The Heart of the Matter

GLOBAL EQUITIES RESEARCH

“It’s time to raise rates, Ben” the Barron’s magazine says. Its approach is that it’s time for the Fed to stop talking about an “exit strategy” and to start implementing one. There’s no need for short term rates to remain near zero now that the economy is recovering. The call to action is clear: Gold, oil and other commodities are rising, the dollar is falling and the stock market is surging. The move in the Dow Jones industrial average above 10,000 underscores the renewed health of the markets. Super-low short rates are fueling financial speculation, angering U.S. economic partners and foreign creditors, and potentially stoking inflation. The Fed doesn't seem to be distinguishing between normal accommodative monetary policy and crisis accommodative policy. There's a huge difference. With the crisis clearly past, the Fed ought to boost short-term rates to a more normal 2% -- still low by historical standards -- to send a signal to the markets that the U.S. is serious about supporting its beleaguered currency and that the worst is over for the global economy. Years of low short rates helped create the housing bubble, and the Fed risks fostering another financial bubble with its current policies. The Fed also ought to consider scaling back its massive bond purchases, which have totaled more than $1 trillion this year and have artificially depressed mortgage and Treasury interest rates. The Fed has virtually cornered the mortgage-backed market, buying about 75% of newly created government-backed securities this year, and that has forced the usual institutional buyers of mortgage securities into other markets, like corporate and municipal bonds. This has contributed to the sharp rally in munis and corporates. Ultimately, higher short-term rates could help by suppressing incipient inflation while doing little to dampen a mending U.S. economy. Real GDP growth could top 3% in the second half of this year.
The perils of easy money: the Fed’s policy of near-zero short term interest rates is affecting a wide range of markets. It is contributing to the sharp drop in the dollar and the rally in gold. The stock market has welcomed the lower dollar, because it helps sales for big exporters. But, ultimately, low rates could stoke inflation and undermine the confidence of overseas investors who are critical buyers of U.S. debt and equity.
But there is another scenario for short term rates. This is the one that says that the measures put in place by governments to support their banking sectors and economies have helped to avert a full-scale financial meltdown and a 1930s-style economic depression. But the full costs of the measures will be felt for years, if not decades, as governments put their finances back together. Indeed perhaps the biggest danger is that they try to do so too quickly. The prospect of much tighter fiscal policy and of a squeeze on public spending means that economies will need to be supported in other ways to keep them expanding even at sluggish rates and perhaps even to prevent them from falling back into recession. Monetary policy is therefore likely to remain very loose for a prolonged period.
Anyway, equity markets would like to know when the first rate hike will take place! Admittedly, previous U.S. stock markets rallies have often been brought to an end by policy tightening. In six of the seven previous U.S. recessions, the peak in the S&P 500 occurred within eight months of the Fed turning the screw. The exception was the 2001 downturn, when the market’s belated rally (which didn’t get off the ground until the spring of 2003) petered out four months before the Fed Funds rate was raised from a low of 1 %...
Yesterday, in his speech about Asia and the global financial crisis, Ben Bernanke was very optimistic about Asia: “Early this year, with many of the Asian economies in freefall, a quick recovery seemed difficult to imagine, but recent data from the region suggest that a strong rebound is, in fact, under way. Although the regional economy continued to contract in the first months of 2009, it expanded at an impressive 9 percent annual rate in the second quarter, with annualized growth rates well into double digits in China, Hong Kong, Korea, Malaysia, Singapore, and Taiwan. At this point, while risks to the economic outlook certainly remain, Asia appears to be leading the global recovery”.
Yesterday, despite a slight disappointment about the NAHB housing market index (HMI) for October, U.S. equity markets soared towards a new year-to-date record high on better than estimated earnings, with the S&P 500 index close to 1,100 pts. The NAHB HMI retreated 1 pt to 18. “It comes as no surprise that after trending upward from an historic low in January, the HMI’s positive momentum now appears to have stalled,” said Joe Robson, chairman of the National Association of Home Builders (NAHB). “Our economists have repeatedly warned that the approaching expiration of the $8,000 home buyer tax credit on Nov. 30, combined with the massive hurdles that builders face in obtaining construction financing and appropriate appraisals on new homes, could derail the fragile recovery in housing just as it is starting to take shape. Congressional action to expand the tax credit and extend it for one year would provide a critically needed boost to the employment market and economy, generating nearly 350,000 jobs, $28.2 billion in wages, salaries and business income and $11.6 billion in additional tax revenues. That’s an opportunity we can’t afford to pass up at this difficult time.”
Apple (+0.96 % during the session, +6.60 % after session) released impressive Q3 earnings & sales. Eaton and Texas Instruments also topped estimates, while Boston Scientific cut profit outlook. Today is a big day for earnings, with a very long list of major companies releasing data (see below). Roughly 70 companies of the S&P 500 index have released quarterly earnings, with 78 % above analysts’ estimates. This morning, the dollar went as low as 1.4995 EUR/USD before gaining strength, gold price rose to 1066 /oz, and oil price reached $80.05 /oz before retreating to $79.75 /oz. At 06.30 BST, Asian markets were slightly up and U.S. index futures were up: DJIA +0.20 %, S&P 500 +0.30 %, Nasdaq 100 +0.94 %. European markets should record a nice opening.



