LCM Dawn Patrol – 5.11.13 – LCM Cross Assets Strategy (must read before ECB), MS on Italian Banks, GS on Media, Earnings, TUESGEAR and More….

Bonjour,

US equities finished higher following a quiet trading session on Monday. News flow and volume were on the light side. Services PMI from China and manufacturing PMIs from Europe provided positive economic news. Factory orders in the US showed improvement month over month. As earnings season begins to wind down macro themes are likely to reassert their influence. Currently the main macro topic is potential central bank action; expectations are rising for a rate cut from the ECB and conjecture continues regarding the timing/sizing of any tapering by the Fed. All sectors were higher; led by energy +1.31%. Treasuries broke a 3-day move lower with modest gains. Crude was slightly lower. Gold was slightly higher.
Asian bourses came under pressure ahead of China’s leadership meeting, the most anticipated political event of the year for the world’s second-largest economy.

European markets to open higher as investors expect Central Banks to remain accommodative for some time (and then what?).

Week ahead highlights include:

Earnings reports continue, but the overall impact declines as the number of reports begins to fall and the size/importance of the reporting companies drops.
Tuesday, 5-Nov: October US ISM Non-Manufacturing
Thursday, 7-Nov: US Q3 GDP (advance), ECB meeting
Friday, 8-Nov: October Nonfarm Payrolls

TUESGEAR

I’m a camera fan (I like Canon cameras better as their first digital ones were better than Nikon) and this new Nikon DSLR with a vintage look is one to consider…
http://gizmodo.com/nikon-df-a-dslr-monster-with-a-slimmed-down-old-schoo-1458357544

NEWS

U.K. Outlook Raised by Niesr as Property Boom Feeds Spending
Greece Resumes Talks With Troika to Bridge Fiscal-Gap Difference

Twitter sharply increased the price range of its initial public offering by 25 per cent
Vivendi
Sells 53% of Maroc Telecom to Etisalat for EU4.2B Cash
Deutsche Bank Co-CEO Fitschen Probed Amid Kirch Proceedings
Novartis Said to Explore Animal-Health Sale Amid Asset Review
Bumi CEO Seeks to Complete $501m Bakrie Deal by Year End
Four Fired Deutsche Bank Rate Traders Said to Return to Work
Seamless to Sell 8m Shrs in Accelerated Bookbuilding

Beiersdorf Raises Sales, Margin Forecast on Tesa Business Gains
Sixt 3Q Pretax Increases; Raises 2013 Pretax Forecast
Hannover Re 3Q Net EU205.5m vs EU265.5m; Confirms Profit Goal
BMW 3Q Profit Beats, Rev. Misses; Full-Year Forecast Confirmed
Sky Deutschland 3Q Ebitda Climbs 19% to EU29.2m, Beats Estimates
DSM 3Q Revenue Misses Estimates, Repeats 2013 Outlook
Fresenius SE 3Q Adj. Ebit Misses Est.; Confirms 2013 Forecast

CURRENT STUFF

“China needs to sustain economic growth of 7.2 percent to ensure a stable job market, Premier Li Keqiang said in remarks published on Monday, one of the few times a top official has stated the minimum level of growth needed for employment.” (Reuters)

Johnson & Johnson is to pay more than $2.2bn in fines to US federal and state authorities for kickbacks and promotion of its medicines for diseases beyond their approved uses over more than a decade. (Financial Times)

Pimco loses biggest fund crown to Vanguard: While Vanguard now has $250bn under management, Mr Gross’s flagship fund fell to $248bn in assets at the end of October, after another month of withdrawals. Investors asked for $4.4bn back last month, taking the outflows for 2013 so far to $33.2bn. (Financial Times)

STRATEGY

LCM (Abet) The Ultimate Opportunity
The ECB has a great opportunity to give investors a positive shock by reflating further; domestic assets will be the beneficiaries.
– The ECB meeting will be closely scrutinised as investors’ focus intensifies given the release of very weak data on the inflation front last week. We show that excluding administered prices, inflation in the periphery of Europe is no longer consistent with the ECB’s definition of price stability. Mario Draghi’s credibility is at stake as any reluctance to act further may be taken as a sign of complacency, or put in simple words, a mistake.
– We show that reforms engaged in the periphery of Europe following the euro crisis have improved the flexibility of these economies. With the decline of nominal wages plus the global deflationary forces of the recession, competitiveness is restored for these countries.
– The bad news however is twofold: 1) competitiveness does not represent a growth model but is only a pre-requisite for any sustainable recovery and 2) core Europe has not realised any reform and therefore remains stuck in economic stagnation.
– The cyclical recovery continues to hide the absence of structural economic improvement but helps to sustain the euphoria on financial markets. With our hope of an ECB step towards further financial accommodation, we reiterate our positive call on domestic assets (buy sovereign bonds of the periphery, sell EUR, buy domestic equities).
– Domestic equities have suffered from a rally in quality stocks, thus breaking the correlation with sovereign bonds. We take this opportunity to move back into domestic equities as we think it is too early to see a sustained rally of quality growth stocks in Europe. The benefit of doubt on the European revival is still there.
Trade recommendation summary
Last chance to play the European story and this week ECB’s action
Non-AAA sovereign bonds present the best risk/reward ratio for the rest of the year. Buy X1G FP.
Stay OW Financials, Utilities, Telecoms and, Underweight Food&Bev, Travel&Leis, PersonalHHG and Autos
This domestic/global trade on equities has done +7% since our recommendation in late August. Following the recent retracement, we would reinforce the position.
We published last week our Derivatives Report “The Finger and The Moon” with several recommendations.
Our key ideas are: Short RUB, Underperformance of NKY, Outperformance of FTSEMIB, Short SPX via Options.

