LCM Dawn Patrol – Merry Christmas from Santa Ben. See El-Erian op-ed, LCM’s Abet on EU sectors, MS on oil services, JPM on Amadeus… more…



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US equities finished sharply higher on Wednesday. The S&P 500 posted its biggest one-day gain in more than two months. The rally was driven by the somewhat surprising initial tapering announcement from the Fed. The move suggested that the market had already priced in the removal of some policy accommodation and was increasingly comfortable with a shift in support from the liquidity dynamic to signs of better recovery traction. Enhanced forward guidance also seemed to underpin sentiment. The market struggled for meaningful direction ahead of the FOMC announcement. However, the economic calendar was somewhat of a bright spot with another upside from the housing sector. Takeaways from the corporate calendar were mixed, though capital return announcements remained fairly well received. Healthcare and financials were the two best performers today. Tech was the only major S&P 500 sector up less than 1% on the session, but still finished well off its worst levels. Treasuries were mixed with shorter-dated paper outperforming, while the dollar put in a strong performance. EEM (Emerging Markets) finished 2% up.

Asian equity markets traded mixed Thursday morning. Greater Chinese markets flattened out shortly after opening however as it is expected that the Fed’s decision will have little impact on mainland markets. Japan and Australia both outperformed after the Fed’s commentary sent their respective currencies sharply lower against the US dollar. Korea was up as much as 1% on foreign buying in morning trade, but gave back the gains to trade flat. Reports continued to note that India’s persistent current account deficit leaves it potentially vulnerable to tapering, and a weaker rupee exacerbated inflation fears. However, RBI governor Rajan reaffirmed that the bank would not hesitate to take action if necessary, including on off-policy dates.

Today, we’ll watch the market rally, the UK retail sales, the US jobless claims, the Philly Fed biz outlook and home sales. Spain sells bonds. NIKE to publish.


• Fed Trims QE Pace to $75b on Labor Market Outlook
• U.K. Ratings Affirmed at AA+ by Fitch, Outlook Stable
• France’s Fabius Skeptical About Iran Nuclear Deal: WSJ
• EU Banking Deadlock Broken as Ministers Agree to Resolution Plan
• LBO Firms Seen Ratcheting Risk With U.K-Company Dividend Deals

CSLI Agrees to Buy Systran For EU5/Shr (reminds me of Lernout&Hauspie)
Serco, G4S Seen Barred From Significant U.K. Contracts: Sky
Banesco to Buy Spain’s Nationalized NCG for 1b Euros
Immofinanz 1H Ebit EU305m, Down 7.1% Y/y
Aston Martin, Mercedes-Benz Agree on Engine-Supply Deal: FT
Rio CEO’s $2b Cost Cuts Bolster Prospects of Cash Returns
BASF Prepares Bid for RWE Dea as Deadline Nears, FAZ Says
Compagnie Des Alpes Targets Operating ROCE Above 8% in 5 Years
Publicis and Omnicom approved, GS ups its numbers by 14%

Bristol-Myers Nears Sale of Diabetes JV Stake for Over $3b: WSJ
Transocean Cuts Est. 2014 Planned Out-of-Service Days by 36
Oracle 2Q Adj. EPS 69c, Est. 67c; Shrs Up 2%
Apple CEO Cook Kicks Off ‘Made in USA’ Push With $2,999 Mac Pro (and I want one…)


Fed Taper Begins — What Happens Next? Mohamed El-Erian Op Ed on the Huffington Post:

The US Federal Reserve took its first step away from a historic era of monetary stimulus by tapering its monthly asset buying from $85bn to $75bn. The Fed also reinforced its forward guidance of low interest rates: interest rates are likely to stay close to zero “well past the time that the unemployment rate declines below 6.5 per cent”. Msg taken by the markets? Risk on. (Financial Times)

Europe took a big step towards completing its banking union. After a fortnight of fraught negotiations involving six separate meetings of finance ministers, EU countries backed a deal to create a common bank resolution regime and fund, with a design heavily influenced by German efforts to keep its taxpayers off the hook. (Financial Times)

Concern is rising about trading at Marks and Spencer. Nomura, which last year correctly predicted poor Christmas trading at M&S, is now expecting the retailer to suffer a decline in underlying clothing sales in the third quarter – the first full period to include M&S’s revamped womenswear offer. (Financial Times)


LCM (Abet) European Equity Sectors – The Quant View
– Dispersion remains low but trends are becoming more pronounced with the emergence of leaders like autos, insurance, media and technology.
– Betas and alphas have moved again significantly and high beta sectors continue to exhibit the lowest alphas. The reversal of trend on equities (Stoxx Europe is down over the past month) was fatal to basic resources but also to supposedly defensive names like food&bev or personalHHG.
– The banking sector has stabilised while insurance continues to outperform.
– There is a “cyclical growth” bias in this quant message, we summarize the key points hereafter:
– Positive signals on Media, Travel&Leisure, Telecoms, Insurance, Oil&Gas, Auto, Technology
– Negative signals on Retail, Personal HHG, Industrial G&S, Utilities, Construction, Basic Resources
– Compared to the previous month’s recommendation, these signals imply an upgrade of Travel&Leisure, Banks, Technology and Chemicals and a downgrade of Utilities, Basic Resources and Food&Bev.
– It remains a well-balanced portfolio with neither hidden beta nor value/growth bias. The status of most sectors is changing profoundly so classic characteristics like defensive/cyclical, high beta/low beta or value/growtn are simply irrelevant in this context.

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GS (Nathan) Top of Mind
2013 update and a peek at 2014.
We take a look at where our 2013 Top of Mind themes stand now, how they might evolve in the coming year, and potential new themes for 2014.


MS (Ostrower) Global Implications of European Oil Services Profit Warnings
Over the past week, there have been four profit warnings in the European Oil Services sub-sector. There were two primary causes : (1) A slowdown of activity and contract awards; (2) High market expectations. With little excess FCF amongst the oil majors, upstream capex growth is likely to move to low- to mid-single-digit levels from the 15-20% per year of the last decade. Pressure on contractors to lower costs will likely intensify. Our European Oil Services analyst, Robert Pulleyn, believes that expectations will continue to moderate across the space over the next few months, keeping sentiment negative. However, if capex cuts were to become widespread, this would be a further headwind.

Amadeus IT Holding (JPM,  Pollard) Acquisition to accelerate move into the hotel vertical.
Amadeus is accelerating its entrance into the hotel vertical with the acquisition of Newmarket International for $500m (to be financed by debt, and completed in Q1 2014 subject to regulatory approvals). Newmarket is a provider of cloud-based IT solutions for the hotel industry. The acquisition brings expertise of the hotel industry and a customer base including several top tier hotel chains, and it is immediately earnings accretive. While not material in size, we view the acquisition as a positive from a strategic point of view.

CNP (JPM,  Huttner, CFA) Reiterate OW to €18.8 TP and believe CNP will raise its ROE as it negotiates with Caisses d’Epargne
We believe that the current discussions with Caisses d’Epargne on the potential ending of their exclusive distribution agreement after Dec15 is in our view a positive for CNP, as that business has an ROE of just 6.5% FY12, below CNP’s cost of capital of 10%. In addition, when the agreement ends, CNP has the right to reduce commissions paid and so improve its margins and ROE. We roll forward our sum of parts based price target to Dec14e and raise it to €18.8 from Dec13e €17.6 previously. We reiterate OW to €18.8 Dec14e SOTP target price.


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