A Relative Price Strength Screen for All Markets

By Kevin Matras
November 25, 2009

Over the last few weeks, I have found myself screening for stocks with the best Relative Price Changes in an effort to determine whether a stock is good or not. Of course earnings growth and valuations are important. But if a stock is simply not responding, or worse, going down (worse than the market), something’s wrong. Or at the very least, it’s just simply not ready to move higher.

I’ve talked about this kind of stuff in the past. An investor’s best stocks are the ones that are performing the best; in other words, the ones that are moving higher. And it’s the same here. Stocks moving higher have a tendency of moving even higher. And the stocks I’ve been looking at recently are indeed the ones moving higher, especially on good volume since the overall market volume has been kind of weak. And if they are moving higher, it’s likely because there’s a good reason for them to be moving higher, or else they probably wouldn’t be.

Of course, this doesn’t mean you should only look at price change. But, by including those kinds of things in your screening, some very interesting stocks will come up. Some might have just missed your normal fundamental screening. But when put on your radar screen thru other measures (its price performance for example), you might find that these are just the kinds of companies you’ve been looking for.

Once again, you’ll also notice I said relative price strength. There are periods, of course, where virtually everything is going down. So screening for absolute positive price changes will often times come up with zero results in these periods, just when you need them the most. But also, when the market is doing nothing but going up, you want to get into the pacesetters and outperformers, not the laggards that are going up only because the rising tide is raising all the ships. So using the relative price strength will always put the outperformers on your list in both good times and bad.

In this week’s screen, I’m looking for relative price change winners that also have the fundamentals to potentially make these gains last and continue into the future.

The screen starts off with:
* Relative % Price change – 12 weeks > 0
* Relative % Price change – 4 weeks > 0
* Relative % Price change – 1 week > 0
(I’m looking for stocks that are outperforming the S&P 500 over the last 12 weeks, 4 weeks and 1 week.)
* Projected Growth Rate (F1/F0) > the S&P 500’s Median Growth Rate
(Not only do I want the price to be responding better than the market, I also want the growth rate to be better than the market as well.)
* Zacks Rank = 1
(Only Zacks Strong Buys)
* Current Price >= 5
(They all have to be trading at a minimum of $5 or higher.)
* Average 20-Day Volume >= 100,000 shares
(And have enough volume to allow easy trading in and out.)

Here are 5 stocks that made it thru this week’s screen:
NNI – Nelnet, Inc.
NUS – Nu Skin Enterprises, Inc.
PRGO – Perrigo Company
TECD – Tech Data Corp.
WPZ – Williams Partners L.P.

These are all fundamentally strong stocks that are on the move and outperforming the market.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Give Thanks for a Great 3Q

By Dirk Van Dijk
November 20, 2009

Investors will be able to say thanks next Thursday for a wonderful earnings season, one that is rapidly drawing to a close. There will be only 57 firms reporting quarterly results next week, including 10 members of the S&P 500. That group, however, contains some pretty important names, including computer giant Hewlett-Packard (HPQ), agricultural equipment king John Deere (DE) and investors will find out if Campbell Soup (CPB) really is “mm-mm good.” The economic data is squeezed into the front part of the week due to the holiday:

Monday
• Existing Home Sales are expected to rise to a seasonally adjusted annual rate of 5.65 million from 5.57 million in September. While existing home sales make up more than 85% of all home sales, their effect on the economy is minimal and largely indirect. Watch the inventory numbers, though — a decline would be a very good thing, particularly if it results in a drop in the months of supply outstanding

