Do You Remember The Time....

GLOBAL EQUITIES RESEARCH

Do you remember the time when things were falling apart, with the big mistake to let Lehman fall bankrupt one year ago, which sent for real both the indices and the economies on the floor. Until then, economies did hold rather well, but then they stalled struck by a heart attack. Now they are just out of intensive care, and might start to run on their own at a decent speed, enough to keep on supporting equity indices, and bring further confidence which entertain the current virtuous circle and should open the door to further massive inflows from "king cash" sleeping in monetary funds.

It makes no longer any doubts that in the near term the recovery in the US economy will look fairly impressive. But doubts are more about whether it will last. Not only we recommend to follow the first fact, as things change too fast to play the possible collapse in one year time now. But anyway, it happens that the prediction of such a collapsing scenario is based on the idea that the consumer will never take part to the recovery, which we thing is not only wrong, but mostly a not worth-it-bet in term of risk reward. Indeed, the reason for worries is that a sharp fall in the supply of credit (bad in July) will constrain consumption by even more than already expected. However, there are two reasons why this is not so sure. First, the perceived wisdom is that the fall in consumer credit is due to banks cutting back on the supply. But this is not the case. Over the last year, commercial banks have actually provided more credit, albeit only just. Instead, the sharp fall has been driven by large drops in the credit extended by finance companies (such as those that provide auto loans) and securitized credit. The declines in credit provided by finance companies and through securitization have been driven by the collapses in the commercial paper and securitization markets and the fall in bond issuance. Now that some of the fall in securitized credit is being offset by the Fed's TALF scheme (which has so far provided $37bn of funds) and that the commercial paper and bond issuance markets appear to be getting back on their feet, the supply of consumer credit may soon improve. Second, and more importantly, trends in consumer credit lag the economic cycle. This is best shown by plotting the annual change in the outstanding value of consumer credit against the change in the consumption of durable goods. Trends in consumer credit typically follow trends in spending after a year. In other words, the recent sharp falls in consumer credit merely reflect the weakness of consumption seen a year ago. The upshot is that most of the sharp fall in consumer credit is not a result of a decline in the supply of credit provided by banks but instead has been driven by a fall in demand associated with the weakness of consumption over the past year. So the weak consumption would remain so only due to high unemployment and slowing wage growth, not weak consumer credit. And Employment, once more might just improve a lot sooner than imagined so much the firms cut costs and were ready for a long and lasting Great Depression revival which worldwide officials managed to avoid.

Retail Sales out today is the one this week. Thanks to the success of the “cash for clunkers” programme, August’s retail sales numbers will be very strong. But after stripping out the boost from autos, the underlying trend might look fairly weak. The 25% m/m jump in the volume of manufacturers’ auto sales in August suggests that the “cash for clunkers” programme boosted the value of retail auto sales by anything up to 12%. On its own, that would be enough to push overall retail sales up by just over 2% m/m. The boost may be even larger if manufacturers' total sales were constrained by subdued sales of fleet autos, which do not appear in the retail sales data. Things are unlikely to have been as good outside of the autos sector. The stabilisation in the gasoline price suggests that sales at gasoline stations were broadly flat. Meanwhile, high unemployment, slowing wage growth and a desire to pay back debt and boost savings implies that non-auto, non-gas sales may have fallen for the sixth month in a row. Nonetheless, a 2.0% m/m gain in total sales would leave consumption on course to increase rapidly in the third quarter.

August's PPI data will highlight the weakness of cost pressures towards the start of the inflation pipeline. A modest rebound is gasoline prices is likely to be the main factor behind a 0.4% m/m increase. But core crude materials inflation has fallen sharply over the past year and that it is about now that it should be filtering through into the cost of core finished goods. Some of this may be offset by further gains in the price of vehicles. After all, auto manufacturers probably did not feel the need to discount when the government was handing out cheques to buy a car. Nonetheless, a modest 0.1% m/m gain in core prices would be enough to push the annual rate down from 2.6% to 2.2%. Still not the so feared deflation level.

The Empire State (today) and Philly Fed manufacturing indices both rebounded to pre-recession levels in August and there is a good chance the upward trend will continue in September. Along with the recovery in the national ISM index, those improvements suggest the recession has abated and that the recovery is now picking up momentum . The improvement in the August surveys was widespread, with even the employment and inventories indices strengthening quite sharply, albeit from very low levels. One part of these surveys that normally receives little attention is the gauges of capital expenditure plans over the next six months. However, economists are keeping a close eye on how those indices develop this month, since they are good leading indicators of business investment in machinery and equipment.

Bullish day ahead as the newsflow, as usual lately will be friendly. Option gamma players might keep the market within a range though due to big delta hedge from long gamma.



