The Week Ahead in the Stock Market
May 20, 2013

The Week Ahead: Bulls To Continue To Drive The Market!

Stock Market: Fed Minutes and Bernanke To Control Market Direction!

The Game Plan: Retail Dominance Along With Sparse Data!

Wall Street: The Rally Continues As Correction Talks Become Stale!

by Ian Harvey

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Introduction

Bullish momentum should continue to drive stocks higher in the week ahead as markets watch to see if Federal Reserve Chairman, Ben Bernanke, weighs in on whether the economy is strong enough to justify paring back on Fed bond buying any time soon.

Housing data dominates the economic calendar in the week ahead with existing home sales Wednesday and new home sales Thursday. Also, Manufacturing PMI for Europe, the U.S. and China is released Thursday.

There are still a few late quarter earnings reports due in the week ahead, including Hewlett-Packard, Toll Brothers, and retailers - Home Depot, Lowe's, Target, TJX and Saks.

The U.S.Treasury also auctions $99 billion in 2-year, 5-year and 7-year notes Tuesday through Thursday.

Quick Reference:

‘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’
‘A Positive Outlook Still!’
‘Sentiment Effect on Stocks’
‘Conclusion’


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The Past Week




The Week Ahead

Introduction to the Week Ahead

…..” With the broad S&P 500 Index (SPX) gliding once again into uncharted territory and posting four straight weeks of gains, the talk of Wall Street's rally inevitably hitting a ceiling is starting to get old.

Concerns about a technical correction have been a hot topic for weeks, especially as the rally accelerated in May - the S&P 500 is up 4.4 percent so far this month and up nearly 17 percent for the year. But as the three major U.S. stock indexes inch higher and higher to set record after record, many analysts are shrugging off the pullback worries.….”

- The Past Week in the Stock Market – May 20, 2013

With earnings season coming to a close, the week ahead’s focus will be on the U.S. Federal Reserve. Chairman Ben Bernanke will head up to Capitol Hill on Wednesday morning to testify on the economy before the Joint Economic Committee. The minutes from the Federal Open Market Committee's most recent policymaking meeting on April 30-May 01 will be released on Wednesday afternoon.

Preparations for the Memorial Day holiday on May 27 will probably cut trading short, and most market action is likely to be completed by mid-week. Lighter trading volume may also trigger slightly higher market volatility.

The Economy in the Week Ahead

In the week ahead, market focus shifts back to the Fed as the FOMC minutes of the latest meeting are released. Also, Fed Chairman Ben Bernanke is set to speak as earnings season slows down, although there are still some key earnings set to be released.

The week ahead’s economic indicators include existing home sales for April on Wednesday, followed by weekly jobless claims and new home sales for April on Thursday, and durable goods orders for April on Friday.

In a quiet week ahead for economic data, the minutes of the Federal Reserve’s last meeting could make the most noise.

The release of the Fed’s May minutes on Wednesday will likely shed some light on which direction Fed members are leaning in terms of eventually either tightening fiscal policy or, conversely, expanding its bond buying programs if the economy continues to stumble.

Fed Chairman Ben Bernanke could also address that issue when he testifies before Congress on Wednesday morning.

Economic indicators have been mixed for months with some aspects of the economy such as housing looking stronger while others such as the jobs market have continued to lag expectations.

Two months ago the Fed was openly considering scaling back its $85 billion per month bond buying program, known as quantitative easing. Then a disappointing March jobs report which showed just 88,000 jobs created had policy makers rethinking that shift. Decent April employment numbers – 165,000 jobs created – might have policy makers moving back in the direction of gradually scaling back "Quantitative Easing (QE3)".

Economic Predictions for the Week Ahead

On Wednesday is the release of existing home sales, a number that should be ticking higher in midst of the spring buying season. Home prices have been moving higher in many areas of the country and inventories tightening, a good sign for that important sector.

The Fed in the Week Ahead

The debate about whether and when the Fed should start trimming back on its bond-buying program was underway in markets this past week, and was further fueled by the comments of Fed hawks. It also has made the Fed chairman's economic testimony before the Congressional Joint Economic Committee Wednesday even more important.

The Fed is playing the game both ways:-

• On the one hand, it shows the Fed is concerned about downside risk to growth, and in so doing keeps markets believing the Fed will remain accommodating for a long time.

• But, on the other hand, the Fed has to seem somewhat optimistic about the future because the decision point is getting closer to a taper. Given the rising asset prices and improving employment – saying there is progress!

