LCM Dawn Patrol – 05.08.13 – China’s PMI, Barron’s Cover, JPM View, GS on EM flows, MS on European earnings and so much more information for breakfast!

Bonjour,

 

European markets to open slightly up today following the S&P 500 on Friday as the lower than expected jobs numbers may lead to continued support from the Fed (groundhog day?…). Asian equity markets traded mixed to begin the week. Reports attributed the sluggish start to the week on disappointing US jobs numbers, but it is likely there was no specific catalysts driving the markets. Chinese services PMI numbers showing the economy was in expansionary territory supported greater China markets.

This Week’s focus will include the final PMI in the Eurozone, UK and Japan, as well as the IP data. In the US, we’ll check the ISM non manufacturing and in China the trade balance, the UP, CPI and so on…

Today: UK and Eurozone services PMI; US non-manufacturing composite ISM; Fed’s Fisher speaks. HSBC, Standard Chartered, Prudential.

 

NEWS

 

China’s services sector maintained modest expansion in July, according to the HSBC/Markit PMI survey. The index stood at 51.3 in July, unchanged from June and slightly above a 20-month low of 51.1 struck in April. (Reuters)

Fed chairman – The Fed chair needs to be politically independent. On that front, Yellen wins. Washington Post
AAPL Obama administration vetoes ban on sale of some Apple products – WSJ
Samsung Electronics to launch Galaxy Note III in September before IFA Berlin– Electronista
Paris Prosecutors Investigate Sale of Printemps, Le Figaro Says


EADS
. The FT writes that  TCI has written to EADS’ CEO to demand it sell its Dassault stake. FT
Lego to Start Selling Simpsons Sets From 2014, Borsen Reports
FCC to Start Talks to Refinance EU5b of Debt, Expansion Reports
Veolia CEO Says Could Sign Deal to Sell Berlin Water Stake
Veolia Profit Almost Wiped Out on Impairment Charges in Germany
PostNL 2Q Sales Miss Estimates, Sees Bigger Mail Volume Drop
Telefonica Deutschland, E-Plus Must Give Up Spectrum, Welt Says
Natixis to Shed At Least 500 Jobs, Journal du Dimanche Reports
Alcatel Will Have to Choose on Debt Lowering, CEO Tells Investir

Veolia Environnement 1H adj. missed on operating cash flow (EU930m vs est. EU946m), Rev. EU11.1b vs est. EU11.1b, Confirms 2013 targets including selling EU6b in assets, to cut net debt to between EU8b-EU9b, to pay div. of EU0.70 per share in 2013, 2014

 

 

CURRENT STUFF

 

China services PMI gains, but gap remains with HSBC number. China reported its July services PMI at 54.1 vs 53.9 in June, however a separate survey by HSBC reported the services PMI unchanged from June at 51.3. The release compounds the discrepancies between the official and private forecasters after last weeks manufacturing PMI numbers painted a diverging picture of the economy. Although some observers cited both being in expansionary territory as a sign of China better balancing the servicing and manufacturing sectors of its economy, Reuters reported that HSBC chief economist Qu Hongbin sees a decline in the jobs sub-index and a profit squeeze as adding downside risk.

 

Barron’s Cover
In this week’s cover story, Barron’s is positive on the traditional television. Netflix (NFLX), Google (GOOG), Apple (AAPL), Intel (INTC) and others all have plans to remake the industry, but Barron’s thinks that all the hype about the death of conventional television is overdone, as advertising revenues are stronger than ever and TV content has never been more valuable. Netflix trades at a sky-high 105 times forward earnings, and traditional TV stocks, Comcast (CMCSA) and Viacom (VIAB) in particular, look very cheap by comparison. Comcast could have 20% upside or more, and Viacom has similar potential. One analyst sees 21st Century Fox (FOXA), which recently split from News Corp (NWSA), as the best-positioned pure-play content firm. Time Warner Cable (TWC) and Charter Communications (CHTR) could both benefit from industry consolidation. Satellite players Dish (DISH) and DirecTV (DTV) are more risky, as they don’t have broadband internet to fall back on (Barron’s)

