4Q08.1 EARNINGS - ZEP, Bullish: INFY, SCHW, JPM

Last Friday's "sell into the close" call has been timely as SRS was up nearly 12% yesterday, while airlines (~5%) and dry bulk shippers (~10%) sold off in high volume.  AMD continues its death march, and PALM gapped up 10% before finishing with a small loss.  We expect the market to stay negative this week, with CPI, capacity utilization, and consumer sentiment data on FRI collectively punctuating the negative news.  If the selloff is severe enough, however, I am inclined to go long hope/Obama into the long weekend heading into inauguration day.

MONDAY review.  Alcoa (AA) has the undeserved honor of kicking off earnings season.  The reults disappointed as usual, but a poorly managed company is not a good barometer of answering the question: “How bad are things really?”  Zep (ZEP) was spun-out of Acuity Brands (AYI) in Nov/07 and provides cleaning/maintenance products mainly to industrial customers including autobody shops.  The huge earnings miss based on raw material expense and a revenue miss was one thing, but the utter lack of confidence in a short-term outlook caused 25% to be lopped off the stock (closed weak).  The company wasn’t cheap prior, but I expected more benefit from the trend of longer car ownership and DIY maintenance.

TUESDAY.  The premier IT outsourcing company in India, Infosys (INFY), beat on earnings and revenues overnight to provide some relief in the Bombay SENSEX after the Satyam (SAY) accounting scandal rocked the country. With its 0.65 PEG ratio and very solid balance sheet it seems to be a worthy proxy for buying India and will probably be the primary beneficiary of market share gain from the SAY fallout. Worth a trade or start building a LT position as a proxy for the country.

WEDNESDAY.  Judging from last year, Charles Schwab (SCHW) is expected to release earnings and DEC activity this day.  Despite getting knocked down with the rest of the Financial sector lately, I'm expecting a very upbeat call (all things considering). The pool of potential independent advisors grows substantially for SCHW if the “Morg-ue”-Barney j.v. goes through as expected.  Apologies for the cynicism, but a Salomen Smith Barney executive will probably head the j.v. as s/he would know how to cut most effectively.  Meanwhile, as I noted on Jan 7, I expect SCHW's Institutional Services business to continue to drive growth.  In November total assets had only fallen 4% Q/Q while net new assets actually grew by $5.9B (vs. $1.1T total).  SCHW gained 30K new customers in October (+88% y/y).  The new marketing campaign launched last SEP has clearly been resonating with investors. Lastly, I expect mgmt denies any speculation of its interested in buying optionXpress (OXPS) in the aftermath of TD Ameritrade (AMTD) acquiring ThinkOrSwim (SWIM). 

THURSDAY.  I am bullish on JPM (vs its peers) after moving up its earnings six days to get in front of the BAC’s on 1/20.  My interpretation is they want to be able to distinguish its recent Q performance as “acceptably poor” by simply being able to confirm CEO Jaime Dimon’s recent public statements that the Q was terrible.  I only recommend a quick trade as there may be a capital raise in the works this weekend as well.  If you believe Oppenheimer banking analyst Meredith Whitney, it’s actually inevitable.  Meanwhile, the probability of acquisition-happy CEO Ken Lewis of BAC announcing disastrous results seems very high.  How smoothly could the Merrill Lynch integration be going in this market? There are already signs that Charlotte and NYC cultures are incompatible as the head of the Thundering Herd’s financial advisors is leaving to attend Yale law school.

FRIDAY.  All about the aforementioned economic data. Gold and other commodities sell off if deflation fears take hold going into MLK weekend.

Disclosure: No positions.