LCM Dawn Patrol – 09.12.13 – WSJ: Rally unlikely to repeat. The JPMorgan View and 2014 Outlook and Strategy. JPM initiates on Essilor, MS on SAP, GS on ASOS.

Bonjour,

Asian markets were largely positive this morning. Despite a slightly weaker than expected GDP revision and surprise deficit Japanese sentiment was positive as the $-¥ moved back over 103 in response to US jobs data and the market rebounded off last week’s strong losses. Chinese markets jumped slightly in reaction to CPI and PPI data but retracted not long after. Also in China, strong export data raised some questions about the data’s validity with some analysts supicious that overinvoicing was occuring. Australian markets bucked the trend, with details of QBE’s profit warning being released impacting sentiment.

European Markets are set to open up following better than expected Chinese exports data.

Attention will turn to next week’s Fed FOMC meeting while this week’s data flow will be more limited. The main event will be the November retail sales report where a moderate gain in sales is expected in terms sales outside of autos, providing the final clues to the Fed’s decision next week. Otherwise, the Senate returns to session Mon 12/9, Congress has set itself an informal deadline of 12/13 by which time they hope to reach a “mini” budget deal, the final Volcker Rule language could be voted on by the major regulatory agencies by 12/10, Eurozone fin min meeting & results of the German coalition referendum expected to be made public around 12/14. Finally, the RNBZ is will hold a policy rate meeting this week although no change is expected from the central bank as recent mortgage restrictions will have reduced the need to tighten policy

FITNESS

30 Minute Ski Conditioning Workout. Going skiing soon? You have to do do this!!!

NEWS

• Poland May Leave Rates at Record Low Through 2014, Chojna Says
• Sweden Ready to Force Debt Curbs If Credit Growth Doesn’t Slow
• Swiss Authorities Press Banks to Meet U.S. Disclosure Deadline
• BIS Sounds Alarm Over Record Sales of Payment-in-Kind Junk Bonds

• Merkel Coalition Agreements Spark Dissent From Party Members
• Ukrainian Opposition Floods Kiev to Keep Pressure on Yanukovych

HSBC May Sell 30% Stake in U.K. Retail Bank in IPO, FT Reports
Credit Suisse Said Talking to Finma on Capital for Legal Risks
Glencore Said to Revive Interest in Rio’s Canada Iron Ore Assets
Telecom Italia Is Said to Risk Fine by Regulator Over Bond Sale
Monte Paschi Foundation to Vote Against Bank’s Shr Sale If in 1Q
BP Venture Said to Seek Doubling of Output at Argentina Field
BP Investors Can’t Sue as Group Over Losses, Judge Says

CURRENT STUFF

Heady Rally Unlikely to Repeat Next Year. U.S. stocks’ amazing run in 2013 raises the stakes for next year. Will markets keep rising, powered by steady economic growth and low interest rates, or will they take a breather after the Federal Reserve begins paring back economic stimulus? (WSJ)

Chinese imports from Australia were up another 25%/yr and reached a fresh record high in USD terms. So while Chinese GDP may be slowing from double-digit growth towards 7%/yr or so, demand for Australian bulk commodities has tripled over the last three years.

India’s Sensex hit a fresh record high within the first hour of Mumbai trading — up 1.78 per cent at 21370, topping the record-high it hit a month ago at 21,293. Its 2013 gain is now in double-digits, just barely, at 10.02 per cent. The gains follow Sunday’s state elections in which the ruling Congress party was routed by the opposition BJP. (FastFT)

Japanese Q3 growth revised down: An updated calculation showed economic output increased at an annualised rate of 1.1 per cent, compared with an initial estimate of 1.9 per cent announced in November. (Financial Times)

Chinese inflation slowed in November due mainly to a drop in food prices giving the government more room to push ahead with its slate of financial reforms. The consumer price index rose 3 per cent year-on-year, down from its 3.2 per cent pace in October and comfortably below the official 3.5 per cent target for 2013. (Financial Times)

Barron’s Summary:
– Barron’s names its 10 favorite stocks for 2014, which include General Motors, Citigroup , Nestle , Intel , Deere (DE), MetLife, US Airways Group (LCC), Barrick Gold , Simon Property Group and Canadian Natural Resources. Last year’s picks outpaced the market by 9%, gaining an average of 35.2%
– Barron’s is positive on Coach, largely citing the company’s management, Chairman and CEO Lew Frankfort, who has been with the company for 34 years, and incoming President and CCO Victor Luis, due to begin his position in January. Currently at $56, the stock is a bargain, selling for 16 times forward earnings estimates. Shares could climb 25% in the next two years to $70
– Barron’s is positive on companies selling assets including Dow Chemical (DOW), Royal Dutch Shell (RDSB.LN), General Electric (GE), and Time Warner (TWX). Positive mentions also for fast-growers (albeit priced more expensively): Chipotle Mexican Grill (CMG), Whole Foods Market (WFM), Netflix (NFLX),Amazon.com (AMZN) andSalesforce.com (CRM)
– Positive on Dassault-Sytems (DSY.FP), whose currently cheap shares may rise over 20-30% in the next 12 months.
– Positive on Indian equities, which have profited from the delay if the Fed’s tapering program; the new ReserveBank Governor, Raghuram Rajan raised long-term interest rates to curb inflation and attract capital from abroad; weaker currency has increased export growth; Indian stocks still offer value, even if they aren’t as cheap as they were;equities likely to add to their 20% year/year gains. Positive mentions for Tata Consultancy (532540.IN), Ranbaxy (500359.IN), Larsen & Toubro (500510.IN), and Reliance Industries (500325.IN).