“Gold miners have started to protect themselves against more falls in the price of the precious metal, in a tentative return to the long-shunned practice of hedging.” Many large gold miners abandoned hedging in the past decade as prices rallied. (Financial Times)

“Investors poured a record $40.3bn into U. equity mutual funds and exchange-trade funds in July, after largely ignoring equities in June, research provider TrimTabs Investment Research said on Sunday.” (Reuters)

Hedge funds lowered bullish gold bets for the first time in five weeks by July 30, CFTC data shows. (Bloomberg)

To read
The end of Wall St’s commodities love affair. (Financial Times)
Hedge funds transform into ‘family offices’ to avoid regulations. (FTfm)
Charlemagne: Vamos a la playa – The Economist bit.ly/11EBSVt

 

 

STRATEGY

 

MS (Garman) European Strategy.
Earnings Season Summary.

We have published the latest readings of the 2Q 2013 earnings season. So far we have tracked 275 companies or 42% of European market cap. Only 55%-60% of market cap report quarterly earnings data. Earnings season has been fairly disappointing so far, with the earnings miss only softened by Financials Looking at pre-exceptionals earnings, 33% of companies have beaten estimates, with 30% missing estimates, meaning a net 3% of companies have beaten expectations. However, excluding Financials, we’ve seen a weaker result, with 4%more companies missing earnings estimates than beating. In aggregate, earnings have missed by 5.1% on a weighted basis. Earnings excluding Financials have missed in aggregate by 7.5%. Earnings are on track to fall 11% YoY, but are down nearly 15% excluding Financials

 

JPM (loeys) The J.P. Morgan View
Value and Momentum

Asset allocation –– The best line-up of value and momentum sits in the long equities to bonds trade.
Economics –– Modest downside risk on Q3 growth emanating from EM, Japan and the US, with the European recovery forecast tracking nicely.
Fixed Income –– BoE’s Carney to take a dovish bow next week .
Equities –– Euro area equities have started outperform ing. Stay OW.
Credit –– Further spread tightening largely depends on higher government yields.
FX –– No change: dollar strength against currencies with easing central banks (JPY, AUD) or large imbalances (TRY, ZAR, IDR, INR).
Commodities –– Stay OW energy vs. base metals
Our most important investment recommendation is to be long equities, both outright and relative to bonds. Both of these exposures have strong positive momentum. Equity multiples are near historic means (i.e. average value), but equity risk premia over cash and bonds in most counties rem ain way above historic means as yields have only modestly risen. The fundamentals are more mixed, as we are not seeing an upgrading of consensus forecasts for global growth or earnings. If anything, such forecasts are still being trimmed down, with much of the downside coming from EM. For Q3 growth, our forecasts of Europe pulling out of recession is tracking well, while recent data prints are tracking on the soft side of our projections for the US, China and Japan. The best macro fundamental support for equities is that with each passing quarter, we are further away from the Great Recession and are showing no signs of overheating, thus reducing uncertainty and with it risk premia, of which equities offer the largest one , in our view

 

GS (Eoyang) The EM flow outlook for 2H13
The EM positioning tea leaves suggest a focus on alpha over beta

EM ETFs sold off heavily in May-June EM ETF AUMs ($148 bn) fell $42 bn in May-June; $12.7 bn was from withdrawals, primarily from global EM funds. Since then, EM has rebounded, but only 11% of the withdrawn amount has returned, as sentiment surrounding EM remains understandably cautious.
Active EM funds: leaning away from EM Our collation of $226 bn in EM-dedicated MFs shows their active positions are mainly underweight Brazil, Korea, Taiwan & South Africa. They are overweight parts of DM, and slightly overweight India & Turkey. The apparent underweight in China is fully offset by HK-listed China stocks.
Foreign flow outlook: flat to negative With tightening occurring in much of EM without growth offsets, we believe 2H13 will see flat to down AUM trends for EM ETFs (and perhaps for active EM managers as well), supporting our less positive view about the outlook for EM equity in aggregate.
Leave the beta, take the alpha Despite the dour outlook, EM continues to be a more fertile area for country allocation and stock picking than DM, in our view. Our overweights have outpaced our underweight countries by 7.4% in just a month; we show that dispersion opportunities in EM are better at both the stock and country levels than in DM.

