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Good morning,
Markets are called higher this morning. This is what's happening today:
The S&P 500 lost 0.9% on Friday after U.S. government data showed payrolls increased 80,000 last month, less than a 100,000 gain forecasted by analysts. The markets sold off after this news though the situation in the US is not as bad as that pictured by the markets. The payrolls data can in less than expected however it is not bad enough to trigger QE3. Obviously the US will remain under pressure until we see a pickup in China and Europe. Nonetheless, the US economy has performed well considering what is happening around us. Also, there are election in the US. Barack Obama is the favorite to win the elections which will be taken as a positive by the marktets.
The same securities analysts warning of the first decline in quarterly earnings since 2009 are also more bullish than ever on U.S. stocks. A total of 247 companies in the Standard & Poor’s 500 Index have more buy ratings than sells and holds, a record in Bloomberg data starting in 2000. Bullish recommendations have been expanding even as Wall Street firms cut their forecast for second-quarter net income in the U.S. to a decrease of 1.8% from a gain of 2% in April, more than 10,000 estimates compiled by Bloomberg show. Earnings season begins today with a report from Alcoa Inc.
Bears say rising equity volatility, declining profits and the approaching U.S. presidential election mean the 4.5% drop in the S&P 500 since April will continue. Bulls say analysts are advising clients to buy because earnings are still on track to reach a record this year and the index is trading 16% below its average valuation since the 1950s.
Moving on to Europe, European finance ministers gather today to discuss crisis- fighting measures adopted by heads of government at a summit last month including how to give support to Spanish banks. The meeting starts at 14.30 CET. The EURUSD dropped to as low as $1.2251, its weakest point sice July 2010, before the EU finance ministers meeting in Brussels. There is still alot of uncertainty in Europe and although growth is slowing in the US, the situation is much better than that of Europe.
Stock to watch: Alcoa (Price $8.73, Price Target (DB) $9)
Alcoa is a global leader in aluminum with equity capacity of 4.2m tons (~8% of world supply) and its performance is highly levered to the outlook for this metal. Aluminum and related products account for over 80% of sales and we estimate a penny change in aluminum (~1%) to impact 2013E EPS by ~4 cents (~5%). COGS (~80% of revenues) are sensitive to changes in energy, raw materials (metals, caustic soda), global inflation and the US dollar exchange rate. Longer term, aluminum has significant growth potential given the increasing usage of this lightweight metal in cars & airplanes and rising demand from EMs. Rising profitability of alumina segment owing to gradual shift to spot or indexed based pricing and steady earnings from downstream operations are positives. However, given the company's still high net debt load (c. $8bn), large unfunded pension status (c. $3bn) and slow growth in US and Europe, its main end-markets, we rate Alcoa as Hold.
For further information on Alcoa or other stocks and bonds we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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