AD AUGUSTA PER ANGUSTA- 24-Jul-09

GLOBAL EQUITIES RESEARCH

To high places by narrow roads…Yesterday morning, equity indexes were testing major resistances, following the strong rally that started on July 10th: 956 pts for the S&P 500, 2549 for the Eurostoxx 50. Then, weekly initial jobless claims data below 600 k for the third week in a row (554 k on July 18th); a decrease in continuous claims (6225 k on July 11th vs. 6313 a week earlier) and an increase in existing home sales (4.89M annualized in June vs. 4.72M in May) sparked an intraday rally that burst through this resistances. Next targets are 1007 pts for the S&P 500 (yesterday’s close at 976.29), 2608 pts for the Eurostoxx 50 (yesterday’s close at 2585.79). Yesterday, the CAC 40 closed at 3373.72 pts below the resistance (3399, next 3426). The current rally will certainly be fostered by a higher level of liquidity, triggered by increasing net inflows: U.S. mutual funds received $1.5bn of net inflows this week, the most since May 13th, according to AMG Data Services.
The equity risk premium and the corporate bond spread can be usefully compared. The spread of BBB-rated 7-10 year US Corporate bonds over equivalent maturity Treasuries is now less than the equity risk premium – the cyclically-adjusted earnings yield (CAEY) of the S&P 500 minus the yield on 10-year US Treasury Treasury Inflation-Protected Securities (TIPS) – for the first time since the onset of the credit crunch. The equity risk premium as described above is equal to the stock market’s earnings yield less the real yield on 10-year TIPS. If the stock market is in equilibrium – by which investors required rate of return on equity and firm’s expected return on equity are identical – then the equity risk premium will simply be equal to the discount rate that investors use to value the stock market less the real yield on long-dated government bonds. But the corporate bond spread and the equity risk premium have not always moved together. The 1990’s stock market bubble in the U.S. is a notable example. Much of the explanation lies in the fact that the stock market is not always in equilibrium – indeed it is often far from it. The difference between the CAEY and the real yield on long-dated government bonds will then also depend on firms’ payout ratio and their expected return on equity. If firms’ expected return on equity rises relative to investors’ required return on equity – as it did in the late 1990’s in the U.S. – then the earning yield will fall independently of any change in the discount rate that investors use to value equities. Temporary wedges between investor’s required return on equity and firms’ expected return on equity eventually tend to even themselves out. But such wedges can be sustained for some time. A drawn out period in which the equity risk premium lies substantially above the corporate bond spread is most likely to occur after the worst of a recession has ended.
The eurozone composite PMI index may have continued to climb in July (09.00 BST), courtesy of an improvement especially on the manufacturing side (43.5 expected vs. 42.6) and on services (45.2 expected vs. 44.7). At 45.3 (vs. 44.6), the composite index could possibly be at the highest level since last September, thus adding to the evidence that the pace of economic contraction eased further at the beginning of Q3. If the historical relationship between the composite PMI index and GDP Growth reasserted itself, a level of 45.3 for the PMI index would point to a quarterly contraction of GDP of around 0.5 % in Q3 – quite an improvement from the record 2.5 % fall in Q1 ( 4.9 % YoY). We forecast -1.0 % QoQ and -5.5 % YoY for Q2.
German IFO business sentiment may have improved further in July (09.00 BST), despite the latest drop in ZEW investor confidence. June’s third consecutive rise in the headline business climate index left it at its highest in nearly a year and consistent, in the face of it with a sharp slowdown in the rate of economic contraction. July’s fall in ZEW investor sentiment probably reflected the sharp decline in equity prices (between June 1st and July 10th) and the ECB’s continued reluctance to engage in quantitative easing, factors that might not feature as heavily in businesses’ own assessments of economic conditions. Further signs of improvement in global demand may have caused another increase in IFO business expectations in July. The current conditions index has been slow to pick up, but with industrial production rising (+3.7 % MoM in May vs. -2.6 % MoM in April), there may be an increase this month. In all, the headline composite index may rise to 87.5 vs. 85.9. The ECB’s harmonised competitiveness indicators (HCIs) confirm that Germany has improved its competitiveness since the inception of the euro-zone while the Netherlands as seen a considerable deterioration, such as Italy and Spain. France recorded a light decline. So, Germany seems better positioned to benefit from the global recovery when it comes. Germany (the biggest economy in the euro zone) may be one of the first euro-zone countries to expand again next year.

