Believe

GLOBAL EQUITIES RESEARCH

Another week last week of disillusion for bear players , who initiated some heavy shorts early in the week as the lack of data would prevent any further bullish run, especially as the previous ride did need a pause which the August post earnings period and the bad Lowe data did easily trigger. The scenario is the same since the beginning of July, a buying flow is being fed by the positive newsflow, with pension funds and hedge funds incoming cash to be invested, while traders are still looking at searching the top of the bear rally. The end of week and new fresh positive data keep are doing the rest, with some short covering pushing the market to new highs, as always. This is part of the plan, and the reason why we should reach 3200 and 1200 respectively on the cash Eurostoxx and the S&P very soon. UBS placement from the government reflecting the nice private equity placements which made the governments in rescuing banks all over the world, and the heavily rebounding Existing home sales were important symbols. Both housing and banking sectors back on track, the virtuous circle should last more than one would imagine, and definitely add to the idea that a big bear market rally from March 2000 to March 2009 is over, opening door to an even bigger bull one.

Some bright economists are examining what could turn this so-called "statistical recovery" into the real thing -- the "fake" recovery consists of output catching up with actual demand as the inventory cycle ends. A sustained recovery requires that demand recovers to it's underlying level. Most recoveries rely on increased demand for consumer durables and housing. These economists reckon the underlying demand for autos is 15.5 mln units per year (13 mln to replace scrapped vehicles and 2.5 mln due to population growth), compared to the current sales pace near 11 mln. Similarly, the underlying trend demand for housing is estimated to be around 1.5 mln units per year, largely due to population growth , whereas housing starts are currently 580,000 (only 40% of underlying demand). At 2.2%, they are not advocating robust growth for next year but do expect the recovery to be sustainable. They point to the possibility that we are all too focused on downside risks, while underestimating the potential for a rebound in demand (the consensus is looking for 2.2% growth over the next 4 quarters, compared to a post-war average of 5.8% in the first year of recovery).

The 7.2% m/m leap in US existing home sales in July takes sales to a two-year high of 5.24m and puts them well above the level seen before the collapse of Lehmans last September. This was the fourth consecutive monthly rise and leaves sales 16.7% above January's trough. Once again, some bear strategists are telling you there are three reasons not to get too carried away, which we disagree with : First, sales are still 28% below their peak, so activity is still very subdued, which we think is very promising as the upside is huge. Second, around 31% of sales are "forced" sales of foreclosed properties, which we think is weighting on prices and should no longer do anytime soon, in addition to reduce inventories quickly. Third, by holding at 9.4 the months' supply of unsold homes remains above the level of around 7.5 that has historically been consistent with stable prices, which we say come from 11 months a few months ago, meaning at that speed of rebound we should head toward a normal inventories level before the end of the year. Overall, these figures may suggest for some that the recovery in housing activity is gathering pace, but there is a long way to go yet. To us, they just sign the end of the very depressed period from the Housing and banking sectors, which combined to the stimuli in place will unfreeze the shy consumer spending thanks to an increasing wealth effect which the sharp rebound of equity indices will boost even more.

Already in Europe, data are pointing out some spending and growth in Q3, which the record increase in the composite PMI is reflecting . The record increase in the composite index, from 47.0 to 50.0, was far better that the consensus forecast for a rise to 47.8 and was the sixth consecutive monthly gain. The pick-up was driven by further rises in both the manufacturing and services indices. The latter recorded a particularly sharp rise from 45.7 to 49.5. On the face of it, the composite index now points to unchanged output on a quarter earlier . Given that the index looks set to be much higher than the Q2 average this quarter, it is not out the question that GDP might even have expanded modestly in Q3, after Q2’s 0.1% drop . The survey provided further encouraging signs that the worst of the labour market downturn could be over. The composite employment index now appears to be consistent with annual employment growth of around zero. This, coupled with the recent increase in consumer confidence, suggests that household spending could continue to expand over the coming quarters . The German and French composite PMIs also increased sharply on the month. Both indices are now above the 50 “no-change” level, indicating that both economies might have continued to expand in Q3. The upshot is that the worst of the downturn certainly now appears to be over and the economy might have stopped contracting.

This week confirms that the summer doldrums are in full effect this time of year, as always, but there are still a few noteworthy events scheduled. Consumer Confidence will be interesting tomorrow, as well as the Durable Orders and New home sales on Wednesday. Jobless Claims on Thursday will be in the shade of the personal spending on Friday.

The world's central bankers aren't ready to step away from playing an active role in the global economy as it follows a slow, tenuous path to recovery. European Central Bank President Jean-Claude Trichet said Saturday central bankers must do everything they can to prevent a repeat of the past year's crisis. "Now that we see some signs confirming that the real economy is starting to get out of the period of 'free fall' -- which does not mean at all that we do not have a very bumpy road ahead of us -- the largest mistake we could make would be to forget the importance and the urgency of this task".

