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Summary

This week is an important week to see if the market can follow through on the upside from last week after the government avoided a lengthy shutdown and potential default on the debt ceiling. With the crisis "solved," the market has seen some upside especially in the small-cap and technology side. This week, we get a large slate of data to make up for a lot of the missed reports from the last few weeks with the government shut down. Additionally, we continue with a strong slate of earnings that should gather even more attention as the investing community switches its focus from DC.

Chart Overview

(click to enlarge)

The S&P 500 (SPY) rebounded off support at 1650, and it has now broken all resistance. The index looks quite strong, and the new resistance for breakout is 1750. If that level breaks, it could be big for the SPY to move even higher.

(click to enlarge)

The Dow (DIA) is bouncing back but still remains the laggard. The index has had trouble getting going over 15400, and it has strong resistance 15500 and 15600. It is still going to need some more help to be more solid. The lagging blue chip earnings have hurt this index.

Economic Data

Date

Data Report

Market Expectations

Previous Report

October 21

Existing Homes Sales - September

5.30M

5.48M

October 21

Crude Inventories - 10/12

N/A

6.81M

October 22

Nonfarm Payrolls - September

183K

169K

October 22

Unemployment Rate - September

7.3%

7.3%

October 23

Export/Import Prices - September

N/A

-0.1% / -0.2%

October 23

FHFA Housing Price Index - August

N/A

1.0%

October 24

Initial Claims - 10/19

341K

358K

October 24

New Home Sales - September

432K

421K

October 24

JOLTS Job Openings - August

N/A

3.7M

October 25

Durable Orders - September

3.5%

0.1%

October 25

Michigan Sentiment - October

74.5

75.2

The economic calendar is busy this week as we get housing data, employment, data, and inventories on natural resources that we should have gotten in previous weeks. We start out on Monday with Existing Home Sales and Crude Inventories. We get the unemployment rate and NFP report on Tuesday, which makes it a big day! On Wednesday, we get the important Import/Export Prices to show global inflation/deflation information that is crucial to understanding if the Fed will continue to QE or not. Finally, we finish off the week with jobless claims, new home sales, JOLTS job openings, and the final reading on Michigan Consumer Sentiment. Woo! It is a busy week that will definitely be important to market movement.

Foreign Markets

Outside of the USA, Europe and Asia will remain important, but with so much data and earnings on the docket, it will still be a sub-story. The crucial moments to watch are BOJ's Governor Kuroda will speak in Tokyo about monetary policy and Abenomics. Wednesday we get Euro-Zone Consumer Confidence as well as the HSBC Flash Manufacturing PMI for China on Thursday. Further, we get Purchasing Manager Indices for France, Germany, and the Euro-Zone on Thursday as well. WE finish the week with Great Britain's GDP for Q3.

Earnings

Date

Key Company

October 21

McDonald's (MCD)

October 22

United Technologies (UTX)

October 22

Amgen (AMGN)

October 23

AT&T (T)

October 23

Boeing (BA)

October 24

Microsoft (MSFT)

October 24

Amazon.com (AMZN)

October 24

3M (MMM)

October 25

Procter & Gamble (PG)

October 25

UPS (UPS)

It is a big week for earnings especially as this set of earnings will be in the spotlight as the government crisis moves out of the headlines. The key reports to watch are Procter & Gamble, Amazon, McDonalds, Boeing, and UPS. P&G, MCD, and UPS are excellent economic bellwethers, and we have seen mixed bellwethers so far. Johnson & Johnson (JNJ) was strong last week but other companies like Coca-Cola (KO) were not quite as good. Boeing will be interesting to watch in response to their Dreamliner problems, but we are most interested in Amazon. Last quarter, AMZN earnings came in slightly lower than expectations and guided down on revenues as well as operating income.

This quarter, what is in store for Amazon? The key to watch for with this company is if the company notes how pre-order sales of the new Kindle Fire HDX is doing, which according to Paulo Santos is not selling well. It will also be key to see how the company forecasts for Q4. If the company slashes revenue expectations again it would be a big deal because the company has gaming consoles and the new Kindle Fire to release. Finally, we would watch for earnings. While not a lot of progress should be made, it is important to see that these do not decline even further as the company has been consistently dropping margin expectations.

The question for Amazon investors is when do they finally start to show all the investing and taking hits on products like the Kindle as well as distribution centers starts to pay off. If there is weakness in the above topics, we could see some pullback in a stock that has well priced in future growth.

