LCM Dawn Patrol – 3.12.13 – LCM Strategy, Lots of up and downgrades. Tuesgear.

Bonjour,

US equities finished lower in fairly quiet trading on Monday. There were no clear catalysts for broad market action. There were several important data points leading into today’s session including lackluster retail sales updates in the US for the important Thanksgiving long weekend, better than expected US economic data and mostly positive manufacturing PMIs from Europe and China. Expectations for the Fed’s taper have not changed materially, but continued positive economic data could give more impetus to a shift in timing from March to January or even December. Holiday-like volume and light intraday news flow conditions remained in place from last week. Sectors were mostly lower with telecom (0.85%) the largest decliner; healthcare +0.10% and energy +0.05% the only sectors higher. Treasury yields rose with the 10-year now yielding 2.80%. Crude was higher. Gold was lower.
Asian markets were mixed in this morning’s trade. In Australia the key focus was the release of the RBA’s cash rate decision, which was left unchanged as widely expected. Commentary included a statement that the AUD was uncomfortably high. Speculation continues to mount that the RBA will cut 25bp early next year. The $-¥ remained strongly above the 100 mark boosting. Chinese stocks recovered some of yesterday’s losses.

Europe to open lower this morning mirroring the US and Asia.

TUESGEAR

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NEWS

• EU Nations Approve 2-Year Pact With China on Solar-Panel Imports
• Ukraine Protest Violence Corners Yanukovych as Choices Dwindle
• German SPD Seen Ceding Finance While Pushing Merkel Coalition
• Cyber Monday Sales Increase 19 Percent Aided by Mobile, IBM Says

Airbus to Assure Buyers on Value of $200m Phased-Out Jets
Saint Gobain (SGO FP): The glass maker and six banks created a 600 million euro financing by securitizing its trade receivables
Danone (BN FP): The food company will maintain its 20 percent stake in Yakult, Nikkei reported, citing CEO Franck Riboud
EADS Managers Face Insider Trading Trial With Daimler, Lagardere
EDF said it will restart its Fessenheim-1 reactor tomorrow
Mediobanca Names Barclays’ Marsaglia Investment Banking Co-Head
Neopost SA (NEO FP): The supplier of postal equipment said third quarter sales rose 4.2 percent at constant exchange rates to 261.3 million euros
Novo’s Ryzodeg Offers Significantly Lower Rates of Hypoglycaemia
Rio Tinto to Halve Capital Spending by 2015 in Focus on Cash
Seadrill Partners to Buy 2 Semi-Submersible Rigs; Selling Units
Soitec said it has started construction of a photovoltaic plant in Portugal
Tesla Says German Agency’s Review Clears Model S Car After Fires

CURRENT STUFF

China services PMI gauge falls: A government services sector purchasing managers’ index for November has given a reading of 56, compared to 56.3 in October. (FastFT)

Australia holds interest rate steady at a record low 2.5 per cent. More interestingly, the RBA also said: “The Australian dollar, while below its level earlier in the year, is still uncomfortably high. A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy.” (FastFT)

The Federal Reserve on Monday approved revised capital plans from JPMorgan Chase and Goldman Sachs, allowing the banks to press ahead with share buybacks and dividends. (Financial Times)

PC Sales: PC sales will suffer the “most severe yearly contraction on record” in 2013, falling more than 10 per cent as consumers switch to tablets and smartphones, according to the closely watched International Data Corporation PC tracker.

Daimler, Lagardère and seven current and former Airbus and EADS executives are to stand trial in France for alleged insider trading in shares of the Franco-German aerospace company. The indictment against the German car manufacturer and the French media conglomerate was confirmed by French judicial officials on Monday. (Financial Times)

STRATEGY

LCM (Abet) ECB’s Investment Strategy Outlook
Eurozone banks’ valuation is too low according to the ECB which expresses a numerical objective for price-to-book.
– According to the ECB, the low price-to-book of European banks reflects the lack of confidence of investors towards the EUR banking system. The upcoming Asset Quality Review aims to fix this problem as the recovery of the EZ banking sector is at the heart of the ECB’s strategy to fight fragmentation on the sovereign bond market. We do not want to fight this willingness so we buy deeply this story.
– However, because the banking sector embed a significant beta, we explain the importance to hedge the position “in beta” and not “in notional” to focus only on the expected positive alpha of this trade.
– We discuss also the myth of the low valuation argument for Chinese stocks (HSI index) and demonstrate that only the three big Chinese banks have low valuation ratios while the valuation of the other 47 companies is perfectly in line with that of European equity indices.