While some see the small activity as a sign that upside run is fake, we would recommend to believe it is real, and will also turn things increasingly into bullish ones as time is passing by. While some are telling you the recovery can not happen as consumers, weighting 2 thirds of the GDP, are not part of the game, we would suggest that the GDPs are not doing so bad for now, and might just be rocketing if somehow consumers are coming back thanks to an increasing wealth effect which is well happening now by the way.

As usual, lack of data and Friday's short covering should make today's a typical Monday sell-off , which end of week events will make a buying opportunity once more. Next week is a new month, fund managers come back, heavily underweight equity, will do the rest.



ECONOMIC DATA WITH IMPACT


Chicago Fed National Activity Index -July – (13.30 BST) : prev –1.80 (Minor)


POSITIVE IMPACTS



SULZER :H1 sales SFR1.72Bn (1.58e) / H1 EBIT SFR214.4M (167e) / H1 net pft SFR155.6M(125e) / Doesn’t expect quick recovery in its key mkts

RBS – LLOYDS have set up subsidiaries that buy the properties taken over by the bailed-out banks, in a bid to stave off bn of losses that would be incurred if the repossessed assets were sold in the open market (Times)

POSTBANK wants to report a "clearly positive" fin. result by the end of 10, although it could also do so by the middle of that year (CEO)

COMMERZBANK :Close Brothers has made a bid for Kleinwort Benson, a private bank being sold by CBK (Sunday Times)

DEUTSCHE BANK (minor) Deutsche Bank Private Wealth Management has hired 7 specialists from rivals including Credit Suisse, UBS and Barclays as it expands its UK business.

BBVA took over Guaranty Financial Group Inc. of Texas. (as expected)

BNP agreed to sell its retail banking operations in Argentina to the local unit of Banco Santander SA.

ERSTE BANK : Criteria CaixaCorp (investment arm of La Caixa) has raised its stake in Erste Group to 7.85% from 5.1%

LLOYDS is in early talks with RESOLUTION about the possible sale of the bank’s Clerical Medical subsidiary, which could fetch up to £4bn. (The Mail on Sunday) / Separately Win Bischoff is facing pressure from investors to reshuffle the board (Sunday Times)

SIEMENS : Siemens & Deutsche Bahn AG may jointly pursue orders for U.S.high-speed trains (Der Spiegel)

DEUTSCHE TEL will offer a high-capacity radio network for quick Internet connections in metropolitan areas of India from 2010. (India is among the fastest growing telco mkt, and market researchers expect the number of mobile phone users to rise by 30% in 2009 to 450M)

BT has shut its graduate recruitment program amid a cost-saving plan that will result in more job cuts by the end of the year (FT)

RIO TINTO : Chinalco, is willing to open discussions Rio for cooperation in bauxite & alumina production (WSJ)

BALFOUR BEATTY’s US unit selected for $415M road project in Texas

CONTINENTAL : Schaeffler offered banks options for stakes in a possible biz entity with Conti in return for refinancing debt (Welt)

LUFTHANSA has held talks with Virgin Atlantic Airways Ltd. About the possible sale or merger of its BMI airline (Sunday Times)

NOVARTIS receives approval in EU for Xolair to treat children age 6 to 11 y suffering from severe persistent allergic asthma

GERMANY : Bundesbank President Axel Weber, said that the contraction of the German eco. appears to have come to a halt and the first signs of a pending recovery have emerged. Weber added that the possibility of revising up next year's GDP growth has improved.



NEGATIVE IMPACTS


EADS : GULF AIR could renegotiate (number & size ) its order with Airbus & Boeing / In order : 35 Airbus, 24 Boeing

WATER UTILITIES (minor) : China’s Ministry of Housing & Urban-Rural Development may be investigating whether some

foreign water companies are manipulating water prices in some cities (Jinan Daily )

BASF has a “defense plan” if the Co become a takeover target because of its dispersed ownership structure (CEO in Wirtschaftswoche)

LONZA : JLL Partners rejected a $3.55 per-share bid for Canada’s Patheon ( JLL owns 57%of Patheon)

UBS will meet with Canadian tax officials next month in connection with bank accounts and tax evasion (Canadian National Rev Minister)

BMPS ‘s shareholder won’t allow the lender to be a hostile takeover target (chairman of the Fondazione Monte dei Paschi)

TELIASONERA makes offers for TEO LT ($213M) and Eesti Telekom ($475M)



TRADING IDEAS


BUY AHOLD to play island possibility & BUY Cars such as RENAULT / PEUGEOT & BUY OIL names such as BP / TOTAL / ENI on eco recovery

BUY ERICSSON / PERNOD on double bottom possibility & BUY AEGON / MUNICH RE / ALLIANZ to resume their upside trend


BUY NOVARTIS / SELL ROCHE // BUY VINCI / SELL LAFARGE // BUY CARREFOUR / SELL METRO // BUY EDF / SELL EON // BUY BOEING / SELL UNITED TECH // BUY GENERAL ELECTRIC / SELL 3M


