Monday, August 27, 2012

Preview of Macro and Earnings 8/27-8/31

It is getting to be that time of the year again; yes the school year is approaching once again. I have been enjoying the last week of summer with my cross country team here at school and it has been great despite not yet being able to run. I am feeling very optimistic that soon enough I will be back out on the trails, but for now, just a lot of strength training and cross training.

The past two weeks the markets have been drifting up on low volume no news, which seems to be the normal pattern for an upward trend. We are pretty much unchanged in 2 weeks with a very narrow trading range between 1404-1424 in the S&P futures .This past Tuesday into Wednesday, we started to see Europe headlines appearing back on the wires. This brought futures below a key support 1400, though quickly recovered as the day continued. Long-term (10 years out) I believe we will be higher, though near term we will continue to see troubles from Europe as they will widdle their way back into the news. Massive amounts of monetary policy cannot fix bad ficsal policy.

We have a lot of macro data out this week, mainly manufacturing and housing, following a very light past couple of weeks, so this should be one to pay attention to, seeing as the slight bull run we have had in the past 3 weeks seems to be coming to an end.

10:30 AM EST Dallas Fed Survey
Prev -13.2 Consensus -6.0 (range -10 to -5)
Survey of about 100 manufacturers in Texas. US Flash PMI last week gave us a read higher than consensus, which has been the 1st time that has happened  in a few months. This tells me that even though global manufacturing growth is slowing, US manufacturing is growing, but stagnant. I still expect a read below consensus on Dallas fed.


9:00 AM EST Case Shiller Home Price Index
Seasonally adjusted M/M
Prev 0.9 %
Consensus 0.4 %
Range 0.2 % to 1.0 %
Non-Seasonally adjusted M/M
Prev 2.2 %
Consensus 1.4 %
Range 0.9 % to 1.5 %
Non-Seasonally adjusted Y/Y
Prev -0.7 %
Consensus 0.0 %
Range -1.5 % to 1.0 %
After 3 previous months of increased home prices (.9% in May and modest gains in March + April), we still expect to see an increase, but at a slower pace, seasonally adjusted. Housing will continue to be a difficult market to gain traction as supply is still flooding the market.

10:00 AM EST Consumer Confidence
Consumer Confidence 
Prev 65.9 
Consensus 65.8 
Range 63.0  to 68.0 
Expect there to be little change in consumer confidence for the month of August. We can see from the chart below of Retail Sales and Consumer Confidence that they generally move in tandem, and Retail Sales have been slowing for the past year.

 10:00 AM EST Richmond Fed Manufacturing Survey
Prev -17 
Consensus -10 
Range -12  to -7 
Looking to be the same picture as Dallas Fed, look for continued slow growth


Prev 1.5 %
Consensus 1.7 %
Range 1.4 % to 2.0 %
The second read of Q2 GDP we expect to see a slight uptick, but still below Q1 '12 levels of 2.0%

 10:00 AM EST Pending Home Sales
Prev -1.4 %  Consensus 1.0 % (Range -1.5 % to 3.5 %)
After last months read was revised down due to a shortage of supply (odd),  expect to see a tick up.


8:30 AM EST Jobless Claims
Prev 372 K
Consensus 370 K
Range 365 K to 375 K
Expect to see little change in unemployment claims this week as we get toward the end of the month

8:30 AM EST Personal Income and Outlays
Personal Income
Prev 0.5 %
Consensus 0.3 %
Range 0.2 % to 0.4 %
Consumer Spending 
Prev 0.0 %
Consensus 0.4 %
Range 0.2 % to 0.6 %
new motor vehicle sales were down 2.0 percent in July while retail sales excluding autos jumped 0.8 percent, so expect to see a slight jump in consumer spending for this months read.

10:00 AM EST Kansas City Fed
Prev 5 
Consensus 5 
Range -5  to 6 
There was improvement in July, rising to 5 from 3 in June, showing a slightly stronger growth rate, though details were mixed. The production index went  to 2 from 12 in June. New orders did improve, but remained in negative territory, rising to -4 from -7. Expect to see the slow growth continue.

9:45 AM EST Chicago PMI
Prev 53.7 
Consensus 53.0 
Range 51.0  to 54.5 
 Expect this to follow suit with ISM manufacturing, which is also getting close to contraction, although a preliminary look at PMI last week showed a slight sign of hope.

9:55 AM EST Consumer Sentiment
Prev 73.6 
Consensus 73.5 
Range 73.0  to 75.0 
A small survey done in Michigan with 500 households participating on feelings of economic conditions. Any read above 80 is considered positive sentiment.

