Good morning,

Markets are called to open lower this morning. This is what's happening today:

  • Microsoft declined in extended trading, following an 8% plunge in Google shares yesterday after the world’s largest search engine inadvertently released results during regular market hours;
  • US economic data yesterday were mixed. Jobless claims rose more than forecast, an index of leading indicators gained in September by the most in seven months, and manufacturing in the Philadelphia region expanded in October for the first time in six months;
  • Existing-home sales probably fell 1.7% in September from the month before, according to the median forecast of economists surveyed by Bloomberg News before a report today;
  • In China, the government won’t inject big economic stimulus and a strong rebound in growth is unlikely, Song Guoqing, an adviser to the central bank, said yesterday after official data showed the economy was stabilizing;
  • Jobless claims in the US increased by 46,000 to 388,000 in the week ended Oct. 13 from a revised 342,000 the prior period that was the lowest since February 2008, Labor Department figures showed today in Washington;
  • 10-year Italian debt is yielding 4.755%, 10-year Spain is yielding 5.320% and 10-year Portuguese debt is yielding 7.646%;
  • Apple closed the session at $631.70

EU leaders agreed in the EU Summit that they will work together to establish a euro-area supervisor by year-end, opening the prospect of direct aid to Spain’s banking sector. The EU will seek to agree on a framework that makes the ECB the main supervisor by 01/01/13. The new system, intended to break the link between banks and governments and give the power to the ECB, will phase in over the next year and could cover all 6,000 euro-area banks by 01/01/14. The EU leaders vowed to ensure that the single supervisor won’t put countries outside the euro area at a disadvantage. They said non-euro nations that join the supervisory framework can receive equitable treatment and representation, and intensive technical work in this area will continue. We'll have to wait for the December summit to see what has been concluded on the issue.

Plans to give the ECB oversight powers have helped bolster confidence in financial markets, which also have rallied on expectations Greece won’t get kicked out of the euro, Spain will get the money it needs and the ECB will use its balance sheet to limit potential turmoil. Spanish 10-year bond yields fell to their lowest in six months.

Spain was at the center of the most pressing banking issues because of the financial-sector rescue already underway. Spanish Premier Mariano Rajoy wasn’t prepared to make a request for a broader bailout. Rajoy wants the euro area’s firewall to inject cash directly into its troubled banks, to relieve it of the burden of paying back as much as E100b in bank rescue loans. However, the prospect of direct bank rescues became less urgent after stress tests revealed that Spain’s lenders required less than half of the funds approved by euro-area states.

Spain estimated in September it may need about E40b to recapitalize its banks. The government has played down the necessity of seeking additional aid while pushing for progress on a European banking union.

Greek Prime Minister Antonis Samaras moved closer to winning a delayed aid disbursement when European leaders praised his government’s budget-cutting push. At his first European Union summit since becoming premier in June, Samaras said record unemployment showed the price Greece was paying for austerity demanded by the euro area as a condition for emergency loans. He urged parallel steps to kick-start the economy and stuck to a request for two extra years until 2016 to meet targets for narrowing the budget deficit, prompting signs of European goodwill.

In the US, $20 billion were wiped off the value of Google after the results were released. Google Inc. blamed financial printing company R.R. Donnelley & Sons Co. for the premature release of results that showed a profit shortfall, caused shares to plunge and made Chief Executive Officer Larry Page the brunt of jokes shared widely on Twitter Inc.

Microsoft also reported disappointing results yesterday. The Company is on the verge of releasing Windows 8, its biggest software product in years and the company’s lackluster financial results on Thursday underscored how badly the company needs it to succeed. The results reflected the grim market for personal computers, the technology from which Microsoft still derives much of its sales and profit in one way or another. Smartphones, tablets and other devices have been taking in more and more money that might have once been spent on PCs. The soft economy has not helped PC sales either.

US companies reporting Q312 results today:

  • Schlumberger
  • Honeywell International Inc
  • McDonald's
  • Baker Hughes
  • McMoRan Exploration Co
  • General Electric

Stock to watch: Google (Price $, Price Target)

Bloomberg comments: Google Inc.’s profit and sales are under pressure as the operator of the largest search engine struggles to wring advertising dollars from the growing number of people who surf the Web on tablets and smartphones. The company yesterday reported third-quarter revenue, minus some items, of $11.3 billion, short of the average estimate for $11.8 billion, according to data compiled by Bloomberg. Third-quarter profit excluding some items was $9.03 a share, below estimated profit of $10.65 a share. The stock tumbled 8 percent after the results were inadvertently released early.

Citi's comments: Reiterate Buy Rating – Q3 came in light, but the results weren’t thesis changing. Per our 9/23 Long Thesis report, we believe we are seeing the abating of several Key Overhangs – especially those related to Motorola, Mobile Monetization & Competition. We see valuation (16X 2013 P/E) as reasonable. And we view Google as well positioned against several of Consumer Internet’s biggest trends (Mobile, The Migration Of TV Ad Budgets Online, Local, and Cloud Computing.)

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

Good day and happy trading!

Kristian Camenzuli