BROKER METEOROLOGY


REPSOL RAISED TO BUY FROM NEUTRAL BY UBS

WPP RAISED TO BUY FROM HOLD BY DEUTSCHE BANK

ERAMET RAISED TO BUY FROM HOLD BY NOMURA

BBVA RAISED TO OVERWEIGHT FROM NEUTRAL BY JP MORGAN

SANTANDER RAISED TO OVERWEIGHT FROM NEUTRAL BY JP MORGAN

DSM RAISED TO BUY FROM HOLD BY RBS


VIVENDI CUT TO HOLD FROM BUY BY DEUTSCHE BANK

NOKIA CUT TO HOLD FROM BUY BY DEUTSCHE BANK


DATA


WTI : 74,3 (2,73 %)

Eur/$ : 1,4329 (0,02 %)

$ /Yen : 94,80 (-0,47 )

10 Yr US : 3,57 ( 0,93 bp)

10 Yr Euro : 3,31 ( 5,7 bp)


Indices : US close ; Europe close

SOX : 1,65 %; -%

S&P :1,86 %; - %

DOW: 1,67 %; -%

NAS :1,59 %; -%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : 2,81 %; - %

ENERGY : 2,69 %; - %

FINANCIAL : 2,12 %; - %

HEALTHCARE : 1,06 %; - %

TECHNO : 1,49 %; - %

TELECOM : 1,93 %; - %

INDUSTRIAL : 2,35 %; - %

UTILITIES : 1,82 %; - %



TO BE COMING



Today

Results :Sulzer / Orascom Telecom

Dividend :STMicroelectronics ($ 0,03)

Events :



Tuesday

Results : Gemalto

Dividend :

Events: Tata Motors AGM



Wednesday

Results : Suez Env sales / WPP / Heineken / Corio / Dexia / Heineken / Antofagasta / Irish Life / Swiss Life / Abengoa

Dividend : Intercontinental Hotels (GBp 8,111111) / QUALCOMM ($ 0,17)

Events : Semi conductor conf at Morgan Stanley



Thursday

Results : Accor / L'Oreal / Credit Agricole / Bureau Veritas / Premier Oil / SeaDrill / Baloise / Casino / Diageo / Cimpor / Essilor / Bouygues / Fortis / GDF Suez / Natixis / Ingenico / OZ Minerals / Lagardere / Dell

Dividend :Time Warner ($ 0,1875)

Events:



Friday

Results :Carrefour

Dividend : France Telecom (GBp 0.60) / Lockheed Martin ($ 0,57) / McDonald's ( $ 0,5)

Events:



ECONOMIC DATA PREVIEW



Sales of existing US homes climbed more than expected to the highest level in almost two years. Purchases increased by 7.2 % for the fifth consecutive month to a 5.24 million annual rate following a 3.6 % rise in June at 4.89 Million. Falling home values and government stimulus efforts such as the tax credit for first-time buyers are boosting sales and stemming the housing meltdown that triggered the financial crisis.


ECONOMY



United States: existing home sales surged in July

Sales of existing US homes climbed more than expected to the highest level in almost two years. Purchases increased by 7.2 % for the fifth consecutive month to a 5.24 million annual rate following a 3.6 % rise in June at 4.89 Million. Consensus forecasted sales to rise to 5 million. in July. Remember that resales reached their lowest level at 4.49 million pace in January 2009. From a year earlier, purchases of existing homes rose by 5 %. Falling home values and government stimulus efforts such as the tax credit for first-time buyers are boosting sales and stemming the housing meltdown that triggered the financial crisis. The Median prices fell to $178 400 in July from $182 000 in may and $210 100 in July 2008. The average prices rose to $ 237 400 in July to $227 900 the previous month but prices dropped more than 6 % from a year ago at $253 000.



Eurozone: PMI Composite climbed in August

The Eurozone composite PMI Index rose more than expected at 50 in August from 47 in July while consensus expected a rise to 48. The PMI composite climbed for the sixth consecutive month from the lowest level of February at 36.2. This record rise was driven by an improvement on both Manufacturing and Service. The PMI Manufacturing increased at 47.9 (vs 47.5 expected) from 46.3 and the PMI Services climbed to 49.5 (vs 46.5 expected) following 45.7 in July. Note that a reading below 50 indicates a contraction and a reading above 50 signals an expansion. This adds to evidence that economic conditions continued to improve and that recession ended around the middle of the year.

In France, PMI Manufacturing was above the 50 level at 50.2 (49 expected) from 48.1 the previous month. The PMI Services rose at 48.9 from 45.5 in July (46.3 expected); But the composite PMI surged at 50.9 in August, the highest level in15 months and following 47.3 in July.

In Germany, PMI Manufacturing improved at 49 (47 expected) in August from 45.7 the previous month. PMI in Services surged above 50 at 54.1 in August for the first time in 11 months. The composite PMI increased at 54.2, its highest level since May 2008.