Edison & Co

GLOBAL EQUITIES RESEARCH

U.S. industrial capacity utilization rate (as a % of total capacity) will be the key data today (14.15 BST). The capacity utilization rate is a key driver for investment and inventories change. It fell to an historical record low of 68.3 % last June, to be compared with a 80.6 % level in December 2007. It recorded a sharp fall in 2008 and in the first half of 2009. Since last June it recovered somewhat: 69. % in July, 69.6 % in August. The downward trend of the capacity utilization rate is a consequence of the economic slowdown and of a slump in inventories: manufacturer’s inventories slumped 12 % between July 2008 and August 2009 while inventories/sales ratio jumped 21 % between July 2008 and March 2009 to 1.46 month. It is interesting to underline that, between March and August 2009, inventories/sales ratio contracted to 1.38 month, while inventories were still decreasing. The last data regarding inventories were August’s ones. Early September, inventories decreased as car inventories slumped. Today, a surge in motor vehicle production to replenish the inventories reduced by the cash for clunkers scheme is likely to boost September’s industrial production (14.15 BST). Modest gains in other areas can be expected, which will mean that overall industrial production increases by around 0.5% m/m in September. Investors are expecting another rise (to 69.8 %) of the capacity utilization rate in September which would materialize a quarterly sharp rebound. This could be good news for gross private domestic investment data: in Q2 2009, it was down 24 % (annualized rate) after -50 % in Q1… Financial markets are now bound to the Fed’s decision to tighten its monetary policy or not (and when?) and to companies Q3 results. As for the Fed, on the one hand, monetary policy is likely to remain very loose for a “prolonged period” as the prospect of much tighter fiscal policy means that economies will need to be supported in other ways to keep them expanding even at sluggish rates and perhaps to prevent them from falling back into recession. After all, even when economies start to recover, governments will presumably see this as a green light to step up the fiscal squeeze. On the other hand, the minutes from the US Fed's most recent FOMC meeting (published on Wednesday) only hinted at the apparent tensions developing between the doves and the hawks. Those tensions have been more notable in recent speeches by officials. The doves still seem to have the upper hand, arguing that “the economic recovery was likely to be quite restrained” and that “slack in both labour and product markets would be substantial over the next few years, leading to subdued and potentially declining wage and price inflation.” Some FOMC members even wanted to increase the size of the Fed's MBS purchase scheme. However, the hawks are becoming more vocal, expressing skepticism about measures of economic slack and what impact that slack has on inflation. The hawks put more stress on inflation expectations, which they worry will rise unless the Fed starts to reverse its ultra-loose policy stance soon. One member even wanted to halt the Fed's asset purchase program immediately. A “few” participants felt the longer-term risks to the inflation outlook were already “tilted to the upside”. If the Fed sticks to its plan to buy mortgage-backed securities until the end of Q1 2010, then we cannot see it hiking rates before then. It would make no sense to be hiking short rates while the Fed is still trying to drive down long rates using quantitative easing. Monetary policy would presumably then be on hold until economic growth picked up again, which might be in the second half of 2011. There is a slim possibility, however, that the Fed will manage to squeeze in a couple of rate hikes next year before economic growth slows, particularly if it calls a premature halt to its asset purchases. Any additional fiscal stimulus (although now looking unlikely) might also tip the balance in favor of