Fedy Tales

GLOBAL EQUITIES RESEARCH

A falling dollar drove buying in commodities and commodity-related stocks to help the US market start the session on positive footing, but it was the financial sector that emerged to provide the most leadership. Early gains were led by the energy sector (+1.4%), materials sector (+1.2%), and financial sector (+2.3%) after the trio had lagged in the previous session.

What a disappointing consolidation. There a few reasons for the downside to be limited a bit more everyday, in addition to the improving economic background. They are a result from the so called virtuous circle. House holds wealth increase and M&A are among them. One positive side effect of the stock market rise has been the boost to household balance sheets. The market value of corporate equities held directly by US consumers rose by more than $1.1trn (at an annualised rate) during the second quarter according to the Federal Reserve’s latest Flow of Funds accounts. What’s more, the rally is likely to have provided a boost of around half as much again during the summer. Most of the increase in household wealth has come about as a result of rising stock prices rather than as a result of increased exposure to the equity market. Indeed, of the $1.1trn increase in the value of corporate equity during Q2, more than $1trn resulted from holding gains. Net direct purchases of equities hit a record $501bn annualised during the first quarter and remained strong during Q2 ($288bn). Retail investors also hold equities indirectly, via their exposure to life insurance companies, pension funds and mutual funds. In total, the market value of corporate equities held indirectly increased more than $1trn in Q2. Again, this was not entirely due to rising prices. Just under two thirds of mutual fund assets are held by households, and mutual funds’ holdings of equities increased around $226bn during the second quarter. Anecdotal evidence suggests that net inflows into equity mutual funds also remained strong in July and August. Admittedly, the negative wealth effects of the past collapse in stock prices have still only partially been unwound. But the rally has still been good news for households struggling with too much debt and an uncertain economic future.

In general, the recent round of mergers is a good sign for the market. Dell's deal announcement followed Kraft's unsolicited $16.7 billion takeover offer for Cadbury and Baker Hughes' $5.5 billion offer to BJ Services. When there's a lot of mergers"companies are saying they have increased faith, like a vote of confidence in the economy, they're doing what they can to ensure they have a solid position in the industry. Also, it's a positive sign of companies' outlook on their own stock". One driver for more merger activity is easier and cheaper access to corporate credit. Corporate credit spreads having dropped to below their levels before Lehman failed about a year ago, indicating investors are demanding less yield for corporate bonds relative to Treasuries. Debt issuance has rebounded sharply. "As confidence in a sustainable economic recovery increases, companies are likely to turn their attention back toward strategic M&A".

S&P analysts anticipate several sectors are getting ready to see a surge in merger activity, with stronger companies seeking economies of scale or strategic expansions, and financial distress forcing some sellers to go on the block. Entertainment companies, auto-parts suppliers and manufacturers, retailers, energy shale companies, pharmaceutical and biotech companies, construction-related businesses and wireless telecommunications companies are likely to ink more deals in the coming months, they said. In technology, larger software companies are probably on the prowl for fast-growing, smaller firms, the analysts said.

One reason for optimism is that even good-quality companies are struggling to generate organic growth against a tough background of consumer deleveraging. "Taking over rivals and stripping out costs is a good way of boosting earnings and reducing competition". Conditions are improving to help companies raise capital quicker and cheaper to fund "opportunistic deals," which could also spur activity. "Once a wave of M&A starts, it tends to gather momentum as companies fear that they may be left behind in the quest for growth". Kraft Foods' surprising $16.7 billion cash-and-stock bid for U.K. confectioner Cadbury's just over a week ago could be the icing on the cake for European mergers and acquisitions, as conditions for capital raising perk up and the global recession eases

The FOMC meeting will be the focus today. The stronger tone of incoming economic news has further decreased the chances that the Fed will boost the size of its asset-purchase programme. But the concerns over the sustainability will mean the Fed will not start tightening before a while. The FOMC should adopt a more upbeat tone in the statement and an announcement that the Fed will extend the duration of its mortgage-backed securities purchase programme beyond the end of the year to limit market disruptions. The tone of the statements released alongside the last three FOMC meetings has become gradually more upbeat in line with the incoming economic news. Back in April, the Fed noted that “the economy continues to contract”. In June it said that “the pace of contraction is slowing”. Last month, it concluded that “activity is levelling out”. With the ISM Manufacturing index having shot above 50 in August, to a level consistent with annual GDP growth of around 3%, it is very possible that the Fed will conclude that the economy is growing again, such as Bernanke stated when saying “the recession is very likely over at this point” .

