Monday, December 10, 2012

Why RIM Is Still A Bargain After 91% Rally

On November 13th, I published an article on my tech blog titled Here's Why It's Better To Buy RIMM Than AAPL Right Now.  I listed 6 reasons why RIM was a more attractive investment than Apple.
  1. BB 10 is appealing and unique; iOS 6 is boring and old
  2. BB 10 is on track to have more than enough apps
  3. Investor sentiment is near the bottom for RIM but near the peak for Apple
  4. Consumers are tired of Apple’s product cycles
  5. Valuation
  6. Technicals
At the time, RIMM closed on Nov. 12 at US$8.81.  Since then, the shares have rallied 34.85% (as of today's closing price of $11.88).  Meanwhile, AAPL closed at $542.83 on Nov. 12.  The shares closed at $529.82 today, which represents a fall of 2.40%.  

Despite RIMM's dramatic rally from its 52-week low of $6.22, the shares could still have much upside.

1) Technicals

RIMM continues to be in an uptrend.  Its RSI remains strong (at 69.30).  In addition, the 50 DMA is about to break above the 200 DMA in several days.  This is a bullish signal that is closely watched by traders.  When the Golden Cross occurs, more traders are likely to buy the shares.

2) Wave of Analyst Upgrades Likely

Several analysts have upgraded RIMM in the past two months, due to warm reception of BlackBerry 10 by the mainstream media, tech bloggers and carriers.  For example, analysts from Goldman Sachs, National Bank Financial and Scotiabank have upgraded the shares.  However, many analysts still have target prices of $8-$9, which is far below the current market price.  Thus, a wave of upgrades by analysts who are behind the curve would send the shares higher.

3) RIMM is Trading Far Below The Bullish Scenario

A few analysts, including Peter Misek from Jefferies and Gus Papageorgiou from Scotiabank, have outlined a bullish scenario in which RIMM could achieve EPS of over $4 in FY2014 and trade at above $40.  In my upside scenario of $3.5 in FY2014 EPS and 12X forward P/E, the shares would trade at $42.  This would represent an upside of 253.54% over today's closing price.  Thus, RIMM still has plenty of upside potential if the bullish case materializes.

Sunday, July 8, 2012

US Markets Tumble on Weak June Jobs Report

U.S. markets fell on Friday on a disappointing June non-farm payrolls report. The S&P 500 fell 12.90 points or 0.94% to 1,354.68. The Dow dropped 124.20 points or 0.96% to 12,772.47. For the week,
the S&P 500 fell 0.6%, while the Dow dropped 0.8%.

U.S. June Non-Farm Payroll Disappoints

Friday's US jobs report showed a gain of only 80,000 non-farm jobs in June, which was lower than the 100,000 that the market expected. The unemployment rate remained unchanged at 8.2%. In addition, it was the third consecutive month in which the increase in jobs was less than 100,000. In the second quarter, job growth averaged 75,000 per month, which was far weaker than the 226,000 per month growth in the first quarter. It was also the worst job growth for a second quarter in two years.

Federal Reserve Not Expected to Launch QE3 Imminently

Despite the weak June jobs report, and the weak job growth in the second quarter, most analysts believe that the numbers are not weak enough for the Federal Reserve to immediately launch QE3. Thus, they expect the Fed to continue with its $287 billion extension of Operation Twist.

Three Central Banks Take Action

On Thursday, China's central bank lowered its interest rate by 0.25%, while the ECB lowered its interest rate by 0.25%, resulting in a rate of 0.75%. In addition, the Bank of England increased the size of its quantitative easing program by £50 billion, resulting in a size of £375 billion. The action by the three central banks was to boost their respective slowing economies. The action by the ECB followed a June PMI reading of 45.1 for the euro zone, which was lower than the 50 mark that indicates contraction.

Spanish Bond Yields Remain Unsustainable

Before the three central banks took action, Spain held a bond auction in which its 10-year bonds were auctioned at 6.43%, which was higher than the 6.044% at the last auction. As a result, the yield on 10-year Spanish bonds rose to 6.842%. On Friday morning, following the action by the central banks, the yield on 10-year Spanish bonds remained elevated, at 6.78%.

US ISM Data Indicates Contraction in Manufacturing

On Monday, the ISM reported that its manufacturing index fell to 49.7% in June from 53.5% in May. It was lower than the 52.3% that the market expected. With a reading below 50%, it indicated that the US manufacturing sector is contracting for the first time since 2009.

Looking Ahead to Next Week

Earnings season begins next week, with earnings from Alcoa and JP Morgan. Investors will be paying attention to the size of JP Morgan's trading loss. Investors will also focus on the Fed's meeting minutes, which will be released on Wednesday, to see if there is any indication of a QE3. In addition, investors will watch China's GDP numbers, which economists expect to show a growth of 7.6%.

