The Week Ahead: Stocks Continue To Rally -- Few Roadblocks To Equities' Climb After New High!
The Game Plan: Earnings -- Investors Watching Anadarko, Activision, and Whole Foods!
Stock Market: Round Numbers Fall!
Wall Street: Speeches By Fed Members!
by Ian Harvey
May 06, 2013
With Friday's payrolls report serving as a springboard to lift Wall Street stock indexes to fresh all-time highs, investors are left to contemplate whether the gains will fizzle or if the upward momentum will continue in the week ahead.
Stocks enter the week ahead, energized by new highs, and less concerned about the economic headwinds that have been worrying markets.
But that doesn't mean traders have abandoned the debate about whether investors will "sell in May and go away," pocketing some of the 13 percent gains in stock prices year-to-date.
The economy is certainly better than expected and the stock market is going to continue a bit here -- ignoring the 'sell in May' argument!
In the week ahead, the pace of the earnings season will be slower, but there are still dozens of S&P 500 companies, including entertainment companies like Disney and News Corp, and energy names like Marathon Oil, Anadarko and Holly Frontier. Whole Foods and Groupon also report. Berkshire Hathaway also holds its annual meeting Saturday, and investors will be watching for comments from Chairman Warren Buffett.
There is very little on the economic calendar in the week ahead, but economists will be watching consumer credit, wholesale trade and Thursday's weekly jobless claims, as well as inflation data from China Wednesday.
One of the highlights of the week ahead could be the half dozen or so Federal Reserve speeches including Fed Chairman Ben Bernanke who speaks on monitoring finance at Chicago Fed Annual Conference on Bank Structure in Chicago Friday morning. Kansas City Fed President Esther George, the FOMC's lone dissenter, speaks Friday afternoon and Richmond Fed President Jeffrey Lacker speaks Thursday.
• ‘The Past Week’
• ‘The Upcoming Week’
• ‘The Economy’
• ‘The Fed Ahead’
• ‘Round Numbers Fall’
• ‘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’
Two events of the past week should carry over and act as positives. One is that the Friday's April jobs report was not as dire as many investors expected, and while job growth looks slower, it does not signal an economy falling off a cliff. There were also large revisions to February and March reports that were encouraging. The 50,000 added to March's number pushed nonfarm payroll growth to 138,000, and February's report, already a strong 268,000, was revised to 332,000.
The other factor is the Fed, which reaffirmed for markets Wednesday, in the past week that it will continue to ease by keeping rates low and continuing its $85 billion in monthly purchases of Treasurys and mortgage securities. But it also signaled that its asset purchase program has a two-way lever, and that it could increase its purchases, just as well as decrease them, if the job market or inflation warrants it. The Fed met in the past week, the day before the European Central Bank cut its main refinance rate, to a half percent, as expected. The refinancing rate, now at a record low, applies to more than 850 billion euros in ECB loans.
NOTE: 506% PROFIT SO FAR THIS YEAR!
After last week's action, the focus is clearly back on the upside.
…..” The S&P 500 Friday, of the past week, vaulted above the psychological 1600 level for the first time, after April's better-than-expected jobs report. The Dow broke through the major milestone of 15,000 for the first time though it closed below it. At the same time, bond yields that were testing the lows of the year just Thursday, jumped, taking the 10-year yield to 1.74 percent….”
- The Past Week in the Stock Market – May 06, 2013
The Fed in the Week Ahead
Bernanke’s speech next Friday at a banking conference in Chicago will be closely watched for hints of what direction the central bank is leaning following a better-than-expected April jobs report.
On Friday, the Labor Department said the U.S. economy added 165,000 jobs in April, more than economists had predicted and enough to allay fears that the job market was retreating rather than accelerating. Perhaps more importantly, the Labor Department revised upward its February and March job counts by a total of 114,000.
The relatively good news has the potential to change the Fed’s conversation -- once again. Prior to March’s disappointing jobs report, the Fed was suggesting it might scale back its easy money policies as the economic recovery gained traction. As lousy data piled up through April the conversation shifted and the Fed said this week it would consider expanding its bond buying programs aimed at easing lending and spurring economic activity.
The better-than-expected April report, plus the upward revisions for the two prior months, could conceivably shift the Fed’s conversation again. Analysts will be parsing Bernanke’s words for any hints on Friday.
Also Friday is a speech by Kansas City Federal Reserve President Esther George, the lone dissenter in the Fed’s recent decision to continue its bond buying program at its current pace of $85 billion per month. George is a so-called inflation hawk and her views Friday will also be closely watched.
Richmond Federal Reserve President Jeffrey Lacker is giving a speech on Thursday focusing on ending “too big to fail” banks. Philadelphia Fed President Charles Plosser is also giving a speech on Thursday. Plosser will address monetary policy.
