The Dawn Patrol – 12.11.12 – On China, Greece, the Fiscal Cliff. The JPM View, JPM on capital goods and more.

Kalimera,

European futures give a weak opening. Asia was so so, with the Nikkei falling 0.93%, and Shaghai uo 0.17%. The EURSUD is at 1.2722 and Gold is worth US$1,733. Today, in the US, bond markets are closed for the Veterans Day holiday, as are banks. The stock market is open. Our macro eyes will look at German Wholesale price indices and that’s it really… We have a another busy week in terms of earnings and on the US front, we’ll focus on the FOMC meeting and any comment out of the Chinese congress

I hope you had a great week end. It’s getting cold out there. Maybe time to detox before the ugly weather takes the energy left in you. I’m starting the Clean program. No need to buy the book, it’s way too boring. http://www.cleanprogram.com/. It’s a 3 week program during which you’ll replace most of your food, stop drinking alcohol, stop eating processed food and so on.

NEWS

EU Earnings: DWNI ups full-year guidance
Egyptian billionaire Naguib Sawiris, founder of Orascom Telecom Holding SAE, offered to purchase a stake in Telecom Italia – Bbg
Blackstone decreases DTE stake by third.
PUBLICIS’S CEO announced strong recovery in October
APPLE, HTC announced yesterday global patent settlement ending all lawsuits, incl. 10-yr licensing of current and future patents > GS says HTC may boost mkt share.
VUELING’S top investors said to oppose Bid from IAG as too low
Weber says UBS will never need state aid again. Euro am Sonntag
BG starts CFO search as Barbosa won’t return – Times
JCDecaux digital business grows 48% in a year, Figaro says, JCDecaux has installed 12,000 digital screens worldwide, CEO Jean-Charles Decaux tells newspaper.
E.ON and its employees have agreed on the outlines of a cost cutting programme, the group’s head of HR tells Handelsblatt.
REPSOL CEO Antonio Brufau plans a management revamp that could affect as many as 100 executives – Expansion
GLENSTRATA update: “Xstrata and Glencore are moving to boost shareholder turnout in an upcoming vote on their proposed merger, as the verdict on the miner and commodity trader’s $80bn tie-up looks set to be tight. The voting structure on the deal, which requires investors to decide not only on the merger but also a retention package for Xstrata’s senior executives, is further complicating the approval process.”

UPS & DOWNS

GS reiterate Sell on ALU and Buy on IFX, BB&T raised to Buy at BofA/ML, JPM upgrade SCMN to OW and downgrade EPS’s ACA on weaker consumer finance performance, RYA cut to Neutral at Citi, Bernstein still see upside on EADS, DNB raised to Buy at Socgen.

MS on Utilities : adding EON and REE to their least preferred list (with SSE, FORTUM and GSZ) – Most Preferred names are: RWE, IBERDROLA, NATIONAL GRID, TERNA AND SUEZ ENVIRONNEMENT.

SWISSCOM (JPM, Wittig, PT: CHF415)
Visibility remains superior, upgrading to O/W
SCOM has outperformed the sector for some time, but we believe it can continue to do so. The company is successfully de-risking its mobile tariff portfolio, is investing proactively to protect its franchise, and remains privileged by its domicile, resulting in stable EBITDA with a comparatively high visibility which will continue to differentiate. We raise our price target to CHF415 (CHF400) and upgrade to O/W (N).

JPM on CapGood
Q3 results were weak as expected and consensus estimates got cut by ~5% with most companies downgrading the outlook. Top-down data finally shows progress on inventory reduction. We expect further destocking in Q4 to result in another weak quarter. Political catalysts have been driving the turns in near term momentum this year, as currently seen again, while in a ‘normal’ cycle, the sector should start to perform better now, at least for a few months. Our strategy remains unchanged – we stick to higher quality companies with pricing power and high cash flow and add some higher Beta name to the mix: ASSA ABLOY, SCHNEIDER, SPECTRIS, SMITHS GROUP, GKN, IMI, VOLVO OR SCANIA, REXEL AND PRYSMIAN.