ECONOMIC DATA WITH IMPACT

In the U.S, watch for housing starts in September, expected to rise to 610k (a ten-month high) from 598k while building permits may rise as well to 590k vs. 579 k (13.30 BST) / Important
Producer Price Index (PPI, 13.30 BST) is expected to be flat MoM and -4.3 % YoY in September (vs. +1.7 % MoM and -4.3 % YoY in August), with the core index ex food & energy expected up 0.1 % MoM, 2.0 % YoY (vs. +0.2 % MoM and +2.3 % YoY) / Minor

POSITIVE IMPACTS

SOC GEN : Today is the last trading day for the right…
LVMH : Q3 sales €4.13bn, in line / Org. growth -3% (-6% exp) / Still 2-digit growth at LV / Demand for luxury apparel, jewelry and leather goods still weak but showing signs of stabilization / Said that destocking end may bear near
ADECCO announced the acquisition of MPS for $1.3 bn in cash ($13.80 per share, 24% premium, approved by MPS' board) / Deal expected to be EPS accretive in year 1 / Trading in Q3 in line with exp. With improvement seen over the course of Q3
PEARSON said Q4 trading is ahead of expectations / Raised FY EPS guidance to £0.60 (0.58 exp)
ESSILOR is open to bigger-than-usual acquisitions with sales in the range of €100 m to €200 m (Les Echos citing CEO)
ACTELION : Q3 sales SFR447.3m (457m exp) / Ebit SFR157.2m (158m exp) / Confirmed its FY forecast for both sales and cash EBIT to rise between 16 and 19% + said it would very likely be towards the upper end of the ranges…
NOVARTIS' Tasigna met its main target in a late-stage trial against Glivec as a first line treatment against chronic myeloid leukaemia
GSK : The FDA approved Votrient, a new GlaxoSmithKline drug to treat kidney cancer.
REPSOL : The Russian ambassador to Spain said that Lukoil/Gazprom could, hypothetically, buy Repsol but talks appear to be frozen
ALLIANZ has no quick plans to sell its shares in China's ICBC after a lock-up period ends Today
FAURECIA : Q3 sales €2.27bn (2.44bn exp) but raised its guidance for the H2, expecting sales to decrease less than initially forecast, and said Q3 revenue, although lower, was better than exp. / Sees positive operating & global FCF close to break-even" for the H2
SKF : Q3 sales SK13.3bn (13.5bn e) / PTP SK 689m (538m e) / Q4 demand expected to be slightly higher than Q3


