Bear Trap

GLOBAL EQUITIES RESEARCH
Weak session yesterday probably more due to a fear of the US employment report and the October month rather than the data we did attend.As a reminder the Non Farm payrolls are out before the opening of the US cash indices, better explaining some profit taking, and a possible bear trap (only 1 bn shares traded on the NYSE). As usually since this rally has started, new highs are being reached just after some look-alike dramatic sell-offs which so far never confirmed a trend reversal. Can’t see any red October unless any unpredictable news comes out, and as such a 52.6 ISM vs 54 expected won’t do the job, especially given the last few days rise driven by window dressing and M&A deals which had to be retraced. It is difficult at this stage to measure what part of the rise is due to the exaggerated crash last year triggered by hedge fund redemptions and panic selling, and what is worth equity valorisation once the growth speed has stabilised, reminding that we should be on for some 3% growth mini in the US for a while, which October 29th GDP will tell you.
Interesting day ahead, although possibly quiet in the morning, with a focus on a data which is the last bullet for bear economists as to the sustainability of the economical growth : the employment report. Indeed, according to everyone, whatever the view, hiring is required to make households consumption pick up, which would make the current recovery solid and spread from the industrial sector to all the others. A jobless recovery is what people call the current one, but every recovery is jobless to start with as firms only hire once they increased their working time and sales. There is and will always be a lagging time, which today might be not too long so much corporate reactivity has been prompt in cutting cost. They did adjust to a new and drastically lower growth speed after the Lehman bankruptcy which hopefully did not last long thanks to quantitative easing policies and big stimuli. But with a 29 crisis revival avoided, any slight pick up in activity should trigger a rather quick reversal on the hiring front.
Yesterday’s data were rather promising.
Admittedly, the ISM Manufacturing did not show as strong as what was expected, but do not forget the previous rise the month before, same as the one we did attend with the consumer confidence which just did a little pause. Things are not all clear, this is a fact is precisely what makes it interesting. The drop in the ISM index reverses only a very small part of the recent increases and still leaves the index consistent with annual GDP growth of around 3%. The fall may be due to the end of the cash for clunkers scheme that had boosted auto production in previous months. It wouldn't be surprising to see the index rebound in the coming months. Even after slipping from 64.9 to 60.8, the new orders index is consistent with the headline index increasing to around 55.0. The regional surveys and the plunge in corporate bond yields are sending a similar signal.
Meanwhile, activity in housing market continues to improve. The 6.4% m/m leap in the pending home sales index in August suggests that the dip in existing home sales in August is just temporary. The index is consistent with home sales rebounding rapidly from 5.1m to around 5.8m. The 0.8% m/m increase in construction spending in August was the first in three months and was driven by a 4.2% surge in residential spending. Same for the personal income and spending. Which means that after the banks getting better (which we will see in two weeks time with the US banks earnings), the other cause for the crisis is gradually getting cured (no wonder given all the incentive and the low mortgage rates). The little sell-off was rather welcome in order to get some fresh air and slightly more attractive entry points for whoever missed the train, or else wishes to jump in. As such today’s employment report will be an opportunity to break latest highs.
A bad employment report is granted, especially after the higher jobless claims yesterday, however the better help wanted index, ISM employment components and previous weekly jobless surveys are pointing out some improving labour sector. No one expect the jobs number to pick up given its lagging time, but if it did, it would take away a lot of doubts regarding the recovery sustainability. We should only worry about the non increasing jobs next year.
As to yesterday’s drop, just take a look at the first day of September, when the S&P cash moved down from 1028 to 993 (did 1057 to 1029 last night) and the Eurostoxx 2796 to 2715 (did 2892 to 2810 yesterday), it was scary, and the end of the rally because we broke down the previous highs level, just because the stimulus was behind us, and September months are supposedly the worse ones for equity indices historically (ended up 3.5% on both the S&P and the Eurostoxx). But now it is October, and its famous crashes, the 87 one was much of a thrill. Unfortunately for you and us, it won’t happen (we did a lot of money in October 87). This kind of crash do not call you before, like the mega one we did attend last year… Not with the worldwide officials ready to be supportive, aware of the possible recovery weakness, and with some few quarters coming of strong GDP and new orders in the pipe. Employment came out better in Germany on Wednesday, and in Japan this morning by the way, triggering some economic headaches. Jump in, carefully, choosy, but in not out.

