Quarter Hours

GLOBAL EQUITIES RESEARCH
Yesterday, U.S. equity markets slightly worried about housing data and more generally about the macro-economic situation and the monetary policy stance in the months to come. These worries overshadowed largely better-than-estimated quarterly earnings. The modest 0.5% MoM increase in September’s housing starts to 590k annualized mainly reflects the downward revision to starts in August from 598k to 587k. It is not a sign of growing strength in the housing market. Housing starts have now been broadly unchanged for the past four months. The good news is that they are stabilizing at a level close to 20% higher than the trough reached earlier this year. At the time, average prices are stabilizing or even slightly rising (see Case-Shiller composite-20 home price index). The bad news is that housing starts are still 75% or so down from their peak in 2005, when they were running at more than 2,000,000 a year. Although the pace of starts in the bubble years was not necessarily desirable or sustainable, it helps to illustrate that they still have a lot further to rise just to get back to a normal healthy level. Building permits were revised up in August (from 579k to 580k) and decreased to 573k in September vs. 595k expected. These data were a little bit disappointing a day after the National Association of Home Builders (NAHB) housing market index (HMI) retreated 1 pt to 18 (but still largely above the trough of 8 recorded last January. But remember 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.
In our mail yesterday we discussed the scenario of a quick hike in the Fed Funds rate after the Barron’s magazine said “it’s time to raise rates, Ben”. The minutes from the US Fed’s most recent FOMC meeting (09/23/09) 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 labor and products 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”. A quick move up to 2% - or even 1% - in the key Fed Funds rate, now at 0.00 % / 0.25 %, might shock global markets, where big investors have come to see the dollar, commodities and stocks as one-way bets. Major global equity indexes probably would fall, while commodities likely would fall and the dollar would rally. 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. With unemployment near 10%, few see a need for higher rates. And Fed Chairman Ben Bernanke, while acknowledging that the Fed will need to pursue an "exit strategy" and tighten monetary policy, clearly wants to act later rather than sooner. Financial markets expect the pace of Fed tightening to be very slow, with short-term rates not hitting 1% until October of 2010. But some central-bank officials, such as St Louis Fed President James Bullard, have been warning about inflation. And they have a point: Inflation is back, with prices rising 0.2% in September after increasing 0.4% in August. The CPI index could be up 2% in the next year, versus a 1.3% decline in the 12 months through September.
Anyway, the key drivers for equity markets are the S&P 500 Q3 quarterly earnings. We guess that the 17 % slump in Q3 09 earnings (vs.Q3 08) expected by analysts will be largely revised up considering that on October 20th, 104 out of 500 companies had released their quarterly data and that a record of 78 % were largely above estimates. Remember that analysts expect a 570 % (!) rise in Q4 09, partly due to a base effect (-85 % in Q4 08)… Yesterday after the close there were good pieces of news with Yahoo! (+5.07 % after session) and SanDisk (+10.20 % after session). However, some companies’ revenues are disappointing investors, but most of this downside is due to exchange rate impact. Today is a busy day again for earnings with, among a long list, Boeing, Eli Lilly, Freeport McMoran, Mac Donald’s, Northrop Grumman before the open and eBay after the close.
Yesterday, U.S. equity indexes were weaker but closed well above their intraday low (the S&P 500 closed at 1,091.06 vs. an intraday low of 1,086.16) and, this morning (06.30 BST), U.S. index futures were flat: DJIA +0.02 %, S&P 500 0.09 %, Nasdaq 100 +0.014 %. Asian markets were roughly flat as well. No major data being released today (the Beige Book will be released at 19.00 BST), European markets may be widely consolidating before earning announcements in the U.S.

ECONOMIC DATA WITH IMPACT

In the U.S, watch for the Fed’s Beige Book (19.00 BST / published two weeks before each FOMC meeting) which should confirm that economic activity is picking up, but with unemployment still getting worse / Interesting
MBA mortgage applications (12.00 BST) could mark some improvement / Minor, weekly data
Many speeches from Fed’s officials: Jeffrey Lacker (Economic Workshop, Richmond Fed, 17.00 BST), Daniel Tarulllo (Exchequer Club of Washington, 18.00 BST), Eric Rosengren (Boston Fed, 21.30 BST)
In the U.K, watch for the minutes of Bank of England MPC’s 10/08/09 meeting / Interesting on quantitative easing