Tuesday
• We get the second cut at 3rd Quarter GDP. It was originally estimated at 3.5% growth, but due to weaker-than-expected trade numbers and downward revisions to September retail sales, the consensus estimate is now that the economy grew at just 3.0% in the quarter. The GDP deflator is expected to remain unchanged at up 0.8%
• The Case-Schiller home price index is expected to show that the year-over-year decline in housing prices in September was 9.10%, a significant improvement over the 11.32% decline in August. Thanks to extraordinary government support for the housing market, housing prices have started to recover, at least on a month-to-month basis. However, with a huge overhang of supply and shadow supply from seriously delinquent mortgages, this strength will probably fade by the first quarter, especially as government and central bank support diminishes
• The other major house price index is the FHFA report, which is expected to show a 0.3% monthly increase for September, reversing a 0.3% decline in August
• Consumer Confidence is expected to fall slightly to a reading of 47.5 for November from 47.7 in October

Wednesday
• Personal Income is expected to have risen by 0.2% in October after being unchanged in September. Personal Spending is expected to increase 0.5%, reversing a 0.5% decline last month. Combined this means that the savings rate is falling again, which is good news short-term, but a disaster long-term
• Initial Claims for unemployment insurance are to be released a day early due to the holiday. Last week they were at 505,000 and have been in a downward trend since April. The decline will probably continue.
• New Home Sales are expected to have increased to an annual rate of 414,000 in October from 402,000 in September. This is a far more important number for the economy than existing home sales as it directly impacts residential investment. Housing starts came in very light for October, so an increase will help get inventories under better control
• New orders for Durable Goods are expected to have risen by 0.5% in October on top of a 1.0% rise in September. Excluding the very volatile Transportation sector they are expected to be up 1.0% after a 0.9% rise last month
• The University of Michigan Consumer Sentiment Index is expected to show an increase to 66.5 from 66.0 last week

Thursday
• Caloric consumption is expected to hit its high for the year, but this is highly seasonal and should be roughly flat with a year ago
• Belts are loosened, naps taken and football is watched

Friday
• People wake up early to stampede into the malls
• Leftover turkey sandwiches are consumed

Potential Positive Surprises
Historically the best indicators of firms which are 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. Some of the companies that have these characteristics include:

Deere (DE) is expected to post EPS of just $0.05, down from $0.81 last year. That low expectation sets it up for a positive surprise. Last time out they beat by 73.7%. However there has been no change in the estimate over the last month, and the stock has a neutral Zacks Rank of 3

Tyson (TSN), the poultry producer, might just make its investors thankful. It is expected to earn $0.26, up from $0.14 last year. Last time out it beat by 83.3%. However, analysts have slightly shaved the mean estimate by 0.6% over the last month.

Potential Negative Surprises
In keeping with the overall very positive tone of this earnings season, the potential negative firms are less clear cut. However:

BJ Services (BJS) is expected to post EPS of just $0.03, down from $0.57 last year. It badly missed estimates last time, reporting a loss instead of income and analysts have cut the estimates for this year’s quarter by 11.1% over the last month.

Some Improvements in Energy

By Dirk Van Dijk
November 18, 2009

Normally, the focus of this article has been on the industries that have the best overall Zacks ranks, with an occasional mention of the industries that rank particularly badly and thus should be avoided. This week, however, I want to look at some of the industries that are showing sharp improvements in rank, even if they are still far from the top of the list.

Ideally, you would want to focus on the industries that are both near the top of the list and rising fast, but that rarely happens, especially for industries with a large number of participants. The Zacks Industry Rank is an un-weighted average of the Zacks ranks of the firms in the industry, so it is much easier for a small industry with only two or three firms in it to rise quickly and have a very good-looking rank than it is for a large industry with 25 or 30 firms in it.

A good example of an industry that is showing both a very good overall rank and substantial improvement is Oil Royalty Trusts, which with a industry rank of 2.00 is tied for 4th place with several other industries. What sets it apart is that it improved 21 spots in its ranking as the average ranking of its components, up from 2.43 last week. Every one of the seven firms in the industry has a Zacks Rank of 2.

These are great vehicles for income-oriented investors, as they simply represent big pools of oil or natural gas in the ground. As the oil is produced, the proceeds are paid out in the form of dividends. It also means that the dividends are very variable with the price of oil.

