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Softness in Myriad Places

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Thursday, November 14, 2013

Soft economic numbers out of Europe, Janet Yellen’s confirmation hearing, and weak earnings reports from Wal-Mart (WMT - Free Report) and Cisco (CSCO - Free Report) provide the backdrop for today’s trading action. It’s hard not to extrapolate the weak Wal-Mart and Cisco results to their respective industries, even though the issues could very well be company-specific.

The overall tone emerging from Wal-Mart’s release this morning and Cisco’s after the close on Wednesday is broadly weak. Wal-Mart beat on EPS, missed on revenues, and provided weak guidance. The retail giant’s tepid momentum for the holiday season is in contrast to what we heard from Macy’s (M - Free Report) on Wednesday and likely indicative of problems for other operators like Target (TGT - Free Report) at the low end of the retail space. Results from Kohl’s (KSS - Free Report) were also broadly disappointing.

Beyond retail, the unusually weak guidance from Cisco reflects terribly for global tech capital-spending trends. The company’s problems appeared particularly notable in emerging markets like China, India, Brazil and Russia.

Q3 GDP data for the Euro-zone runs counter to the overall positive sentiment about the region’s outlook that has been taking hold lately. Yes, the region’s economic growth was positive, up +0.4%  in Q3. But that is down from Q2’s +1.2% GDP growth pace, which came after 6 quarters of back-to-back negative GDP growth. France’s economy contracted, as did Italy’s. Germany’s growth was positive (+1.3%) and matched expectations, but was down sharply from Q2’s +2.9% growth pace.

These three economies combined account for roughly two-thirds of the region’s total economic output. There were some encouraging signs from the region’s southern periphery, however, with economies in Spain and Portugal showing modest positive growth.

The overall picture emerging from today’s GDP numbers spotlights the divergent paths for the European and American economies. That’s the reason why the European Central Bank recently had to cut interest rates while the U.S. Fed is getting ready to start tapering its ongoing QE program. Janet Yellen is unlikely to provide any fresh Taper guidance in her Senate confirmation hearings today, but the dominant question for investors at present is whether Taper is a December event or something much later.

Sheraz Mian
Director of Research

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