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Markets are called to open flat this morning. This is what's happening today:
A flat start this morning in European markets after Moody's downgraded France from Aaa to Aa1 with a negative outlook. This news shouldn't move the markets since S&P had already downgraded France. The irony of it all is that since S&P's downgrade of France, French government bonds gained 9.4%, compared with 3.4% for Germany debt, and 2.5% for that of the US. Investors aren't worried about investing in France despite losing its Aaa rating. The 10-year yield is at 2.069%, the lowest it has ever been since the adoption of the Euro!
What is stopping the markets from rallying this morning is that fact that the Bank of Japan kept policy unchanged after a two day meeting. The fact that we did not see any stimulus led to a rally in the value of the Yen against a basket of currencies. The Bank of Japan Governor kept policy unchanged amid calls for unlimited easing by opposition leader Shinzo Abe, who polls indicate may become Prime Minister following elections next month.
Moving on the to US, we had a great session yesterday. We saw the NASDAQ close 2.21% up pushed by Apple who's shares increased by 7.21%. Better-than-expected existing home sales data has helped to lift sentiment. Existing US home sales increased 2.1% to a 4.79 million annual rate, exceeding analysts estimates. The markets also rallied after Obama put investors' minds at rest that an agreement will be reached with congress.
When Obama was re-elected, the markets started selling off because they thought of the worst. They thought that if an agreement isn't reached by year end, the US will go back into recession. Goldman Sachs and Barclays are predicting that GDP growth for Q312 will come in at 2.9% whereas that for the for Q412 will slow down to 1.7% because of the negative effect by Hurricane Sandy. The weakness in the 4th quarter will also be reflected in the 1st quarter of next year though we should start seeing decent growth rates post Q113.
The austerity measures which are expected to be adopted in US to tackle the fiscal cliff shouldn't have a large negative impact on growth and things should keep on progressing positively, ceteris paribus. The reason for this is that the US economy is currently growing at a decent rate so a hike in taxes and a reduction in government expediture shouldn't be a detrimental factor to a weaking growth rate in the US. The situation would have been different if the US was in a recession like the Eurozone. Then adding taxes and reducing expenditure would continue making things worse for the country. However analysts are not worried about the negative impact of these measures on the US.
Keep in mind that despite what is happening in the global economy, employment is improving and so is the housing market in the US. If things keep on moving in this direction the US economy will continue to improve.
I'd like to close the blog with a few lines on Apple. We have seen the price come down from its high of $705 in September of this year. The biggest problem of Apple is that it is a stock that everyone talks about. And when everyone talks about something, the movements to the upside or downside will be bigger. Lets start off with the fundamentals of the company. Apple is trading on a historic PER of 12.8x and pays out a gross dividend yield of 1.87%. During yesterday's trading session, the company is trading (once again) on a market cap above $500bln. Alot of investors started to worried about the global economy and since Apple has rallied alot this year, the first thing they sell in their portfolios are the winners. Then we started hearing that the iphone had problems with the maps application, that key officials were selling shares etc. and all this led to investors selling shares in a market where in general, investors were putting risk back on the table.
To add to all of this, institutions were selling to avoid paying a higher capital gains tax next year on the large profit they were making on Apple. So they crystalized the gain this year in order to be able to start from zero going into 2013.
Fundamentally Apple is very attractive. The company is cash rich, has no debt and is trading on very attractive multiples. Let me give you an example. Apple is in the tablet business. So is Amazon. The difference is that Amazon is trading on a historic PER of 433.42x! Of course there are many other positives to Apple but I can't put them all down on this blog.
Regarding the tax issue, instituations were selling to avoid paying higher taxes next year. This does not mean that the money which went out of Apple won't go back in. If anything, once they crystalized the gain, they will time the market to get back in. Most analysts (not to say all) are bullish on Apple.
Infact out of 63 opinions on Apple on Bloomberg only 2 have a sell recommendations and they come from houses I have never heard of before. Probably they are a 2 man band set up on a private island in the Caribbean who analyse stock depending on their mood for the day whilst sipping Bacardi in the sun.
Bottom line is that Apple is a great stock to be holding and in time you should see positive momentum build in the stock. What happens in the short term is irrelevant. What you are interested is the medium-long term. That's how it works with equities.
Stock to watch: St. Jude Medical ($35.75, Price Target $47)
Over the past five years, St. Jude has capitalized on the difficulties faced by its two larger competitors, has narrowed the product development gap in the cardiac rhythm management (CRM) market, and has been opportunistic in M&A. The cardiac rhythm management market has been disappointing of late and Riata lead concerns continue to weigh on the stock, but we still believe the pipeline will allow St. Jude to return to high-single-digit top-line growth. St. Jude is also working to improve its cost structure, which when combined with financial engineering should provide for double-digit EPS growth on a constant currency basis. Given the stock's valuation, we rate STJ Buy.
For further information on St. Jude Medical or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
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