Round Numbers Fall
Investors plowed through another benchmark Friday, taking out the ’round-number’, 15,000 on the Dow, in a move that could set up for a short-term market lull.
Crossing psychological hurdles often has led to sideways trading amid some profit-taking and pulse-checking to see what's next.
It happened in December when the stock market passed 13,000 and traded in a volatile range over the next month.
It happened again in February when the Dow passed through 14,000.
So it could happen now with the Dow Jones industrial average crossing 15,000 Friday as traders bet that the economy may be able to evade a spring slowdown.
Earnings and Company News in the Week Ahead
The week ahead is the last major reporting week of the Q1 earnings season, with results from 625 companies, including 46 S&P 500 members. This includes industry leaders like Disney (DIS), News Corp (NWSA), Priceline (PCLN), Whole Foods (WFM), Groupon (GRPN) and many others. By the end of the week ahead, we will have Q1 earnings reports from 451 S&P 500 companies. The Retail sector will be the only group by the end of the week that will have more than half of its Q4 results still awaited (retailers typically have fiscal Q4 period-ends in January).
The aggregate earnings picture for the 97 S&P 500 reports still to come is for an earnings decline of -2.8%, which compares to +2.1% earnings growth for the same group of companies in the preceding quarter. The composite growth rate for Q1, where we combine the results of the 405 companies that are out with the 97 still to come, is for a rise of +1.7% in total earnings on -1% lower revenues. In terms of dollar earnings levels, composite earnings in Q1 total $249.9 billion, a new quarterly record, surpassing the prior high mark of $245.8 billion in Q1 2012. This will be the highest quarterly total since the current earnings cycle started back in 2009 (is that why the market is at a new all-time high as well?).
Expectations for the coming quarters have started coming down, though they still represent a material improvement in the earnings picture. Total earnings in 2013 Q2 are now expected to be up +1.7% on -0.2% lower revenues. This is a drop from the +3.9% total earnings growth expected in Q2 on +0.5% higher revenues less than four weeks ago.
A similar though less pronounced downward adjustment process has gotten underway for the second half of the year as well. Current expectations are for total earnings growth of +5.9% (down from +7.6% in early April) in 2013 Q3 and +13.6% (down from +14.3% in early April) in Q4. For full years 2013 and 2014, total earnings are expected to be up +6.1% (down from +6.8%) and +11.3% (down from +11.7%).
The Spotlight on Certain Companies in the Week Ahead
Unfortunately, the market is a cruel taskmaster -- no sooner do we go to all-time highs then we have to evaluate what's next in an attempt to find more opportunities and avoid pitfalls.
Following are the catalysts that could move stocks and perhaps the entire market through Friday May 10th.
• On Saturday, the Berkshire Hathaway (BRK.B) annual meeting will commence and Warren Buffett will likely have a lot of positive things to say. This may be the launchpad for the stock's next move higher.
It is expected that 35,000 people will venture to Omaha to hear Warren Buffett opine on the state of the world at the Berkshire-Hathaway annual meeting. Each year he tells his investors what he thinks is going to happen and how shareholders will benefit from it.
Because Buffett is perhaps the most influential investor alive today his commentary is largely expected to influence many areas of the market.
Looking at Berkshire stock specifically, the recent technical analysis suggests the stock could break out.
• Turning to Monday, both Anadarko Petroleum (APC) and EOG Resources (EOG) will be reporting.
Anadarko Petroleum will be one of the more closely watched names when the company releases its financial results after the closing bell. Wall Street analysts expect the company to earn $0.94 per share, compared to EPS of $0.92 in last year's corresponding quarter. Revenue for the quarter is estimated to be up 1.10 percent to $3.49 billion. Year-to-date, Anadarko shares have rallied nearly 17 percent heading into next week.
Last week, the company announced success at its Phobos site, with the discovery well indicating 250 feet of net pay. Anadarko is a 30 percent owner in Phobos. In a report from April 25, analysts at Deutsche Bank also noted that Anadarko's success from its deepwater program "continues to garner interest." The firm has a Buy rating on the shares and a $101.00 price target. Anadarko closed on Friday at $86.60. Bank of America Merrill Lynch analysts also released a research update on the independent oil and gas company last week, reiterating its Buy rating and $120.00 price target on the stock.
• Tuesday brings earnings from Whole Foods (WFM) and Walt Disney (DIS).
After the closing bell on Tuesday, grocer Whole Foods will report its quarterly results. Current consensus EPS estimates for the company are set at $0.73 versus $0.64 last year. Revenue is expected to rise 13.40 percent to $3.03 billion. Heading into the key quarterly update, Whole Foods shares have been struggling a little. In 2013, the stock is roughly unchanged, underperforming the broader market.
