The Dawn Patrol – 06.11.12 – On US Elections, Spain, France and Basel III. GS testing the Shiller PE, MS’sellers compendium, JPM on Vivendi.


Markets to open slightly up according to futures direction. Asia was mixed. Brent futs up 2.13% at $107.8 and Gold is now worth $1686.82/oz. Apart from the elections in the US, we’ll be watching the October PMIs for the EZ, France, Germany and Italy as well as German Factory orders. In the US: the ISM for NY and JOLTs Job openings. Greece to sell €1bn bills and the EFSF to sell ip to €2bnof 91 day bills.

The Monday Blues…
(from GS) In spite of recent declines, equity markets have performed relatively well during the past few months….but curiously, not so much on Mondays when returns have been negative around 70% of the time..

Interesting chart: to understand the US elections.


On US Elections …
Election outcome scenarios (short term market implications by JPM):
1) Base case: Obama president; GOP keeps House with at least ~227 seats (they have 241 now); Dems keep Senate with a split similar to where it stands today (53-47);
2) Upside case: Romney wins; GOP keeps House without losing a lot of seats and maybe even gains some (so ends >237); Senate turns Republican;
3) Downside case: Obama president; GOP barely keeps House and/or actually looses majority; Senate expands their majority beyond present 53 seats.
We may see results, such as Obama win in the electoral college, by as early as2am GMT (if Obama wins Ohio, it may be called by the networks early, and we should get key swing states –Virginia, North Carolina, Florida). On the other hand we may also see a 1-2 point lead in the popular vote for Romney at the same time and if the networks call it before the popular vote is in (and that may take until Thursday to count) that would create a lot of GOP noise.

On Spain
Spain’s economy minister wrote an op-ed in the WSJ today. Luis de Guindos says the country’s future is bright. “The Spanish Treasury has been able to finance itself comfortably thanks to good planning. The Treasury has placed more than 95% of the medium- and long-term debt issuance foreseen for this year at a lower cost than last year. ” No mention thanks to Draghi and his OMT… WSJ

On France
We’re next! In the FT: “France risks falling behind crisis-hit Italy and Spain if it does not reform its economy, the International Monetary Fund has warned, adding to pressure on President François Hollande to stem the country’s industrial decline . In its annual report on the French economy , the IMF on Monday called for “a comprehensive programme of structural reforms”.

BUT… Thanks to Louis Gallois, France to cut Taxes on companies By EU20B, Les Echos claims this morning. Tax on companies will be reduced over three years, with the first reduction of EU10B ($12.8B) to be granted for 2013 , public spending will be cut by EU10B to help pay for the measure, Govt. is likely to propose an increase in VAT to raise the other EU10B, according to the newspaper Govt. is set to announce the moves today. Louis Gallois President! (Vers une diminution de 20 milliards des prélèvements pesant sur les entreprises, Actualités

On Basel III
FT says on the front page the global systemic banks will be given extra time on reform FT. The Financial Stability Board said last night that progress in overhauling areas of the global financial system had been solid but more needed to be done and that the GSifi’s will be given an additional six months to finish their wills. Speaking at the G20 FinMin meeting in Mexico, the FSB said, only eight of the 27 members of the Basel Committee on Banking Supervision are on track to enshrine the “Basel III” reforms in national law by January even though the rules were supposed to be phased in from then.


GS (Walterspiller) Strategy Matters
Testing equity valuations part 3: Stress-testing the Shiller PE

The PE on 10-year average earnings for European equities is at a large discount to the historical average. If history is a guide, this discount indicates a high future real return for equity investors. However, investors often highlight lower future growth and the weight of structurally declining sectors as the reasons for the low multiple. We find that, even taking conservative assumptions about future growth, the prospective real return for equity holders remains attractive. The market is still at a discount to the long-term average, even excluding the cheapest sectors or countries.

