwin-Williams, Snap-on, Union Pacific, Amphenol, Nucor
• 8:30 am: Weekly jobless claims
• 9:00 am Minneapolis Fed's Kocherlakota
• 9:30 am: Richmond Fed President Jeffrey Lacker
• 10:00 am: Philadelphia Fed survey
• 10:00 am: Leading indicators
• 12:00 pm: Fed Gov. Sarah Raskin
• Earnings: General Electric, McDonald's, Kimberly-Clark, SAP, State Street, UnderArmour, SunTrust, Rockwell Collins, Schlumberger
• 12:00 pm: Fed Gov. Jeremy Stein
International Economic Reports in the Week Ahead
On the economic calendar in the week ahead, the German ZEW Economic Sentiment Index is expected to be released as well as U.S. CPI inflation and the British employment change report. In addition, British retail sales data is expected as well as the Philly Fed Index, Conference Board Leading Indicators, and Canadian CPI.
The technical picture for the stock market is still positive, as is the view for the economy. However, currently the prices may not be supported by the economic data in the next few weeks.
If the stock market completes a short-term top in the coming weeks, as it has in the past three years, it would allow for stock prices to get back in line with the economy.
The market still needs a stronger technology sector to help push it to much higher levels, and this is a strong seasonal period for many of the technology industry groups.
However, this chart of PC shipments from The Wall Street Journal confirms that tablets and phones are the future as PC sales slump. While tech giants like Intel (INTC) and Microsoft (MSFT) are trying to adapt to this trend, they have some catching up to do.
This comparison chart of the PC makers since the start of the bull market shows that despite its decline from the 2012 highs, Apple (AAPL) is still leading—up 403%, which is almost three times better than IBM's 145% gain.
The Spyder Trust (SPY) is not far behind IBM, while Dell (DELL) is up just 67% and Hewlett-Packard (HPQ) is down almost 23%. Of course, this is just one part of the technology sector, but it does suggest we should look out for new bellwether tech stocks.
Expectations for the Stock Market
We are now only 3 1/2 months into the new year and stocks are up 11 to12 percent – which may mean that there is not a whole lot left and a pullback is inevitable, or maybe things really get even better than we thought and the targets predicted are exceeded and the bull rally continues!
The more recent Reuters poll in March showed some analysts had revised targets following the strong start to the year, with the S&P above the midyear target for 21 of 34 analysts surveyed and the full-year target for 18 of 43 analysts surveyed.
The run has been notable for its resilience. As investors buy into weakness, dips are short-lived while bears are forced to cover short positions and asset managers chase performance.
So far this year, the S&P has only experienced three consecutive losing sessions once, and the deepest "correction" was a brief 2.8 percent slide in late February.
The call for a correction may not be happening, with data in the last six weeks not being as weak as some expected, and the data that has been below par, shows that the equity market has managed to look past it, anyway.
JP Morgan estimates that 2013 is currently the worst year for active-manager performance since 1995, with an estimated 68 percent of funds falling short of their benchmark. Fund managers, as a result, are taking on more risks in order to play catch-up.
Sentiment Effect in the Week Ahead
The bearish commentary in the financial media seems to have died down. Those who have been calling for a top since early February appear to have thrown in the towel. Clearly, the powerful rally last Wednesday that accompanied the early release of the FOMC minutes squeezed some of those on the short side.
Also reported was the dramatic 16.2% plunge in bullish sentiment for the AAII. It was reported at its lowest level since March 5, 2009.
Bearish sentiment went to 54.5 percent, up 26.3 points from the prior week, the highest pessimism level since July 8, 2010. Some are noting that there was an unusually low level of respondents this week ... maybe the bears are just more motivated!
Conclusion for the Week Ahead
The foundation of the rally, broadly, looks firm. Therefore, it should be sensible to continue to buy leaders – however, the other side of the story exists, with those economists insisting that it time to buy the laggards.
Those in the camp of buying the laggards put forward the argument that a ”rotation” in the market is expected. That consumer staples are expensive and probably overbought -- consumer staples have low growth expectations and high multiples – an unappealing scenario. They also suggest avoiding utilities – another sector that's attracted buyers. Instead buy laggards such as semiconductors and US multinationals.
Now, viewing the opposite argument – where a fundamental catalyst for consumer staples and utilities exists -- that is, the recent advance has been generated by a quest for yield and as long as interest rates remain low, these sectors attract new buyers. Stick with what's working – in other words, buy the leaders. The belief that price is truth and the truth is that utilities and consumer staples are performing well -- buy high and sell higher.
Which direction do you wish to take in your trading strategies for the week ahead?