Weekly Outlook: The market dealt well with sequester cuts due to some better housing data as well as good news from Fed Chairman Ben Bernanke that the QE program of buying assets will not be ending any time soon. That news helped give the market some confidence heading into sequester cuts, and when those cuts came, the market did well with it. Going into this week, the market will be dealing with a large slate of economic data, reaction to the sequester cuts, news out of Italy and Europe, and continued reaction to the Federal Reserve comments this past week. The big data for the week will be the jobs report on Friday, which will definitely need to be solid to continue to see the market move higher.
Economic data will be the key to the market this week. The data starts this week on Tuesday with ISM Services. That number is expected to come in slightly higher at 55.4 versus 55.2 last month. On Wednesday, the market will start to get employment data with ADP Employment Change. Factory Orders and the Fed Beige Book will also be announced. From there, we continue with the employment data on Thursday with Initial Jobless Claims as well as Trade Balance. The big report, though, comes on Friday with Nonfarm Payrolls and the Unemployment Rate. NFP are expected to come in at 165K versus the 157K prior month reading. That report will definitely set the tone to end the week and heading into next week. Look for ADP to signal Friday expectations and set the mood from Wednesday through the end of the week.
Outside of the USA, Europe and Asia will continue to be important. Two weeks ago, Italy started to brew trouble with their election that showed a lack of majority and support to non-friendly austerity Silvio Berlusconi. That lack of support was hurtful to the markets but ignored last week. We may see some more renewal of fear in Europe over Italy's lack of support for austerity. Additionally, we should see reaction to some interesting data. Tuesday the markets will get Euro-Zone Retail Sales. Euro-Zone GDP will come out on Wednesday, which will be a key report. Thursday we will get the Bank of Japan and Bank of England rate decisions, which could prove to be interesting reports due to Japan's current Fed-like decisions to pump their economy full of money. Finally, we get a key Japanese GDP on Friday as well as Chinese Trade Balance. Both reports will be very crucial as well.
Earnings are not expected to make a major impact this week, but reports to watch will be Transocean (RIG), Vimpelcom (VIP), and Kroger (KR). None of those reports will have a severe impact on the market but are the biggest names to report.
The Federal Reserve was crucial to the market moving higher last week, and the QE continuation will put a floor on any downside in the market. Free money puts way too much capital into the market to keep it down for long. This week, the Fed will release its Beige Book on Wednesday. It tends to have a minimal impact but will definitely be parsed for any news/signals. Other than that, they have a quiet week.
So where are we headed this week?
The market will continue to be headline driven surrounding Europe, Asia, the sequester, and data. Those four things will be the key to the week. If data can turn out solid for employment, we have a chance to continue higher despite the fact that the sequester should limit upside to start the week. The sequester will definitely be the focus to start the week, and we should see the market trading different sectors up and down around that development. Defense companies as well as discretionary will get hit while defense and discount retailers may benefit. It's a tough week to call because one would expect correcting. Yet, this market has shown no signs of doing what should be expected of it.
Stocks To Trade:
EBAY continues to look very solid, and we believe that the stock has very limited downside right now moving forward. Movements down are an opportunity to buy or write option spreads. The reason we like EBAY is that we are firm believers in the movement of shopping from brick and mortars to online and believe that EBAY will benefit greatly from that with their online marketplace as well as online payment solution, PayPal. Actually, we believe the PayPal portion of their business is much more exciting as well. As more movement occurs in online shopping, physical credit cards will become more obsolete. We believe more and more use of online payment solutions and mobile payment solutions will continue to develop, and we like PayPal's dominant presence in online payments as well as its ability to grow (from Micah Dickson):
PayPal is obviously still growing. According to the Q3 conference call, PayPal had 117 million active users with account growth accelerating by 1% to 14% in Q3. Remember, these numbers were before the holiday shopping season. The most recent numbers from eBay reports that PayPal saw an increase in mobile payments of 133% during Thanksgiving Day, 153% on Black Friday, and 196% on Cyber Monday. Consumers are not just doing their holiday shopping using their credit cards but are using PayPal for mobile payments.
