Trader Talk: An Analysis of the Markets this Morning

Good morning,

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

• Yahoo! Inc. beat earning estimates whereas Texas instruments missed targets;

• Caterpillar the world’s largest maker of construction and mining equipment, forecast sales growth for 2013 that would be slower than in the previous three years as the global economy decelerates;

• External factors such as the European debt crisis and the U.S. elections are still the biggest risks for the market;

• 10-year Italian debt is trading at 4.76%, 10-year Spain is trading at 5.47% and 10-year Portuguese debt is trading at 7.460%

• Brent is trading at $109.35;

• Apple closed the session at $636.75. Today Tim Cook launches the mini-ipad – if you want JP Morgan report on the effect the mini ipad will have on Apple's profitability, call us on 25688688!

I'll start off today's blog with a comment on Caterpillar's results. The market use Caterpillar's earnings as a guage as to where the economy is heading. Caterpillar is the world’s largest maker of construction and mining equipment. They forecasted sales growth for 2013 that would be slower than in the previous three years as the global economy decelerates. Sales next year will be from 5% below to 5% more than 2012 results. That compared with an average projection for an increase of 5.1% based on 17 analysts’ estimates compiled by Bloomberg. Revenue year-over-year grew 31% in 2010, 41% in 2011, and was estimated to increase 13% this year. The biggest concern is the declining backlog, which would imply a more challenging year next year, especially for mining, and whether or not North American construction will re-accelerate. The shares closed the session 1.45% up at $85.08.

Yahoo! on the other hand beat estimates and the shares went up 4.6% after hours. The new CEO which is full of enthusiasm said she will put mobile apps and services at the centre of her turnround strategy for Yahoo!. The company’s fifth CEO in four years plans to reverse three straight annual sales declines by recharging growth in existing businesses. Mayer plans to focus on small acquisitions of less than $100 million rather than large deals, and expects to move workers around within Yahoo instead of cutting large groups of employees.

It is interesting to note that ff the 42 companies on the regional benchmark index that reported quarterly earnings since Oct. 1, about 60% missed analyst estimates, while 40% surpassed expectation.

From today till the 25th October, its all about Apple. We can go ahead and talk about the EU summit where nothing was concluded or the fact that sovereign yields in Europe keep on coming down because the markets are convinced Rajoy will call for a bailout very soon. But all this talk will just be a waste of time because regarding EU leaders, it is always more of the same. Postponing for tomorrow what they can do today. And regarding Rajoy, I wouldn't bet my money on a bailout anytime soon because you never know with politicians. But at the end of the day our job isn't to regurgitate what's going on in the markets. You can put it on BBC and get all the news you want. Our job is to create portfolios that will generate returns in the medium to long term and Apple, in my opinion, is one of those constituents that will make this possible.

Apple's share price lost over 3% on Friday and got it all back yesterday. But many ask 'if the market is convinced as much as you on Apple than why do we see these swings in the price?' There are many answers to this question – a few might be rational but the majority in my opinion are irrational. Here are the reasons I can think of this morning:

• The first obvious reason is that not everyone has the guts to hold onto the shares on the eve of results. Many prefer cashing in on the profits and wait on the sidelines;

• Then there are people who start to worry because the tech industry is underperformancing. Look at Microsoft, HP, IBM – all of them missed estimates and got hammered after hours. My answer to this is that if you sold Apple because these companies got it wrong, you got it even more wrong. HP and IBM have underpeformed because they are old school. People are reluctant to buy PC's nowadays because they opt for the tablet which is cheaper for students and much more convenient. Although a tablet doesn't replace a pc, students are buying the tablet and delaying the time it takes them to replace their pc;

• Then there is Google. They too missed estimates. Oh Lord this must be bad! But again if you see why, its all got to do with lower revenue from advertising. And a wise man explained to me that the lower revenue is caused due to lower number of clicks on adverts because of the use of smartphones and tablets. That doesn't mean anything bad for Apple. On the contrary its telling you that people are using more smartphones and tablets than ever before;

• Then there is the famous worry that 'Apple can't keep up with demand' Oh boy now that's what I call a problem! There are so many companies going through tough times and the best you can come up with is telling me that Apple's products are so much in demand that the company can't keep up with supply -and this is a bad thing? This world gets me confused;

• Then you hear alot that the share price keeps on doubling. This stock must be expensive! But this has nothing to do with it. The share can be cheaper today trading at $636.75 than it did in the 1980s trading at $20 a share. It's all about valuation!;

• Then there is the legal battle they lost against Samsung because the judge said that it can't be that Samsung tablets are a copy of the ipad because they aren't as cool as the ipad. Thank you judge – I need not add anything else to the statement. (I actually started supporting the English team after the judge's statement);

• Then you might come across a Samsung geek who has nothing bad to say about Apple but just out of spit says 'Now apple is giving a dividend the company is telling you that it doesn't need the cash for growth' – Apple has so much cash that it can afford to pay a dividend and keep on growing. Wait for it – today the mini ipad is out, then we'll hear about the Apple TV – then who knows what…but one things for certain -Apple keep on coming up with new products;

• Then we hear people worry about the iphone – more of the same they say. If is so much 'more of the same' how does Apple manage to sell 5 million iphones in just 3 days?!

You know I could go on forever but i'm paid by my boss not Apple and I have other things to do. Bottom line is that Apple is a great stock to hold and no matter what people say, no matter how high the share price came up, it is still one of the best investments you could be making. And this is not a short term thing. This stock needs to be in your portfolio for years to come because Apple products are what the future is all about. Obviously if one day, if it had to be expensive we will be the first to let you know it's time to call it a day. But till then, we are long Apple stock. Today, Tim Cook launches the mini-ipad and on Thursday the company reports results. Hold on in there.

US companies reporting Q312 results today:

• Reynolds American Inc

• AK Steel Holding Corp

• Harley-Davidson Inc

• Xerox

• 3M Co

• Facebook

Stock to watch: Shire (Price 1822p, Price Target 2130p)

Deutsche Bank comments: We believe Shire has attractive growth prospects derived mainly through robust growth in its ADHD franchise and a near doubling in revenues from its HGT business over 2011-16E. We expect Shire to achieve sales and EPS CAGR over this period of 7% and 11%, respectively, with several sources of possible upside (pipeline, acquisitions). We expect this growth to translate to strong cash flow, allowing Shire to redeem its $1.4bn convertible in 2014 and to undertake further M&A, in-line with its corporate strategy. The company's attractive growth and cash flow outlook should command a premium rating in our view: BUY.

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

Good day and happy trading!

Kristian Camenzuli