Good morning,

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

  • Markets rallied yesterday across the global on a well-received auction of Spanish debt, upbeat US corporate earnings and a positive German survey of economic sentiment;
  • Adding to this optimism was the welcome afforded by an auction of Spanish bills. Although the interest rates paid by Madrid jumped at the sale, traders seemed pleased that the auction raised more than its target of between €2bn and €3bn;
  • On top of encouraging news from Europe, the International Monetary Fund’s modest upward revision of its global growth forecast boosted risk appetite across the region;
  • Japan and three Nordic countries said they would lend additional money to the International Monetary Fund;
  • 10-year Italian debt is yielding 5.475%, 10-year Spanish debt is yielding 5.887% and 10-year Portuguese debt is yielding 12.496%;
  • Brent is trading at $118.65/barrel;
  • Tomorrow Spain will auction bonds maturing in 6-months, 2014 and 2022;
  • Tomorrow – G20 meeting;
  • Apple closed the session 5.15% up at $609.70/share (for more on Apple refer to yesterday's blog);
  • Priceline closed the session 1.9% up at $715.37/share.

The markets have turned positive yesterday for four main reasons: a better Spanish auction than expected, upbeat US corporate earnings, a positive German survey of economic sentiment and a boost to the IMF funds.

Although all four reasons lead to an increase in the indices across the globe yesterday, it is important to understand why and if the rally does have legs. Regarding Spain, although the take up of Spanish bonds was more than expected, one must not forget the rate Spain is paying to raise this debt and who is buying it. Spanish, Italian and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors. Just because there was a better takeup of Spanish bonds than the worst case scenario doesn't mean we are out of the woods and it doesn't prove anything about Spain. Don't forget than European banks have the LTRO money which they are paying only 1% on and finding ways of how to get a higher return on this cash since there is no growth in Europe and corporates are not borrowing money. We need to start seeing the deficit/GDP ratio come down, the 25% unemployment rate come down and we need to see growth in Spain before we can justify a rally in the market because of Spain. Therefore the first reason why the markets rallied in my opinion doesn't have legs and will be short lived. Tomorrow Spain will auction bonds maturing in 6-months, 2014 and 2022. We will see if the auction goes as well but the same reasoning will apply. It doesn't make sense that the markets rally if the country raises as much as it needs because it only means that banks are building their books in Spanish debt which could in the future create an even worse scenario if Spain defaults of its debt.

The second reason why the markets rallied was because of better than expected US earnings being reported. I am all for the US and US international companies. I believe there are alot of cash rich companies which are trading below their fair value and despite what is happening in Europe, these companies are still increasing their margins and have a strong balance sheet. Yesterday I dedicated the blog to Apple. The shares closed the session 5.15% up. The company reports results for Q212 on 24/04/2012. DO NOT SELL THE STOCK IS WEAKNESS because you will be caught out on a day like yesterday. There are investors who are taking profits on Apple. Although alot of people are making alot of money on Apple and are crystalising the gains. I disagree because there is still alot Apple has to offer and the share is trading on decent multiples. Hold on in there you won't be disappointed.

The third reason for the rally was the positive German survey of economic sentiment. Of course it does not come as a surprise. It would be beneficial to hear something like that for Spain, Italy or Portugal rather than German whose got its books in order. Now that would boost the markets.

The last reason for the rally was that Japan and three Nordic countries said they would lend additional money to the International Monetary Fund, offering a lift to the fund’s managing director, Christine Lagarde, who is trying to raise as much as $400-billion over the objections of the United States and Canada. The pledges include $60-billion from Japan and a combined $26-billion from Denmark, Norway and Sweden. The promises put Ms. Lagarde on stronger footing heading into a weekend meeting of the 187-member IMF this weekend in Washington.

My opinion remains the same. Get exposure to American corporates with strong balance sheets and improving margins. Despite the negative news coming out of Europe, look at tech stocks in the US and industrial names. It is my opinion that the rally for 2012 is not over and will resume in H212. And you don't want to be caught out of the market when that happens. Be ready for some volatility in the markets before we see what's going to happen with Spain and Portugal but I am confident that a solution will be found to deal with the problem at least short term. Get exposure to emerging markets with particular reference to China. And last but not least my opinion is that the Euro should weaken as we should see a strengthening Dollar in 2012.

Stock to watch: Bayer (Price E52.85, Price Target E61)

Bayer now generates over 80% of its profits from non-cyclical life sciences (Healthcare and Agrochemicals). Strong medium and long term growth within these businesses is clear but also MaterialScience is now offering strong potential in emerging markets. The Healthcare business also now benefits from a diversified late-stage pharmaceutical pipeline that offers upside potential to forecasts. Longer term, we continue to believe that further portfolio expansion will occur, with the focus remaining on increasing investments in the higher-value Healthcare business. If needed for financing in a large acquisition, we believe management might be willing to dispose of the MaterialScience business. These positives also combine with an ongoing strong focus on cost cutting and cashflow generation. With the company offering life sciences structural growth prospects on chemical sector multiples, we believe the stock remains highly attractive-Buy.

For further information on Bayer or other stocks we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli