Friday's Brew - Oct 27

Enjoy your fresh morning coffee with our summary of the market outlook for the day and a medley of important information you should find useful. Equity futures are down in early activity, on lower than expected GDP data.

OVERSEAS MARKETS

Stocks ended lower in Japan, Hong Kong and Australia. In Hong Kong, it appears everybody sold stock to buy into new IPO in China's top mainland lender, Industrial & Commercial Bank of China. The stock soared 15 percent in its first trading day following a record US$19 billion initial public offering. Stocks in Europe and the U.K. were mixed and indecisive, with the DAX up fractionally, while the FTSE 100 was down fractionally.

ECONOMIC DATA & NEWS

Economic news provided a scary finish to the week, appropriate enough for the Halloween season. The Commerce Department reported third-quarter gross domestic product, showing U.S. economic growth at 1.6%, below the 2.6% pace set in Q2 and under the economists' consensus expectation of 2.0%. It was in fact the slowest growth rate in more than three years.

The decrease was driven by the sharpest homebuilding decline in 15 years.

You can look at this data in two ways, like most economic data... One, okay, so the Fed might be done raising rates now and if inflation shows some decrease in future data, we may be nearing a Fed rate cut sooner than later. Or two, the housing sector is shaking the economy, and what if we fall into recession. As we pointed out in previous postings, we expect the equity markets to trade choppy in a sideways pattern until the debate, "recession versus soft landing", is won.

Also today, the University of Michigan will release its reading on consumer sentiment. Minneapolis Fed head Gary Stern will address the 43rd annual meeting of the Missouri Valley Economic Association. Finally, the Wharton School will host its 9th annual Wharton Investment Management Conference in Philadelphia.

COMMODITIES

Crude oil is at about $60.50 and gold is trading around $597.60. Crude is somewhat inactive as traders await remaining OPEC members to confirm production cuts with their customers. No surprises expected here, and the market will watch Iran and the U.N. for further news going into the weekend. With Russia defying the U.N. on sanctions against Iran, you might expect oil prices to decline, but this only pushes Israel one step closer to action, supported by the U.S. We expect oil and gold to strengthen some in the near term. Nickel is down roughly 5% today.

STOCK NEWS

Microsoft (MSFT) posted quarterly EPS of $0.35, versus consensus of $0.31, however, revenue guidance was below expectations, confusing the shares in pre-market. MSFT shares opened up 1%. Intuitive Surgical (ISRG) posted quarterly EPS of $0.45, versus consensus of $0.41. Revenues rose 57%, and we believe in coming quarters, EPS growth should be less burdened by tough comparables that do not reflect necessary expense structure increases. As EPS growth begins to reflect revenue growth, we believe the PEG ratio will increase to a level more compatible with a company exhibiting the kind of high growth that ISRG has. Price performance should rise higher at least in concert, in our opinion. We hope you enjoyed "Today's Morning Coffee" and we wish you a good day trading. Be sure the read "The Greek's Week Ahead" on Sunday night or Monday morning, and stay tuned for the next "Speculative Trade."

(disclosure)