POSITIVE IMPACTS

SANTANDER is considering using a surplus of core capital to pay a special dividend in 2010 (CEO in the FT)
STM : Q3 revenue $2.28bn (2.20bn exp) / GM 31.3%, in line / EPS loss $0.17 (-0.14 exp) but analysts will retain upbeat guidance for Q4 with GM boosted to 36.5% (+/- 1.5%age point) (35% exp) + sees Q4 revenue $2.39-2.55bn (2.35bn exp)
ERICSSON : ST-ERICSSON, the JV between STM & Ericsson, reported Q3 operating loss $121m
FERROVIAL : BAA has agreed to sell Gatwick airport to Global Infrastructure Partners for £1.5 bn (FT)
DBK has reached preliminary terms with the Dutch government to buy commercial banking assets from ABN Amro / Separately, DBank looks set to buy a stake of about 75% in Sal. Oppenheim for about €1 bn as soon as next week (Reuters)
SANOFI & Wellstat Therapeutics announced a global licensing agreement to develop, manufacture and commercialize an oral insulin sensitizer for the treatment of Type II diabetes. Wellstat will receive cash payment of as much as $350 m
CAP GEMINI : Tietoenator reported Q3 sales of €383m (394m exp) / Ebit of €30.1m (28.4m exp) / Said that key customers segments has started to recover / Separately, Infosys is adding further offices in Germany & France as it looks to expand ops in Europe
TELECOM ITALIA : Lawyers for TLIT and for infrastructure fund F2i will meet to agree on a letter of intent for F2i to buy 49% of TLIT's Sparkle unit / F2i will pay €1.5 bn for the stake in Sparkle (Il Messagger)
TELE 2 : Q3 sales SK9.8bn (10bn exp) / Ebitda SK2.4bn (2.3bn exp) / Added 1.1 m customers in Russia in the quarter /Does not see recovery in Baltic market in the near term
HOME RETAIL : H1 underlying profit £123m (121m exp) / Interim dividend kept at 4.7p
CADBURY : Q3 Underlying sales up 7% / Raises FY sales gwth target to Middle of 4-6% range & FY margin target up 20bp to 135bp
DRAX sees FY trading in line with views / Commodity markets remain challenging

YAHOO : Q3 revenue ex-tac $1.13bn (1.12bn exp) / EPS $0.15 (0.12 exp) thx to cost-cutting and restructuring / Sees Q4 revenue$1.6-1.7bn (1.22bn exp) / Sees signs that the markets have stabilized and spending is starting to free up…

NEGATIVE IMPACTS

PPR : Q3 sales €4.56 bn, -7.6% (4.65bn exp) / Gucci like-for-like sales -6% / Puma LFL sales -9.8% / Nearly all of PPR's non-luxury divisions reported LFL sales declines of around 10% / Fnac +0.5% / Reiterated plans to spin off CFAO / Sept. better than July-August
PEUGEOT : Q3 sales €11.78bn (12.6bn exp) / Said the decline was due to a forex impact that shaved revenue by 2.6% + negative product mix impact of 2.5% / Q3 Europe market share to 13.4% from 12.9% / No earnings guidance
SEBA : Q3 revenues SK9.7bn (10.6bn exp) / NII SK4.5bn (5bn exp) / Operating SK388m (273m exp) / Total costs SK6bn (6.2bn exp) Credit Loss level 0.98% vs 1.07% in Q2 / Tier1 capital 13.5% / Press conf at 0830 UKT / Conf call at 1400 UKT
BHP : Q1 iron ore and coking coal output came in slightly lower than expected but the petroleum unit posted strong output growth
DEUTSCHE TELEKOM : German cable company Unitymedia plans to offer new super-fast Internet access, raising the pressure on DTE
FRANCE TELECOM will put off any restructuring of sites or offices in France until the end of the year, meeting a demand from unions
EADS : 80% employees working for EADS do not feel committed to their work due to "lack of recognition, lack of communication, lack of innovation (internal company survey)

LG ELEC. : Q3 sales W7.87Trl, in line / Operating W602.8bn (430bn exp) / Sees Q4 sales better than Q3 but with profitability down…

TRADING IDEAS

BUY ACCOR / ASML / on double bottom possibility
BUY QUALCOMM / CARREFOUR on reversal Head &Shoulder possibility

BUY ENI or BP / SELL ROYAL DUTCH // BUY GSZ / SELL EDF // BUY PUBLICIS / SELL LAGARDERE // BUY BAYER / SELL AKZO // BUY VISA /SELL MASTERCARD