10:00 AM EST Factory Orders
Prev -0.5 %
Consensus 2.0 %
Range -0.4 % to 2.6 %
 New factory orders have been down in the past few months due largely to the decline in orders in natural gas and coal, where we see too much supply and problems with clean energy respectively. Y/Y we have seen new orders and shipments come back down from highs reached 2.5 yrs ago to about the unchanged level, signaling some tough times are yet to come.

Earnings for the 2nd Quarter are starting to dwindle down as we near the beginning of September, more than 2/3 of the S&P 500 have reported this quarter, mostly a mixed picture with the consumer names (ones I am bullish on) continually beating and raising guidance, while the manufacturing names continue to slow. We are also seeing a big push into the high yield corporate bond market, especially the  HYG and LQD, which have had stellar performances this quarter.

This week, most of the Canadian banks report their earnings, so we will get a peek at how our neighbors north are fairing the slowing global economic conditions.

Monday: PVH Corp.
Tuesday: Bank of Montréal, Bank of Nova Scotia
Wednesday: Brown-Forman, Heinz, Joy Global, Pandora, Vera Bradley, Zale Corp.
Thursday: Royal Bank of Canada, Toronto-Dominion Bank
Friday: Cubic Corp, Frontline

I will be previewing Heinz, Joy Global, and Frontline

Heinz is the maker of ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition and other food products. They do their business globally, but since they are a consumer staple, a company like this would be little affected by a global slowdown or any sort. Heinz just hit an all-time closing high Friday just above 56.00 with a p/e of about 20. They continue to see record revenue growth, though were hit by higher operating expenses last quarter which drove profit margin from 10% to 6%. I don't see any real concern here, seeing as they are probably onetime expense items.

In an uncertain environment as a long term investor, I generally look for growing companies with a safe dividend yield, and no better company than Heinz can fit that picture with a 3.66% dividend. They have also increased their divided by nearly 10% every year for the past 9 years, not suspending or decreasing it during '08. Even though this company continues to make all-time highs, the revenue growth is there, so this would be a great company to be buying long-term.

Above, a chart of Heinz with 50 and 100 SMA and MACD both looking bullish long term.

Next, Joy Global, which is a servicer of mining equipment for the extraction of coal and other minerals and ores. The Company's equipment is used in mining regions throughout the world to mine coal, copper, iron ore, oil sands, and other minerals. Seeing what has happened with coal stocks and this sector for the past year, this is not a name I would want to own. Although its P/E ratio is very low (about 8) I don't expect them to keep up with their earnings in the coming quarters. If Obama gets re-elected, which in my mind looks like it will happen, he will do anything possible to get consumers to use clean energy, limiting the amount of coal extraction needed for energy purposes. Although coal is not all they extract, so they are a very economically sensitive name, and seeing how manufacturing growth is slowing at a substantial rate, Joy is being hit with a double whammy.

Their revenues and income have been fairly stagnant for the past 4 reporting quarters, but the slowing is definitely there. Share prices are down almost 50% from the highs this March, don't be fooled into thinking this is a value trap because I believe we are going to be seeing some rough times ahead for this company.

Above, a chart of JOY, notice Death cross in April at the 2nd sell signal, then gapped down 20+ dollars from there, some momentum has picked up in August as the overall market has had a good far.

Finally, Frontline, which is the owner of large crude tankers, has seen its share of dark days in the past year and a half, down 85%. This company is basically dead in the water, barely edging out a gain in their last reporting quarter. The problem here is a flooded supply of vessels, with slowing demand for oil. I was reading an article this past week on how future drilling techniques could extract oil at a faster rate. Putting this into perspective, that could flood the oil supply market when demand would still be the same, and still put pressure on the tankers.

They have lost a ton of money in one year and their equity positions are just about dried up, on enough they will have to sell off assets and some sort of bankruptcy will take place. I see no light at the end of the tunnel for Frontline, and for those of you who like to catch falling knives, good luck and wear some thick gloves.

Above is a 2 year chart of Frontline, long term investors have been hit pretty hard here.

Have a great week everyone, as for me, I will be focusing most of my time to looking at our schools stock portfolio, follow them on twitter @bonasimm we are a long-only equity money management team, with roughly $200K AUM.

Monday, August 13, 2012

Preview of macro/earnings 8/13-8/17

Welcome back everyone, its been a couple weeks since the last update due to final exams and a bit of a last hurrah over here at Oxford. I can say that it has probably been my best summer yet, but I’m home now and heading back to school for fall semester this upcoming Friday.

After the employment report two Fridays ago, we saw a huge unexpected jump, and the market reacted in a positive manner. My opinion, that was a good number, but to continue upward movements in the market like that, we need to continue to see numbers like this or 200K+ month in and out.

