The major US indices finished lower on Monday, but well off their midday lows. There was no clear, immediate catalyst for the move. Follow through on last week’s decline was frequently blamed for early weakness and concerns about emerging markets remain. CAT +5.9% was one of the few bright spots today after reporting better than expected Q4 results. The December new home sales report was a disappointment coming in below expectations and showing downward revisions to prior months.
Asian equity markets broadly rebounded on Tuesday. The PBoC appeased markets by injecting CNY150B of liquidity in to markets via 14-day reverse repos. Caution lingered around emerging markets ahead of RBI and Turkish central bank meetings later today.
Today: Before US opening: Comcast, DD, F, GLW , PFE ,Siemens, Philips, Software AG. ACE, AMGN, FSL, T, VMW and YHOO after the close. On the macro side: EZ FinMin meeting, UK GDP, US Durable Goods orders, Case Schiller, Obama State of the Union Address.
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• Britain’s Royal Household spent more than it received last year
• EU Mulls Faster Pooling of Resources If Needed When Banks Fail
• India RBI Unexpectedly Raises Benchmark Rate to 8% From 7.75%
• Nabiullina Says No Black List of Russia Banks Amid Shutdowns
• Platinum Producers Build Two-Month Stockpile to Beat Pay Strike
• Turkey Central Bank to Meet Tue. Night Amid Pressure to Raise Rates
• U.K. GDP Growth Accelerated in Qtr to Jan: CBI
• Ukraine Leader Offers Compromise Before Cabinet Confidence Vote
• Apple IPhone Sales Trail Estimates for Holiday Quarter
• Credit Suisse Said to Plan $500m U.S. CLO Amid Slow Start
• Goldman Wins Danish Assurance Dong Energy Deal Won’t Fall Apart
• Interparfums Says 2013 Operating Profit May Exceed EU50M
• Ipsen 4Q sales rise 2% to EU293m
• Kloeckner to Enter Steel Processing in Strategy Change: HB
• Lufthansa Considers Rene Obermann for CEO Post: Rheinische
• Prada Falls Most Since October 2011; PE Drops to 20-Month Low
• RBS Set for Biggest Loss Since 2008 After $5.1b Provision
• SFR, Bouygues to Share Mobile-Phone Networks, Le Figaro Says
• Shell Said to Seek Buyers for $1b Stake in Ho-Ho Pipeline
• STMicroelectronics Posts $36 Million Loss, Trails Estimates
Apple: Q1 EPS $14.50 vs $14.09 exp, revenue $57.59 vs $57.47B est vs guidance $55.00-58.00B
Outlook : Q2 revenue $42Bln-44Bln vs $46.12Bln est
Q1 Segments :
Macs: – Shipments 4.8M vs 4.49M exp
iPod: – Shipments 6M vs 7.95M exp
iPhone:- Shipments 51M vs 54.61M exp
iPad: – Shipments 26M vs 24.88M exp
=> Shares are down 5.8% in after-market
STMicroelectronics 4Q Rev. In Line; Adj. Loss/Shr Worse Than Est
4Q rev. $2.01b, est. $2.02b
• 4Q adj. loss/shr 1c, est. EPS 2c
• 4Q includes charges/costs $29m
• 4Q gross margin 32.9%, est. 32.9%, saw 33% +/- 2ppts
• Sees 1Q rev. down ~9.5% sequentially +/- 3.5 ppts, est. down 9%
• Sees 1Q gross margin 32.4% +/- 2%, est. 32.2%
• Call 9am 631-570-5613 or webcast
Disappointing iPhone sales triggered a sharp sell-off in Apple stock in after-hours trading, despite the company beating earnings and revenue estimates in its December quarter. Despite setting a new record for the company, Apple’s 51m iPhone sales compared with forecasts of more than 55m, sending its shares down more than 8 per cent after its earnings were published on Monday. (Financial Times)
The manager of the City’s oldest investment fund is set to be sold to a Canadian buyer. F&C Asset Management, which traces its roots back to the formation of Foreign & Colonial Government Trust in 1868, said it was likely to recommend a £700m offer from BMO Financial Group, part of Bank of Montreal. (Financial Times)
Bundesbank’s Stunner To Broke Eurozone Nations: First “Bail In” Your Rich Citizens. In what is sure to be met with cries of derision across the European Union, in line with what the IMF had previously recommended (and we had previously warned as inevitable), the Bundesbank said on Monday that countries about to go bankrupt should draw on the private wealth of their citizens through a one-off capital levy before asking other states for help. As Reuters reports, the Bundesbank states, “(A capital levy) corresponds to the principle of national responsibility, according to which tax payers are responsible for their government’s obligations before solidarity of other states is required.” However, they note that they will not support an implementation of a recurrent wealth tax in Germany, saying it would harm growth. We await the refutation (or Draghi’s jawbone solution to this line in the sand.)
LCM (Abet) The Second Alert
The break of August’s lows for several EM currencies is not good news.
• The meltdown of EM currencies is occurring in a context of stable US$ interest rates. This is the key difference with last Summer when the “tapering risk” was the reason for the EM assets sell-off. This time, the correction is endogenous which means that the financial risk is becoming more serious as this negative trend can transform into a classic self-fulfilling prophecy crisis.
