The Week Ahead in the Stock Market November 26, 2012

Week Ahead: Political Wrangling and the Fiscal Cliff Still in Focus!

Stock Market: Volatility To Continue!

Wall Street: Manufacturing and Housing Data!

by Ian Harvey

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November 26, 2012

Introduction

Holiday shopping could be a bright spot for the stock market, but both could soon stall if lawmakers don't make progress on the ”fiscal cliff” when they return in the week ahead.

Congressional leaders and President Barack Obama have said they expect compromise when making a deal to stop the $500 billion wave of higher taxes and automatic spending cuts from hitting the economy early next year.

But many on Wall Street are betting Congress will resort to its fractious ways before a deal is reached, and that could upset the stock market — and holiday shoppers, particularly those at the high end.

There is a batch of consumer-related data in the week ahead, most of it housing data, with home prices on Tuesday, new-home sales Wednesday and pending home sales on Thursday.

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The Past Week

At Friday's close, the Standard & Poor's 500 Index (SPX) wrapped up its second-best week of the year with a 3.6 percent gain. Encouraging economic data in the week ahead could confirm that regardless of the ups and downs that the fiscal cliff could bring, the market's fundamentals are solid.

The Markets Ending November 23, 2012

All three major averages had their best week in over five months. For the week, the Dow rose 3.3 percent, the S&P climbed 3.6 percent and the Nasdaq Composite Index (COMP) jumped 4 percent.

Friday was a solid day for the Dow Jones Industrial Average (DJI), which ended near a session high to finish north of 13,000 for the first time since Nov. 6. In addition, the blue-chip barometer ended atop its 200-day moving average for the first time in more than two weeks.

With a lack of domestic data to go on, Wall Street spent the holiday-shortened trading day applauding upbeat reports from China and Germany. Investors also appear to be optimistic about the holiday shopping season, with most tech stocks and retailers gaining notable ground on the biggest shopping day of the year.

CBOE Market Volatility Index (VIX) ), widely considered the best gauge of fear in the market, fell to near 15.

Among key S&P sectors, techs and telecoms led the market advance, while utilities lagged.

Consumer discretionary stocks were up 4.4 percent for the week, one of the best performers, and the sector was the best performer since the start of November, up 2.3 percent against declines in most other sectors. Chain stores will provide a look at the holiday sales in their November sales reports, expected to be released Thursday.

European stocks had their best week so far this year, boosted on Friday by strong German business confidence data and growing expectations Greece will receive more aid.

Greece said the International Monetary Fund had relaxed its debt-cutting target for the country, suggesting lenders were closer to a deal for a vital aid tranche to be paid. But other sources involved in the talks cautioned the funding gap was far bigger than Greece has suggested, according to Reuters.


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The Week Ahead

Economy

Several manufacturing reports and some key housing data highlight the week ahead economic calendar.

On the economic front, Tuesday will bring information on U.S. durable goods orders and German CPI. Expectations for durable goods orders are for a decline of 0.3 percent, while the consensus estimate for German CPI is an increase of 1.9 percent, year-over-year.

As housing has improved, so have consumer attitudes, but the impact of Super Storm Sandy could make data look temporarily weaker. Consumer confidence and durable goods are reported on Tuesday.

Stock Market Rally to be Confirmed Based on Housing Data

The week ahead is heavy on economic data, especially on the housing front. Some of the numbers have been affected by Superstorm Sandy, which hit the U.S. East Coast more than three weeks ago, killing more than 100 people in the United States alone and leaving billions of dollars in damages.

The housing data, though, could continue to confirm a rebound in the sector that is seen as a necessary step to unlock spending and lower the stubbornly high unemployment rate.

Tuesday's S&P/Case-Shiller home price index for September is expected to show the eighth straight month of increases, extending the longest continuous string of gains since prices were boosted by a homebuyer tax credit in 2009 and 2010.

New home sales for October, due on Wednesday, and October pending home sales data, due on Thursday, are also expected to show a stronger housing market.

Other data highlights in the week ahead include durable goods orders for October and consumer confidence for November on Tuesday and the Chicago Purchasing Managers Index on Friday.

Earnings and Company News in the Week Ahead

Several of the major apparel retailers will release earnings during the week ahead, including PVH (NYSE: PVH), American Eagle Outfitters (NYSE: AEO), Guess? (NYSE: GES) and Pacific Sunwear (NASDAQ: PSUN).

These earnings reports will not include sales from Black Friday, but investors might look to the reports for guidance on the crucial fourth quarter.

Analysts at Wedbush like American Eagle Outfitters heading into earnings. They expect a strong third quarter report and guidance that will come in line with expectations. Wedbush has a $26 price target on the company, shares are currently trading around $19.60.

On the other hand, Piper Jaffray is cautious on Guess. In October, Guess' CEO and CFO tendered their resignations. While the management change may have been necessary for longer-term success, Piper Jaffray believes it brings short-term uncertainty. In the face of this uncertainty, investors should remain cautious.

