Welcome back everyone, it’s been over a month since my last post, been busy finishing up the last month of school, semester was good overall but not quite exceeding my expectations, win some, lose some. Let’s get down to business. We have been seeing this pattern of equities selling off and the dollar rallying after Fed interventions for the last 3 years now, and it seems like we are currently in that rut. Within the last month Operation Twist/QE3 ended and we have been seeing a bit of pressure on equities. The Euro this week broke below 1.30 and traded down near a 1.28 handle. We still have to remember that nothing in Europe is fixed and the US is not surrounded by a bubble; whatever happens overseas DOES affect us here.
This is what I foresee happening the rest of this month/this summer:
- With corporate earnings relatively in line to beating estimates recently, the Fed probably believes that we are back in somewhat of a recovery
- No more rounds of QE
- We will see equities weaken and the Dollar rally, Euro could go below 1.25
- Europe will continue to be a problem with yields still very high, Greece could leave Euro Zone as early as sometime this summer, worst case scenario
What got me a bit concerned was about two months ago when McDonald’s came out with their comps and mentioned slowing global growth, especially China. MCD stock is off about 10 dollars since this, took a huge hit this week, and will be interesting to watch under 90.00 if we get there. MCD is down 8.4% YTD and is one of the worst performing Dow 30 stocks thus far.
Above (via ZeroHedge) is what I was talking about. Notice equities get a bit uneasy after the Fed stops intervening.
We have a slew of Macro data out next week, some of which will be market moving.
· Tuesday, May 15th:
o 8:30AM Retail Sales Exp 0.2% Prev. 0.8%
o 8:30AM CPI Exp. 0.0% Prev. 0.3%
o 8:30AM Core CPI Exp. 0.2% Prev. 0.2%
o 8:30AM Empire Manufacturing Exp. 8.4 Prev. 6.6
o 10:00AM Business Inventories Exp. 0.3% Prev. 0.6%
o 10:00AM NAHB Housing Market Index Exp. 26 Prev. 25
· Wednesday, May 16th:
o 7:00AM MBA Mortgage Index
o 8:30AM Housing Starts Exp. 680K Prev. 654K
o 8:30AM Building Permits Exp. 730K Prev. 747K
o 9:15AM Industrial Production Exp. 0.5% Prev. 0.0%
o 9:15AM Capacity Utilization Exp. 79.0% Prev. 78.6%
o 10:30 Crude Inventories Prev. 3.652M
o 2:00PM FOMC Minutes ßBig event
· Thursday May 17th
o 8:30AM Initial Jobless Claims Exp. 365K Prev. 367K
o 8:30AM Continuing Claims Exp. 3.25M Prev. 3.229M
o 10:00AM Philadelphia Fed Exp. 8.8 Prev. 8.5
o 10:00AM Leading Indicators Exp. 0.2% Prev. 0.3%
We also have a few earnings reports out this week, biggest ones to watch for:
o Silver Wheaton
o Home Depot
o JC Penny
o Pan American Silver
o Saks Fifth Avenue
o Chico’s FAS
o Limited Brands
o Advanced Auto Parts
o Dollar Tree
o The Gap
o Ross Stores
o Teekay Tankers
Looking at Home Depot before they report, I’m seeing a big sell here. They have performed very well in the past year, especially compared to Lowes.
Above, HD is up more than double, 36% compared to Lowes, 15%. Since people are not buying new homes but fixing them up, I can see why both have done well, but I am still not convinced this rally can continue, especially nearing ’07 levels. What I am most concerned about is their margins. Looking on a q/q basis, we have been seeing declining margins as shown below:
Going forward, I still think they can be a very profitable business, but am worried investors might sell this off on just a slight miss. They have cut their costs drastically, but revenue has been declining since mid last year.
Next, looking at Deere, I can also see the same thing happening here. If it is true global growth is slowing, this is a name that will be directly affected. Revenue and income took a huge hit in Q1 ’12 down from 8.44B to 6.63B and 669M to 532M respectively.
Technical analysis shows DE as a sell
I also spotted a Death Cross (50day crossing below 100day) in this chart, could have the potential to cross under the 50% retracement 52wk hi-lo which is 75.26.
Next, looking at Target and Wal-Mart. WMT has been in the news recently with some bribery scandals in Mexico, seemed to be a one and done event, stock is up $2 from its low since then, but still more than $3 off it’s 52wk high. I’m a bit cautious here, and want to look more into buying TGT instead. TGT have performed about the same and has a strong chance to get toward 58-60 on a solid report. I like both names, but the potential for WMT going up here is lower, in my opinion. WMT is flirting with all-time highs, wile TGT at 60.00 was last seen in ’10 and still more than $10 off all-time highs from there. Below is a YTD performance of both names.
Last, looking at one of the stronger names for the last few years, but spotting some slowing growth is Advanced Auto Parts (AAP). We all know the whole story here, less people buying cars, more fixing them up. In my previous posts, I have been a big fan of AutoZone from around 300, has done very nicely since last fall, but I’m seeing some red flags for both. Once again the issue is shrinking margins.
As shown above, there are 2 quarters in a row of revenue decline with net income almost being cut in half, while stock continued to rally. Would not be surprised to see a slight guidance cut for ’12; the stock has had a great run in the last 3 years, time to take some off the table.
Also, putting a big sell rating on Sears before their report; 4 quarters of negative growth and the last one losing 2.4B, not good at all.
That’s all for this week, catch me on twitter @peter_eller10 for more updates.