LCM Dawn Patrol – 13.11.13 – LCM Strategy, MS on Atos, GS on Wirecard, JPM on BNP and MS adds SSAB to top buys.

Bonjour,

US equities finished mostly lower on Tuesday in fairly quiet trading amid a light economic calendar and the backend of earnings season. Comments from a few Fed officials were in focus today amid the continued speculation over monetary policy. Airlines rallied after the US government approved the merger of LCC+1.1% and AAMRQ +26.1%. Financials and utilities were the worst performing sectors, while crude oil and gold both fell sharply.
Asia’s main bourses were lower, responding to a lack of detail on economic reforms from China’s leadership after the Communist party wrapped up its third plenum.
European markets to open lower today following Asia and on tapering concerns…

Today, we get the BoE inflation report and labour data, In Europe, we’ll focus on industrial production. In the US, w have the MBA mortgage applications and the budget statement. Switzerland, Germany, Sweden, Italy sell bonds. Carlsberg, E.ON, Intesa, Sainsbury report earnings.

NEWS

Bacon’s $142 Million Triptych Sets Auction Record in New York. (That’s Francis, not Louis).
Equity Traders’ Bonuses Seen Rising as Rates Salesmen Face Drop
Europe Seen Nearing Accord on Insurance Rules After 13 Years
Troika to Return to Athens Nov. 15 to Continue Talks: Official

• KKR, Permira Selling ProSiebenSat.1 Stake Worth $1.5b
Constantia Flexibles Sets IPO Price Range EU19.50-EU25.50
Shell to Quicken Disposals to Offset Spending, Voser Says
T-Mobile to Sell $1.8b Stock to Fund Airwave Purchase
Telefonica Said to Seek Partner in Mexico to Challenge Slim
Glaxo Gets Orphan Status for Promacta to Treat Aplastic Anemia
Mediaset’s Quarterly Loss Narrows as Ad Market Stabilizes

Wienerberger 3Q Net Income EU17.4m vs EU14.6m; Confirms Forecast
Agfa-Gevaert 3Q Net Loss Group Share EU8m vs Restated EU1m Loss
Teleperformance 3Q Organic Growth Beats Est, UBS Says; Lifts PT
Maersk 3Q Net Beats Est.; Raises 2013 Net Outlook
Solocal Lowers 2013 Forecasts; Sees Return to Growth in 2015
Carlsberg 3Q Ebit Ex-Items In Line, Keeps 2013 Profit Forecast
Hochtief 9-Month Profit Rises; Confirms 2013 Forecast
Celesio 3Q Ebit Misses Est.; Keeps 2013 Ebit Forecast

Best performing tech stocks: MWW, IVAC, XRX, PAY, MANH, KLIC, ATML, XXIA, AVID, JNPR, AMD, SMTC, EPAY, BRCM, TQNT, NCR, DDD, PAY
Weakest performing tech stocks: RAX, VECO, VSAT, GTAT, TSRA, VCLK, FSLR, NEWP, DIOD, CDNS, SUPX, SWI, CY, EQIX, TIBX, AMAT, AEIS.

CURRENT STUFF

Post-plenum China’s pledge of big reforms cements era of market forces: China’s ruling Communist party pledged a “decisive” role for the market as it outlined sweeping reforms at the close of a conclave intended to map the country’s direction for the next decade. In a rare policy pronouncement from China’s secretive ruling elite, a communiqué at the conclusion of the four-day meeting reinforced the reformist rhetoric of President Xi Jinping signalling an eventual end to state-mandated prices in the world’s second-largest economy. (Financial Times)

Goldman Sachs is betting that the hedge fund industry can attract more investors despite its recent performance record – by raising money for a second incarnation of one of its highest-profile investment vehicles, Petershill. Like its predecessor, Petershill II will buy minority stakes in established hedge fund management companies, in order to take a slice of the profits they make from charging fees to their clients. According to investment docs the original fund has, despite some misstepts, returned an average of 10.8 per cent annually. (Financial Times)

Other Stuff:
Why Draghi was right to cut rates (Financial Times Wolf)
Steven Cohen: The Gilded Age revisited (Reuters)

STRATEGY

LCM (Abet) The Ultimate Opportunity – Part 2
The price of economic uncertainty in the US cannot remain low indefinitely, we want to buy it.
– Draghi’s decision last week could mark the start of a new era for the implementation of monetary policy in the Eurozone. After the ECB granted its total support to the common currency in the summer of 2012 and after implementing ‘forward guidance’ earlier this year, the decision of lowering rates in the context of economic recovery appears to be another exceptional step towards a structurally more accommodative monetary policy.
– We are happy with this decision which supports our view that the “EZ domestic trade” is not over. We do not want to “sell the news” but discussed the risk of de-correlation between the domestic theme on European equity markets and the pricing of sovereign bonds in the periphery.
– We examine the microeconomic picture in the US and wonder if there is a disconnection between the profit cycle and the economic cycle. The US-centric view defends the idea of an economy running well below its potential which justifies the ultra-accommodative monetary policy, and ultimately the high valuation equity multiple given the potential for profit recovery.
– We disagree with this view and recommend remaining disciplined regarding the risk management of a portfolio. We think the end of the year is the ultimate opportunity to buy the uncertainty attached to this new economic regime at a very low price. We want to take the opportunity of the current complacency of investors to buy protection for next year.
Trade recommendation summary
– European Sector Allocation: UW autos and OW technology
We published last week our monthly report and European equities and decided to adjust slightly our sector allocation.
– Buy Put Spread June 14 on US equities financed by Selling a Call Spread June 14 on emerging equities
We propose a 0 cost strategy with limited risk to buy a put option on US equities with a long maturity.