Also of note, two companies that have both been targeted by short sellers in recent months will release earnings in the week ahead. BothGreen Mountain Coffee (NASDAQ: GMCR) and Focus Media (NASDAQ: FMCN) will report on Tuesday.

Last October, hedge fund manager and short seller David Einhorn targeted Green Mountain in a presentation. Einhorn raised questions with the company's accounting and argued that the expiration of Green Mountain's patents would put tremendous pressure on the company's earnings.

Thus far, Einhorn's Green Mountain call has been a great one, with shares down almost 40 percent so far this year.

Green Mountain's upcoming earnings might be expected to be light, given that this quarter is the first time the company saw competition from Starbucks (NASDAQ: SBUX). Although Starbucks has fiercely denied that it is attempting to compete with Green Mountain directly, Starbucks released its single-serve Verismo in October, a device largely similar to Green Mountain's Keurig brewer.

Yet, analysts at Canaccord Genuity remain bullish Green Mountain. The Keurig-maker announced that it had hired a new CEO last week, a Coca-Cola (NYSE: KO) executive named Brian Kelly.

Canaccord thinks Kelly's hiring is a reason to buy the stock. Analysts there currently have a $39 price target, much higher than the current price near $28.

Focus Media was targeted by Muddy Waters earlier in 2012. Muddy Waters, headed by Carson Block, has successfully targeted companies like Sino Forest and RINO International. Most recently, Block set his sights on Singapore-based Olam International.

Despite Block's allegations, Focus Media has been a winner so far this year, and shares are up more than 25 percent. The company is reportedly set to be acquired by a group of private equity firms, led by the Carlyle Group (NASDAQ: CG). Traders might look to Tuesday's report for info on the progress of the deal.


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Fiscal Cliff and Its Effects in the Week Ahead

President Barack Obama and U.S. congressional leaders are expected to discuss ways to reduce the budget deficit and avoid the "fiscal cliff" of automatic tax increases and spending cuts in 2013 that could tip the economy into recession.

As politicians make their case, markets could react with wild swings in the week ahead.

There are several area that could affect you if the tax increases apply:-

• There will be much more effect on the high end -- taxes are going to go higher for the wealthy, no matter what kind of deal is reached.

• There is an automatic 3.8 percent tax, resulting from the Affordable Care Act, on investment income for those couples earning $250,000 or more, and another 0.9 percent tax on each dollar earned above that threshold. The 2 percent payroll tax holiday is expected to expire for all tax brackets.

• Everybody’s paycheck goes down 2 percent next year – which will really hit home.

What’s not clear is whether the top tax rates will be raised, as sought by Democrats, or whether other revenue sources will be found, such as reduced deductions, a path suggested by some Republicans.

The expected increase in capital gains and dividend taxes are still unknowns, but they have already hit some stocks. The dividend-paying utilities sector was the only negative major S&P sector this past week, down close to 1 percent, and it’s the worst performer since the beginning of November, down more than 8 percent.

Analysts are split on whether the market will be able to keep rallying, and they say whether there will be a “Santa Rally” this year depends on Congress.

Many in the market agree there will be some sort of agreement that will fuel a rally, but the road there will be full of political landmines as Democrats and Republicans dig in on positions defended during the recent election.

Liberals want tax increases on the wealthiest Americans while protecting progressive advances in healthcare, while conservatives make a case for deep cuts in programs for the poor and a widening of the tax base to raise revenues without lifting tax rates.

The VIX and the “Fiscal Cliff”

The CBOE Volatility Index .VIX, known as the VIX, Wall Street's favorite barometer of market anxiety that usually moves in an inverse relationship with the S&P 500, is in a long-term decline with its 200-day moving average at its lowest in five years. The VIX could spike if dealings in Washington begin to stall.

If the fiscal cliff happens, a lot of major assets will be down on a short-term basis because of the fear factor and the chaos factor. Therefore, go long the VIX and short the market.


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Overseas Influences in the Week Ahead

Thursday is a full calendar of international economic reports. Japan will release its unemployment rate and industrial production. Recent Japanese data has been poor, but Japan's stock market has rallied as its yen has shown weakness. Likewise, Germany will release its unemployment rate on Thursday, with expectations for 6.9 percent.

The Middle East And Europe

Tension in the Middle East and unresolved talks in Europe over aid for Greece could add to the uncertainty and volatility on Wall Street could surge, analysts say.

An Egypt-brokered ceasefire between Israel and Hamas came into force late on Wednesday after a week of conflict, but it was broken with the shooting of a Palestinian man by Israeli soldiers, according to Palestine's foreign minister.

Buoyed by accolades from around the world for mediating the truce, Egyptian President Mohamed Mursi assumed sweeping powers, angering his opponents and prompting violent clashes in central Cairo and other cities on Friday.

This kind of potential large-scale conflict can certainly overwhelm some of the fundamental data and affect the US stock market contributing to higher volatility.


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