With U.S. markets little changed from where it was two months ago, better-than-expected earnings could send markets higher. In addition, any indication of a QE3 in the Fed's minutes would provide a boost to markets. However, with the Chinese Central Bank rushing to lower interest rates before its GDP report, the Chinese economy may have cooled more quickly than expected in the latest quarter. Spain will continue to affect the markets, but with investors now accustomed to high Spanish yields, the country is unlikely to affect markets in a significant way next week.


Sunday, June 10, 2012

U.S. Markets Post Biggest Gains of 2012 on Hopes of Spain Bailout

U.S. markets rose on Friday, as investors expected Spain to ask the euro zone for a bailout on Saturday for its troubled banking system. On Friday, the S&P 500 climbed 10.67 points or 0.81% to 1,325.66. Meanwhile, the Dow gained 93.24 points or 0.75% to 12,554.20. For the week, the S&P 500 jumped 3.7%, while the Dow gained 3.6%.

One week after the S&P 500 lost 6.3% in May and dropped below its 200-day moving average, the index posted its strongest weekly gains so far in 2012.

Euro Zone Agrees to Bailout For Spain

Today, the 17-member euro zone has agreed to a 100 billion euro bailout for Spain's banks. This was larger than the amount that the market expected, and followed a 2.5 hour telephone meeting among euro zone finance ministers. On Friday, a report by the IMF had indicated that Spain needed 40 billion euros to inject into its banks. The bailout is likely to erase the market's concerns about Spain, at least in the short term.

Spain Troubles World Markets

Prior to Sunday's bailout announcement, the situation in Spain dogged U.S. markets for the entire week. On Friday, Fitch downgraded Spain 3 by botches, from A to BBB. The agency also gave Spain a negative outlook, meaning further downgrades are likely. In addition, Moody's warned that Spain and other euro zone nations were at risk of a downgrade. On Tuesday, following a meeting of G7 finance ministers, Spain indicated for the first time that it was asking for assistance from the euro zone.

China Cuts Interest Rate By Quarter-Percent

After a slew of data indicated a slowing economy in China, the country's central bank cut interest rates by 0.25% on Thursday. It was the first rate cut in 3 years, and caused markets to rally.

Ben Bernanke Offers No Hints of QE3

Testifying in front of the U.S. Congress on Thursday, Federal Reserve Chairman Ben Bernanke said the Fed was ready to take action, but offered no details or promises on a new round of stimulus. As a result, markets posted reduced gains following Bernanke's statements, after recording strong gains following China's rate cut.

Looking Ahead to Next Week

Markets will likely receive a strong boost on Monday, following Spain's 100-billion euro bailout. The focus in the euro zone will shift back to Greece, as investors anticipate the June 17 elections. Thus, U.S. markets are likely to head higher this coming week.

Investors will also be paying attention to China, with recent data indicating a slow-down in the economy. With May CPI in the country falling to 3%, it gives policy makes room for stimulus. Thus, investors will look for hints of further stimulus in the country. In the U.S., economic data to be released in the coming week includes the PPI and retail sales on Wednesday. CPI and initial jobless claims are scheduled for Thursday. The Empire State manufacturing index, U.S. industrial production and the June reading of consumer sentiment from Thomson Reuters/University of Michigan are expected on Friday.

Monday, June 4, 2012

US Markets Fall Into Correction Territory on Disappointing Jobs Reports

U.S. markets tumbled on Friday on disappointing jobs reports from the U.S. and the euro zone. The S&P 500 fell 32.29 points or 2.46% to 1,278.04; the Dow dropped 274.88 points or 2.22% to 12,118.57. For the week, the S&P 500 lost 3%, while the Dow dropped 2.7%. The S&P 500 is now in a correction, after falling 10% from its April 2nd highs. The index also closed below its 200-day moving average for the first time in 2012 on Friday.

Disappointing Jobs Report from the U.S. and euro zone

On Friday, the U.S. May jobs report showed a gain of only 69,000 non-farm positions, which was far lower than the 165,000 that economists expected. In addition, the unemployment rate rose for the first time since July 2011, to 8.2%.

Meanwhile, the unemployment rate in Spain, France, Italy and Portugal also rose in May, causing the unemployment rate in the 17-member euro zone to reach 11%.

Troubles in Spain Continue

On Friday, Spain's central bank announced that in the first quarter, $97 billion euros were pulled from the country's financial sector. The amount is approximately 10% of Spain's GDP. In addition, the yield on 10-year Spanish debt reached 6.63%, as it continued to head towards the dangerous 7% level. Spanish 5-year CDS, which reflects the probability of a default, reached 615 basis points, a historical high.

U.S. Manufacturing Weakens

On Thursday, U.S. first quarter GDP was adjusted downwards to 1.9%. In addition, initial jobless claims was higher than expected, increasing by 10,000 to 383,000. May Chicago PMI fell to 52.7, close to the 50 mark and its lowest level since September 2009.

Looking Ahead to Next Week

A sustained rally in the market in the coming weeks would likely require stimulative measures from the US Federal Reserve. The Fed is scheduled to meet on June 19-20, and an extension of Operation Twist or an introduction of QE 3 would send markets higher by double digits over several months. Some analysts expect the Fed to take action at a later date, in August.  Ben Bernanke is expected to testify before Congress on Thursday, and he might give a hint of how the Fed intends to act.