The Fed currently purchases $85 billion a month in mortgages and Treasury securities, and the market debate this past week has focused on whether the economy is strong enough for it to begin to cut back on those purchases and also how it would do so. The discussion also comes as other central banks around the globe are adding tremendous liquidity, helping send the dollar higher.

Bernanke is the highlight but there are other Fed officials speaking earlier in the week ahead, including Chicago Fed President Charles Evans and New York Fed President William Dudley. They should be more dovish in their comments than the Fed officials who spoke in the past week. Philadelphia Fed President Charles Plosser, who does not vote on policy, said the Fed should start cutting back on its bond purchases in June, and San Francisco Fed President John Williams said the Fed could start winding down this summer, if employment continues to improve.

The Fed also releases the minutes of its last meeting Wednesday afternoon, and investors are hoping to see more about the Fed's discussions on its easing program. The talk of the Fed -- "tapering" -- peppered Wall Street research in the past week. JPMorgan economists said the Fed could begin discussing tapering in June, and carry it out at the end of the year. Meanwhile, Goldman Sachs economists expect it to be discussed in December, and then implemented early next year.

The idea of the Fed paring back on its bond purchases was also advanced after the Congressional Budget Office released estimates for a smaller-than-expected deficit this year of $642 billion, $200 billion less than its previous forecast. The Treasury has already indicated that it may decide in the next several months to issue less debt. Bernanke is expected to speak on the economic outlook before the committee Wednesday morning, but traders expect him to also discuss policy.

Some analysts say the Fed's tapering of bond purchases should not be a big mover of markets, but the time will come, still several years away, when the Fed increases the Fed funds rate, and that will have an impact.

The Fed has given itself an out if paring back the program hurts the economy. In its last meeting statement, it said it could either increase or decrease the amount of assets it is buying. With the Fed buying Treasurys, it has helped keep rates low but also pushed buyers into riskier assets, adding big support for the stock market.


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Earnings and Company News in the Week Ahead

The Q1 earnings season is effectively over for most of the major sectors, with Retail as the only one that still has a number of major reports still to come in the week ahead.

As such, Retail has a heavy presence in the week ahead’s earnings reports, including industry heavyweights like Target (TGT), Home Depot (HD), Lowe’s (LOW), Gap (GPS) and Staples (SPLS). But there are a couple of bellwether operators from other sectors coming out with results in the week ahead, like Hewlett-Packard (HPQ), Salesforce.com (CRM) and Toll Brothers (TOL) . In total, there will be Q1 earnings reports from 96 companies this week, including 25 S&P 500 members. By the end of this week, we will have seen Q1 results from 490 members of the S&P 500.

Total Retail sector earnings thus far are up +5.8% from the same period last year on +1.9% higher revenues. This includes strong gains at drugstore chains Walgreens (WAG) and momentum in online players in eBay (EBAY) and Priceline (PCLN). The remaining 17 retailers out of the 47 companies in the S&P 500 Retail sector are expected to see total earnings decline by -0.5% on +2.5% higher revenues. This reflects expectations of earnings declines at Target, Best Buy (BBY) and a few others.

Combining the Retail sector earnings for the 30 companies that have come out with the 17 still to come, the sector’s total earnings in Q1 should be up +4%. This compares to earnings growth rates of +8.1% and +6.1% in 2012 Q4 and Q3, respectively. April same-store sales data for the sector has generally been on the soft side, with industry players citing colder temperatures in April as a reason for light traffic. But it could very well be that the payroll tax changes in January are finally starting to have an effect, as we saw with the Wal-Mart (WMT) report.

The Spotlight on Certain Companies in the Week Ahead

Salesforce.com

Customer-relationship management software company Salesforce.com (CRM) is set to report first quarter operations for its 2014 fiscal year on Thursday, May 23. Analysts are expecting EPS of $0.10 vs. $0.09 a year ago on revenue of $887.1 million vs. $695.47 million a year ago.

Analysts at Oppenheimer are bullish on the stock ahead of the report. “We view CRM as the best long-term growth investment in our coverage universe, and we anticipate positive 1Q results for Salesforce.com despite facing tough y/y comparables, seasonal headwinds, and more adverse FX effects since guidance. We estimate PF revenue of $887M (+28% y/y) and PF EPS of $0.10, which is in line with consensus.”

“Our recent checks suggest CRM is not experiencing any slowing in its business and rather point to increases in average deal sizes. We are bullish on CRM's many growth opportunities in 2013 as the secular trends around enterprise- wide SaaS adoption continue to strengthen.”