The problem with them is that eventually the oil in the ground will run out, so some of that dividend is really a return of capital, not a return on capital. Thus if you are thinking about investing in them, look at how long those reserves will last, as well as the current income you are getting from them.

On the plus side, the tax code recognizes this, so a portion of the dividend is sheltered from the IRS. Unlike a regular exploration and production oil firm, there is no risk of a dry hole, nor are they exposed to changes in the price of drilling. If you think that the price of oil is headed higher, they are very attractive investments, especially if you want current income. Two of the larger names in the area that are worth considering are B.P. Prudhoe Bay Trust (BPT) and San Juan Basin (SJT).

A good example of a big important industry that is still distinctly mediocre in terms of its absolute standing is the Integrated Oil Industry, the home of some of the world’s largest firms like Exxon Mobil (XOM) and Petrobras (PBR). It currently has an average rank of 2.95, which puts it in 102nd place out of 206 industries ranked. That, however, is a substantial improvement from the 3.16 average last week, and was enough to lift it by 49 spots.

A good example of an industry that scores poorly on both fronts, and thus should be avoided is the SBIC and Commercial lenders group. It is no secret that credit for small businesses has been under pressure for awhile now, but this suggests that things are still getting worse. The industry rank for the group is a very weak 3.43, which currently puts it in 192nd place, a deterioration of 31 spots from last week when its overall score was 3.21.

What’s your Stock’s Target Price?

By Kevin Matras
November 17, 2009

I wrote about this back in February when the market was putting in its lows and everyone was wondering what their stock’s price target was or how low it was going to go. Today, after a pretty big run up, people are still wondering what their stock’s price target is, but now they’re wondering how high it’s going to go. Either way, it’s important for everyone to know how to calculate their stock’s price target.

You can do this by using either technicals or fundamentals. Today, I’m going to focus on fundamentals. And we’re going to use the P/E ratio to calculate it. Many people use P/E ratios to determine a company’s perceived undervaluation or overvaluation. But you can also use the P/E ratio to determine a stock’s upside and downside price targets as well.

The two most common P/E ratios used are the:
1. P/Es using the Trailing 12 months (or 4 quarters) of earnings
2. P/Es using the F1 (or Current Fiscal Year) Estimates

The calculation for the P/E ratio is simply price divided by earnings. For example: if a stock’s price is $30 and its earnings are $1.25, the P/E would be 24. If that stock’s earnings rose to $2.00, the P/E would now be lower at 15. ($30 price / $2.00 earnings = 15 P/E). And the most logical conclusion would be to see the stock’s price rise until its most recent multiple (or P/E ratio) of 24 was hit again.

Why is this so ‘logical’? Because if people had just been willing to pay 24 times earnings, they probably will again if they believe the company’s earnings will continue to improve. And in an environment where P/Es are increasing, they might be willing to pay even more.

You’ll also find that most of the time, a stock’s P/E ratio using EPS actuals is higher than its P/E ratio using its forward estimates. That’s because of the uncertainty regarding the projected earnings vs. the certainty of actual earnings. As the company continues to report (and meets its projections), the forward P/E ratio typically increases, which means the stock price increases as the earnings projections are coming to fruition. And as more optimism grows over future earnings growth, you may see the P/E ratio grow even more, getting even higher than its previous multiple.

So, the calculation to figure out your stock’s price target is below:
Price x ((current P/E) / (forward P/E)) = future price (or price target)
In other words, let’s say a stock’s price was $50 and its current P/E was 20. Let’s also say its forward P/E was 15. That’s: $50 * (20 / 15) = $66.50 price target. Another way of saying this is: 15 goes into 20, 1.33 times. So $50 times 1.33 equals your price target of $66.50.

The screen I’m running today, finds stocks with their P/Es under their average P/E over the last 5 years and that also have price targets of at least 20% or more above their current price.

