Wednesday, September 28, 2011
Stocks have been gaining ground all over again recently — up almost 4% in the last three days — even as tangible positive news has been hard to come by.
Optimism has been growing in recent days that the Europeans are finally moving toward a TARP-like solution to get a handle on their problems, but we have yet to see any official confirmation of those rumors and discussions. It is hard to envision the rally sustaining itself without fundamental support, though today’s favorable Durable Goods report would qualify as such.
This morning’s August Durable Goods report came roughly inline with expectations on a headline basis, but was significantly better than expected on the core basis. The core number, which strips out the volatile transportation and defense equipment, serves as a proxy for business capital spending. This report, admittedly a very volatile metric on a month-to-month basis, should help lessen some of the concerns about the loss of momentum in the manufacturing sector.
Manufacturing activity peaked earlier this year and has been moving sideways-to-down ever since. This trend was earlier believed to be a result of temporary factors, but is now considered a precursor of a recessionary downturn in the U.S. economy. While today’s Durable Goods report does not remove the recessionary odds altogether, it nevertheless provides a reassuring look at business spending.
Even the Fed acknowledged in its last post-FOMC statement the positive momentum on the business spending side. The economy is unlikely to fall into a fresh recession if we can sustain current business spending trends.
In corporate news, Amazon (AMZN) is expected to come out with its challenge to Apple’s (AAPL) successful iPad tablet. The online retailer has been tight-lipped about its tablet plans, but is expected to unveil its tablet offering at a special media event in New York today. These has been no shortage of challengers to the iPad, ranging from Motorola Mobility’s (MMI) Xoom to Hewlett-Packard’s (HPQ) TouchPad, but none have received Apple’s broad market acceptance.
Amazon has the potential to give Apple a run for its money given its entrenched online presence, an existing digital media offering, and history of aggressive pricing. But as we have seen with many other companies, taking on Apple directly is not easy.
On the earnings front, we got positive surprises after the close on Tuesday from Accenture (ACN), Paychex (PAYX) and Jabil Cirbuit (JBL).
Without dismissing the gains of the last few days, we should keep in mind that they are consistent with the market’s range-bound behavior since early August. We are unlikely to move out of this trading pattern unless the macro picture changes. The most important elements in that macro picture are the U.S. growth outlook and the European financial situation.
And notwithstanding today’s favorable Durable Goods report, nothing has changed on either of those two fronts — at least not yet.
Sheraz Mian
Director of Research
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