LCM Dawn Patrol – MS Strategy: list of 20 cyclicals names. MS on Aerospace, MS on Tech, JPM initiates on Valeo, ups Faurecia, d/grades Michelin… More

Bonjour,

US equities were lower on Monday. Equities hovered around the unchanged mark until around noon when a sustained move lower began. Equities finished near their lows for the day. Although there did not appear to be a clear catalyst for the move, valuation concerns were noted by many as a reason for caution. Things remained quiet as far as economic data and macro themes were concerned, but company specific news flow has picked up substantially. News from the retail sector regarding the holiday season continues to be negative. All sectors were lower; largest decliner was consumer discretionary (1.94%). Treasury yields fell. Crude was lower. Gold was higher.
Asian equity markets traded broadly lower Tuesday morning. Chinese markets were the exception, flat for most of the morning then rising before the lunchtime close. Media did not give hints of any directional drivers, however the vice mayor of Shanghai did comment on expectations for the yuan convertibility in the Shanghai FTZ. The PBoC abstained from adding liquidity as benchmark rates continued to trend lower.

Today, we’ll watch several inflation measures in Europe (CPI in France, CPI and PPI in the UK), the US retail sales (probably low as it was a short Christmas season).

BALLON D’OR
I know nothing about football… But Ronaldo won. Messi is 2nd and Ribery third.”Individualists win in a collective game” said a famous strategist.

NEWS

Remember the NEST thermostat I told you about? The company has been acquired by Google for $3.2bn…

• ECB Candidate Lautenschlaeger Backs Euro Bank-Failure Authority
• Stimulus Can’t Drag Finland Out of Crisis: Prime Minister
• Spain Says CAM Savings Bank Rescue Cost May Reach $21 Billion
• Banks in Denmark Face Tougher Credit Rules to Tackle Record Debt

EDF Sells 100-Year Bonds in Biggest U.S. Corporate Issue of 2014
• McKesson Fails to Gain Stakeholder Support for Celesio Bid
Volvo Returned to Operating Profit in 2013, CEO Says: Reuters
Chrysler Says Jeep to Reach 1 Million Sales Worldwide by 2015
BMW Targets Record 2014 Sales as German Luxury Rivals Take Aim
Lamborghini Plans to Introduce SUV in 2017: CEO Winkelmann
Maserati ‘On Pace’ to Boost Sales to 50,000 in 2015: CEO
Sacyr Says It Will Finish Panama Canal Work After Halt Threat
Actelion Says Opsumit Has Strong Demand Since U.S. Introduction
Jeronimo Martins 2013 rev. EU11.83b vs est. EU11.87b

 

CURRENT STUFF

The US Congress has agreed a broad spending deal for the first time since 2009, but it has left the International Monetary Fund in disarray by refusing to fund its latest capital increase. The $1.012tn package lays out how the US will spend the budget agreed after tense negotiations in December. It means an update to US spending priorities after years of “continuing resolutions” that keep the government open but cannot reallocate funds. (Financial Times) (WSJ)

Investment banks hail victory in Basel battle: Global investment banks were breathing a sigh of relief after notching up a series of victories over tough new debt rules on Monday, but lobbyists warned they still face years of wrangling as the parameters of the regime are hammered out. Shares of the top European lenders jumped after central bankers and supervisors meeting in Basel, Switzerland, significantly watered down the international standard for the leverage ratio – a measure of banks’ financial strength. (Financial Times)

Google has made a bold bet on the emerging “internet of things” with the $3.2bn acquisition of Nest Labs, a four-year-old start-up founded by Apple veterans that makes “smart” thermostats and smoke alarms for the home. The deal is the second largest in Google’s history, behind its $12.5bn Motorola acquisition in 2011 and ahead of DoubleClick, the display advertising network it paid $3.1bn for in 2007. (Financial Times)

Elliott is demanding that Juniper Networks return an additional $3.5bn to shareholders, making it the latest technology company to attract criticism for building up a large cash pile. revealed a 6.2 per cent stake in the company on Monday and attacked it for hoarding more cash as a percentage of its market capitalisation than Apple. (Financial Times)

STRATEGY

MS (Secker) European Equity Strategy
Are there any cheap cyclicals left in Europe?

Positive macro newsflow supports investor interest in cyclicals. We look to see which cyclical sectors and stocks still offer attractive valuations. We prefer financials over cyclicals; however, better macro newsflow supports investor interest in cyclicals. In a purely European context, cyclicals look expensive against the wider market, with the group’s Shiller PE at a 28% premium to the market. However, relative to their US and global peers, European cyclicals’ valuations appears reasonable.

Our analysts have highlighted 20 cyclical stocks where they think valuations are still attractive – these include EADS, Renault, Volkswagen, Rexel, BASF, Hays, Wolseley, Accor, TF1, SSAB, Debenhams and Panalpina.

UPS&DOWNS

Aerospace & Defense (MS, Vig) 1H14 Bottom-Up Backlog Analysis: Still Strong
The market remains concerned that there is froth in current OEM backlogs which could be shaken out if macro worsens. In this report we do a bottom-up analysis of OE backlogs and conclude that this cycle is likely to be far more stable and resilient to macro than prior cycles.