In the coming week, if euro zone leaders announce concrete measures and few bad news emerge from the euro zone, markets could get an upward bounce as a result of bargain hunting. Regardless of the direction of the market in the coming week, the magnitude of its movement, either upwards or downwards, will likely be large, as volatility increases.

Sunday, May 27, 2012

U.S. Markets Fall Ahead of Long Weekend on Spanish Bank Troubles

U.S. markets fell on Friday on a relatively uneventful day before the long weekend. The S&P 500 fell 2.86 points or 0.22% to 1,317.82. The Dow dropped 74.92 points or 0.60% to 12,454.83. For the week, the S&P 500 ended higher, breaking the index's streak of consecutive declines at 3 weeks. For the week, the S&P 500 gained 1.7%, while the Dow rose 0.6%. The S&P 500 has fallen 5.7% since the beginning of May, but is still up 4.8% for 2012.

Spanish Bank Bankia Seeks Expanded Bailout

On Saturday, Spanish bank Bankia requested $19 billion euros of additional bailout funding from the Spanish government, which was twice as large as what the market expected. As a result, S&P downgraded Bankia and two other banks to a “junk” rating. On Thursday, the Spanish government had decided to completely nationalize Bankia by injecting $9 billion into the bank. However, that amount was determined to be inadequate by Saturday. In addition, the Spanish government injected $4.5 billion euros into Bankia in early May, which brings the entire bailout to a total of $23.5 billion euros.

EU Leaders Meet But Produce No Results

On Tuesday, EU leaders began to meet for a summit in Brussels to resolve the euro zone debt crisis. French President Hollande pushed for the issuance of Eurobonds, which Germany resisted. The market doubted that the meeting would produce any significant results. In addition, Reuters reported that EU officials were instructing EU member nations in preparing for Greece to exit the euro zone. As a result, the Dow fell around 160 points in early trading on Wednesday. Meanwhile, the euro fell to its 21-month low of US$1.2615. By Friday, Germany and France were unable to come to an agreement on Eurobonds, and simply suggested 3 measures to help economic growth.

Facebook Shares Tumble In Second Week of Trading

On Monday, Facebook shares tumbled 11% after Friday's disappointing IPO. The shares closed down $4.20 at $34.03. By the end of the week, FB closed at $31.91, after losing 3.4% on Friday. It hit a intraday low of $30.94 on Tuesday.

Looking Ahead to Next Week

With elections in Greece to be held on June 17th, it is likely the situation in the country has stabilized until then. While the possibility of Greece exiting the euro zone will provide a negative overhang for stocks, its effect could be small until the election occurs. Meanwhile, most of the euro zone concerns will be focused on Spain, as a result of the Bankia bailout. Investors will be watching to see whether Spain's other banks also require bailouts.

Next week, investors will be watching a long list of economic data to be released in the U.S. Consumer confidence, GDP and May non-farm payrolls reports will be released. Better-than-expected economic data from the U.S. could send markets higher next week, if few negative news emerge from the euro zone.

Sunday, May 20, 2012

U.S. Markets Tumble on Greece Euro Zone Exit Concerns

The S&P 500 fell for a 6th consecutive day on Friday on euro zone worries, and posted its worst week since November. On Friday, the S&P 500 fell 9.64 points or 0.74% to 1,295.22. The Dow lost 73.11 points or 0.59% to 12,369.38. For the week, the S&P 500 tumbled 4.3%, while the Dow fell 3.5%. The S&P 500 has fallen 7.3% so far in May.

Facebook Records Lackluster Performance After IPO

After its IPO on Friday, shares of Facebook initially rose 10% in early trading. However, it closed just 0.6% above its issue price of $38, at $38.23. The shares almost fell below the $38 level, but were supported by its underwriters.

16 Spanish Banks Downgraded as Euro Zone Concerns Spread

On Friday, Moody's downgraded 16 Spanish banks by 1 to 3 notches, as concerns about Greece spread to other PIIGS nations. Meanwhile, with the increasing threat of Greece leaving the euro zone, S&P downgraded Greece on Friday, from B- to CCC.

Spanish Debt Yields Hit Record Highs

On Thursday, Spain auctioned $2.5 billion of 3- and 4-year government bonds. The yield on the 4-year bonds was 5.106%, much higher than the 3.374% at the last auction. As a result, the yield on 10-year Spanish bonds rose to 6.38%, and its spread versus German debt rose to 500 basis points.

Greeks Rush To Withdraw Deposits from Banks

With the increasing threat of Greece leaving the euro zone, Greeks have been rushing to withdraw money from banks. On Monday, Greeks withdrew $700 million euros from Greek banks. The situation was similar on Tuesday. This caused the euro to fall to US$1.2688 on Wednesday, and the yield on Spanish 10-year debt to hit 6.51%.

