The Dawn Patrol – 15.10.12 – On China, on Spain, on Q3 earnings. JPM Strat and more…

Good Morning,

Markets to open flat to slightly down. No real directionin Asia either despite mch better data in China (Exports, M2 and CPI see below). SPZ2 1422pts, EURUSD slightly down at 1.291, Gold $1745, WTI $91

Watch today : 10:30 Italy government debt, 14:30 US retail sales, 15:00 France bill sale, 16:00 US business inventories… And some earnings: Casino, LVMH, H&M…

Hope you enjoyed your Week End. Paris was raining and cycling in the rain ain’t the same…

FT reports Royal Bank of Scotland’s deal to sell 316 branches to Spain’s Santander has collapsed (initially valued at ??1.65bn)
Vivendi (just buy some) in SFR telecoms merger talks with Numericable Some analysts estimate SFR is worth about ???15bn and Numericable, which is owned by private equity groups Carlyle, Cinven and Altice, is worth 4bn-5bn. The proposal being discussed would see both companies merged into a new entity, with Vivendi holding 49 per cent of the shares and Numericable’s owners receiving 51 per cent.
Deutsche Telekom aims to complete the merger of T-Mobile USA with MetroPCS in 2Q13 and pay a dividend of at least EUR 0.70 per share for 2012
Sprint and Softbank reach $20b deal for Softbank to buy 70% of S. Softbank will tender at $7.30 per Sprint share and buy $8b in new equity.
VW expects growth in China of between 7% and 8%
BAE Systems directors are weighing a share buyback to appease investors after the collapse of the group’s merger with EADS – Sunday Times
Celesio is in advanced talks with an investor who is interested in buying the group’s DocMorris mail order pharmacy unit
Roche says FDA approves Actrema for rheumatoid arthritis
BASF to buy part of Poland’s Ciech, expand plastics business

Ups/Downs :

STAN named a Most preferred Stock at Citi, DWNI rated new OW at Barcap whereas BT cut to EW and Abertis to UW. Ahead 3Q, JPM like Imagination in Semis (if McPate says buy Imagination, just buy it!), TLSN raised to Hold vs Sell at Berenberg. JPM on UK Housebuilding : Upgrading Bovis to OW, downgrading Persimmon & Redrow to N and on Insurance : Continue to prefer reinsurers (Munich and Swiss) and restructuring stocks (Ageas and Aviva)


On China
The September merchandise exports rose 9.9% YoY, better than markets expectations. The M2 money supply rose 14.8%, higher than consensus as well. And inflation (CPI) stays in line with expectations. All in all, this is much better data than expected in terms of growth prospects for China,. However, it also means that the chances of further cuts are now disminishing.

On Spain
We still don’t have a date, but press reports (Bloomberg) suggest that Spain is seeking more time to reach its fiscal goals as it won’t be able to reach its targets for 2013. El Pais reports that Rajoy wants to make sure the OMT will reduce Spanish yelds if it seeks a bailout (I’m wondering if this won’t have the countereffect…).

On Q3 Earnings
It’s starting today (in Europe)!!! Get ready for this great time of year, where sales people arrive earlier just to be able to tell you how good or bad results are. We have bloombergs! Anyway… So far in the US it hasn’t been so bad after all the profit warnings we’ve had. Personnally, I’m still on the cautious side in the very short term. Q4 expectations are a bit high…

Other Stuff
Forget the fiscal cliff: U.S. has other possible economic threats looming
Why iron ore prices are rebounding


JPM (Lee) S&P500 Q3 EPS: Bad Does not mean Broken.
Domestic Getting Stronger: Int’l Potentially Troughing; 14 Ideas.

I guess Tom Lee is still bullish… His views are that, we may be at a trough in a cycle as earnings should now accelerate with stronger US and Asia and Europe stabilised. In this peice, he advises to go for Industrials and Tech which account for most of the decline in this Q (QoQ) but will rally first. He adds that Domestically oriented companies are lifing their estimates while the drag is global. Also financials are likely to be the bright spot in Q3. Finally he believes that discretionaries could get a lift from the wealth effect (housing prices and Equities).

His 14 stocks picks: Kroger Co., Wells Fargo & Co., CVS Caremark Corp., Macy’s Inc., Union Pacific Corp., Fifth Third Bancorp, SunTrust Banks Inc., Bed Bath & Beyond, Cintas Corp., Equity Residential, KeyCorp, Genuine Parts Co., Northrop Grumman, NiSource Inc.

JPM (Loeys) The J.P. Morgan View
Patience during political season

Asset allocation –– No changes in our medium-term, value-focused strategy to be long assets with high risk premia, equities, credit, and carry trades, even as upcoming political events will likely create shorter-term volatility.
Economics –– No major forecast changes, although increasing uncertainty around US fiscal cliff posturing creates downside risk on US Q4 and Q1.
Fixed Income –– We prefer German Bunds to US Treasuries.
Equities ––US earnings season favors domestically-oriented stocks and US Financials.
Credit –– We expect further spread tightening in US HG as the lack of credit supply brought about by QE3 is not fully priced in.
Currencies –– We launch a Chinese Economic Surprise Index.
Commodities –– Stay long Brent time spreads on Middle East uncertainty.

GS Strategy Matters : The shallow cycle is not drivingreturns: So far it’s all about risk
Leading indicators have improved but levels remain low – The fall in risk aversion has driven equities so far…and it’s dominated sector performance, rather than the cycle ..but for continued performance we need the up-tick to strengthen

Strategy Espresso: Equity correlation normalisation – is it sustainable and what are markets pricing?
Equity correlations have normalised from the very high levels in 4Q last year – especially since the beginning of the 2nd half of 2012 they declined significantly. Those declines were broad-based, both for the STOXX Europe 600 (see exhibit below) and EURO STOXX 50 but also the S&P 500, across sectors and countries. If 1-month correlations remain at currently low levels, they would expect 12-month correlations to drop further to previous post-2008 troughs around 0.35 as the correlation spikes from 4Q last year roll off.

Max Kamir

Louis Capital Markets UK,LLP



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