They're Back

GLOBAL EQUITIES RESEARCH

It 's a long time we had not seen such an M&A activity back on the scene. More than two years, when in the H1 2007 there was speculation of a possible bid every weekend. And then, the bubble blew up... However, things today are very different, the landscape is improving, banks credit facilities are easing, marking the end of the financial crisis, which not only will support the housing activity, important vehicle for the recovery, but also the M&A activity with CEOs starving to take opportunity from low yield conditions to bid a potential competitor. Kraft possible £10bn bid on Cadbury, Vodafone and Telefonica possible £3.5 bn bid on T mobile UK, Xstrata coming back on a £3bn bid on Lonmin added to last week Disney $5 bn bid on Marvel games. Not only this will make short positions a dangerous bet, but it shows credit activity is back in place, and will bring analysts to upgrade their stocks including a spec premium valorisation.

The ISM manufacturing index, traditionally the single most reliable barometer of the overall health of the US economy, is pointing to a strong and rapid recovery from recession. At nearly 53, the headline index is now consistent with annual GDP growth of around 3% in the coming quarters and there are good reasons to expect this index to continue climbing. Bear strategists estimate this is exaggerate as a the same time, it is clear that the recovery is much less entrenched outside of manufacturing. The improvement in the ISM non-manufacturing index has been much more modest while the recovery in the consumer sector has hardly even begun yet. But where they see some risks, we understand why the potential of the ISM is so big. Given its track-record, it wouldn't be wise to dismiss the ISM altogether; it is clear that the risks to strategists forecasts now lie firmly on the upside, at least for the next 6-12 months, and they will have to publish new numbers shortly given the current evidence of the recovery.

The ISM manufacturing index breached the boom/bust level of 50 in August for the first time in 18 months. (In practice a reading of 45 or more is consistent with positive growth. Nevertheless, the markets remain fixated on the magical mark of 50.) If that wasn't enough, by leaping from 48.9 to 52.9, the index hit a level not seen since June 2007, a full five months before the recession began. At face value, the index is now consistent with annual GDP growth of around 3% in the coming quarters. What's more, if the headline index were to follow the path indicated by the new orders balance, as it has done in the past, it will soon rise to around 58. In fact, the forward-looking elements of the regional manufacturing surveys suggest that it may soon climb all the way to 60. Such an increase would be consistent with annual GDP growth of a very impressive 5%.

Finally, the rebound in the ISM survey seems to be more than just hot air, as the hard data are already recovering. Industrial production recorded its first monthly increase in July. Meanwhile, the 1.3% monthly gain in factory orders in the same month was the fourth increase in a row and suggests that further increases in production are in the pipeline. This all appears to suggest that the recession is over, that the recovery has began and that it might be a fairly speedy and strong one to boot. The ISM manufacturing index has historically been the single best leading indicator of trends in the wider economy and has accurately captured the strength of the rebound from the last four recessions. The ISM non manufacturing close to the 50 level is reflecting growth as well. let the consumer sector recover, which the hiring process will soon trigger, and fasten seat belt ...

Indeed the boost to GDP should come in Q4 , when inventories need to be restocked. According to reports in Automotive News, Ford and GM are expecting demand to continue at the heightened levels seen in August, and both companies are increasing production to meet that demand. If this holds true, inventories should rocket upward in Q4 and produce a boost to GDP growth. Auto assemblies in July rose 32% month-over-month and it's plausible that car manufacturers increase production another 30% through Q4. In this scenario, inventories contribute a 0.7 percentage point increase to GDP. If car companies assume demand is going to increase from the levels in August, assemblies may increase by over 50% in Q4 given the extreme low levels of current production. This would increase GDP by 0.9 percentage points. The clash for clunkers not only boosted a manufacturing pick up which started a few months ago, but it helped reducing inventories which is spreading to many other sectors, giving more chance to the recovery to last. Already bear strategists which forecasted Armagedon, and then a collapse in Q2, then Q3 then Q4 are now forecasting a production fall sometimes next year. We would recommend to cross that bridge when you come to it, and to focus on an economic rebound which is not a dream but a reality, which equity markets are just moderately playing, adding to the possible virtuous circle taking place. M&A deals, and increasing households wealth effects will do the rest.