Looking Ahead to Next Week

With the severity of the euro zone crisis increasing, markets will likely continue to fall until the situation in Greece is resolved, either with a temporary solution by the ECB/EU/IMF or through exiting the euro zone. G8 leaders have been meeting this weekend, and investors will look to see if there are any concrete measures announced next week. Meaningful action by the G8 would provide markets with a boost. Investors will also be looking at the German, French and euro zone PMIs to gauge the health of the euro zone economy. In addition, Germany's Ifo for business sentiment will shed light on the strength of Europe's leading economy.

Sunday, May 13, 2012

U.S. Markets Fall For Second Week on Greece and Spain Concerns

U.S. stocks fell for a second week in a row, as a $2 billion trading loss by JP Morgan and concerns about the political uncertainty in Greece and the stability of Spanish banks pulled markets lower. On Friday, the S&P 500 fell 4.60 points or 0.34% to 1,353.39. The Dow dropped 34.44 points or 0.27% to 12,820.60. For the week, the S&P 500 lost 1.1%, while the Dow dropped 1.7%.

JP Morgan Loses $2 Billion in 6 Weeks

On Friday, shares of JP Morgan Chase & Co tumbled 9.3% after revealing that the bank had lost $2 billion in 6 weeks on hedging positions involving the CDS Index. Investors became concerned that other U.S. banks would be affected, sending the KBW bank index down 1.2%.

U.S. Consumer Sentiment Surprises

On Friday, the Thomson Reuters/University of Michigan's consumer confidence index for May improved to 77.8 from April's 76.4. It was higher than the 76.2 that economists expected, and was a 4-year high.

Spain Nationalizes Fourth Largest Bank

On Thursday, Spain injected $4.5 billion euros into its fourth largest bank, Bankia, to take a 45% stake. This caused investors to become concerned about the health of Spanish banks, and whether further bailouts are needed.

Greece Political Turmoil Troubles Markets

Alexis Tsipras enters Greek Presidential Palace. Source: Associated Press
On Tuesday, after Greece's largest political party failed to form a government, the responsibility to do so fell to Alexis Tsipras and his Syriza party, the radical leftist party that seeks to overturn Greece's bailout agreement with the EU and IMF. As a result, concerns about Greece either exiting the euro zone or backing out of its agreement with the EU and IMF sent the Dow 150 points lower in early trading. German and French markets fell by 2% and 3% respectively, while the Greek market tumbled by 4%, reaching its lowest level in 20 years. The euro fell below the US$1.30 level, reaching US$1.2988.

Looking Ahead to Next Week

As I correctly forecasted last Sunday, U.S. markets fell this week on increasing uncertainty in the euro zone, especially the political crisis in Greece. Investors will continue to focus on the situation in Greece in the coming week. If the parties are unable to form a government, and the public heads into another election, markets will likely fall on the continued uncertainty. However, if a government is formed without the radical leftist Syriza party, markets will likely see a upward bounce. Meanwhile, investors will also pay attention to the banking system in Spain. If no other banks face trouble following the nationalization of Bankia, it would provide a boost to markets.

Sunday, May 6, 2012

U.S. Markets Post Biggest Weekly Drop of 2012

U.S. markets tumbled on Friday on a weaker-than-expected jobs report, and weak economic data from the euro zone. On Friday, the S&P 500 dropped 22.47 points or 1.61% to 1,369.10. The Dow tumbled 168.32 points or 1.27% to 13,038.27. For the week, the S&P 500 fell 2.4%, for its worst weekly performance in 2012.

Disappointing April Jobs Report

The jobs data responsible for Friday's market tumble was the U.S. April jobs report, which showed a gain of only 115,000 jobs. It was 55,000 less than the 170,000 jobs that economists expected. In addition, job gains decreased for the third month in a row. Even though the unemployment rate fell to 8.1%, it was due to 342,000 people giving up looking for work.

Euro Zone PMI Disappoints

On Friday, the Eurozone Services PMI from Markit showed a reading of 46.9 in April, which was significantly lower than the 49.2 in March. It indicated a deeper recession for the euro zone. In addition, France and Greece were heading into elections in the weekend, which added to the uncertainty in the markets.

Yields on Spanish Debt Remains Elevated

On Thursday, 3-year Spanish debt was auctioned at 4.037%, much higher than the 2.89% in the previous auction. Meanwhile, 5-year debt was auctioned between 4.752% and 4.960%, higher than the 4.319% previously.

ADP Shows Weak Private-Sector Hiring

On Wednesday, the ADP jobs report alluded to the disappointing April jobs numbers. The ADP report showed a gain of only 119,000 private-sector positions, much lower than the 177,000 the market expected. In addition, U.S. factory orders in March fell 1.5%, its biggest fall in 3 years. This caused the U.S. markets to open lower on Wednesday.

ISM Data Better Than Expected

Not all economic data this week was weaker-than-expected. On Tuesday, the April ISM reading was 54.8, better than the 53 the market expected. As a result, the Dow rose almost 100 points in early trading.

