Good morning,

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

  • Markets sold off yesterday in the US as the markets were not happy that Obama was re-elected President of the USA. Obama, who was re-elected yesterday, now faces negotiations to avoid more than $600 billion of automatic tax increases and spending cuts;
  • President Hu Jintao said China must double per-capita income by 2020, setting a target for new leadership that will be announced at the close of a Communist Party Congress, which started today;
  • In Greece, Prime Minister Antonis Samaras got enough support to approve austerity measures needed to unlock bailout funds as more than 50,000 protesters ringed Parliament;
  • ECB and BOE meeting today;
  • 10-year Italian debt is trading at 4.902%, 10-year Spain is trading at 5.678% and 10-year Portuguese debt is trading at 8.38%;
  • Brent is trading at $107.47;
  • Apple closed the session at $558/share

Alot of news to digest in the markets this morning. Lets start off with the US since the negative sentiment we saw in the markets yesterday were the result of Obama being elected President of the USA. I had said in my previous blogs that the markets wanted Romney to win because what Obama is planning to do to raise taxes in order to reduce the US debt problem is going to have a negative effect on stocks, particularly dividend paying stocks.

You currently pay 15% on dividends from US companies. Under Obama’s plan, the wealthiest would see a personal tax rate of nearly 45% because it will start to reflect the level of tax an investor pays on his income. And before a company gives a dividend, that money is taxed as corporate profit. Obama would like to lower the corporate tax rate to 28%. So, by the time the dividend reaches your bank account, it has been taxed twice.

Forbes Magazine – 3 main problems with a higher dividend tax are as follows:

1) It Could Hamper The Shelter Behind Dividend Stocks – A high-yield dividend stock can provide some comfort and stability in volatile times. A period like the one we’re in right now. If each new day brings a wild swing in the equity market, then being able to count on a dividend can seem like a good way to take cover. Money managers can direct clients toward blue-chip companies with sizable dividend yields–stable firms like Exxon Mobil, General Electric, Microsoft and Pfizer. Stalwart Coca-Cola just raised its dividend for the 50th straight year. Now, you don’t invest in these types of companies to make money through appreciation or trading. You pick these stock for their security–and their dividends. But, if those dividends lose their value through higher taxes, these stocks lose their attraction.

2) It Could Increase Market Volatility – To make up for what you lose in dividends, investors would probably start trading more. Greater volume can bring volatility. And don’t we have enough volatility as it stands?

3) It Could Hurt Retirees The Most – Americans 65 and older accounted for 42% of dividend income reported to the IRS in 2008, the latest year available. So, when Obama suggests raising the tax rate on dividends, he’s taking aim right at their retirement nest egg.

The dividend tax is the biggest blow to the market. But Obama has more on his plate. Unless the US Congress can strike an agreement on a budget that reduces the debt, $607 billion of tax increases and federal spending cuts are set to kick in automatically in January. The Congressional Budget Office has said the US economy will contract by as much as 0.5% next year if Congress fails to keep the increases from taking effect.

Moving on to Europe, the European Commission yesterday said that the Eurozone will expand 0.1% in 2013, down from a May forecast of 1%. . It cut the forecast for Germany, Europe’s largest economy, to 0.8% from 1.7%. Technically, the euro area will avert a recession, defined as two consecutive quarters of contraction, though the overall economy will still shrink 0.4% in 2012, ending a two-year expansion. The euro fell after the downbeat forecast and a warning by European Central Bank President Mario Draghi that debt-related difficulties are starting to affect the German economy.

Siemens reported results for Q412 today which beat estimates and plans to save E6bln by 2014. However the company sees headwinds going into 2013. To cater for the headwinds the company will be going through a cost cutting exercise. in order to meet targets going into the future.

Moving on to the banks, Socgen and Commerzbank both missed estimates for the quarter. Societe Generale reported a 86% decline in third-quarter profit, hurt by losses on the sale of its Greek unit and a charge related to its own debt. Societe Generale is making some progress however, it’s always largely lagging behind BNP. BNP issued very good results yesterday. Our view has always been that of being invested in the good strong banks and avoid complicated banks at this point in time. Check out yesterday's blog for more information on BNP.

Commerzbank said it’s forgoing its dividend to invest in the core business. This is on the back of reporting profit that missed analysts’ expectations on losses from non-core assets and a decline in consumer banking earnings. Germany’s second-largest bank last night said dividend payments for 2012 and 2013 are “unlikely” as it prepares to invest more than 2 billion euros in its core bank and reduce “non-core assets” by more than 40% by 2016. Banks are restructuring their operations amid changing market conditions of less client and trading activity while being forced to hold more capital by regulators.

Stock to watch: Volkswagen (Price E146.90, Price Target E165)

Deutsche Bank comments – olkswagen has proven to have one of the most successfull business models within the industry and also shows a very impressive cash generation. With the full consolidation of MAN taking place now and the, in our view, highly likely, early exercise of the option to buy the remaining 50% of Porsche AG, we take a closer look at the impact of this step. While we have never seen much value in analyzing VW on a SOP concept, these two assets have proven to be successful standalone businesses. We especially highlight the attractiveness of Porsche AG, which we argue could explain up to 1/4 of VW's value – Buy

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

Good day and happy trading!

Kristian Camenzuli