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Good morning,
Markets are called to open lower this morning. This is what's happening today:
Markets got hammered in to US last Friday after General Electric and McDonald's failed to beat estimates for Q312. General Electric fell the most in almost a year after cutting its 2012 sales target amid lower finance-unit revenue and reporting weaker Q312 demand for some industrial equipment.
McDonald's posted its worst quarterly restaurant sales growth in nine years on Friday, lifting the curtain on the fast-food industry's fight for customers in a weak economy. The world's biggest fast-food chain is battling more than the bleak global economy that is curbing appetites for its hamburgers, salads and smoothies. Resurgent chains like Burger King Worldwide and Yum Brands' Taco Bell are challenging McDonald's in the United States with revamped menus, celebrity endorsers and a renewed focus on low-priced food.
Moving on to Europe, the EU Summit turned out to be disappointing once again with no conclusions made. Despite all the rhetoric, last week’s summit of the European Union has simply delayed decisions on a European banking union and tighter fiscal integration. These are the difficult, practical parts of a deal in terms of which Germany, the paymaster of Europe, would effectively underwrite a widespread bailout for Eurozone countries and commercial banks, in exchange for greater fiscal discipline and supervision.
However, as was expected from the start, the implementation of the deal has floundered on political divisions and national self-interest. The rest of the Eurozone is reluctant to give up more national powers to a EU that will be economically dominated by Germany, which has so far come through the debt crisis relatively unscathed. German insistence on austerity measures, with harsh social and political policies to match, are politically unpopular in the most debt-ridden Eurozone countries. German Chancellor Angela Merkel is openly sparring with French leader Francois Hollande — her most important opposite number in Europe, who wants to use economic stimulus measures to wriggle Europe out of the crisis. There are also suspicions in the rest of Eurozone that Germany is happy to keep the single currency weak in order to benefit from its exports. Conspiracy theories aside, German commercial banks and financial institutions are as vulnerable to Eurozone debt as any other country. The apparent calm in financial markets must not fool politicians. Nobody can win until sustainable financial stability returns to Eurozone.
My opinion is that alot has been priced into the markets and seeing profit taking take place should not be seen as a coincidence. Companies are missing estimates in the US because of slower global growth. On the other hand we have Japan which just reported a 10% decline in exports year-on-year. In Europe we have more of the same – no conclusion from the EU summit. You can't blame investors for wanting to sell out of the markets after the DAX has rallied 25% for the year. It all comes down to stock selection. A portfolio will turn out to be a winner at the end of the year if the stocks picked in the portfolio are reflected of what is going on in the markets.
At the start of the year we had the markets rally 25% as cyclicals had a good run and defensive stocks were underperforming. In H212 we saw a shift out of cyclicals and into defensives. And now, defensive stocks are the ones looking expensive. Logic would say to move out of defensive stocks and start building positions in cyclicals. This statement might sound incorrect since we are seeing a slowdown in global growth which is expected to remain so in 2013. However, picking up bargains in times of weakness for when the economy starts to recover is what will distinguish a good portfolio from a mediocre one. A portfolio should not be 100% invested in cyclicals, however it should hold cyclicals stocks that are oversold and will recover nicely once we see economic data that shows improvement in the global economy. There is also the elections taking place in the US on Nov 6 which will keep investors alert to know what will happen in the US.
Caterpillar results out today. Investors use this stock as a guage of the global economy. At its current valuation, most analysts are bullish on this stock with Jeffories giving it a price target of $110/share and JP Morgan $109/share.
US Companies reporting Q312 results today:
Stock to watch: Google (Price $695.42, Price Target $850)
Deutsche Bank's comments: We rate Google a Buy. Our bullish thesis is based on: 1) Google's revenue growth is likely to hold up over the next few years as core international search markets continue to grow at rapid pace and prop up modest deceleration in developed markets, 2) new revenue streams from display, YouTube, mobile and other areas are becoming more meaningful and should support growth, 3) EBITDA margins appear to have stabilized at core Google, and 4) at 15x 2013 EPS, the valuation is one of the most compelling in the space, especially considering the growth profile. We would initiate or add to positions at current levels. Given Google's significant market share and over $200bn market capitalization, we don't see as high a total return profile with Google vs. some of the other names in the space, but we believe significant upside from current levels is possible.
For further information on Google or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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