The Dawn Patrol – 10.09.12 – Rcube goes long EM. Soros’ view of Europe. On China and the Markets.

Bonjour,

No real indication of where the markets will open. Asia was slightly higher. Gold is at 1738.78! Today, we’ll watch our screens for some Chinese data on Trade balance, loans and M2. In Europe, we’ll have the French IP, the German current account and the Italian GDP. Germany to sell 6 mo bills around 11:30. France sales 3/6/12 months bills around 15:00.

UPS/DOWNS
DSY reiterated Buy at BofA/ML whereas AZN cut to UW, Saipem and Ericb cut to Neutral whereas Vallourec to Sell at UBS, GS d/g SKF to Neutral, Laird to Sell and u/g ASSAB to Neutral, Alfa + SAND to Buy, Philips cut to Neutral at GS + CS. Also a note on CARREFOUR by MS with key take aways. GS adds TEF to its conviction SELL list. Citi upgrades Essilor to B from N, Smith and Nephew to Buy from Sell and Straumann to Buy from N.

RCUBE

And RCUBE goes long EM.

They have had some great calls recently. Going long risk and European equities mid May, going long Gold via the GDX last month and selling the VIX yesterday.

Now the next winning trade is to go long the EM Equities.

– EM Earnings Revisions Ratio improving (following a really poor 2012 performance).
– EM credit channel is getting better and this is key.
– EM central banks continue to ease like crazy to boost local growth.
– EM FX implied vols have crashed and as DM central banks ease as well there should be less headwind for EM FX appreciation.

BUY EEM!OTHER STUFF

Soros
The Tragedy of the European Union and How to Resolve It by George Soros | The New York Review of Books http://bit.ly/QedZfh
Soros On What Happens Next In Europe After September 6 Game-Changer
– Business Insider http://read.bi/P6VLwG
‘Lead or leave euro’, Soros tells Germany – FT.com http://on.ft.com/P6VMRf

Sterilized ECB Bond Buying – Business Insider http://read.bi/OzGwv5

Book to read
(In French) Ciseaux: Amazon.fr: Stéphane Michaka: Livres http://amzn.to/RveHbR

CURRENT THEMES

On China
Some data were released on Sunday (CPI, IP…). IP rose 0.6% vs 0.4% in July and retail sales were up 1.3% MoM. These were rather good news despite the slowdown in fixed assets investments which grew at 19.4% YoY vs 20.4% in July. According to JPM, corporate profits continue to decline and destocking continues. JPM lowers its China 2012 GDP growth to 7.6% (vs 7.7%).
The CPI remains in line with expectations at 2% and we can hope for further cuts.

On the Markets
Still a painful rally, the most hated bull market… No one really participates in this rally…. Youhave to go long and OW and you don’t want to… There are still some obstacles ahead of us even in the very short term. We need Spain to ask for help, the Germans to say yes and we wait to see what the next FOMC meeting will deiver. The longer term issues are too big to mention in this paragraph…
So what to do? Keep buying, but beware the edge of the cliff is not far. What to buy? Don’t rush to the buy the cyclicals, keep looking for growth companies with defensive qualities and also, continue to hunt the dividends and Gold.

STRATEGY

JPM (Loeys) The J.P.Morgan View
Can the risk rally last?

Asset allocation –– Following our re-entry into long US equities vs cash last week, we have further upgraded our risk exposure by being long both equities and credit versus cash and government debt. Given the overnight announcement of Chinese infrastructure spending, even if not all new, we cover our underweight in Chinese equities and in industrial metals and reverse the short in commodity FX.
Economics –– World growth is in a bottoming process, but at well below potential with a return to trend only projected by the middle of next year. Policy easing is restarting in the US, UK, Euro area with monetary policy, and in China with both monetary and fiscal policy.
Fixed Income –– Position on ECB policy though Spanish curve flatteners, and Fed QE3 through long end Treasury steepeners.
Equities –– We take profit on our BRIC underweight within EM.
Credit –– We go further up in yield and down in quality in our credit portfolio.
Currencies –– Close defensive trades and go long commodity FX vs Europe.
Commodities –– The newly announced Chinese stimulus makes us take profits on our OW energy vs. base metals trade. We stay long energy on Middle East

risk.
JPM thinks the current positive environment for risk assets can and will last for the next 3-6 months… But not for economic reasons…

JPM (Matejka) European Equity Strategy
Exploring the case for better performance of Europe vs the US – part II

Mislav changed directon mid July cutting his UW Europe. He is now pushing for a plain old OW Europe in a global portfolio. Reasons:
1. ECB has finally assumed the role of lender of last resort.
2. Valuations are supportive (P/B 43% discount for Europe).
3. Europe undeperformed.
4. Activity momentum is narrowing (???).
5. The EUR is near 10 y low (trade weighted).
PREFER DAX and CAC. Within the periphery long Italy vs Spain.
Sectors: top pick insurance (Allianz, MuRe, Aegon and Ageas).
Banks could have a further 15% upside (Unicredit, SocGen and Intesa).
Screen gives a list of hihgly leveraged names that could benefit (Lots of Utilities and Telcos).

Max Kamir

Louis Capital Markets UK,LLP

Authorised and regulated by the FSA and Banque de France

39-41 rue Cambon

75001 Paris

T +33 (0)1 53 45 10 74

E mkamir
I http://www.louiscapital.com

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