ECONOMIC DATA WITH IMPACT

Euro-zone, July composite PMI index (09.00 BST)
German IFO (09.00 BST), both expected significantly higher.
U.K provisional estimate of Q2 GDP (09.03 BST) expected at -0.3 % QoQ and -5.2 % YoY (vs. 4.9 % Q1).

POSITIVE IMPACTS

SAINT-GOBAIN : H1 revenue €18.7bn (18.9bn exp) / Sees H2 operating and net income better than H1 / Raised FY cost cutting targets to €1.1bn from €600m previously estimated…
DANONE : H1 sales €7.52bn (7.55bn exp) / Operating €1.21bn (1.19bn exp) / Repeated FY sales, op. margin & EPS growth targets
ALSTOM & SCHNEIDER said they are considering a joint bid for Areva's transmission and distribution unit, valued at €3-5bn
ERICSSON : Q2 sales SK52.1bn (52.9bn e) / GM 36.3% (35.7% exp) / Operating (ex-restructuring charges and its loss-making JVs)SK6.9bn (6bn exp) / Q2 restructuring charges of SK3.6bn, related to its announced cost-cutting plan making net coming below exp.
TELIASONERA : Q2 Sales SK 27.48Bn (27.30e) / EBITDA before Items 9.04Bn (8.81e) / Raised forecast for EBITDA margin in 2009
INFINEON-STM… : Samsung Electronics said its semiconductor business posted a Q2 consolidated operating profit margin of 4% versus a Q1 loss margin of 13%
BANCO POPULAR sees its non-performing loan ratio growing in coming months, but at a slower pace (CEO in Expansion)
NATIONAL EXPRESS : Spain's Cosmen family & private equity grp CVC have made a joint takeover approach for National Express (FT)

HYNIX : Q2 sales W1.68Trl (1.55Trl exp) / Operating loss W211bn (-198bn exp) / But said the average price of its DRAM chips rose 20% in the Q2 after falling 7% in the Q1 / NAND flash memory prices rose 23% compared with a 10% rise in the Q1
SAMSUNG ELEC. : Q2 sales W21Trl (20Trl exp) / Operating Trl1.06 (1.63Trl exp) / Head of investor relations for said the company "cautiously" expected its overall profitability to improve in the Q3 from the Q2, without elaborating.
BURLINGTON SANTE FE (No. 2 U.S. railroad) : Q2 revenue $3.32bn (3.43bn exp) / EPS $1.18 (1.01 exp) / CEO said : “We are beginning to see volume stabilize in our more economic sensitive businesses […]”
AMERICAN EXPRESS : Q2 revenue $6.09bn (6.29bn exp) / EPS $0.27, in line / ROE 13% (7% exp) / Tier 1 = 9.6% / CEO said : "Although it is still too early to point to any sure signs of an economic recovery, the number of cardmembers who are falling behind in their payments, the volume of bankruptcy filings and the level of loan write-offs were better than we had expected"
CAPITAL ONE : Q2 revenue $4.15bn (3.88bn exp) / Loss of $0.65 (-0.73 exp) including TARP repayment / But executives warned that delinquencies and loan losses won't improve any time soon / The net charge-off rate in its lending biz rose to 8% from 7.55% in the Q1 while the deliquency rate rose to 5.82% from 5.70%...

NEGATIVE IMPACTS

AIR FRANCE : Q1 revenue €5.19bn (5.5bn exp) / Passenger revenue -18.7% to €4.01 bn / Cargo revenue -41.5% to €544m / Sees more limited deterioration in Q2 with slight improvement in H2 / Maintained current forecasts
LAGARDERE : H1 rev. €3.72bn (3.74bn exp) / Still cannot give guidance for Lagardere active as lack of visibility / Kept 2009 guidance on other activities
SYNGENTA : H1 sales $6.65bn (7.02bn e) / Ebitda $2bn (2.25bn e) / Said achieving FY EPS growth has become more challenging
MERCK : Q2 sales €1.9bn, in line / EBIT €184.5 m (210m exp) / Guidance given in April for the group remains unchanged
VODAFONE : Q1 revenue £10.74 bn (£10.83bn exp) / Organic service rev. fell 2.1%, dragged down by declines in Europe / Repeated FY earnings guidance of FCF in 2010 of between £6 &£6.5 bn and adjusted operating of between £11.0 bn and £11.8 bn
BRITISH AIRWAYS : Negotiations between the airline and trade union Unite aiming to break the deadlock over the carrier's proposals to axe thousands of jobs and freeze pay have collapsed
THOMSON will comment on its balance sheet Today after the close of the Paris market / On June 16, Thomson extended a moratorium on its debt restructuring in order to continue talks with all its creditors until July 24.
EADS : German defense minister expects the delay for Airbus' military transporter A400M to be around 4 years (FAZ)
LLOYDS & RBS submitted restructuring proposals to the European Commission that could lead to the banks shedding assets (FT)

