LCM Dawn Patrol – 15.01.14 – Lots… Most shorted stocks in Europe, LCM Strat, JPM d’grades Danone, Unilever, MS ups AZN… More.

Hola,

US equities finished higher on Tuesday after the S&P suffered its biggest one-day pullback since early November on Monday. While there was no specific catalyst for yesterday’s selloff (valuation and tapering concerns were the go-to excuses), there also did not seem to be any high-profile drivers behind today’s bounce. However, better December retail sales data was highlighted as a positive, particularly given the negative sentiment surrounding the group and the recent concerns about dampened recovery momentum. The corporate calendar seemed to be another bright spot with some positive takeaways from today’s preannouncement activity. This contrasted with all of the attention on negative guidance trends. While the early earnings season focus was on the banks today, it was the tech sector that led the market higher. Most of the other deeper cyclical pockets of the market also outperformed, while the Japanese yen sold off and Treasury yields were mostly higher following yesterday’s flight-to-quality moves. There did not seem to be much attention in the market to today’s hawkish leaning Fedspeak. Headlines out of Washington were also largely relegated to the backburner.
Asian markets are generally higher in morning trade after yesterday’s losses. Japanese markets where higher this morning, as they rebounded off losses yesterday and are being helped along by the $-JPY rebounding. Data showing that the issuance of new yuan loans by Chinese financial institutions fell in December compared to November drove the Hong Kong market lower initially ad while it quickly rebounded it has since tracked back down.

Today, we’ll watch the Empire state index for January and the the Fed’s Beige Book at 20:00. In Europe, the main focus will be the German GDP (2013) to be published at 9:00 (+0.5% e).

VIDEO of the day.

Not much snow needed to ski…
http://video.lefigaro.fr/figaro/video/du-ski-de-l-extreme…-a-detroit/3052219734001/

NEWS

• EU Lawmakers Clinch Deal on Financial Market Rulebook Overhaul
• World Bank Raises Growth Forecasts as Richest Nations Strengthen
• Osborne to Say U.K. Needs to Renegotiate Position Within EU
• U.K. Lobbied in Brussels to Prevent EU Regulation on Shale Gas
• Hollande Seeks Franco-German Alliance as Energy Policies Shift

Canal Plus : un chèque de 355 millions d’euros pour conserver les droits du rugby français
Casino 2013 Sales Below Ests., Hypermarket Vols. Improved
Airbus CEO Open to Space Merger, Ready to Bid for Missile Maker
Shell to Sell Some North Sea Assets in Next 2 Yrs: FT
United Cancels $1.08 Billion of Airbus Orders in Fleet Shift
Samsung Stake in CSR Being Sold in Narrowed Price Range: Terms
Sabadell Lowered by Moody’s on Increase in ‘Problematic Assets’
Villar Mir Says It Buys 19.3% of Inmobiliaria Colonial From RBS
Deutsche Bank Suspends FX Trader in New York, Welt Reports

Casino 2013 Sales Below Ests., Hypermarket Vols. Improved
Casino 2013 rev. EU48.6b, est. EU48.95b.
• Total 4Q sales up 1.9% to EU13.1b, up 8.5% organic ex-fuel, calendar effect
• 4Q France sales up 10.3%, intl sales down 3%
• France had improvement in customer traffic, higher vols. sold at both Geant, Casino supermarkets; Leader Price comp sales down due to price cuts, less promotional activity
• 4Q France LFL sales (includes calendar effect:)
• Hypermarket ex-fuel LFL -2.8%, est. -3% (median of 7)
• Supermarket ex-fuel LFL -3.3%, est. -2.9% (median of 6)
• Franprix LFL -3.4%, est. -2% (median of 6)
• Leader Price LFL -8.5%, est. -7.5% (median of 7)
• Monoprix LFL -0.8%, est. -0.5% (median of 6)
• 4Q Latam LFL sales ex-fuel up 10.6%
• 4Q Asia LFL sales ex-fuel down 4.1%
• Related preview here
• Call 6:15pm CET +33(0)1 70 77 09 35
• To report 2013 earnings Feb. 18