the hawks. As for companies’ Q3 results, IBM showed that revenues were declining while profits were up, which disappointed investors (-3.87 % after hours). Google released impressive revenues and profit data. Citigroup (loss of 27 cts/share) and Goldman Sachs (profit of $5.25 /share) confirmed that banks’ profits were mostly due to trading and market activities more than credit. U.S. Equities were up yesterday, with the S&P 500 index close to 1,100. Asian markets were mostly flat this morning. U.S. index futures were slightly up: DJIA +0.06 %, S&P 500 +0.17 %, Nasdaq 100 +0.19 % (06.45 BST). European markets could go for new YtD record high today. Quarterly results of General Electric will be closely watched (before the opening). ECONOMIC DATA WITH IMPACT US industrial production in September (14.15 BST) expected to rise between 0.2 % and 0.5 % (minor) and for the industrial capacity utilization rate expect to rise for the third month in a row, to 69.8 % (important). The rebound in house prices and the modest fall in gasoline prices should support the provisional estimate of October’s University of Michigan consumer confidence index (15.00 BST). However, the consensus expects a small drop (73.3 vs. 73.5) /interesting. Watch for General Electric / Bank of America / Halliburton Q3 results (before the opening). POSITIVE IMPACTS TELECOM ITALIA’s shareholder Marco Fossati (who holds 5% of TIT) is in favor of spinning off TIT's fixed-line network into a separate unit to make it more competitive (Corriere della Sera) / But TIT CEO and Telefonica are against this idea… REPSOL confirmed that a natural gas site off the coast of Venezuela had reserves of between 5.6 trl and 7.8 trl cubic feet of gas, the largest such discovery in the country's history… DEUTSCHE POST : FedEx said it is witnessing stabilisation in volumes in Europe and improvement in Asia CONTINENTAL's planned capital hike will be delayed until next year (FTD) NOVARTIS-SANOFI-MERCK KgaA : Acorda Therapeutics shares soared nearly 50% yesterday as analysts said a FDA panel review of the company's multiple sclerosis drug paved the way for approval by next year / Analysts said that aside from Biogen other companies in the multiple sclerosis area like NOVN, SASY, TEVA & MERCK could be potential acquirers… ($1bn) UNICREDIT recorded a 40% increase in its deposits in Russia this year (CEO) / Separately, it is looking to grow further in Central and Eastern Europe (La Republica) ATOS : Q3 sales €1.23 bn, in line / Organic sales -5.6%, in line / Net debt cut to €293 m at end September / Keeps 2009 goals LSE has withdrawn from bidding for the Warsaw Stock Exchange coz the acquisition would not have fit with the new strategy (FT) EDP will be able to raise electricity rates on the mainland by 2.9% next year under a proposal by the country’s energy regulator EADS : Airbus denied a report he was involved in a bid to buy plane leasing giant ILFC with Qatari financial backing GOOGLE : Q3 revenue $4.38bn ($4.24bn e) / EPS $5.89 ($5.42 e) / U.S. paid clicks surged 14% from a year earlier ( up 4% from Q2 AMD : Q3 sales $1.4 bn (1.26bn e) / EPS loss $0.26 ex-items (-0.42 e) / Sees its product revenue "to be up modestly for the Q4" NEGATIVE IMPACTS STORA ENSO said it will record non-recurring items with a €655m negative impact on Q3 operating… CARREFOUR : Q3 sales €24bn (24.3bn exp) / LFL sales -3.8% (-0.5% e) with LFL French hyper sales -8% / Plans togoout of Russia (but small biz) / No improvement in global trading environment (CFO) / Spain weak / Latam slowing a bit / Asia less good than Q2… ACCOR : 3M sales €1.85bn (1.83bn exp) / Hotel LFL sales -9.3% / Prepaid services LFL -0.6% / Does not see improvement neither in Q4 nor in H1 2010 / Maintained its FY PTP guidance of between €400 m and €450 m / No more details on the planned demerger VOLKSWAGEN is considering a capital increase to secure refinancing of its planned participation in Porsche = Extraordinary shareholder meeting scheduled Dec.3 DEUTSCHE BANK is considering completing its