Looking Ahead to Next Week

Investors will be watching data from China next week, when the country releases inflation, retail and factory numbers. In addition, investors will pay attention to March readings on industrial output in Germany, France, Italy and Spain for a measure of how deep the euro zone recession will be.

Sunday's election defeat of Nicolas Sarkozy in France and the ruling parties in Greece will cause investors to become concerned about how determined the euro zone is in carrying out austerity measures. These election defeats will add to the uncertainty in the markets. With the disappointing jobs data from Friday continuing to weigh on markets, stocks will likely head lower in the beginning of next week. With earnings season winding down, investors will turn their focus back to the euro zone. With uncertainty in the euro zone increasing and what appears to be a deeper recession, U.S. markets will likely head lower next week.

Sunday, April 29, 2012

S&P 500 Posts Best Week In One Month

 U.S. markets rose on Friday on better-than-expected earnings from Amazon. The S&P 500 rose 3.38 points or 2.24% to 1,403.36. The Dow gained 23.69 points or 0.18% to 13,228.31. For the week, the S&P 500 gained 1.8% for its best week in a month, as strong corporate earnings overshadowed concerns about the euro zone. The S&P 500 also closed above the psychologically-important 1,400 level.

U.S. First Quarter Growth Disappoints

On Friday, the U.S. Commerce Department announced that first quarter GDP growth was 2.2%, which was lower than the 2.5% the market expected. However, it was higher than the 1.5% that economists expected at the beginning of the year, which prevented the market from falling on the news. On Thursday, U.S. initial jobless claims also disappointed the market, when it fell by only 1,000, to 388,000.

Spain Downgraded by S&P

On Friday, S&P announced that it is downgrading Spain's rating by two notches, from A to BBB+. S&P has also placed Spain's rating on negative watch, and stated that Spain's banking system was too reliant on government funding. Meanwhile, Italy's bond auctions disappointed investors, with the yield on its 10-year debt at 5.84%, which was 60 basis points above last month's auction.

Federal Reserve Reiterates Stance

On Wednesday, after the Fed's much-anticipated meeting, it announced it is continuing its stance of keeping interest rates at the current level until the end of 2014. However, it did not mention QE3.

UK Slips Into Double-Dip Recession

Also on Wednesday, the UK announced that first quarter GDP shrank by 0.2%, which was weaker than the 0.1% growth the market expected. With the negative 0.3% growth in the fourth quarter, the UK is now officially in a double-dip recession.

Apple Boosts Markets

On Wednesday, U.S. markets received a boost from Apple's earnings. The company's profits rose 94% from last year to $11.6 billion. EPS was $12.30, higher than the $9.94 the market expected.

Markets Tumble on Netherlands and France

On Monday, markets tumbled when the Prime Minister of the Netherlands resigned due to a disagreement in parliament over austerity measures. In addition, with the second round of federal elections in France about to get underway, investors faced a large degree of uncertainty. As a result, the yield on Spain's 10-year government bonds rose above 6%, and stock indices in Europe fell more than 1%.

Looking Ahead to Next Week

Investors will be paying close attention to the U.S. March jobs report on Friday. On Wednesday, the ADP jobs report will be announced. In addition, investors will continue to pay attention to corporate earnings. So far, 57% of S&P 500 companies have posted earnings. Next week, companies including Visa, Kraft and Prudential will be reporting results.

With the situation in Spain showing no signs of improvement, it will take stronger-than-expected earnings just to keep the market from falling. If the yield on Spanish debt rises, then the market will likely fall regardless of earnings results. With the UK now in a double-dip recession, it will likely conduct quantitative easing, which should boost the prices of gold and silver.

Sunday, April 22, 2012

U.S. Stocks Post First Positive Week of April

 U.S. markets rose slightly on Friday, as strong corporate earnings overcame worries about the euro zone. On Friday, the S&P 500 edged up 1.61 points or 0.12% to 1,378.53. The Dow rose 65.16 points or 0.50% to 13,029.26. For the week, the S&P 500 rose 0.6%, after falling in the two previous weeks.

Strong Results From Microsoft and IBM Boost Shares

On Friday, Microsoft posted better-than-expected results. Sales rose 6%, while earnings was $5.11 billion, which was better than what the market expected. As a result, shares rose 4% when markets opened the next day. Meanwhile, IBM posted earnings of $2.78, better than the $2.65 that analysts expected. In addition, the company raised its full-year earnings outlook.

Market Breaths Sign of Relief on Spanish Bond Auctions

On Thursday, markets breathed a sign of relief when 10-year Spanish bonds were sold at a yield of 5.743% at an auction, lower than the critical level of 6%. However, new data indicated that the effects of the LTRO are beginning to weaken.

Stocks Surge on Goldman Sachs Earnings and IMF Forecast

On Tuesday, the Dow rose almost 200 points, after Goldman Sachs and Coca Cola reported better-than-expected results. Goldman Sachs reported EPS of $3.92, better than what the market expected. In addition, the IMF raised its world economic growth forecast for 2012.