CURRENT STUFF

François Hollande promises tax cuts for French business: François Hollande launched a bid to revitalise Europe’s second-largest economy and rescue his faltering presidency by promising a landmark €30bn payroll tax cut for French companies. (Financial Times) and Why Hollande Could Get Away With An Affair, In One Chart

“The Spanish government is considering selling part of its stake in bailed-out Bankia as soon as the first quarter of this year, official and banking sources said, hoping to recoup part of the multi-billion euro rescue under favorable market conditions. While no decision has yet been made, the economy ministry has recently stepped up contacts with bankers over the possible sale, the sources said.” (Reuters)

Europe has agreed its biggest overhaul of securities markets since the 2008 crisis, extending its regulatory reach into off-exchange dealing, commodity speculation and the new technologies that have transformed the speed of modern trading. After almost three years of complex and politically fraught deliberations, EU member states and the European parliament on Tuesday settled the terms of a long-awaited revamp aiming to increase transparency and stability. (Financial Times)

Chinese banks grew their official loan books at a much slower rate than analysts had forecast last month, signalling the end-of-year cash crunch was more severe than economists realised. The banks extended Rmb 482.5bn of new loans in December. Economists surveyed by Bloomberg expected to see new loan growth of 570bn. December’s figure was also a 23 per cent drop on the previous month. (FastFT)

Most Shorted stocks in Europe (source: BBG)
The market resilience and today’s price action are making short seller unhappy. Recently, we have seen many HFs announcing reducing their large short position. Today, Maverick Capital trimmed Delhaize short position. {NSN MZEHMQ6JIJWC <go>}
If the Eurostoxx breaks this 3100 area (corresponding to 2009/2010 top), I expect short covering to accelerate. See below the list of the most shortedstock in Europe

Security Mkt Val Position % Out Latest Chg
1 INGENICO -556.72MLN -8.68MLN -16.348 954
2 ELEKTA AB-B SHS n/a -52.7MLN -14.297 10MLN
3 K+S AG-REG -614.15MLN -25.34MLN -13.240 6MLN
4 WEIR GROUP PLC/THE -685.29MLN -27.19MLN -12.756 3MLN
5 GEMALTO -893.43MLN -10.58MLN -12.017 176030
6 LONMIN PLC -193.25MLN -52.12MLN -9.153 4MLN
7 TUI AG -226.73MLN -17.97MLN -7.117 1MLN
8 ALCATEL-LUCENT -630.65MLN -197.14MLN -7.019 40MLN
9 PEUGEOT SA -269.99MLN -24.62MLN -6.939 4MLN
10 OCADO GROUP PLC -247.06MLN -39.19MLN -6.726 5MLN
11 AGGREKO PLC -370.24MLN -17.76MLN -6.600 53781
12 LADBROKES PLC -117.54MLN -59.2MLN -6.439 9MLN
13 DELHAIZE GROUP -280.03MLN -6.08MLN -5.933 -167003
14 PUBLICIS GROUPE -812.84MLN -12.36MLN -5.798 -714741
15 NESTE OIL OYJ -190.93MLN -13.51MLN -5.270 -282043
16 ADMIRAL GROUP PLC -215.61MLN -13.42MLN -4.859 -695683
17 CGG -103.01MLN -8.38MLN -4.739 1MLN

Here’s KKR’s Outlook For The Stock Market And Global Economy In 2014 (Business Insider)