BROKER METEOROLOGY

UK REAL ESTATE SHARES RAISED TO OVERWEIGHT FROM UNDERWEIGHT BY BANK OF AMERICA – ML
WOLSELEY RAISED TO BUY BY BANK OF AMERICA – ML
HAMMERSON RAISED TO BUY FROM NEUTRAL BY BANK OF AMERICA – ML
LANDSECURITIES RAISED TO NEUTRAL BY BANK OF AMERICA - ML

NOVARTIS CUT TO EQUALWEIGHT FROM OVERWEIGHT BY MORGAN STANLEY
TELECOM ITALIA CUT TO UNDERPERFORM BY BANK OF AMERICA - ML
RAIFFEISEN CUT TO SELL FROM NEUTRAL BY UBS
LSE CUT TO NEUTRAL FROM BUY BY GOLDMAN SACHS
FAURECIA CUT TO NEUTRAL FROM BUY BY BANK OF AMERICA – ML
UK PERSONAL&HOUSEHOLD....................... CUT TO UNDERWEIGHT BY BANK OF AMERICA – ML
CARBONE LORRAINE CUT TO UNDERPERFORM BY BANK OF AMERICA - ML
LOEWE CUT TO NEUTRAL FROM OVERWEIGHT BY HSBC

DATA

WTI : 1,4933 (-0,08 %)
Eur/$ : 90,64 (0,22 %)
$ /Yen : 3,33 ( -1,12 bp)
10 Yr US : 3,24 ( -6,6 bp)
10 Yr Euro : -1,02 (-1,43 )

Indices : US close ; Europe close
SOX : -0,62 %;-0,49%
S&P :-0,59 %; -0,37 %
DOW: 1,4933%; -0,08 %
NAS :-0,50%; -0,44%

DJ Stoxx US Sectoral Indices : US close ; Europe close
BASIC MATERIALS : -0,84 %; -1,50 %
ENERGY : -0,83 %; -0,10 %
FINANCIAL : -1,11 %; -0,55 %
HEALTHCARE : -0,03 %; -0,02 %
TECHNO : -0,51 %; -0,57 %
TELECOM : -0,76 %; -0,83 %
INDUSTRIAL : -1,15 %; -1,25 %
UTILITIES : -0,23 %; 0,46 %

TO BE COMING

Today
Results :Alpha Laval / Altria / Biogen / Cadbury / eBay / Elan / Eli Lilly / Iberdrola / Fiat / Peugeot (BMO) / Skandinaviska Enskila Banken / 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:

Tuesday
Results :Aegis / Akzo Nobel / interim / Banco Bilbao Vizcaya Argentaria / Banco Espirito Santo / Bayer / BP / Daimler / Enagas / Honda Motor / Klepierre sales / KPN / Norsk Hydro / Publicis / Renewable Energy / Saipem / Tata Steel / United States Steel / Vestas Wind
Dividend :
Events:Pfizer analyst & investor

ECONOMIC DATA PREVIEW

Watch in the United-States the Fed Beige Book for September (19.00 GMT). The economic recession is over in the United States as showed by the ISM manufacturing and services index reaching respectively 52.6 and 50.9 in September, and by the rebound in household consumption, confirmed by the increase of retail sales. Not to mention the US manufacturing companies investing again. The Beige book release should widely reflect the present economic rebound in the United-States.

ECONOMY

United-States: Housing starts rose modestly and building permits declined in September
Housing starts rose modestly from 587 000 in August to 590 000 in September (forecast 610 000). This is the fourth rise in fifth months and housing starts are now at a similar level for the past four months, stabilising in September at a level to 20% higher than the level reached at the beginning of the year. Nevertheless starts remained roughly 75% down from their peak in 2005. On the other hand building permits (and advanced indicator of housing starts) dropped from 580 000 in August to 573 000 in September (forecast 695 000) confirming that the real estate market recovery remained fragile and will be very progressive especially now that government incentives have elapsed.

United-States: Producer prices unexpectedly fell in September
Producer prices unexpectedly fell from +1.7% in August to -0.6% in September (forecast +0.0%). This drop was mainly led by a 5.4% fall in gasoline prices and a 1.9% fall in gas prices. It must be noticed that September is the month when many manufacturers switch to producing next year models which is impacting producer price index. Nevertheless overall price pressure are still easing as showed by the core PPI dropping to a 2 year low from 2.3% to 1.8%./