ECONOMIC DATA WITH IMPACT


German ZEW investor sentiment (10.00 UK) is likely to have increased further in September. Given firmer signs of recovery in global demand and the rally in equity markets, the index is seen rising to +65.0 this month. This would leave the index at its highest level since March 2006 pointing, on the face of it, to a very strong pick-up in GDP growth / minor as just a survey

US earnings : Best Buy (BBY), Kroger (KR), Adobe Systems (ADBE)

Retail Sales (13h30 UK time) +1.9% from prior -0.1% // ex auto expected 0.1% from previous -0.4% / important data as to gaude the consumer spending mood, in order to see whether (or when) the manufacturing sector recovery is spreading to the retailing sector / interesting although volatile data, and already granted that the consumer spending is lagging due to high unemployment level, meaning any good data might be very welcome.

PPI (13h30 UK time) expected 0.8% from -0.9 // ex food & energy 0.1% from -0.1% / minor as the focus will be the CPI tomorrow in term of inflation, and this will fine for now. The deflation doesn’t t appear through data unkine economists were screaming not so long ago.

Empire Manufacturing (13h30 UK) expected 15 from previous 12.8 / minor

Business Inventories (15h UK) expected -0.9% from -1.1 / minor as the story behind the data is hard to read / a drop in inventories is welcome as it means sales are increasing, but it also might mean the inventories adjustment impact might not boost the current GDP (Inventories rebuilt is a boost to the GDP)


POSITIVE IMPACTS



DEUTSCHE TELEKOM isn't planning any large purchases in the US for now and will give its management there until the end of the year to turn business around (Handelsblatt)

MICHELIN said that it does not manage to keep up with growth in emerging markets… / H2 will be good as lower raw-material costs are starting to feed through into the company’s earnings…

SKF's sales turned positive in China in the Q2 with Asia & LatAm also showing good figures (CEO)

VOLKSWAGEN’s CEO said he sees increasing signs for a recovery of the automotive market but cautions that the crisis is not over yet… / Deliveries rose 9.5% in August

PHILIPS : Taiwan Semiconductor Manufacturing is in talks to buy Philips Lumileds Lighting (the Economic Daily News)

REPSOL-BG Group : Petrobras struck again oil & gas in another well in Brazil / Repsol has a 25% stake in the block.

UBS should not buy toxic assets which were transferred to the central bank last autumn as part of a govt rescue package (Regulator)

NOVARTIS : A respiratory medicine from Novartis improved lung function and significantly reduced breathlessness in a late stage trial

NOVARTIS, SANOFI, GSK look set to sell all the swine flu vaccine they can make in 2009

EDF may get a stake of at least 10% in Gazprom’s South Stream project in exchange for LT contracts to supply gas to power stations / Separately, France is preparing to speed up competition in the electricity sector if the EC drops sanctions against France (Les Echos)

NOBEL BIOCARE has settled a patent dispute with Materialise Dental and would pay an undisclosed amount to the group

BAE SYSTEMS is reorganizing its Land & Armaments unit in 3 market areas to cope with likely revenue decline of as much as 40%

EUROPE AUG NEW CAR REGISTRATIONS +3% ON YR : PEUGEOT +12.6% / FIAT +9% / RENAULT +7% / VOW +4.1%



NEGATIVE IMPACTS



AIR FRANCE is in talks with Japan Airlines to form an alliance in which it would inject $300 + take a minority stake

RSA Insurance is considering acquisitions potentially valued at about £600m that may need to be supported by a rights offering (FT)

SWATCH : The Swiss competition watchdog has launched an investigation into a Swatch’s subsidiary as it may have abused its dominant position in the market for mechanical clockworks…