Spain Concerns Cloud Markets

On Monday, yields on Spain's 10-year government bonds rose above the critical level of 6%. In addition, Spain's 5-year CDS reached a record high. It was revealed that Spain's deputy finance minister has asked the ECB to buy Spanish debt to push down the yield. As a result, the euro fell below the US$1.30 level.

Looking Ahead to Next Week

Investors will continue to focus on earnings results next week, when 180 S&P 500 companies will be reporting. With the yield of Spanish government bonds near unsustainable levels, earnings will have to continue to beat expectations in order for the market to head higher. Even with strong earnings, stocks could head lower once earnings season is over, as the situation in the euro zone becomes the center of investor focus during a season that is traditionally weak for stocks.

Sunday, April 15, 2012

U.S. Stocks Record Worst Week of 2012 on Spanish Yields and China GDP

U.S. markets fell on Friday on weaker-than-expected first quarter China GDP and the rising yield on Spanish sovereign debt. On Friday, the S&P 500 fell 17.30 points or 1.25% to 1,370.27. The Dow dropped 136.99 points or 1.05% to 12,849.59. For the week, the S&P 500 dropped 2%, while the Dow fell 1.4%. It was the worst week for the S&P 500 so far in 2012.

China GDP Disappoints

On Friday, China announced 1st quarter GDP growth of 8.1%, which was lower than the 8.4% the market expected. It was also the slowest growth in almost 3 years. This sparked concern about China's ability to boost world economic growth, at a time when the euro zone is in a recession.

Spanish Yields Spark Euro Zone Concerns

On Friday, the yield on Spain's 10-year government bonds approached 2012 highs, while CDS on Spanish government debt rose to a record high. The yield on Spain's 10-year government bonds rose to almost 6%, while CDS on Spanish debt reached 500 basis points for the first time. As a result, Europe's three largest indices fell on Friday, with the German DAX and the French CAC each falling by about 2%.
Concerns about the euro zone debt crisis negatively affected markets for much of the week. On Thursday, Italy had a disappointing bond action. 3-year government bonds were auctioned at 3.89%, much higher than the 2.76% in March. In addition, Italy's stock market fell 5% at one point on Wednesday.

U.S. Initial Jobless Claims Disappoint

After several weeks of falling initial jobless claims numbers, the claims number on Thursday disappointed markets when it rose over the previous week. Initial jobless claims rose to 380,000, worse than the 355,000 the market expected.

Looking Ahead to Next Week

Investors will be paying close attention to the second week of earnings season next week, when 10 Dow components including Intel will be reporting earnings. In addition, banks including Citigroup, Goldman Sachs and Morgan Stanley will be reporting results. This follows the better-than-expected earnings announced by JP Morgan and Wells Fargo last week.

With two consecutive weeks of decline for U.S. markets, if earnings beat expectations next week, markets will likely rise for the week if the euro zone situation does not worsen. However, if Spanish yields continue to climb, it would neutralize gains that the market achieves next week.

Sunday, April 8, 2012

S&P 500 Posts Worst Week in 2012 on Rising Spanish Yields

U.S. markets fell on Thursday in a shortened week of trading, as rising yields on Spanish government debt continued to trouble markets. On Thursday, the S&P 500 slipped 0.88 points or 0.06% to 1,398.08. Meanwhile, the Dow fell 14.61 points or 0.11% to 13,060.14. For the week, the S&P 500 fell 0.7%, which is its worst weekly performance in 2012.

U.S. Jobs Numbers Disappoint

On Friday, the U.S. jobs data for March showed a gain of 120,000 jobs, which was worse that the 203,000 the market expected. The gain was also the smallest in 5 months. However, the unemployment rate in March fell by 0.1% to 8.2%. It was better than the 8.3% economists expected, and was the lowest since January 2009. However, the 0.1% fall in unemployment was likely due to workers giving up searching for work.

Initial Jobless Claims Falls to 4-Year Low

U.S. initial jobless claims have been consistently below the critical 400,000 mark in recent weeks. On Thursday, initial jobless claims fell by 6,000 from the previous week, to 357,000. It was the lowest level in 4 years.

Spanish Yields Sink Markets

Following weak demand in Spain's bond sale on Wednesday, Spanish debt yields rose to levels last seen during the euro zone debt crisis. Investors became concerned about whether Spain would eventually need a bailout. This sank world markets on Wednesday, and continued to drag on markets on Thursday.

Federal Reserve Minutes Disappoints Investors

On Wednesday, minutes from the recent Federal Reserve meeting helped to push markets lower. The minutes indicated the Fed will not consider another round of quantitative easing in the near future. World markets fell as a result, since investors prefer more liquidity in the markets.

Looking Ahead to Next Week

The start of earnings season next week will likely determine the direction of U.S. markets. Companies including JP Morgan and Google will be reporting their quarterly results. In addition, investors will be closely watching data from China next week, as the country will be releasing first-quarter GDP, inflation and trade balance numbers.