Trade recommendation summary
Long EZ banks Short SXXP with a beta-hedged approach (recommended beta is 1.25)
This is the “ECB trade” but because we do not want to bear its embedded market risk, we advise to hedge the long position “in beta”
Long Italy 10y Bond Short UK 10y Bond (Long IKH4 Short G H4)
The EZ-UK economic and monetary divergence is consistent with the EZ-UK bond pricing divergence. We want to play further this trend.
– We published our Volatility Strategy Report last week and made several recommendations. Among our preferred ones you can find: Buy Call Spread 1.06/1.14 6M on USDCAD, Buy Call Spread 33.5/35 3M on RUB

UPS&DOWNS

MedTech & Services (MS, Jungling) 2014 Outlook: A Healthy Time For Stock Picking
Fresenius SE: EW to OW, PT €104 to €119
Nobel Biocare: UW to EW, PT SFr8.60 to SFr13.20
Smith & Nephew: EW to OW, PT 757p to 904p
Straumann Holding: UW to EW, PT SFr123 to SFr168
Elekta AB: EW to UW, PT SKr93 to SKr88.30
Sonova Holding: OW to EW, PT SFr115 to SFr125

In our 2014 Strategy & Outlook report, we provide updated stock ratings and an overview of the important investment themes for the year ahead. We expect EU MedTech to outperform the EU Market, with the relative valuation trading at an -11% discount to the long-term averages in 2013, despite industry fundamentals remaining stable. A broad range of investment ideas from growth to value should attract investor interest. We see EU Services to be In-line vs. EU Market, with relative valuations inline with the past.

Saipem (JPM, Dobbing) Major earnings downgrades on delayed margin recovery, we cut to UW

Atlantia (JPM, Rall) Gemina: Italy integrated – enhancing returns, upgrade to OW
We feel the marriage between the two companies with diverging cash flow issues strengthens the Atlantia story through improving returns and a greater liquidity (>€13bn market cap), creating a new global infrastructure player. The group looks set to benefit from an improving Italian outlook through recovering traffic growth and continued Italian bond yield compression. We forecast strong cash flow delivery leading to full deleveraging by 2024 and see 17% upside potential to our new PT of €19, supported by an attractive 5% dividend yield. Our bull case suggests a further 25%potential upside to our PT. We upgrade to Overweight from Neutral.

Vodafone (JPM, Dattani) Assessing the key catalysts for a further re-rating
Vodafone shares are +53% YTD with this reflecting an agreement to sell its VZW stake for $130bn (9.4x LTM EBITDA) and a broader sector rally fueled by hopes of improving regulation and industry consolidation. In this report we explore three additional areas of upside potential with these comprising: (i) More favourable European spectrum auction rules, (ii) A potential bid from AT&T, (iii) Establishing network differentiation through Project Spring.

Autos (JPM, Asumendi) The good year ahead
2014 route map

Looking into FY14 we remain bullish on our European Autos universe. We look for recovery of the European car market, which combined with the expected strength of the North American and Chinese car market as well as relatively muted Brazilian car market growth, looks set to support higher earnings across OEMs and suppliers. Within our coverage, our OEM overweight ratings offer exposure to strong product momentum and excellent European car market exposure which should translate into strong earnings momentum next year. Our top picks are Daimler, VW, Renault, and Pirelli.