ECONOMIC DATA WITH IMPACT

Employment report (13h30 UK time) expected –175k from previous –216k / rate expected 9.8% from 9.7% / average hourly earnings 0.2% from 0.3% / average weekly hours 33.1 from 33.1 / the rate will not be the focus but the number of destruction will be / keep an eye on the average weekly hours which is a leading indicator before hiring / important and win-win data as both bear and bull economists are not expecting the employment sector to rebound before next year / we think there might be some upside surprises due to the back to school effect , and jobless claims as well as the help wanted index and the ISM job component which showed some improvement
Factory Orders (15h UK) expected flat from previous 1.3% / minor today

POSITIVE IMPACTS

XSTRATA : The UK takeover panel set a deadline of Nov. 20 for XTA to “put up or shut up” on its proposal to merge with ANGLO-AM.
VIVENDI : Comcast and GE are discussing a plan that would merge Comcast's cable networks with GE's NBC Universal in a newly
formed private company (Reuters) / The debt from GE would be raised to enable it to buy out Vivendi's 20% stake in NBCU… (CNBC)
FIAT : Italian car sales rose 6.77% in September with Fiat taking a 31.52% share / In Brazil, Fiat's 2nd most important market, sales jumped 19.9% in September / However, Chrysler sales fell 44.4% in the US
PEUGEOT said that the current level of orders is very good
EDF announced that it is initiating a process to evaluate ownership options for its electricity distribution business in the UK / This is in line with its intention, already announced in February 2009, to reduce its net financial debt by at least €5 bn by the end of 2010
GDF SUEZ will likely conclude talks this year to take a 9% stake in the Nord Stream gas pipeline being built by Gazprom & Eon
AXA is discussing the possibility of abandoning its dual governance structure & replacing it with a single board of directors (Les Echos)
GSK said that the UK Health Agency recommended Hycamtin for 2nd-line lung cancer treatment
BAYER : The FDA approved Mirena drug to treat heavy menstrual bleeding, making it the 1st contraceptive to treat such bleeding
DEUTSCHE POSTBANK will see Q3 results improve significantly but it may not reach the break-even point (CEO) (In line)
TUI : The German government will approve the €1.2 bn guarantee for Hapag-Lloyd Today (FTD)
EUROPEAN BANKS : Stress tests showed that the EU's top 22 banks could survive a €400 bn in credit losses this year & next if the region's economy deteriorates more than exp. & that they were sufficiently capitalized

U.S. AUTO SALES tumbled by 23% in September : HYUNDAI +22.2% / VOLVO +11.7% / PORSCHE +4.1% / BMW -0.5% / VOW -2.6% FORD -9.6% / NISSAN -10.7% / MERCEDES -13.2% / TOYOTA -16.1%

NEGATIVE IMPACTS

BHP-RIO TINTO : Agreement on BHP and Rio Tinto's iron-ore JV could face delays due to issues surrounding access, commercial benchmarks and the role of joint venture partners (The Australian Financial Review)
SAS could need to raise more capital after a share issue earlier in the year (Dagens Industri quoting an airline consulting firm)
SWEDISH BANKS could well be overcapitalised in a couple of years' time, giving them the ability to return around SEK100 bn to shareholders (Dagens Industri)
ARCELORMITTAL announced pricing of $1 bn bond issue / Yield of 30-year bonds is 7.4%
REC is launching a €300 m convertible bond

U.S. AUTO SALES tumbled by 23% in September after the boom from the "cash for clunkers" program : SAAB -73.7% / GM -47.2% / CHRYSLER -44.4% / MITSUBISHI -38.7% / HONDA -23.3%