APPLE : Q4 revenue $9.87bn (9.22bn exp) / EPS $1.82 (1.43 exp) / GM 36.6% (35.5% exp) / Sees Q1 revenue $11.3-11.6bn (11.5bn exp) & Q1 EPS of $1.70-1.78 (1.92 exp) & GM 34% but mket will see that too conservative… / Sold 7.4M Iphone in Q4
TEXAS INST. : Q3 revenue $2.88bn (2.82bn exp) / EPS $0.42 (0.39 exp) / All segments better than exp. with strong demand from every industry that uses chips, from cars to computers & phones / Sees Q4 rev. $2.78 bn-$3.02 bn ($2.79 bn exp) & EPS $0.43-0.51 (0.40 exp)
BOSTON SX : Q3 sales $2.02bn (2.04bn e) / EPS $0.19 (0.14 e) / Sees Q4 sales $2.02-2.12bn (2.11bn e) & EPS $0.17-0.21 (0.16 e)
INTEL’s CEO said the back-to-school season for chip was "extraordinary," & consumer sales overall are "very good" (Fox Business)

NEGATIVE IMPACTS

YARA : Q3 sales NK14.38bn (14.96bn e) / EBITDA NK 860m (1.16bn e) / Op. loss NK 117m (+141m e ) / LT fertilizer demand remains strong / Will continue to drive cost reduction measures, streamline operations to improve FCF
AHOLD : Q3 sales €6bn (6.07bn exp) mainly due to Albert Heijn sales €2.1bn (2.16bn exp) / Stop&Shop/Giant-Landover $4bn (3.98bn exp) / Giant-Carlisle $1.1bn, in line / Sales at stores open at least a year, ex-petrol, were mostly weaker than expected…
SWEDBANK : Q3 total income SK8.14bn (8.3bn exp) / NII SK5.02bn (5.27bn exp) / Impairment losses on loans SK6.1bn (-5.34bn exp) / Operating loss SK2.6bn (-2.2bn exp) / Core Tier1 9.9% end Q3 / Says recession, fin. crisis “far from over” & / Conf call 800 UKT
EADS : A U.S. lawyer filed suit against Airbus and many aerospace suppliers seeking unspecified compensation on behalf of survivors of 8 of the 228 passengers who died when an Air France flight crashed off the coast of Brazil in June
XSTRATA : Q3 coal output +8.9% but copper cathode production -14.7% (due to temporary shutdown at a smelter in Sept.) =Note that coal and copper are the main earnings drivers for Xstrata, accounting for 56% and 36%, respectively, of H1 Ebitda

TRADING IDEAS

BUY ACCOR / FRANCE TEL / ASML / EON / RWE on double bottom possibility
BUY QUALCOMM / CARREFOUR on reversal Head &Shoulder possibility

BUY EON / SELL EDF // BUY NORSK HYDRO / SELL STATOIL // BUY PINAULT / SELL LOREAL // BUY PUBLICIS / SELL LAGARDERE // BUY ALSTOM / SELL SIEMENS // BUY BAYER / SELL AKZO

BROKER METEOROLOGY

BG GROUP RAISED TO BUY FROM HOLD BY DEUTSCHE BANK
TELEKOM AUSTRIA RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS
KPN RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS
CNP RAISED TO BUY FREOM NEUTRAL BY UBS
MAGNIT RAISED TO BUY FROM HOLD BY ING

ILLILAD CUT TO SELL FROM NEUTRAL BY GOLDMAN SACHS
CARPHONE WAREHOUSE CUT TO NEUTRAL FROM BUY BY GOLDMAN SACHS
TRAVIS PERKINS STARTED AT UNDERWEIGHT BY HSBC

DATA

WTI : 78,6 (-0,05 %)
Eur/$ : 1,4934 (0,19 %)
$ /Yen : 90,78 (-0,07 )
10 Yr US : 3,41 ( 0 bp)
10 Yr Euro : 3,30 ( 1,7 bp)

Indices : US close ; Europe close
SOX : 1,35 %;1,33%
S&P :0,88 %; 0,89 %
DOW: 0,96%; 0,98 %
NAS :0,82%; 0,80%