The weaker-than-expected U.S. March jobs data on Friday will likely pull markets lower on Monday. In addition, the rising Spanish bond yields will likely affect markets negatively early next week. Thus, unless companies post better-than-expected earnings, U.S. markets will likely fall next week.

Sunday, April 1, 2012

U.S. Stocks Record Best 1st Quarter in 14 Years

U.S. markets ended the quarter on a positive note on Friday. Data showed U.S. consumer spending rose by the most in seven months, while consumer confidence in March reached its highest level in 12 months. On Friday, the S&P 500 rose 5.19 points or 0.37% to 1,408.47. The Dow climbed 66.22 points or 0.50% to 13,212.04.

For the first quarter, the S&P 500 rose 12%, while the Dow gained 8%. It was the best first quarter since 1998 and the best quarter overall since 2009.

Consumer Spending and Consumer Confidence Both Rise

U.S. February consumer spending rose 0.8% from January, higher than the 0.6% increase that the market expected. Meanwhile, the Reuters/University Michigan survey showed consumer confidence in March increased to 76.2, an increase of 0.9%.

Initial Jobless Claims Encouraging

On Thursday, weekly initial jobless claims fell 5,000 from last week to 359,000. It was the lowest level since April 2008, and was another week the figure has remained under the critical 400,000 level.

Housing Market Still Weak

On Tuesday, the S&P/Case-Shiller index fell for the 9th month in a row, to its lowest level since 2003. However, many market watchers believe the housing market is nearing its bottom.

Ben Bernanke Hints at More Easing

On Monday, while attending a forum, Federal Reserve Chairman Ben Bernanke said that despite the improving job market, much of the improvement has been from companies decreasing the number of people they are cutting, rather than increase in hiring. Thus, the job market has not been keeping up with the improvement in the economy. Analysts believe that Bernanke's statements indicate a possibility that he would conduct further quantitative easing.

Looking Ahead to Next Week

After a very strong first quarter for stocks, markets are experiencing a pause in the rally. Investors will focus next week on the March nonfarm payrolls number. In the subsequent week, the direction of the markets will likely be determined by the earnings season. Investors will likely look at company guidance for effects of Europe's entry into a recession and slowing growth in China on US corporate earnings.

With strong gains in the first quarter, further gains would only materialize if there are strong results during earnings season. In addition, the high price of oil (Brent at $122.88/barrel while WTI at $103.02/barrel on Friday) will likely limit gains in the coming week.

Sunday, March 25, 2012

U.S. Markets Rebound on Euro Strength and Energy Sector

 U.S. stocks rose on Friday on a stronger euro, as well as strength in the energy and base metals sectors. The S&P 500 gained 4.33 points or 0.31% to 1,397.11. The Dow rose 34.59 points or 0.27% to 13,080.73. For the week, the S&P 500 fell 0.5%, while the Dow dropped 1.2%. It was only the second week this year that the S&P 500 had a down week.

China Growth Concerns Drag Markets

For much of the week, concerns about economic growth in China dragged on markets. On Monday, China's Department of Finance announced that in the first two months of this year, revenues at state-owned companies fell 10% versus 2011. This resulted in sharp losses in the Hang Seng index in Hong Kong and indices in China.

On Thursday, HSBC's China PMI showed a reading of only 48.1 for March, which was lower than the 49.7 in February. It was also the lowest reading in 4 months. Within the index, new orders in March had a reading of only 46.1, lower than the 48.5 in February. Meanwhile, new export orders in March was also below 50, with a reading of 48.7, but was higher than the 47.5 in February. The PMI reading pushed U.S. markets lower on Thursday.

Looking Ahead to Next Week

The relief rally that North American markets experienced since the start of 2012 is clearly over. The market is either in a pause or a pull-back. Markets will likely continue to be dragged lower next week by news from China. On Saturday, China's banking regulator told banks that they had incorrectly classified around 20% of their loans to local governments into the safest category of loans. The re-classification of these loans would require more loan-loss provisions to be set aside, reducing the net income of banks. Thus, that would push banks' share prices and Chinese stock indices lower.

In addition, high energy prices will likely neutralize gains in the US market. On Friday, Brent crude settled at above the $125 mark, at $125.13/barrel (up $1.99). Meanwhile, WTI rose $1.52 to settle at $106.87/barrel. With the summer driving season around the corner, the effect of high energy prices on the economy will be more clearly felt in the coming weeks.

Sunday, March 18, 2012

S&P 500 Posts Best Weekly Gain Since December

US markets posted mixed results on Friday, after the Thomson Reuters/University of Michigan consumer sentiment index for February posted a lower-than-expected reading. The index fell in February from 75.3 to 74.3, and was lower than the 76.0 that economists expected.

On Friday, the S&P 500 rose slightly by 1.57 points or 0.11% to 1,404.17. The Dow fell 20.14 points or 0.15% to 13,232.62. For the week, the Dow gained 2.4%, while the S&P 500 posted its 5th consecutive week of gains.

