LCM Dawn Patrol – JPM more cautious on the European rally. JPM upgrades Iberdrola, MS on 3D printing, S&P earnings summary.

Bonjour,

US markets continued their ascension last week with the S&P500 gaining another 0.88% in a busy week in terms of earnings and despite numerous red flags. JPM citing the following as red flags: Nikkei down, Asia tough, SHIBOR up, SX7P coming down, US momentum stocks losing momentum… It really feels like investors are being forced into the rally without strong convictions.
European markets, although sluggish on Friday, are expected to follow the rest of the world and open up today.

Today, we’ll have our eyes on Italian business confidence, the US IP, home sales and the Dallas Fed Manufacturing activity. In terms of earnings, we’ll get Saipem, Mediobanca, Bankia, Merck, Burger King, Pfizer, Cognizant, BoA, Pandora, Apple and more…

Great race from Alexis Pinturault who finished in the second place, right after an incredible Ted Ligety.

NEWS

Worst Storm in Years Threatens Chaos for U.K. Commuters
Euro Jobless Fault Line Festers as Italy Scars Region’s Recovery
ECB Capital Assessment Negative for Weak Italian Banks: Moody’s
Norway Seeks Probe Into Mortgage Caps in Push to Support Lending
Schaeuble Says Debt, Taxes Can’t Rise With New Govt: Focus
Worst Cash Crunch Since June Shows Robust Economy: China Credit
Global CEOs More Bullish on Deals as Recovery Quickens, EY Says

Veolia
to Pay EDF EU550M as Part of Dalkia Accord, Echos Says
Moscovici Says Peugeot Must Remain French, Les Echos Says
Carlsberg Chairman Says Brewer to Sell Shares, Borsen Reports
Tesla Planning U.K. Electric Car Charging Network, CEO Tells FT
SAP CFO Brandt Says Not Interested in BlackBerry Assets: Euro
ThyssenKrupp May Not Get Brazil Plant Sold, Handelsblatt Says
TUI Wants to Exit Tourism Project in Tuscany, Spiegel Reports
Titan Plans Europe Expansion With Plant Buy, CEO Tells FT
Numericable Is Said to Seek IPO Valuation of Up to $8.3b
K+S Cost-Cutting Efforts to Include Job Cuts, Reuters Says

CURRENT STUFF

SP500 earnings recap

According to Bloomberg, 244 of the SP500 companies have reported earnings. 76% of the 244 have beaten St EPS forecasts by an average of 4.88% (that number has been in the 70%s throughout the entire earnings season). SPX EPS is tracking up 7% and revs are pacing up 3.5% so far.
The largest EPS beats have come in materials – 76% of S5MATR firms have exceeded EPS forecasts by an average of 12%. Some of the upside highlights include AA, FCX, NUE, IP, and DD. Financials and consumer discretionary also have been exceeding estimates by a large margin (7% and 6%, respectively). Utilities are the only sector where EPS in aggregate is tracking below the St.
On the sales front trends have been more mixed w/only 53% of companies exceeding expectations.
Street EPS estimates haven’t changed over the last few weeks. “Top down” (average of Wall St strategists) is still calling for $109 in in 2013 and $115 in 2014.
The “bottoms up” (aggregate of all individual SP500 company EPS forecasts) is $110.50 and $122.70. (JPM)

TECH: (JPM)

Sifting through the rubble – some of the biggest post-earnings declines have come in AMD, UTEK, CREE, TQNT, SYMC, RFMD, AKAM, ALTR, SLAB, XRX, FCS, CDNS, JNPR, AVT, EMC, IBM, XLNX, and EBAY and investors are beginning to wonder if any are worthwhile picking up at present levels.
Some of the biggest rallies coming out of earnings – NTCT, GOOG, AMZN, MANH, TYL, INFA, SNDK, MKSI, QLGC, LOGM, WDC, MCRS, CMTL, and MSFT.