However, some Fed officials have suggested that near-term rate increases are not likely (the markets still expect the Fed to start increasing rates early next year). Atlanta Fed President Lockhart recently said "it's too early to be contemplating a rise in the fed funds target rates". NY Fed President William Dudley added "I think it's a little premature to be so confident that you want to pull all these things back right now". Meanwhile, Charles Evans Chicago Fed president suggested that the timeframe for the first rate rise was "towards the end of 2010 to 1011". And once more, we hardly see the Obama-Bernanke team do such an easy mistake when the recovery success will be rewarded at the same level on a political view… Growth will sometimes soon depend on the household sector, and it is important to get it well back on track same as the manufacturing sector to make sure the recovery is solid. The Fed is perfectly aware of that, and won’t raise rates until the employment rebounds.

Another day of consolidation ahead of the FOMC meeting tonight / Japan reopening tonight



ECONOMIC DATA WITH IMPACT


Mortgage Applications (12h UK time) / the higher the better / previous was down 8.6% / minor as weekly and volatile data

Oil inventories (15h30 UK)

FOMC (19h15 UK) / no rate change expected / might impact slightly as some operators might be looking for some sign of unwinding of the quantitative easing now that the tone about economic conditions might be upbeat


POSITIVE IMPACTS


AIR FRANCE expects a slight improvement in revenue by the end of 2009 + expects to halt its deterioration in cash by next spring & wants to reach a balance at the start of the fiscal year of 2010-2011, excluding the impact of old fuel hedges.

CADBURY’s shareholders want 850p a share from Kraft (Instead of 745p offered in the initial approach)

ALCATEL indicated to analysts that it may report better-than-expected Q3 operating profit (Wansquare)

GSK would have hired Lazard to evaluate potential acquisitions in India / The company has narrowed its search down to Piramal Healthcare and Dr Reddy's Laboratories (Livemint.com)

LUFTHANSA is sufficiently financed & does not need to approach the capital markets in the short term for reasons of liquidity (CFO)

EDF will hold a board meeting at 1900 UKT on Sunday to decide whether CEO should stay on or to choose his successor (Reuters)

BNP plans to start repaying its €5.1bn of hybrid capital to the government before next summer (CEO in the FT)

NATIXIS will post a profit for the Q3 (La Tribune citing CEO to analysts)

STANDARD CHARTERED plans to apply to list its shares on an Indian stock exchange as soon as this week (WSJ)

UNITED UTILITIES : H1 trading in line with views

ALSTOM-SCHNEIDER : Areva received 3 offers of less than €4bn for its T&D unit, falling short of the €4.25bn exp. by analysts…

ANTOFAGASTA’s mining unit in Chile sees higher-than-expected earnings for the Q3 on recovering copper and molybdenum prices



NEGATIVE IMPACTS


UNICREDIT most likely will carry out a capital increase of €4bn instead of turning to government-backed Tremonti bonds (Il Sole 24 Ore) / Shares offered in a capital increase could carry a discount of 20 to 30% to current market prices (La Stampa)

REDROW capital increase : Will issue 148m new shares at a price of 105p each / 13 for 14 right issue

BARRATT DEV. capital increase : Will issue 72.9m at a price of 240p each / 1.3 for 1 right issue / 100p per new ordinary share

SSE : Moody's downgraded SSE's ratings (Stable outlook) due to a combination of a large capex programme + a weak operating environment / In addition, the group's dividend growth policy leaves limited flexibility to retain cash within the business


TRADING IDEAS


Would still buy Dollar which should resume its upside trend as soon as the Fed is happy with the employment as carry trades will unwind

SELL SIEMENS / CAP GEMINI / STM / AXA / ENEL / GSZ / IBERDROLA / BAYER / DANONE / RAYTHEON / YAHOOon double top

SELL ALSTOM to play Head & Shoulder possibility

SELL CARS such as DAIMLER / BMW (H&S poss) / FIAT (H&S poss) toppish for now in consolidation process

SELL EDF / LAFARGE / ST GOBAIN / UPS with island possibility still / SELL AIR LIQUIDE & LINDE seems toppish for now

BUY DOLLAR / YEN ahead of FOMC meeting

BUY VOLKSWAGEN / VERIZON / QUALCOMM / TEXAS on double bottom possibility



BUY DEUTSCHE TEL / SELL FRANCE TEL // BUY TECHNIP / SELL VALLOUREC // BUY ENI or BP / SELL REPSOL

BUY HOLCIM / SELL LAFARGE // BUY NESTLE / SELL DANONE // BUY LVMH / SELL PINAULT

BUY MOTOROLA or QUALCOMM / SELL JUNIPER // BUY DUPONT / SELL DOW CHEMICAL // BUY VERIZON / SELL AT&T


BROKER METEOROLOGY


ALPHA BANK RAISED TO NEUTRAL FROM UNDERPERFORM BY BANK OF AMERICA - ML

ALPHA LAVAL REMOVED FROM PAN EUROP SELL LIST // RAISED TO NEUTRAL FROM SELL BY GOLDMAN SACHS


EADS CUT TO UNDERWEIGHT FROM OVERWEIGHT BY NATIXIS

RHEINMITALL CUT O NEUTRAL FROM BUY BY UBS

FRESENIUS CUT TO SELL FROM BUY BY CITIGROUP

CARNIVAL REMOVDED FROM EUROPE FOCUS LIST // CUT TO NEUTRAL FROM OUTPERFORM ....................... BY CITIGROUP


DATA



WTI : 71,7 (0,08 %)

Eur/$ : 1,4817 (0,18 %)

$ /Yen : 90,71 (0,27 )

10 Yr US : 3,45 ( 0,55 bp)

10 Yr Euro : 3,40 ( 1,6 bp)


Indices : US close ; Europe close

SOX : 0,90 %;123,00%

S&P :0,66 %; 0,40 %

DOW: 0,52%; 0,26 %

NAS :0,39%; 0,23%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : 1,92 %; 1,73 %

ENERGY : 1,43 %; 1,35 %

FINANCIAL : 2,15 %; 1,29 %

HEALTHCARE : -0,33 %; -0,65 %

TECHNO : 0,33 %; 0,34 %

TELECOM : -0,60 %; -0,32 %

INDUSTRIAL : 0,83 %; 0,81 %

UTILITIES : -0,10 %; -0,15 %



TO BE COMING



Today

Results :United Utilities trading statement / BB&B / General Mills

Dividend :Aviva (GBp 10.00) / Ford 1 per 1 poison pill rights / Centrica (GBp 4,066667) / Petrofac (GBp 0,107)

Events :Steel and Mining conf at Credit Suisse



Thursday

Results : LSE trading updtae /Hennes & Mauritz / RIM

Dividend : Philip Morris ($ 0.58)

Events: Oil & Gas Conference at Deutsche Bank / Philips analyst day / Vallourec investor day



Friday

Results :

Dividend :

Events : DSM analyst day



Monday

Results : Prudential / Wolseley

Dividend :Colruyt ( GBp 4,722222) / Dow Chemical ($ 0,15) / Kraft Foods ($ 0.29) / US Bancorp ( $ 0,05) / Xerox Corp ( $ 0,0425)

Events:



Tuesday

Results :Compass trading update /

Dividend :

Events:Solvay analyst meeting / Nesté capital market



ECONOMIC DATA PREVIEW



Inthe United-Stateswatch the FOMC Meeting(19.15 GMT), Conscious of the gravity of the situation, the Fed has been very reactive in maintaining its leading rates at between 0 and 0.25% since December 2008. The maximum has been done in order to save the economy of Uncle Sam, consequently: cutting further the Fed funds rates will be useless.



In Francewatch the Business confidence indicator (7.50 GMT) for September, expected to rise for a fifth consecutive month reaching 80 a highest since October 2008 as France’s economy is progressively recovering.

In the Euro areawatch the advanced release of the PMI manufacturing and services (9.00 GMT) for September. Improving every month since last March and after reaching the level of 48.2 in August, the PMI manufacturing index in the euro zone should rise again in September to reach 48.5. Following the slight economic recovery in the euro zone, this index should progressively get closer to 50, marking the border between contraction expansion of economic activity. On the other hand, PMI services index which has been improving every month since March and which reached 49.9 in August, should slightly decrease to 49.5 in September.



ECONOMY



United-States: Richmond Fed manufacturing index expand for a fifth consecutive month in September

Manufacturing activity in the central Atlantic region expanded for a fifth straight month in September reaching 14 according to the Richmond Fed’s latest survey. All broad indicators shipment, new orders and employment are in positive territory and manufacturers posted their first increase in workers numbers since December 2007. Meanwhile other indicators were mixed. It is important to notice that manufacturers reported slower growth in inventories. This new rise of the Richmond Fed’s manufacturing index is confirming the rebound of the US industrial production showing a “growth gain” of 0.7% at the third quarter. Slowly but surely the virtuous circle investment-employment-consumption is back in the United-States.



United-States: House price index rose for a third consecutive month in July

House price index rose for a third consecutive month in July by 0.3% (prior +0.1%) confirming that the three year long decline in prices stopped. Activity and prices have been boosted by the tax credit for first time buyers (expiring at the end of November) as well as mortgage rates and valuations. Consequently the housing recovery will most likely continue once the tax credit will expire.