The Week Ahead: Double trouble from Sears and jobs
Posted
Dec 01 2008, 03:30 AM
by
Andrew Horowitz
Rating:
So far this season, we have seen a mixed bag of earnings. Earnings are light this week but several important economic indicators are coming out over the next few days.
While earnings and market news are both important, economic data is considered a general measure of our system's financial stability. Though many of these indicators are lagging, since they look back at the previous month, they can provide us a with good indication of where our economy may be heading.
Typically these numbers are issued monthly and the market will usually only react to substantial deviations from expectations. In fact, if investors have already priced in a disappointing outcome, the market may be muted following the data release. Here's what is coming out this week and what to expect.
Monday, December 1st
Construction spending is to be released today. It is defined as the dollar amount of residential, non-residential and public expenditures for new construction. In the current environment this indicator is worth noting as it may "tip the hat" of when the housing / lending crisis may turn around. If we get a hint of an increase in construction spending, it could suggest that the real estate decline is finally leveling off. As depicted in the chart, since the end of January 2006, the year over year change in construction spending has been in a sharp decline. This month the market is expecting another decline of -0.9%. and until credit begins to thaw, we do not expect construction spending to significantly increase.
Tuesday, December 2nd
Sears Holdings is expected to report earnings today and analysts are looking for a loss of $0.50 per share vs. $0.01 per share seen in the year ago period. The past five quarters of earnings per share growth have been negative and this quarter should be no different. With an expectation of dismal holiday sales, Sears may continue to suffer into the next several quarters. What was once billed as a great opportunity to profit from a retail giant with massive real estate holdings has now turned into a monumental disappointment. Management is continuing to search for ways to turn it around and regain profitability in a time when it may be next to impossible. (See my warning - Stock Valuation Sears in Focus)
TREND: Neutral / Stock Scouter = 7
Wednesday, December 3rd
Employment data is probably the the most important piece of information we will need to digest this week -- absent another bailout. The first report will be the Automatic Data Processing (ADP) National Employment Report. This is a measure of non-farm private employment to which ADP provides payroll services. Last month we saw a loss of 157,000 jobs and it is expected that this month the number to will swell to 173,000. Increased unemployment only worsens the situation we are currently facing and will surely be an urgent agenda item for President-Elect Barack Obama's economic team.
Del Monte Foods is expected to report $0.12 per share vs. $0.14 per share reported during the same period a year ago. Although Del Monte Foods has fallen more than 60% over the past year, the company may show some signs of life into the next few quarters. This is because commodity prices have fallen from their obscenely high levels reached during the summer and that turn may help to increase profit margins, helping to bring them back on track to increased profitability.
TREND: POSITIVE/ Stock Scouter = 10
Thursday, December 4
Initial claims will give us another peek into the United States employment situation. If past data is any indication of what the future will bring, we are in for a significant increase in the number of new claims. As seen in the chart below, initial claims have been on the rise and are now approaching record levels. Corporations are continuing to lay off workers in an effort to stem losses and we do not believe this release will provide any indication that the economy is improving.
Recent intervention by Treasury Secretary Henry Paulson to support mortgage backed securities may eventually benefit Toll Brothers, but it is probably too early to tell. As you may imagine, we are not too excited about the reckless spending that we have witnessed over the past few weeks as the hangover awaiting our economy may be nasty. Even as the housing market crumbles, homebuilders will continue to build. Watch today for Toll Brothers to report earnings which are expected to come in at a loss of $0.39 per share as compared to a loss of $0.52 from the previous year. Even as this is a 25% annual increase, sales continue to decline and earnings projections for 2009 are negative.
TREND: NEUTRAL/ Stock Scouter = 6
Friday, December 5th
Finally, Friday is here and it is a big day for economic data. The highly followed and well regarded unemployment data released by the Bureau of Labor Statistics is expected to show a loss of non-farm payrolls approaching 300,000 and the unemployment rate should rise to 6.8%. If this is true, it will be the highest level of unemployment we have seen since the early 1990’s. President-Elect Barack Obama has made it clear that he is ready to combat this issue and has already set plans in motion to rescue 2.5 million jobs. Any positive surprise on this data could send the markets higher considering the massive amount of stimulus the government has recently pumped into the system and the actions taken to stabilize markets. However, this is not likely though anything short of a disasterous number could be considered progress.
Related reading:
TDI Podcast 85: PinPoint Charting the Next Market Move
Bleak Friday for Retailers
The Real bailout cost? $7.4 trillion
TREND indicates Horowitz & Company short-term trading indications. These take into consideration market conditions, technical analysis and company outlook.
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