DJ Stoxx US Sectoral Indices : US close ; Europe close
BASIC MATERIALS : 1,48 %; 1,49 %
ENERGY : 0,89 %; 0,87 %
FINANCIAL : 0,77 %; 0,78 %
HEALTHCARE : 0,66 %; 0,67 %
TECHNO : 0,79 %; 0,79 %
TELECOM : 0,82 %; 0,82 %
INDUSTRIAL : 1,04 %; 1,05 %
UTILITIES : 0,46 %; 0,46 %

TO BE COMING

Today
Results :Ahold trading statement / Bank of New York Mellon / Caterpillar (BMO) / Coach (BMO) / Coca Cola Co / Du Pont de Nemours / Iberdrola Renovables / Lockheed Martin / Pfizer / Omnicom / PPR sales / SanDisk / State Street / ST Micro (After US close) / Swedbank / UnitedHealth / United Technologies / Western Union / Xtrata / Yahoo ! / Yara International (BMO) / Zain
Dividend :
Events :Soc Gen end of subscription time / Abengoa EGM

Wednesday
Results : Alpha Laval / Altria / Biogen / Boeing / Cadbury / eBay / Elan / Eli Lilly / Iberdrola / Fiat / Peugeot (BMO) / Skandinaviska Enskila Banken / Swedbank / Synthes / Tele 2 / United Tech Home Retail / US Bancorp / Valeo / Wells Fargo
Dividend : BAE Systems (GBp 7,111111) / British Sky Broadcasting (GBp 11,22222) / Hays ( GBp 4,388889)
Events: Wal-Mart investor meeting

Thursday
Results : 3M / Air Liquide (BMO) / Aker Solutions / Amazon.com / American Express (AMC) / Atlas Copco / AT&T / Aviva trading update / Black & Decker / Essilor /Bristol-Myers Squibb / Broadcom / Credit Suisse (BMO) / Dow Chemical / Eastman Chemical / Ericsson (BMO) / Fortum (BMO) / Gemalto / Ingenico / Logitech / McDonald's / Merck & Co / Nestlé sales (BMO) / Nicox / Novartis / Pernod Ricard / Philip Morris (BMO) / Reed Elsevier / Saint-Gobain sales / Schneider sales / Schering-Plough (BMO) / UCB / Union Pacific / Wyeth / Xerox
Dividend :
Events : Microsoft Windows 7 goes on general release / Annual Retail Round Table at Deutsche Bank

Friday
Results : B Sky B / Danone sales / Fortune Brands / Gazprom / Honeywell (BMO) / Ingenico / Microsoft / Morgan Stanley / Saab (BMO) / Schlumberger (BMO) / Verizon / Syngenta / Volvo /
Dividend :
Events: B Sky B (AGM)

Monday
Results :Banco Popular (BMO) / Boliden / Merck KGaA / Michelin sales / Scania
Dividend :
Events:

ECONOMIC DATA PREVIEW

Watch in the United-States the Housing starts and building permits for September (13.30 GMT). The bottom floor has been reached on the real estate market as showed by the increased trend in the NAHB index. Moreover low prices and mortgage rates should boost house purchases. Consequently we anticipate housing starts and building permits to increase again in September to respectively 612,000 and 595,000. Watch as well the Producer prices index for September (13.30 GMT). After increasing by 1.7% in August, producer prices should rise again, but only by 0,2% in September. This new increase will be led by the small rise in energy and commodities prices, and by the weakness in the dollar. Excluding energy and food products, producer prices should increase by 0.1% in September.

ECONOMY

United-States: Slight decline of th NAHB index in October
The NAHB market index slightly declined from 19 in September 18 in October (forecast 20) after rising for three consecutive months. Despite this small decline we can say that the housing market has reached a bottom and is now progressively recovering. Indeed housing is taking advantage of government programs, including credits for first time buyers. Moreover low prices and mortgage rates should boost house purchases. We anticipate housing starts and building permits to increase again in September to respectively 612,000 and 595,000 on todayconfirming the present real estate slight rebound.