Analysts at Goldman Sachs are also bullish on the stock ahead of earnings. “We think there is upside risk to the Street's revenue and non-GAAP EPS estimates of $887mn and $0.10 (GSe: $887mn/ $0.11). Guidance is for revenue of $882- 887mn and non-GAAP EPS of $0.10-0.11 ($0.40-0.42 pre the 4 for 1 split).”

“We expect CRM to raise its FY14 revenue outlook off of a strong F1Q14. Also, we expect cash flow guidance to remain at low 20% growth (consensus 23%) while we expect Street bookings growth of 21% yoy to remain relatively the same despite a bigger FX headwind. We think M&A continues to be an overhang for the shares post the company's $1bn convertible issuance. In our view CRM remains a key beneficiary in the movement to the cloud and it continues to be a top long-term pick.”

Wedbush analysts jump into the bullish bandwagon on Salesforce.com, noting that it is also one of their top picks. “For 1Q, we expect revenue over $5M above consensus, and we are a penny above EPS consensus. Our revenue estimate reflects 28% Y/Y growth in total revenue and subscription revenue, and is over $5M above the consensus estimate.”

“Looking forward to 2Q, we believe the company has plenty of room to guide ahead of consensus revenue of $935M. Our revenue estimate of $950M is predicated on 27% Y/Y organic subscription growth, which looks achievable given CRM's deferred commissions growth of 34%+ in each of the last four quarters. On the EPS line, we expect guidance will include consensus (and our estimate) of $0.12.”

“We reiterate our OUTPERFORM rating and 12-month target price of $51. Our target price is based on a combination of our P/E, EV/FCF, and DCF approaches. Our estimates are unchanged; our target price is adjusted for a 4:1 stock split on April 18th.”

The Gap

The Gap Inc. (GPS) is expected to report first quarter results on Thursday as well. Last week, the company raised guidance for the quarter for EPS to $0.68-0.69 per share vs. the consensus estimate at the time of $0.56 as well as a rise of 7% in same store sales in April. Now, analysts are still expecting EPS of $0.58 vs. $0.47 a year ago on revenue of $3.68 billion vs. $3.49 billion a year ago.

Analysts at Goldman Sachs commented on the guidance raise ahead of earnings. “EPS include $0.04 of tax benefits, so on an operating basis the $0.64 adjusted number is still nicely ahead of expectations. We estimate margins expanded +260 bps on the back of cost deflation and fixed cost leverage.”

“We are nudging up FY13/14 EPS to $2.83/$3.34 from $2.81/$3.30to reflect the 1Q upside with some back half reinvestment, and are about 10% above consensus. We raise our 6-month P/E-based target $5 to $46 as we roll EPS forward and revise our target multiple to 14.5x from 14.0x given improved sentiment.” They have a buy rating on the stock.

Analysts at Piper Jaffray also chimed in ahead of earnings. “For trading oriented investors, we are mindful that shares post-market [May 10] approached our revised price objective and given strong outperformance over the last year, expectations are starting to extend beyond levels that are typical at this point in the demand cycle. For investors with longer-term (12 months & beyond) time horizons, we continue to favor GPS as a solid core holding given stability in the profitability model, strong brand equity, cash generation, commitment to share repurchases, and attractive dividend yield. We are raising our price target from $42 to $43 on a similar 14x FY15E EPS multiple.”

“We are raising our estimates, allowing a large portion of the 17 cents of upside from FQ1 (vs. our model) to pass through, including 2 of the 4 cents of items benefiting EPS in Q1 (net beat of 13 cents; 2 cents carries forward). We expect sustained low double digit to low- teens EPS growth on an annual basis, based on a low-single digit long range fashion industry average comp rate.”

Pandora Media

Thursday is set to be a big day for earnings as Pandora Media (P) is also set to report earnings. Pandora is expected to report a loss of $0.10 per share vs. a loss of $0.09 per share a year ago on revenue of $124.03 million vs. $80.78 million. It will also be seen if Pandora comments on increasing competition from services such as Spotify and recent announcements of products from competitors such as Google (NASDAQ: GOOG).

Analysts at J.P. Morgan voiced their opinions ahead of the report. “Pandora's April listener metrics reported this morning show continued user growth while the mobile cap implemented in March is curbing total listener hours and radio share. Total hours increased 24% Y/Y, but were down 12% M/M, and Pandora's radio share fell to 7.33% in April from 8.05% in March. Pandora's hours have typically been flat to slightly down from March to April due to seasonality, but we believe the decline this April suggests the mobile hours cap is having the desired effect on total usage.”

