Friday, November 13, 2009

Nervous System

GLOBAL EQUITIES RESEARCH

Equity markets are more nervous (as we get close to the end of the year) than really volatile, with the VIX index far below 30 % (24.24 % yesterday), which is quite safe for equities for the short term. But intraday swings are very impressive: yesterday, the S&P 500 erased an earlier advance (up to 1101.97) spurred by HP’s takeover of 3-com. as well as a decrease in initial weekly jobless claims (just above 500k) and closed 1 % down after bigger-than-estimated growth in oil inventories (which were already at very high levels by historical standards) made the energy sector slump. There was also a wild gyration among homebuilders that dropped sharply after surging the day before. Wal Mart results were in line but forecasts for Christmas sales were a little bit disappointing, sending retailers broadly down. Anyway, yesterday’s session reminds us that 1) despite a huge U.S. budget deficit (17 % of GDP currently) Treasury auctions are met with plenty of demand, mainly from indirect bidders, such as the $16bn auction of 30-year T-Bond yesterday. This means that the expected rise in long term rates is subdued. Over the past month, U.S. bond and equity prices have moved in opposite directions, ending the co-movement seen between these two asset classes since the middle of the year 2) this implies a sustained demand of dollars that may avoid the worst case scenario of a sharp plunge of the greenback. This reminds us that the dollar case is one of the key issues for the months to come. Remember what we wrote yesterday: “a sharp and efficient dollar intervention could trigger a carry trade unwinding process which would harm any riskier assets including equity indices”.

The only thing scarier than the slide of the dollar, which has dropped by 16 % since March, would be an attempt by the Fed to stop it. Such an attempt would show that the Fed has learned nothing from the Bank of Japan's disastrous premature exit from a zero-interest policy in August 2000. The dollar is falling because U.S. growth and inflation are well below levels consistent with sustained recovery. Under current conditions-including falling inflation and a massive output gap-the Taylor Rule for guiding interest-rate policy implied that the Fed Funds rate ought to be -1.85 %, or 210 bp below the current setting of 0.25 % (The Fed Fund target rate is currently at 0.00 %/0.25 %). A deflationary tightening by the Fed at this time would push even more funds into Treasury securities, thereby pushing interest rates for savers even lower. The weaker dollar is about the only thing that is operating now to help improve the outlook for the U.S. and global economies. Multinational corporations will need all the help they can get from a weaker dollar that enhances sales abroad and increases the dollar value of foreign-generated earnings. The key to understanding the current odd combination of a weaker dollar, rising gold prices, rising stock prices, and falling bond yields lies outside the United States, mainly in China. By July, its money and credit growth were growing at a 31 % annual rate. With the currency peg, China has tacitly made the highly accommodative Fed its central bank and thereby has added substantial monetary stimulus to the huge fiscal stimulus already in place. As a result, the Chinese economy is growing rapidly, and Chinese funds are flooding into the country's rapidly expanding real estate market and into equity and commodity markets worldwide. The weakness of the dollar since March is very much a part of the widely discussed need for global rebalancing. The United States needs to mitigate excess supply in the economy as signalled by below-trend growth and falling prices, and a weaker dollar can help bring about such adjustments. If the weaker dollar, which represents the United States exporting deflation, causes other members of the G7 to effect more stimulative policies, the much-praised global rebalancing would be more likely to occur. The jump in the U.S. monetary base has not boosted the static money supply because passive banks are not lending. Households hold the sharp surge in liquidity as measured by the collapse in velocity, the ratio of nominal GDP to the money supply. Until the money supply rises and nominal GDP starts to rise (it is currently falling at 2 % YoY), the temptation to withdraw liquidity should be resisted.

This morning, Japanese stocks were slightly lower (Nikkei -0.35 %) in the wake of Wall Street negative stance, but the decrease was limited by a slight improvement of consumer confidence in Japan (40.8 in October vs. 40.7 a month earlier). At 05.30 GMT, U.S. index futures were flat: DJIA +0.05 %, S&P 500 +0.04 %, Nasdaq 100 +0.04 %. European Markets may be sustained by better-than-expected GDP Q3 data in the euro zone (see below).



ECONOMIC DATA WITH IMPACT



US September trade balance figures (12.30 GMT), with a deficit expected at $32.0bn vs. $30.7bn in August as the latest rise in oil prices is likely to boost the value of oil imports by $3.0bn. This rise will be partly offset by a rise in exports, as the ISM surveys suggest.

November’s University of Michigan consumer confidence (14.00 GMT), expected at 71.5 vs. 70.6, should confirm that October’s dip (as well as the Conference Board’s one) was just a blip. Anyway, tough labor market conditions will limit the extent of the increase.