The Parameters are:
* P/E less than Average P/E over the Last 5 Years
(I want the stock’s P/E to be less that the Average P/E over the Last 5 Years.)
* Price Target >= 1.2* the current price
(Looking for stocks whose price targets are at least 20% above their current price.)
* Zacks Rank less than or equal to 3
(No Sells or Strong Sells allowed.)

Here are 5 stocks that came thru this week’s screen:
AIRM – Air Methods Corp.
CNX – Consol Energy, Inc.
CWCO – Consolidated Water Co., Ltd.
NEM – Newmont Mining Corp.
NOVN – Noven Pharmaceuticals, Inc.
All are trading at least 20% below their projected price targets.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

The Return of the Living Dead

By Dirk Van Dijk
November 11, 2009

OK, Halloween is over, but some of the best-looking industries according to the Zacks Rank are those that not long ago were considered part of the living dead.

Case in point, is the top performing sector — Auto-Truck-Tires. Out of 206 industries tracked, the sector has five of them, and the worst of the bunch, Foreign Autos, ranked tied for 89th with a composite score of 2.88. None of the groups were at the very top, but all were better than average.

The original equipment parts makers (although one could argue about the grouping of some of the names) scored best with a rank of 44 and a composite score of 2.62. Three of the 28 firms in the industry, Fuel System Solutions (FSYS), Oshkosh Truck (OSK) and Wabco Holdings (WBC), hold the coveted Zacks #1 Rank, while an additional 10 have #2 ranks.

While not part of the sector, the Auto Dealers (which are included in Retail) are tied for the 48th spot with the Domestic Automakers, both with composite ranks of 2.67. Among the dealers, CarMax (KMX), Group 1 Auto (GPI) and Penske (PAG) all hold #1 ranks, while Ford (F) holds a #2 rank.

The Construction sector was also left for dead not that long ago, but it is tied for third place among the sectors. It is more of a mix by industry, but has some of the very strongest, including some very big surprises, including the Mobile Home/RV industry, which is tied for 3rd place in the rankings thanks to #1 ranks from Cavco (CVCO) and Thor (THO), both of which reported earnings that were more than twice as high as expected. Who is the RV industry tied with? Two other building related areas: Lighting Fixtures, led by LSI Industries (LYTS), and Paint, led by RPM International (RPM).

So what does this say about the economy? Mostly good things. It says that the stimulus is working and helping out some of the most depressed sectors. Also that these sorts of durable goods-type firms are among the ones seeing the greatest productivity gains (productivity in durable goods rose at over 20% in the third quarter), and those gains are translating into gains at the bottom line.

Over the long term, I have some doubts about the sustainability of such a move, given the need for the consumer to tighten their belts and save more. However, the bar got set extremely low and it was an easy hurdle to clear. Easy money and low interest rates mean that not only were they able to survive, at least for the short term — they look like they will be able to thrive.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Using Price-to-Cash Flow to Find Value

By Kevin Matras
November 10, 2009

The Price to Earnings ratio (or P/E) is probably the most common ratio in determining whether a company is under or overvalued. However, the Price to Cash Flow (or P/CF) is another great ratio to do just that. Cash of course is vital to a company’s financial health, especially nowadays, in order to finance operations, invest in the business, etc. And cash can’t really be manipulated on the Income Statement like earnings can.

The reason why some people like this measurement better than the P/E ratio is that the net income of the Cash Flow portion rightly adds back in depreciation and amortization, since these are not cash expenditures. Whereas the net income that goes into the Earnings portion of the P/E ratio does not add these in, thus artificially reducing the income and skewing the P/E ratio. So many analysts prefer using the Price to Cash Flow metric to judge a stock’s value.

And just like the P/E ratio is calculated by dividing the Price by its Earnings per share — the Price to Cash Flow ratio is calculated by dividing the Price by its Cash Flow per share. Also like a P/E ratio, the lower the number, the better. Currently, the average Price to Cash Flow (P/CF) for the stocks in the S&P 500 is 9.6. For the 12-month forward P/E ratio, it’s 15.3. But just like the P/E ratio, a value of less than 15 to 20 is generally considered good.