STRATEGY

LCM (Abet) Unfortunately The Financial Crisis is Over

This is the last stage of the rally of domestic assets in Europe.
– The European financial crisis is over but the economic crisis stays. The financial crisis reflected the economic distress in Europe BUT was also a self-fulfilling crisis through the negative impact of elevated interest rates on the economic cycle. The further decline of tensions on the EUR sovereign bond market towards more “normal” levels put an end to the “self-fulfilling prophecy” crisis.
– This is bad news for European equity markets as the easy part of the “domestic rally” is behind us. The remaining positive factor is the cyclical improvement of the European economy. Thus, the half-full glass view will continue to favour domestic assets because of the expectations of an end of the economic crisis while the half-empty glass view is to consider that the economic disarray of the eurozone is intact and should prevent further re-rating of domestic equities. We belong to this second group of thinking.
– There is no solid alternative to support European equity markets, other than domestic equities. The acceleration of the US economy could represent a positive surprise but it is a theme difficult to play as the few European stocks exposed to the US tend to be also significantly exposed to EM countries.
– The collapse of bond yields in the periphery occurs at a time when bond yields in emerging countries are rising towards levels unseen for more than two years. Commodity prices are at their 18-month low and the relative performance of EM equities compared to US equities is back at its 2005 level. The implicit message cannot be more clear and looks like the mirror image of Europe. The risk of a “self-fulfilling prophecy” crisis is rising in the EM world.
Trade recommendation summary

– Buy Consumer Value stocks in Europe against SXXP

– Buy Industrial Growth stocks in Europe against SXXP

– Buy Australia LT government bonds

MS on US Q4 earnings
Given the high level of negative guidance, consensus earnings estimates for the S&P 500 have declined for both 2013 and 2014. Over the last three months, Q4 2013 consensus estimates were cut in eight of the ten GICS sectors, while 2014 S&P 500 earnings estimates fell by 0.83% led by industrials, staples, technology, and energy. Telecom and utilities experienced upward estimate revisions. We continue to believe estimates are too high as analysts are embedding 7% earnings growth in 2013 to $110 per share, followed by 10% growth in 2014 to $121 per share. Our top-down estimates remain below consensus — $109 and $116 of earnings per share in 2013 and 2014, respectively.
During this earnings season, we want to see if revenues can again exceed consensus expectations after beating in the past couple of quarters. We will also monitor capital spending, inventory levels, and hiring, as we remain focused on what costs are put in place by companies and whether this could introduce any volatility in 2H 2014 EPS estimates. The punishment of negative guidance and the reward for positive guidance remain key metrics of focus. We expect negative guidance, though at a less severe rate than last quarter. Capital spending remains a hot topic, and we are looking for signs that companies within technology, industrials, and consumer see the need to add capacity. Signs of backlog extension and book-to-bill ratios above one are key signposts. Overall, we maintain that capex-to-sales levels and utilization levels are below average, and CEO hubris appears for now to remain reasonably contained

UPS&DOWNS

▼Danone (JPM, Pannuti, CFA) A tough H1 ahead – Downgrading to Neutral
The longer than anticipated impact from the Baby China recall, along with the recent rise in milk prices in Europe and stalling shares in US/WE dairy, lead us to cut FY14E by 11%, pushing back our scenario of an earnings rebound to 2015. With the stock trading in-line with peers, we see a better entry point ahead as the market digests EPS cuts (JPM 8% below Bloomberg consensus EPS14E) and with a depressed H1 ahead adding to the lack of visibility short term. Downgrading to Neutral (Overweight) with a new Dec-14 TP of €53.

▼Unilever NV/Plc (JPM, Pannuti, CFA) Margin risk and High Valuation – Downgrade to Underweight
After the top line disappointments of 2013, we continue to see pressure on earnings as top line woes should be coupled with margin pressure. We cut 2013E EPS by 2% and 2014E by 6% due to lower LFL, margins and worse FX. We expect flat 2014E EPS, 7% below company-compiled consensus. Although the shares underperformed in 2013, a valuation of 19x 2014E looks rich versus history and peers for a decelerating top line with no earnings growth. Downgrade to Underweight (from Neutral).

