LCM Dawn Patrol – 10.02.14 – JPM becoming less bullish, GS’ lists of rich cash names to own, JPM on banks and on Nestlé/L’Oréal… More


Markets in Asia are generally higher this morning. The quarterly monetary policy statement from the PBOC reiterated its intent to keep policy stable in the coming year however noted that interest rate volatility should remain. Chinese automakers are leading the China market after news of a subsidiary extension for electric cars. The Japanese current account widened again as exports were weaker than expected. Australian financials are pushing the wider market higher ahead of results from the sector due this week, while resource stocks are benefiting from strong commodity prices.

The market. Despite mild shifts in the macro narrative, the major driver behind the 2014 volatility remains positioning, technicals, and sentiment as overexposed traders abruptly and aggressively brought down their long positions in the latter part of Jan and into early Feb. According to data published Fri, stock funds saw record outflows during the week ended 2/5 while HF beta (according to JPMorgan) has plunged from 0.256 (the highest starting point in more than 5 years) to 0.072 (inline w/historical levels). Looking ahead, with the SPX having recaptured an important technical hurdle Thurs (the 100day MA) and w/long exposure levels materially reduced, the path of least resistance is to the upside for the time being.

Feb 20 brings the next major economic data point. There are plenty of economic data points scheduled for the coming days (inc. Jan retail sales 2/13, Jan IP 2/14, Empire Manufacturing 2/18, etc) but investors are really focused on two numbers in particular: 1) Feb flash PMIs from the US/China/Europe on Thurs 2/20 and 2) the Feb jobs report on Fri 3/7.

Watch today: (not much) European IP, Spanish Trade Balance, German CPI.


It may not last…

fr it

capture dc3a9cran 2014 02 10 07 41 59

Have a good look…


Euro Area Crawls in Recovery as Car Sales Hint at Further Growth
EU Banks’ Risk-Free Debt Addiction Threatens ECB-Led Overhaul
Catalonia to Market $406 Million Office Portfolio to Cut Deficit
Hedge Funds Boost Diesel Bets With Supply at Decade Low: Energy

Barclays Examining Possible Theft of Data From 27,000 Customers
Deutsche Bank Ordered to Hand Over Documents to Dubai Regulator
Deutsche Telekom Said to Pay $1.1b in Czech Mobile Buyout
Coutts Sees No Emerging-Market Crisis as Rout Divides Investors
Vodafone Said to Approach Spain’s ONO for Potential acquisition
Vente-Privee Seeks $11 Billion Revenue With Flash Sales Online
Garuda Said to Mull More Airbus A330s, Weigh A350 Versus 787
Nestle Said to Explore Ways to Reduce $30b Stake

raised the issue to L’Oreal at the highest levels, both sides discussed the matter with banks, people familiar tell Bloomberg’s David Welch, Jacqueline Simmons, Aaron Kirchfeld. Cos. would have to agree on timing, as would Bettencourt family,which owns 31% of L’Oreal. FYI Last week, MS and UBS suggested status quo is the most likely scenario & it looks well priced in if you observe L’Oreal’s implied volatility.


“Business activity across emerging markets expanded in January at the slowest pace in four months, dragged down by sluggish services sectors in the BRIC quartet of big developing countries, a survey showed on Monday. HSBC’s composite emerging markets index of manufacturing and services purchasing managers’ surveys slipped for the second month running to 51.4 in January. It stayed under the 2013 average of 51.7 and well below the score of 64.1 posted last January.” (Reuters)

US Earnings. According to Bloomberg, ~76% of firms beat EPS expectations by an average 5% (that 76% number has been the status quo for the past several earnings seasons). There were puts-and-takes but the full year ~$118-120 EPS estimate for the SPX stayed constant throughout the season. With CQ4 over, the focus turns to the Jan-end season which kicks off this Wed night 2/12 (AMAT, CSCO, NTAP, and NVDA all report Wed after the close). The retail Jan-end earnings season starts later in Feb (WMT 2/20, HD/M 2/25, LOW/TGT/TJX 2/26, KSS/SHLD 2/27, etc).

George Soros’s Quantum Endowment fund had its second-best year ever in dollar terms in 2013, adding $5.5bn to the billionaire’s fortune and putting Quantum back in top place among the most successful hedge funds of all time. (Financial Times)

Apple gets backing against Icahn proposal: “Influential proxy-advisory firm Institutional Shareholder Services Inc. recommended that Apple shareholders reject a proposal by activist investor Carl Icahn that the company buy back $50 billion of its stock.” (WSJ)

China Development Bank, a lender fully owned by the state, has asked several foreign clients in recent months to delay drawing down lines of credit that had previously been offered, according to individuals with direct knowledge of the matter. Two Indian companies – an infrastructure developer and a shipping group – were among those told to wait before accessing promised credit lines, the individuals said. (Financial Times)


JPM (Loeys) The J.P. Morgan View
A Correction, but not without warning
Asset allocation –– A market reversal with unchanged fundamentals makes the year so far a correction, not a change in direction, in our view. Wider spreads made us add to our credit OWs. For equities, volatility is a better signal than value, and discipline thus forces us to reduce our long from aggressive to still significant.
Economics ––  No change in forecast. If Payrolls disappoint again next month, then FOMC should be expected to put tapering on hold.
Fixed Income –– We close our US duration short (2s10s UST steepener).
Equities –– Move Cyclicals to UW tactically, but stay long IT in the US.
Credit –– Add risk through a long in EMBIG spreads.
FX ––EM FX weakness is not over, we fear.
Commodities –– Open a short in energy and a long in cotton.