US players back in the game, with some good and supportive news to attend once more this week, ending with some strong Chinese data on Friday should bring us on new highs anytime soon this week.



ECONOMIC DATA WITH IMPACT


German Industrial production (...) expect up 1% / should provide further hope that the hard-hit sector is finally starting to recover. All of the industrial business surveys have improved in the past few months. Only the expectations component of the Ifo industrial survey really predicted the extent of the previous downturn in the sector. This index has risen particularly sharply lately and now points to roughly unchanged production compared to a year earlier / minor

US Consumer credit (20h UK) / minor


POSITIVE IMPACTS



D.TEL & F. TEL. agreed to merge their UK units in a new 50:50 JV with 37% market share in UK / The merger of T-Mobile UK with Orange UK should generate synergies in excess of €4bn / Deal would be accretive from 2010 in terms of FCF per share & from 2011 in terms of EPS / DTE will contribute T-Mobile UK on a cash-free, debt-free basis, including T-Mobile UK's 50% holding in its 3G network JV with hutchison and gross tax losses carried forward of at least £1.5 bn / FTE will contribute the whole of Orange UK including $1.25 bn of intra-group net debt in order to equalize the value of the contributions to the JV / Deutsche Telekom would grant a £625 m shareholder loan to the JV, which would be used to simultaneously reimburse £625 m to FTE

BRITISH AIRWAYS & IBERIA will meet twice this month to reach a formal agreement about a merger (ABC)

CADBURY : The Hershey Co. is likely to make a response to Kraft Foods’s bid for Cadbury (WSJ) / Hershey may have difficulties to fund the deal & such could join with NESTLE to make an offer… / In such case, bear in mind that NESTLE owns 29% of L’OREAL…

DEUTSCHE TEL plans "massive" investments in the U.S. with billions of euros to be spent in the coming years on network development in mobile phone unit T-Mobile USA (Handesblatt)

FERROVIAL has received $445 m in public financing for its planned $4 bn contract to build and operate the highway in the US state of Texas, Cinco Dias reported citing the Texas transport department.

LSE plans to expand its equities trading business by containing costs amid lower fees (CEO)

SOLVAY announced it will acquire majority stake in berezniki soda ash plant in Russia / EV for the stake amounts to about €160 m



NEGATIVE IMPACTS


UK RETAILERS : The British Retail Consortium said like-for-like sales were 0.1% weaker on the year in August after rising 1.8% in July, pushed lower by weaker sales of clothing and homeware + persistently wet weather

AIR FRANCE : August passenger traffic falls 2.9% / Passenger load factor 84.8% / Cargo traffic falls 16.1%

PPR : CEO of Gucci said that he does not believe good days are around the corner and it is preparing itself for a continuing downturn just as it is for an eventual upturn… he added that Balenciaga is the fastest growing brand within Gucci / No forecast for Xmas sales

GDF-SUEZ : Price of gas in France will not rise Oct. 1st (French radio)

SAAB : Brazil will begin final negotiations with Dassault Aviation to buy 36 Rafale, but expects a "competitive" price to close the deal…



TRADING IDEAS


BUY AEGON to play island possibility

BUY METRO / AIR LIQUIDE / LVMH on double bottom possibility

BUY CARREFOUR / MC DONALDS / REED ELSEVIER on reversal Head & Shoulder possibility



BUY TOTAL / SELL VALLOUREC // BUY ALCATEL / SELL STM // BUY CARREFOUR / SELL PINAULT // BUY ST GOBAIN / SELL HOLCIM // BUY ELI LILLY / SELL BRISTOL


