LOTS OF DATA NEXT WEEK

By Dirk Van Dijk, CFA, Zacks Investment Research

The flood of earnings reports is slowing to a trickle. Now it is mostly down to the retailers, who tend to have October, rather than September, fiscal period ends. A total of 212 firms are scheduled to report, including 27 of the S&P 500.

The firms reporting next week include: Abercrombie & Fitch (ANF- Analyst Report), Applied Materials (AMAT - Analyst Report),Dell (DELL - Analyst Report), Heinz (HNZ - Analyst Report), Home Depot (HD - Analyst Report), Lowe’s (LOW - Analyst Report),Target (TGT - Analyst Report) and Wal-Mart (WMT - Analyst Report).

The pace of economic data releases will be on the heavy side. We get both key measures of Inflation the PPI on Tuesday and the CPI on Wednesday. Tuesday also brings Retail Sales, while Wednesday brings Industrial Production and Capacity Utilization. On the housing front we get the National Asociation of Homebulders index, and Housing Starts/Building Permits.

The week finishes up with the leading economic indicators. So there will be plenty that has the potential to move the market, in addition to what ever news flows from the other side of the Atlantic.

Monday

• Nothing of particular significance.

Tuesday

• The Producer Price Index (PPI) is expected to fall 0.2% in September after having risen a surprisingly high 0.8% in September. Stripping out volatile food and energy prices it is expected to rise 0.1% a slight deceleration from the 0.2% pace last month. Those numbers are for finished goods. The report will also show how prices are behaving further up the production food chain at the Raw Materials and Intermediate stages of production. Those numbers tend to be much more volatile than the numbers for finished goods, but can sometimes offer clues as to the direction of finished goods prices in the future.
• Retail Sales are expected to have risen by 0.4% in October after having been up 1.1% in August. This is a very broad-based measure of retail sales, including not just spending at the mall, but also at auto dealers and at restaurants. October was a strong month for auto sales as the supply constraints due to the Japanese disaster eased. Excluding autos, retail sales are expected to have risen by 0.2% after a rise of 0.6% in September.
• The first of the regional mini-ISM’s comes out, the Empire State Index. This one, unlike the overall ISM, has 0 instead of 50 as the dividing line between growth and contraction. Lately it has been very weak, indicating that the manufacturing sector in New York State has been contracting. The September reading was -8.48. For October, the consensus is looking for 0.0, indicating a manufacturing sector that is dead in the water, but at least no longer contracting.

Wednesday

• The Consumer Price Index is expected to be unchanged in October after a rise of 0.3% in September. If we strip out volatile food and energy prices, it is expected to be up just 0.1% after being up 0.2% in September. Longer-term inflation expectations are very well contained (as measured by the spreads between regular T-Notes and Inflation Indexed TIPS). I maintain that the bigger danger the economy faces is deflation, not runaway inflation. Inflation is not what investors and especially policy makers should be worried about — unemployment and slow growth is.
• In September, Industrial Production increased by 0.2%. This is a broad measure of industrial output, including not just what the nation’s factories are producing but also the output of its mines and utility power plants as well. The utility side can often distort the overall number, as it often reflects the weather as much as it does the level of economic activity. Thus it is important to look at just the change in manufacturing output. Factory output alone rose by 0.4% in September. In October the consensus is looking for total industrial production to rise another 0.2%.
• The Industrial Production report also includes data on Capacity Utilization, which is in my book one of the least-appreciated economic indicators out there. Like Industrial Production, the overall headline number can be distorted by weather in the utility sector, and thus it is important to look at the level of factory utilization as well. In September, overall Capacity utilization was 77.4%, up from 75.7% a year ago, and the recession lows of 67.3%, but still well below the long-term average of 80.4%. Factory utilization was 75.1%, up from 72.7% a year before and the recession low of 64.4%, but below the long-term average of 79.0%. In October, the consensus is looking for overall capacity utilization of 77.6%, up only slightly from September. I would expect a bigger increase in the headline number, but only due to a rebound from the extremely (weather) depressed utility sector, where in September the untilization rate was actually below the lowest level of the Grea Recession. Factory untilization is likely to increase by only 0.1%.
• The National Association of Homebuilders index is expected to remain at a dismal level of 18 in October. However, September was up a sharp 4 points from August. This is a “magic 50” index, so any reading below 50 indicates that homebuilders see conditions as poor. The index has been mired in the mid-to-low teens for over two years now. In every previous recovery, residential investment has led the economy out of the swamp. This time it has been pulling us further into it, and remains one of the key reasons why the recovery is anemic.