CURRENT STUFF

On the Fiscal Cliff
At last, we’re going to talk about it. Obama spoke of it Friday after the European close. The plan is to reduce the deficit through tax increases and spending cuts (is there another way?). He reitereated that the Bush tax cuts will definitely end for the top 2% earners, but seems more accomodating regarding the level above which tax will be reinstated (he wanted $250k, republicans want $1bn). JPM’s economist expects some kind of deal to be reached by year end, but it won’t be able to advert all of the fiscal cliff. The fate of the upper income Bush tax cuts is a critical element. They need to agree on that specific point.
GS expects the upper income tax to rise back to the Clinton era level. May occur through reduction in tax preferences rather than top marginal tax rates. According to their first forecasts, it may still represent a drag on growth from ¾ to 1 ¾ points for the first hald.

The CBO released new forecasts and no agreement would substract 3% of GDP growth next year…

On Greece
Greece passes budget:
“Greece is battling to raise funds to avoid defaulting on a €5bn debt repayment this week as international lenders remained deadlocked over how to reduce its overall debt even as Athens won parliamentary approval for its 2013 austerity budget.” (Financial Times)

On China
China trade data this weekend was better-than-expected, continuing the trend that is increasingly confirming China’s economy bottomed out in 3Q. China’s October merchandise exports rose 11.6%oya, exceeding market expectations

STRATEGY

JPM ( Loeys) The J.P. Morgan View
Asset allocation –– The equity market has priced out the Romney win scenario, but from these levels, our economic and market outlook and risks are unchanged. These keep us medium-term overweight equities and credit, despite the likely volatility as the fiscal cliff is negotiated. Within equities, we stay underweight the US, and move most of the overweight into EM Asia. We have moved some of our credit overweight from the US to Europe.
Economics –– The data flows continue to confirm that June/July was likely the bottom in global activity growth, and that we are gently lifting from those levels, even as it will take well into next year before growth returns to trend.
Fixed Income –– Look for yields to head higher, but focus more risk on spread compression trades.
Equities –– We focus our overweights on EM Asia, Cyclical stocks and US Home builders.
Credit –– We see the current dip as an opportunity to add risk.
Currencies –– Be long the dollar during the fiscal cliff negotiations.
Commodities –– A further set of better Chinese economic data keeps us long base metals.
Equity markets fell sharply post US elections, but we are not changing our strategy.

We stay with the same strategy focusing our recommendations on EM Asia across regions, and Cyclical stocks and US Home builders across sectors. The rebound in the October global manufacturing PMI is what keeps us long Cyclical vs. Defensive equity sectors. Is this a high-beta trade? Not necessarily. Last summer, as equity markets rebounded in June and July, Cyclical sectors actually underperformed and have recaptured only a quarter of the underperformance seen between March and August and thus provide a better entry point. Position indicators suggest that investors are underweight Cyclicals and overweight Defensives, which in turn means that Defensive sectors are more vulnerable to position unwinding.

We introduced an underweight in US equities in mid-October to position for the US fiscal cliff risk. Obama’s win makes it more likely that this risk will intensify into year-end. Across regions we favour EM Asia and Europe vs. the US. While the US is facing fiscal cliff risks, Asian equities are benefiting from concrete signs that economic activity is rebounding in China. European equities are benefiting from greater improvement in financial conditions, although they are more vulnerable to noise around the Greek and Spanish issues. We focus our overweights on EM Asia, Cyclical stocks, and US Home builders.

JPM (Matejka) Europe Equity Strategy
Risk-reward still challenging; FCF yield to continue driving stock selection
Earnings growth forecasts for 2013 started to nosedive. This is one of concerns we hold for equities, in addition to fiscal drag and peaking margins. Our call remains for range trading at best into year end – “travel and arrive”, to be followed by a break lower in Q1. Within this, we believe that Eurozone will stop being high beta on the downside, and think it should continue outperforming the US. However, Dax not to be an outperformer within Eurozone anymore. At stock level, FCF yield was the factor which delivered the best returns, the only one which outperformed in each quarter this year. We think this could continue. The latest screen of high FCF names includes the following JPM OWs: ABE, KYG, SAP, BNZL, PSON, EXPN, GIVN, UCB, BATS, DPW, ITRK, ABF, CPI, ISYS.

Have a geat week.

 

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