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Ahead of Wall Street - September 21, 2012

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Friday, September 21, 2012

With nothing else on the economic calendar today, Spain-centric hopes are adding to market optimism that the Draghi plan will finally become operational. Also on deck today is the release of Apple’s (AAPL - Free Report) iPhone 5, which will likely bring in stories of long lines of fans around the company stores. Given Apple’s status in the market, the apparently successful iPhone 5 launch is a net positive for this market.
A little explanation of the Spain news may be in order as bailout hopes of a large country like that would generally be considered a negative for the market. The reason it’s a positive is that the Draghi plan in which the European Central Bank will effectively backstop Spanish government bonds will only get triggered if the country formally asked for help (read: bailout). But the ECB bond purchases are preceded by strict budgetary and fiscal conditionalities. The recently elected conservative government has been loath to put Spain in the same league as Greece, Portugal and Ireland by asking for a bailout, hoping that the mere presence of the Draghi plan will do the trick for them. But sanity seems to be prevailing now, helping remove the uncertainty which has been holding back the ECB from playing its announced role.

Spain’s pride aside, there are other issues holding the Draghi plan back. Tiny Finland is apparently not onboard with the plan to leverage up the European Stability Mechanism, the €500 billion permanent bailout facility that comes into being early next month. The original plan was the fund would leverage up to increase its buying power beyond the level contributed by the members. The hope is that Finland will eventually be brought around to agree to the original plan, but it’s consent may not come soon enough if Spain’s request comes through in the next few days.
In corporate news, Apple will dominate the headlines, but Oracle’s (ORCL - Free Report) revenue miss after the close on Thursday gives us a foretaste of what to expect from the third quarter earnings season that gets underway in a couple of weeks. Revenue growth was a persistent problem in the last earnings season and will most likely be a key issue this time around as well. In other earnings reports, we got positive results from Darden Restaurants (DRI - Free Report) , the operator of Olive Garden and Red Lobster chains, and homebuilder KB Home (KBH - Free Report) . My sense is that the market will remain in a tentative till it gets a sense of the earnings picture as the third quarter reporting cycle gets underway.
Sheraz Mian
Director of Research

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