Euro Breaks to New Lows, Equities Trading Lower

Friday, May 14, 2010

London is trading down nearly 1.8%, Spain 3.8% and Italy 3.3% as investors became skittish after Spain's core inflation data turned negative and the euro continued to tumble. The inflation data casts doubt on Spain's ability to grow its way out of its debt obligations while struggling with >20% unemployment. MarketWatch is reporting that "Nicolas Sarkozy threatened to pull France out of the euro zone unless other members promised to help Greece at the crucial meeting of ministers in Brussels last Friday, according to a report in Spain's El Pais." This stunning development is adding pressure to an already weak euro as we see the currency break to new lows on the year cracking the psychological $1.25 level and hitting new lows of $1.2434. The massive debt package while assuaging some of the short-term concerns over individual country debt has done little to calm the fears of currency traders who continue to question the long-term survival of the European monetary union. The US futures are gapping lower about 0.8%. The S&P 500 index will be testing the lows from Monday and Tuesday's trade likely to see volatility around that area.

Individual corporate earnings have been nothing but fantastic as the US economy continues to rebound. Productivity enhancements and cost-cutting have gone a long way to reinvigorate US firms. While bears continue pounding the table about the unemployment rate, which is and always has been a lagging indicator, US firms have progressed each quarter for over a year now. Analysts still have muted expectations with 77% of all companies once again beating their estimates, approximately the same percentage of EPS estimates exceeded in the first quarter. Revenue per share is still unexciting and this piece of the puzzle will only pick up as the overall economy turns and we see the unemployment rate begin ticking down. (The Pragmatic Capitalist) These overall positive developments in the earnings space are now placed in contrast to Europe's debt woes and a stock market that is due for a rest after rallying 70% off the lows. I am beginning to think this pull-in may be a deeper correction. I see no long-term drop though, only a great chance to put some cash to work in strong, growing companies. I will continue putting together a watchlist on great companies that I like over the long-term. Specifically I am currently researching IMAX Corporation (IMAX), Dendreon Corporation (DNDN), A123 Systems (AONE), Visa Inc (V), Mastercard (MA) and Potash Corp (POT). I really like the stories of all these companies, it just seems a matter of timing and price to be paid. I will get some research together on these names later.

After my post about Goldman Sachs not losing money on any trading day in the first quarter, JP Morgan, Bank of America and Citigroup all followed up matching the same astounding feat. I understand that zero on the short-end and the steepest yield curve in decades give banks a license to print money but I am still amazed. I will have to do a bit more research into this to understand what these banks are doing. Adam Warner of Daily Options Report has summed up these results in the best way I have seen: "[say you have] become so skilled at playing the markets that you have a 70 percent probability of making money any given trading day...the odds that you would post a daily net gain 63 times in a row...would be about on in 5.7 billion." He goes on to highlight some issues with this namely "calling this 'trading' to being with. Even Goldman's own definition sounds more like bookmaking." Agreed, Adam! How is it considered "trading" when you're winning everyday? Clearly, the proprietary side should be separated from the client side of the business so investors know what they are investing in.
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