 

 

UPS&DOWNS

 

Semiconductors (MS, Kim) Global Memory Downgrade – What Investors Think
From our discussions with over 100 investors, we estimate that 80% were bullish on the memory sector, with the US region being the most positive. Those with more direct money management (PMs) tended to be more constructive on risk-reward, versus buy-side analysts who were overwhelmingly positive.

 

Europe: Energy: Oil – Integrated (GS, della Vigna) 2Q13 takeaways: Poor results reinforce our Cautious stance
The 2Q13 reporting season has been generally poor for the European integrated oils on all fronts: earnings, guidance and free cash flow generation. In aggregate, net income was 11% below our expectations (as published on July 1, 2013).

 

AKZO NOBEL CUT TO SELL VS HOLD AT BERENBERG
ALCATEL-LUCENT PT UPPED TO EU2 VS EU1.45 AT CITI, STAYS NEUTRAL
BETFAIR GROUP REISTATED AT BUY AT GOLDMAN; PT 1,070P
CAPITA CUT TO HOLD VS BUY AT BERENBERG
DIASORIN CUT TO HOLD VS BUY AT KEPLER CHEUVREUX
DRAX GROUP RAISED TO CONVICTION BUY VS NEUTRAL AT GOLDMAN
EURAZEO CUT TO HOLD VS BUY AT SOCGEN
FERRAGAMO CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
GENEL ENERGY PT UPPED TO 1,150P VS 1,000P AT LIBERUM, STAYS BUY
KIER GROUP REINSTATED AT OVERWEIGHT AT JPMORGAN; PT 1,630P
MEDIASET RAISED TO BUY VS HOLD AT DEUTSCHE BANK
OPHIR ENERGY CUT TO NEUTRAL VS BUY AT UBS
PALADIN CUT TO UNDERWEIGHT FROM EQUAL WEIGHT AT MORGAN STANLEY
PALADIN ENERGY CUT TO SELL AT CITIGROUP, PT A$0.67
POLYMETAL INTL CUT TO NEUTRAL VS BUY AT UBS
RBS CUT TO SELL VS HOLD AT SOCGEN
RWE CUT TO UNDERPERFORM VS SECTOR PERFORM AT RBC
THOMAS COOK GROUP RAISED TO BUY VS NEUTRAL AT CITI
TITAN CEMENT RAISED TO NEUTRAL VS SELL AT CITI
URALKALI CUT TO UNDERPERFORM, POLYUS CUT TO NEUTRAL AT BOFAML
XING AG RAISED TO BUY VS HOLD AT DEUTSCHE BANK

 

 

OVERNIGHT MARKETS: DOWN

 

Asian markets
Nikkei 225 down -127.98 (-0.88%) at 14,338
Topix down -7.08 (-0.59%) at 1,189
Hang Seng up +35.99 (+0.16%) at 22,227

US markets
S&P 500 up +2.80 (+0.16%) at 1,710
DJIA up +30.34 (+0.19%) at 15,658
Nasdaq up +13.85 (+0.38%) at 3,690

European markets
Eurofirst 300 up +3.57 (+0.29%) at 1,225
FTSE100 down -34.11 (-0.51%) at 6,648
CAC 40 up +2.92 (+0.07%) at 4,046
Dax down -3.79 (-0.05%) at 8,407

Currencies
€/$ 1.33 (1.33)
$/¥ 98.77 (98.89)
£/$ 1.53 (1.53)

Commodities ($)
Brent Crude (ICE) up +0.32 at 109.27
Light Crude (Nymex) up +0.22 at 107.16
100 Oz Gold (Comex) up +6.70 at 1,317
Copper (Comex) unchanged 0.00 at 3.17

10-year government bond yields (%)
US 2.62%
UK 2.42%
Germany 1.65%

CDS (closing levels)
Markit iTraxx SovX Western Europe -1.21bps at 89.33bp
Markit iTraxx Europe -0.6bps at 96.02bp
Markit iTraxx Xover -0.57bps at 397.44bp

Sources: FT, Bloomberg, Markit

 

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