LCM Dawn Patrol – 13.05.13 – Strategy from JPM. MS on the Earnings season. JPM on Adecco and lots more…

Bonjour,

European shares are seen mixed on Monday following a sharp three-week rally, pausing before Chinese industrial production data for April.

After a short week, we’re back in business with some interesting data to watch. Is the market rally based on false hopes? Are the data going to get better? We’ll watch the German ZEW, the Eurozone Q1 GDP and CPI and IP data from China, the US and Japan. In the US, we’ll focus on today’s retail sales, the PPI, the NAHB and consumer confidence on Friday. One of the most talked about event this Week End was John Hilsenrath’s (i.e. the Fed watcher or Hilsy if you’re into the brevity thing) article in the WSJ. The key is timing and on this the article isn’t 100% clear although it seems to suggest tapering could commence sometime in the summer (WSJ).

Really hope you enjoyed your week end. Got myself a new bike. It’s lighter, it’s better, but I’m still an appalling rider…
Next race is Arcachon-Guéthary. Raising money for Zumarika http:/zumarika.com/pariszumarika/

NEWS

Chinese IP data came in at 9.3% vs 9.4% expected. All data slightly below consensus.
DANONE BUYS MORE THAN 90% OF HAPPY FAMILY
EADS. Kuwait Airways Said to Be Near Deal on $4.4b Airbus Order BBG
Sharp plans to reduce LCD TV and solar operations in Europe
Siemens denies bribe payments to Mexico’s Pemex
UBS – the chairman has agreed to meet w/activist investor Knight Vinke; Vinke has called for UBS to spin out its investment bank – London Telegraph.
Mittal suggested that Europe should embrace protectionist measures to stop Chinese products flooding the market with cheap goods – FT
ABB says Prith Banerjee to leave for family reasons, relocate to U.S.; joined ABB last yr.
HSBC’s CEO Stuart Gulliver to outline strategy in presentation set for May 15 and may seek $1b more in cost savings
Lazard Capital Weighs Sale Among Strategic Options for Broker

Italy – George Soros thinks the calm in Italian sovereign bond markets will wind up being short lived as Europe still has unresolved imbalances. Reuters

Draghi said the ECB wasn’t called on to do more at the G7 – “There wasn’t any call to do more,” he told reporters after the meeting. “It is quite clear that all central banks have done a lot, each one within its own mandate. So (the meeting) was just taking note of this … All of us have really been active.” Reuters

EARNINGS

– Parmalat 1Q Net Beats Est., 2012 Net Restated; Dividend Cut

– Atlantia 1Q Ebitda Beats Est.; Italy Highway Traffic Down 2.6%

CURRENT STUFF

Top hedge funds bet on Greek banks: “Some of the world’s leading hedge funds are pouring money into the Greek banking sector in expectation of huge potential returns, even as the country struggles to right its economy in the face of deep government spending cuts.” (Financial Times)

Schäuble warns EU bank rescue agency needs treaty changes: “Germany’s finance minister has warned that a single EU bailout agency and rescue fund for ailing banks is legally untenable until the bloc’s treaties have been overhauled. In today’s Financial Times, Wolfgang Schäuble calls for a “two-step approach” that would leave bank rescues in the hands of “a network of” national authorities until treaty changes can take place.” (Financial Times)

Fed Maps Exit From Stimulus. Timing of Wind-Down Is Uncertain, but Focus Is on Managing Unpredictable Market Expectations (WSJ)

Fed-Chief Contender Faces Test on Easy Money. The next chief of the Federal Reserve will decide when to reverse its easy-money policies, a judgment that could strangle the economic recovery if made too early or trigger runaway inflation if made too late. (WSJ)

To read:
CS says Portugal will soon need more money and a bailout isn’t the best solution http://t.co/fpAaFC0EY4
– Krugman on bubbles. There are bubbles, but Treasuries are not one of them. http://t.co/zfuem5xsBd
– Bill Gates explains how GDP understates growth in the poorest countries bit.ly/18pgFBm
– George Soros: Italy market calm will be short-lived cnbc.com/id/100729962

– Top hedge funds bet on Greek banks on.ft.com/17iFSOQ

– John Hussman On Profit Margins And Un-“Reasonable Valuations” http://www.zerohedge.com/news/2013-05-11/john-hussman-profit-margins-and-un-reasonable-valuations

– Don’t Give Up on Me Now, Says Paulson John Paulson to investors: Don’t give up on me when I hit a rough patch or two. (WSJ)

 

UPS&DOWNS

Credit Suisse Group (MS, Van Steenis) Constructive on cost cutting & strategy post meeting CFO
Gritty cost focus to drive operational leverage, i-bank transformation benefits & medium term divi potential stood out in our meeting with CFO. We remain OW but think patience required for the full potential of restructuring & divi. On 1.3x TNAV the stock is appealing for 15-16% ROTE.

European Staffers (JPM, de la Grense) Momentum improving, macro downside risks reduced, valuations undemanding. Upgrade Adecco to OW.
We are turning more constructive on the European temporary staffers, where we see evidence of improved trading momentum, macro tail risks receding and a supportive structural backdrop. In particular, the staffers stand to benefit from the deregulation of European labour markets and a secular trend towards more flexible workforces, in our view. Although the economic outlook remains uncertain, we believe the risk/reward is now skewed to the upside and that valuations are undemanding, particularly after the recent pullback. We see Adecco as the better positioned to deliver growth, due to a more favourable geographic profile and greater exposure to professional staffing, and upgrade to OW with 11% upside potential to our Dec-13 price target of CHF 60.30.

