The White Calm

GLOBAL EQUITIES RESEARCH

Columbus day today with settlement desks closed, but markets open, which might trigger some light but volatile trading activity. Focus will be on the earnings releases in addition to the Retail Sales on Wednesday and the CPI on Thursday as well as the Industrial Production on Friday. Earnings should be reflecting a strong growth with some more to come, the Retail sales headline data will be not good but the core will show that the non stimulus sectors were picking up too, CPI should be seen as non event for now, and the capacity utilisation on Friday is one of these little indicators which are closely watched, in order to see if business volume is growing and inventories being rebuilt.

The real trade balance narrowed, meaning that it now looks probably that net trade will make a broadly neutral contribution to GDP growth in the Q3 compared to the negative contribution of around 1% that previously looked likely . The 0.2% m/m increase in total exports was the fourth in as many months. Looking ahead, the surveys suggest that both exports and imports will continue to increase from here. However, exports are likely to increase more rapidly as they are boosted by the rebound in activity overseas while imports are held back by continued consumer weakness. Net trade may therefore contribute to the economic recovery in the coming quarters. That said, pessimistic economists are still saying that once the fiscal stimulus and initial rebound in investment, exports and inventories fades, economic growth is likely to fall back as consumption growth remains weak. Forecasting around 3% GDP growth next year, that would halve to just 1.5% in 2011. We take such a bear view as a good news, as if consumption is to improve then such a floor in term of economic activity perfectly justifies the current equity indices rise, and should predict some more, keeping in line that 1.5% in 2011 means no longer a double dip, which means any downside will hardly occur more than some healthy ones such as we experienced on the Employment report.

Same for the UK, the latest figures showed that the trade deficit narrowed in August, although the good news is slightly tempered by a pick-up in factory gate prices. The trade in goods deficit narrowed from -£6.2bn to -£6.0bn, the smallest deficit since 2006. And export volumes rose by 1.6% in the 3 months to August – the first quarterly rise in a year. Accordingly, the tentative global recovery may finally be allowing UK exporters to make the most of the previous drop in the pound.

Some doom players will recall that the second quarter reporting period, which began in mid-July, coincided with the latest ramp in the stock market, which has seen the S&P 500 gain as much as 33% since the close on July 10, after a series of better-than-expected earnings reports juiced economic recovery expectations. But we will remind that at that time markets did slide back again thinking the "mid March-end of May" rise was just a bear market rally, similar to the 29 crisis one before falling even more sharply. At that time again, cash was king, and any stimulus from government would be useless so much consumers are full of debts and would use any coming money to lower these. Sure, sales growth was not that showing, although could be found here and there, and remarkably 23% of the S&P 500 companies posting results reported year-over-year sales growth, while 73% of the companies reporting second quarter results exceeded consensus earnings estimates. According to Thomson Reuters, that matched the highest rate of positive surprises since the first quarter 1994. Corporate did cut heavily their costs in order to match for a long and lasting tough economic growth, which proved to be short lived thanks to governments stimuli. Top world officials and Central bankers are still working on it, and they won't let things down until the economy is able to run on its own, that is to say is creating jobs so that consumption is picking up (already talking about a 3ed stimulus aiming at helping the job sector). The US is likely to record some pretty decent rates of growth over the next 6-12 months as the full effects of the fiscal stimulus come through, the inventory cycle turns positive and investment picks up again. A stronger economy and ultra-loose monetary policy should therefore continue to underpin the equity market for some time to come.

Economists will be more demanding this time given the latest market rise, but the base effect will be very friendly. Easier comparisons than Q2 should make for much better news in Q4 and Q1 2010 given that GDP declined 5.4% and 6.4%, respectively, in the year-ago periods. There will be a greater demand for top-line driven earnings growth in the third quarter reports, yet with the easy comparisons on the horizon, it is easy to see how the market could grant another hall pass to corporate America. The weakening dollar will be a supportive force in the earnings outlook for the fourth and first quarters. It is evident in the economic data that the U.S. economy and the global economy, while not fully recovered, are showing signs of recovery after the near meltdown of the U.S. financial system. Things aren't truly good yet from an economic standpoint, but clearly they are less bad than before. This understanding has fed the improved earnings outlook. Stocks and the market tend to follow the trend in the consensus estimate. That makes sense since earnings are the most important driver of stock prices. What can be ascertained is that earnings estimates for calendar year 2010 started to pick up noticeably at the start of June, as did positive earnings revisions. That also makes sense knowing that the government's stimulus spending will persist in 2010. Moreover, it has been presumed that the housing market, the auto industry, the banking sector, and the consumer will be in much better shape in 2010, certainly vis-a-vis 2009.There is a lot of optimism about the 2010 earnings outlook -- and the forward 4 quarter outlook for that matter as easy comparison periods await. According to Thomson Reuters, the calendar year 2010 consensus EPS estimate of $75.50 stands 27% above the calendar year 2009 consensus estimate of $59.61.

