Where Are We?

GLOBAL EQUITIES RESEARCH

We are in the middle of a recovery process , on a macro front, initially triggered by the worldwide quantitative easing policies, which boosted domestic economies through an output increase process. The background is still not great looking, with the consumer mood rather gloomy, because of a weak employment sector where hiring process is still missing. However, the virtuous circle is well taking place, and the front running of equity indices on the improving news flow has no reason to stop, since the news flow will keep improving crescendo up, with the wealth effect influence now taking place, which sooner or later will boost spending and hiring process (not even talking about the M&A activity which we have to deal with back again). Again last week FedEx shares jumped (very good leading indicator) after the company says its fiscal first-quarter profit will top earlier estimates due to surprisingly strong international parcel shipments, cheaper fuel and tighter cost management. The increase in the University of Michigan's measure of consumer confidence, from 65.7 in August to a provisional 70.2 in September, reverses the most recent falls and takes confidence back to the level seen a year ago when Lehman Brothers collapsed. However, confidence remains well below both its 2006 peak of 96.9 and the long-term average of 86.7. Some improvement on the employment front will just do the rest, and this will happen rather sooner than later seen the speed of the normalisation process, and the impact of seasonal workers we had to deal with. Focus Friday 2ed October with the Non Farm payrolls.

Let's take the example of the UK , high leveraged country. According to economists, the recent increase in the stock market - which saw the FTSE 100 break through the 5,000 barrier last week -coupled with rising house prices, may have raised the value of households assets’ by as much as £500bn , equivalent to six months’ disposable income. There will no doubt be hopes that the rise in equity prices will itself help to underpin the economic recovery. One channel through which it might do this is the potentially positive effect on consumer confidence. The FTSE and confidence certainly sunk together last year, though it is not entirely clear which leads which. What’s more, equities are not the only component of households’ wealth that has recently gone up in value. Last week’s Halifax house price figures for August, revealing a 0.8% monthly rise, brought the total increase in the index since its low to just above 4% , while the Nationwide index has risen by more than 6%. According top the same economists, i t is changes in wealth, rather than levels, which has the greater bearing on households’ behaviour. Annual changes in wealth and spending are related, with the rise in wealth pointing to a sharp pick-up in spending growth.

We are at the start of very new and lasting bull market , on a technical view, which is ending the bear market which started in March 2000 to low in March 2003, retraced on the upside until July 2007 before reaching new lows on March this year. Yes, the latest rise might look impressive, but nothing compared the violence of the drop from last year (25% in a week sometimes), due to the truth hidden by banks on the last quarter 2007, which made the 2008 year a dramatic one starting with Kerviel-Socgen storm, followed by Bearstearn bail out from JP a few months after, then the Lehman collapse one year ago, which lead to end the year on some Madoff ugly story and a lack of confidence worldwide regarding all sort of financial vehicles at a time when the economy stalled and firms had to deal with it adjusting their cost to the new shrinking volumes. Precisely the reason why any activity pick up could lead to a more prompt hiring process than people might be thinking.

We are in the end of a quarter, on a trading point of view, with a creeping up market, supported by inflow from money sleeping in monetary funds as well as equity fund managers trying to be less underweight, at a time when Q3 earnings will prove once more that we are getting out slowly but surely from a recession which has been switched to a classic one thanks to the government interventions. Some inflow from sovereign funds catching opportunity to invest in Western countries (China saying two weeks ago that they plan to invest on Western caps this year is only one example among others). Yes the consumer mood is still low, but it is getting better as well, and switch from job destruction to a hiring process will just send equity indices in the sky, the other way around being not true as spending remains low . Difficult to collapse in such an improving environment, even though things are far from perfect for now. But they are going the right way, and let us remind you that the road to the top levels 5500 on the cash Eurostoxx seen in March 2000 is as far as the economic activity is from perfect.

We are more precisely in a week where the quarterly option expiries will be the focus and might drive some heavy and specific flows. But also, this is a data heavy week for the US , bringing news on the consumer, industrial, external and housing sectors. Both producer price inflation (Tomorrow) and consumer price inflation (Wednesday) releases should show that core price pressures remained subdued in August. Retail sales (Tomorrow) are likely to be the focus and to have been very strong last month, but this will reflect the boost from the “cash for clunkers” programme. Stripping this out, the underlying trend is likely to look fairly weak, and this is precisely the focus. The ISM production index suggests that industrial production (Wednesday) expanded by a similar amount in m/m terms in August as it did in July. The Empire State and Philly Fed (Tuesday/Thursday) reports on manufacturing will also likely provide evidence that the recession has abated and that the recovery is now picking up momentum. Meanwhile, the sharp narrowing in the trade deficit suggests that the current account (Wednesday) deficit shrank to an 11-year low in Q2. Finally, expect the NAHB and housing starts (Wednesday/Thursday) figures to show that the gradual recovery in the housing market continues.