MICROSOFT : Q4 revenue $13.10bn (14.46bn exp) / EPS $0.36, in line / Annual sales of Windows fell for the first time on record / CFO aid that “while things are not necessarily getting better, they may have bottomed out…
AMAZON : Q2 revenue $4.65bn (4.69bn exp) / EPS $0.32, in line / Sees Q3 revenue $4.75-5.25bn (4.95bn exp) & operating profit between $120 m and $210 m (190m exp) / But the Stock is up 80-plus % since the start of 2009 …

TRADING IDEAS

BUY AHOLD / BAYER ahead of results next week
BUY GSZ / DT BOERSE on reversal head & shoulder & EDF / VIVENDI / ENEL on island possibility still
BUY NOKIA / BOUYGUES / FTE / DTE / IBERDROLA to play economic recovery

BUY SAINSBURY / SELL TESCO // BUY FIAT / SELL RENAULT // BUY ALSTOM / SELL SIEMENS // BUY AEGON / SELL AXA orING //BUY BAYER / SELL BASF
BUY RESEARCH IN MOTION / SELL APPLE // BUY DELL / SELL HEWLETT PACKARD

BROKER METEOROLOGY

AKZO NOBEL RAISED TO BUY FRO HOLD BY ING
FAURECIA RAISED TO BUY FROM HOLD DEUTSCHE BANK
ABB RAISED TO EQUALWEIGHT FROM UNDERWEIGHT BY MORGAN STANLEY

CASINO CUT TO SELL FROM NEUTRAL BY UBS
MERCK KGaA CUT TO UNDERWEIGHT FROM NEUTRAL BY JP MORGAN
ASM INTERNAT CUT TO SELL FROM HOLD BY ING

DATA

WTI : 66,8 (1,83 %)
Eur/$ : 1,4157 (0,10 %)
$ /Yen : 94,81 (0,07 )
10 Yr US : 3,65 ( -0,75 bp)
10 Yr Euro : 3,46 ( 7,9 bp)

Indices : US close ; Europe close
SOX : 0,98 %;0,23%
S&P :2,33 %; 2,13 %
DOW: 2,12%; 1,92 %
NAS :2,45%; 1,97%

DJ Stoxx US Sectoral Indices : US close ; Europe close
BASIC MATERIALS : 3,30 %; 3,35 %
ENERGY : 3,03 %; 2,70 %
FINANCIAL : 2,86 %; 1,79 %
HEALTHCARE : 2,43 %; 2,35 %
TECHNO : 1,85 %; 1,70 %
TELECOM : 2,81 %; 3,70 %
INDUSTRIAL : 2,56 %; 2,01 %
UTILITIES : 2,59 %; 1,63 %

TO BE COMING

Today
Results :Vodafone / United Utilities / Acciona / Danone / Ericsson (BMO) / Kesko / Saab / Ericsson / Metso / Merck KGaA / Syngenta (BMO) / Havas sales / TF1 / Telia Sonera (BMO) / Schlumberger (BMO) / Black & Decker
Dividend :
Events :

Monday
Results : Union Fenosa / Honeywell / Banco Popular Espanol / Thales / SSAB (BMO) / Ubisoft / Amgen / Verizon
Dividend : ABB (CHF 0.48) / Swiss Life (CHF 5.00)
Events:

Tuesday
Results : Ahold (BMO) / Alleanza Assicurazioni / BBVA (BMO) / Banco Espirito Santo (BMO) / BP (BMO) / Bureau Veritas (AMC) / Deutesche Bank (BMO) / EADS / Endesa (BMO) / ST Micro (After US close) / Verbund /
Dividend :
Events :