TRADING IDEAS

Would definitely buy Dollarwhich seems (at last) resuming its upside trend, deficit in Europe will be the focus very soon when France will launch its big loan early next year, yesterday’s oil prices rise from 66 to 70.4 on the WTI with no dollar weakness is another sign of the decolleration from commodities
BUY ALSTOM / ARCELORMITTAL killed yesterday& BUY SAP / GSZ / VINCI on double bottom possibility
BUY OIL names such as TOTAL (ex div 09/11/13 €1.14) / ENI / TECHNIP to play upside trend
BUY CARS such as BMW / VOLKSWAGEN / RENAULT & PEUGEOT which could resume their upside trend
BUY AHOLD on reversal Head & Shoulder possibility (dollar related)
SELL VIVENDI / ST GOBAIN / DANONE / AXA on double top

BUY ROCHE / SELL SANOFI // BUY PHILIPS / SELL ASML // BUY AHOLD / SELL METRO // BUY BMW / SELL DAIMLER // BUY AEGON or AXA / SELL ALLIANZ // BUY ABB or HOLCIM / SELL ST GOBAIN // BUY TOTAL / SELL REPSOL
BUY ELI LILLY / SELL BRISTOL // BUY EXXON / SELL CHEVRON // BUY BEST BUY / SELL TARGET

BROKER METEOROLOGY

REPSOL RAISED TO NEUTRAL FROM UNDERWEIGHT BY JP MORGAN
TOD’S RAISED TO BUY FROM NEUTRAL BY UBS
SCHRODERS RAISED TO BUY FROM NEUTRAL BY UBS

TANDBERG CUT TO NEUTRAL FROM BUY BY UBS
CARLSBERG CUT TO SELL FROM SOLD BY DEUTSCHE BANK
TESCO RATED NEW SELL BY CITIGROUP
SAINSBURY RATED NEW SELL BY CITIGROUP
MORRISON RATED NEW SELL BY CITIGROUP
UPM-KYMENE CUT TO NEUTRAL FROM OUTPERFORM BY CREDIT SUISSE
BOLIDEN CUT TO SELL FROM HOLD BY S&P
ABERDEEN ASSET CUT TO NEUTRAL FROM BUY BY UBS
GEOX ADDED TO LEAST PREFERRED LIST BY BANK OF AMERICA - ML

MOODY’S DOWNGRADES BES INVESTIMENTO’S DEPOSITS TO BAA2

DATA

WTI : 70,2 (0,38 %)
Eur/$ : 1,4542 (-0,02 %)
$ /Yen : 89,41 (0,25 )
10 Yr US : 3,15 ( -2,76 bp)
10 Yr Euro : 3,16 ( -6,3 bp)

Indices : US close ; Europe close
SOX : -4,84 %;-3,87%
S&P :-2,58 %; -1,90 %
DOW: -2,09%; -1,55 %
NAS :-3,06%; -2,48%

DJ Stoxx US Sectoral Indices : US close ; Europe close
BASIC MATERIALS : -4,13 %; -2,96 %
ENERGY : -2,95 %; -1,99 %
FINANCIAL : -3,96 %; -1,99 %
HEALTHCARE : -1,76 %; -1,15 %
TECHNO : -3,00 %; -2,53 %
TELECOM : -1,76 %; -1,60 %
INDUSTRIAL : -2,73 %; -2,28 %
UTILITIES : -1,84 %; -1,35 %

TO BE COMING

Today
Results :Dior sales
Dividend :JPMorgan ($0.05) /
Events :

Monday
Results : Air-France KLM traffic / British Airways traffic / EDF energies nouvelles
Dividend : Acerinox (€ 0.10) / Comcast ($ 0.0675)
Events:

Tuesday
Results : Tesco (BMO)
Dividend :
Events :