BROKER METEOROLOGY


INTERCONTINENTAL HOTELS RAISED TO OUTPERFORM FROM NEUTRAL BY CREDIT SUISSE

DASSAULT SYSTEMES RAISED TO BUYR FRO MHOLD BY DEUTSCHE BANK

ERICSSON RAISED TO HOLD FROM SELL BY DEUTSCHE BANK

ATOS ORIGIN RAISED TO BUY FROM HOLD BY DEUTSCHE BANK

BOLIDEN RAISED TO NEUTRAL FROM SELL BY UBS

CIMENTS FRANCAIS RAISED TO NEUTRAL FROM UNDERWEIGHT BY JP MORGAN

CADBURY RAISED TO BUY FROM HOLD BY S&P

SAMPO RATED NEW BUY BY JEFFERIES


EDP RATED NEW SELL BY SOCIETE GENERALE

HOLCIM CUT TO NEUTRAL FROM OVERWEIGHT BY JP MORGAN

INDRA CUT TO HOLD FROM BUY BY DEUTSCHE BANK

ZURICH FINANCIAL CUT TO HOLD BY JEFFERIES


DATA


WTI : 68,4 (0,20 %)

Eur/$ : 1,4335 (0,02 %)

$ /Yen : 92,76 (0,31 )

10 Yr US : 3,43 ( -1,3 bp)

10 Yr Euro : 3,23 ( -1 bp



TO BE COMING



Today

Results :

Dividend :Baxter International ($ 0,26)

Events :



Wednesday

Results : Texas Instruments mid quarter

Dividend : Diageo (GBp 24,66667) / Michael Page ( GBp 3,2) / Shire (GBp 1.302)

Events: Compagnie Financière Richemont AGM / Citigroup Tech conf / Apple expected to reveal new product developments at media event



Thursday

Results : Morrison Supermarkets / National Semiconductor / Home Retail

Dividend :

Events : Maurel & Prom analyst meeting / Home Depot at Goldman Sachs Retailing Conference / PepsiCo at Barclays Capital Back-To-School Conference



Friday

Results : Club Mediterranee / Campbell Soup

Dividend :Coca-Cola Co ($ 0.41) / NYSE Euronext ($0.30)

Events: ABB capital market day



Monday

Results :

Dividend : Compagnie Financiere Richemont (CHF 0.30)

Events:Abbott at Morgan Stanley Global Healthcare Conference



ECONOMIC DATA PREVIEW



In the United States watch the consumer credit (7.00 GMT) for July expected to decrease at a slower pace to reach - 4.0 bn dollars (prior -10.3 bn dollars).



In Germany, watch the trade balance (7.00 GMT) for July. Germany’s trade balance surplus is expected to stabilize at 12.4 bn euros. Indeed despite the rise of the euro the economy is progressively recovering and foreign demand for German goods is increasing. Watch as well the industrial production (11.00 GMT) for July. In the wake of the 4th consecutive rise in the IFO index on business expectations by the German Industry, we anticipate a 1% increase in the industrial production for the month of July. On a YoY basis the decline should ease from -18.1% in June to -15.6% in July. If the improvement is noticeable, we are still far away from a positive annual growth



ECONOMY



Germany: Factory orders rose for a fith consecutive month in July

German factory orders rose for a filth consecutive month in July by 3.5% (forecast +2.0%). This data is confirming the progressive recovery in Germany as showed by the GDP of the second quarter ( + 0.3% QoQ,-5.9% YoY) and in the wake of the recent economic statistics like the IFO index on business expectations by the German Industry rising for a fourth consecutive month in July. Meanwhile from a year ago factory orders remained very weak but improved from -25.2% YoY to -19.8%YoY. Nevertheless as Germany starts 2009 with a “growth deficit of 2%” the GDP should fell by 4.9% this year the sharpest drop since the German reunification.