Let the Earnings Season Begin

Includes: AA, LNG, OCN, SHZ, SOL
by: David Brown

The market had a wait-and-see attitude today, as it anticipates the fourth quarter earnings season, which kicked off with Alcoa’s after-market announcement. The first major company to report, Alcoa (NYSE:AA) beat analysts’ estimates (+$0.21 versus the estimated +$0.19). The S&P 500 closed down slightly (-0.14%) at 1269.75.

Earnings season opens amid a plethora of economic reports and against a political backdrop of the Republican takeover of Congress and continued global economic uncertainties, specifically Europe’s renewed concerns about Portugal. As for the economic reports, Wednesday’s Beige Book will give us a report on economic conditions that will be used at the FOMC meeting later in the month. Thursday, we’ll get another look at jobless claims and the producer price index (PPI). On Friday we’ll have a whole slew of important numbers: retail sales, industrial production, consumer price index (CPI), consumer sentiment and business inventories. The PPI and CPI will let us know how we’re doing on inflation.

Week in Review. After the roaring start last Monday, the market did very little for the remainder of the week, despite the surprising ADP report on Wednesday, which reported an astounding 297,000 new jobs versus the 92,000 expected. The market barely had time to respond before Thursday’s initial jobless claims threw in a heavy dose of reality. After dipping below 400,000 the week before, initial jobless claims jumped back over that line, coming in at 409,000. The market didn’t like that much, nor was it mollified by the small reduction in the unemployment number announced on Friday. The figure dipped slightly to 9.4%. Still unacceptable, but the best figure we’ve seen in some time.

Market Stats. Large-cap Value made something of a turnaround over the past month. For 11 months of the past year, it was the poorest performing cap/style, but last month and last week, it shot to the top, up +1.08 for the week and +5.0% for the month. That performance can be attributed partly to the strength in the Finance Sector, but I doubt that level of performance can be sustained over the next months. As for the worst performing cap/style last week, it was Small-cap Value, up +0.18%.

Our SectorCast did quite well last week, projecting Health Care, Technology and Finance as the top three, and indeed, they were among the top five. One we didn’t get right was Consumer Durables. We projected it to come in dead last, but it shot to the top instead (up +2.68%), outperforming all other sectors last week. Consumer Durables include building-related industries (furniture and appliances), but also includes automotive manufacturing and sales. December’s heavier-than-expected auto sales were the likely reason for the surge in performance in this sector. The Transportation Sector was also higher than expected, likely due to holiday travel and shipping.

SectorCast expected Consumer Non-Durables to be weak, and it came in at the bottom. The other sectors fell more or less in line with our projections.

Looking ahead, SectorCast finds Basic Industries, Energy, and Technology likely to outperform in the short term. Consumer Durables, Consumer Services and Transportation are expected to lag.

This week’s economic reports and other fourth quarter earnings releases will go a long way toward setting the tone for the remainder of the month. In the meantime, I am cautiously optimistic.

4 Stock Ideas for this Market

This week, I started with the Hidden Gems preset search in MyStockFinder (http://MyStockFinder.com). Here are four intriguing stock ideas from the top-ranked sectors. Each carries a Strong Buy rating from the Sabrient Ratings Algorithm.

China Shen Zhou Mining (NYSEMKT:SHZ) – Basic Industries
Cheniere Energy, Inc. (NYSEMKT:LNG) – Energy
ReneSola Ltd. (NYSE:SOL) – Technology
Ocwen Financial Corp. (NYSE:OCN) – Finance