Stress Test Results Boost Market

Most of the market's gains this week was on Tuesday, because of the results of the stress test on US banks and Fed Chairman Ben Bernanke's statement after the FOMC meeting. The stress test results indicated that of the 19 large banks tested, only 4 banks failed. Several banks were allowed to increase their dividends following the stress test. Following the results, shares of JP Morgan rose 7%.

US Federal Reserve Boosts Economic Outlook

Also on Tuesday, Federal Reserve Chairman Ben Bernanke issued a statement following the FOMC meeting. He improved the wording used to describe economic growth for the next several quarters, from “modest” to “moderate”. Meanwhile, monetary policy remains unchanged, with the current low interest rate to be kept in place until late 2014. A new round of QE was also not mentioned, and Bernanke reiterated continuing Operation Twist.

Looking Ahead to Next Week

With the S&P 500 having gained about 30% since October 3rd, a 5-10% pullback is likely. In addition, there is concern that Portugal would need to have its debt restructured, since its debt have been at unsustainable high yields. Furthermore, a Greek election is expected in April or May, and the new government's ability to implement tough bailout conditions is in question.

Brent crude has rebounded to settle above $125/barrel this week, as Iranian exports will soon be restricted. The high price of oil presents another headwind for stocks. Thus, North American markets will likely trade sideways or head lower next week.

Sunday, March 11, 2012

US Markets Rise on Greece Bond Deal and Jobs Data

On Friday, US markets received a lift from Greece avoiding a hard default and the better-than-expect February jobs number. The S&P 500 gained 4.96 points or 0.36% to 1,370.87. The Dow gained 14.08 points or 0.11% to 12,922.02. For the week, the S&P 500 gained 0.1%.

The Greek government announced on Friday that 83% of bond holders have accepted the bond-swap deal. With the activation of the collective action clause (CAC) the percentage of participants increases to 96%. The deal decreases Greece's debt by about $100 billion euros.

In addition, on Friday the U.S. government announced that 227,000 non-farm jobs were added, which was higher than the 210,000 the market expected. The February unemployment rate remained at 8.3%, meeting market's expectations. The market also received a boost from rumours that the US Federal Reserve is considering a new type of QE.

Greece Debt Classified as in Default

By Saturday, the ISDA has ruled that the bond swap deal is considered a default, while Moody's and Fitch have downgraded Greek debt to selective default. This activates about US$3.2 billion in CDS payments, but was largely brushed aside by markets on Friday.

China Decreases Growth Target

On Sunday, China decreased its 2012 GDP growth target from 8% to 7.5%. It was the first time since 2004 that the growth target had been lowered, and the news weighed on markets early in the week.

Looking Ahead to Next Week

The Fed's FOMC will meet on Tuesday, and issue a statement after. Investors will be looking for any sign of a new round of QE or operation twist (OT). Meanwhile, the Thomson Reuters/University of Michigan consumer sentiment data will be released on Friday. The market expects a reading of 76.0 for March.

The bond swap deal and the resulting triggering of CDS payments could have a negative effect for markets next week. In addition, investors with high hopes for a new type of QE will likely be disappointed Tuesday. Even if the Fed gives a hint about conducting a new type of QE, its size will likely be much smaller than QE2. Finally, markets will likely be pushed lower early in the week by China's weak February export numbers, and its largest monthly trade deficit in 22 years.

Sunday, March 4, 2012

LTRO Lifts S&P 500 To 8th Weekly Gain in Past 9 Weeks

US markets fell slightly on Friday, as the recent rally lost some momentum. The S&P 500 fell 4.46 points or 0.32% to 1,369.63. The Dow slipped 2.73 points or 0.02% to 12,977.57. For the week, the S&P 500 rose 0.3%, while the Dow edged 0.05% lower.

The S&P 500 recorded its 8th week of gains in the past 9 weeks, and has risen 9% since the beginning of 2012.

LTRO Boosts Stocks

World markets received a boost on Wednesday when the ECB's second tranche of LTRO was larger than expected. The ECB loaned €529.5 billion ($713.4 billion) to 800 European banks, which was larger than the €500 billion the market expected. It was also larger than the €489 billion in the first tranche.

Bernanke Dashes Hopes for QE3

On Thursday, US Fed Chairman Ben Bernanke dashed the market's hopes for a QE3, when he did not mention quantitative easing during his testimony to Congress. Many investors have been hoping for QE3 to provide more liquidity to markets. As a result, US markets and gold prices fell on Thursday.

Looking Ahead to Next Week

The US government is scheduled to release the February jobs report on Friday. Economists expect non-farm payrolls to have gained 210,000 jobs last month. With the impressive gains that US markets have achieved since the beginning of 2012, markets are susceptible to a pull-back. Thus, a jobs report that is worst than expected could cause a pull-back. Meanwhile, a better-than-expected report could continue to send markets higher.

The high oil price is another concern. The tensions in the Middle East has kept the price of Brent crude above $120/barrel. If the high price of oil continues, it would eat into consumer spending and cut short any rallies in the market. In addition, if the situation with Iran rapidly deteriorates, it would certainly send markets lower.