The Risk of Not Doing Enough

We got another reversal yesterday. This time stock reversed a mid-day sell off to finish higher. Good luck making any kind of accurate forecasts from the current market action. Prices are rising, or falling, on every word out of Europe.

Here's a pretty humorous quote I found at Bloomberg. President of Cambiar Brian Baris said:

 "This whole situation makes doing my job, as a guy who's trying to buy stocks based on a long-term view, almost laughably difficult…The market is hypersensitive as to whether or not a plan will emerge that will stabilize Europe."

Mr. Barish makes a good point. Yes, it's almost laughable at this point. But also, he says any plan form the EU must be able to handle the debt loads and stabilize the EU. So it's with concern that original idea to raise the value of the EFSF bailout fund to 2 trillion euro has been lowered to 940 million euro.

Clearly, the risk for Europe is not doing enough. If you give Greece debt forgiveness of 30%, but Greece still can't make its payments, then you haven't really accomplished anything. Better to go ahead and forgive an amount that's adequate.

This is even more true with a bailout fund. Better to make the fund huge and not use it then make it too small to instill confidence.

EU leaders start a six-day summit today. Clearly, the hope is that a sweeping solution for bank recapitalization and debt forgiveness for Greece will be reached.

The EU debt issues have been building for nearly two years at this point. It's become part of our consciousness. I almost can't imagine what investing will be like once a solution is reached. What will we worry about?

Well, we've always got China…

I'm saddened to report that Microsoft (Nasdaq:MSFT) failed to beat earnings expectations after I endorsed it yesterday. At least it didn't miss. However, the company managed to beat on revenues, so I got that going for me.

General Electric (NYSE:GE) met expectations and is down slightly. McDonald's (NYSE:MCD) beat and is up 3%. Verizon (NYSE:VZ) posted mixed results. It beat expectations by a penny, but missed its subscriber growth number. One interesting tidbit — half the phones it sold were Android phones, Google's (Nasdaq:GOOG) operating system.

Android based tablets are also playing catch-up with the iPad. Android tablets now account for 27% of sales after making up only 2.3% a year sago. Apple's (Nasdaq:AAPL) market share has fallen from 96% to 67%.

Apple's iPhone has maintained a roughly 50% share of the smart phone space. That's still a remarkable share, and should the iPad hold 50% of the tablet space, that's a victory, especially with Amazon (Nasdaq:AMZN) entering the space with an attractive price point.

Around 70% of S&P 500 companies have beaten earnings expectations so far. It's a little early to say that trend will continue, we're about 20% through, but of it holds up, we'd end up with outperformance percentage that's in line with what we've seen over the last few years.  

Given that we haven't seen many blowout numbers, it seems that analysts were very accurate when they lowered their 3Q estimates by around 10% in August and September.

Without those adjustments, it seems we would have many more misses, and we would not have the bullish undercurrent to the stock market. But as it stands, the S&P has a trailing P/E of 14, and a forward P/E based on estimates of 12.

That suggests we have an excellent chance for a strong end of year rally. All we need is resolutions from Europe. I know, it may be hard to wait for the final action, but that still seems to be the proper course of action.

*****Write me anytime: [email protected]

Have a great weekend,  

Ian Wyatt
Daily Profit

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