In an earnings preview report, analysts at Deutsche Bank said that Whole Foods "remains very well-positioned to capitalize on growing secular demand for healthier natural/organic food and can triple its U.S. store base over time, driving high-teens/low 20% EPS growth for several years." The firm has a Buy recommendation on the stock and a $100.00 price target. Whole Foods closed Friday's trading session at $91.46.
Whole Foods may see some pressure in the short term, but it’s still a good company in the longer term.
Media will also steal the spotlight on Tuesday when Disney reports. Disney has a film roster that's red hot while the theme parks and ESPN are practically printing money.
• On Wednesday it's Continental Resources (CLR), Heckman (HEK) and Activision Blizzard (ATVI) in the spotlight. Continental should shine, while Heckman may be sluggish this quarter due to skepticism over natural gas.
. Video-game publisher Activision Blizzard is due to release its quarterly earnings results on Wednesday after the close. Investors will be watching the stock closely after a big run-up in the shares in 2013. Year-to-date, ATVI has climbed roughly 43 percent. Wall Street expects the company to report EPS of $0.11 versus $0.06 last year. Sales are expected to be up 20 percent to $704.20 million.
Wedbush analysts released an update on the company on Friday. The firm said that they are expecting a beat due to strength in Activision Blizzard's Call of Duty franchise, but that guidance is unlikely to change much on future uncertainty. Wedbush reiterated its Outperform rating and $21.00 price target on the stock.
• On Thursday Dish Network (DISH) and Priceline.com (PCLN) will be reporting. Dish's play for Sprint Nextel (S) will make for an interesting conference call, while Priceline will likely deliver another stellar quarter. However, investors need to be careful with this wild trader.
• Finally, on Friday Weyerhaeuser (WY), will offer its results.
Dan Fulton, the CEO of Weyerhaeuser will present at a shareholder meeting. When Weyerhaeuser reported recently Fulton was very conservative, as he always is, and the stock sold off. This shareholder meeting may bring out a better, more positive multi-year story.
Companies to Consider
• Citigroup -- at $47, Citigroup is already up 24% for the year, which is better than the S&P. However, this stock used to trade at $500 a share! And in many ways it is a better, leaner bank now. Also the new CEO Michael Corbat believes the company is well positioned for growth with more than half of its business coming from overseas.
• Wells Fargo -- used the downturn to buy a down-and- out Wachovia to take over 30% of this nation's mortgage market. It was a brilliant decision yet the stock has still not taken out its pre-crash high.
• KeyCorp / First Horizon
Both KeyCorp and First Horizon have used the downturn to solidify their standing in their respective regions – this presents bargains.
• Radian / Genworth
Radian and Genworth are favorable in part because they were able to survive the financial crisis. The mortgage insurance business used to have multiple players before the downturn. Now there's just a handful and they are just beginning to turn profitable. And business could increase significantly because the FHA, which was one of their biggest competitors, has started to pull back from mortgage insurance. That should drive shares even higher.
• Microsoft -- this stock is cheap. Microsoft has been busy creating immense value away from personal computers, with its digital entertainment business. It sells for 12 times earnings with a 2.75% yield. Given the tremendous balance sheet and the ability to create value with this division, the P/E ratio is ridiculous, and soon Wall Street will see this also.
• EMC -- is a favorite way to play the cloud. It's a repository for big data. It has pretty much beaten or met all expectations yet the stock is still negative ytd.
• Ford / General Motors
Both Ford and GM are probably among the most undervalued in the market. Ford and General Motors have been pulled down endlessly by Europe -- Ford traded at $18 not that long ago before Europe soured. Now it's trading at $13, but it appears to be a better company now. And GM is just now back to where it was when the government brought it public a little less than three years ago – and at $32, is a value buy.
• ConocoPhillips -- investors punished energy stocks earlier in the year and some of the selling may have been extreme -- but Conoco has just gotten back to where it was two years ago despite the market being radically higher.
• Schlumberger -- this stock is simply too cheap. Schlumberger is trading around $74 but was $94 a couple of years ago and it's currently experiencing a huge pick-up in business.
• US Airways -- US Airways will soon be merging with AMR to form the largest airline on earth -- get in now at $16 and change!
• Caterpillar / DuPont
Both of these stocks stand to benefit from an upswing in business activity. Caterpillar and Dupont are both totally levered to worldwide growth that may be just beginning.
