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Good morning,
Markets are called to open flat this morning. This is what's happening today:
In Europe, the euro traded below $1.30 for a third day before data forecast to show German consumer confidence will fail to improve in November and French household sentiment fell for a fourth month, adding to signs that the region’s debt crisis is hampering growth in its biggest economies.
Today's going to be an interesting day for the markets in the US because some interesting blue-chips are reporting results. Earning season for Q312 is giving a clear indication that the economic crisis is influencing companies negatively. After the Christmas period last year we saw shares rally as results came in above expectations and goverments across the world pumped money into their economy. Then we saw the markets lose all it earned in the first quarter after companies started to disappoint with bad earnings in the second quarter. The problem today is that analysts revised down their forecasts and still companies are not meeting expectations. This is a clear sign that the slowdown projected by economists is real and is happening. European leaders need to find a solution and they need to do it fast but we know for certain it will take years to be solved.
Yesterday, the Fed, in its last scheduled statement before the US presidential election, repeated it would press on with its asset purchases until the labor market improves substantially. This injection of cash into the US is what's causing the weakness in the Dollar. Don't think for a second that the strength we are seeing in the Euro is attributable to the recovery in Europe. Its just that much more money is being injected into the US than into Europe. Unfortunately (like always) nothing was concluded from the EU leaders summit and we now have to wait for the December summit to see what''s going to happen. For the US there isn't much more to say. The Fed (like the Bank of England) is all out for growth at whatever cost. They want to create jobs, circulate money and grow. But no matter how much money is being invested in the US and the UK, if Europe does not improve, there is only a limit as to how much the data from the UK and US can improve. The same applies to China. The slowdown we are seeing is all a result of lower demand from the developed world which is hurting emerging markets.
Nonetheless, China has alot of firepower it can use and analysts are betting their money on further easing out of China. It hasn't come yet but after the positive PMI number which came out yesterday, the markets are convinced the Chinese government will give the needed push to get China moving in the right direction.
Again no matter how much you try to explain what's going on, it all comes down to Europe. We had the ECB do all forms of cash injections. Be it the LTRO exercise or the latest OMT announcement, the truth is nothing is really happening. Money is being injected into the banks but the banks are not lending out money so jobs are not being created. Spain has still not asked for a bailout. But what's important is understand how countries like Italy and Spain are going to generate jobs and growth and we have never heard anything about this. Not only that but the Spanish Finance Minister came out saying that with the bailout money the situation of Spain will not improve because of the additional austerity measures it has to adopt.
The problem with Europe (not that I see any other solution) is that whenever a country is given cash it has to sacrific something else so at the end nothing really happens. The Europeans got it wrong when they adopted the Euro and there is no other way of putting it. You just can't have a common currency and each country does what it wants and gets itself into situations which are unsustainable. Now we are hoping for a banking union which will take power away from governments and give it to the ECB. But it is already evident that governments don't want to give up this power to control their banks and that this banking union is still just a theory. Alot of hope has been built into the market about this banking union and nothing has come out of the last summit. Now they are hoping to conclude in the December summit but I doubt that we will ever see a banking union in Europe in the short term.
Some people argue that a banking union won't help things. They are partly right. The banking union won't stimulate growth thats for sure. But thats not the scope of the banking union. The scope of the union is to take the responsibility of the banking sector away from individual governments and give that responsibility to the ECB. That way governments won't increase their debt burden and debt/GDP ratio and avoild pumping money into failing banks. The ECB will decide whether to do that or not. Of course this is creating alot of debate because at the end of the day governments are elected by the people and the banks are a very important part of an economy.
Apart from how countries can still keep the Euro is of interest to us but we also need to know how Spain and Italy are going to create new jobs and this imporant question has still not been answered. EU leaders are still having problems solving things that should have been solved when the Euro was introduced. This means that important things like growth are being put on the back burner and this is why when economists say that the situation in Europe will remain like this for years and years, THEY ARE RIGHT!
On thing is for certain and that is that sovereign bonds be it Spain, Italy or Germany are trading on ridiculous yields. And when it comes to corporates, I think that what had to be squeezed out of the yields has been done becuase prices are very high and there isn't much more to squeeze at this point. This is why equities are looking very attractive because with prices of high yield and sovereigns trading on very low yields, the return on equities are looking more attractive.
With equities it then depends if you want stability and income or if you want to forfeit income for capital gains. There are equities for all portfolios. What's certain is that portfolios should be exposed to equities, you don't have to be a rocket scientist to understand this logic.
Many may ask why should an investor be invested in equities when companies are not generating growth? First of all this statement is not correct. Not all sectors are perofrming badly. This time round it gets more complicated because its not just the sector that you have to pick correctly but also the individual stocks. For example take technology which I am a buyer of. I'd buy the sector but I wouldn't but all stocks. For example i'd buy Oracle, Apple, SAP but I wouldn't buy IBM, HPQ, Microsoft at this point in time. So is not just picking the right sector but also picking the right stocks within a sector. Because if you think about it although the companies I mentioned are in the same basket, they are completely different from each other and what's good for one is bad for another.
My conclusion is that it is always good to be invested. Whoever ever came up with the saying 'cash is king' in 2007 was incorrect. Even when the crisis started in 2007 cash wasn't king because in hindsight safehavens like gold performed extremely well. Today we don't have a 2007 scenario and things are much better. The truth is the markets will always have problems to deal with. Investing is not as simple as it used to be in the past. That is why you need professional help today because there is a fine line between investing and gambling and unless you get the right advice, you'd get the wrong perception of the markets.
US Companies Reporting Q312 Results Today:
Stock to watch: Yandex (Price $22.15, Price Target $31)
Deutsche Bank comments: As the dominant Russian search engine and Internet services company, Yandex is the leading Internet and search company in Russia, with more than 60 million global unique users across its sites and ~60% market share of the Russian search market, approximately 2x the No.2 player in the market, Google, with an estimated 25% revenue share. Operating leverage exists, but focus is on profit growth – we have argued that operating leverage should be a theme that plays out with the last two points of our strategy, but in the meantime Yandex appears positioned to produce 34% operating profit growth on a ruble basis through 2014, similar to underlying click volume growth. Buy.
For further information on Yandex, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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