This past week was pretty light on all aspects, we drifted up a bit, with the S&P up just over 1% and the NASDAQ up nearly 2%, mainly driven by Apple.

I expect markets to be a bit more volatile this week with the large amount of data being released, we seem to be in the formation of a market top, being a bit over 1% away from 4 year highs. I am still a bit confused as to why the market keeps going up when growth is continuing to slow, but it is all about following the trends.

Above a picture of the weekly performance of the S&P 500, NASDAQ and Dow Jones
Along with a look at ES_F CL_F and EUR/USD futures.

Reviewing my recommendations from the last post, we saw Texas Roadhouse down slightly, but beat expectations. Looking at internals from the report, they beat EPS .28 v .22 and revenue is growing at a steady pace as they continue to build more restaurants.
Kent Taylor, CEO of Texas Roadhouse, commented, “Our results remained strong in the second quarter highlighted by 15 percent revenue growth and a 28 percent increase in diluted earnings per share. We are encouraged by the impressive sales volumes currently being generated by our 2012 restaurant class. Our solid real estate pipeline will enable us to grow at least 25 restaurants in 2013. Finally, our balance sheet and cash flow remain healthy as we continue to internally fund our growth while returning excess capital to our shareholders through dividends.” Overall, the conference call was optimistic and he is looking for more growth in the restaurant sector as 2013 is quickly approaching. So far this year, they have built 15 new restaurants. I mentioned that this place is busy, and I am not lying when I say that, every time I drive by, the parking lot is full.

Frontier Communications, one of my long holdings, is up 25% after is earnings report from July 31st. Earnings estimates and revenue were both below expectations, but it was Maggie Widerotter, CEO of Frontier on the conference call saying that “Frontier’s second quarter 2012 showed solid revenue performance and the highest operating margin since the closing of our acquisition,” said Maggie Wilderotter, Chairman & CEO of Frontier Communications. “Our strong results were positively impacted by our proactive revenue initiatives commenced in the second quarter to rationalize our product set and our customer pricing. Our new, residential tiered pricing gives customers flexibility and choice, which should enhance the run-rate of our financials for the second half of 2012. During the quarter, we expanded our network’s broadband reach to an additional 60,000 households and are aggressively focused on increasing our overall network speeds over the next eighteen months. Frontier is also excited to be connecting 92,876 additional broadband homes through our $71.9 million receipt of the Federal Communications Commission’s Connect America Fund, which is aligned with our corporate goal of improved broadband connectivity for rural America and we will connect even more broadband households starting in Q4 2012 through our recent agreement with Hughes Network Systems.” That was the bit of good news though, but troubling was that FY estimate EPS for ’13 may be guided down from .24 to .20, seeing that the last 4 reports have all come under expectations. The stock now is trading at a bit of a premium with a rich P/E if that is going to be the story. I have an upside target of $5.00 set on the stock, which is where most analysts have it at now, I will reevaluate there, but I may look into selling it, seeing subscriber growth is really coming to a halt as people are looking for cheaper alternatives.

Invesco Mortgage Retail also came in a bit below expectations at $79.8 million, or $0.68 per share for the quarter ended June 30, 2012 compared to $84.1 million, or $0.72 per share from Q1 ’12. Book value per share stayed about the same. Since almost all of their earnings are paid out in dividends, the dividend will stay close to what the EPS is. I continue to be long this company, along with analysts estimates being brought up to 21.00

Dominion Resources reported in line with analysts estimates EPS, but a slight revenue miss. The stock is down about 2% from the release of the numbers, though looks to be a good long term hold for an income stream.

 Marco data for this week is as follows:

No major data

8:30 AM EST Producer Price Index
Prev 0.1 % Consensus 0.2 %   (range -0.2 % to 0.6 %)
Ex food + energy Prev 0.2 % Consensus 0.2 %            (range 0.0 % to 0.2 %)
Measure of the average change over time in the prices received by domestic producers of goods and services. Consensus expects to see a slight tick up, but I see a flat to disappointing number ahead of us.

8:30 AM EST Retail Sales
Prev -0.5 % Consensus 0.3 %  (range0.0 % to 0.4 %)
less autos prev -0.4 %  consensus 0.4 % (range 0.1 % to 0.7 %)
Less Autos & Gas prev -0.2 % consensus 0.5 % (range 0.3 % to 0.7 %)
Measure of the total receipts at stores that sell merchandise and related services to final consumers. We expect to see a few ticks higher after last months dismal report, but the continuing trend seems to be lower in the near term. I expect a read higher than last month, but not quite what consensus is saying.

