The Week Ahead: Eyes On Oil, Earnings and Data

by: Markos Kaminis

After last week's oil plunge and equity market rally, all eyes will be on oil and a handful of key technology companies reporting earnings to start the week. The media has shined the spotlight on OPEC, repeatedly directing attention to the possibility of another production cut. However, last week we declared our expectation that OPEC would be patient this time around, focusing its efforts on three indirect actions to impact the price of crude.

First, we expect the consortium to focus its internal attention on the implementation of cuts that have already been agreed upon. According the group's president, only two-thirds of planned cuts have actually been implemented, and the group is likely pressuring its lagging members to get up to speed. Secondly, OPEC voiced hope last week that non-member producing nations might help drive the price higher through production cuts of their own. Given Russia's history of selfish, and in some instances, menacing energy policy, we doubt this will occur. Thirdly, we anticipate OPEC ministers will continue to voice public concern about the price of crude, providing lip service to the media with a strategic goal to drive the price higher. However, we expect all of these actions to be relatively ineffective. We anticipate the price of oil may steady in the general range between $50 and $55, and if OPEC wants it higher, they will likely need to act further or invent a weather machine...

If oil hands off the baton this week to a new market driver, it could be to a few key technology firms that are scheduled to report earnings. Last week, AMD and SAP reported not so a-OK news, shaking up the tech sector at the end of the week. Also, increasing clarity on the investigation of Apple and its iconic leader, Steve Jobs, led us to flat out recommend investors sell AAPL despite its pioneering vision and interesting new product launches. We believe the last shoe has yet to drop in this story, and Steve Jobs' admission that he was aware of the issue and even recommended a date, implicates him in our view. Indicating that he was unaware of the "accounting implications," does not excuse him, and we are astonished with the amount of denial that seems to exist within the American media concerning his alleged wrongdoing. In fact, we would go as far as saying that if he was anybody else other than himself, Bill Gates or Warren Buffet, he would have been forced to resign by now. It is not the accounting that could eventually lead to his indictment, but the economic benefit to his bank account, and ignorance is no excuse for crime no matter who you are.

Intel has the ability to turn the tech tide with its Tuesday earnings report. Then on Wednesday, Apple can once again temporarily redirect attention from its Co-founder with its own earnings report. We would use any strength that may present itself in the shares to unload. Key financial firms, Merrill Lynch, JPMorgan Chase and Citigroup will also report earnings this week.

Tuesday starts the abbreviated trading week off with the first of a parade of regional manufacturing reports. Last month, the report from the Philly Fed initiated concern about the slowing American economy, before a report from the Chicago area and the ISM eased worries. The New York Fed will post the Empire State manufacturing index on Tuesday, and a survey by Bloomberg News indicates economists' consensus at 20.0, compared to 23.13 in December.

Tuesday's earnings schedule includes Intel Corporation, Wells Fargo & Co., U.S. Bancorp, Forest Labs Inc., Marshall & Isley, Freeport-McMoRan and Linear Technology.

Three key reports headline the economic newswire on Wednesday. At 8:30 a.m., the federal government reports the December producer price index, with consensus expectations for an increase of 0.5%, compared to a 2.0% increase in November. December PPI could be impacted by the increase in import prices experienced in December, which were reported last week and were impacted by higher relative energy prices. However, we believe recent decreases in the prices of metals and aggregates are likely more representative of the true global supply/demand picture than volatile energy prices.

December industrial production and capacity utilization are scheduled to be reported at 9:15 a.m. The consensus expectation for industrial production, as polled by Bloomberg News, is for an increase of 0.1%, as compared to 0.2% in November. The Fed will be watching industrial production closely, to see if it keeps up with the pace of average hourly earnings (reported up 0.5% in December), as it offers the potential to offset pressure from wage inflation. December capacity utilization is seen measuring 81.7%, compared to 81.8% in November.

The market will pay close attention to the Fed beige book, due out at 2:00 p.m. EST, for signs of what the Fed may decide to do at its next open market committee meeting. On the Fed tour marquee this week, San Francisco Fed President Janet Yellen is scheduled to address a group in Scottsdale, Arizona, while St. Louis President William Poole is set to speak in Missouri.

The Treasury Department releases its data on net foreign purchases of U.S. securities in November. Previously we stated our view that capital was not just flowing out of dollars, but out of American securities all together, due to the U.S. standing in the global community and concerns about where the situation with Iran is heading. However, recent emerging market blow ups in Venezuela and Thailand have highlighted the higher degree of risk inherent in emerging markets. It's more likely that if capital were flowing out of the U.S., it would find its way into the Euro region, which is coincidently doing well lately.

The Redbook release at 8:55 EST will give the market yet another reading on the strength of consumer spending, before more key data is posted on Friday. Two important housing readings become available on Wednesday as well. The Mortgage Banker's Association's purchase applications we be posted in the morning and in the afternoon, the National Association of Home Builders will post its housing market index.

Reporting earnings on Wednesday are JPMorgan Chase, Apple, Washington Mutual, State Street, Mellon Financial, Kinder Morgan, Northern Trust, Southwest Airlines, CIT Group, Synovus Financial and Parker-Hannifin Corporation. Washington Mutual's earnings report should provide some insight into the state of consumer credit. The company has recently seen trends in its EPS estimated declining, due to what we believe was some exuberant lending during the building of the housing bubble.

On Thursday at 8:30 a.m., the Labor Department reports December's consumer-price index, which we view as a more important read on inflation that PPI reported earlier in the week. According to Bloomberg's most recent survey, the consensus view is for a 0.4% increase in CPI, compared to no change in November. The January Philly Fed Survey, expected at high noon will give a read of the regions manufacturing activity. A decrease in the most recent reading surprised the market. Once again, the consensus sees an increase this month, amounting to a rise of 3.2, though we have seen two varied consensus figures from Bloomberg. The other indicates an expectation for a reading of 5.0.

December housing starts are due out in the early morning, with the consensus seeing 1.56 million starts, compared to 1.59 million in November's measure. Weekly jobless claims are expected to reach 315,000 for the week ended January 13th, after measuring just 299,000 in the week just prior.

Fed Chairman Ben Bernanke is scheduled to testify before the Senate Budget Committee on the state of the economy. Overseas, the Bank of Japan is expected to conclude its two day meeting with a decision on interest rates. Finally, due to the shortened week, the Energy Information Administration will provide its petroleum status report a day later than normal.

Companies reporting earnings on Thursday include Merrill Lynch, Unitedhealth Group, Bank of New York, BB&T Corp., Capital One Financial, Fifth Third Bancorp, Harley-Davidson, International Game Technology and Sovereign Bancorp.

Friday concludes the week with a key consumer reading in the January consumer sentiment report from the University of Michigan. Bloomberg's consensus expects a measure of 92.4 compared to 91.7 in the December read. Due to the shortened holiday week, the EIA will report weekly natural gas inventory on Friday this time around. Reporting earnings, look for Citigroup, Schlumberger, Motorola, Suntrust Banks, Regions Financial, Johnson Controls and Keycorp.