But make sure you compare the stock’s P/CF to its Industry, since different Industries will have different numbers that are considered normal. For example: the average Price/Cash Flow for Gold Mining companies is about 30, whereas it’s about 3 for Telecom.

Screen
The screen I’m running today is relatively simple:
* Zacks Rank = 1
(Only Strong Buys get thru.)
* One Year Projected Growth Rate >= Average for the S&P 500
(Looking for above-market growth rates.)
* Current Cash Flow >= 5 Year Average Cash Flow
(I want to see the Company’s cash position improving.)
* Price to Cash Flow less than or equal to Median for its Industry
(I want to see Companies with valuations lower than the median for their respective groups.)

There were 30 stocks that came thru this week’s screen. Here are 5 of them:
BARE – Bare Escentuals, Inc.
CMN – Cantel Medical Corp.
HS – HealthSpring, Inc.
TTC – Toro Company
VIA.B – Viacom Inc.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Earnings Season Winding down

By Dirk Van Dijk
November 06, 2009

Earnings season is rapidly drawing to an end. There will be only 280 firms reporting next week, and only 16 of those will be members of the S&P 500. That is down from 855 firms that reported this week, including 89 S&P 500 members. Most of the major firms that will be reporting are retailers, which will be reporting fiscal periods that ended in October, not September.

Some of the most important of these are Dow component Wal-Mart (WMT), Macy’s (M) and J.C. Penney’s (JCP). Among the important non-retail firms that will report are semiconductor equipment giant Applied Materials (AMAT), Rockwell Automation (ROK) and Tesoro (TSO), the oil refiner.

The flow of economic data will slow down after the fire hose of the last week. However there are a few things to keep an eye out for. These include:

Thursday:

* (1) Weekly initial unemployment claims, which have been trending down. Last week they fell by 20,000 to 512,000. I would expect another drop, but smaller.
* (2) Oil inventories, which have recently been trending down, but are at high levels for this time of year.
* (3) The Treasury budget. The consensus is that we ran a deficit of $150 billion in October.

Friday:

The Trade numbers are due out. While the trade deficit is dramatically lower than a year ago, it has recently started to trend up again, in large part due to the rebound in oil prices. The consensus is for the deficit to rise to $31.9 billion from $30.7 billion last month. That sounds about right to me. At least the recent increases in the trade balance have come from imports rising faster than exports, rather than seeing both of them decline.

Potential Positive Surprises

Historically the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. Some of the companies that have these characteristics include:

J.C. Penney’s (JCP) has seen its quarterly estimate jump by 103% over the last month and last time around they posted earnings that were twice what was expected. On the other hand, because the retailers earn most of their money next quarter, with very small absolute numbers it is easy to have big percentage surprises.

Electronic Arts (ERTS) has seen its estimates for the about-to-be-reported quarter rise by 19.2% over the last month and last time out it beat the Zacks Consensus Estimate by 45.5%.

Applied Materials (AMAT) has seen the estimates for its quarterly earnings edge up by 3.39% over the last month and last time it posted a 66.7% surprise. However that was a smaller than expected loss of $0.03, so the percentage surprise is much less than it appears.

Let Me Check My Calendar

By Kevin Matras
November 05, 2009

Even if you’re not that familiar with options, I’ll bet you’ve heard someone use the term ‘calendar spread’. Whether or not they knew what they were talking about is another story. So let’s define it here.

Definition
A Calendar Spread (also known as a ‘time spread’ or ‘horizontal spread’) is when you sell (write) an option in one month and buy an option with the same strike price but in a different, further out month.

Since the option you’re writing has less time (worth less) and the one you’re buying has more time (will be worth more), this can also be referred to as a ‘debit spread’ as well. You can do this with puts too – sell a put in a nearby month and buy the same strike in a further out month. As you would expect, you’d have a neutral to bullish bias with the calls and a neutral to bearish bias with the puts. You can also ’sell’ this strategy by buying the nearby and selling the further out – but today, let’s keep our focus on the long side.

