LCM Dawn Patrol – 17.12.13 – LCM Cross Assets strategy, GS on Eurazeo, JPM on European generators (ups Enel), TuesGear and a lot more….

Bonjour,

US equities finished higher on Monday. The gains reversed a part of last week’s losses. The Fed meeting taking place Tuesday and Wednesday loomed large over today’s session. Economic data had a positive impact overall. December manufacturing PMIs from the US and China were modest disappointments. However, that was outweighed by better than expected manufacturing PMIs from Europe and November US industrial production, which surpassed its pre-recession December 2007 peak for the first time. A burst of M&A activity provided another tailwind for equities. All sectors were higher with the exception of consumer staples (0.03%). Crude and gold both higher.
Asian markets are largely positive in morning trade. The Australian market pulled back after Treasurer Joe Hockey announced the Mid-Year Economic and Fiscal Outlook in which the government said it expects a combined deficit of A$123B over the next four years and that significant budget cuts will be made in the May budget. RBA minutes reiterated concerns that the AUD is still uncomfortably high and said they would not rule out further rate cuts. Hong Kong stocks were being led higher by gaming stocks as Macau gaming growth expectations were increased.

Today, we’ll watch the Swedish Riskbank decision (25bp cut expected), the German ZEW (expected to reach a 4y high), European new car registrations, CPI data for the EZ. Switzerland, Spain, Belgium, Greece and
Malta sell bills.

TUESGEAR

There are three awesome gadgets I would recommend for Christmas. I own several cameras (from point & shoot to DSLRs), and I believe that the best mix of them all is the recent Canon S120. If you’re looking for a small portable speaker, the Bose Soundlink mini is the best for its size and price (not the Beats Pill).
And finally, if you’re looking for something for yourself, and try to stay in shape, the Withings Smart Body Analyser is the scale to consider.

Also, the original Indiana Jones movies should be soon released in HD (Blue Ray), including the Taper of Doom.

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NEWS

The original Indiana Jones movies to be released in HD (Blue Ray soon), including the Taper of Doom.

Hungary Seen Cutting Main Rate by 20 bps to 3%, Survey Shows
Czech Central Bank to Review Koruna Sales as Rates Seen on Hold
• Zurbruegg Says SNB Able to Keep Currency Reserves at Right Level
U.K. Lords Approve Final Stage of U.K. Financial Services Bill
Greece Said to to Get EU1b Delayed Aid Dec. 19: Govt Officials
• Trade pact talks between the EU and Ukraine break down.
China maintains 2014 GDP growth target at 7.5%
Portugal Will Dig Up Alternatives If Court Blocks Plans: EU
• Merkel Takes Oath at Peak of Powers as She Returns to EU Stage
• Libya’s Oil Sales Constrained as Eastern Ports Remain Shut

Total’s de Margerie Tells BBC He Wants to Seek Shale Gas in U.K.
Patrizia Immobilien Cuts 2013 Forecast
Orange’s Richard Says No Chance of 4G Accord With Iliad: Figaro
Chocolate Eaters Drive Record Cocoa-Output Deficit
Copper Falls From Seven-Week High Ahead of Fed Meeting
Soybeans Drop as Rains in South America May Ease Dryness
RBS Exits Govt’s Contingent Capital Facility a Year Early
Statoil, Total Opt Not to Take Stakes in Tanap Pipeline: FT
BlackRock Says It Followed Rules With Telecom Italia Stake
Swiss Re CFO Quinn Replaces Wauthier at Zurich Insurance
Rexel Shares Said to Be Offered at EU17.65 to Market Price

CURRENT STUFF

The Fed’s tapering program remains principal issue, but expectations have not changed significantly. Markets should get a substantial update this week though as the Fed holds its December meeting 17-18 Dec. FOMC statement will be released at 1400ET on Wednesday, 18-Dec, followed by Bernanke presser at 1430ET.

GS Views on Fed tapering :  No tapering this week.  Despite the improving employment picture suggested by the recent payrolls report, our US economist Jan Hatzius does not expect the Fed to start tapering in December given that inflation remains well below the Fed’s target. He believes Fed officials will not want to surprise the markets on the hawkish side with the first tapering move when inflation is as low as it is. His central forecast for the first tapering move remains March 2014, although January remains a possibility. 
When tapering does occur, we do not expect a disruptive market reaction:  In a recent Global Markets Daily (How Will Bonds React to Tapering?, December 13, 2013), our Global Markets team argued that they did not expect any future tapering announcement to have a large impact in the market place, provided it is accompanied by a strengthening of the forward guidance. If this view is realized, they would expect the term structure of rates to be relatively unchanged, probably after an initial ‘relief rally’.

A WSJ poll of 46 economists showed a quarter of respondents expect an announcement about the start of tapering this week, a third in late January and just over a third in March. The survey also revealed that 39% expect the Fed to end their bond purchases completely in Q3-2014, 34% in Q4-2014 and 19% in early 2015.