The mobile payment market could be over $500B by 2015, and PayPal appears to be right in that mix. On top of that, online shopping continues to be a growing. The market is expected to grow 9-12% this year. With such strong growth, we would expect that EBAY would be priced fairly strongly, correct? The company is expected to see 15-16% growth in sales this year and 14-15% next year. Yet, its future P/E is just over 17. Under 15 is value, but EBAY is a growth stock. For its potential, we believe shares are still quite cheap.
Trade #1: EBAY, Long
Buy Point: Break of $56
Another stock we like long is Thermo Fisher. TMO looks very strong right now, and we like buying it on this strength as it has more upside. First off, TMO has great fundamentals along with good value. Shares are trading at 12.5 future P/E and just over 2 price/sales. Both levels show pretty great value. Yet, the company is expected to see a lot of growth this year. Analysts are anticipating around 10% growth in earnings in 2013 and 2014. Growth of margins is expected to be seen by the company over the next two years despite sequester cuts and a drop in federal spending, which is very attractive. Better demand for products as well as slashing SG&A is key. Additionally, we believe that the company is being heavily discounted due to concerns over budgetary cuts that would hurt academic research as well as medical research, but the company has noted that in their margin expansion they have accounted for this. The company's last round of earnings was very strong and showed strong growth in emerging markets.
On top of this, we believe that TMO has a near-term catalyst in that, medical companies will be a safety play in volatile times that are not connected to biotech/pharmaceutical results. And while many speculate budget cuts will hurt TMO, the contrarian play is that the cuts are priced into it and when they actually occur, TMO can move on from it. Further, with the cuts priced into the stock (as seen from its value), TMO has commented they can still perform well. We like the $75 level for a potential move higher, and we are looking for some solid gains to come above that level. With such great value, TMO is very attractive right now. Growth in emerging markets should offset domestic and European issues moving forward.
Trade #2: TMO, Long
Buy Point: Over $75
One bearish position we are taking is in Apple. The problem for AAPL, as we have noted previously, is that the company has no near-term catalyst. There was some speculation that the company would potentially split its stock last week or it's going to do something soon with all its cash. We are not convinced, and we also do not believe that this "PILE of CASH" that many claim AAPL has actually exists. Jeffries analyst Peter Misek made some strong comments about Apple's cash. He noted that the company is going to need a lot of cash moving forward as they take on TV. Processing costs, licenses, and potential original programming will cost quite a bit. On top of that, the company wants to return $45B to shareholders over the next three years through buybacks and dividends.
Finally, the company may have to eventually do their own subsidizing as some carriers are speculated to stop doing that themselves. Further, it's little known that AAPL does not have quite as much cash lying around as many think. The company's latest balance sheet shows AAPL has only $16B in cash and cash equivalents. The majority of AAPL's money is tied up in short-term investments ($24B). While those investments will close in one year, the money is not as liquid as many expect and would take up to 12 months to direct to cash/cash equivalents. A stock split might be a short-term catalyst, but it does not solve the problem for AAPL in that their product lineup is slowly becoming stale.
While crazy to say, the iPhone/iPad/iPod need a new friend quickly. While we do believe that the lineup is strong and will continue to provide AAPL with great business, they need another product to reinvigorate shareholders and interest. TV, watches, etc. have been passed around, but the company has been pretty mum on what is coming next. New developments of the iPad and iPhone are also not anticipated until this summer. For now, shareholders will have to continue to hold pat.
The value argument for AAPL is not there as well. Value is great as long as we know that shares will rebound. And while AAPL will rebound very strongly when it gets its catalyst, its value, for now, signals a stock that lacks the necessary interest. That is not changing until something at AAPL changes. A great way to make some money while also holding AAPL long is a bear call spread. While short-term upside may occur, we do not see the big catalyst happening for at least 2-3 months. Therefore, we can make money on a bear call spread in the meantime. The stock has severe resistance at 480-500, so we like using that area for an Apr20 expiration bear call spread.
Trade #3: AAPL, 485/490, Apr20, Bear Call Spread
Max Gain: 11%