Weekly Outlook: The market continued to build this past week as we begin to get into the thick of earnings season. The first series of reports looked pretty solid with Alcoa (AA) reporting a good outlook for 2013, Wells Fargo (WFC) showing no ill effects of the fiscal cliff, and Monsanto (MON) reporting very solid results as well. This week, though, we get a bevy of reports to watch. The top reports this week to watch are Lennar (LEN), Goldman Sachs (GS), JP Morgan Chase (JPM), eBay (EBAY), Bank of America (BAC), Intel (INTC), and many more.
It's a big week for a number of blue chip bellwethers, and those reports will lead the way. Additionally, we have some interesting economic data to watch this week as well with Retail Sales, Housing Starts, and the Fed's Beige Book all to be released. It should be a busy week with the market being made or broken by a lot of financial reports as well as key blue chips. Strap in for an exciting week.
On top of earnings, it's a busy week for economic data. Here is a breakdown of what to watch for this week. We get started on Tuesday with Retail Sales for December and the Empire Manufacturing Update. Retail sales are expected to rise 0.2% while the Manufacturing Index is supposed to improve to 2.0 from a negative reading for November, which was mostly due to Superstorm Sandy. On Wednesday, we will be watching for Industrial Production, which is expected to come in at 0.2% after a solid 1.1% rise in November. Additionally, the Fed's Beige Book comes out Wednesday, which is always an interesting breakdown of the economy and can give helpful perspective.
Thursday continues with Initial Claims, Building Permits, and the important Housing Starts. The Housing Starts report will complete the annualized reading for 2013 and is supposed to improve to over 880K vs. November's 860K reading. A miss there could damage homebuilders. We complete the week on Friday with Michigan Consumer Sentiment. There are definitely a fair number of key reports to watch, so do not overlook these readings as earnings take center stage.
Outside of the USA, Europe and Asia have been quieter due to an extensive amount of attention to the fiscal cliff and now earnings season. Going into next week, Asia has been hot as of late after some promising Chinese data last week. What to watch for this week? Tuesday will be the German GDP. This report is pretty crucial as it's important that Germany shows at least some growth for 2012. Expectations are for an 0.8% gain, any movement towards a recession would be very critical for Europe.
Thursday, the ECB publishes their monthly report. These reports tend to be less impactful in the USA, but they are always a spot for the ECB to announce any new deals/ideas/programs. Friday belongs to China as the company reports Q4 GDP. That number is expected to come in at 7.8%. A beat there could be big for the global markets, while a miss could hurt. Some key stuff going on overseas, but other than the GDP reports, we should focus on earnings.
What is the important thing to watch for earnings this week? There are some main topics on everyone's mind. What did the fiscal cliff do to the business climate? What will 2013 look like for different industries? How was spending for the holiday season? Are companies being cautious about expected spending cuts from the government? These are the big questions. The rear view picture will be important as well as the outlooks. Q4 earnings are always the most crucial as they set the stage for the next fiscal year. We are excited about the reports. We already mentioned a number of the key reports.
Other ones to watch for this week include GE (GE) on Friday, Capital One (COF) and American Express (AXP) on Thursday, and Wendy's (WEN) on Wednesday. Financials lead the way, and they can answer the questions of fiscal cliff and 2013 outlook. AXP and COF will give pretty strong indicators of spending habits in Q4, and WEN will be the first look into the food industry for Q4. GE and INTC are bellwethers for the economy, so they are key to answering all questions as well. It's a crucial week for the market.
The Federal Reserve will release its Fed Beige Book this week, but other than that they have a fairly quiet week. The Philly Fed on Thursday is another report they are releasing this week, but it will be limited in impact as so many other data points and earnings are occurring on Thursday.
So where are we headed this week?
Great question. It's hard to say due to such a large number of unknowns in earnings. If WFC, AA, and MON are precursors to this week, we could have a fairly nice week in the markets. It's doubtful, though, that things will proceed so smoothly. One major question mark for the market in addition to data, earnings, and overseas news is cash flow. The market needs buyers to feel confident to get back into the market, so any reports will need to show people that confidence. Until spending cuts are resolved in February, that inflow of cash could be limited. It's not to say the market cannot improve on limited volume -- it can. Rather, the lasting of any uptrend might be limited by lack of confidence.