Merkel’s phone tapped by US since 2002, leaked documents claim: According to leaked documents seen by the weekly news magazine Der Spiegel, US intelligence intercepted the German chancellor’s phone from before she became chancellor until shortly before a visit by President Barack Obama to Berlin this past June. (Financial Times) (Spiegel)

Fed probes banks’ exposure to mortgage vehicles: The private discussions, described by one person as a “deep dive” into the topic, underscore regulators’ growing concerns about the rapid expansion of mortgage real estate investment trusts. MReits finance their purchases of long-term mortgages with short-term borrowings, known as repo, secured from dealer banks.The worry is that MReits could be vulnerable to a sharp increase in interest rates which would force the vehicles to quickly reduce their holdings of mortgage-backed securities (MBS) and set off a wider fire sale. (Financial Times)

It Feels Like We’ll Never See The Fed Taper: Economists and traders are increasingly talking about how the Federal Reserve may have missed its chance to taper its large-scale asset purchase program (aka QE). Last week, bond traders passed around a report from Medley Global Advisors titled “Fed: Ctrl-Alt-Delete.” Medley analysts Regina Schleiger and Jeremy Torobin write that, “more than simply standing pat, the Federal Open Market Committee has effectively hit the reset button and is back where it was six months ago — at the very start of a long process of building the case for a downward adjustment to the Large-Scale Asset Purchase program. http://read.bi/16Dssy2

STRATEGY

JPM (Loeys) The J.P. Morgan View: Markets Can it last?
Asset allocation:
Window for further asset price inflation is not wide, but should be open through year end. With next tapering (April) only coming if US growth improves, its impact on risk assets should be dulled. We stay long equities and credit, but are flat bond duration.
Economics:
World economy is cruising at trend growth pace, without clear up or downside risk. Start of tapering moved to April.
Fixed income:
Bonds in a range as tapering is now half a year away. 10yr UST yield moved to 2.6% at year end. We remain focused on carry, which favors EM local bonds.
Equities:
Prompted by weak flash PMIs, we close our overweight in global Cyclical vs. Defensive equity sectors.
Credit:
Financial spreads are now tighter than non-financials for the first time since before the 2008 crisis.
FX:
Focus on carry. long CNH, INR, MXN, AUD and NZD and add a long position in ZAR versus ILS
Commodities:
Better Chinese PMI keeps us OW base metals and copper

JPM (Matejka) European Equity Strategy

Arguments to take some risk off the table materializing – Cutting Cyclicals to Neutral
Equities had a strong run with SX5E up more than 20% since end June. We believe that the medium term outlook remains very compelling, but in the short term, next 1-2 months, the arguments for some (healthy) consolidation are crystallizing. We advise tactically to take risk off the table:
1) Macro momentum is stalling. CESIs are approaching zero in both Europe and the US. The latest Euro PMIs and IFO have moved lower. Payrolls have softened.
2) Q3 results are mixed. EPS revisions remain negative. Those who were staying out of the market because of the poor earnings backdrop might not feel the pressure to capitulate this side of the yearend.
3) All the equity run was explained by P/E rerating. MSCI Eurozone is now on 13.2x 12M forward P/E, 5% above the historical median of 12.6x. While we believe European equities will be trading at a premium next year given potentially very strong earnings growth, we think the valuation discount is exhausted and catalysts for the further multiple rerating are missing in the short term – creating an air pocket.
4) Bond yields are falling once again. Many are citing this to be a tailwind for equities given that tapering is delayed, but we are not comfortable with that conclusion. Delayed tape ring could stall the rotation out of fixed income into equities. Also, Cyclicals tended to underperform in the backdrop of flat/lower yields. 5) Sentiment is bullish. RSIs are stretched. Bull bear is at the top of its range. HF beta is elevated. Complacency over the EM/China outlook is evident yet again .
We are cutting Autos from OW to Neutral and shifting the funds to Utilities, moving them from UW to Neutral. Autos are the best performing sector ytd, up 31%, and they show one of the highest positive correlations to bond yields and to PMIs. Utilities have underperformed the broader market by 800bp ytd and by 50% since ’08. Their valuations appear more supportive now. We had OW Cyclicals vs Defensives stance since June, following their huge 1H underperformance, but are now advising a Neutral weighting between these two groups of stocks.
Putting all of this together, we are less bullish in the short term than we were over the past few months. However, we do not envisage a fundamental change of direction; we see this as purely a tactical call. Typically good Q4 seasonality is a support. Also, given that many managers are lagging the benchmark, they could use the potential weakness to add. European recovery is tracking and we see equities as attractive vs bonds.

