12/9/2011
By Carlos Guillen, Research Analyst

More Articles by Carlos Guillen

A Slow, Painful Recovery

Apple Takes Everyone by Surprise

Equities Get Axed

Equity responded rather well during Friday�fs trading session, mainly as a result of an overall positive outcome from the EU Summit and as a result of better than expected consumer sentiment here are home. With the Exception of the U.K., The EU Summit came into agreement on a plan to save the eurozone from its current debt crisis. As a result equity investors were energized and felt a bit more confident, serving to lift the Dow Jones Industrial Average up over one and a half percent.

On the other side of the world, the EU Summit culminated in an almost unanimous agreement that automatic sanctions should be enforced in the event a member state has a budget deficit that exceeds 3 percent of GDP. Also, the European Stability Mechanism (ESM) should kick in by July 2012, with its EUR 500 billion limit to be reviewed in March of 2012. Perhaps the most encouraging element of the agreement was that a green light was given for the euro area to provide the International Monetary Fund (IMF) with up to EUR 200 billion in loans; however, this will be confirmed in 10 days. One other prominent item was that private sector involvement will have to adhere to the well established IMF principles and practices. All this, however, will not be finalized until March of next year; nonetheless, it was a move in the right direction for Europe.

Here at home, the University of Michigan Consumer Sentiment December result landed at 67.7, which was higher than the Street�fs expectation of 65.1, increasing from the 64.1 reached last month. It is apparent the consumers, despite the still rough economic condition, are becoming encouraged by the recent decrease in fuel prices and by the uptick in employment. The recent gains in equity markets are also serving to fuel confidence as consumer�fs perceived wealth improves, which may lead to stronger consumer spending this holiday season. Of course, the continuing lack of agreement in Washington over deficit reduction, particularly if the payroll tax cut and unemployment benefits that are scheduled to expire at the end of December are not extended, and economic aftershocks in Europe continue to present risks to confidence in the short term.

On a negative note, Thursday night DuPont, Texas Instruments, and Altera cut their guidance below the Street consensus estimates, citing weakening demand. Clearly, the main culprit of their weakening demand is overseas as these company�fs derive more than 50 percent of their revenues outside the U.S.

Nonetheless, equity markets continued to recover from Thursday�fs fall and are on the verge of breaking above resistance, which could lead the Dow up another 400 point by the end of this year.

Carlos Guillen
Wall Street Strategies