Example:
Let’s use IBM (IBM – Analyst Report) for this example.

* Let’s say you wrote the December 125 call for 2.20 (collect $220) (delta is .35)
* And let’s say you bought the April 125 call for 6.50 (paid $650) (delta is .45)
* net cost (debit) is 4.30 or $430

Why Would I Want to Do This? The maximum potential loss is limited to what you paid for the spread – in this case $430. The maximum profit if removed together would be the difference between the two option prices at the expiration of the nearby month. Continuing with this example, let’s say IBM closed under $125 by the time the nearby December option expired:

* At expiration, the December 125 call I wrote for $220 is now worth $0
* And the April 125 call I bought for $650 is now worth $540
* my calendar spread is worth $540
$540 less my cost of $430 = profit of $110 or a 25% profit

If I wanted, I could hold onto that further out call if I thought a rally was underway – and make even more money. But of course, if it went down, I could lose the rest of the premium. But again, my maximum loss would be limited to $430.

This is a great strategy. Granted, you’re limited in your profit potential, but you’re capitalizing on the dynamics that the nearby month will lose its value (time value) quicker than the further out one. Some people probably don’t bother with this strategy because the profit potential seems small. But if you look at it in percentages, a 20% or 25% return isn’t small at all. For example, if you put ten of these on, before commissions, that would cost $4,300. If you made $110 profit on each one, that’s a $1,100 profit or 25%. And that’s pretty exciting.

You can learn more about this strategy and others by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About).

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Screening for PEG Ratio

Screening for PEG Ratio

By Kevin Matras
November 03, 2009

This week, I’m going to focus on a simple strategy that uses the PEG Ratio for determining a company’s under- or overvaluation. Let’s first start with a definition. A PEG ratio is simply the: P/E Ratio divided by the Growth Rate. A value of 1 or less is considered good (at par or undervalued), while a value of greater than 1 is, in general, not as good (overvalued). Once again, the PEG Ratio is simply the P/E Ratio divided by the Growth Rate. Many believe this ratio tells a more complete story than just the P/E.

A company with a P/E Ratio of 25 and a Growth Rate of 20 would have a PEG Ratio of 1.25 (25 / 20 = 1.25). While a company with a P/E Ratio of 40 and a Growth Rate of 50 would have a PEG Ratio of 0.8. Traditionally, investors would look at the stock with the lower P/E Ratio and deem it a bargain (undervalued). But looking at it closer, you can see it doesn’t have the growth rate to justify its P/E.

The stock with the P/E of 40, though, is actually the better bargain since its PEG Ratio is lower (0.8), implying it’s undervalued with more potential value. (Undervalued in relation to its projected growth rate.)

In other words, the lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth. So for this week’s screen, we’re going to use the PEG ratio to find value. Let’s first start with:
* Zacks Rank less than or equal to 2
(Only stocks with a Zacks Rank of Strong Buy or Buy get through.)
* Average Broker Rating less than or equal to 2.5
(The brokers too have to be on board as well. Only companies in the better part of a Strong Buy or Buy are allowed.)
* Projected One Year Growth Rate >= 20
(Strong performers are what we’re looking for.)
* PEG Ratio less than 1
(P/E using F(1) divided by its F(1) projected growth rate.) (We’re using a classic, text book example to identify undervalued stocks.)
* Price >= $5

Here are 5 stocks from this week’s list (for Tuesday, 11/3/09):
BUCY – Bucyrus International, Inc.
DV – DeVry Inc.
IMA – Inverness Medical Innovations, Inc.
OSIS – OSI Systems, Inc.
SCHL – Scholastic Corp.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Earnings Preview for Nov. 2 – 6

By Dirk Van Dijk
October 30, 2009

This will be another busy week for earnings, particularly among the smaller firms. A total of 855 firms are due to report, including 89 S&P 500 members, and Kraft Foods (KFT), a Dow 30 Component. Other noteworthy firms that are set to release reports include Cisco (CSCO), Ford (F ) and Time Warner (TWX ). It will also be a busy week for the oil industry with major firms like Marathon (MRO), Anadarko (APC) and Devon (DVN) reporting.

