LCM Dawn Patrol – 29.10.13 – LCM cross assets strategy, Apple=, Michelin-, DB-, JPM on insurance,


US equities were little-changed on Monday following a rather quiet trading session. The major indices were mixed with the S&P 500 slightly higher, the Dow flat and the Nasdaq slightly lower. Lacking any significant catalysts market participants seemed content to wait for the outcome of the Fed meeting later this week. Economic data was mixed and appeared to have limited broad impact; pending home sales was much weaker than expected and industrial production was modestly higher than expected. Most activity was company specific in nature driven by earnings- or deal-related news. Earnings season continues to deliver mixed results and will provide another heavy week of reports. Attention remains focused on the Fed meeting this week and the resulting FOMC statement due at 1400ET on 30-Oct. Sectors were mixed with defensives outperforming; staples +1.20% was the best performer and materials (0.55%) the worst. Crude and gold both higher.
Asian equity markets traded lower Tuesday morning. News that the PBoC had injected CNY13B of liquidity in the form of 7-day reverse repos failed to provide support for greater Chinese markets as liquidity concerns remained abound. A number of large Japanese companies are set to release quarterly earnings this week


Duane punts the traditional life to learn to surf in the cold, sharky, locals-only waters of Santa Cruz.


• EU Delays Bank Capital Calculation Rule Following Nordic Protest
• EU’s Rehn Says Clearly Premature to Declare Europe Crisis Over
• Cameron to Unveil U.K.’s Plans for Debut Issue of Islamic Gilts
• Iceland Pushes to Become Arctic Hub After Scrapping EU Accession

EDF and Veolia Closer to Agreement on Split of Dalkia Assets
• Letta Said to Seek Telefonica Pledge on Keeping Italian Jobs
Michelin Tightens Cost Controls as FX Headwinds Sap Sales
Vivendi Buys Lagardere Out of Canal Plus France for $1.4b
Lloyds to Add GBP700m to Amount Set Aside for PPI Claims: Sky
Deutsche Boerse Faces $169m Fine Over Iran Sanctions
Fondiaria Shrs Priced at EU1.735/Each in Placing, Terms Show
Saipem sees recovery in 2014 profitability


Michelin 3Q Rev. Misses Est.; Sees Higher 2013 Op Income -2%
Michelin 3Q rev. EU5.12b, est.EU5.33b. Yr ago EU5.44b.
• Passenger Car and Light Truck sales EU2.70b vs 2.797b y/y
• Markets on a good trend in 3Q, as expected, FX worsened
• Outlook: Group is aiming for 2013 year-on-year increase of ~EU150m in operating income before non-recurring items, excluding FX
• Confirms objective of positive FCF in line with the structural objective of EU500m and a 10% ROCE
• Previous outlook “stable” 2013 operating income, >10% ROCE, positive FCF
• Call: 6:30pm CET 44 203 367 9453//646 722 493

Deutsche Bank 3Q Net Income EU41m; Est. EU430m
Deutsche Bank 3Q net income misses estimates.
• Net rev. EU7.7b, est EU7.66b
• Pretax profit EU18m, est EU657m
• Equity trading EU643m, est EU650m
• Debt trading EU1.29b est, EU1.6b
• Loan Loss Provision EU512m, est EU406m
• PBC pretax EU347m, est. EU429m
• CBS pretax EU345m, est EU449m
• NCOU pretax loss EU1.18b, est EU529m loss|
• AWM pretax EU283m, est. EU137m


Apple down c.1% after hours. 1Q Gross Margin View Misses Est.; 4Q iPhones Beat.

Apple (MS, Huberty) Revenue Growth Trajectory Surprising to the Upside
Our CY2014 revenue and FCF estimates move higher while EPS remains unchanged due to deferral of gross profit dollars on the back of free software updates. The stronger revenue growth inflection, bullish management tone, and improving like-for-like gross margins are all bullish, in our view. Price target: $585.

iPhone: Total units 33.8M up 26% y/y, notes sales were ahead of expectations and grew strongly y/y in all geographies
Particularly pleased with sharp growth in developing markets including Latin America, Middle East, Russia and India; notes sales remain robust in the US
Exited quarter with 14.3M units in the channel, up 3.3M units sequentially, at the low end of targeted range of 4-6 weeks of channel inventory
Gross margins expected to be 36.5-37.5% – says they are pleased with roughly flat guidance given new product launches with higher cost profiles and change in deferrals.

