The Dawn Patrol – 04.02.13 – Swatch+, MS on INDITEX, JPM View, GS Strat, UP&DOWNS, More…

Bonjour,

European stocks are seen inching higher on Monday, tracking sharp gains on Wall Street and in Asia after U.S. macro data showed the world’s biggest economy continues to recover.

Macro wise, we’ll monitor EZ PPI, ISM NY & US factory orders.

Hope you had a great week end. Went skiing. Not in the shape I thought I was…

HOT STUFF

Julius Baer FY profit +15%,beat ests. AUM +11%, inflows +5.7% near top endof target. Gross margin weakened though on reduced client activity.

Swatch, showing strong results FY sales beat, profit +26%. 2013 showing `healthy growth’ for industry & swatch

Barclays finance chief to step down Successor to Lucas likely to come from outside the bank
HSBC seals Ping An stake sale: The bank has received regulatory approval to sell 15.57% stake in the Chinese insurer to Thai billionaire Thanin Chearavanont, ending six weeks of speculation about whether the sale would go through. The transaction will generate a $2.6bn profits for HSBC.
Centrica is believed to be ready to pull out of plans to build nuclear power stations in Britain – clearing the way for Chinese investors to step in.” (Financial Times)
Veolia, EDF in agreement over Dalkia International – LeFigaro
Permira, KKR said to work with JPMorgan on ProSiebenSat.1 exit

Tom DeMark: Apple Stock Could Pop Monday

Hannover Re Says Full-Year Earnings to Remain Little Changed

Meggitt Removed From UBS’s M&A Watch List

France is preparing to cut its 2013 growth forecast from 0.8% to 0.3%-0.4%. WSJ

Sequestration – Senate Democrats want to find new tax revenues to pay for an elimination of the sequester. Harry Reid spoke Sunday and said there were a number of low-hanging tax breaks he would like to see eliminated. FT

CURRENT STUFF

On China

China Official Non-Manufacturing PMI increased to 56.2 in January this year, up 0.1 points from December 2012, according to figures released by the China Federation of Logistics and Purchasing (CFLP). After seasonal adjustment, the new order index decreased 0.6 points from December to 53.7 last month. The new order index in the construction sector stood at 56.7, followed by 53.0 in the service sector. The intermediate input price index rose 4.4 points from the previous month to 58.2 in January. The intermediate input price index in the service sector was 57.9 last month and was 59.5 in the construction sector.

On Europe
Merkel urged her European counterparts to work hard to reach a budget deal at this week’s summit although said an agreement was far from certain – Reuters. Hollande said he would do everything possible to strike a deal on an EU budget but added that the conditions for a compromise aren’t yet in place – Reuters

Greece’s banks have begun a frantic lobbying of the bodies behind the country’s bailout, in an effort to ease the conditions imposed on their recapitalisation and avoid full nationalisation. Greece’s €172bn troika bailout specified that €27bn is to be injected into the big four lenders, with a further €2.5bn to be supplied by private sector investors. However it is proving difficult to attract private sector money. If outside investors fail to appear, the banks could be fully nationalised. (Financial Times)

Spain. Spanish Prime Minister Mariano Rajoy on Saturday denied wrongdoing in a growing corruption scandal that threatens his credibility just as he makes headway against economic crisis. “I need only two words: it’s false,” Rajoy said in a televised address after an extraordinary meeting of party leaders to discuss the allegations. Rajoy, who has had a reputation for being boring but clean, welcomed an investigation into the affair and said he would publish his tax declarations on the internet. Last week El Pais published extracts from what it said were secret ledgers by PP treasurers over 20 years. “It is not true that we received cash that we hid from tax officials,” Rajoy said. He did not take media questions.

To Read:
Editorial: Spanish government must hold full, transparent and independent investigation of slush fund claims. (Financial Times)

UPS & DOWNS

Inditex (MS, Ruddell) An Introductory Guide.
Great report!!

A non-contentious introduction to Inditex. This isn’t a ‘regular’ research repot. Rather, it attempts to provide a high-level introduction to the company. We do not expect it to add much value to those following Inditex, though we hope that those less familiar with the business will find it useful.

Telecom Services(GS, Lee) Mobile pain stronger for longer; Sell FT, Buy Iliad
We believe the French mobile market is likely to see larger and longer revenue decline than companies and investors expect. Sell FT, Buy Iliad.