“We expect Pandora to report its 1QFY14 earnings on May 23rd, and we are modeling revenue of $122.5M (+51.6% Y/Y), EBITDA losses of ($16.8M) and PF EPS of ($0.11). Pandora remains our top small-cap pick as we look for stronger mobile monetization in FY2014.”

Analysts at Canaccord Genuity agree and view the stock positively ahead of earnings. “While competitive developments continue, we believe fundamentals at Pandora remain strong heading into Q1 earnings next week. We believe Google's newly announced $10/month “All Access” subscription service should have only a moderate competitive impact on Pandora's listener base, which clearly likes free stuff.”

“We also believe subscription revenue and content costs could both show improvement in Q1 from the 40-hour mobile cap, with more impact in Q2 and beyond. Our $18 target is unchanged and is based on 32x our F2017 EPS estimate of $0.90, discounted to present at 12.1%.” The analysts have a buy rating on the stock.

Lastly, the analysts at Piper Jaffray commented on overweight-rated Pandora ahead of the announcement. “We are reiterating our OW rating on Pandora and raising our F14 estimates and PT to $20 from $17. Our increased bullishness on P shares is largely driven by our expectation of improving mobile monetization (helped out by mobile caps, better local sales, and increased ad loads). Recall poor monetization of listenership had been the single biggest concern of investors throughout 2012.”

“We now expect mobile RPMs to accelerate at a more rapid pace, increasing 22% in F14 compared to our previous estimate of +12%. We expect management to continue to invest in Sales and R&D in F14, as Pandora builds out its local sales effort and the necessary infrastructure to continue to take share in the local radio ad market. While risks still exist related to the entrance of new competitors, we remain less concerned about subscription models (Spotify, Google Play).”

“We expect revenues to come at $118M (just short of consensus of $124M) as a shortfall in listenership related to mobile caps should impact top line in the quarter. However, we are maintaining our Q1 EBITDA of ($21M) vs. consensus of ($17M) as we expect the bottom line to be impacted by a royalty step-up increase to $20 per thousand listener hours from $18 last year, as well as substantial 43% growth in Sales and Marketing expense, as Pandora continues to expand its sales force in 27 of top 40 local radio ad markets.”

“We are raising our price target from $17 to $20. Our new price target is based on a 5-Yr DCF using a 7.6% WACC (up from 6.3% as a result of increased market risk premium) and a 12.5x terminal EBITDA multiple.”

IPO’s in the Week Ahead

Channel Advisor - an e-commerce software company that allows retailers to present wares on multiple on line channels.

Ply Gem - a company that manufactures exteriors for residential construction.

Sprouts Farmers Marker - which runs 150 natural and organic groceries.

A List of Key Events for the Week Ahead

All earnings dates listed below are tentative and subject to change for the week ahead. Please check with each company's respective website for official reporting dates.

Monday

Earnings: Campbell Soup, Ryanair, Urban Outfitters, TIVO

Economy:

• 1:00 pm: Chicago Fed President Charles Evans speaks on the economy

Tuesday

Earnings: Home Depot, Medtronic, Vodafone, AutoZone, Best Buy, Dick's Sporting Goods, Saks TJX Cos., Red Robin Gourmet Burgers, Analog Devices Compuware, Intuit

Economy:

• 11:30 am: St. Louis Fed President James Bullard speaks in Frankfurt, Germany, on monetary policy
• 1:00 pm: New York Fed President William Dudley speaks on a panel at Japan Society, N.Y. on policy
• 1:00 pm: Treasury auctions $35 billion 2-year notes

Wednesday

Earnings: Hewlett-Packard, Lowe's, Target, Staples, Toll Brothers, American Eagle, Booz Allen, PetSmart

Economy:

• 7:00 am: Mortgage applications
• 10:00 am: Fed Chairman Ben Bernanke testifies at Joint Economic Committee on economic outlook
• 10:00 am: Existing home sales
• 1:00 pm: Treasury auctions $35 billion 5-year notes 2:00 pm: FOMC minutes

Thursday

Earnings: Toronto Dominion, Advance Auto Parts, Dollar Tree, GameStop, Ralph Lauren, Sears, The Buckle, Gap, Marvell Tech, Ross Stores, Salesforce.com, Mentor Graphics, Pandora, Zumiez, Signet Jewelry

Economy:

• 6:05 am: St. Louis Fed's Bullard speaks on economy and policy in London
• 8:30 am: Weekly jobless claims
• 8:58 am: Manufacturing PMI
• 9:00 am: FHFA home prices
• 10:00 am: New home sales
• 1:00 pm: Treasury auctions $29 billion 7-year notes

Friday

Earnings: Abercrombie and Fitch, Footlocker

Economy:

• 8:30 am: Durable goods

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 - Italian Industrial New Orders, Russian GDP

Tuesday - German PPI, British CPI and PPI and the Bank of Japan Interest Rate Decision.

