The Monday Morning Kickoff - It Won't Be All Peaches And Cream This Week

by: Tematica Research


We continued to get more economic data pointing toward slower economic growth, particular in the domestic industrial economy.

Expect volatility to continue with more than 1,200 companies will issues quarterly results and outlooks over the next two weeks.

With 2016 S&P 500 earnings expectations looking aggressive, earnings from Apple, Boeing, Ford, Hershey and dozens of other will set the market direction this week.

After what started off as another dismal turn, the stock market rallied in the back half of last week to see the S&P 500 close up 1.4 percent. The rally relieved some of the January pain, but the net result still has index now being down 6.7 percent so far in 2016. The reprieve was fueled in part by two things:

1. Comments from European Central Bank President Mario

Draghi suggesting perhaps another round of stimulative monetary policy could be in the cards and the rebound in oil prices.

2. The move higher in oil prices reflecting a smaller inventory build per the Energy Information Administration (NYSEMKT:EIA) weekly report than that reported by the American Petroleum Institute. Peering into that EIA report, however, US crude oil inventories are levels not seen in the last 80 years.

While oil prices will likely trend higher near-term as the east coast digs out from #Blizzard2016, US refineries are still clocking in at 90.6 percent capacity utilization and crude oil imports are up year over year. We also have to remember that Iran's returning oil exports will soon ratchet up global supply against a slowing global economy. As such, we see a high probability of any short-term oil price bump is likely to be short lived.

For those in doubt over the slowing speed of the US economy, last week's read on the Chicago Fed's National Activity Index for December marked the fifth consecutive month of contracting activity in the US. To us that adds to the concern raised by the recent January Empire Manufacturing Report, which showed "that business activity declined for New York manufacturers at the fastest pace since the Great Recession." Digging into that report we see new orders, shipments and overall business conditions fell sharply in January.

That weakening outlook was reiterated with last week's January Philly Fed Index, which not only remained in contraction territory, but also showed yet another drop in its 6-month outlook indicator, which fell to 19.1 in December, down from 24.1 in December and 43.4 in November. Against that backdrop, it's not hard to see how in its December earnings report last Friday, General Electric's (NYSE:GE) industrials segment posted a 1 percent decline in both organic profit and revenue for the quarter.

In other economic news from last week, unsurprisingly the December CPI report showed a deflationary environment, which we chalk up to the drop in oil and gas prices. Given the weakening economic climate and continued lack of inflationary pressures thus far in the data, there is a high probability the Federal Reserve will leave interest rates unchanged at their meeting next week (Jan. 26-27). Coming out of that meeting we'll be looking for any changes in the Fed's language about the economy and its potential for additional interest rate increases in 2016.

That said, we expect Fed Chairwoman and crew to stick with their now infamous "data dependent." Hopefully the Fed will keep in mind that additional interest rate hikes will only serve to strengthen the US dollar, particularly if the ECB does enact additional monetary stimulus, and add wood to existing currency headwinds faced by Corporate America. We expect to be reminded of those headwinds in the coming days as December quarter earnings kick into higher gear this week.

Turning to the Week Ahead

In addition to the Fed's latest FOMC gathering, this week also brings several pieces of housing related data - New Home Sales and Pending Home Sales for December. Given the sharp drop in available inventory for existing homes, odds are we will see another bump higher in the November FHFA Housing Price index report.

Later in the week, we'll get more manufacturing data points in the December Durable Orders Report as well as the January Chicago PMI. In November, core capital goods orders (nondefense/nonaircraft) contracted modestly, and based on prior December data the odds are high we will see another negative print. The key figure to watch in the Chicago PMI report will be the January order data, following one of the weakest orders prints in several months that was reported in December.

Amid those latest economic gleanings, the velocity of earnings reports has started to pick up week over week, and so far we have to say we've seen more than a fair amount of disappointing, if not flat out weaker than expected outlooks from IBM (NYSE:IBM), Starbucks (NASDAQ:SBUX), Deutsche Bank (NYSE:DB), United Continental (NYSE:UAL), Intel (NASDAQ:INTC), Union Pacific (NYSE:UNP), American Express (NYSE:AXP) and others. That velocity will only accelerate further given the number of companies that will be reporting their quarterly earnings the next two weeks.

In total, we count more than 1,200 companies will issue their December quarterly results in the next two weeks, with a good percentage of them updating their outlook for the coming months. It's not all going to be peaches and cream - it probably won't even be close given the economic climate that is developing and other factors that are helping ratchet up uncertainty. In such an environment, management teams tend to be cautious if not overly so.