Arkema Rated New Overweight At Barclays; PT Eu108
Azimut Cut to Underperform vs Neutral at MainFirst
BBVA, Sabadell Stay Preferred Spanish Bank Stocks at Nomura
Daimler Raised To Overweight VS Neutral at HSBC
Deutsche Post Cut To Underweight VS Neutral at HSBC
Johnson Matthey Cut To Neutral VS Buy at Citi
K+S Cut to Equalweight VS Overweight at Barclays
Linde Cut To Underperform VS Neutral at Credit Suisse
Meggitt Cut To Neutral VS Buy at UBS
Prosiebensat.1 PT Raised to Eu30 VS Eu26 at Credit Suisse
Renault Cut To Neutral VS Overweight at HSBC
Saipem Raised To Buy VS Hold at SocGen
SEB Cut to Neutral VS Outperform at Credit Suisse
Stagecoach Cut To Neutral VS Overweight at HSBC
Suez Environnement Raised To Overweight VS Neutral at HSBC
Tenaris Cut To Neutral VS Buy at UBS
UniCredit Cut to Neutral VS Buy at UBS

STRATEGY

GS – Portfolio Strategy Research.
Profit margins and money flow will drive US equity performance in 2013
Our S&P 500 year-end 2013 target of 1575 reflects a tug-of-war between profit margins and money flow. We expect relatively flat margins through 2014, but 4Q earnings results suggest margins have begun to slip. A 50 bp shift in margins reflects $5 of EPS, implying downside risk to our 2013 forecast of $107. However, a large asset reallocation from bonds to equities could support valuation and offset weaker earnings. Domestic equity funds have received more than $10 billion of inflows in 2013 after $240 billion of outflows from 2008 to 2012. We recommend investors sell bonds and buy stocks but do not yet expect a significant rotation.

GS Strategy Matters : Moves in FX and the risk premium create opportunities

We look at the performance of our baskets in the light of the recent sharp moves in risk aversion and currencies. Lower risk aversion has been a key factor; however, we believe investors are ignoring the still very large growth differentials within Europe and between Europe and the rest of the world. To get exposure to better growth we recommend long positions in areas such as the German consumer and international stocks. We also recommend a long in our UK international basket vs. domestic stocks to take advantage of weak sterling and better international growth.

JPM ( Loeys) The J.P. Morgan View
What is working? What is not?

The first month of the new year is in the bag, creating a handy checkpoint to see what part of the investment strategy is working; what is not; and what needs changing. Overall, our model portfolios are up nicely as we have been long risky assets and short the Japanese yen. But not all is working well.
Asset allocation –– The long risk position is working, but much better in equities than in credit. We see recent selling of credit and bond duration on fears of an early end to easy money. We find these fears premature and thus keep longs in credit, duration hedged, and play mean reversion in bond yields.
Economics –– 1.4 point rise in Global Manufacturing PMI keeps us with upside risk bias on global growth.
Fixed Income –– Inflows and shifting central banks support EM local bonds.
Equities –– The past month has seen a spectacular rally in equity markets bringing the cumulative rise in the MSCI AC World Index to 22% since June. This global index is only a whisker away from its May 2011 peak. While signs of overextension are prevalent across various position indicators, we see no signs that investors are retrenching yet from overbought levels. Flows and positions are still rising, likely adding fuel to the equity rally. Our model equity portfolio, which has little directional exposure and instead focuses on regional and sectorial trades suffered over the past month. Our main regional theme of underweighting US equities produced a loss, as US equities outperformed all other regions with the exception of Japan. The outperformance of US equities is puzzling given a rather dull US reporting season and mixed US economic data. Perhaps the 3-month suspension of the debt ceiling provided a relief to US equities as the risk of debt ceiling impasse is pushed back by a few months.
We make two changes to our trade recommendations 1) we broaden the EM Asia overweight vs. S&P00 to the whole of EM, i.e. shift the long leg from MSCI EM Asia to MSCI EM; and 2) we express the Topix overweight against Korea and Taiwan rather than S&P500. In this way, we reduce the overall underweight on US equities and at the same time capture intra-Asia competitiveness changes.
Credit –– Stay long credit, duration hedged.
Currencies –– Short JPY vs. NOK, USD and EUR.
Commodities –– Our top trades are long Brent and soybean time spreads, long base metals, long US natural gas and long corn vs. wheat.

OVERNIGHT MARKETS: UP

Asian markets
Nikkei 225 up +80.24 (+0.72%) at 11,272
Topix up +12.91 (+1.37%) at 955.56
Hang Seng up +91.55 (+0.39%) at 23,813

US markets
S&P 500 up +15.06 (+1.01%) at 1,513
DJIA up +149.21 (+1.08%) at 14,010
Nasdaq up +36.97 (+1.18%) at 3,179

European markets
Eurofirst 300 up +3.55 (+0.30%) at 1,168
FTSE100 up +70.36 (+1.12%) at 6,347
CAC 40 up +40.93 (+1.10%) at 3,774
Dax up +57.34 (+0.74%) at 7,833

Currencies
€/$ 1.36 (1.36)
$/¥ 92.62 (92.80)
£/$ 1.57 (1.57)

Commodities ($)
Brent Crude (ICE) down -0.20 at 116.56
Light Crude (Nymex) down -0.32 at 97.45
100 Oz Gold (Comex) up +1.70 at 1,671
Copper (Comex) unchanged 0.00 at 377.55

10-year government bond yields (%)
US 2.04%
UK 2.10%
Germany 1.70%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.91bps at 103.48bp
Markit iTraxx Europe -0.99bps at 111.3bp
Markit iTraxx Xover -9.33bps at 433.55bp
Markit CDX IG -2.71bps at 86.24bp

Sources: FT, Bloomberg, Markit

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