Skip to main content

Morning Update

Spanish unemployment hits a new high of 24.6%. The silver lining is that job losses totaled only 15,000 versus 870,000 last quarter.

Today the Bundsbank reiterated its opposition of ECB bond purchases to reduce stuggling countries cost of borrowing. This came in response to comments from Mario Draghi yesterday suggesting the ECB was prepared to buy Spanish and Italian debt in order to force their cost of borrowing down. Draghi will be put to the test on August 2nd, the ECB’s next scheduled meeting. Markets will now be expecting bold and decisive action from him. If he disappoints markets are likely to sell off hard; if he follows through on his promises he is likely to alienate the ECB from the Bundsbank. As Carsten Rrzeski, senior economiust at ING Group in Brussels said, “Draghi is damned if he does and damned if he doesn’t.”

On top of high expectations for stimulus from the ECB next week, markets will also be hopefull of talk of QE3 from Ben Bernanke next Tuesday following the FOMC meeting. The Non-farm payrolls report on Friday will also be highly anticipated as another poor reading will drastically increase the likelyhood if more easing from the Fed.

One indicator of trader’s expectations of quantitative easing is gold (GLD). Gold has historically rallied during times of easy money and quantitative easing. Since March the metal has traded down, but in recent days has looked like it could be breaking out of its recent trading range to the upside. This buying pressure is likely in anticipation of Fed action next week.

The third estimate of US Q1 GDP was released this morning, coming in at 1.5% Q/Q versus 1.2% expected. Economy-wide inflation, as measured by the GDP price index, was revised to 2.0% from the prior estimate of 1.7% (Bloomberg). This report, while modestly better than expected, confirms that US economic growth is slowing.

Last night Facebook, Amazon, and Starbucks missed their earnings estimates. Facebook delivered earnings largely in line with expectations, though reported slowing revenue growth and did not provide any guidance going forward. This has sent the shares sharply down to all time lows. Amazon said that they are spending a lot on investments because of the opportunities they see. Amazon’s investment spending has focused around video technology and cloud computing. Investors are hopeful that this spending will begin to pay dividends in the fourth quarter’s holiday season. Starbucks not only missed earnings and revenue expectations but also guided down, stating “We’re dealing with significant global economic and consumer challenges.” The chain showed growth rates higher than its peers, however, suggesting that the problem is a macro one, not Starbucks specific. Starbuck’s management has also been known to be conservative in their guidance.

Comments

Popular posts from this blog

Morning Update

Yesterday JC Penny reported what some are calling “The Worst Quarter in the History of Retail.” The company reported a quarterly loss of $2.51 per shares and that revenue dropped 24.8%. Revenue at stores open for at least a year fell 31.7% and customer traffic dropped 17% last quarter following a 10% decrease in third quarter. Not surprisingly these dismal numbers spurred option traders to make some large bearish bets on the stock. The biggest was the purchase of 30,000 May 16 puts for $1.57 with the stock at 17.50. This trade will be profitable if JCP is below 14.43, 17.5% lower, by May expiration. One of the biggest concerns investors should have in JC Penny’s cash supply. In November they told investors that they would end the year with $1 billion in cash, but ended up with only $930 million. Wednesday they then told investors that they had delayed $85 million in payments to their suppliers until the early part of the first quarter. This is another red flag that the company is run...