Seeking Alpha
Growth at reasonable price, research analyst, newsletter provider, long/short equity
Profile| Send Message|
( followers)  

Summary

After a couple weeks of the market not doing too much except starting to show some overall fear towards the December FOMC meeting, we finally get the report this week about whether Ben and the gang are going to start to taper or lay out a plan to taper. While economic data has improved, we have held that taper seems very unlikely with inflation so low, employment data participation rate questioned, and some weak manufacturing data as of late. Yet, the market is still not sure and no one can be entirely, which makes for a very exciting week.

Chart Overview

The S&P 500 (NYSEARCA:SPY) broke out over 1800 before being rejected and failing support. Now, the index is sitting on 1775-1780 support. If that fails, we have next support 1750.

The Dow Jones (NYSEARCA:DIA) is similar in that it broke key 16000 resistance before being rejected and is now sitting on near-term support with large support below it at 15500.

Economic Data

Date

Data Report

Market Expectations

Previous Report

December 16

Empire Manufacturing - December

5.0

-2.2

December 16

Industrial Production - November

0.4%

-0.1%

December 17

CPI - November

0.1%

-0.1%

December 17

NAHB Housing Market Index - December

55

54

December 18

Housing Starts - November

950K

N/A

December 18

Building Permits - November

983K

1034K

December 18

FOMC Decision - December

0.25%

0.25%

December 19

Initial Claims -12/14

333K

368K

December 19

Existing Home Sales - November

5.00M

5.12M

December 19

Philly Fed - December

5.0

6.5

December 20

GDP - 3rd Estimate - Q3

3.6%

3.6%

It is a very busy week for economic data, and there will likely be extra scrutiny surrounding the data this week as we build into Wednesday's decision. Monday gets us started with Empire Manufacturing Index as well as Industrial Production, which are two big reports to watch. Manufacturing and industry are key gauges for the health of the economy. Empire was negative in the prior month but is supposed to bounce back. On Tuesday, CPI will be crucial, as it will give a look into inflation/deflation conversation. If it is negative again, it will help support non-taper conversation. On Wednesday, we get the FOMC decision as well as key November Housing Starts and Building Permits. Finally, we round out the week with jobless claims, Philly Fed, and the 3rd Estimate for Q3 GDP. Those figures will definitely take on different conversations based on Wednesday's decision.

Foreign Markets

Outside of the USA, Europe and Asia may end up taking a bit of a backseat this week with such a busy U.S. schedule. Further, these markets will likely move mostly based off of what's happening with the Fed. Yet, it is important that we still watch certain reports. On Monday, we get the December PMIs for France, Germany, and the Euro-Zone. Those reports are important to continue to show a rebound for Europe. Further, on Tuesday, we get the Euro-Zone and German ZEW Economic Survey, which are important to understand what economic sentiment in the region is. We finish on Friday with the Bank of Japan Monetary Policy statement, which will be interesting in the context of the Fed. It is a very light week for Asia with a bit more excitement in Europe. Overall, though, these markets will be watching diligently to see what happens with taper.

Earnings

Date

Key Company

December 16

Discover (NYSE:DFS)

December 16

Carnival (NYSE:CCL)

December 18

Oracle (NYSE:ORCL)

December 18

FedEx (NYSE:FDX)

December 18

General Mills (NYSE:GIS)

December 19

Nike (NYSE:NKE)

December 20

Walgreen (NYSE:WAG)

It is a decent week for earnings with some interesting reports to come out throughout the week. While we expect the earnings to be overshadowed by the general market, it is still something to pay attention to especially to get an idea of how companies did with the October-November period as well as how December is starting. The key companies to watch are Discover, Oracle, FedEx, Nike, and Walgreen. DFS, FDX, and WAG will have very solid understandings of how the early holiday spending was going, and that is definitely something to watch. ORCL is a key report for tech that we will discuss further from here, and NKE is a great global barometer. In the light of recovering economies in Europe and bounce back in Asia, we will see if that is translating into success for companies like Nike.