Wednesday
Results : Sanofi Aventis / Arcelor Mittal / Gas Natural / France Telecom / Santander / ACS / Acerinox / Akzo Nobel / Acciona / Infineon / SAP / Atos / Saipem / Maroc Telecom / M6 Metropole TV / EDF Energies Nouvelles sales / Rhodia / Bayer / Daimler / Time Warner / ConocoPhillipsSymantec / General Dynamics / Nissan / Honda MotorNec Electronics / Nomura
Dividend :
Events: Unicredit EGM / Eletronic Arts AGM

Thursday
Results :Siemens / L'Oreal sales / Alcatel Lucent / Centrica / Grupo Ferrovia / Air France-KLM / Renault / Repsol / Enel / Royal Dutch Shell / ENI / Vinci sales / BASF / Maurel & Prom / Solvay / Clariant / Air Liquide / Mediaset / HeidelbergCement / Deutsche Postbank / Lufthansa / Dassault Systemes / Mediaset / Telefonica / Abertis / AstraZeneca / B Sky B (BMO) / Capgemini / CGGVeritas / Continental AG / Exxon Mobil / Neste Oil / Kellogg / Goodyear / Colgate Palmolive / Mastercard / Motorola / Walt Disney / Sony / NTT DoCoMo / Nec
Dividend :
Events:

ECONOMIC DATA PREVIEW

Watch in Germany the release of the IFO business climate for July due at 9.00 GMT. The IFO index is expected to slightly increase confirming that Germany’s economy reached a bottom at the first quarter and is progressively recovering.

Watch in the Euro zone the release of the purchasing managers PMI manufacturing and services survey for July due at 9.00 GMT, both survey are expected to slightly increase, getting slowly closer to the level of 50 marking the border between a contraction and an expand of the activity./JB

ECONOMY

United-States: existing home sales rose for a third consecutive month
US existing home sales rose for a third consecutive month from 4.72 million in May to 4.89 millions or +3.6% in June (forecast 4.84 millions,+1.5%) their highest level in 2009. This rise was mainly led by the drop of interest rate and by the gain of purchase power due to the Obama stimulus plan. Following the rise of housing starts and building permits, the increase of the NAHB index and the rise of house prices this is another significant sign of the progressive recovery of housing market.

United-States: initial jobless claims rose and continuing claims declined
After declining for three consecutive months, initial jobless claims slightly rose last week from 524 000 to 554 000. Meanwhile continuing claims declined from 6 313 000 to 6 225 000 the lowest level since April 10th.These encouraging data confirmed that a ground floor has been reached on the labour market and after over laying off companies are now starting to have a more realistic behaviour. Indeed if 60% of the lay off are due to the drop of the GDP, 40% can be considered as an over adjustment disconnected from the real drop of the activity. More generally this over adjustments behaviour concerned as well stocks and investments confirming the gap between economic fundamentals and US companies management.

France: Rise of the business confidence indicator in July
Following the rise of the industrial production in May and the increase of the household consumption in June French economy is shining during this summer. Indeed after three consecutive months of rise France business confidence indicator increase again in June to reach the level of 78 showing a rise of 10 pts in four months. This leading indicator of industrial activity reached its highest level since November 2008. In fact this rise is a technical correction after the slump observed since a year and a half as showed by the sub index of the INSEE survey. Starting with the orders books gaining 2 pts with foreign countries and 1 pt overall. Meanwhile overall production outlook remained at a level of - 40 but it must be said that its average level since 1976 is -9. Nevertheless the real good news of the survey is showed by the 3 pts rise of the own production outlook (the best leading indicator of industrial activity). With a level of -14 this indicator rose by 33 pts since its lowest point in March. Finally we can say that the rebound of French industry is more a technical rebound than a lasting recovery. Indeed to confirm this encouraging data France needs a lower euro , lower interest rates and the end of the commodities rise trend.

Japan: Increase of the trade surplus in June
After reaching a lowest point with a trade deficit of Yen 376 billion in January the Japanese trade balance slowly recovered to reach positive territory and showed a surplus in March. The trade balance has improved regularly since then to reach Yen 438 billion in June (forecast Yen 480 billion). This rise is mainly explained by the fact that exports fell at a slower pace in June( -35.7% ) versus -40.9% in May as the demand is slowly recovering worldwide and as the Yen/USD rise only by 1.3% in June. Meanwhile imports dropped at a slower pace as well from 41.9% in June versus 42.4% in May. As Japan’s growth is mainly based on exports the country recovery is strongly linked to the rebound of the US economy its main trade partner with China.