Three Gray Swans – Week of July 14 – 18

As part of our effort to keep traders on top of the markets I have started a new blog series using the title, “Three Gray Swans”. The idea is that a Gray Swan is a market moving event that we know is coming, we just don’t know what the market impact is going to be. I take a look at economic and earnings calendars for the following week and highlight what looks like potential market or individual stock moving events that are on the horizon.  This week there are two earnings events (one involves two stocks) and an economic number that have caught my eye.

Goldman Sachs and JP Morgan Earnings

Earnings season starts to kick into high gear next week and there are a couple of things worth keeping an eye on.   Tuesday morning two of the biggest financial companies around, Goldman Sachs (GS) and JP Morgan (JPM) report their earnings. Their reports and the market’s reaction could set the tone for the rest of the week. Earnings season kicked off in a small way the week before, but due to the Independence Day holiday falling on a Friday the week of July 14 – 21 is when we really will get some insight into business trends for the second quarter of 2014. Here are the three year historical stats on GS and JPM –

JPM GS Earnings

The Producer Price Index

Probably the most significant economic number coming out next week is the Producer Price Index which is a key measure of inflation.   The Bureau of Labor Statistics will release the PPI on Wednesday at 7:30 Chicago time.   The short explanation is that the PPI is a measure of costs associated with producing goods before they reach their respective retail channels. Inflation has not been an issue for quite a while, but at some point it may start to gain the attention of investors and traders. A higher than expected PPI may be an early signal that inflation needs to be on the radar screen for interested parties and most importantly the Fed.  The Fed’s job is to manage the economy in a way that maximizes employment while keeping inflation in check.   The response to inflation and keeping it under control would be higher interest rates, which is something that would not be taken as a positive by the equity market.

Yum Brands Earnings

On Wednesday after the close YUM! Brands (YUM) reports earnings.   You may wonder why I consider the owner of Pizza Hut, KFC, and Taco Bell significant. No it is not the stint I did as a Pizza Hut delivery driver back in the late 80’s. I like to use YUM as a proxy for the health of the Chinese economy.

From my days as an equity analyst covering retail and restaurants I know that YUM has significant operations in China. However, when I checked their geographic revenue breakdown I was pretty surprised.   The pie graph below shows YUM’s revenue breakdown for 2013, note the biggest slice is attributed to China.   In fact over 50% of sales for the company come from China so if you want insight into the Chinese economy and have any doubts about the accuracy of some official economic numbers keep an eye on YUM’s earnings release as a proxy for the business climate in world’s most populated country.

YUM Revenue Breakdown

As far as history goes, over the past three years YUM’s stock has moved on average 3.74% the trading day after earnings. They have a history of big moves with the stock climbing 8.92% when they reported in early February this year and the quarter before that large gain saw the stock drop 7.24%. Their most recent report in April resulted in the stock losing less than 1%.