Amid that swelling sea of reports, here are some of the one's we will be watching and why:

Monday, January 25

Kicking off the week we get home builder DR Horton (NYSE:DHI)

- We'll also get NVR, Inc. (NYSE:NVR) on Tuesday and PulteGroup (NYSE:PHM) on Thursday. All three will likely benefit from the unseasonably warm temperatures in the December quarter, but we'll be listening to see the trend in home prices as part of our Rise and Fall of the Middle Class investing theme. We'll also be seeing if these two companies confirm expected margin pressures cited by Lennar (NYSE:LEN). We'll find out to what degree all day breakfast and the revamped dollar menu have been boons to McDonald's (NYSE:MCD), and if the one-time fast food king has seen a pick up as Chipotle (NYSE:CMG), which reports next week, has grappled with E. coli concerns.

Tuesday, January 26

The report that most of the market will be waiting for comes after the close and it's the one from our Connected Society poster child - Apple (NASDAQ:AAPL). With the bulk of revenue and profits to be had from the iPhone, quarterly shipments and to the extent the company offers any insight into the first half of the year will have an impact on key suppliers such as Skyworks Solutions (NASDAQ:SWKS), Qorvo (NASDAQ:QRVO), Avago Wireless (NASDAQ:AVGO), Cirrus Logic (NASDAQ:CRUS) and others. We'll also see how initial sales of the new iPad Pro stacked up, how the Apple Watch faired during the quarter. We expect both to be only modest contributors. The subscriber rate for Apple Music is something we're curious to see - specifically if the free-trialers from when the service launched last year are sticking around as their credit card is dinged every month. While not a big contributor to profits like the iPad and iPhone, this subscription-based music model is a game changer for Apple if they can make it work.

Ahead of that report from Apple, we'll have several industrial companies - IIVI (NASDAQ:IIVI), 3M (NYSE:MMM), W W Grainger (NYSE:GWW) and Danaher (NYSE:DHR) - publish their results. We suspect we'll get cautious outlooks that reinforce the slowing economic landscape and currency headwinds that we are seeing as part of our Economic Acceleration/Deceleration theme. Results from both Coach (COH) and Polaris Industries (NYSE:PII) should shed some light on the willingness of consumers to part with their disposable dollars during the recent holiday shopping season.

Wednesday, January 27

Despite the growing amount of data that points to a slowing global economy, airlines and aircraft leasing companies have continued to place new aircraft orders due to the need to replace the aging fleet, as well as grow their overall fleet to accommodate rising world- wide passenger traffic. This puts Boeing (NYSE:BA) at the center of our Rise and Fall of the Middle Class and Replacement Demand investing themes. Given the 15 percent drop in BA shares over the last few months compared to its strong order flow, details in the quarterly report could make this one that moves from our Red Shirt List to the Tematica Select List.

Following results from Charles Schwab (NYSE:SCHW) and TD Ameritrade (NASDAQ:AMTD) last week, we'll look for even more clarity on the looming retirement crisis that is part of our Aging of the Population investing theme. Similarly, PayPal's (NASDAQ:PYPL) quarterly results should shed light on mobile payment adoption that is at the cornerstone of our Cashless Consumption theme. We'll

also be watching results from both Qualcomm (NASDAQ:QCOM) and Cavium (NASDAQ:CAVM) as part of our Connected Society thematic.

Thursday, January 28

Following a strong domestic auto demand in 2015, falling gas prices and bullish comments coming from the North American International Auto Show, we'll be parsing comments from both Auto Nation (NYSE:AN) and Ford Motor (NYSE:F) to get a better handle on replacement demand in 2016. We'll also be looking at new features and functions (infotainment, driver assisted technologies and so on) that will be hitting the dealer lots in the coming quarters.

Amid the rising concern of the China economy, Alibaba (NYSE:BABA) should offer some insight on Chinese consumers as well as the tone of the soon to be upon us Chinese New Year, the largest gift giving holiday bar none. Guilty Pleasure company Hershey (NYSE:HSY) will clue us in on the demand for chocolate and other sweets, but we'll be looking under the hood at what's expected for cocoa and sugar prices as it relates to margin trends in the coming quarters. Under Armour (NYSE:UA) and Harley Davidson (NYSE:HOG) have both seen their shares beaten down over the last few months -

peering into these two earnings reports could indicated if it's time to double down or build a new position.

Friday, January 29

Closing out the week will be reports from Chevron (NYSE:CVX), and its insights on the petroleum market (something that may be a Scarce Resource play in the coming quarters) will be something to note. Also on deck is MasterCard (NYSE:MA) and we'll compare/contrast its results and commentary against that from Visa (NYSE:V) from Thursday and PayPal from earlier in the week to update our Cashless Consumption investing theme. Also Friday, heavy truck manufacturer Paccar (NASDAQ:PCAR) will offer its latest take on demand in both the US and Europe; given rail traffic data and truck tonnage data of late as well as the direction of Industrial Production (contraction!) we expect a lackluster report. More fodder for our Economic Acceleration/ Deceleration theme.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.