The world is still too uncertain a place to put full faith and credit in the calendar 2010 estimate, true, , but it works both ways. Where most see earnings risk in the back half of 2010 -- when comparisons are more challenging -- believing the consumer won't be in the robust shape the market is hoping he/she will be, as the consumer will still be in a deleveraging mode where the aim is to save more and to spend less, and that a weak labor market will be a driving factor for that approach, we would answer the same assumption, 2010 is still too uncertain to be so bearish. No comparison to this situation in the past, and the bear market rally did not prove to be so bear after all, why should things not keep on improving , especially as the most difficult has been done, reversing the vicious circle into a virtuous one. Banks are giving the money back to the governments, they will probably do reverse provision, hiring will happen sometimes next year according to everyone bull or bear forecaster and confidence will gradually be back, time is a great healer, that is the most possible view now. Easier comparisons play out well in liquidity-driven moves like the one we have seen since March.

At 15.3x forward 4 quarter earnings, some think the stock market is fairly valued when contemplating a longer-term outlook, telling you about higher inflation, higher interest rates, higher tax rates, higher rates of unemployment, a higher level of savings, lower levels of borrowing, and increased regulation etc... is it not a bit too extreme ? inflation ? officials would be happy today to hear they avoided deflation. Higher rates ? the lesson from the past has proved useful. In avoiding the Japanese and 29 strict measures, officials managed to fix the economy rather fast, although not granted yet. Too expensive to spoil it with some too early rate hikes. High unemployment is precisely the reason why the quantitative easing policies will remain. Savings ? they ve gone up quickly, and proves to be equity supportive through the investment point of view. Yes borrowing might not be as high as in the bubble years, and the regulation should not be as easing going, but who would blame this ? and should we sell for that ? your decision, your book, your life...



ECONOMIC DATA WITH IMPACT


Anticipation on US earnings releases with Johnson & Intel tomorrow, JP Morgan on Wednesday, Goldman, Citigroup & IBM on Thursday, GE and BOA on Friday


POSITIVE IMPACTS


NORDEA-SWEDBANK : Sampo (Nordea’s largest shareholder) is evaluating the possibility of turning Nordea into a regional superbank through a merger with Swedbank ( Dagens)

PHILIPS : Q3 sales €5.6bn (5.4bn exp) / Ebita €344m (109m exp) / Most businesses saw improvement / Remains cautious about short-term outlook in absence of structural recovery in majority of end-markets

BARCLAYS plans to spin off a £4bn portfolio of credit assets as part of an effort to clean up its balance sheet (FT)

XSTRATA's hostile merger approach for Anglo American, is expected to be ditched in the next few days (The Sunday Times)

BG GROUP has received an “unsolicited” offer for most of its £1.5bn power generation unit (Sunday Times)

LVMH expects a 0.2% rise in sales and a 0.1% increase in earnings for 2009 (La Lettre de l'Expansion) (Better than consensus)

TOTAL & Iran's state oil firm have resumed talks about Total's participation in a major LNG project after a gap of several months

EADS : Airbus is confident its delayed A400M military transport plane will fly by the end of the year but dismissed a magazine report that its maiden flight could come as soon as Nov. 30

EDF & Constellation won approval from the US Nuclear Regulator to transfer operating licenses for Constellation’s reactors to a JV

SAIPEM and South Korea's Hyundai Engineering and Construction have won a contract to build a new fertiliser plant in Qatar

PROSIEBENSAT1's reiterated a €200 m cost savings plan for 2009 (Euro am Sonntag)

ANGLO IRISH BANK is in talks to sell a £925m real estate portfolio

BANK OF IRELAND is still considering a rights issue to buy back some government preference shares (Sunday Tribune)

TO READ IN BARRON’s this week, a screen of stocks with dividend yields higher than their bond yields… BP, ENI, Total, RWE, IBE, FTE, Vivendi, Belgacom, KPN, TEF, Sanofi, Novartis… = Some of these stable and steady firms offer robust dividend yields of 6% or more. It wouldn't take much stock appreciation to give a double-digit total return…



NEGATIVE IMPACTS



CARREFOUR’s CEO does not see significant signs of improvement in the world economy (WSJ) (Q3 sales exp. On Thursday)

LLOYDS : Citigroup, GS, JPM, Cazenove & HSBC would act as joint underwriters of the £11bn offering / LLOYDS is also considering swapping up to £15bn of debt securities for equity (Sunday Times)

DEUTSCHE POST : The German unit of TNT is building a mail delivery consortium in Germany to rival D. Post (WirtschaftsWoche)

GERMAN BANKS : Chairman of the parliamentary group that supervises Germany’s Soffin bank-rescue fund, warned the country’s lenders may face a capital shortage because of loan defaults and writedowns (Euro am Sonntag)



TRADING IDEAS


BUY BNP / SOC GEN ahead of US financials earnings starting this week + end of capital increase period Tomorrow (1 for 10)