The reports that can most move the market will be Oracle and FedEx. FDX is a great economic bellwether, but ORCL has the power to move the entire Nasdaq. It has been a peculiar year for Oracle with the stock flat YTD and down 2% in the past six months. The company dropped last week another 6% after it received two downgrades last week. Morgan Stanley (NYSE:MS) dropped the stock to Equal Weight while RBC Capital dropped it to their equivalent. MS noted that it was due to valuation, while RBC said that cloud was pressuring the company as well as they had concerns with alternative data management and China spending concerns.

The problem for Oracle has been the growth of young companies like Salesforce.com (NYSE:CRM), Workday (NYSE:WDAY), and Akamai Tech (NASDAQ:AKAM). Oracle has excelled for years as one of the top providers of data management that helped companies achieve strong efficiency in digitizing information. Now, a lot of companies are offering a lot more and maybe even better products. CRM, WDAY, and others have been able to undercut the company with "cloud" computing. In fact, Salesforce was started, as a splinter to ORCL after the company did not pursue the idea.

Oracle has tried to play catch up over the past couple years to the cloud revolution, introducing its new products. Yet, the stranglehold it had on the market is looking very limited with competition so high. The company has seen its rich valuations as an economic moat software giant disappear. The company now sits with a 10x future PE in the same range as other tech companies like Hewlett-Packard , dinosaur Xerox (NYSE:XRX), and struggling semiconductor Seagate (NASDAQ:STX). Is ORCL about the same as HPQ? The market seems to believe so based on valuation.

This quarter will be very crucial for the company. The expectations are that the company will report about 1% in revenue growth and around 4% in EPS growth - not indicative of a growth tech company but rather one treading water. The company needs to decide what its future is going to be, commit to it, and become the best at it. Right now, the company is losing the cloud battle since they are late to the game, so they either have to commit strongly to that and be the best product or introduce something else - or they could struggle for a while. One sign the company gets it is that R&D spending has increased to 13% of revenue compared to 12% in 2010 and 2009.

Interestingly, in the last earnings call, CEO Larry Ellison had to miss the company's earnings call to focus on the America's Cup Race as a slight "slap in the face" to Oracle investors. As revenue growth has dried up, Ellison has played it cool and potentially that is part of the issue. Some shareholders have wanted Ellison to be more focused and take a pay cut given the poor performance of the stock. In this report, he needs to be there and needs to be focused on presenting a game plan for ORCL investors. If he does not have something good up his sleeve, more downside or flatness could be on the way for Oracle.

Here are the key areas to watch for in Oracle's report:

- Revenue growth in Oracle's software and cloud units. In the previous quarter, it came in at 4% growth with license updates up 7%. The company needs to show more traction here to show that they are having success at attracting clients to their new software and cloud network.

- The success of the company's new database system, 12c. In the last report, it was too early to know how successful the new system had been, and this report should shed light on it. The new database needs to be successful to help Oracle overcome this bump in the road.

- Ellison needs to breathe confidence into investors. His miss in the last report along with a year of no movement in the stock price has left investors restless. He needs to have a game plan for growth and to get interest back into the company.

Fed Outlook

The week belongs to the FOMC as they decide on what to do with taper for QE. It is likely Bernanke's final FOMC meeting as Fed Chair, but there is a lot of speculation about whether or not it will happen. The Fed has a lot of data to digest - some good, some bad. The keys to us are interest rates, inflation, and jobs. Inflation has stayed down, but interest rates have shown some ticks up on potential taper news, which is not a positive. Inflation down means QE can continue. The jobs market has shown surface improvement, but the underlying measures of full-time jobs and participation rate decline show not all is well. With Yellen suggesting QE was still a useful tool in her comments for approval, we do not believe they will do anything.

Conclusion

With Yellen potentially being approved, the Senate potentially approving budget for the government, and the Fed skipping over taper, we could be set for a huge week in the market. The Xmas Rally has not happened yet, so a rally starting this week carrying through early 2014 could definitely be possible. If we do taper, though, the question then becomes how far we drop. With the market pricing in some concern already, our expectations are that a move down would be tempered to around 15500, 1750 on the DIA and SPY.

