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Markets are called to open lower this morning. This is what's happening today:
Data released today is expected to show GDP in the US to have increased by 1.7% in the three months through June, more than the 1.5% estimated previously. Data released yesterday showed home prices in the US rose for the first time since 2010, while consumer confidence fell the most in 10 months. The Fed signaled last week it’s ready to take further steps to spur the recovery and investors are waiting for the Fed's meeting to be held tomorrow and Friday to see if Bernanke will announce any form of quantitative easing. In my opinion, we will see no further easing till after the election. Also the fact that data is coming out better than expected buys time for the Fed and allows it to delay further easing. We have seen this meeting after meeting as Bernanke says that the US will need further stimulus if data continues to worsen. Figures coming out are showing an improvement in the state of the economy and I believe the Fed will use this as an argument to delay further easing.
If we are lucky and get further easing in the US, the markets will rally across the board because the truth is investors like it when governments intervene. Why Europe should rally because of easing in the US is not very clear to me. Europe still has alot of problems and the fact that the US government is being pro-active whereas the ECB is just sitting on the sidelines does not warrant a rally in European stocks. Howvever, do keep in mind that many European companies are multinational companies which will benefit from an injection of cash in the US economy. But do make sure the companies you are buying for your portfolio are going up for the right reasons and are being effected positively by the move made by the respective government.
The Euro is rallying and I'm also finding it hard to agree with the market on this one. The Euro is rallying for two reasons. The first being that the market believes the Fed will come out with some form of easing which will result in the strengthening of the Euro against the Dollar so the market is pricing in this move by the Fed. On the other hand the market is expecting the ECB to come out with some form of easing in the meeting next week. Both statements contradict each other and in reality that should result in no move in the Euro because one gain eliminates the loss of the other. But the market is not trading on fundamentals, it is trading on sentiment and this is where it becomes dangerous. So if there is quantitative easing in the US the Euro rallies (so far this makes sense and is backed by theory). On the other hand, if there is further easing of monetary policy in Europe, the Euro also rallies (and this goes against every economic principle). But the truth is, European investors are tired of hearing bad news. And when they hear good news anything that is European ralllies. Forget theory, the markets will go up. However one must appreciate when sentiment and fundamentals do not walk hand in hand, the markets will correct in the short term and investors can get caught on the wrong side of the trade. So be careful and think of every constituent in your portfolio and the reason why it is there. Don't adopt a herd mentality because although it can result in profits short term, it can harm your portfolio significantly in the long term and it can take years to recover the loss.
So this is what I think. We will get further easing out of the US but not for now. Having said this, I would take the opportunity in times of weakness to build on positions in the Ishares MSCI emerging Markets because easing will eventually come in the US. Bernanke himself said that in order for the US to improve, the Fed must intervene. And anyform of easing in the US results in a rally in emerging market stocks.
Do not close all your positions in the Dollar just yet. The euro traded near an eight-week high versus the dollar before Italy sells six-month bills and German Chancellor Angela Merkel hosts Italian Prime Minister Mario Monti for talks in Berlin today. The euro was at $1.2558 from $1.2565 yesterday. It touched $1.2590 on Aug. 23, the strongest since July 4. In my opinion this rally we are seeing in the Euro will be short lived and we will see the Dollar continue to strengthen once we see the Fed delay further easing and Draghi annouce a stimulus package that falls short of the markets expectation. Stay exposed to US blue chips and emerging market stocks. Do buy European multi national companies becuase they are trading at a discount to their American peers but do keep in mind that the problems in Europe are far for being over. Both Spain and Greece are a time bomb waiting to explode. And they will eventually explode harming those investors on the wrong side of the trade.
Stock to watch: Goodyear ($11.58, Price Target $20)
Our investment thesis remains that Goodyear will have tremendous earnings leverage if and when its N.A. business unit returns to profitability. We see several factors that should contribute to that recovery, including cost savings, and a recovery for the N.A. commercial truck market. Our view on an improving N.A. tire market is also supported by significant structural changes which have occurred in recent years. We maintain our Buy recommendation based on valuation.
For further information on Goodyear or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
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