GS (Garzarelli) Global Markets Daily: Bond Yields: How Low Can They Go?
Government bond yields in the major markets (bar Japan) are now ‘fair’ on our valuation models. We try to assess how much lower they could go and still be consistent with the consensus macro outlook.

The current consensus calls for US domestic demand accelerating in 2014 and a modest expansion in Europe…
… the Fed starting to taper in March 2014 and the main central banks keeping policy rates floored through 2015…
…fiscal-related tensions relaxing in the US, and the fiscal impulse easing in Europe through next year.
Government bond yields have been declining since September and, with the exception of Japan, are now ‘fair’ on our models.
Using our metrics, we ask ourselves how much lower can bond yields go and still be broadly consistent with the macro outlook above?
A decline to 2.25% in US TY10 and 1.40% in 10-yr Bunds would put yields back into June’s valuations and at par with those of JGBs.
To be clear, we continue to forecast that bond yields will go higher during the next 12-months, not much lower.
But without much clarity from the macro picture, and the policy front, we would stick to the neutral stance we recommended since August.

UPS&DOWNS

Iberdrola (JPM, Garrido) Upgrade to Neutral
2014 should be still a difficult year, but a 6% divi yield should provide support.
We upgrade Iberdrola to Neutral with a new Dec-14 PT of €4.45. IBE has shifted its equity story towards one dominated by the guarantee of a sustainable dividend of €0.27/share (and no risein share count), sacrificing capex and further leverage reduction. We see this as the right approach at a time of questionable returns on capex and when leve rage should reach (in 2014E) an adequate level for a company with Iberdrola’s risk profile. A 6% div yield and further compression in Spanish sovereign spreads should offset poor earnings and additional political risks in Spain and the UK.

Technology – Software & Services (MS, Wood) 3D Printing – implications for the Software sector
We see 3D Printing as a driver for Design & Simulation software companies. We outline four potential scenarios with outcomes from ‘status quo’ to ‘a major shift’, and the impact each would have. We see industrial adoption as the most likely,

which would be a small positive for software.

ADMIRAL RAISED TO ADD VS REDUCE AT NUMIS
BRE BANK CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
ENQUEST RAISED TO BUY VS HOLD AT LIBERUM
EUROCASH CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
GEMALTO CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
IBERDROLA RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN
PGS CUT TO SECTOR PERFORM VS OUTPERFORM AT RBC
PLAYTECH RAISED TO HOLD VS SELL AT NUMIS
SAGE RAISED TO BUY AT JEFFERIES
SALAMANDER ENERGY CUT TO SECTOR PERFORM VS OUTPERFORM A…
UNICREDIT CUT TO HOLD VS BUY AT DEUTSCHE BANK
VEOLIA CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
ZURICH INS. RAISED TO ’OUTPERFORM’ AT KEEFE BRUYETTE

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +255.85 (+1.82%) at 14,344
Topix up +15.39 (+1.31%) at 1,194
Hang Seng up +108.77 (+0.48%) at 22,807

US markets
S&P 500 up +7.70 (+0.44%) at 1,760
DJIA up +61.07 (+0.39%) at 15,570
Nasdaq up +14.40 (+0.37%) at 3,943

European markets
Eurofirst 300 down -1.13 (-0.09%) at 1,285
FTSE100 up +8.16 (+0.12%) at 6,721
CAC 40 down -3.38 (-0.08%) at 4,272
Dax up +5.11 (+0.06%) at 8,986

Currencies
€/$ 1.38 (1.38)
$/¥ 97.61 (97.41)
£/$ 1.62 (1.62)

Commodities ($)
Brent Crude (ICE) up +0.26 at 107.19
Light Crude (Nymex) down -0.17 at 97.68
100 Oz Gold (Comex) unchanged 0.00 at 1,352
Copper (Comex) unchanged 0.00 at 3.27

10-year government bond yields (%)
US 2.52%
UK 2.64%
Germany 1.75%

CDS (closing levels)
Markit iTraxx SovX Western Europe +1.01bps at 71.65bp
Markit iTraxx Europe +0.4bps at 86.9bp
Markit iTraxx Xover +0.95bps at 349.73bp

Sources: FT, Bloomberg, Markit

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