Euro zone flash estimate Q3 GDP (09.00 GMT) expected at +0.6 % QoQ (-3.8 % YoY), the first rise since Q1 2008, with +0.4 % QoQ (-2.1 % YoY) expected in France (06.50 GMT), +0.8 % QoQ (-4.8 % YoY) in Germany (06.00 GMT), +0.8 % QoQ (-4.5 % YoY) in Italy (08.00 GMT). Yesterday, Spain reported -0.3 % QoQ, ‑4.0 % YoY.



POSITIVE IMPACTS


VIVENDI : Q3 revenue €6.35bn (6.25bn exp) / Ebit €1.35bn (1.3bn exp) helped by strong SFR / Music still weak / Kept 2009 goals / Did not make any comment on NBCU or GVT situation / Confirms dividend payout ratio of at least 50% of net adjusted for 2009

VINCI : 9M rev. €23.6bn (23.7bn exp) / Order book : €24.2 bn, +4% since 31/12/2008̀ / Good FCF / Debt down / Outlook confirmed

TECHNIP : Q3 sales 1.71 bn (1.63bn e) / Operating margin 10.1% (9.8% e) / Confirmed 2009 forecasts / Sees FY rev. €6.4bn (in line)

LAFARGE and Shui On Construction are set to spinoff their cement JV, aiming to raise $500 m-$600 m from a Hong Kong IPO in 2010

RICHEMONT : H1 sales €2.38bn, in line / Operating €390m (333m exp) / But Oct. sales decline in all regions was 10% at actual rates

BULGARI : Q3 revenue €233m (231m exp) / Ebitda €35.9m (23.6m exp) / Saw slight market improvement at the end of Q3 …

TELEFONICA : Brazilian telco watchdog ruled on that Telefonica can proceed with plans to take over GVT under a series of restrictions

KBC : Q3 underlying profit €631m (€418m exp) / Net €528m (€432m exp) / Says charges for problem loans are lower by €200m (37%) from previous Q / In final stages of restructure discussions with EU / To repay state largely via retained earns & asset sales

BRITISH AIRWAYS & IBERIA (as expected) agreed terms to create Europe 3rd largest airline Co by revenue = Current BA shareholders will own 56% of the new company, while Iberia stockholders will own the rest / IBERIA reported 9m Ebit loss €331m (-320m exp)

REXAM : Interim Management Statement = Group results in line with management’s exp. / Net debt/ EBITDA ratio improved to 2.3 times end of Sept. / Will meet market expectations for the FY / Graham Chipchase will succeed Leslie Van de Walle as CEO

DISNEY : Q4 revenue $9.87bn (9.30bn exp) / EPS $0.46 (0.41 exp) / Strong cable business helped overcome disappointing film studio



NEGATIVE IMPACTS


BOUYGUES : Q3 sales €8.38bn (8.45bn e) / Telecom & real estate fine but Colas unit weaker / Confirmed FY sales outlook of €31.5bn

DEXIA : Q3 income €1.37bn (€1.54bn exp) / Net Profit €274m (€269m exp) / Tier1 11.8% / Cost €916m (€878m exp) / Says Negative AFS reser / Says liquidity improving without using govt guarantees / Plans end to state guarantees in oct 2010

PORSCHE : FY 2008/09 pretax loss of €4.4 bn (-1.8bn exp exp)due to a write-down related to its stake in Volkswagen / Proposes dividend of €0.05 for preferred shares + €0.044 for ordinary shares

NATIXIS : Q3 revenue €1.35bn (1.08bn exp) / Back to net profit of €268m (488m exp) / Tier 1 ratio 9.7%

UNIPOL : 9M life premiums €4.03bn, in line / Non-life CR 104.7% (102.5% exp) / Net profit €31m (45m exp)

KLOECKNER : Q3 sales €934m (988m exp) / Ebitda €11m (16m exp) / Said recovery in demand not yet sustainable

GAMESA : 9M revenue €2.27bn, in line / Ebitda €289m (€310 exp)



TRADING IDEAS


BUY EADS / STM to play Dollar recovery

BUY MUNICH RE / RWE / EON / LAFARGE / ALSTOM / AMGEN on reversal Head & Shoulder possibility

BUY SUN MICRO / SANOFI / SIEMENS / AXA on double bottom possibility


BUY LAFARGE / SELL HOLCIM // BUY EON / SELL IBERDROLA // BUY AHOLD / SELL METRO // BUY ROYAL DUTCH / SELL TOTAL // BUY STM / SELL ASML // BUY EADS / SELL BOEING // BUY JNJ / SELL ELI LILLY // BUY UPS / SELL FEDEX



BROKER METEOROLOGY


JOHNSON MATHEY RAISED TO BUY BY BANK OF AMERICA – ML

ACCIONA RAISED TO NEUTRAL BY BANK OF AMERICA - ML


TELIASONERA CUT TO NEUTRAL FROM BUY BY MORGAN STANLEY

NATIXIS CUT TO UNDERPERFORM FROM MARKETPERFORM BY KBW

GAZPROM NEFT CUT TO NEUTRAL FROM BUY BY BANK OF AMERICA - ML



DATA


WTI : 76,9 (-3,02 %)

