Good morning,

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

  • The cost of insuring Japanese corporate bonds against default rose to the highest in almost year;
  • Federal Reserve Bank of Philadelphia President Charles Plosser yesterday said more bond purchases by the central bank probably won’t boost growth and may jeopardize its credibility;
  • In Asia, a territorial dispute between the region’s biggest economies sent shares of automakers lower and added to concern about a trade slowdown;
  • The biggest Japanese manufacturers were pessimistic for a fourth quarter, the Bank of Japan’s Tankan survey is forecast to show next week;
  • The euro was at $1.2905, trading near the lowest level since Sept. 13, before reports that may show declines in Italian retail sales and French consumer confidence. The shared-currency was also under pressure as Spanish Prime Minister Mariano Rajoy faced calls for early elections and a possible international rescue of his nation;
  • 10-year Italian debt is trading at 5.088%, 10-year Spain is trading at 5.717% and 10-year Portuguese debt is trading at 8.588%;
  • Brent is trading at $109.83;
  • Apple closed the session at $673.54.

It's always the same story repeating itself time and time again. Central banks stimulate the economy by pumping money into it and investors get over excited and start buying stock. Since the blog wasn't available when we saw central banks stimulate the economies, let me go back and point out the positives before mentioning the negatives which are driving the markets lower today. In September we saw 3 main good points and one negative point come out of Europe.

The good news was:

  • The introduction of the ECB’s Outright Monetary Transactions (OMT) facility,
  • The decision of the German Constitutional Court to allow German participation in the ESM with small additional conditions,
  • The strong performance of centrist, pro-European parties in the Dutch election.

The bad news was that differences between Germany (and allies) on one side, and France (and allies) on the other on certain aspects of banking union are becoming increasingly obvious. The latest disagreement is over whether all or only systemically important or cross-border banks should be supervised by the ECB.

We have the CAC up 11.2% for the year, the DAX up 25.88%, the NASDAQ up 19.68% and the NIKKEI up 5.55%. But what the market fails to factor in is why all this stimulus is taking place. The markets now turned negative for many reasons. The first reason is a report which is expected to show declines in Italian retail sales and French consumer confidence. Keep in mind that governments do not like stimulus and would do anything to avoid it. They are only forced to carry it out if the situation is looking nasty. There are still many problems in Europe. Look at Spain. Catalan President Artur Mas yesterday called for early elections, with greater autonomy at stake, five days after Rajoy rejected his bid for increased control of his region’s tax revenue. Mas set the vote for Nov. 25. The move risks plunging Rajoy into a constitutional crisis amid a recession that has sent unemployment to 25%. He’s struggling to persuade Spaniards to accept the deepest austerity measures on record and stoking frustration in Germany over his foot-dragging on whether to seek a bailout. As police clashed with protesters in Madrid yesterday, Rajoy didn’t respond to Mas’s defiance.

Moving out of Europe and looking at Asian, the situation is not looking good their either with the dispute taking place at the moment. Toyota Motor Corp. and Nissan Motor Co. cut production in China in August as anti-Japanese protesters damped demand in the world’s largest vehicle market. Nissan reduced output in China, its largest market by volume, 8.9% in the month from a year earlier to 86,488 units, according to a statement from the automaker. Production at Toyota, Asia’s biggest carmaker, fell 18% to 67,625 vehicles in the country. Chinese demonstrating against Japan’s claim to own a set of islets in the East China Sea torched auto showrooms and smashed Japanese-branded cars earlier this month, prompting Toyota, Nissan and Honda to temporarily shut plants. Japanese autos will lose their lead this year over German nameplates in the country for the first time since 2005, China’s Passenger Car Association estimates. Japanese car brands’ market share will probably fall to 22% this year, while German marques will increase theirs to 22.5%, according to the association’s projections. Combined sales of Japanese automakers fell last month in China, compared with gains of more than 10 percent for German, U.S. and South Korean vehicles, according to the China Association of Automobile Manufacturers. Nissan generates about 30% of its profit in China, compared with 17% at Toyota and 15% at Honda Motor Co., Goldman Sachs Group Inc. estimates.

It woulld be wise at this point in time to review your portfolio and see which stocks have gone up much more than they shouldto liquidate positions. On the other hand there are still many buying opportunities out there. Make sure you are exposed to the right sectors and names within the sectors. Ask for advice when in doubt.

One last point on Apple. Everyone is asking whether it is time to sell Apple shares once it hits the $700 mark. Everytime Apple goes up a $100, investors create a psychological level at which they think it is time to sell without considering the changes that have taken place within the company to bring the share price up to that level. It is true in hindsight that everytime the share price hit the psycological level the share price came back down. However it is also true that many investors that got out at lower levels never had the courage to get back in and lost alot of money just by staying out. Apple is still a screaming buy at these levels and I would take this opportunity to pick up stock in weakness rather than be tempted to sell out.

Stock to watch: Apple (Price $673.54, Price Target $850)

Deutsche Bank comments: iPhone 5 will fly: Raising PT to $850

iPhone 5 will begin shipping today as early demand indicators are tracking very strongly. We believe iPhone 5 demand is extremely robust (simultaneous form factor and LTE upgrade) and with a fast geographic ramp our prior est's were too conservative. We raise our iPhone estimates by 5M in CY12 and 10M in CY13. We also raise our CY13 EPS to $60 (vs. prior $56) and our PT to $850. Buy.

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

Good day and happy trading!

Kristian Camenzuli