Last week started out with concerns over the velocity over the Chinese economy, and worries grew to include the vector of the eurozone economy -- but, after Friday's better-than-expected September employment report, the market continued the rebound that had begun in the middle of Thursday's session. That turning point reflected oversold conditions for the market, as touted by a number of technical models -- but it also came amid word of declines in job cuts and better-than-expected August factory orders, excluding transportation.
Market moves such as these provide opportunities for patient investors to scoop up high-quality companies with now-discounted shares. Versace did just that with American Railcar (ARII) following that stock's 10% decline in this past week. He believes the continued growth in railcar loadings bode well for railcar orders -- and he also likes the demand driver for tank cars that is regulatory in nature, which calls for double-lined cars much in the fashion of oil tankers. One of the other factors that spurred Versace in this was the geographic mix of the company's business: American Railcar is heavy on North America, and has little to no eurozone or China exposure.
In Versace's view, recent economic data and macroeconomic conditions are likely to weigh on forward guidance when corporate earnings season officially kicks off next Wednesday with Alcoa's (AA) quarterly results. Despite the secular shift to LED lighting, Cree (CREE) warned of a revenue and earnings shortfall for the September quarter -- and that took the shares down 18.6% this week.
If you've been following Cree, you'll recognize the shares' historical pattern and question whether you should attempt to catch what looks like a falling knife. Given Versace's history, his advice is to wait for Cree's earnings report and related conference call in order to get more details on how the company's gross margin is shaping up, given the usual link between gross-margin trends and the company's share price.
Warnings such as these are what we need to be watching out for -- and we should also be identifying any attendant ripple effect. In this case, Cree's miss likely carries implications for SemiLeds (LEDS), Aixtron (AIXG), Veeco Instruments (VECO) and, possibly, sapphire-substrate demand for GT Advanced Technologies (GTAT).
After last week's heavy economic data flow, we have a rather light few days ahead. Following the September jobs report, this week's focus is likely to be on Wednesday's Federal Open Market Committee (FOMC) minutes from the Federal Reserve's September meeting.
Also, while this is not quite economic data, Treasury Secretary Jack Lew is slated to peak on the global economy on Tuesday at the Peterson Institute. We expect Lew to be full of chest-puffing economic commentary. But we'd remind him that, despite the number of jobs added, the labor-force participation rate still slipped in September -- and, even if you had an atomic microscope, you wouldn't be able to find wage growth in that report.
We've already mentioned Alcoa's earnings report, which is scheduled for Wednesday. Joining it that day will be Costco (COST), Monsanto (MON) and Yum! Brands (YUM).
Costco bears are watching for insight on whether Joe and Jane Bag of Doughnuts are increasing their spending or cutting down on it. As for Monsanto, its outlook will have implications when it comes to fertilizer companies such as Potash (POT), CF Industries (CF), Agrium (AGU) and Mosaic (MOS) given the fall in corn prices. The latter is part of what has led to a 10% employee-headcount reduction at Deere (DE) as farmer income comes under pressure.
Finally, as to Yum! Brands, there is growing concern over Chinese consumer spending -- so this company's traffic and ticket size, as well as its expansion plans, could prove insightful if not confirming.
Rounding out the week, we have PepsiCo (PEP) set to report Thursday. Out of all the news the company should offer regarding water, carbonated beverages and salty snacks, Versace is most interested in what PepsiCo will have to say about its new Pepsi True product. PepsiCo and Coca-Cola (KO) are bringing new products to market that each use different sweeteners, and Versace is keen on understanding the timing of the rollout and what it may mean for companies such as International Flavors & Fragrances (IFF) and Senomyx (SNMX).
Meanwhile Hawkins will be keeping her eye on the strengthening of the U.S. dollar, as the dollar spot index rose 1.2% in the last week alone. The greenback climbed against all of its 16 major counterparts, while the euro fell to a two-year low and the Japanese yen dropped for the eighth week. A strengthening dollar, coupled with continued relative underperformance by emerging-market equities and falling commodity prices, could potentially wreak havoc on financial markets.
Below is a more detailed look at what's coming at you in the week ahead. Be sure to check back midweek for The Corner of Wall & Main, in which we will dish on the first half of the trading week and other key matters and thoughts, as well as how to play it all.
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Economic Calendar
Monday, Oct. 6
- Markit Eurozone Retail Purchasing Managers Index (PMI)
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Tuesday, Oct. 7
- Treasury Secretary Jack Lew to speak at Peterson Institute on the global economy
- Job Openings and Labor Turnover Survey (JOLTS) Report (August)
- IBD/TIPP Economic Optimism Report (October)
- Consumer Credit (August)
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Wednesday, Oct. 8
- Mortgage Bankers Association (MBA) Mortgage Applications (Weekly)
- Federal Reserve Minutes -- September Federal Open Market Committee (FOMC) Meeting
- Crude Oil Inventories (Weekly)
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Thursday, Oct. 9
- HSBC Emerging Markets Index
- Initial and Continuing Jobless Claims (Weekly)
- Bloomberg U.S. Economic Survey (October)
- Bloomberg Consumer Comfort (Weekly)
- Wholesale Inventories (August)
- Natural Gas Inventories (Weekly)
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Friday, Oct. 10
- Import and Export Prices (September)
- Treasury Budget (September)
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Earnings Calendar
Monday, Oct. 6
- Calamp Corp. (CAMP)
- IDT Corp. (IDT)
- Container Store (TCS)
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Tuesday, Oct. 7
- International Speedway (ISCA)
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Wednesday, Oct. 8
- Alcoa Inc. (AA)
- Costco Wholesale (COST)
- Mistras Group (MG)
- Monsanto Co. (MON)
- Novagold Resources (NG)
- Ruby Tuesday (RT)
- Yum! Brands (YUM)
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Thursday, Oct. 9
- Barracuda Networks (CUDA)
- PepsiCo Inc. (PEP)
- Richardson Electronics (RELL)
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Friday, Oct. 10
- Fastenal (FAST)
- Voxx International (VOXX)