Saint-Gobain (MS, Pereda) Is there a French building recovery? Not yet
We continue to think the market is pricing in a too optimistic recovery in building activity in Europe and France. Our detailed analysis of the French building market suggests the trough will be delayed another year. With our forecasts materially below consensus and rich comps, we maintain our UW.

AstraZeneca (MS, Walker) Focus shift to future growth prospects, upgrade to E/W
Earnings upgrades post the diabetes acquisition and pipeline news flow may divert attention from ongoing challenges in the underlying business near term. We upgrade to E/W on the back of our new forecasts, and the potential for further multiple expansion as pipeline visibility improves.

Corrective Lens Update (MS, Jungling) Early 2014 Market Update
We provide feedback from OPTI, the international trade show for optics held last week in Germany.

Wholesale Market Growth – our discussions with manufacturers of lenses suggest that growth in the developed markets remains sluggish, especially in Europe. However, unlike last year, where November and December were poor, the year finished with reasonable momentum. With respect to outlook, wholesalers appear to be a bit more optimistic for 2014 on the basis for a potential recovery in Europe. Growth in emerging markets remains the main bright spot, with growth rates estimated at +10-20%.

EDP Renovaveis SA (GS, Losa): Downgrading to Neutral following outperformance
We remove EDPR from the Buy List following recent outperformance. In our view, upside risks come from higher than expected disposals and downside risks come from higher than expected government intervention.

ALLIANZ SE RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT SUISSE
ANGLO AMERICAN RAISED TO BUY VS NEUTRAL AT UBS
ASTRAZENECA RAISED TO EQUAL WEIGHT AT MORGAN STANLEY
AUTOGRILL RATED NEW BUY AT JEFFERIES, PT EU7.75
CATLIN CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
CENTRICA CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
DANONE CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
DIRECT LINE CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
EASYJET CUT TO NEUTRAL VS BUY AT CITI
FERREXPO CUT TO NEUTRAL VS BUY AT UBS
MAPFRE SA CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
QSC CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
RESOLUTION CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
SAS CUT TO SELL VS NEUTRAL AT CITI
SHAFTESBURY RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN
SSE CUT TO UNDERWEIGHT VS OVERWEIGHT AT BARCLAYS
STANDARD LIFE RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT S…
SWISS LIFE RAISED TO NEUTRAL VS UNDERPERFORM AT CREDIT SU…
TOPDANMARK RAISED TO NEUTRAL VS UNDERPERFORM AT CREDIT…
UNILEVER CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +343.57 (+2.23%) at 15,766
Topix up +19.34 (+1.52%) at 1,288
Hang Seng up +70.55 (+0.31%) at 22,862

US markets
S&P 500 up +19.68 (+1.08%) at 1,839
DJIA up +115.92 (+0.71%) at 16,374
Nasdaq up +69.71 (+1.69%) at 4,183

European markets
Eurofirst 300 up +1.95 (+0.15%) at 1,326
FTSE100 up +9.71 (+0.14%) at 6,767
CAC 40 up +10.93 (+0.26%) at 4,274
Dax up +30.34 (+0.32%) at 9,541

Currencies
€/$ 1.36 (1.37)
$/¥ 104.42 (104.20)
£/$ 1.64 (1.64)
€/£ 0.8302 (0.8319)

Commodities ($)
Brent Crude (ICE) down -0.16 at 106.23
Light Crude (Nymex) down -0.10 at 92.49
100 Oz Gold (Comex) down -2.50 at 1,243
Copper (Comex) down -0.02 at 3.37

10-year government bond yields (%)
US 2.87%
UK 2.85%
Germany 1.82%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.39bps at 52.65bp
Markit iTraxx Europe +0.56bps at 72.04bp
Markit iTraxx Xover +3.11bps at 287.23bp
Markit CDX IG -1.25bps at 65bp

Sources: FT, Bloomberg, Markit

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