Adnaan Ahmad (Berenberg) is more cautious on the name. He’s the one who wrote that Apple should look into acquiring Tesla. He is now concerned about Apple’s strategy. Gross margin is key, of course, and he’s seen Nokia play the same game of saying that gross margins are not that bad. The other interesting comment he makes is regarding the recent software give away. As you know, Apple’s new OS (Mavericks) and the iWork suite have been given for free by Apple. Could it be that Apple has difficulties fighting on new features for their phones so they keep clients on the computers?


The WSJ reports on Apple’s Q4 earnings, focusing on its promise for a flat profit margin in the coming quarter. The article also notes that Apple’s stabilising average selling price suggest the competitive threat may not be great as some feared. (Wall Street Journal)

Apple upbeat over iPhone sales momentum: Tim Cook, chief executive, said Apple was “stronger than ever” and would consider returning more cash to shareholders by the beginning of 2014, amid calls for an increased buyback programme. (Financial Times)

Iran tries to lure back western oil groups by offering them more lucrative contracts as part of efforts to repair its battered economy and improve the Islamic Republic’s relations with the western world. In a rare interview, Mehdi Hosseini, an adviser to the oil minister, said the current system of “buyback” contracts – which do not allow foreign companies to book reserves or take equity stakes in Iranian projects – would be scrapped. (Financial Times)

“China’s money rates stabilized after the central bank resumed open market operations on Tuesday morning for the first time since Oct 15, easing worries that the authorities were preparing to dramatically tighten monetary policy.” (Reuters)

“India’s central bank raised its policy interest rate for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated for the rest of the fiscal year, and rolled back an emergency measure put in place to support the slumping rupee. The Reserve Bank of India (RBI) lifted its policy repo rate by 25 basis points (bps) to 7.75 percent, in line with the expectations of most analysts in a recent Reuters poll, despite the risks to an economy beset by sluggish growth.” (Reuters)

Apple upbeat over iPhone sales momentum: Tim Cook, chief executive, said Apple was “stronger than ever” and would consider returning more cash to shareholders by the beginning of 2014, amid calls for an increased buyback programme. (Financial Times)

Deutsche Börse said it had received an offer from the US to settle an investigation over the alleged violation of US sanctions against Iran for $152m. The sum is less than half the $340m Deutsche Börse had set aside pending the investigation. (Financial Times)

“China National Petroleum Corp., the country’s largest oil producer, is nearing an agreement to buy Petroleo Brasileiro SA’s assets in Peru for more than $2 billion, said three people with knowledge of the matter. The proposed deal may be announced as soon as next month, said one of the people, who asked not to be identified because the talks are private.” (Bloomberg)


LCM (Abet) Cross Asset Strategy
Macro vs. Micro vs. Nothing
The current market behaviour is driven by something that is not easily identifiable.
The “daily comment” game becomes more and more tricky as the focus of investors is particularly unstable these days. The market’s logic can change in a day, from micro to macro or to nothing.
We are comfortable with our bets on Japan (positive on yen, avoid the Nikkei) which is maybe the one zone in which analysis is less difficult. Recent economic data validate our expectations that market euphoria will not return soon.
The European story is unchanged despite the appreciation of the currency. The “risk-on” mood seems to be the main reason behind this recent move. Investors start to capitulate as the pain from their mark-to-market of their short positions takes effect. The stubbornness of the ECB to refuse using the currency as a monetary tool increases the economic risk for next year. Although we continue to expect a “verbal intervention” we revise down our expectations for the zone and increase further the exposure to US equities in euros.
We close our bullish stance on US bonds as our target for 10y UST bond yield has been reached (2.5%). Monetary policy in the US remains data dependant and because economic growth is moderately strengthening, there remains the question of timing for “tapering”. At 2.5%, the risk of an interest rates shock is neutralised and upside risk is therefore reconstituted. We do not reverse our bets but become neutral on the US bond asset class.
Commodity prices have been weak despite this “risk-on” mood and the easing of financial conditions in USD. If these two supportive factors were to disappear, the pressure on commodity prices could be severe. This should be one of the themes of next year. From an economic point of view, this de-rating process contributes to the re-balancing of the economic growth leadership between EM and DM countries and reinforces our view on these assets (self-fulfilling process).
Trade recommendation summary
Hedge 100% of your equity portfolio or use call options to get an exposure to equities
We discuss on page 8 the low level of implied volatility and explain why there is an opportunity here from an investment perspective as there is no correlation between implied volatility and expected return.
Long MSCI World Short Commodities
The bear market of commodity prices has a still long way to go. We take the opportunity here to re-enter in this trade.
Buy Call Spread 18/19 Feb 2014 on EUO US
The return is not too far from 1 to 5 which appears very attractive.


