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What a Difference a Week Makes

PantagesThe worst-case scenarios which were being priced into the equity markets over the past few weeks are not showing up in economic data. Stocks have rebounded.

European stocks rallied on ECB progress towards buying covered bonds and ABS securities and leaks on the results of European bank asset quality and stress tests on 130 banks to be released Sunday were bullish. And German consumer confidence rose while the UK posted healthy 3% y/y growth in GDP.

The blue chip European Stoxx 50 index hit its highest level since Oct. 10, recovering all the losses of last week’s sharp selloff. (It’s still off 8% since its summer highs – Europe is not out of the woods yet. Eventually it will have to choose between “embracing change and creative destruction, versus protecting old business models that are no longer viable” according to one analyst.)

The S&P 500 gained 4.1% this week to close at 1964. Total return is 8 % year to date. Treasury bonds sold off a bit with the yield on the 10 year rising to 2.26%, up a nickel on the week.

U.S. corporate earnings reports continued to stream in. Apple said its quarterly profit rose strongly, up 13%, driven by sales of its newest iPhones. Coca-Cola reported flat soda volumes in Q3 and an unexpected decline in revenue. Its profits fell 14%. McDonald’s said Q3 earnings slumped 30% as it struggled to improve global sales. Amazon posted a loss again as it goes for market share – revenues were up sharply y/y. Shares fell 8.3% on the news. The stock is down 28% year to date.

Q3 earnings have been decent with 80% of the S&P 500 companies reporting beating estimates. ISI Strategies expect that when all is said and done Q3 earnings will be up 9% over the past year.

It’s been a rough ride for airline stocks – beaten down sharply in late September and early October on fears that Ebola would depress passenger traffic. But, as that risk subsides investors are now focusing on the positive impact of lower oil prices on costs. The Bloomberg US airline index is up 24% in the last two weeks and only 3% away from their summer highs.

Bloomberg reports FHFA: Lenders Should “Aggressively Make Mortgage Loans. And the WSJ says Fannie/Freddie announced they are set to loosen lending.

Yep, government officials and politicians are asking for easy loan terms for middle and low income borrowers just six years after the subprime meltdown. Apparently the lenders are okay with this but only if they get protection from legal claims of making bad loans given all the lawsuits after the last debacle. And they may get it. Amazing.

China’s economy grew at 7.3%, in the third quarter, better than the consensus, but the slowest pace for five years, suggesting that the government’s targeted easing measures to boost economic growth haven’t yielded results yet. Expect China slowdown worries to continue.

However, ISI notes: Over the past eight years, China’s real GDP has doubled. So real GDP growth of +7.3% this year produces 40% more unit growth than +10.8% growth did in 2006!

The CPI inflation data out Wednesday showed a 0.1% gain in September and 1.7% over the last 12 months. That is below the Federal Reserve’s 2% target and will set the stage for the FOMC meeting next Tuesday and Wednesday.

The APCM bond guys think they will probably announce an end to the QE3 bond buying program but still say short rates will remain low for a considerable period. They probably will not let their portfolio run off but rather keep reinvesting maturing Treasury and MBS back into the market.

Next week there will be lots of economic data in the US including new home sales, personal income, and consumer confidence. Third quarter preliminary estimates for GDP are expected to show growth of 3%.

Jeff Pantages
Chief Investment Officer

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