We just passed a weekend where the news of Obama implementing 35% tax on import Chinese tyres should at this stage be no threat to the international trade, as a G20 in two weeks will be the opportunity to discuss this type of rules, and it should just be seen as a demagogic move seen as part of the bail out from the auto sector. The possible bid from DeutscheTel on Sprint Nextel however will remind you that time has been passing by, credit conditions are gradually becoming attractive and every coming weekend will be the fruit of a new M&A deal which obviously will lead analysts to include some spec premium valorisation to the names they follow.

We are in a trading day which once more should be quiet. A consolidation should take place, which might be short lived in the US as the Retail sales tomorrow will be important as to see whether the consumer spending has increased, and the data being out when the cash is not open yet tomorrow in the US might trigger a short covering on session end today.



ECONOMIC DATA WITH IMPACT


July's euro-zone industrial production (10.00 UK time) Despite the recent signs of a revival in German and French production, July’s national data were pretty disappointing. Combining these figures with those from the other major euro-zone economies points to a monthly fall in industrial output of 0.3% or so. This would lower the annual growth rate to around -16.4%. The EC industrial survey, which has recently tracked annual industrial production growth pretty well, points to a further near-term improvement. But due to the sharp monthly falls in output in the second half of last year, production will only need to stagnate / minor for now

Obama's speech comes one day short of coinciding with the one-year anniversary of Lehman Brothers bankruptcy filing, which took place on Sept. 15, 2008. Obama is scheduled to speak midday at Federal Hall in New York to discuss steps the administration is taking to revive the economy and what efforts it is taking to phase out its bank bailout programs. He is also expected to press Washington lawmakers to move quickly to enact regulatory restructuring legislation.


POSITIVE IMPACTS



REPSOL-ENI : Hugo Chavez said a consortium, including Repsol & ENI, has struck a natural gas field, which may be one of the largest in the world / A JV will be created, in which Venezuela's state Co would have a 35% stake, while Repsol & Eni would have 32.5% each

BARCLAYS : Fears of rising costs & weakening margins are overplayed & shares still have plenty of upside (Barron’s)

MICHELIN : US President signed an order to impose a new duty of 35% on Chinese tyre imports on top of an existing 4% tariff…

DAIMLER rejected a press report that said COO of Mercedes-Benz Cars, will likely leave the company.

BMW : The worst of the car sales downturn is over, CEO said, forecasting sales would accelerate in 2011 after an uptick next year

CARREFOUR is in talks with India's Future Group for the possibility of a cash-and-carry alliance (Economic Times)

EADS : The German government plans to support the planned construction of the Airbus with a state guarantee worth €1.1 bn ( Focus)

ROCHE : Tamiflu helped prevent deaths from flu in severely ill patients who had chronic underlying health probs (Chinese research)

THYSSEN is close to selling an industrial services unit to Wisag Service, for a tree-digit million euro amount (FAZ)

PUBLICIS is looking to China to underpin LT growth as the global advertising market slows (CEO) / China now makes up less than 5% of Publicis' global revenue but in 5 years could be its 2nd-or third-largest market, its CEO said…

RENAULT and NISSAN will unveil 4 new electric cars Wednesday at the Frankfurt Auto Show (CEO)

DBK is planning to buy 45% in private-wealth manager Sal. Oppenheim in a first step (Focus magazine)

SANTANDER‘s Brazilian unit will take orders from investors for its share offering from Sept. 28 through Oct. 5.

INDEPENDENT NEWS & MEDIA : Anthony O'Reilly is close to agreeing to give up his controlling stake in IN&M in exchange for banks agreeing a rescue plan for the company (The Times)



NEGATIVE IMPACTS



DEUTSCHE TELEKOM has called in banking advisers to study a possible multibillion-dollar bid for Sprint Nextel, which has a market valuation of $10.6 billion(Sunday Telegraph).