Thursday

• Weekly Initial Claims for Unemployment Insurance come out. They had a very nice decline early in the year, but had then been stuck just above the psychologically important 400,000 level. Last week they fell by 10,000 to 390,000, but only after the previous week had been revised upward by 3,000, so it was really more like a 7,000 decline. The consensus is looking for 400,000. I suspect an increase, but not quite that sharp and have 395,000 penciled in. The 400,000 level is important psychologically in that it has historically been the inflection point below which we tend to create enough jobs to bring down the unemployment rate. The week-to-week numbers can be very volatile, so the four-week average is the thing to focus on. Keep an eye on the prior week’s revision as well as the change from the revised number.
• Continuing Jobless Claims have been in a downtrend of late, but the road down has been bumpy. Last week they fell by 72,000 to 3.615 million. That is down 699,000 from a year ago. I would expect a small decline this week. The consensus is looking for a bounce to 3.648 million, a small increase. Some (most?) of the longer-term decline is due to people simply exhausting their regular state benefits which run out after 26 weeks. Those, however, don’t last forever either. Federally paid extended claims rose by 43,000 last week but are down 1.281 million over the last year. Looking at just the regular continuing claims numbers is a serious mistake. They only include a little over half of the unemployed now, given the unprecedentedly high duration of unemployment figures. A better measure is the total number of people getting unemployment benefits — currently at 6.636 million — which is up 52,000 from last week (there are some timing issues, so the change in continuing and existing claims does not match the change in the total). The total number of people getting benefits is now 2.073 million below year-ago levels. What is not known is how many people have left the extended claims via the road to prosperity — finding a new job — and how many have left on the road to poverty, having simply exhausted even the extended benefits. Unless the program is renewed, all extended benefits will end in January. Make sure to look at both sets of numbers! Many of the press reports will not, but we will here at Zacks.
• We find out if the Homebuilders’ pessimism is well founded when the data on Housing Starts are released. In September, they ran at an annual rate of only 658,000, about a quarter of the level at the peak of the bubble. However, that was a big improvement over August. They have been extraordinarily distressed for over two years now and show little sign of improvement. In some ways the low level of starts is a blessing in disguise, since it indicates that few housing units are being added to the glut of unsold homes. However, that is very cold comfort to the unemployed construction workers, a group harder hit than almost any other in the Great Recession. It is hard to see how we have a robust recovery until housing starts start to rebound significantly. The consensus is looking for starts to fall back to 603,000 in October.
• The best leading indicator of Housing Starts is Building Permits. In September they ran at an annual rate of only 594,000. That was much lower than the starts rate, which is one reason that the starts number is likely to fall in October. In October, the consensus is looking for permits to rise to a still very low 603,000 annual rate.
• The Philly Fed index, another regional mini-ISM, this one covering the Mid-Atlantic States, is expected to fall to 5.0 from a  reading of 8.7. Like the Empire State Index, the dividing line between growth and contraction is Zero, thus the expectation is that manufacturing activity in the Mid-Atlantic region is rising, but at a slower rate than in October.

Friday

• The index of Leading Economic indicators is expected to increase by 0.6% after rising 0.2% in September. While this is the leading index, most of its components are already known by the time it is released, so this number does not normally have a major market impact. Indeed, the stock market itself is one of the key leading indicators, and the great run in October is one of the key reasons for the strong showing expected for October.

Potential Positive or Negative Surprises

The best indicators of firms likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. The Zacks Rank is also a good indicator of potential surprises. Similarly, a recent history of earnings disappointments, cuts in the average estimate for the quarter in the month before the report is due and a poor Zacks Rank (#4 or #5) are often red flags pointing to a potential disappointing earnings report.

In the Earnings Calendar below, $999.00 should be read as N.A.  

Potential Positive Surprises

The Limited (LTD - Analyst Report) is expected to earn $0.24 per share, up from $0.18 a year ago. Last time out it had a positive surprise of 4.35%, and over the last four weeks analysts have raised their estimates by 3.44% for the quarter. LTD is a Zacks #2 Ranked stock.

Home Depot (HD - Analyst Report) is expected to earn $0.59 per share versus EPS of $0.51 a year ago. Last time out it had a positive surprise of 4.88%, and over the last four weeks analysts have raised their estimates by 0.62% for the quarter. HD is a Zacks #2 Ranked stock.

Target (TGT - Analyst Report) is expected to earn $0.74 per share versus EPS of $0.74 a year ago. Last time out it had a positive surprise of 6.19%, and over the last four weeks analysts have raised their estimates by 0.64% for the quarter. TGT is a Zacks #2 Ranked stock.

Potential Negative Surprises

China Sunergy (CSUN - Snapshot Report) is expected to lose $0.40 per share versus EPS of $0.35 a year ago. Last time out it had a negative surprise of 13.51%, and over the last four weeks analysts have cut their estimates by 31.67% for the quarter. CSUN is a Zacks #4 Ranked stock.

Tower Semiconductor (TSEM - Analyst Report) is expected to earn $0.08 per share versus EPS of $0.11 a year ago. Last time out it had a negative surprise of 83.33%, but over the last four weeks analysts have not changed  their estimates. TSEM is a Zacks #5 Ranked stock.

Sorl Auto Parts (SORL - Snapshot Report) is expected to earn $0.18 per share versus EPS of $0.26 a year ago.  Last time out it had a negative surprise of 16.13%, and over the last four weeks analysts have cut their estimates by 10.51% for the quarter. SORL is a Zacks #4 Ranked stock.

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Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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