GS Portfolio Strategy Research: Show me the money Part 1: Cashback
Corporates have lots of cash after hoarding it through the crisis. Withbetter growth and a decline of the equity risk premium likely, we expect them to boost spending. We expect increasing cash returns and look at related investment strategies.
Screening criteria: Stocks with a 2014E dividend yield above 3.5% based on our analysts’ forecasts and cumulative dividend growth from 2013-15 of at least 10%. We exclude companies with: a mark et cap below €1 bn; 2014/15E payout ratios above 75%; 2014E FCF coverage of less than 0.75x (1x in 2015E); 2014E net debt/EBITDA above 3.5x (3x in 2015); option-implied dividend growth below  -20%; and CDS above 200 bp. We also exclude stocks rated Sell by our sector analysts. We relaxed the criteria for Oil & Gas stocks : BMW, CNH, DAI, BARC, BBVA, BNP, HSBC, NDA, BOL, TRE, DG, ATCOA, ROG, SAN, DPW, SU, SIE, CS, AGN , RSA, PSON, SES, BP, ENI, RDSA, IMT, BATS, CO, ERICB, SCMN, TEL, CNA….

GS (Kostin) US Weekly Kickstart
Portfolio Strategy Research
Continued macro data stability and improving flows key to market recovery
S&P 500 responded surprisingly well to a weaker-than-expect payroll report but remains down 3.5% in 2014 thanks to soft macro data, below-consensus earnings guidance, and less-positive flow of funds. Strong rotation has occurred at the stock and sector level in response to both growth data and equity vs. bond performance. We maintain a pro-cyclical bias given our forecast of (1) steady improvement in US GDP growth; (2) solid 8% EPS growth; (3) net inflows from retail investors; and (4) a 35% surge in repurchase activity to nearly $600 billion in 2014. Buy stocks with high operating leverage and large share buybacks.


Statoil: Delivering (MS, Rashed ) ‘The Full Monty’ – Upgrade to OW
Last week’s strategy update unveiled several positive announcements: a dividend increase, cut to capex guidance, a more active buyback program and a focus on ROACE instead of volume growth. We think Statoil now has the strongest FCF momentum vs. peers over the next two years, and we upgrade to OW.

Europe: Banks (GS, Omahen) AQR/test: Reassuring messaging on AQR, in parallel with capital “creation”
The ECB has further clarified its approach on AQR. We are reassured by (i) the disclosed progress on data collection, (ii) the outlined operational set-up, and (iii) the newly disclosed approach to trading book review.

JPM on Global Investment Bank Tracker (Kian Abouhossein) Disappointing 1Q14E so far across all products due to low volatility: Top pick UBS, DB
Central bank intervention and forward guidance is negatively impacting IB revenues in 1Q14E, reducing volatility in Rates, FX and Equity derivatives in our view leading to lower activity levels and margins. Cash equity is the best performing business followed by credit-related products. We estimate 1Q14E IB revenues -8% y/y (local currency) with FICC -16% y/y, equities -7% y/y and IBD +10% y/y (all local currency) and cut our FY14E EPS estimates by avg -2% for IBs (ex Barc). We see further risk to EPS in the range of 3-5% in the event volatility does not pick up. We note that 1Q13 was a very strong quarter for FICC with $29bn in industry revenues compared to a $19bn average quarterly run-rate for the remaining 3 quarters in 2013. Hence, we believe that the y/y decline in FICC revenues should narrow and we expect FICC revenues in 2H14 to be up y/y.

JPM on Nestle/L’Oreal/Sanofi (Celine Pannuti, CFA) Cash return on the way
This report follows on our March 2013 note (Unlocking value for all shareholders) where we argued the rising odds of Nestlé’s (NESN) selling its 30% stake in L’Oréal (OR). The market appears to be pricing a ‘Status Quo’ – ie a non-event – though recent divestments at Nestlé increasingly resonate with a historic disengagement (JPMe 70% chance). A landmark decision to recognize OR as purely financial would unlock cash returns (whether Nestlé sells or not) with L’Oréal set to benefit the most (21% EPS17E accretion, Galderma 50% stake to buy). Nestlé and Sanofi should also be supported by substantial buybacks.

GS (Toorabally) downgrades UPM, Stora Enso and Redrow following their stock price outperformance.

Vodafone (GS, Boddy) Buy: Upside as both acquirer and potential target; Buy rated, 12m PT 275p
We remove the Not Rated designation from Vodafone. We are Buy with 24% potential upside to our 275p 12-month price target. We believe the stock fails to reflect the opportunity to benefit from industry consolidation.


Asian markets

Nikkei 225 up +224.39 (+1.55%) at 14,687
Topix up +12.60 (+1.06%) at 1,202
Hang Seng down -9.78 (-0.05%) at 21,627

US markets
S&P 500 up +23.59 (+1.33%) at 1,797
DJIA up +165.55 (+1.06%) at 15,794
Nasdaq up +68.74 (+1.69%) at 4,126

European markets
Eurofirst 300 up +9.70 (+0.75%) at 1,300
FTSE100 up +13.40 (+0.20%) at 6,572
CAC 40 up +40.08 (+0.96%) at 4,228
Dax up +45.34 (+0.49%) at 9,302

€/$ 1.36 (1.36)
$/¥ 102.39 (102.25)
£/$ 1.64 (1.64)
€/£ 0.83 (0.8309)

Commodities ($)
Brent Crude (ICE) down -0.38 at 109.19
Light Crude (Nymex) down -0.13 at 99.75
100 Oz Gold (Comex) up +7.00 at 1,270
Copper (Comex) at 3.27

10-year government bond yields (%)
US 2.68%
UK 2.71%
Germany 1.66%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.03bps at 54.44bp
Markit iTraxx Europe -1.67bps at 76.97bp
Markit iTraxx Xover -9bps at 292.74bp
Markit CDX IG -2.34bps at 67.5bp

Sources: FT, Bloomberg, Markit


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s