Wednesday - Eurozone Current Account and the Canadian retail sales.

Thursday - Chinese HSBC Flash Manufacturing PMI, Eurozone, French, and German Manufacturing and Service PMI's, Italian retail sales and British GDP and retail sales.

Friday - German GDP, French Business Climate, German IFO Business Climate Index and Italian Consumer Confidence.


CLICK HERE for a complete list of companies reporting in the week ahead.

.....or go to.....

CLICK HERE for a complete list of companies reporting in the week ahead.


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A Positive Outlook Still for the Week Ahead!

There have been some positives lately for the market:-

Momentum

The momentum is really strong -- and riding along that momentum is what investors need to try and achieve.

The S&P 500, which rose above the 1,600 level only about two weeks ago, is now less than 40 points away from 1,700.

As the market continues its upward move, some market participants are beginning to believe that the rally is not a bubble but rather the start of a new bull market. Others argue, meanwhile, that the strong momentum is not based on fundamentals like economic data or corporate earnings but is relying heavily on easy monetary policy from global central banks.

Regardless, the consensus in the short term is that the market will avoid two of Wall Street's most popular maxims - "sell in May and go away" and "summer doldrums" - and maintain the upward momentum.

No Fear Factor

Along with the S&P 500, the Dow Jones industrial average (DJI) has been setting a string of record highs. The Dow has gained 17.2 percent for the year. The Nasdaq Composite Index (COMP) is up 15.9 percent for 2013 so far. On Friday, the Nasdaq closed at its highest level since October 2000.

Even at these levels, a popular options gauge shows investors are placing optimistic wagers on the stock market, positioning for the current run-up to extend for the next three months.

Earlier this past week, the Credit Suisse Fear Barometer, known as the CSFB Index, fell 11.4 points over the past two weeks - the largest decline on record - and is now at a one-year low of 21.73.

The indicator essentially tracks investors' willingness to pay for downside protection with zero-premium collar trades that expire in three months, using S&P 500 index (SPX) options.

Also, the CBOE Volatility Index, Wall Street's fear gauge, is down more than 1 percent for the past week.

The options market is a popular place for investors to hedge against a sudden fall in the stock market. Among the most popular strategies are put options on the S&P 500 index, and call options on the VIX, which generally moves inversely to the S&P 500.

Sentiment Effect in the Week Ahead

Consumer sentiment gained in May to the highest level since July 2007, according to the Thomson Reuters/University of Michigan index. And leading indicators rose in April, hitting its highest level in nearly five years, according to the Conference Board, suggesting an anticipated growth slowdown would be temporary.

Adding to positive sentiment, JPMorgan boosted its its year-end price target for the S&P 500 to 1,715, sharply above the bank's original expectation of 1,580, which the index crossed above last month. So far in 2013, the index has surged more than 15 percent.

Conclusion for the Week Ahead

It is extremely unlikely that the Fed will do anything to change its posture in regard to changing its stance on quantitative easing in the week ahead, and also probably through the summer. The data is suspect, at best, right now and there's as many negatives in the data set right now as there are positives -- which means that the Fed are definitely going to need to err on the side of caution. It does not appear, looking at the present economic situation that they're going to change their policy for the time being.

It is more likely that when the Fed does trim its purchases, it will do so slowly to about $50 billion or $60 billion a month -- this would still represent fairly substantial easing on an ongoing basis -- equivalent to about a half-point cut in the Fed-funds rate.

The Fed will likely wait for several months of improved employment numbers before moving to taper. The next employment report is released June 7, and the Fed meets June 19 – but it is not very plausible that the Fed will do anything even if the payrolls are stronger, very vigorous and the full report is robust.

Even if the Fed begins tapering, it should not make a difference to the stock market progress. The fact the stock market is higher only because of the Fed is not a sensible argument or explanation. If the budget deficit gets smaller and the economy improves, quantitative easing should be able to get smaller without some macroeconomic disturbance.


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