Australia reveals deepening budget shortfall: The Coalition government now expects a shortfall of A$47bn ($42bn) for the year through June 2014, up from a previous forecast of A$30.1bn made only four months ago. (Financial Times)

Boeing intends to increase its dividend by 50 per cent to 73 cents and ask investors to approve up to $10bn of share buybacks, the commercial jet maker said on Monday, calling the move a mark of confidence in its own future. (Financial Times)

“Iceland’s central bank said on Monday it will begin selling just over 100 billion crowns ($8.6 bln) worth of bonds held against assets and claims left with it as the nation’s banks collapsed during the global financial crisis.” (Reuters)

Singapore’s exports, excluding oil, fell 9.3 per cent in November compared to the month before. And analysts had forecast the city state’s overseas sales would record a 2.8 per cent gain. The reason for the disappointing trade performance was a hefty 47 per cent decline in shipments of pharmaceuticals products. (FastFT)

Zions bank becomes early Volcker casualty: One of the first casualties of the Volcker rule is a small Utah-based bank that is far from the large Wall Street institutions that regulators had sought to rein in. Zions Bancorp said on Monday it would no longer be able to hold certain types of securitised debt as it seeks to comply with the Volcker rule, raising concerns about the cost of the new regulations to smaller banks. (Financial Times) (WSJ)

STRATEGY

LCM Cross Asset Strategy #25  (ABET)- Economic Momentum vs. EPS Momentum
The economic momentum remains positive in Europe.
- BRICs’ economies have not strengthened this year in a supportive context so how will they behave when PMIs in the developed world revert next year? This could be THE question for 2014. We explain why the consensual view of an economic stabilisation in the EM world next year is doubtful.
- From a European sector allocation perspective it is difficult to play a disappointment in the emerging economies as there is no stable correlation between European sectors and BRIC equity indices. The easiest way is to focus on currencies or commodities which will be also under great pressure.
- The good news for portfolio managers lies in the very low level of the implied volatility on commodity prices. We show that investors have not priced any potential risk in financial markets with IV’s skews being too low. This is a good opportunity to build derivatives strategies for next year with a very attractive risk/reward ratio.

Trade recommendation summary

– Buy Put Spread 29/32 July 14 on USO US

– Buy Put Spread 0.88/0.86 Jan 14 on AUD

– Buy Euribor Future June 14

UPS&DOWNS

Eurazeo (GS, Iwar): Update to reflect recent transactions; retain Neutral
We make updates following Eurazeo’s announced share buyback, cancellation of 4.5% of share capital, and the IPO of Moncler, of which Eurazeo now owns 19.7%. Eurazeo’s NAV discount appears wide at 29%. We retain our Neutral rating.

▼UBM (JPM,  O’Donnell) We see a mix of positive and potential negative stock drivers; downgrade from OW to N
Post the company’s ad hoc trading update, we see leverage remaining comfortable, structural growth of Events continuing, and rebased earnings potentially providing more confidence on 2014 numbers. However, we also see some potential negative drivers (e.g. concern about strategy of an incoming CEO, less acquisition potential) for a stock trading at a premium (10.6x 14E EV/EBITDA vs 10.0x for peers). We downgrade from OW to N.

▲Spanish & Italian Generators (Javier Garrido) Tariff deficits weigh on near-term sentiment. Upgrade Enel to Neutral on valuation and self-help
Sector news flow will continue to be dominated by tariff deficits (TDs) for the foreseeable future. This suggests caution near term, as the gas TD will likely bring further earnings hits, and uncertainty surrounding the electricity TD will continue to justify higher equity risk premiums, in our view. In the medium term, we are more constructive on the sector as we see trough earnings in 2014 and moderate growth thereafter. Enel’s 21% P/E discount to its main peer and its more aggressive approach to costs drives our upgrade to on that name to Neutral. Enel Green Power (OW) remains our top pick.

United Kingdom: Transportation: Surface: Bus and rail (GS, Dogani) GOG up to CL Buy; SGC down to Sell
We believe valuations do not reflect differing growth and returns and the extent to which relative industry positioning is likely to change. We highlight opportunities: GOG onto CL Buy, SGC down to Sell; reiterate FGP at Buy; reinstate NEX at Neutral.

Analyst Actions

DAISY GROUP CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
ENEL RAISED TO NEUTRAL AT JPMORGAN
FINISH LINE RAISED TO BUY VS UNDERPERFORM AT BOFAML
GAS NATURAL RATED NEW OUTPERFORM AT RBC CAPITAL
HENNES & MAURITZ RAISED TO NEUTRAL AT HSBC
LUKOIL CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
ROSNEFT CUT TO UNDERWEIGHT VS OVERWEIGHT AT BARCLAYS
SEADRILL PARTNERS RATED NEW BUY AT BOFAML, PT $38
VINCI CUT TO NEUTRAL VS BUY AT BOFAML

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +145.28 (+0.96%) at 15,298
Topix up +6.64 (+0.54%) at 1,230
Hang Seng up +69.39 (+0.30%) at 23,184

US markets
S&P 500 up +11.22 (+0.63%) at 1,787
DJIA up +129.21 (+0.82%) at 15,885
Nasdaq up +28.54 (+0.71%) at 4,030

European markets
Eurofirst 300 up +15.63 (+1.26%) at 1,258
FTSE100 up +82.24 (+1.28%) at 6,522
CAC 40 up +60.17 (+1.48%) at 4,120
Dax up +157.10 (+1.74%) at 9,164

Currencies
€/$ 1.38 (1.38)
$/¥ 103.00 (103.01)
£/$ 1.63 (1.63)
€/£ 0.8436 (0.8442)

Commodities ($)
Brent Crude (ICE) down -0.06 at 109.35
Light Crude (Nymex) down -0.17 at 97.31
100 Oz Gold (Comex) unchanged 0.00 at 1,246
Copper (Comex) down -0.01 at 3.37

10-year government bond yields (%)
US 2.87%
UK 2.90%
Germany 1.84%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.13bps at 62.65bp
Markit iTraxx Europe -0.6bps at 78.41bp
Markit iTraxx Xover -4.02bps at 313.77bp
Markit CDX IG -0.62bps at 69.37bp

Sources: FT, Bloomberg, Markit

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