STRATEGY

The J.P. Morgan View
2014 Outlook and Strategy
• Asset allocation –– Aggressively long stocks; short duration in bonds; overweight credit in US and EU, UW EM assets as we start 2014.
• Economics –– Trend-like growth, with DM above and EM below potential, pushing DM inflation up and EM down.
• Fixed Income –– Short duration into 2014, as we again expect negative total returns. Underweight the belly. For the full-year, our top-to-bottom preference is EM local, followed by Euros, JGBs, and then US & UK. But we start the year UW EM. Within the Euro area favor peripherals.
• Equities –– Double-digit returns again in 2014. Our full-year OWs are US, Japan, and EM Asia. We start with OW Cyclicals and Small Caps.
• Credit –– US HG and HY to earn 1.4% and 5% next year, respectively, with modestly lower returns expected in Europe. EMBIG and CEMBI should see 4.5% and 2.5%, respectively. But we start the year with UW EM, given a vulnerability to tapering.
• FX –– Modest USD gains in 2014.
• Commodities –– Low returns again in 2014.

Equity Strategy (JPM, Matejka) December Chartbook – Beyond tactical consolidation call, 2014 outlook is for another positive year
What is needed to transition from this consolidation phase, where Europe is flat/down over the past two months and is clearly lagging other risk markets? 1) We believe earnings are important. Q3 results failed to surprise given aggressive market move into them. For Q4, the prospect of a positive surprise is more likely given recent choppy trading. Current PMIs are consistent with +10% EPS growth and the falling EPS integer is by now confined only to telcos, utilities and commodities. 2) We find investors to be in profit taking mode at the moment, but they could add risk again in Q1, especially given that inflows are historically strongest then. 3) Euro PMIs are not likely to decouple from global for longer than a few months; they could resume their uptrend in Q1. For now, we stick to our tactical call to take risk off the table which we made at end October, expecting the European consolidation to continue into year end. We see this as a healthy pause, a platform for the next leg higher in ’14.

The Fed is going to taper and people are eyeing the assets ostensibly hurt most by tapering? As taper comfort grows, investors are now beginning to consider some of those assets that historically have been hurt most by tapering anxiety. This includes items such as gold, TSYs, builders, EMs, etc (although it DOESN’T include everything like high-dividend US stocks). Note that on Friday all these assets performed well (a lot of this comes down to positioning – people had been shunning builders/gold/EMs/TSYs for weeks in anticipation of the taper and as a result all these assets had become relatively underowned). So long as Treasuries remain stable throughout the taper process (the initial signs are encouraging) and the 2-10 curve creeps wider, the taper comfort will continue. In the coming week investors will be focused on earnings out of TOL (Tues morning) and HOV (Thurs morning) for the builders

UPS&DOWNS

SAP AG (Wodd) Heavy Cloud, No Rain
OW, PT €67 | 20 for 2015 Stock
We expect SAP to announce in early 2014 a move to more subscription sales. While short-term EPS will fall, we see the transition as a positive, as the model becomes more predictable. We expect new long-term guidance will reflect this and help the market look through to the longer-term gain.

Essilor (JPM, Adlington) Initiating at Neutral. Significant upside requires continued faultless operational and M&A execution.
We initiate coverage of Essilor, the world’s largest manufacturer of spectacle lenses, with a Neutral rating and Dec-14 €72 price target. We acknowledge the high quality of the business, with positive fundamental market dynamics, organic growth and a strong track record of execution on M&A. However, this appears well reflected in the valuation. Further upside from here would require us to assume continued strong underlying performance and execution on M&A for the next 5-10 years. If the company were not able to continue to execute M&A, the shares would look over-valued.

ASOS plc (GS, Walding): A structural leader, but lower upside; off Conviction List, still Buy
We remain positive on the long-term opportunity for ASOS, but remove the stock from our Conviction List as a function of less upside to valuation. We remain Buy rated.

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +277.93 (+1.82%) at 15,578
Topix up +15.12 (+1.22%) at 1,251
Hang Seng up +87.27 (+0.37%) at 23,830

US markets
S&P 500 up +20.06 (+1.12%) at 1,805
DJIA up +198.69 (+1.26%) at 16,020
Nasdaq up +29.36 (+0.73%) at 4,063

European markets
Eurofirst 300 up +9.08 (+0.72%) at 1,270
FTSE100 up +53.66 (+0.83%) at 6,552
CAC 40 up +29.46 (+0.72%) at 4,129
Dax up +87.46 (+0.96%) at 9,172

Currencies
€/$ 1.37 (1.37)
$/¥ 102.96 (102.85)
£/$ 1.63 (1.63)
€/£ 0.8383 (0.8395)

Commodities ($)
Brent Crude (ICE) up +0.11 at 111.72
Light Crude (Nymex) up +0.18 at 97.83
100 Oz Gold (Comex) up +0.20 at 1,231
Copper (Comex) at 3.27

10-year government bond yields (%)
US 2.86%
UK 2.91%
Germany 1.85%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.01bps at 64.28bp
Markit iTraxx Europe -2.4bps at 80.67bp
Markit iTraxx Xover -5.23bps at 325.79bp
Markit CDX IG -2.84bps at 69.42bp

Sources: FT, Bloomberg, Markit

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