10:00 AM  EST Business Inventories
Prev 0.3% Consensus 0.2% (range -0.1% to 0.5%)
The dollar amount of inventories held by manufacturers, wholesalers and retailers. Last month we saw a tick up in the inventories to sales ratio, to the highest in a year, something to keep an eye on as manufacturing is slowing, less products will be sold.

8:30 AM EST Consumer Price Index
Prev 0.0 % Consensus 0.2 %   (range 0.0 % to 0.5 %)
less food & energy prev 0.2 % Consensus 0.2 % (range 0.1 % to 0.2 %)
As we have seen the US dollar continue to gain strength on the Euro and other currencies, we see the CPI hit new 2 year lows. Look for continued signs of weakness and deflation as growth continues to slow. I expect a slight tick up but no very large gains in CPI for the near term.

8:30 AM EST Empire State Manufacturing
Prev 7.39 Consensus 7.00 (range -2.00 to 9.00)
No doubt in my mind this goes negative, we see the correlation and weakness to the Philly fed numbers and we are ready for further contraction in the manufacturing sector.

9:15 AM EST Industrial Production
Production prev 0.4 %  consensus 0.5 % (range 0.3 % to 1.1 %)
Capacity Utilization prev 78.9 % consensus 79.2 %      (range 79.0 % to 79.6 %)
Manufacturing prev 0.7 % consensus 0.5 %      (range 0.2 % to 0.8 %)

8:30 AM EST Housing Starts
Starts prev 0.760 M     Consensus 0.750 M     (range 0.695 M to 0.785 M)
Permits prev 0.755 M   Consensus 0.766 M     (range 0.695 M to 0.805 M)
We see continued slow growth in the housing market, surely this sector will turn around, but it will be decades. As shown below, at least we are above 600K, but well below the 1.5-2M we were seeing in the mid 2000’s.

8:30 AM EST Jobless Claims
Prev 361K Consensus 365K (range 355K to 375K)

10:00 AM EST Philadelphia Fed Survey
Prev -12.9 Consensus -5.0 (range -16.5 to 0.0)
Look for continued weakness here

9:55 AM EST Consumer Sentiment
Prev 72.3 Consensus 72.0 (range 71.0 to 75.5)

10:00 AM EST Leading Indicators
Prev -0.3% Consensus 0.2% (range 0.0% to 0.4%)

Earnings reports for this week:

Monday: Sysco

Tuesday: Estee Lauder, Home Depot, Saks, TJX Companies, Valspar

Wednesday: Abercrombie, Cisco, Deere, Target

Thursday: Bon-Ton, Dollar Tree, Wal-Mart

Friday: JM Smucker

I will be looking at the following 3 companies: TJX, Cisco, and Dollar Tree

TJX is a discount clothing and home fashions retailer in the US, Canada and Europe. In the past I have been bullish this name mainly on the prices they sell their clothing at when they are name brand items. The stores are generally busy, but the problem facing them is their European growth is slowing and it is starting to hurt. We saw last quarter revenue drop from 6.7B to 5.8B, with net income 10% below the previous read. Going forward, as long as they can outperform in the US and Canada, which is where they are getting most of their revenue, being long this name would not be a bad idea. I do expect them to beat earnings on Tuesday, due to the American presence who are continuing to look for a bargain as disposable income dwindles.

TJX’s main competitor is Ross Stores and their chart patterns are very similar. Ross reports on Thursday.

Next, Cisco which designs manufactures and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry It has five segments: United States and Canada, European Markets, Emerging Markets, Asia Pacific, and Japan. Seeing from where it does most of its business, I expect a pretty dismal report from Cisco this week, they have tended to not perform very well in the past, and have had no real upward traction since the economic crisis in ’08. Another reason is John Chambers the CEO is most known for being pessimistic and not mentioning many sparks of hope. Looking at their balance sheets, net income has nearly doubled in a year, though has slowed the past two quarters. Emerging Markets and Europe will be a huge problem this quarter and I am sure Chambers will mention that on the call. The only spark I see in CSCO long term is possibly the 1.8% yield, but there are better, higher income stream companies to put your money into, expect disappointment.

Up next one of my long-term favorites, Dollar Tree. They are a discount store selling nearly every item at a dollar; 98% of their stores are located in the US with the rest in Canada, so full North American exposure is a definite plus. The past two quarters were a bit concerning to long term investors as we saw income drop from 187M to 116M, though mostly due to onetime items. The trend is still up, as people will continue to buy inexpensive items.

Above comparing Dollar Tree to Dollar General and Family Dollar, they have all had good performances ytd, I expect long term growth for all of these companies.

I will be looking at other names this week at well included on the list, we should be a bit more volatile and should see some sense of direction taking us into the fall and out of the light volume summer.