Trader Talk: An Analysis of the Markets this Morning

Good morning,

Markets are called lower this morning. This is what's happening today:

• The US budget issue is posing the biggest uncertainty to the market now given that some data in the world’s largest economy have been showing signs of recovery;

• Data yesterday showed US consumer confidence rose and home prices increased;

• A report today will probably show Germany’s jobless rate held near the highest level in a year. The rate has stayed at that level, the highest since November 2011, since September;

• 10-year Italian debt is yielding 4.719%; 10-year Spain is yielding 5.505% and 10-year Portugual debt is yielding 7.628%;

• Brent is trading at $110.07 per barrel;

• Gold is trading at $1739.69/t oz;

• Apple closed the session at $584.78

An interesting session in the US yesterday. The markets were trading flat before US Senate Majority Leader Harry Reid said he was disappointed with the progress made in congressional budget talks over $607 billion in tax increases and spending cuts set to begin in January. After this comment the markets turned negative. Investors are very sensitive to news and one word can change sentiment overnight. Infact the market misinterpreted what Senator Reid said. The market thought that little progress is being made regarding talks on the fiscal cliff. But what he meant to say was that he wanted more cooperation from the Republicans to get on board with Democrat proposals. There is a general consensus by analysts that this sell off was premature as nothing negative was said that scattered the selloff in the market. Another reason, in my opinion to be picking up stocks!

There is actually a positive about the fiscal cliff. And this is special dividends. Alot of companies are issuing special dividends this year in order to pay lower taxes than if that had to pay them post 2013 with higher tax rates. Companies across the board are issuing special dividends. Las Vegas Sands for example announced a special dividend yesterday. The shares closed the session 5.29% up! But's what's even more interesting is Apple. Analysts are now saying that if there is a company in the US that should be paying a special dividend to return cash to shareholders it should be Apple. Apple officials who say that their actions are a result of the best interest for shareholders, cannot deny the fact that the company has $120bln in cash!!! That's equivalent to $11.44/share. Another reason why you should be buying Apple shares at this point in time! But Apple that analysts are expecting to come out with a special dividend to shareholders on the register before the close of 2012. ebay, Corning, Juniper Networks, Dell, Microsoft, Oracle, Charles Schwab, Yahoo! etc. are all potential stocks which could be issuing a special dividend.

Moving on, the OECD cut its growth forecasts, warned of the risk of a major global recession and urged the European Central Bank and the People’s Bank of China to ease monetary policy.

• US GDP will rise 2.2% this year and 2% next, down from predictions of 2.4% and 2.6% in May;

• The euro area will shrink 0.4% and 0.1% in those years, compared with a 0.1% 2012 contraction and 0.9% 2013 growth expected in May;

• UK GDP meanwhile will fall 0.1% this year and grow 0.9% in 2013. The OECD said that the Bank of England is providing significant support to the economy through quantitative easing, which should continue;

• Germany is expected to grow 0.9% this year and 0.6% next year;

• France will expand 0.2% and 0.3%. The OECD said that France must seize the opportunity of the initial phase of a new government mandate to launch a comprehensive medium-term strategy of fiscal consolidation, spending cuts and structural reforms to boost confidence and raise competitiveness and growth;

• Italian GDP is set to shrink 2.2% this year and 1% next year. The OECD said that Italy needs to uphold Prime Minister Mario Monti’s pledge to shore up public finances and overhaul the country’s economy to prompt a return to growth and enjoy investor confidence after next year’s elections;

• The Spanish economy will shrink 1.3% and 1.4% in 2012 and 2013. The OECD advised Spain, where a recession is intensifying, to proceed “briskly” with bank restructuring;

• China’s economy is set to expand 7.5% this year and 8.5% next year;

• India’s will grow 4.4% in 2012 and 6.5% in 2013;

• Brazil will register an expansion of 1.5% this year before accelerating to 4% next year.

The OECD highlighted the risks posed to global growth at a time when US lawmakers are trying to avoid the so-called fiscal cliff of about $607 billion in automatic tax increases and spending cuts and euro nations are saddled with a recession and a debt crisis that is now in its fourth year.

I am still confident (at these valuations more than ever) that is is a good time to be invested in the markets. Always get professional advice when in doubt.

Stock to watch: Oracle

Citigroup comments – Oracle still top-pick — Oracle trades at the lower-end of its historical valuation range (90% of S&P) and on the eve of potentially strong product cycle, we see an opportunity to own the stock for 12c database cycle (database is ~70% of ORCL profits). While not statistically significant, the company has seen Q/Q database license growth accelerate in the first three quarters of a new release. The consensus view is Oracle is at the losing end of the “big data” trend and we believe a new database release and potential license acceleration could change that consensus view. Additionally, we believe hardware (~5% of profits) and applications (~20% of profits) will likely bottom in FY13 and improve in FY14. Our Oracle price target remains $37, 21% ahead of current levels. This level implies shares trade back to 112% of the S&P valuation, with the historical range being 85% to 125%.

For further information on Oracle or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli