Pittsburger

GLOBAL EQUITIES RESEARCH

Yesterday’s FOMC statement suggests that “economic activity has picked up following its severe downturn” while it suggested on August 12th meeting that “economic activity is levelling out”. As for the current situation, conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Despite acknowledging that "economic activity has picked up" and that it expects to see a further "strengthening of economic growth", the Fed today maintained its commitment to keep the fed funds rate at "exceptionally low levels" for "an extended period" and offered not the slightest hint that it would be considering reversing quantitative easing any time soon. The only real news in today's statement is that the Fed will take an extra three months to buy the $1.45trn in mortgage-backed securities and $200bn agency debt that it has already pledged to purchase. It originally planned to have those purchases completed by the end of this year, but will now take until the end of the first quarter of 2010. As of last week, the Fed had only bought about half of the mortgage-backed securities and about two-thirds of the agency debt. It would be difficult to buy the same amount again in little more than three months. With economic conditions improving and 30-year fixed mortgage rates dipping back below 5% last week, the Fed can afford to take its time. Stretching out the purchases will also minimise the disruption to the markets when the Fed brings its quantitative easing operations to an end. With the unemployment rate still headed higher and considerable resource slack putting downward pressure on prices there are plenty of reasons for the Fed to hold off tightening policy.

As for “exit strategy”, the Fed’s purchase of $300bn of Treasury securities will be completed by the end of October 2009 (the Fed has just $11bn left for such purchases), and there should not be any extension of this program. Some investors are still convinced that quantitative easing will necessarily lead to high inflation, but the bottom line is that for the past few months the broad money and credit aggregates have been shrinking. Market interest rate expectations for next year have been dropping back recently and today's statement from the Fed may drive them even lower.

Analysts have paid more attention to the government’s debt sales in the past several months in search of signals of whether investors, particularly foreign central banks, remain willing to buy U.S debt and the dollar.

Tuesday’s $43bn 2-year note auction sold at a yield of of 1.034 %, with investors bidding for 3.23 times the amount the amount of debt available, the highest bid-to-cover ratio since September 2007. Yesterday, the Treasury sold $40bn in 5-year notes at a yield of 2.47%. Investors bid for 2.40 times the amount of debt available compared to 2.34 times on average at the last three auctions of the notes. Indirect bidders, a class of investors that includes foreign central banks, purchased 44.8% of the sale. On average, they bought 52% in the last three auctions since June.

The G20 meeting is the second major event of the week, even if it may be regarded as a non-event. Bankers’ pay is under intense scrutiny from governments and is sure to be a central topic of today’s and tomorrow’s meeting of the G20 in Pittsburgh. As for bonuses, U.S. regulators, led by the Fed, are intensifying efforts to gather data on banks’ trading positions in a move that could herald a drive to ensure traders’ bonuses are based on real profits rather than unrealised gains that might never materialise. In recent weeks, important banks have been asked to provide a detailed breakdown of their balance sheets, with particular attention to their trading books. The authorities wanted to know what proportion of a bank’s balance sheet was held in more liquid positions and how much was held in derivatives and other trading positions whose profitability might not be known for years. The aim is to overhaul Wall Street’s tradition of paying traders yearly bonuses based on paper gains on their positions at the end of each year before it is known whether they they have made a loss or a profit in cash terms. By determining extent of realised and unrealised gains, regulators would be able to judge whether the size and composition of traders’ bonuses was in line with the profitability and risk profile of their institutions. Several banks have introduced provisions to “claw back” a portion of traders’ bonuses if their bets end up losing money. But the Fed proposal goes further, as it would give authorities the power to tell banks to change compensation structures for certain employees. More generally, the US and Europe want to push on the issue of global rebalancing, and quickly establish a credible process for monitoring the efforts of the surplus countries to boost domestic demand. China meanwhile will try to shift the focus on to measures to avoid protectionism and will likely stress what they are actually doing to lift domestic demand. Given the fragility of the economic recovery we expect policy makers to remain cautious about withdrawing economic stimulus, though political momentum for tighter regulation of the financial sector is building. Policymakers have advocated measures to reduce leverage and increase the quantity and quality of capital that must be held by banks, including a substantial cyclical element whereby banks have to put aside more reserves in better times. The G20’s Financial Stability Board is expected to make specific proposals in Pittsburgh.

Yesterday, U.S. equities retreated while Treasuries rose (10-year rate at 3.41 % vs. 3.45 %) as the Fed acknowledged recovery but reiterated commitment to keep rates low for extended period. The dollar strengthened (1.4719 EUR/USD vs. yesterday’s intraday high of 1.4844), dragging down metal and oil prices (the WTI price plunged to $68.67 /bbl vs. $71.55 after stockpiles rose sharply). This morning the Nikkei was up (+1.16 % at 05.35 GMT) while U.S. index futures were down: DJIA -0.40 %, S&P 500 -0.40 %, Nasdaq -0.40 %. Consolidation should prevail at the opening of European markets.



ECONOMIC DATA WITH IMPACT


Jobless Claims (13h30 UK) expected 550k from previous 545k / minor as weekly data and although improving remains an low level

Existing Home sales (15h UK) expected 5.35m from previous 5.24m / the rise in Pending home sales index in July and the recent strength of the housing news indicates some upside possibility / interesting

German IFO business survey (09.00 UK) should rise from 90.5 to about 93.0, given further evidence of a recovery in global demand and clear signs from the monthly hard data that German exports are responding / interesting


POSITIVE IMPACTS


SANOFI : An HIV vaccine has for the first time been proven effective against the virus responsible for AIDS (US research) = A combination effort that includes Alvac, made by Sanofi, and Aidsvax (Vaxgen) prevented infections in 31.2% of the cases

INBEV : Blackstone is looking into a possible deal to buy InBev 's theme parks as it would fold nicely into its London-based Merlin Entertainments Group / Analysts have estimated a sale could fetch between $2 bn and $5 bn…

H&M : Q3 sales SK23.5bn (24.4bn exp) / GM 61.6% (60% exp) / PTP SK4.8bn (4.7bn exp) / But August sales disappointing : -3% vs +5% expected… / August like-for-like sales -11% vs –4.9% exp …

HOCHTIEF is making progress in its plans to float its airport concessions unit on the stock market (FTD) / DBk, GS and Citigroup are leading the transaction & a presentation to analysts is set of early October / Hochtief plans to retain a majority stake in the unit.

JULIUS BAER's U.S. AM unit priced shares at the top of the estimated price range in its IPO + boosted the size of the share issue

ABB : Fitch has changed ABB's outlook to positive from stable as the financial profile is likely to remain resilient in the medium-term despite possible further slowdown in demand for its products and services / BBB+ rating confirmed

SOLVAY : Abbott Laboratories would have made an offer to buy the drug unit of Solvay (WSJ) but details of Abbott's offer could not be learned / Nycomed, would have recently made a fully financed €4 to 4.5 bn offer to buy the unit / UCB is also considering a bid

TUI's major shareholder John Fredriksen confirmed that he has hiked his stake in the company to about 19% from 18%

EADS : Airbus hopes to get funding from France’s planned public loan to help pay for the development of a new generation of civil aircraft (COO in Le Figaro) / The project needs additional investment of between €800 m and €1 bn by 2015

E.ON is discussing the sale of its German high-voltage power lines to Dutch electricity-grid operator TENNET

VIDEO GAMES (Ubisoft…) : Shares of Electronic Arts surged yesterday in WS on speculation that Microsoft was considering buying the videogame maker (Nonsense as MSFT has its own videogame console & its own developping plans…) / Microsoft denied



NEGATIVE IMPACTS


ALCATEL’s CEO said his company is not in merger talks with any of its rivals, dismissing speculation a deal might be in the works.

VEOLIA : France's ecology minister M. Borloo could run Veolia if Veolia's current head got the top job at EDF (L'Express)

UNICREDIT : Foundation shareholders appeared to be supporting a capital increase but depending on the "dividend prospects"

INTESA SANPAOLO has decided to resume plans to list Banca Fideuram, rather than sell it, after a sale to Exor waned (MF-DJ)

DSM said that Q3 operating profit before one-offs is expected to be about €120m (130m exp) / No more outlook for FY09 / Said that base chemicals & materials cluster is still expected to be loss-making in 2009, in spite of a strong improvement in Q3…

DEXIA's sale of its French life insurance unit Dexia Epargne Pension now has 2 candidates after Credit Mutuel pulled out (Les Echos)

BG Group’s CEO sold 1.6m shares at £11.13 a share



TRADING IDEAS


SELL SIEMENS / ALSTOM / DBK / CAP GEMINI / STM / ENEL / IBERDROLA / BAYER / DANONE / RAYTHEON / YAHOOon double top

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

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

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



BUY SODEXO / SELL ACCOR // BUY PEUGEOT / SELL BMW // BUY DEUTSCHE TEL / SELL FRANCE TEL // BUY TECHNIP / SELL VALLOUREC // BUY ENI or BP / SELL REPSOL // BUY NESTLE / SELL DANONE // BUY QUALCOMM / SELL JUNIPER


BROKER METEOROLOGY


GAZPROM RATED NEW BUY BY NOMURA

PORSCHE PREF RAISED TO BUY FROM NEUTRAL BY NOMURA

BUREAU VERITAS RAISED TO OVERWEIGHT FROM UNDERWEIGHT BY MORGAN STANLEY

SGS RAISED TO EQUALWEIGHT FROM UNDERWEIGHT BY MORGAN STANLEY

FRESENIUS SE RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS

NOBEL BIOCARE RAISED TO NEUTRAL FROM SELL BY GOLDMAN SACHS

ACTELION RAISED TO BUY BY BANK OF AMERICA - ML

PETROPLUS ADDED TO EUROPE 1 LIST BY BANK OF AMERICA – ML

TELEKOM AUSTRIA RATED NEW BUY BY ING

RENEWABLE ENERGY STARTED AT BUY BY HSBC

IBERIA STARTED AT BUY BY UBS

LUFTHANSA STARTED AT BUY BY UBS

SAFRAN RAISED TO BUY FROM HOLD BY RBS


SIEMENS INVESTORS URGED TO TAKE PROFIT ON THEIR LONG POSITIONS BY MORGAN STANLEY

BRITISH AIRWAYS CUT TO HOLD FROM BUY BY CITIGROUP

SAS CUT TO SELL BY CITIGROUP

AIRFRANCE-KLM STARTED AT SELL BY UBS

ASTRAZENECA CUT TO SELL FROM NEUTRAL BY GOLDMAN SACHS

AUDIKA CUT TO NEUTRAL FROM BUY BY GOLDMAN SACHS

NOVATEK CUT TO REDUCE FROM BUY BY NOMURA

EVRAZ CUT TO NEUTRAL FROM BUY BY UBS

TNT CUT TO UNDERWEIGHT FROM NEUTRAL BY HSBC


DATA

WTI : 68,3 (-4,93 %)

Eur/$ : 1,4723 (-0,08 %)

$ /Yen : 90,83 (0,59 )

10 Yr US : 3,40 ( -1,49 bp)

10 Yr Euro : 3,37 ( -2,2 bp)


Indices : US close ; Europe close

SOX : 0,52 %;1,21%

S&P :-1,01 %; -0,15 %

DOW: -0,83%; -0,06 %

NAS :-0,69%; 0,01%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -2,38 %; -1,28 %

ENERGY : -1,91 %; -1,41 %

FINANCIAL : -2,05 %; -0,40 %

HEALTHCARE : -1,08 %; -0,44 %

TECHNO : -0,30 %; 0,32 %

TELECOM : 1,50 %; 1,93 %

INDUSTRIAL : -0,99 %; -0,21 %

UTILITIES : -0,57 %; 0,16 %



TO BE COMING



Today

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 : KB home

Dividend :

Events: DSM analyst day



Monday

Results : TUI trading update / Prudential / Wolseley / Beneteau sales

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

Events : FedEx AGM



Tuesday

Results : Compass trading update / Nike

Dividend :

Events: Solvay analyst meeting / Nesté capital market



Wednesday

Results : Man Group trading update / Marks & Spencer trading update / Kaufman & Broad

Dividend : International Power (GBp 4,722222) / Bristol-Myers Squibb ($ 0.31)

Events:Eurofins investor day



ECONOMIC DATA PREVIEW



In the United-Stateswatch the weekly release of the initial jobless claims and continuing claims (13.30 GMT), both statistics are expected to decrease as the labour market which has reached a bottom is progressively recovering. Nevertheless there will not be any substantial improvement of unemployment before spring 2010.



In Germanywatch the IFO business confidence (9.00 GMT)for September. After reaching an historical low at 82.2 in March, the IFO index measuring the German’s industrial confidence recorded its fifth consecutive monthly rise, reaching 90.5 in August, the highest since September 2008. Indeed, after reducing stocks and investments drastically, the German industry is now putting itself together. However, taking into account the end of the car incentives and the approaching of German’s elections, we now forecast stabilization of the IFO index at 90.5 in September.



ECONOMY



United-States: Status quo for the Fed Funds

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. Nevertheless, after being very accommodative, the Fed will have to lead the recovery to compose with the return of higher consumer prices. Consequently the Fed will be forced to increase its fund rates. On this point, Ben Bernanke confirmed that the Fed will not adopt such a policy as long as unemployment does not drop significantly, and will not commit itself into a phase of tough monetary tightening in order not to penalize the recovery. This is why we anticipate Fed fund rates to rise to 0.5% in spring 2010 and reach 1.75% in a year from now.



Euro area: PMI manufacturing and services rose in 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 rose again in September to reach 49.0. Following the slight economic recovery in the euro zone, this index is progressively getting 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, rose to 50.6 (prior49.9) in September confirming the recovery in the services sector.

Nevertheless if the euro zone did reached a bottom floor, the effects of the revival plan are fading and the recovery remains fragile at the manufacturing level as well as services.



France: household consumption dropped in July-August and sharp rise of the business climate indicator

French household consumption dropped in July (-1.2%) and in August(-1.0%) confirming that household situation remained fragile. Nevertheless July-August drop is a logical technical correction. Indeed from a year ago at -1.3% YoY the household consumption is resisting. Meanwhile French business climate rose to 85 the highest level since October 2008 showing that the recovery is indeed taking place. Of course the household consumption good resistance is widely explained by the “car incentive” and consumers spending should resist till next winter. In such conditions the French GDP should reach +0.3% at the third and at the fourth quarter 2009 and should decrease by “only”2.1% in 2009./