• The most important element to understand is that a currency devaluation is good news for developed countries (because it is seen as a competitive devaluation) while it is bad news for emerging countries (because it is seen as a potential balance of payments (BoP) crisis).
• The vicious circle in EM countries comes from the inflation variable. The currency depreciation leads to an increase in the inflation rate and helps the current account position of BoP to deteriorate at the same time. The pressure on the domestic demand increases in consequence and sustains the negative trend on the currency. Clearly, the spectre of the 80’s and 90’s BoP crisis is reemerging and history seems to be doomed to repeat itself. This is a sad statement.
• The policy answer has to be strong and multilateral but for the moment we have no positive signs on this front. Again, authorities will have failed to prevent the accident and can only react to events rather than anticipating them.
• The temptation for investors to “buy the dip” is strong because they have been looking for entry points for two years now. This seems like a dangerous game as this Phase II of the EM tragedy is just starting. We prefer to stick to our hedging strategies and to wait for a genuine capitulation.
• The dollar has increased against EM currencies but has failed to increase against the EUR. We discuss the possibility of a change in the euro currency status.
Trade recommendation summary
– We publish last week our derivatives report “The Finger and The Moon” with numerous recommendations on relative value trades for equity markets and directional trades on currencies. We have been buyer of the USD against EM currencies since our first report published last August. We stick to these strategies because markets have not yet reached the classic capitulation phase.
– US LT Govt Bonds vs. EM Bonds: Sell Call 109USD June 14 on TLT US to buy PutSpread 107/105USD June 14 on EMB US
– Buy Real Estate stocks in Europe
CS (Garthwaite) Global Equity Strategy M&A: Welcome to the recovery. For Mr Garthwaite, M&A is one of the key theme for 2014. I agree. But I thought so last year as well. His arguments: • Cash-financed M&A/buy-backs are EPS-enhancing for 49% and 23% of the European and US market, respectively (double the mid-2012 levels). • The corporate sector has $2.3trn of ‘firepower’ to return leverage to average levels in Europe and the US, and private equity has nearly $1.1trn available to spend. 32% and 16% of US and European market cap have net cash. • Cheaper to buy than build: 26% of market cap trades below replacement value in Europe, 34% in GEM, 43% in Japan and 5% in the US
The sectors most vulnerable to M&A are pharma, hotels, semis, tobacco and telecoms in Europe, on our scorecard. Analysts’ picks are featured in CSEREUMA and CSUSUSMA. Fenner, Arkema, Sonova, Flowserve, Health Net, Global Payments and Informatica are more than 10% cheap on Credit Suisse HOLT® , have positive EPS momentum and are Outperform-rated. We also show quant screens. M&A is not enough to make us alter our neutral stance on investment banks. Other names highlighted in the note: Tele2, Rotork, Spectris, IMI, Morgan, Straumann, Tod’s, Burberry, UBM, Imperial Tobacco, Alcatel (Wireless),… There are a lot more names.
Verbund(MS, Azzola) Gas asset restructuring – gaining momentum?
Downside to consensus is limited and risk-reward looks more balanced, hence we move EW. Also, Verbund’s plans to restructure loss-making gas assets may be gathering pace: a restructuring or potential sale could be earnings accretive and help realign the stock with peers on P/E and EV/EBITDA.
BG Group (JPM, Lucas) Unexpected warning on 2014/15 – reducing 2014/15E EPS by 23%/27% and NAV by 9%, cutting to Neutral
Shire (GS, Parekh) Buy: Superior growth; valuation remains compelling; reiterate CL-Buy
We update our estimates to reflect the Viropharma acquisition and Dermagraft divestment. On our new estimates, Shire grows revenue at 10% 2012-17E CAGR and EPS CAGR of 18.5% 2012-17E, more than 2x peers at a 2015 PEG of 0.7.
European Food/HPC (JPM, Pannuti) Sector de-rating likely as earnings growth slows. Upgrading Beiersdorf to Neutral
With valuations of the Food and HPC sectors at historical highs and earnings growth close to ten year lows, we see risks of multiple compression as the market awakes to the fundamental deceleration in the sectors’ growth profile. Along with our recent downgrades of Unilever and Danone, we take a cautious view on both sectors. Our top picks are Nestlé in Food and SCA, L’Oreal in HPC. We raise Beiersdorf to Neutral.
ARCELORMITTAL RAISED TO OUTPERFORM AT RBC CAPITAL
BANCO POPULAR RAISED TO OUTPERFORM AT CREDIT SUISSE
BANCO SABADELL RAISED TO NEUTRAL AT CREDIT SUISSE
BG GROUP RAISED TO NEUTRAL VS UNDERPERFORM AT CREDIT SUISSE
CAIXABANK RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT SUISSE
EUROPEAN METALS & MINING RAISED TO NEUTRAL VS BEARISH AT NOMURA
INTESA SANPAOLO RAISED TO OUTPERFORM AT RBC CAPITAL NUMERICABLE RATED NEW BUY AT NOMURA; PT EU31
VERBUND RAISED TO EQUALWEIGHT VS UNDERWEIGHT AT MORGAN STANLEY