UPS&DOWNS

Atos SA (MS, Wood) SOTP now the base case – move to OW
EW to OW, PT €56 to €71
We expect Atos to give 2016 guidance and a clearer plan for Worldline at its analyst meeting. Given CEO Breton’s strong track record, we expect the market to discount these targets. With action to monetize Worldline closer, our SOTP bull case PT of €71 becomes our base case, and we upgrade to OW.

Wirecard (GS, Borra) Buy: mcommerce, Asia to drive revenue acceleration: Reiterate CL-Buy
We believe the share price outperformance will continue, driven by topline acceleration from mcommerce, Asia and expansion in operating margins. The company also has M&A appeal. Our new 12m price target is €42 (+50% upside). Reiterate CL-Buy.

BNP Paribas (JPM, Lee) CIB cost reduction required to improve ROE – prefer SG
Whilst BNP Paribas benefits from balance sheet and capital strength, we highlight in this note some questions we have over its CIB expansion strategy. Market expectations are too high on BNP CIB revenue growth in our view, and with 8% CIB ROE in 2015e, we are concerned about investment costs in the US and Asia; we believe cost reduction is required to generate more adequate returns. Also, we do not expect any large share buyback to unlock value, with ongoing uncertainties on regulation, strategic focus on growth and potentially small- to medium-sized M&A. With BNP trading at 9.7x PE, 0.9x NAV for RoNAV of 10% in 2015e, we see the shares as fully valued and would prefer SG at 8.1x PE, 0.8x NAV for RoNAV 9.5%.

MS’ Best Ideas EUROPE – Adding SSAB
We are adding SSAB following Alex Haissl’s upgrade to a relative Overweight last week. Alex believes the market underestimates the earnings power of the US business and the recovery/restructuring potential of the EMEA operations, and the relative discount to peers can close in the near future.

ARCELORMITTAL CUT TO UNDERPERFORM VS NEUTRAL AT EXANE
ARKEMA RAISED TO BUY VS NEUTRAL AT CITI
ATOS RAISED TO OVERWEIGHT VS EQUALWEIGHT AT MORGAN STANLEY
CARGOTEC CUT TO HOLD VS BUY AT DEUTSCHE BANK
ETALON RATED NEW OVERWEIGHT AT JPMORGAN; PT $7
GODREJ CONSUMER RAISED TO BUY VS NEUTRAL AT BOFAML
LSR RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
NORSK HYDRO RAISED TO NEUTRAL VS SELL AT CITI
PROSEGUR CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
PZ CUSSONS RAISED TO BUY VS NEUTRAL AT GOLDMAN
SECURITAS CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
SISTEMA REINSTAED BUY AT GOLDMAN, PT $42.7
SOLVTRANS RAISED TO BUY VS HOLD AT NORDEA
TESCO CUT TO NEUTRAL VS OVERWEIGHT AT HSBC
WOLSELEY RAISED TO OVERWEIGHT VS EQUALWEIGHT AT MORGAN S…
WOOD GROUP RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT SUI…

OVERNIGHT MARKETS

Asian markets
Nikkei 225 down -24.34 (-0.17%) at 14,564
Topix down -2.42 (-0.20%) at 1,203
Hang Seng down -298.19 (-1.30%) at 22,603

US markets
S&P 500 down -4.20 (-0.24%) at 1,768
DJIA down -32.43 (-0.21%) at 15,751
Nasdaq up +0.13 (0.00%) at 3,920

European markets
Eurofirst 300 down -7.60 (-0.59%) at 1,291
FTSE100 down -1.58 (-0.02%) at 6,727
CAC 40 down -26.36 (-0.61%) at 4,264
Dax down -31.38 (-0.34%) at 9,076

Currencies
€/$ 1.35 (1.34)
$/¥ 99.47 (99.62)
£/$ 1.59 (1.59)
€/£ 0.8461 (0.8446)

Commodities ($)
Brent Crude (ICE) up +0.24 at 106.05
Light Crude (Nymex) up +0.08 at 93.12
100 Oz Gold (Comex) unchanged 0.00 at 1,271
Copper (Comex) at 3.24

10-year government bond yields (%)
US 2.76%
UK 2.81%
Germany 1.79%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.08bps at 64.47bp
Markit iTraxx Europe +2.49bps at 84.05bp
Markit iTraxx Xover +8.07bps at 349.07bp

Sources: FT, Bloomberg, Markit

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