Oct 26, 2011

Europe-Still Twisting in the Wind

October 26, 2011

Equity futures are up this morning in spite of shaky earnings, mixed but improving economic data, and solid but less than expected data coming from Europe. After being stuck in a trading range from early August until last week, the market has now broken above the range and is trying to hold its gains (see chart below).

It’s often said that a correction isn’t complete until the market leaders get taken down. Both Apple (AAPL) and Amazon (AMZN) would qualify as market leaders as both stocks seemed to be performing in their own world, each rising while the markets struggled. That divergence is over as both companies have reported less than stellar calendar Q3 results. AMZN reported last night, missing estimates and guiding down for the 4th quarter (AAPL reported last week). AMZN has successfully navigated through these “investment periods” in the past, and I don’t see any reason why they won’t do so again, however, the stock has corrected by at least 50% each time. The company is saying that 2012 will be an investment year as the company expands markets and leads their razor/razorblade strategy with the Kindle Fire, which they expect to lose money on every unit.

Other companies reporting include Ford (F) reporting in line but disappointing investors regarding the reestablishment of a dividend; Boeing (BA), which beat and may be entering a period of better orders after multi-year delays from their Dreamliner; and WellPoint, which expects better enrollment gains for 2012.

The Eurozone’s proposal for a voluntary write-off of 60% or more of Greek debt was rejected by banks and investors. Rumors that 50% may be the number have been refuted as well, however, the meetings are ongoing. Similar to the failed discussions in July, assurances of a “final package” are beginning to turn into more failed promises. Stay tuned, this situation is very fluid.

US economic data has been slightly better over the past few weeks, with the exception of Consumer Confidence (chart below), which plunged last month. This morning’s Durable Goods Orders report came in better than expected at -0.8% vs. expectations of a 1.0% decline. Ex-transports the measure rose by 1.7% vs. an expected increase of 0.4%.

APAC markets rose last night as rumors began circulating that the Chinese government may begin economic stimulus measures. After months of restrictive monetary policy and signs of an economy that has slowed significantly, it is instructive that the government now feels it’s time to become simulative. Their need to manipulate their economic growth so frequently could be avoided if they were to let their currency float. The biggest beneficiary from the rumored stimulus is oil, which is back up to $93 per barrel.

President Obama issued an executive order yesterday to reduce student-loan payments. The payments will now be capped at 10% of discretionary income. Chalk up a victory to the Occupy Wall Street protestors.

US Treasury Secretary Timothy Geithner said that “I don’t think there’s good evidence in support of the proposition that it’s regulatory burden or uncertainty that’s causing the economy to grow more slowly than any of us would like.” A life-time bureaucrat, Mr. Geithner obviously hasn’t tried to start, fund or operate a small business. I can tell you both from experience and from hundreds of meetings with small companies that both existing and pending regulations create an enormous burden on businesses, especially small ones, that restrict their ability to expand and hire. A recent Gallup poll of small business owners concluded that 70% of small businesses would hire if they were confident about access to capital.

The World Series resumes tonight in St. Louis with the Rangers now leading the series 3-2. I heard a rumor that the NBA season has been postponed, but can’t confirm whether it’s true or not.

Have a great day


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