AHOLD RATED NEW OUTPERFORM AT BERNSTEIN; PT EU17.5
ALPHA BANK CUT TO REDUCE VS NEUTRAL AT NOMURA
AMLIN CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
AVANGARD CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
AXA RAISED TO OVERWEIGHT VS UNDERWEIGHT AT BARCLAYS
BNP CUT TO NEUTRAL VS BUY AT NOMURA
CARREFOUR RATED NEW UNDERPERFORM AT BERNSTEIN; PT EU23
CASINO RATED NEW OUTPERFORM AT BERNSTEIN; PT EU100
CNP ASSURANCES CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARC…
CONTINENTAL CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
CREDIT AGRICOLE RAISED TO BUY VS NEUTRAL AT NOMURA
DAILY MAIL RAISED TO OVERWEIGHT VS EQUALWEIGHT:MORGAN ST…
DNB CUT TO NEUTRAL VS BUY AT NOMURA
GENERALI REINSTATED AT OVERWEIGHT AT BARCLAYS; PT EU19.6
GETINGE RATED NEW BUY AT SOCGEN, PT SEK267
GJENSIDIGE RAISED TO OVERWEIGHT VS UNDERWEIGHT AT BARCLAYS
HOCHSCHILD MINING CUT TO NEUTRAL VS BUY AT UBS
HSBC CUT TO NEUTRAL VS BUY AT NOMURA
INTESA RAISED TO BUY VS NEUTRAL AT NOMURA
JULIUS BAER CUT TO NEUTRAL VS BUY AT NOMURA
MAPFRE RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
METRO RATED NEW OUTPERFORM AT BERNSTEIN; PT EU42
MOL RAISED TO NEUTRAL VS SELL AT UBS
MORRISONS RATED NEW MARKET PERFORM AT BERNSTEIN; PT 270P
NOBEL BIOCARE RAISED TO EQUALWEIGHT AT MORGAN STANLEY
PIRAEUS BANK RAISED TO NEUTRAL VS REDUCE AT NOMURA
PLAYTECH RATED NEW BUY AT UBS, PT 820P
SAINSBURY’S RATED NEW MARKET PERFORM AT BERNSTEIN; PT 430P
SMITH & NEPHEW RAISED TO OVERWEIGHT AT MORGAN STANLEY
SONOVA CUT TO EQUALWEIGHT VS OVERWEIGHT AT MORGAN STANLEY
SPEEDY HIRE CUT TO SELL VS BUY AT CANTOR
STRAUMANN RAISED TO EQUALWEIGHT VS UNDERWEIGHT: MORGAN…
TESCO RATED NEW UNDERPERFORM AT BERNSTEIN; PT 300P
TOD’S SPA RATED NEW OUTPERFORM AT CREDIT SUISSE, PT EU140
UNIPOL RAISED TO EQUALWEIGHT VS UNDERWEIGHT AT BARCLAYS
WILLIAM HILL RAISED TO BUY VS NEUTRAL AT UBS

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +105.08 (+0.67%) at 15,760
Topix up +5.37 (+0.43%) at 1,264
Hang Seng down -140.22 (-0.58%) at 23,898

US markets
S&P 500 down -4.91 (-0.27%) at 1,801
DJIA down -77.64 (-0.48%) at 16,009
Nasdaq down -14.63 (-0.36%) at 4,045

European markets
Eurofirst 300 down -4.38 (-0.34%) at 1,301
FTSE100 down -55.24 (-0.83%) at 6,595
CAC 40 down -9.40 (-0.22%) at 4,286
Dax down -3.34 (-0.04%) at 9,402

Currencies
€/$ 1.35 (1.35)
$/¥ 103.31 (102.91)
£/$ 1.64 (1.64)
€/£ 0.8271 (0.8277)

Commodities ($)
Brent Crude (ICE) down -0.01 at 111.44
Light Crude (Nymex) up +0.18 at 94.00
100 Oz Gold (Comex) down -2.30 at 1,220
Copper (Comex) at 3.22

10-year government bond yields (%)
US 2.80%
UK 2.84%
Germany 1.74%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.33bps at 63.31bp
Markit iTraxx Europe -1.06bps at 77.99bp
Markit iTraxx Xover -4.41bps at 314.48bp

Sources: FT, Bloomberg, Markit

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