The Dawn Patrol – 11.10.12 – On Spain, on EADS/BAE, MS on European Banks. Carrefour.

Bonjour,

Markets should open down on the US markets sell off and the S&P’s two notch-downgrade of Spain. Tech continues to lead the decline in the US, while AAPL was up 0.8%. We’re watching European CPIs (and it’s in line at 2.1%) and we’ll have a look at the US Initial Jobless Claims. Auctions today: Italy for 2015/2016 and 2025 bonds.

and in other other other stuff:

 

HOT

EU Earnings : Suedzucker 2Q net beats estimates, sales inline and Carrefour report slightly better sales ( 22.6bn vs 22.4bn exp – LatAm strong & France improving. But S.Europe unsurprisingly still weak)

UPS said to soon receive EU antitrust objections on TNT bid : will get a complaint from European Union regulators setting out competition concerns over its plan to buy TNT Express – Bbg

RBS said to price Direct Line shares at 175 pence in IPO

ING agrees to sell Malaysia unit to AIA Group for $1.7b

BP close to settlement with U.S. over 2010 oil spill – WSJ

DeTijd report GSZ sees Electrabel market share declining

Veolia’s Proglio to Give Up His Place on Board, Echos Says

Ups/Downs

JPM reiterate OW on RIO after investor day and expect some profit taking on ATLN ahead earnings (but keep OW), BofA reiterate Neutral on EADS and UW on BAE whereas DB raise both to Buy, Assa Abloy cut to Sell at Socgen. MS downgrade KBC to EW and reiterate OW on Galp. Bernstein like Repsol & Galp ahead 3Q earnings. UBS reiterate Buy on Man as possible takeout candidate (but not imminent). LVMH PT Cut to EU151 at Barclays; Kept at Overweight

BAE/EADS. Chairman says not looking for a tie-up with anyone else, will consider buybacks, confirms problems with German government Now that the merger is over and every European leader blames his counterpart (BBC News – How Germany killed the merger of BAE and EADS http://bbc.in/QTnDGJ) , it’s time to look at what to do with the stocks. From what I read this morning (only headlines), keep your EADS and buy some BAE. SocGen, UBS, DBK and MS all say that there is value in BAE and it could be acquired by a US defense (defence?) company. Only BofA resumes EADS at Neutral and cuts BAE to UW. UBS adds that these likely candidates won’t “double up” their defense exposure.

CARREFOUR 3Q Rev. In-Line, Says Had Improvement in France (Indicated up 2%).
Carrefour 3Q rev. EU22.6b, est. EU22.4b.
• 3Q sales notably driven by Latam; 3Q showed improvement in France, S. Europe remained tough
• 3Q total LFL sales ex-gasoline, constant FX up 0.2%
• 3Q total France sales ex-fuel constant FX down 1.1%, in 2Q -3.6%
• 3Q total France LFL sales ex-fuel -1.5%
• 3Q France hypermarket LFL sales ex-fuel -3.3%, in 2Q -5.7%
• 3Q French supermarket LFL sales ex-gasoline unchanged, in 2Q -1.4%
• 3Q Europe ex-France LFL sales ex-fuel -3.3%, in 2Q -3.7

AFTER HOURS

After hours trading. Beats: Mission West Properties +5.7%, Misses Voxx (Consumer Electronics) -8.7% cuts FY forecasts cites European weakness, Ruby Tuesday -7.3% 1Q eps miss, Richardson Electronics -2.5% says 2Q to miss estimates, Sycamore Networks -1% 3Q small miss.

CURRENT STUFF

On Spain
S&P downgrades the country’s debt rating to one level above junk (to BBB- from BBB+) citing mounting economic and political risks ahead of a potential bail out. This S&P downgrade was unexpected and is a clear negative signal. It all comes down to the activation of the OMT which is what the IMF, France and the EC want. There is an article in the WSJ on the subject. But the all thing may hinge on Merkel’s will to pass all requests at once in early November.

To read
El-Erian: Beware the ‘central bank put’ bubble – FT.com http://on.ft.com/UStU3Z
For the first time in 11 years, the worldwide PC market is set to shrink in 2012. http://on.wsj.com/QXZEET
Bloomberg: US Q4-12 Overview And Outlook – Business Insider http://read.bi/ST1epA

Other Stuff

Beige Book : Economic activity expands modestly in most districts. Residential real estate shows widespread improvement; mortgage lending up
– Hedge funds are enjoying large gains from MBS trading according to the FT. The average HF is up just 4.6% this year but those focused on MBS have reaped far larger gains
– WSJ is positive on US housing market – A “Heard on the Street” column says people’s perceptions of the market outlook is improving, and positive jobs data will only help the situation

STRATEGY

JPM (Meijer) European Property
Where we may have a different view
Having spoken to a large number of investors since our book Time for Heavy Lifting, this note deals with the main themes/stocks were we seem to have different views (vs. consensus). Some of the highlights: A dip is likely, but we still see 12% sector upside, Unibail and British Land should be more active, we are buyers of British Land, smallcaps will see a second ‘leg’, more companies will have ‘bleeders’ in their portfolios, Hammerson is more likely to acquire than being acquired, it is too early to increase risk and, Klepierre and Unibail will squeeze competitors in France.

BofA ML: 2013 could mark start of the Great Rotation :
The era of bond outperformance has ended. Equities have staged a remarkable stealth rally, with US stocks not only outperforming Treasuries over the past one and three years, but also the past 10 years. And still, the consensus asset allocation is long bonds and short stocks. However, if the US successfully navigates the fiscal cliff, Europe continues to stabilize and Chinese growth reaccelerates, in our view 2013 could mark the start of the Great Rotation. The stealth rotation Although the BofA Merrill Lynch macro base case remains high liquidity, low growth, the RIC’s anticipation of a Spring 2013 Great Rotation from bonds to stocks continues to grow. The 3Bs – Bricks, Banks and Bonds – hint that a stealth rotation has begun, at least in the US financial markets. The turns in US housing activity indicators are very encouraging, such as the homebuilding stocks and US bank stocks in particular. Both signal markets are quietly beginning to discount the revival in 2013 of the two missing ingredients of a strong US recovery: credit and jobs. If bond yields begin to rise alongside homebuilder and bank stocks, a major asset allocation shift would be warranted.

MS (Van Steenis) European Banks.
Eurozone banks funding cheaper than EUR IG corporates for first time in three years.

Few places are feeling ECB action to curtail tail risks more strongly than bank funding markets. This reinforces our “wholesale over retail” call, as we see scope for wholesale to re-rate whilst still well below consensus for many EU retail names.
Wholesale over retail here: We continue to see greater scope for wholesale banks to re-rate vs. retail banks. Our meetings underscore the fundamental rethink about the appropriate model and we think EPS could be upgraded on higher markets and better equity/debt issuance/trading whilst we struggle to see meaningful consensus EPS increases for Eurozone retail banks in the coming 12 months from policy actions. Most preferred: BARC, BNP, UBS, Cred Ag & Aberdeen; Our least preferred are CBK, UBI, MPS, Lloyds, Sabadell & Popular.

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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