Eur/$ : 1,4870 (0,13 %)

$ /Yen : 90,23 (0,03 )

10 Yr US : 3,43 ( -1,49 bp)

10 Yr Euro : 3,36 ( 1,9 bp)


Indices : US close ; Europe close

SOX : -0,56 %;-0,17%

S&P :-1,03 %; -0,70 %

DOW: -0,91%; -0,58 %

NAS :-0,83%; -0,47%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -1,09 %; -1,25 %

ENERGY : -2,17 %; -2,00 %

FINANCIAL : -1,73 %; -1,11 %

HEALTHCARE : -0,60 %; -0,27 %

TECHNO : -0,50 %; -0,29 %

TELECOM : -0,80 %; -0,33 %

INDUSTRIAL : -1,05 %; -0,59 %

UTILITIES : -1,44 %; -0,55 %



TO BE COMING



Today

Results : EU \\ Acciona / Banco Popolare / Dexia (BMO) / Havas / KBC / Richemont (BMO) / Sacyr Vallehermoso / Technip / Theolia /

Dividend : Rolls-Royce (GBp 6)

Events:


Monday

Results : EU \\ EADS / Lonmin

US \\ Home Depot (BMO)

Dividend : Chevron ($0.68)

Events: Accor board meeting



Tuesday

Results : EU \\ Allied Irish Banks / British Land / Fortis / Portugal Telecom

Dividend : Microsoft ($0.13)

Events : Arcelor Mittal EGM / Cardinal Health at Lazard Healthcare Conference / Annual healthcare conf at Credit Suisse / UBS investor day



Wednesday

Results : EU \\ Ahold (BMO) / Air France-KLM / Corio / Land Securities

US \\ Dell / Gap / Sears

Dividend :Honeywell ($0,3025) / HSBC ($ 0,088889) / Pernod-Ricard (€1.02) / United Tech ($0,385)

Events:



Thursday

Results : EU \\ Infineon / Premier Oil / Sab Miller / Voestalpine

Dividend :

Events:Banca Monte dei Paschi di Siena OGM / Microsoft AGM / Philip Morris at Morgan Stanley Consumer & Retail Conf / VeriSign anakyst day



ECONOMIC DATA PREVIEW



Watch in the United-States the trade balance. for September(13.30 GMT). Exports which had increased in August by 0.2% should stabilized, led by the weakness in the dollar, while imports which had fallen by 0.6%, should increase, led by the rebound in household consumption in the United States. Consequently the US trade deficit should slightly rise to 31 billion dollars in September.

Watch in the Euro area the advanced release of the Gross Domestic Product for the third quarter 2009(10.00 GMT). Because of the technical correction linked to the previous sharp fall, to the reduction in interest rates, to the earlier weakness of the euro as well as energy prices at the beginning of year, and to the effects of the various budgetary stimulus plans, we anticipate the euro area GDP should rise by 0.4% in the third quarter 2009.A similar trend should be observed in France and in Germany, showing that the unexpected rebound of the second quarters was not a flash in the pan./




ECONOMY


United-States: Initial jobless claims and continuing claims decreased again

Initial jobless claims declined from 514 000 to 502 000 last week, confirming the improvement trend of the labour market. Indeed adjustments had already been done on the labour market has companies were overlaying off in comparison to the reality of economic fundamentals. Consequently the bottom has been reached on the labour market as showed by the job destruction in October reaching 190 000 the “best” result since August 2008. Meanwhile continuing claims declined for an eight consecutive month confirming that the hiring market is slowly but surely getting unfrozen and that it easier to find a job once you have lost it. Nevertheless as the employment is a lagging indicator of the activity the unemployment rate should rise till the beginning of 2010 to reach 10.5% at the minimum.


Euro are: Industrial production rose in September

Industrial production rose for a fifth consecutive month from 1.2% in August to 0.3% in September(expected +0.5%). Looking at the breakdown capital goods rose by 1.7% confirming the rebound of investment, non durable consumer goods rose by 1.1% and intermediate goods increased by 0.6%. On the other hand durable consumer goods dropped sharply from +5.2% in August to -6.0% in September. Meanwhile the Euro area industrial production remain at a weak level at -12.9%. This encouraging monthly improvement confirmed the rising trend of the Euro area industrial production as output expanded by 2.2% at the third quarter. This rise will boosted the GDP which should reached +0.7% at the third quarter 2009. Nevertheless the euro area remained fragile as interest rates are not dropping any more, with the effects of the stimulus plans fading, and a dangerously rising the euro as well as firming energy prices, the euro zone should have some hard time to transform this technical rebound into a durable recovery

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