EUROPE AUG NEW CAR REGISTRATIONS +3% ON YR : DAIMLER -25% / BMW -5.4% / GM -1.4% / TOYOTA +1.5% / FORD +1.5%



TRADING IDEAS


BUY CARS to play Frankfurt Motor Show as PEUGEOT / RENAULT / BMW / DAIMLER

BUY EON / UNILEVER / DIAGEO / PERNOD / METRO on double bottom possibility

BUY GLAXO / CARREFOUR / BASF on reversal Head & Shoulder



BUY AXA / SELL ALLIANZ // BUY BP / SELL ROYAL DUTCH // BUY PEUGEOT / SELL EUROSTOXX or RENAULT // BUY ENI / SELL TOTAL


BROKER METEOROLOGY


SCHNEIDER ELECTRIC RAISED TO BUY FROM HOLD BY BANC OF AMERICA - ML

AIR FRANCE- KLM RAISED TO BUY FROM NEUTRAL BY BANC OF AMERICA - ML

ARCELOR MITTAL RAISED TO BUY FROM HOLD BY CITIGROUP

NOVARTIS RAISED TO BUY FROM HOLD BY JEFFERIES

NESTE OIL RAISED TO NEUTRAL FROM SELL BY UBS

DSM RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS

SYNGENTA RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS

JOHNSON MATTEY RAISED TO NEUTRAL FROM SELL BY GOLDMAN SACHS

ROSNEFT RAISED TO OVERWEIGHT BY MORGAN STANLEY

RED ELECTRICA RAISED TO BUY BY UNICREDIT

DNB NOR RAISED TO BUY BY DEUTSCHE BANK

OSI PHARMA RAISED TO NEUTRAL FROM SELL BY GOLDMAN SACHS

DIXY GROUP RAISED TO BUY FROM HOLD BY CITIGROUP

CARNIVAL & ROYAL CARIBEAN REINSTATED AT BUY BY BANC OF AMERICA – ML

SOLARWORLD RAISED TO OUTPERFORM BY EXANE


NESTLE REMOVED FROM MOST FAVOURED LIST BY CITIGROUP

GIVAUDAN CUT TO SELL FROM NEUTRAL BY GOLDMAN SACHS

IMI CUT TO NEUTRAL AND REMOVED FROM EURPOPE 1 LIST BY BANC OF AMERICA-ML

NORDEA CUT TO SELL BY DEUTSCHE BANK

K+S CUT TO SELL FROM HOLD BY CITIGROUP


DATA


WTI : 68,7 (0,36 %)

Eur/$ : 1,4617 (-0,01 %)

$ /Yen : 91,08 (-0,14 )

10 Yr US : 3,40 ( -2,05 bp)

10 Yr Euro : 3,26 ( 2,1 bp)


Indices : US close ; Europe close

SOX : 0,45 %;-0,08%

S&P :0,63 %; -0,01 %

DOW: 0,22%; -0,09 %

NAS :0,52%; 0,06%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : 1,69 %; 0,29 %

ENERGY : 0,50 %; -0,18 %

FINANCIAL : 1,38 %; -0,27 %

HEALTHCARE : 0,65 %; 0,34 %

TECHNO : 0,06 %; -0,12 %

TELECOM : -0,12 %; -0,12 %

INDUSTRIAL : 1,07 %; 0,31 %

UTILITIES : 1,43 %; 0,68 %



TO BE COMING



Today

Results :Adobe / The Kroger

Dividend :

Events :Frankfurt Motor Show press day / Applied Materials at Deutsche Bank Technology Conference / Bank of America at Barclays Capital Conference / Cardinal Health at Morgan Stanley Global Healthcare Conference / Annual Chemical conference at Credit Suisse / Global Healthcare Conference at Merrill Lynch



Wednesday

Results : Oracle (AMC)

Dividend : Antofagasta ($0.034) / Cadbury (GBp 6,333333) / Land Securities (GBp 7.00) / Logica ( GBp 1,111111) / Swedbank AB (SEK 1.00)

Events: Frankfurt Motor Show press day / Qualcomm at Deutsche Bank Technology Conference / Total mid-year review in London / Asian Technology Conference at Credit Suisse



Thursday

Results : FedEx / Carnival / Palm

Dividend :

Events : Kingfisher analyst meeting



Friday

Results :

Dividend :

Events: Euler Hermes AGM



Monday

Results :

Dividend : ENI (€0.50)

Events:General Mills AGM / Nike AGM



ECONOMIC DATA PREVIEW



Inthe United-Stateswatch the advanced retail sales (13.30 GMT) for the August. After two consecutive months of rise, retail sales declined by 0.1% in July. However, lead by the increase of 0.3% in wages in August and by the automobile incentives, retail sales should increase by 1.5% in August. This forecast is reinforced by the progression of 14.1% of the Conference Board household confidence index in August and by the reduction in job destruction in the retail business (in fact a loss of only 10,000 in August, the lowest level since January 2008). Excluding transportation, after decreasing by 0.6% in July, retail sales should grow by 0.6%.



InGermanywatch the ZEW economic sentiment(10.00 GMT) for the September. After dropping at 39.5 in July, stopping eight consecutive months of progression, ZEW index reached the level of 56.1 in August, meaning the highest since April 2006.Following the German rebound and the stock market recovery, we anticipate a new rise of the index which should reach 57 in September.



ECONOMY



Euro area: Industrial production dropped further in July

After dropping by 2.5%QOQ, 4.9% YoY at the first quarter the Euro area GDP fell by 0.1% QoQ,4.7% QoQ showing an improvement of the economic activity. Nevertheless its important to bear in mind that this improvement is more a technical correction after the historical drop of the GDP at the first quarter than a real recovery. This is confirmed by the disappointed statistic of the industrial production dropping at a faster pace from 0.2% in June to 0.3% in July (forecast -0.2%). Looking at the breakdown we see a 1.8% drop in capital goods production showing that at the opposite of the United-States companies are not willing (or not able) to invest again, leaving the economy far from the virtuous circle : investment-employment-consumption. Meanwhile production in the energy sector dropped by 1.2%, and durable goods orders declined by 0.8%. On the other hand non durable consumer goods rise by a small 0.7% and intermediate goods by a slight 0.3%. From a year ago euro area industrial production remained very weak passing from -16.7% YoY in June to -15.9% YoY in July. We see that the rebound in the euro area is very fragile (as showed as well by the drop of employment by 0.5%MoM,1.8% YoY) and needs to be confirmed. Indeed we forecast that Euro area’s GDP will fell by 4.0% this year and growth will be back in 2010 but at a very slow pace as we anticipate that the euro area GDP will reach 1.5% in 2010.