It is also going to be a very busy week for economic data:

Monday:
* Construction Spending is expected to be down 0.4% in September after rising 0.8% in August
* The ISM Manufacturing index for October is expected to rise to 53.0% from 52.6% in September
* Pending Home Sales are expected to rise by 0.4% for September, slowing from a 6.4% jump in August

Tuesday
* Factory Orders are expected to rise by 1.0% following a 0.8% increase in September
* Auto and Truck sales are due out. There is no consensus number available, but I think they are likely to rise a little bit from the very depressed 9.2 million annual rate in September. No boom though, as artifical inticements like “Cash for Clunkers” are missing

Wednesday
* The ADP estimate of private non-farm payrolls is expected to see a drop of 190,000, and improvement over the 254,000 drop in September, but still a big drop
* The ISM Services index is expected to rise to 51.7 for October from 50.9 in September
* The Federal Open Market Committee meeting ends. There is almost no chance of any change in the Fed funds rate, but economists will be studying the statement for indications of when the Fed might pull back from its Quantitative Easing program

Thursday
* Third quarter productivity is expected to rise by 5.8% on top of a 6.6% rise in the second quarter. Given the strength in GDP (up 3.5%) and the weakness in the job market, I will take the over on that number
* Weekly initial unemployment claims, which have been trending down. Last week they fell by 1,000 to 530,000. I would expect another small drop

Friday
* The big employment report for October with a ton of data in it, including
o Non Farm Payrolls, a loss of 166,000 is expected down from a drop of 263,000 in September
o Unemployment rate expected to rise to 9.9% from 9.8%
o Average work week (an important leading indicator of employment) expected to tick up to 33.1 hours from 33.0
o Average hourly earnings expected to increase at the same 0.1% as they did in September
* Consumer Credit is expected to drop by $10.0 billion following a $12.0 billion fall in September. Historically any decline in Consumer Credit is unusual, so even a $10 billion decline is very significant

Potential Positive Surprises
Historically the best indicators of firms which are likely to report positive surprises are a recent history of positive surprises and rising estimates going into the report. Some of the companies that have these characteristics include:

Ford (F): While a loss of 15 cents is currently expected, last time around Ford had a much smaller-than-expected loss, and analysts have been aggressively raising their estimates for the last of the Big Three. “Cash for Clunkers” boosted sales in July and August, and the clearing away of inventory has allowed it to reduce the level of incentives it has to provide to move metal.

Hartford Insurance (HIG): In the second quarter, HIG beat the consensus numbers by 63.8% and analysts have been tripping all over themselves raising estimates lately, with the estimates for the third quarter up 42.3% over the last month. HIG is currently expected to earn $1.07 for the third quarter.

Pioneer Natural Resources (PXD): Pioneer is like a lot of the upstream oil and gas companies that beat estimates significantly in the second quarter and are seeing estimates rising just before they report. Last time PXD surprised by 50.0%, and over the last month estimates for this quarter have shot up by 54.2%.

Potential Negative Surprises
Unlike the upstream part of the oil business, the downstream end looks like it could be a disappointment. That has been the story of the big oil firms like Exxon that have already reported — solid results from the exploration and production side, but very week results for the refineries and gas station end of the business. Two oil firms with heavy exposure to the downstream end that look like they could disappoint are:

Marathon (MRO) missed by 34.0% the last time around and the estimates for the quarter have fallen by 8.2% over the last month to $0.56

Sonoco (SUN) missed by 28.0% last time and estimates for the third quarter have fallen by 131.3% — from a profit to a loss of 9 cents now expected.