Fed Outlook

After several busy weeks for the Fed as far as speeches and developments, this week is a light week. The Richmond Fed releases its manufacturing index on Tuesday and Kansas City on Thursday. The Fed, though, should start to get back into the mix next week when the Fed meets for its October rate decision.

Conclusion

It appears that economic data and earnings are crucial to this week's market. If things go sour with earnings and economic data, we could lose the bullish trend we have. Yet, we are fairly bullish that the market will have some positive information moving forward. The Fed is going to support this market, and bad data will likely be shrugged off as a result of the issues with the government, which has been "priced in." Market charts are very strong right now, and more upside looks to be on the way.

Stock To Watch

Ticker: Sirius XM (SIRI)

Sirius XM reports earnings this Thursday before the market opens, and after a 40% move YTD and 45% move in the past twelve months, the question is whether there is more upside in shares. Currently, the company possesses a 57+ P/E ratio, a 34 future P/E ratio, and 7+ price/sales ratio. All three are very high, as we tend to look for 20-25 on P/E even for stronger growth names and 3 or lower on P/S. The question, therefore, is how much are shares really worth, and what is crucial about this week's earnings report.

The company is expected to report an EPS of 0.02 versus 0.01 from one year ago along with a 12% revenue increase. For the FY, revenue is expected to jump between 11-12% followed by around 10% in growth in 2014. The real key for Sirius XM, though, is consistently high growth due to the company's entrance into motor vehicles. The percentage of motor vehicles that have Sirius XM software built in continues to grow each month, and as more of these cars become secondary cars or third-use cars, it will be the first time that used cars have the ability to be Sirius-ready. Clients will simply just have to activate the system.

We noted this trend in a previous article:

Currently, the company has satellite offerings in 50M cars through their production in new cars. In the next ten years, that rate should go from 50M to 150M. Tripling the revenue in ten years is a great long-term revenue stream. On top of that, SIRI will benefit as new cars move into the used car industry. As new owners own those cars, they have the ability to instantly turn on the satellite radio. In 2013, the company will see 1.5M gross additions in 2013 to satellite radio. Here is the company's CFO talking about the user car potential:

The next phase is as those cars begin to turn over into the used car market and, by the way we continue to build the new car production, so in the next, we have gone from zero to 50 million cars in the first 10 years of factory installed radios. In the next 10 years, we'll go from 50 million to a 150 million enabled vehicles. But the real story and I think the next 10 years is going to be about access to the previously owned car buyer. 80% of the households in the countries have a previously owned car in them and 70% of the cars sold in the country every year are previously owned vehicle. So, it's a market that we have not really tapped in this first 10 years of execution and I think we are going to have a great long-term growth story in the next 10 years.

Right now, profits are not important for Sirius. The most important and maybe the only number that matters is total users. In the last quarter, users reached 25.1M with 715K users added. Seeing growth in that number is the most important point for Sirius. Anything under 26M will likely be a disappointment.

With this growth, what pricing can we expect for Sirius stock moving forward? If we assume an operating margin of 26%-30% with 8-10% revenue growth, we get the following results:

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income

1025

1140

1240

1398

1565

Taxes

256

285

310

350

391

Depreciation

270

274

278

280

282

Capital Expendit.

-125

-140

-150

-160

-170

Working Capital

-200

-200

-200

-200

-200

Available Cash Flow

1114

1189

1258

1369

1486

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for SIRI: 10.0%

2013

2014

2015

2016

2017

PV Factor of WACC

0.9091

0.8264

0.7513

0.6830

*

PV of Available Cash Flow

1013

983

945

935

*

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for BAC: 3.6%

2017

Available Cash Flow

1486

Divided by Cap Rate

5.0%

Residual Value

29715

Multiply by 20167PV Factor

0.6830

PV of Residual Value

20296

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows

3875

PV of Residual Value

20296

Cash/Cash Equivalents

652

Interest Bearing Debt

3041

Equity Value

21782

Step 5.

Divide equity value by shares outstanding:

Equity Value

21782

Shares Outstanding

6210

Price Target

$4

Even in fairly strong models, though, valuations have gotten quite high. Be careful headed into this report.

Source: Sirius Overvalued, Amazon's Earnings Concern, Weekly Market Outlook