HEIDELBERGCEMENT said it plans to increase its share capital by 50% by selling 62.5 m new shares, which will be offered indirectly to the company's shareholders for subscription in a ratio of 2:1 / Public trading for the shares will begin on Sept 24.

LLOYDS - RBS : UK chancellor George Osborne is looking at selling a tranche of shares in RBS and Lloyds to retail investors (FT)

SAP : Siemens cancelled 1 of several software maintenance contracts with SAP & will put the contract up for bidding (WirtschaftsWoche)

SANOFI & Regeneron Pharma said they had halted the trial of a drug for treatment of pancreatic cancer because it was not effective

HYPO REAL ESTATE, of which the government owns 90%, has billions of euros of unrealized losses on securities and loans on its books that could increase its need for fresh capital (Der Tagesspiegel am Sonntag)

ALCATEL-LUCENT : A U.S. court of appeals overturned a $358 m damages award against Microsoft

AIR-FRANCE : Japan Airlines is seeking a capital injection of about $550 m from Delta Air Lines, as well as several tens of millions dollars from Air France-KLM (NHK)

VEOLIA : The French government has not yet decided whether to replace Pierre Gadonneix as CEO of EDF (Top aide to Sarkozy)

SWEDBANK is expected to unveil Today the terms and pricing of its new share issue, announced last month / Swedbank said it will raise 15 bn Swedish crowns ($2.15 bn) to bolster its balance sheet

LOGICA : SAINSBURY is expected to announce within the next few weeks that David Tyler, currently chairman of Logica will succeed Sir Phillip Hampton as its chairman (Sunday Times and Sunday Telegraph)

IRISH BANKS : Ireland’s bad bank may pay a 30% discount on €85bn worth of loans it’s buying from the country’s lenders (Sunday Tribune) / The banks may need an extra €10bn in capital (Sunday Tribune)

ALLIED IRISH BANKS : Ireland’s govt may take a majority stake in ALBK (Sunday Business Post)

DEXIA : A EU ruling on restructuring plans at Dexia has been slowed because regulators are still waiting for details of the package

BRITISH AIRWAYS' pension deficit currently estimated at £2.1 bn could be revaluted to £3 bn (The Mail on Sunday)



TRADING IDEAS


BUY CARS ahead of Frankfurt Motor Show beginning tomorrow as PEUGEOT / RENAULT / BMW / DAIMLER

BUY AEGON to play island possibility

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

BUY GLAXO / CARREFOUR / BASF on reversal Head & Shoulder



BUY GLAXO / SELL SANOFI // BUY AXA / SELL ALLIANZ // BUY BP / SELL ROYAL DUTCH // BUY PEUGEOT / SELL EUROSTOXX or RENAULT // BUY ENI / SELL TOTAL // BUY KPN / SELL TELEFONICA // BUY VISA & AMEX / SELL MASTERCARD // BUY EXXON / SELL CONOCOPHILLIPS


