The Dawn Patrol – 17.09.12 – ARM? On Spain’s coming downgrade. JPM on real assets inflation. MS on EURUSD, JPM on European PEs. MS on FTE.

Ya’at’eeh (Navajo),

Shana Tova.

Hope you had a nice week end, enjoyed the weather and exercised. Markets to open down this morning. Asia down, futures down, a pause in the rally. Today, we’ll watch the ECB EZ current account, the Italian trade bakance. Angela Merkel is to give a Press conference. Bonds and Bills: Netherlands (11:00), Norway (11:10) and France (15:00).

ARM and DIALOG… Did I tell you? “Pre-orders for iPhone 5 have been incredible,” Apple spokeswoman Nat Kerris told AllThingsD. “We’ve been completely blown away by the customer response.” Now, reading the MacHeads forums and blogs over the WE, it’s just crazy. People would give their kidneys to get a new iPhone… There is something I need to understand on the iPhone 5 and ARM’s content. It seems the A6 is not based on the Cortex A15… THIS IS IMPORTANT for ARM… Maybe slightly negative news. (A6 chip: More Apple, less ARM | Apple – CNET News http://cnet.co/U2MQke).

XSTRATA’S board is poised to recommend a GBP36b offer from Glencore International – the Sunday Telegraph

EADSBAE merger plan could be blocked by European law – Spiegel

VW’s commercial vehicles division expects a marked decline in demand from China compared to last year. It also expects demand to fall in Brazil and Europe.

Ups/Downs

EU telcos cut to EW at MS whereas FTE cut to UW (see below) , ABB cut to Hold at Berenberg whereas Fiat Ind Sell and Volvo & Metso rated Buy, POG & NORD raised to Buy and RRS to Neutral at Citi, TKA and VIV cut to Sell at UBS whereas UBS raised to Buy, BBVA cut to U/P and BT to Neutral vs OW at Exane.

CURRENT THEMES

On Spain
JPM still thinks that a downgrade by Moody’s has more than 50% chance of happening, it may be delayed and may even be cancelled as the yields have declined significantly and the OMT requires Spain to maintain market access… Wait for early October (post the banks audit) for the downgrade to happen. Or not.

QE would be right for Europe, too – FT.com http://on.ft.com/OSgGm9

On Bernanke’s Columbus-Like Voyage To The End Of The Monetary Policy World | ZeroHedge http://bit.ly/Qf0bRe: ” Part of the Fed’s current legitimate concerns about the economic expansion traces to the ongoing strains spawned by the sovereign and banking crises in Europe and the elevated risk of a sudden stop in the US federal budget on New Year’s day. At their December meeting, Fed officials will know a lot more about both as the ECB translates words into action and the US election puts the fiscal cliff in stark relief.”

STRATEGY

JPM (Loeys) The J.P. Morgan View
On to real asset inflation

Like everybody else, JPM is running after gold, still pushes for risky assets and now goes long commodities curencies. We should do the same…

Asset allocation –– The market appears to be testing the Fed’s tolerance for rising inflation expectations following its open ended QE3. We believe demand for US inflation hedges is set to rise, supporting commodity futures, stocks and currencies; depressing the dollar and government debt; and boosting real assets generally, including equities.
Economics –– Q3 growth is lowered to 1.7% due to China and Japan. 2012-13 global growth is lowered by 0.1% each to 2.4% and 2.6%.
Fixed Income –– Remain overweight MBS, after the Fed’s aggressive shift in stance.
Equities –– Value continues to outperform growth in Europe, helped by banks. Stay OW.
Credit –– QE3 should support spread products. Stay long and focus on lower quality credits.
Currencies –– Open ended QE is very bearish the dollar.
Commodities –– Rising tensions in the Middle East keep us long energy as a hedge against a supply shock that would hurt our long risk portfolio.

MS on FOREX
By Tom Kohn

Sept. 14 (Bloomberg) — ECB’s attempt to mend broken monetary transmission will reduce front-end rate differentials, Morgan Stanley says in note to clients.

• Boosts year-end forecast to $1.3400 vs $1.19

• Inner EMU bond volatility will decline, Morgan Stanley’s Hans Redeker and Calvin Tse write

• Market to likely rally, supportive effects to last some time

• Medium-term, MS still bearish on EUR

• EUR/USD +0.3% to $1.3025 today, near 4-mo. high

.

JPM (Matejka) European Equity Strategy
How much further can P/E rerating go?

This is a good question…

According to Mislav if we really push our luck, we could get PEs back to 2H09 levels or the goldilocks years (03-07). In both periods, the European PEs reached 13x. We’re now on 11.2, so this would mean 14% upside. Problem is that the consensus expects 13% EPS growth for 2013. How are we going to achieve this? China? Euro weakening??? So if we don’t have this kind of EPS growth, it means we’re already at c. 13x…

In the meantime, just remember who is your friend (ie the trend)… and remember the typical QE trade:
1. Commos rally, 2. DXY falls. 3. Equities advance and bond yileds move higher. Remember in 4Q10 how EM inflation rose.

From the note: “Given this, our preferred positioning is: 1) within commodities, OW Energy. 2) Prefer Eurozone to the US. Our top pick for the year remains Dax. 3) Prefer Financials (top pick Insurance) to Cyclicals (N). 4) Highly leveraged stocks to perform better. 5) thematically prefer US (Hotels, Travel&Leisure, Media, Software, Autos) vs EM exposure. At the stock level, we screened for names which outperformed the most after both QE1 and QE2. We highlight OW-rated names ANDR, CON, FRES, GKN, BOSS, RXL, SUBC, VOE.”

EUROPEAN EQUITIES

FRANCE TELECOM (MS, Delfas) EW to UW, PT €13 to €12.
France Telecom: Earnings and Cash Flow Risks for 2013 – Move UW

Significant mobile EBITDA decline is still to come, and we believe the recent rebound in FT shares is at an end. Our 2013e EBITDA is below consensus and our DPS is only €0.66. S p anish consolidation would be a p ositive but not transformative. We downgrade to UW.

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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