 

UPS&DOWNS

Siemens (MS, Uglow) What To Expect on November 7
We view the upcoming FY14 results as a ‘stepping stone’ into 2014 rather than a positive catalyst per se. Investors expecting a major strategic announcement, or indeed a large buyback, will be disappointed. We look for progress on the cost side and early signs of a bottoming in key divisions.

Italian Banks (MS, Tondi) Moving from Macro to Micro
Macro trends have fueled Italian and indeed peripheral EU bank shares YTD. Current multiples require a more discerning/micro approach. We still find UCG and ISP attractive, but the mid-cap bank valuations require more substantial restructuring / M&A or better macro to justify another leg up.

Europe: Media (GS, Padiachi) Further re-rating potential where disruption risks are overstated
We expect Europe Media to continue to outperform given a more stable structural outlook, improved growth and returns, and more disciplined capital returns. CL Buy: Publicis, UBM, Mediaset, SkyD. Remove from CL: BSY. Down to Sell: Axel Springer.

Weir Group (JPM, Liddy) Despite strong order inflow, 2013E EPS cut by 9% on FX hit, project delays in Minerals; moving to N
We view the strength of the order inflow, particularly in the high margin aftermarket segment of the business, as encouraging. However, project delays in the Minerals division, a more moderated recovery in the Oil & Gas division and a FX headwind look set to leave the group 2013E EPS down y/y for the first time in more than 10 years. While the shares do not look overvalued, in the near term, we expect sentiment rather than valuation to be the key driver of the share price. With limited upside to our conservative PT (cut from 2680p to 2400p) and uncertainty about the near-term outlook for the minerals division, we have moved our recommendation to Neutral from Overweight.

Swiss Banks (JPM, Abouhossein) Dilution analysis from higher leverage ratio: Buy UBS
Following our note, “Potential move towards higher leverage ratio could mean further FICC shrinkage”, we assess the potential earnings dilution impact of meeting 6% leverage ratio on a fully loaded basis by ‘15E. We assume avg. spreads of 4.0% over senior for UBS and 4.5% for CSG for additional CoCo issuance. In our sensitivity, we estimate EPS dilution of 5% in ‘15E for UBS and 7% for CSG from the issuance of CoCo on top of phase-out of existing hybrids. Post the dilution, UBS would be trading at 10.0x P/E and CSG at 8.8x P/E ‘15E (Eurobanks at 10.0x). Post yesterday’s price action, the market seems to already be pricing in the dilution from additional CoCo issuance. We recommend buying UBS at current price, trading at a 10.0x P/E, 1.4x P/NAV for RONAV of 15% in ‘15E post dilution. We see better risk-reward in UBS considering clarity on IB strategy and capital levels.

3I GROUP CUT TO HOLD VS BUY AT LIBERUM
ANSALDO CUT TO HOLD VS BUY AT KEPLER CHEUVREUX
BELGACOM CUT FROM OUTPERFORM AT MACQUARIE
BSKYB CUT FROM CONVICTION BUY AT GOLDMAN, STILL A BUY
ELECTRA PRIVATE EQUITY CUT TO HOLD VS BUY AT LIBERUM
FOXTONS RATED NEW NEUTRAL AT CREDIT SUISSE, PT 322P
FRAPORT CUT TO HOLD VS BUY AT DEUTSCHE BANK
HENRY BOOT RATED NEW BUY AT NUMIS
HGCAPITAL TRUST CUT TO SELL VS HOLD AT LIBERUM
INDRA CUT TO SELL VS NEUTRAL AT UBS
JZ CAPITAL PARTNERS RATED NEW HOLD AT LIBERUM
MOBISTAR RATED NEW OUTPERFORM AT MACQUARIE, PT EU17
MODERN TIMES CUT TO NEUTRAL VS BUY AT GOLDMAN
NYRSTAR CUT TO SELL VS NEUTRAL AT GOLDMAN
PEARSON CUT TO NEUTRAL VS BUY AT GOLDMAN
SIBANYE GOLD RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
SIEMENS CUT TO NEUTRAL VS BUY AT UBS
STROER AG CUT TO NEUTRAL VS BUY AT GOLDMAN
SWEDISH MATCH CUT TO NEUTRAL VS BUY AT GOLDMAN
TONGAAT HULETT CUT TO NEUTRAL VS BUY AT BOFAML

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +5.92 (+0.04%) at 14,207
Topix down -1.32 (-0.11%) at 1,182
Hang Seng down -148.82 (-0.64%) at 23,041

US markets
S&P 500 up +6.29 (+0.36%) at 1,768
DJIA up +23.57 (+0.15%) at 15,639
Nasdaq up +14.55 (+0.37%) at 3,937

European markets
Eurofirst 300 up +4.11 (+0.32%) at 1,294
FTSE100 up +28.88 (+0.43%) at 6,764
CAC 40 up +15.40 (+0.36%) at 4,289
Dax up +29.40 (+0.33%) at 9,037

Currencies
€/$ 1.35 (1.35)
$/¥ 98.43 (98.60)
£/$ 1.60 (1.60)

Commodities ($)
Brent Crude (ICE) up +0.09 at 106.32
Light Crude (Nymex) down -0.03 at 94.59
100 Oz Gold (Comex) unchanged 0.00 at 1,315
Copper (Comex) up +0.01 at 3.26

10-year government bond yields (%)
US 2.60%
UK 2.67%
Germany 1.68%

CDS (closing levels)
Markit iTraxx SovX Western Europe -1.32bps at 68.4bp
Markit iTraxx Europe -1.1bps at 83.44bp
Markit iTraxx Xover -3.6bps at 342.79bp

Sources: FT, Bloomberg, Markit

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