The Dawn Patrol – 08.10.12 – JPM Strat, MS Q3 preview. European news.

Sawubona (zulu),

Hope you had a great week end. Biarritz lost big time versus Toulon and that’s bad. European futures edging downwards and Asia down to adjust following the Golden Week. EURUSD at 1.2991 and gold at 1,770. There isn’t much today to focus on except the German IP data at 12:00. Investors are starting to focus on Q3 numbers (see MS piece below).

EUROPEAN EQUITIES

EADS/BAE : Deadline to announce deal terms approaching (10 oct) and is likely to be delayed. Invesco Perpetual (which owns a 13% stake in BAE) will today signal “significant concerns” and UK government lays down ‘red line’. Sunday Times reports Germany has threatened to scupper the merger unless the headquarters of the combined company is located in Munich. Bernstein see EADS attractive if deal comes off

PPR is looking to cede Fnac & La redoute via IPO to focus on Luxury activities. Such a sale is long overdue.

Vivendi mulls €4bn Moroccan telecom sale – FT

France is looking at implementing measures that will help phone companies cope with competitive pressure after a fourth mobile entrant, Iliad SA, started selling packages in January may cut the tax phone companies pay to help support the broadcasting sector LeFigaro

UBS, Plural said to be in talks for BNP’s Brazil wealth business

BMW expects to sell record number of motorcycles in 2012 – Welt

Julius Baer announces details of rights issue: will offer investors three new shares for every existing 29 shares. Subscription price is CHF24.20/sh. Rights will trade from 10 to 16 October. Trading in new shares will begin on 18 October. Julius Baer will raise gross proceeds of CHF492m.

Lloyds Banking Group Plc’s plan to pay a first cash dividend since its 2008 bailout has sparked a dispute with regulators Sunday Times

BHP says Leinster nickel mine suspended after evacuation

Aquarius Platinum falls as much as 4.7% after CEO resigns

Congressional group advises against Huawei and ZTE

Bidding war looms in US mobile sector http://on.ft.com/RnO

Ups & Downs

Bernstein increase DTE’s pt to 12e and add RIO to Q4 top pick list, EZJ raised to Buy at DB, JC Decaux cut to sell at GS whereas HAVAS added to Conviction Buy list and SKYD upgraded to Buy. Barcap downgrade HMB to EW, MEO downgraded to UW at Exane, JPM reiterate OW on DPW and YAR, Holcim raised to O/P at Bernstein. EU Tobacco cut to Bearish vs Neutral at Nomura

CURRENT THEMES

On European Banks
(WSJ) Vicious Spiral Threatens Europe’s Banks Banks across Europe continue to trade well below their book value and parts of the continent are suffering a credit crunch. That has left policy makers frustrated.

On this never ending tug of war
New German eurosceptic group targets ESM and OMT:
The “Election Alternative 2013″ alliance includes some mid-ranking members of Angela Merkel’s CDU party. (Financial Times)

STRATEGY

JPM (Loeys) The J.P. Morgan View
What do you buy your children?

Asset allocation –– A long-term portfolio, for you or your children, should concentrate on value. This means large holdings of equities, especially value stocks, small caps and EM, combined with BB/BBB rated debt of corporates and sovereigns, plus smaller holdings of gold, crude, and undervalued currencies.
Economics –– Rise in Global PMIs, and in particular order-to-inventory ratios, are the first signal that growth rebound is coming, even as Q4 will likely remain well below potential.
Fixed Income –– Hold spread compression trades, and longs in UK breakevens.
Equities –– Re-enter overweight in Cyclical sectors.
Credit –– Short-dated corporates around the investment-grade boundary offer the most attractive carry-to-risk, particularly European BBs.
Currencies –– Keep limited short USD positions.
Commodities –– We are long gold and base metals and short agriculture.
Basically, JPM remains on the view that it’s still best to remain on value for the mid term. They still like equities and credit looking for yield…

JPM (Matejka) European Equity Strategy

Q3 preview – Expectations are downbeat, so will be the results – stay OW US and UW China/EM exposure

From our recent marketing the most frequent feedback is the near universal bearishness on the Q3 results. Hurdle rate has fallen significantly. Consensus expects outright negative EPS growth yoy in both the US and Europe. This will be a first for the US in the current cycle. Q4 hurdle rate is much steeper though. Consensus expects a reacceleration to +10% yoy EPS growth in both regions. This might prove to be too optimistic unless there is clear macro pickup. There are signs of it in the US, nothing so far in Asia and Europe. Stay with the key themes: caution on China/EM exposure (UW Mining, Capital Goods, Steel, Trucks, Luxury and as of recently Chemicals). Preference for US topline exposure – Discretionary – Hotels, Travel&Leisure and we add further to Autos sector – now OW. Recommend long Autos short Chemicals. Top country pick remains Dax. Our analysts compiled two stock baskets 10 high conviction likely beats and 10 misses. The previous basket ahead of Q2 season produced 12% outperformance.

High conviction Q3 previews

In this report we highlight our high-conviction Q3 previews where our view is different from the market or consensus. Going into the quarter we are positive on: Alstom, Babcock, BG, Danske Bank, Givaudan, Holcim, Roche, Swiss Re, Wereldhave, and Yara. Cautious on: Anglo American, BASF, Danone, Fortum, Kingfisher, Legrand, SCA, SKF, Sodexo, and STMicroelectronics. For Long Derivatives

MS (Parker) US Equity Strategy
Sector Bets and Earnings Trends as Q3 Results Begin
S&P 500 EPS is forecasted by consensus to decline 2% both sequentially and YoY in 3Q12 driven by net margin compression. Many have asked us if there can be an earnings recession without an economic recession, and today’s environment answers the question.
Roughly, 50% of the companies are expected to experience YoY contraction in net margins during the quarter, including heavyweights like CVX, MFST and GOOG (Exhibit 15 and Exhibit 16). While revenue growth expectations have largely held up (Exhibit 4), earnings estimates for the quarter have seen sharp downward revisions in the last two months (Exhibit 1 – sidebar right) hurt by the highest ratio of negative-to-positive guidance any time in this cycle (Exhibit 2 – sidebar right). Given there were no substantial negative pre-releases last week, we suspect modestly light earnings and negative guidance for Q4 will occur, as the $27 forecast appears lofty.
Earnings have declined substantially since the start of the year. 2013 EPS estimates have come down from $121 at the beginning of the year to $116 now (versus our estimate of $99). We expect earnings to continue to come down and forecast a 1.0% decline in earnings in 2013 (versus consensus expectation of 12% YoY growth). So far, recent revisions to 2013 estimates have been most negative in industrials, staples and discretionary (Exhibit 18).
What to watch: Beginning next week, we will be watching for weak guidance for fourth quarter and full year 2013, as investors have punished companies when they guide below consensus expectations (Exhibit 10). Moreover, we will be looking at the trajectory of the earnings decline, and whether it can shift investor attention back to fundamentals, away from policy and positioning. The reward for beating vs. the penalty for missing will continue to be a key variable we monitor during the next two weeks.

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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