Friday, December 7, 2012

The Era of American Austerity Is About to Begin

Published: Tuesday, 4 Dec 2012 | 9:52 AM ET
By: Bob Pisani
Though the Republicans and President Barack Obama seem far apart, we can already see the elements of the deal: modest tax raises and some spending cuts.
The bad news: The era of American Austerity is about to begin.
The good news: It will be a fairly gentle austerity, at least in the beginning. Housing and autos are improving. The Federal Reserve will likely continue to expand its quantitative easing operations at the next meeting on Dec. 12, which will provide some cushion against austerity.
And, in the meantime, U.S. corporations are parting with record amounts of cash to pay out dividends early.
1) Toll Brothers: another homerun. The high-end builders like Toll Brothers are really firing on all cylinders. Orders were up 70 percent, well above everyone's estimate. Gross margins also improved. Full-year 2013 guidance for home deliveries (a key metric) were conservative.
The U.S. housing recovery has fueled builders and building materials this year as prices for single-family homes have increased since February. "Pent-up demand, rising home prices, low interest rates, and improving consumer confidence motivated buyers to return to the housing market in FY 2012," said Toll Brothers CEO Doug Yearley.
But there's a big problem with Toll Brothers: It's really expensive. Really expensive. Trading for close to 30 times 2013 earnings. Really. That's expensive, and even though other home builders are trading in the 20s as well, Toll Brothers is at the top.
2) The bidding may be heating up for Knight Capital Group, which last week was the subject of two offers, from Virtu Financial and Getco. According to The Wall Street JournalCerberus may come in to join Virtu's bid for Knight.
Why does Cerberus need to step in? No one has said, but the obvious answer is that Virtu does not have the cash on hand to close the deal.
It's a lot of cash. Depending on who you talk to, it has to come up with roughly $1 billion for the company, plus another $500 million to cover debt, so it needs at least $1.5 billion, plus enough money to run the operations, so figure maybe $1.8 billion or so.
That's likely where Cerberus steps in.
Speaking of deals, how about telling us exactly how much you (Virtu) plan to offer for Knight? We still don't know exactly what Virtu is offering, only that it is above $3. This makes it pretty difficult to figure out which firm is offering a better deal.

Apple’s Jaw Dropping Flop

What a flop!
Apple’s $37 plus, 6.43 percent sell off was surreal. The world’s largest and most profitable company giving up almost $40 billion of market value while the rest of the market basically yawned? That doesn’t happen often.
The Apple selling on big volume could have been used to finance a move into the financials.   Bank of America was up over 5 percent and Citicorp tacked on over 6 percent.
Apple sits right at its .618 Fib retracement of the $88 bounce from $505.75.  We still think they will be blow out this quarter’s earnings, but the stock is over owned and the bears know it.
Thus technicals will dominate Apple in the short-term, especially with the Vampire Cross (death cross) staring traders in the face.  The 50-day moving average looks to crossover the 200-day in the next week.
Note Apple peaked two days before the big market sell off began in September and we think today’s action in the stock does not bode well for the overall market.   Could be wrong, but that’s how we see it.
(click here if chart is not observable)