Breakfast on Wall Street – 20 September 2013

Market Commentary

At, we had maintained that the Fed should not taper its bond buying. In report after report, we have stated that the Fed needs to keep in mind that unemployment is still high, there are too many disgruntled workers leaving the labor force, inflation is low and there is overcapacity in the system.

We have also mentioned that Chairman Ben Bernanke would not want to rock the boat that he had set in course, in his penultimate FOMC meeting.

While we had hoped that the Fed would see the rationale behind these arguments, we had expected them to start the process of tapering in view of the political wrangling in the upcoming debate on the debt ceiling.

Thankfully, we were proven right on our economic argument. The Fed did not taper and the markets cheered.

But after the initial cheer as the indexes moved beyond their all-time highs on Wednesday, the Dow Jones and the S&P decided to take a breather yesterday. The markets needed to settle down. Although there was good news from the jobs and housing markets, the broader market ended marginally lower on a thin trading day.

The S&P 500 was down 0.18% and ended at 1,722.34, while the Dow was down 0.26% and closed the day at 15,636.55. As technology shares showed a sign of resilience due to the strong economic releases, the NASDAQ bucked the trend by ending up higher by 0.15%, finishing the day at 3,789.38. Data released yesterday on the labor markets attested to the improvement, albeit slow, in the employment situation. After a technical issue last week, when two states did not provide their data, this week’s data on Initial Claims 309,000 was is much lower than the 330,000 expected by analysts. Even if some of the data is not perfect due to last week’s problems, the job markets are showing sure signs of progress. Continuing claims data from the BLS also reflected this advance. 2,787K individuals filed for continuing jobless claims, while consensus had expected the number to come in at 2,900K.

There was an unexpected improvement in the existing home sales numbers from the National Association of Realtors (NAR). Home sales are still more than 50% below its boom time peaks, but they are higher than at any point in the last 6 years. Sales increased 1.7% to an annualized rate of 5.48 million, while analysts were expecting a drop to 5.25 million. However, according to the NAR chief economist, Lawrence Yun, this is probably the “last hurrah” before the effects of higher mortgage rates and rising prices start tempering the housing market. The leading indicators from the Conference Board also showed improvement beyond expectations. The leading indicators increased by 0.7%, while analysts had been expecting a 0.6% growth.

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We ask the discerning investor to keep a keen eye on the leading indicators, since its success rate in predicting GDP movements have surprised the markets multiple times before.

The Last 24 Hours

BlackBerry to Axe 40% of its Personnel

Beleaguered BlackBerry will lay off 40% of its workforce across all departments by the end of the year. In a market dominated by Apple and Samsung, BlackBerry is looking to cut costs by approximately $1 billion. The company had more than 17,000 employees and a 14% share of the U.S. smartphone market two years. It is now fighting to survive with less than 3% of the U.S. market and a revenue loss of over 40%.

Sony Embraces its Entertainment Business after Spin off Proposal by Third Point

Sony’s CEO, Kazuo Hirai, who had earlier rejected an offer from Dan Loeb’s Third Point LLP to make a public offering of about 20% in its entertainment business, has said that the proposal had helped him to focus on Sony’s entertainment business. Since the beginning of the year, Sony’s shares have more than doubled and Mr. Hirai has also spun the once struggling electronics business into a profitable enterprise with signs of growth across every segment.

Surge in Online Services to Drive Future of Microsoft: Ballmer

The outgoing CEO of Microsoft, Steve Ballmer, hinted that Microsoft’s future would depend on the growth of its online products like Office 365 and Azure. The revenues from the cloud services are set to replace the revenues from the PC-oriented products. In the second quarterly report, the revenues from cloud platform services grew 13% YoY to $12.3bn, i.e., 16% of total revenues. In order to capitalize on the growth of cloud services, Microsoft is planning to increase capital spending on new data centers and servers by over 50%.

Obama, Boehner Have To Find Solution As Washington Budget Deadline Approaches

President Obama and John Boehner, the House of Representatives Speaker, will have to make crucial decisions as the September 30 deadline for a Washington budget deal to evade a federal government shutdown and a mid-October deadline to avert the US from defaulting on its national debt approaches. The lack of communication between both the leaders is a major cause of concern as another crucial decision on Syria is still impending.

JP Morgan To Payout $1 Billion In Fines For London Whale Fiasco

JP Morgan Chase, the largest bank in America, will pay $1 billion in fines in the “London Whale” trading scandal, which had resulted in losses of $6.2 billion. The settlement includes penalties of $920 million for the trading scandal and another $80 million in settlements for the wrong billing of credit-card customers. The penalties, which are among the highest ever imposed on financial institutions has caused embarrassment to the bank. It is still facing criminal probes in the U.S.

Google, Facebook Come Under Scanner For Stringent EU Tax Rules

US technology giants Google and Facebook are likely to face tighter tax regulations as France is pushing European regulatory authorities to adopt stricter policies for internet and other digital platforms, a move that might put US at loggerheads with Europe. France believes that the internet and digital media companies are subject to corporate taxes and other regulations as they generate revenues from European territories. The French digital economy minister has called a meeting in which ministers from Germany, UK, Spain and other important European Union members will also participate.

The Next 24 Hours

There are very few economic releases today. We guess the market too is tired after the wringer of the Fed tapering expectation earlier this week. We expect low volumes and a flat to marginally negative market move today. We only have the Chicago Fed’s Activity index at 8:30 AM, which was marginally positive last month.

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