business in Russia with the acquisition of a retail bank (Russian CEO) ING - FORTIS : DSB Bank failed to reach an agreement with a group of banks to avoid bankruptcy. COMMERZBANK will see more credit defaults in its loan biz with small/mid-sized companies in Germany in the H2 than in the H1 (FAZ) SOLARWORLD, Q-CELLS … Economic experts in German conservatives and the Free Democrats agreed to allow cuts in solar energy support levels from next year… SAS : The Norwegian state is ready to sell its stake in SAS if an interesting opportunity arises (Svenska Dagbladet) IBERIA : September passenger traffic falls 8.1% yoy / Load factor reached 79%, down from 80.6% a year earlier and 82.4%in August. ADP : September passenger traffic fell 4% NATIONAL EXPRESS : CVC decided not to make an offer IBM : Q3 rev. $23.6 bn (23.4bn e) / EPS $2.40 (2.38 e) / GM 45.1%, down from 45.5% in Q2 / Slowing pace of signins could weight on growth in the future… / Sees FY EPS of at least $9.85 (9.78 exp) / Remains well ahead of pace to hit its 2010 goal of $10 to $11 in EPS TO BE NOTED (yest.) : M. Roubini said that the average price of houses in the U.S. will fall by as much as 10% next year due to the glut of new and existing homes / The recovery in prices in recent months is due to seasonal factors & has been helped by the tax credit for 1st-time home buyers, pointing out that this benefit expires Dec. 1 / After that, demand is likely to fall again / He reiterated that the U.S. is "closer to the bottom" of the recession but said the recovery will be anemic and "U-shaped," rather than a sharp "V-shaped" rebound TRADING IDEAS BUY DANONE / NESTLE / AHOLD / PINAULT / EADS / TOTAL / BP / RDSA / EDF / HEINEKEN / PERNOD to play upside trend BUY PINAULT / SELL LVMH // BUY PUBLICIS / SELL LAGARDERE // BUY ALSTOM / SELL SIEMENS // BUY AHOLD / SELL UNILEVER // BUY BAYER / SELL AKZO // BUY EON / SELL RWE // BUY BRISTOL / SELL MERCK // BUY QUALCOMM / SELL JUNIPER BROKER METEOROLOGY NORISLK RAISED TO BUY FROM HOLD BY CITIGROUP GIVAUDAND RAISED TO OVERWEIGHT FROM EQUALWEIGHT BY MORGAN STANLEY AEGIS RAISED TO EQUALWEIGHT FROM UNDERWEIGHT BY MORGAN STANLEY SWISS LIFE RAISED TO BUY FROM HOLD BY CITIGROUP NORTHEN FOODS RAISED TO BUY FROM NEUTRAL BY UBS YARA RAISED TO BUY FROM NEUTRAL BY UBS HENKEL RAISED TO BUY FROM NEUTRAL BY NOMURA PHILIPS RAISED TO OVERWEIGHT FROM NEUTRAL BY HSBC TELIASONERA RAISED TO NEUTRAL FROM UNDERPERFORM BY BANK OF AMERICA – ML AKZO NOBEL CUT TO NEUTRAL FROM BUY BY NOMURA BAYER CUT TO NEUTRAL FROM BUY BY NOMURA SANOFI – AVENTIS REMOVED FROM EUROPE 1ST LIST BY BANK OF AMERICA - ML SCOR CUT TO NEUTRAL FROM BUY BY BANK OF AMERICA - ML NOKIA CUT TO HOLD FROM BUY BY RBS PREMIER FOODS CUT TO UNDERWEIGHT FROM NEUTRAL BY JP MORGAN NATIONAL BANK OF GREECE CUT TO EQUALWEIGHT FROM OVERWEIGHT BY JP MORGAN ASML CUT TO SELL FROM HOLD BY CITIGROUP DATA WTI : 77,9 (2,56 %) Eur/$ : 1,4918 (-0,20 %) $ /Yen : 90,95 (-0,24 ) 10 Yr US : 3,46 ( 0,74 bp) 10 Yr Euro : 3,30 ( 7 bp) Indices : US close ; Europe close SOX : -1,41 %;-1,73% S&P :0,42 %; -0,38 % DOW: 0,47%; -0,31 % NAS :0,05%; -0,54% DJ Stoxx US Sectoral Indices : US close ; Europe close BASIC MATERIALS : 0,35 %; -0,86 % ENERGY : 2,01 %; 0,19 % FINANCIAL : -0,60 %; -1,45 % HEALTHCARE : 0,62 %; 0,07 % TECHNO : -0,04 %; -0,66 % TELECOM : 0,45 %; 0,15 % INDUSTRIAL : 0,26 %; -0,60 % UTILITIES : 0,90 %; 0,25 % TO BE COMING Today Results :Atos Origin / Bank Inter / Gazprom / Bank of America - ML (BMO) / General Electric (10.30 GMT) / Halliburton / Sony - Ericsson Dividend :Santander TBA Events :British Oncology Pharmacy Association Annual Symposium Monday Results : LVMH sales (AMC) / Sulzer sales / Soitec / Transgene / Apple / Texas Instrument (AMC) / Dividend : Events: Abengoa EGM Tuesday Results : PPR sales / Ahold trading statement / Iberdrola Renovables / ST Micro (After US close) / Swedbank / Yara International (BMO) / Xtrata / San Disk / Caterpillar (BMO) / Bank of New York Mellon / Du Pont de Nemours / Pfizer / Coca Cola Co / Lockheed Martin / United