BASF (MS, Walsh) Raising PT to €83 post Q3
What’s driving our increase in PT to €83/share? In order of magnitude, we flag (1) our updated SOTP value on BASF rises from €64 to €81, driven by peer multiple re-ratings over recent months esp. in Chem’s and Ag. Solutions (2) better-than-expected EBITDA and working capital management in Q3 drive net debt (including pensions) €505m lower than previously forecast; and (3) we edge up our post-15e MW EPS forecasts by ~2% due to higher organic growth assumptions.

Gemalto N.V.(MS, Humpfrey) Mixed Growth Outlook, Premium Valuation
We lift our PT to reflect an average multiple for the payments sector, though remain cautious on how Gemalto could benefit from mobile payment / NFC. The stock trades on 27x 2013e adjusted earnings, for 16% earnings CAGR over 2013-15. We view this as unsustainable and remain UW.

Europe: Banks (GS, Omahen) Introducing 2016-17 estimates: Between provisioning and operating leverage
We extend our forecast horizon to 2017 which incorporates the following drivers: Business volumes, pre-provision profits, provisioning leverage, returns and capital. We continue to prefer BNP, BBVA, UniCredit, ING and HSBC.

European Insurance (JPM, Huttner, CFA) German nonlife pricing to rise further following high nat cat losses: Allianz benefits most but also Munich and Hannover
Year to date natural catastrophes in Germany have cost a high €5bn for the June floods and the hail storm, or 8.5% of German nonlife premiums, and specialist reinsurer for Germany E&S Re says this will lead to further rate rises in German nonlife. We believe this will benefit mainly Allianz where German nonlife is €9.2bn premiums or 20% of group nonlife, Munich where German nonlife primary is €3.2bn premiums or 60% of primary nonlife, and Hannover through its specialist reinsurance unit E&S Re which has €0.4bn gross nonlife premiums or 6% of the Hannover nonlife re total. We raise our 2015e forecasts by 3% for Allianz, 1% for Munich and introduce new 2015e Hannover estimate 4% higher than 2014e. We reiterate OW on Allianz with a Dec14e SotP based target price of €144 (from €140), OW Munich with €163 TP (from €160) and upgrade Hannover to N from UW with a Dec14 TP of €61m, up from €52 Dec13.



Asian markets
Nikkei 225 down -97.09 (-0.67%) at 14,299
Topix down -2.93 (-0.24%) at 1,195
Hang Seng down -2.57 (-0.01%) at 22,804

US markets
S&P 500 up +2.34 (+0.13%) at 1,762
DJIA down -1.35 (-0.01%) at 15,569
Nasdaq down -3.23 (-0.08%) at 3,940

European markets
Eurofirst 300 down -1.83 (-0.14%) at 1,283
FTSE100 up +4.48 (+0.07%) at 6,726
CAC 40 down -20.70 (-0.48%) at 4,252
Dax down -7.09 (-0.08%) at 8,979

€/$ 1.38 (1.38)
$/¥ 97.54 (97.65)
£/$ 1.61 (1.61)

Commodities ($)
Brent Crude (ICE) down -0.39 at 109.22
Light Crude (Nymex) down -0.25 at 98.43
100 Oz Gold (Comex) up +7.70 at 1,360
Copper (Comex) unchanged 0.00 at 3.26

10-year government bond yields (%)
US 2.53%
UK 2.65%
Germany 1.75%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.02bps at 71.63bp
Markit iTraxx Europe -1.77bps at 85.13bp
Markit iTraxx Xover -2.73bps at 347bp

Sources: FT, Bloomberg, Markit


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