Technology – Software & Services (MS, Wood) Europe’s here to stay
Our January survey saw a continuation of the higher growth expectations in EU, with IT spending expected to increase by +20bps to +3.7% in 2014 vs. 2013 . Software remains the sub-sector with the highest growth expectations, and services rebounded vs. our previous survey, again on stronger EU data.

Facing the European cycle (JPM, Asumendi) Capturing growth and earnings re-rating potential;
initiating Valeo at OW; moving Faurecia to OW, Michelin to UW

We initiate on Valeo with an Overweight rating, PT €95. From our existing supplier coverage, we upgrade Faurecia to Overweight, PT €33, and downgrade Michelin to Underweight, PT €65 (unchanged). We reiterate Overweight on Pirelli, PT €13.5, and our Neutral on Continental, PT €150. In addition, on the OEM side, we remain buyers of Daimler, VW and Renault. We are Neutral on PSA and BMW. All in all, we forecast a slow recovery in the European car market in FY14 with no major pricing momentum for the OEMs in Europe, leading us to prefer supplier stocks vs OEMs as a safe way to play the upside in the European auto market.

Spanish Banks (JPM, Becerril) Time to go back to lending
Last week we visited Barcelona and Madrid and met with banks, officials, local experts and real estate investors. The mood is still improving relative to our November trip, as the economy is showing signs of recovery and even consumption ticked up in December. We think 2014 will be a difficult year for banks’ results but markets are already discounting this and we would still recommend playing this recovery theme through Caixabank (OW) given its valuation, restructuring potential and return to profitability in the longer term.

ADP CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
ASML CUT TO NEUTRAL AT CREDIT SUISSE, PT EU68
BSKYB RAISED TO BUY VS NEUTRAL AT UBS
CHANNELADVISOR CUT TO NEUTRAL VS BUY AT GOLDMAN
DANAHER RAISED TO BUY VS NEUTRAL AT BOFAML
EUROTUNNEL RAISED TO EQUALWEIGHT VS UNDERWEIGHT AT BARCL…
FAURECIA RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
FLUGHAFEN WIEN CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCL…
FLUGHAFEN ZUERICH RAISED TO OVERWEIGHT AT BARCLAYS
FORTUM CUT TO UNDERWEIGHT VS EQUALWEIGHT AT MORGAN STAN…
FRAPORT CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
HARGREAVES LANSDOWN RAISED TO OVERWEIGHT AT MORGAN STAN…
HUGO BOSS CUT TO REDUCE VS NEUTRAL AT NOMURA
INFINEON CUT TO NEUTRAL VS BUY AT GOLDMAN
INFORMA CUT TO NEUTRAL VS BUY AT UBS
JERONIMO MARTINS CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
LOGITECH RAISED TO BUY VS NEUTRAL AT GOLDMAN
LUXOTTICA RAISED TO NEUTRAL VS REDUCE AT NOMURA
MICHELIN CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
ROYAL MAIL RATED NEW OVERWEIGHT AT JPMORGAN; PT 700P
SAFRAN RAISED TO BUY VS NEUTRAL AT BOFAML
SAP CUT TO UNDERWEIGHT AT SANTANDER
SHELL CUT TO HOLD AT SANTANDER
SIAS CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
TECHNICOLOR REMOVED FROM CONVICTION BUY AT GOLDMAN; STIL…
VALEO RATED NEW OVERWEIGHT AT JPMORGAN; PT EU95
VOLKSWAGEN (PREF) CUT TO SELL VS NEUTRAL AT UBS

 

OVERNIGHT MARKETS

Asian markets
Hang Seng down -75.40 (-0.33%) at 22,813

US markets
S&P 500 down -23.17 (-1.26%) at 1,819
DJIA down -179.11 (-1.09%) at 16,258
Nasdaq down -61.36 (-1.47%) at 4,113

European markets
Eurofirst 300 up +3.26 (+0.25%) at 1,324
FTSE100 up +17.21 (+0.26%) at 6,757
CAC 40 up +12.67 (+0.30%) at 4,263
Dax up +36.93 (+0.39%) at 9,510

Currencies
€/$ 1.37 (1.37)
$/¥ 103.36 (102.98)
£/$ 1.64 (1.64)
€/£ 0.8338 (0.8345)

Commodities ($)
Brent Crude (ICE) down -0.01 at 106.74
Light Crude (Nymex) up +0.11 at 91.91
100 Oz Gold (Comex) up +0.10 at 1,251
Copper (Comex) down -0.01 at 3.39

10-year government bond yields (%)
US 2.84%
UK 2.82%
Germany 1.81%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.87bps at 53.04bp
Markit iTraxx Europe +0.88bps at 71.48bp
Markit iTraxx Xover +1.25bps at 284.12bp
Markit CDX IG +2.26bps at 66.25bp

Sources: FT, Bloomberg, Markit

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