Sunday, November 13, 2005

Double Digit Earnings Growth Expected for the Fourth Quarter


The rally continues for stocks after last week's break out from a seven day basing period. Break outs from similar patterns have shown a tendency to move higher. In addition, S&P500 short term moving averages crossed above the index's 200 day moving average, a sign that the smart money continues to buy. That said, this rally is not without its technical challenges. The indices are nearly at the top end of their long term trend channels, a point where channel traders have taken profits in the past. Will it happen again? Some selling is likely in the 1240 range, but ultimately it will be speculation based on fundamentals that will determine the fate of this rally.

Key Market Factors

Our Key Market Factors are parameters we identified as mattering most to market participants. The smart money monitors these factors closely speculating on potential moves that will drive stocks up or down.

Oil NYMEX - $57.83 - (negative +)[score -1] - Crude oil futures moved much lower last week falling below the $60/barrel level and holding there on a weekly basis, the first time in many months. The recent rally in stocks has been stimulated by the fall in oil prices, a situation that can continue. Further, negative technical characteristics in the chart of the OSX may signal more declines. We do not expect a sharp fall in prices, however, short term volatility is expected. For now we have rated the price of energy as negative plus. We would become more positive with a close in oil below $55/barrel, more negative if oil rises above $60.

10 year Treasury - 4.57% - (negative +)[score -1] - Rates on the 10 year note maintain their position above 4.50%, a less bullish sign. Fed fund rates are expect to rise 50 basis points in the next few months, a level we feel is priced into the market. If commodity prices (as well as salaries) flatten or fall off we believe the Fed will pause in raising rates. Speculation about the future direction of interest rates is likely to move markets. Inflation numbers due out this week will be a major focus of the smart money. Higher inflation increases the chance rate hikes will continue beyond expectations. If the CPI, PPI come in high we expect a short term move lower for stocks; the opposite is true if inflation comes in low.

4th Quarter Earnings - 14.5% - (positive)[score 2] - Analysts expect earnings to remain strong for the fourth quarter, growing at a double digit pace. The fourth quarter tends to be stronger than the third especially for tech, a scenario that will likely facilitate buying in the nasdaq. We remain positive on earnings and continue to buy issues with accelerating earnings growth rates.

  • MESA - Mesa Air Group will report earnings this Thursday. Although we do not expect any surprises we do expect stock price volatility. Travel remains strong and lower fuel prices are padding profits. Mesa's stock price lags that of its peers. Its current P/E ratio is around 8 verses the P/E of 20+ for similar companies. In our view the reason for the P/E short fall is Mesa's level of investment. Currently the company is expanding, spending money on opening new routes (e.g. Hawaii) and expanding its operations, which is slowing earnings growth. Once the investment cycle is near completion we feel the company's stock price will normalize and industry permitting, demand a premium. Given this scenario we have a target price of $32 per share.
  • ZHNE - Interesting formations in Zhone's stock price chart are underway in the very short term. Near term moving averages have begun to trend higher, pointing toward the 200 day moving average. Further, the stock has begun a basing period in line with the rest of the market, which could be bullish near term. A break out to the $2.60 level would not surprise us at all.



Let the earnings begin.

9:41 AM  

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