Health / Yahoo ! / UnitedHealth / United Technologies / Omnicom / SanDisk / Zain Dividend : Events : Soc Gen end of subscription time / Abengoa EGM Wednesday Results : Iberdrola / Fiat / Valeo / Alpha Laval / Cadbury : Skandinaviska Enskila Banken / Swedbank / Tele 2 / Boeing / US Bancorp / United Tech Home Retail / eBay / Wells Fargo / US Bancorp / Biogen / Elan / Altria Dividend :BAE Systems (GBp 7,111111) / British Sky Broadcasting (GBp 11,22222) / Hays ( GBp 4,388889) Events: Thursday Results :Novartis / Schneider sales / Fortum / Credit Suisse / Logitech / Ericsson / Stora Enso / Reed Elsevier / Bristol Myers Squibb / Dow Chemicals / Mc Do / Merck & Co / Philip Morris / AT & T / Aviva trading update / American Express / Amgen / Atlas Copco Dividend : Events: ECONOMIC DATA PREVIEW Watch in the United-States the Industrial production and the capacity utilization for September (14.15 GMT). After having increasing by 1% in July, ending eight consecutives months of decline, it rose by 0.8% in August. US industrial production should confirmed this rebound by rising by 0.4% in September. This rise will be confirmed by the “production index” of last ISM manufacturing survey which reached 55.7 in September. In such conditions, after having increased by 69% in July, which followed eight consecutive months of decline, and after rising by 69.6% in August, capacity utilization should increase again to reach 70% in September. Watch in the Euro area the Trade balance for August (10.00 GMT). Euro area trade surplus is expected to decrease from € +6.8 bn in July to € + 4.9 bn in August as exports should decline penalized by the high level of the euro currency. ECONOMY United-States: Initial jobless claims and continuing claims rose at a slower pace last week Initial jobless claims rose at a slower pace last week from 524 000 to 514 000 confirming the progressive recovery of the labour market in the United-States. Indeed after over laying off companies are now matching more and more economic fundamentals. Indeed the United- States are recovering as showed by the ISM manufacturing and services investment advanced indicators and as showed by the US retail sales and advanced indicator of US household consumption. Meanwhile continuing claims dropped from 6 067 000 to 5 992 000 a lowest since March 2009, showing that the hiring process is improving. United-States: Deflation is slowing down in September After stabilizing in July, consumer prices rose by 0.4% in August and dropped by 1.5%YoY. For September, prices rose by 0.2% led by the slight increase in commodities and by the economic recovery in the United States. The rate slightly dropped to -1.3%YoY still being depressed by the base effects linked to last year peak in energy prices but showing a slight reduction of the deflation. Meanwhile the core index (excluding food and energy) increase by 0.2% (a 25 year low) in September and by 1.5%YoY confirming that there is no generalisation of the deflation in the United-States. For 2009 consumer prices should remained in negative territory dropping by 0.6% and inflation will be back in 2010 at 2.7% led by the economic recovery. Euro area:Consumer prices declined for a fourth consecutive month in September Euro area consumer price index dropped for a fourth consecutive month in September by 0.3%YoY (prior -0.2%YoY). This drop was led by the slight decline of energy and commodities prices. Deflation is deepening in the Euro area which is at short term increasing household purchase power but which can be dangerous in the long run. Indeed in the long run deflation increased bankruptcies and unemployment reducing household purchase power. From a month ago prices dropped from 0.3% in August to 0% in September. Meanwhile consumer price index core (ex food and energy) rose by 1.2% confirming that there is no generalisation of the deflation in the Euro area. As the euro area is progressively recovering inflation will turned positive by the end of the year and reached 0.3% in 2009 and 2.1% in 2010.