MS (Carr) European Strategy
Sellers’Compendium: Market is punishing weaker quality and balance sheet metrics
Market punishing weaker quality and balance sheet metrics
Defensives share of Multiple Appearances has declined
Quantitative screens looking for potential underperformers
Multiple appearances and notable Underweight-rated stocks in the screens. There are 66 Multiple Appearances – stocks that appear on at least two screens. SSE qualified on the highest number of screens (four screens in total). Seven other stocks ranked on three screens: Akzo Nobel, E.ON, Kerry Group, SBM Offshore, Seadrill, Severn Trent and Telecity Group


BMW 3Q Net Income EU 1.29 Bln; Analyst Est. Eu1.07 Bln

LANXESS 3Q Ebitda Ex-Items In-Line, Sees 2012 Lower End of Range

ADECCO 3Q Net Income Beats Estimate; Confirms Midterm Outlook

FRAPORT 3Q Sales Eu701 Bln; Analyst Est. Eu699 Mln

Kingfisher would consider returning excess cash to shareholders through a buyback or special dividend – The group has virtually eliminated its net debt position and may finish the year with net cash for the first time since at least 1988
VW looks to raise EUR 2bn+ in fresh capital
TNT Express : The WSJ reports comments from a person familiar with the situation who has reviewed the Statement of Objections saying that UPS can no longer hope to clear the deal by offering country-by-country divestments, but instead would need to look at offering solutions for its entire network since the statement of objections sent to UPS and TNT by Mr. Almunia’s team sets out antitrust issues in at least 25 of 27 European Union member states.
Diageo set to announce $2bn deal with United Spirits later this week (Livemint). This has been talked about for the past couple of months, e.g. DGE take a minority stake in the Indian co. In October, Vijay Mallya (chairman of UNSP) insisted he did not have to sell to DGE causing uncertainty. It would be a small deal for DGE (c1% of mkt cap) as they continue to chase EM exposure.
KPN is nearing an agreement to sell its German mobile-phone towers to American Tower. BBG
Arm, Imagination. FT says Apple’s share of the tablet market slips as rivals using Android gains ground.
Apple is considering replacing the intel chips in its line of Mac computerswith “a version of the chip technology it uses in the iPhone and iPad” – Bbg
Novartis today & tomorrow we get phase III data from Relaxin-AHF study will be presented at the American Heart Association in Los Angeles. We estimate the mortality benefit could be lower than we originally thought. We have a Neutral stance.
Salzigitter cut FY 2012 PTP forecasts at the close last night.

ALSTOM and ASSA ABLOY CutFrom UBS’s Most Preferred List
Cut to Sector Perform from Outperform at RBC Capital
BIOMERIEUX Cut To Hold From Buy at Jefferies
CREDIT SUISSE Raised From Underweight At Barclays
E.ON Cut to Underweight VS Equalweight at Morgan Stanley
ENI Kept as Top Pick in European Oil Majors at Credit Suisse
INVENSYS Rated New Buy at Nomura; PT 330p
OUTOTEC, FIAT Industrial, Metso Added to Ubs’s Least Preferred
STANDARD CHARTERED Cut To Underperform at Credit Suisse
TALKTALK Raised To Buy at Goldman
TENARIS Cut To Sell VS Neutral at Goldman
UBS Raised to Overweight From Underweight at Barclays
VIVENDI PT Raised 10% to Eu17 at Exane; Kept at Neutral (see JPM note below).

VIVENDI (JPM, Pietro Lo Franco)
A weak quarter likely to create an attractive entry point
VIV reports Q3 results on Nov. 13 BMO. We expect VIV profitability to be hampered by an acceleration of the decline in SFR Mobile’s service revenues, as FY12 bears restructuring costs and cost-cutting measures will start to have a meaningful impact only from FY13. Changes in VIV perimeter, increased share count and potential downgrades in SFR estimates are likely to negatively impact our EPS estimates by c.-5% in ’12 / c.-3% in ’13 (same proportional impact on DPS). At this stage, we leave our estimates unchanged as we expect details at the Q3 results. While Q3 earnings are important, we do not believe they are key to the investment case, which we expect to be driven by newsflow about VIV’s corporate structure.



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