BROKER METEOROLOGY


BBVA RAISED TO BUY FROM NEUTRAL BY NOMURA

SANTANDER RAISED TO BUY FROM NEUTRAL BY NOMURA

CREDIT AGRICOLE RAISED TO NEUTRAL FROM REDUCE BY NOMURA

UBS RAISED T0 BUY FROM REDUCE BY NOMURA

TELENOR RAISED TO BUY FROM HOLD BY DEUTSCHE BANK

TELEFONICA RAISED TO BUY FROM HOLD BY DEUTSCHE BANK

EUROPEAN AUTO SECTOR REITERATED ATTRACTIVE SECTOR = OUTPERFORM BY GOLDMAN SACHS

VALEO RAISED TO NEUTRAL FROM SELL BY GOLDMAN SACHS

FIAT RESUMED AT BUY YY GOLDMAN SACHS

AUTOLIV RAISED TO BUY FROM HOLD YY GOLDMAN SACHS

VOLKSWAGEN PREF RATED NEW BUY BY BAN

BERKELEY RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS

NOVATEK RAISED TO BUY FROM HOLD BY CITIGROUP

BARRAT DEVELOPMENTS RAISED TO HOLD FROM SELL BY CITIGROUP

IMI RAISED TO BUY FROM HOLD BY CITIGROUP


SOCIETE GENERALE CUT TO REDUCE FROM NEUTRAL BY NOMURA

DEUTSCHE BANK CUT TO REDUCE FROM BUY BY NOMURA

BNP-PARIBAS CUT TO REDUCE FROM BUY BY NOMURA

NORDEA CUT TO NEUTRAL FROM BUY BY NOMURA

BBVA CUT TO UNDERPERFORM FROM NEUTRAL BY CREDIT SUISSE

NESTLE CUT TO HOLD FROM BUY BY CITIGROUP

PEUGEOT CUT TO UNDERP FROM OVERWEIGHT BY CREDIT SUISSE

VOLKSWAGEN COMMON STOCK RATED NEW UNDERPERFORM BY BANK OF AMERICA – ML

EDF CUT TO NEUTRAL BY HSBC

JOHNSON MATTHEY CUT TO EQUALWEIGHT FROM OVERWEIGHT BY MORGAN STANLEY

RECYLEX CUT TO NEUTRAL FROM BUY BY GOLDMAN SACHS

RECYLEX CEMOVED FROM PAN EUROPEAN 1 LIST BY GOLDMAN SACHS

REDROW ADDED TO CONVICTION SELL LIST BY GOLDMAN SACHS


DATA


WTI : 68,5 (-5,54 %)

Eur/$ : 1,4545 (-0,18 %)

$ /Yen : 90,41 (0,50 )

10 Yr US : 3,33 ( -1,48 bp)

10 Yr Euro : 3,24 ( -6,8 bp)


Indices : US close ; Europe close

SOX : -1,41 %;-0,70%

S&P :-0,14 %; 0,05 %

DOW: -0,23%; -0,09 %

NAS :-0,15%; -0,05%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : 0,12 %; 0,27 %

ENERGY : 0,10 %; 0,52 %

FINANCIAL : -0,67 %; -0,20 %

HEALTHCARE : 0,05 %; 0,04 %

TECHNO : -0,21 %; -0,06 %

TELECOM : 0,37 %; -0,23 %

INDUSTRIAL : 0,36 %; 0,57 %

UTILITIES : -0,33 %; -0,07 %



TO BE COMING



Today

Results :

Dividend :Compagnie Financiere Richemont (CHF 0.30)

Events :Abbott at Morgan Stanley Global Healthcare Conference / Technology Conference at Deutsche Bank



Tuesday

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:



ECONOMIC DATA PREVIEW



In the Euro zone watch the industrial production (10.00 GMT) for the July expected to decrease at a slower pace from a month ago, but which will remained very weak around -16.8% YoY from a year ago.



ECONOMY



United-States: University of Michigan consumer confidence rose more than expected in September

After reaching 70.8 in June (the highest level since January 2008), US consumer confidence dropped for two consecutive months to surge to 70.2 in September the level seen a year ago when Lehman Brother fall. This rise at 70.2 was higher that the consensus forecast at 67.5 and was mainly lead by the progressive recovery in the United-States as well as the rise of wages and by the fact that job destructions are slowing down. Even if the Unemployment remained high, the US economy is now getting back to the virtuous circle : investment-employment-consumption as showed by the latest ISM survey which will boost consumer confidence in the coming months.



Japan: Japan’s economy grows less that first estimation

Japan’s economy surprisingly grew less than initially estimated in the second quarter. Indeed Gross domestic product expand at an annual 2.3% pace at the second quarter slower than the 3.7% of the preliminary release. Meanwhile quarterly GDP figure revealed a rise by 0.6% at the second quarter versus 0.9% of the preliminary release. Looking at the breakdown we notice that companies cut spending as capital investment dropped by 4.8%(previous -4.3%), and private demand dropped by 1.7% (previous -1.3%). Japan’s remained very far of the virtuous circle : investment-employment-consumption and for 2009 we forecast a sharp 5.0% drop of the GDP and a lasting deflation situation. Growth will be back in 2010 but at a very slow pace as the GDP should reach 0.2%.



China: the trade surplus sharply increased in August

China trade surplus improved from 10.63 billion dollars in July to 15.70 billion dollars in August. Nevertheless this sharp improvement is not as good as it looks. Indeed the breakdown of the statistic revealed that exports dropped by 1.63%. As a matter of fact the improvement of the trade surplus is due to the sharp drop of imports( -14.1%). Moreover from a year ago exports dropped by 23.4% and imports by 17%. China’s exports rebound will not occur before 2010 at its strongly linked to the recovery of its main trade partners such as the United-States, Asia and Europe.