With the better-than-expected trade deficit confirming Taper is closer and IBM (following Credit Suisse downgrade) weighing on the Dow (knocking 32 points off), US equity markets are struggling this morning. Treasuries are leaking higher in yield and gold, silver, and oil are all sliding quckly post the data this morning. Perhaps most interesting is the deja vu underperformance of the high-yield credit and Japanese stock markets recently as JPY carry unwinds (a la Taper tantrum) re-emerge (and US equities - as they did the last time - are the last to get the joke).
The S&P 500 (cash) drops back to 1,700 for the first time since crossing last week...
IBM (-2.25%) is knocking 34 points off the Dow after Credit Suisse downgrade:
The combination of fading EPS momentum and the change in the basis of guidance from IBM, which we think is not warranted, sends some initial warning signs to investors. We increasingly believe that the period of optimization at IBM is approaching an end. In particular, we believe the company will be fundamentally challenged to grow revenue organically, as it is faced with a weakening organic revenue base and an increasingly less effective M&A strategy. To be clear, we believe the company will deliver on the $20 EPS roadmap; despite this, we downgrade to an Underperform for several main reasons:
- The current exclusive focus on “EPS based" valuation is distorting – we contend the focus should be on cash flow and here conversion is deteriorating.
- Mainframe and UNIX will start to be a drag and the exposure is higher than thought.
- Organic revenue growth is decelerating.
- Software losing share in key segments.
- PTI margin expansion is more challenging.
IBM Looks Expensive...
The pumped-up Nikkei loses its momentum and drags the carry trade and the S&P begrudgingly lower with it... just as we saw last time...
and the same with high-yield credit...
Charts: Bloomberg and Credit Suisse