BUY PHILIPS / DBK / AXA / MGM to play island reversal possibility

BUY EON / TEXAS INSTRUMENT / AHOLD / L OREAL /ARCELORMITTAL / UPS / BIOGEN on double bottom possibility

BUY AEGON and TOTAL lagging (div 1.13 Total Nov 14th)

BUY FRANCE TEL / NOKIA / ERICSSON / EDF / ROYAL DUTCH / ENI to play upside trend

SELL GSZ to play Head & Shoulder possibility



BUY EON / SELL RWE // BUY SAINSBURY / SELL TESCO // BUY NESTLE / SELL DANONE // BUY HOLCIM / SELL LAFARGE // BUY BMW / SELL DAIMLER // BUY GLAXO / SELL SANOFI // BUY ERICSSON / SELL ALCATEL // BUY TOTAL / SELL REPSOL


BROKER METEOROLOGY


BEIRSDORF RAISED TO NEUTRAL FROM UNDERPERFORM BY CREDIT SUISSE

MEDIASET RAISED TO NEUTRAL FROM SELL BY GOLDMAN SACHS

ITV RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS

LOGICA RAISED TO BUY BY CITIGROUP

DELHAIZE RAISED TO NEUTRAL BY BANK OF AMERICA - ML


VEOLIA ENV CUT TO NEUTRAL FROM OVERWEIGHT BY HSBC

NOKIA CUT TO NEUTRAL FROM OVERWEIGHT BY HSBC

LADBROKES CUT TO NEUTRAL FROM BUY BY UBS

SANDISK CUT TO SELL FROM NEUTRAL BY UBS

INVENSYS CUT TO NEUTRAL FROM BUY BY UBS

HEINEKEN CUT TO NEUTRAL FROM BUY BY UBS

CARLSBERG CUT TO NEUTRAL FROM OVERWEIGHT BY JP MORGAN

EASYJET CUT TO HOLD FROM BUY BY RBS


DATA


WTI : 72,4 (1.73 %)

Eur/$ : 1,4709 (-0,16 %)

$ /Yen : 90,20 (-0,31 )

10 Yr US : 3,38 ( 0,18 bp)

10 Yr Euro : 3,20 ( 8,9 bp)


Indices : US close ; Europe close

SOX : 3,28 %;2,36%

S&P :0,56 %; 0,27 %

DOW: 0,80%; 0,38 %

NAS :0,72%; 0,52%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -0,03 %; 0,03 %

ENERGY : 0,01 %; 0,20 %

FINANCIAL : 0,81 %; 0,88 %

HEALTHCARE : 1,02 %; 0,71 %

TECHNO : 1,28 %; 0,99 %

TELECOM : -0,71 %; -1,03 %

INDUSTRIAL : 0,64 %; 0,35 %

UTILITIES : 0,60 %; 0.68 %



TO BE COMING



Today

Results :Philps

Dividend :

Events :



Tuesday

Results : Johson & Johnson / Intel

Dividend : Abbott Laboratories ($0.40)

Events: BNP Paribas end of subscription time / Procter & Gamble AGM / SAP at TechEd Phoenix show



Wednesday

Results : LVMH sales / Casino sales / Burberry trading statement / BAE Systems interim / Diageo / Rio Tinto Production report / Alleanza Assicurazioni / ASML / Abbott / Xilinx / JP Morgan (BMO)

Dividend : British Land (GBp 6.5)

Events :



Thursday

Results : Carrefour / Accor / Suedzucker / Nokia / Pearson / SABMiller trading statement / Tandberg / Suedzucker / Google / Roche / AMD / Wyeth / Citigroup / Goldman Sachs (BMO) / Safeway / Google / IBM / Coca Cola

Dividend :

Events: Procter & Gamble shareholders meeting



Friday

Results :Atos Origin / Bank Inter / Gazprom / Bank of America - ML / General Electric / Halliburton / Sony - Ericsson

Dividend :

Events:British Oncology Pharmacy Association Annual Symposium



ECONOMIC DATA PREVIEW



No major economic data relased



ECONOMY



United-States: the trade deficit narrowed in August

After reaching the lowest since November 1999 at 26.38 billion dollars in May 2009, US trade deficit, which rose in July to 32 billion, narrowed in August at 30.7 billion dollars. Indeed, exports increased for a fourth consecutive month by 0.2% while imports dropped by 0.6%(prior +4.9%). This encouraging trade balance data add to the industrial recovery could create a good surprise for the GDP at the third quarter which could reach 3%(annualized).



France: Industrial production rise in August

This is now time for redemption in France. Indeed after two years of recession France registered its fourth monthly industrial production rise at +1.8% in August (prior +0.3%). The industrial rise reached now 5% in four months. Even if the annual slide remained weak at -10.8%YoY it is important to notice that France is the leading the present industrial recovery in the Euro area far above Germany (-17.4% YoY) and Italy (-18.3% YoY). The rebound of French industrial production was mainly led by the improvement of the car production rising by 18.2% in August and by 23.9% during the three last months. In such condition we expect a significant rise of the GDP at the third quarter meaning close to 0.5%