Deeper Look

Ticker: SPDR Gold Shares (NYSEARCA:GLD)

Today, we are taking a deeper look at gold. We have been bearish on gold for much of the year, and this week is a critical week for gold in the short-term. Yet, the long-term mechanisms for gold appear to remain the same. In our last article about gold, we noted that:

One area that could see potential downside is gold. The problem for gold right now is that an eventual taper is going to happen. Gold has been built on cheap money entering the market, weakening the currency, and making gold a more valuable asset. Yet, gold prices will eventually come down as taper is inevitable.

The short-term taper decision will have a large impact on gold. If the Fed decides that they will not taper, we could see a jump in gold, as it has remained hindered by this potential development. At the same time, early 2014 will bring about some form of taper, which will strengthen the dollar and increase bond yields. Those two mechanisms make the appeal of gold a lot less significant, and we believe that it will continue to hold prices in check.

Another reason that gold has limited upside and more downside is the government not reentering a crisis in January. With the House/Senate seeming to agree on a smaller budget deal, the government gets out of the way of the economy. Gold, which acts as a safe haven, will suffer this week if the Senate does approve the House budget deal (and they are expected to approve it). During the last government crisis in October, gold shot up as much as 7% during that debacle only to fold lower once it was over.

Finally, gold has very little use economically, which hinders it over something like silver or platinum. It is not used in any manufacturing and only some jewelry. Therefore, as the economy in the USA improves, gold has a neutral effect not positive effect. It loses its safe haven appeal, but it does gain from the wealth of the country growing and more demand for gold existing from more wealth being created.

So, what do the gold bugs have going for them heading into 2014?

The worst is already priced in. Some are starting to speculate that the outflows from GLD ETF and other ETFs is nearing an end, while gold funds have been so liquidated that they can only start to turnaround. Yet, that does not mean the underlying price increases. Russ Winter did a great job of discussing this phenomenon of inflows coming back. He notes that Sprott Resources saw its funds drop from $3B in 2008 to $350M in the latest report. Here are more comments from Winter:

Rick Rule of Sprott just conducted an interview about this flow of funds situation and offers some color on what's transpiring. I give his last comment first because it points to the timing of what's potentially a real turn in sector money flows. I think he is hinting that the money flow worm has turned from a selling climax to a gearing up phase.

"So all things considered, I have to say the events that have transpired over the last month have made me much more bullish in terms of timing than I would have been six weeks ago," Rule said. "First, has been with regard to our Sprott mutual funds. We are seeing net inflows, as opposed to redemptions, for the first time in a long time.

Yet, the latest gold ETF data shows the bleeding has not stopped yet. In December, bullion held by SPDR Gold Shares dropped to its lowest level since January 2009 with another 10 tonnes shed in December already. For now, gold still needs to get over the taper hump to get going again. What gold bugs should be looking for is a capitulation day. Taper occurs and gold drops significantly in the weeks following. At that point, the market will likely have overpriced the drop and we should be able to see gold start to comeback. When does taper occur? We are looking at the January/February meeting as a legitimate chance, but it is very data dependent. Until then, gold has a lot of mid-term resistance points that will make it very hard for this precious metal to get going again.

Another problem for gold is that the institutions have abandoned it as well. Most analysts have noted more downside in 2014 for gold. That is a combination of what their own clients have been doing with their money, and then what these institutions want clients to do since gold offers little yield. Yet, it is important to note how bearish these companies are on gold right now, and that it plays a role in the resistance gold is seeing.

In its latest update, Goldman Sachs noted that gold will likely drop 15% more in 2014, putting GLD around the $100 level, a level it has not hit since 2009. Goldman claims that the economy's recovery gives very little catalyst to gold. The dollar strengthens, equities have good yield, and fear will be down. Here were comments from Goldman analysts:

We expect the long-awaited shift towards above-trend growth in the U.S. finally to occur, spurred by an acceleration in private consumption and business investment," the Goldman analysts wrote yesterday. At the Fed, "we expect a gradual tapering in bond purchases to begin, most likely in March.

Yet, that overcorrection, will likely be a great time to start to add gold again for the long-term as the cycle will likely begin to shift again as we look to 2015. For now, though, too many downside pressures should continue to hold the precious metal in check. The only likely way for gold to comeback is if the economy does not have the success that people are expecting and disappoints.

Source: Gold Still Has More Downside, Oracle Earnings Preview And What's Next For The Market