Stocks To Trade:
We are liking the looks of GCI and VALE for longs right now. Gannett has been very strong as of late, building 50% from June. Yet, with all that build the P/E is only 10.3 and the future P/E just over 8, showing shares are still being discounted strongly. We believe the stock looks primed for upside at least into its next earnings report, and it could make a nice move even higher post-earnings. The company reports earnings on February 4th. Expectations are for a 7% increase in revenue along with about 20% increase in earnings. Both are solid rates. GCI has been left for dead due to the pending death of newspapers. Yet, the company has done an amazing job of closing down a number of unprofitable newspapers and transforming its business onto the digital space.
The company is expecting to see a 25% increase in subscription models for its US Community Publishing division. The subscription model is key to the business for GCI and other advertising based newspaper providers. The company continues to develop new revenue streams, and we believe they are trading at very cheap prices that expect weakness to continue. The company's digital revenue though continues to grow, and while macroeconomic conditions remain questionable, we believe that the value to growth outweighs those issues. The level we are watching is $19. It has been very strong resistance. We like buying the stock on a healthy move above that level and are targeting gains at $20 to start.
VALE is a stock that we are also liking that made a slight pullback last week we can take advantage of. The company dropped this past week on a downgrade from HSBC to Neutral from Overweight on valuation concerns along, but we are not sure what they are seeing. The company's P/E is at 8 right now, and we believe the future of this miner is very bright. The company is expecting a resurgence in China civil construction that will increase demand for the company's steel production. Additionally, last week, Alcoa commented that they saw very solid outlook for metals in producing automobiles, trains, and planes in 2013. Industrial metals are very cheap right now and could make a resurgence if the cyclical demand comes back this year.
Expectations are for VALE to see a snapback in revenue growth in 2013 along with around 10% growth in earnings. We like the company best for a bull put spread on this weakness. The $17 level was great support throughout 2012, and it would be a great place to open a position if the stock falls dramatically. Right now, we can make 8% on a Feb16 expiring 18/17 bull put spread, which will expire before Feb earnings for VALE.
Trade #1: Long, GCI
Breakout: Break of $19
Trade #2: VALE, Feb16, 18/17 Bull Put Spread
Max Gain: 8%
For bearish trades, we like the looks of Dollar Tree and TLT. Remember when dollar store stocks were the hottest thing on the market as spending was flooding into their stores? Those days are over and DLTR has suffered from cash flowing out of their stock into growth stocks. The P/E ratios have, thus, adjusted. Yet, DLTR looks like more downside could be on the way. The company has a strong multiple bottom at $38, and if the stock loses 37.50, it could severely break down. The problem is that the group of companies is just not seeing the same type of sales they were, and most of them have gone through strong remodeling of stores to appeal to consumers. Those customers, though, seem to not be coming back.
Last week, Family Dollar (FDO) announced very weak results with the company missing earnings expectations and guiding below analyst estimates for Q2. The company said that margins were hit by having customers taking too many discounts and not enough of regular priced products. That would suggest to us though that its more mid-level customers are not shopping as much and have moved back to other stores. Dollar stores are looking weak, and we like shorting DLTR if it loses this key support as we expect similar trends for their customers.
The other ETF we are looking at for weakness or at least limited upside is TLT. The bond ETF got hit two weeks ago when the fiscal cliff was averted as it took out risk from the market and pushed cash flow back into equities. Further, the news that the Fed will stop buying bonds in 2014 is not a positive for the ETF. The Fed has been buying tons of bonds, and without demand, yield could significantly increase. That might increase the domestic demand, but they need to make up for billions of dollars that the Fed has been providing.
We are not sure they can foot the bill. Right now, the ETF has strong resistance at 123 where the 200-day MA sits and 125 past that. Right now, we can make 13% on the 124/126 bear call spread, which is a nice way to play the continued cash flow out of bonds. If earnings are good this week, TLT will look even more likely to decline as well, so potentially wait to see some of the first major reports of the week.
Trade #3: Short, DLTR
Breakout: Failure of 37.50
Trade #4: TLT, Feb16, 124/126 Bear Call Spread
Max Gain: 13%
Chart courtesy of finviz.com.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.