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: Sysco, Tyson Food, Anadarko, Allied Nevada Gold, EOG Resources, First Solar, Norwegian Cruise Line, Scotts Miracle-Gro, Vornado Realty, Plains All American, Frontier Communciations
• No major reports for Monday
Earnings: Disney, Electronics Arts, Zillow, Whole Foods, Charter Communications, DirecTV, Discovery Communications, Molson Coors, Mondelez, Oaktree Capital, Perrigo, Health Care REIT, International Flavors and Fragrances, Holly Frontier, FirstEnergy, Fossil, BMC Software, Live Nation, McKesson, Williams Cos., Marathon Oil
• 10:00 am: JOLTS
• 1:00 pm: 3-year auction
• 3:00 pm: Consumer credit
Earnings: Toyota, Deutsche Telecom, AOL, Sodastream, Wendy's, Groupon, News Corp., Sun Life, Alon USA Partners, ING Group, Liberty Media, Enbridge, Cognizant, Monster Beverage, Tesla Motors, Transocean, Westar Energy, Activision Blizzard, Green Mountain Coffee
• 8:30 am: Fed Gov. Jeremy Stein
• 1:00 pm: $24 billion 10-year auction
Earnings: Agrium, AMC Networks, Apache, Brookfield Asset Management, Cablevision, Dish Network, Precision Castparts, Sony, Visteon, Echostar, Windstream, Carlyle Group, Great Plains Energy, Public Storage, Priceline.com, Allscripts Healthcare
• 8:00 am: Richmond Fed President Jeffrey Lacker speaks
• 8:30 am: Initial claims
• 10:00 am: Wholesale trade
• 1:00 pm: $16 billion 30-year auction
• 1:15 pm: Philadelphia Fed President Charles Plosser
Earnings: ArcelorMittal, BT Group, GoldFields, Nippon Telegraph, True Religion
• 8:25 am: Chicago Fed President Charles Evans
• 9:30 am: Fed Chairman Ben Bernanke speaks on monitoring finance at Chicago 49th annual conference on bank structure
• 12:30 pm: Fed Gov. Daniel Tarullo speaks on evaluating progress in regulatory reforms
• 2:00 pm: Federal budget
• 2:00 pm: Kansas City Fed President Esther George
International Economic Reports in the Week Ahead
Around the world, investors will be keeping a close eye on a number of other important economic releases.
• Monday - Canadian Ivey PMI
• Tuesday - Australian interest rate decision, Swiss unemployment rate, German factory orders, Chinese trade balance Australia is expected to hold interest rates at 3 percent, but any deviation from that expectation could cause volatility in currency markets. German factory order data is also due out Tuesday. The consensus expects factory orders to fall 0.5 percent in Germany.
• Wednesday - Swiss CPI, German industrial production, Australian unemployment rate, Chinese CPI On Wednesday, Chinese CPI data is due out which could have an impact on commodity prices. Year-over-year CPI is expected to be up 2.1 percent, but CPI is expected to fall 0.9 percent on a month-over-month basis.
Thursday - BoE interest rate decision, Mexican CPI Economists expect the BoE to hold rates steady at 0.50 percent. Friday - Indian industrial production, Great Britain trade balance, Canadian unemployment rate
Sentiment Effect in the Week Ahead
According to AAII, bullish sentiment has continued to edge higher. It's now at 30.9%, up over 4% in the past three weeks. The bearish percentage has seen a 12% drop during the same period.
The financial newsletter writers are also a bit more bullish, at 47.9%, up from 44.3% last week. This numbers have not reached either bullish or bearish extremes since the fall of 2011.
The weekly Starc band is now at 9,511, and the breakout from the daily trading range has upside targets just above 9,600. The weekly NYSE The weekly NYSE Advance/Decline (A/D) line continues to act quite strong. With new highs again this week, there are no signs that it is topping out.
There is minor support for the NYSE Composite at 9,179 with the 20-week ’Exponential Moving Average’ (EMA) at 8,914.
The Bond Market in the Week Ahead
The bond market in the week ahead will see traders watching The Treasury's auctions, after the past week's big move in rates. Friday's move was the biggest one-day move since September.
The whole global liquidity push is continuing with demand coming out from Japan. The Treasury is auctioning $32 billion 3-year notes, $24 billion 10-years and $16 billion 30-year bonds, Tuesday, Wednesday and Thursday respectively.
Conclusion for the Week Ahead
The key now is preventing a slip back – it would be beneficial to see the bulls continue to push higher. The ultimate contrarian would say a lot of that very well could be priced in, the thing most people aren't expecting is a continued rally in the normally weak summer months.
By the same token, the lofty levels for equities could make them ripe for a pullback, with investors resuming the battle between booking profits and buying dips. That battle caused the index to alternate between weekly gains and losses throughout the latter portion of March and most of April.
A bipolar market has been created -- it is either all on or all off -- either things are great and we are going to soar, or everything is falling apart and it's all over.
However, after last week's action, the focus is clearly back on the upside for the week ahead.