Wednesday
Results : Michael Page Internationa trading statement / Alcoa / Costco / Sainsbury sales / Monsanto
Dividend :Kingfisher (GBp 2,138889) / WPP (GBp 5,766667) / General Dynamics ($ 0,38) / Medtronic ($0.205) / Monsanto ($0.265) / Verizon ($0.475) / AT&T ($ 0,41)
Events: E.On capital market day

Thursday
Results :Pepsi (BMO) / Marriott International
Dividend :
Events:

ECONOMIC DATA PREVIEW

In the United-Stateswatch the Employment report for September(13.30 GMT). After an exceptional drop 9.4% YoY in July, unemployment rate rose to 9.7% in August the worst since June 1983. Despite the end of the recession , this increase in unemployment rate was quite logical as it is a lagging indicator of the economic activity. However, after the rise of August we anticipate a stabilization at 9.7% in September. Meanwhile, the jobs destruction which had strongly slowed down in August at 216 000 (the “best performance” since August 2008) should drop again to reach 165 000 in September. Nevertheless, the unemployment rate will more likely increase in the coming months, to stabilize around 10% until the beginning of 2010.

ECONOMY

United-States: Personal income and personal spending rose in august
After having rising in April and May American’ revenues dropped by 1.1% in June and rise by 0,2% in July. For August, personal income rise by 0.3% as revenues are increasing by 4.0% per year, led also by the Obama checks distribution as well as by the reduction in jobs destruction. Meanwhile, household expenses increased for a fourth consecutive month by 1.3% in August the highest progression since 2001. This good performance was mainly explained by the rise of consumer prices (+ 0,4% in August) and by the sharp increase of retail sales (with and without cars). Indeed the United-States are recovering from the economic recession and spending is back not just led by the cash for Junkers but in the other areas as well. This is another very encouraging news as consumer spending account for 75% of the US GDP.

United-States: Initial jobless claims increased and continuing claims dropped last week
Initial jobless claims increased from 534 000 to 551 000 (forecast 535 000) showing that the improvement of the labour market remained very fragile. Nevertheless after over laying off by anticipation scared by the gloomy economic outlook companies are progressively putting themselves together and matching closer economic fundamentals. Meanwhile continuing claims dropped from 6 160 000 to 6 090 (forecast 6 170 000) confirming the improvement. Anyway employment is always a lagging indicator of the economic activity, this is why the unemployment rate will more likely increase in the coming months, to stabilize around 10% until the beginning of 2010.

United-States: The ISM manufacturing confirmed the industrial recovery
US ISM manufacturing dropped slightly from 52.9 in August to 52.6 in September (forecast 54.0). Nevertheless this is the highest level since June 2007 and this level confirmed the rebound of investment in the United-States. Looking at the breakdown of the sub index production dropped from 61.9 to 55.7 and new orders from 64.9 to 60.8 but backlogs of orders rose from 52.5 to 53.5. After over cutting investment companies are now massively investing again, in such conditions we forecast a 10% annual growth of investment since spring 2010.

United-States: Pending home sales sharply increased in August
Pending home sales rose by 6.4% in August just twice as much as July rise (3.2%) confirming that the bottom floor has been reached on the real estate market. This rise of the number of contracts to buy previously owned homes in the US was mainly led by the decline of home prices, low mortgages rates and government stimulus program. From a year ago pending home sales rose by 12.1% (prior 12.9%).

Euro area: Unemployment rise in August
Unemployment rise for a for a fourteen consecutive month in the Euro area to reach 9.6%, the highest rate increase since January 1999. Nevertheless if the unemployment rate revealed to be high the August’s rise is modest and remained encouraging. Looking at the breakdown Spain unemployment remained gloomy at +18.9% and Germany labour market continues to benefit from government incentives is showing a 7.7% rise while France remained slightly above the average with a 9.9% rise. It important to bear in mind that unemployment remained a lagging indicator of the economic activity and despite the slight recovery in the Euro area its is quite logical that the unemployment rate continue to increase.