ADECCO RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
ALLOT CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
ARCELORMITTAL SOUTH AFRICA RAISED TO NEUTRAL AT BOFAML
AVI LIMITED RATED NEW NEUTRAL AT GOLDMAN, PT 66 RAND
BOCONCEPT CUT TO HOLD VS BUY AT NORDEA
CARLYLE GROUP CUT TO NEUTRAL VS BUY AT UBS
ENKA INSAAT VE SANAYI RAISED TO BUY VS NEUTRAL AT GOLDMAN
EZCHIP CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
GAZPROM NEFT RAISED TO BUY VS NEUTRAL AT GOLDMAN
INVESCO CUT TO NEUTRAL VS BUY AT UBS
JSW RAISED TO HOLD VS SELL AT SOCGEN
KAZMUNAIGAS CUT TO NEUTRAL VS BUY AT GOLDMAN
MELLANOX CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
NAMPAK RATED NEW NEUTRAL AT GOLDMAN, PT 41 RAND
NATUREX CUT TO HOLD VS BUY AT BERENBERG
NESTE OIL CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
ORBOTECH RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
PIONEER FOODS RATED NEW SELL AT GOLDMAN, PT 71 RAND
TIGER BRANDS RATED NEW BUY AT GOLDMAN, PT 396 RAND
VESTAS RAISED TO NEUTRAL VS UNDERPERFORM AT CREDIT SUISSE

STRATEGY

JPM (Loeys) The J.P. Morgan View
Fade the growth trade and instead focus on value
Asset allocation
–– We are not taking part in the growth trade of the past two weeks (rally in Cyclicals and commodities plus sell off in bonds) as we see little reason to upgrade growth forecasts. Our strategy is instead a value based capturing of high risk premia in equities and HY in a world of low market and economic volatility.
Economics –– Better US jobs data and GermanIP and orders reduce downside risk biases on Q2, but are not enough to create upside risks. Forecasts are unchanged.
Fixed Income –– Selloff can only go a little further with monetary policy so supportive.
Equities –– We fade the Cyclical rally. We have not yet seen concrete indications of a rebound in global m anufacturing.
Credit –– We stay up-in yield globally, duration hedged, with a preference for the dollar m arkets.
Currencies –– We keep a short JPY basket vs USD and the commodity currencies and go short CAD vs USD as it appears expensive to us.
Commodities –– We stay bullish natural gas prices on its increasing use for power and transportation, and the rising possibility of US gas exports.

JPM (Mislav Matejka) Equity Strategy
Where to for European margins? Domestic plays stand to benefit the most from here

We continue with our call that equities will shrug off the typical poor seasonality seen at this time of the year. The potential rise in bond yields can be tolerated. What might come as a surprise is that during the ’94 episode Staples and Pharma outperformed the market, but unsurprisingly Financials and bond proxies – Telcos and Utilities – suffered. We remain bearish on commodities on the prospect of stronger USD. Eurozone margins remain depressed in the aftermath of the double dip recession. The margins of domestic plays have fared far worse than those of global plays. If JPM forecast of the return to growth proves right, it is domestic plays, Banks included, that should stand to benefit the most. Our screen comprises 25 names, which also trade at a significant P/B discount to the historical. We did the same exercise for UK stocks and get 17 names – in the report.

MS (Secker, Carr and Co) European Strategy.
Earnings Season Summary.
Earnings season has been very weak…
Looking at pre-exceptionals earnings, 29% of companies have beaten estimates, while 37% of companies have missed expectations, meaning a net 7% of companies have missed expectations. However, excluding Financials, an even weaker result, with a net 12% of companies missing earnings estimates by at least 5%. After a couple of earnings seasons in Europe that have been broadly in-line, this marks a renewed period of disappointment. In aggregate, earnings have missed by 1.7% on a weighted basis, but looking at the median stock, we’ve seen a miss of 0.7%, which would be the worst quarter on this basis since 4Q 2008. Earnings are on track to fall 3% YoY, or 7.3% excluding Financials.


(source: MS)

OVERNIGHT MARKETS: UP

Asian markets
Nikkei 225 up +225.76 (+1.55%) at 14,833
Topix up +24.12 (+1.99%) at 1,235
Hang Seng down -215.03 (-0.92%) at 23,106

US markets
S&P 500 up +7.03 (+0.43%) at 1,634
DJIA up +35.87 (+0.24%) at 15,118
Nasdaq up +27.41 (+0.80%) at 3,437

European markets
Eurofirst 300 up +4.34 (+0.35%) at 1,233
FTSE100 up +32.24 (+0.49%) at 6,625
CAC 40 up +25.25 (+0.64%) at 3,954
Dax up +16.04 (+0.19%) at 8,279

Currencies
€/$ 1.30 (1.30)
$/¥ 101.83 (101.80)
£/$ 1.54 (1.54)

Commodities ($)
Brent Crude (ICE) down -0.82 at 103.09
Light Crude (Nymex) down -0.74 at 95.30
100 Oz Gold (Comex) down -7.10 at 1,430
Copper (Comex) down -0.60 at 335.00

10-year government bond yields (%)
US 1.93%
UK 1.88%
Germany 1.38%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.13bps at 89.89bp
Markit iTraxx Xover +3.61bps at 382.7bp
Markit CDX IG +1.07bps at 72.02bp

Sources: FT, Bloomberg, Markit

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