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Americas : Market Intelligence – Morning Update
by Chris Hussey
Published March 24, 2014
Stocks in Asia were decidedly higher Monday as evidence that China policy
makers are shifting to a pro-growth mode again mounts in the wake of
continuing disappointing data. Over the weekend, the HSBC PMI survey was
released and indicated another step down in business confidence with the
dispersion index dipping to 48.1 from 48.5 in February. Yu Song highlights
in a brief note Friday, "China: What to expect from China’s policy
loosening," that China's State Council last week kicked off a round of
fiscal stimulus to match on-going monetary stimulus that should provide
meaningful support for domestic demand growth. Policy makers also gave the
banking system a boost Friday when they allowed banks to issue preferred
shares (see Nan Li's note, "Sector rebound likely n-t on preferred shares
and modest stimulus").
While Asian stocks were broadly higher on the back of China developments,
further away from the epicenter of stimulus, investor sentiment is more
muted. Equities in Europe this morning are opening definitively lower. An in
-line mid-month PMI survey is doing little to spur investor interest and may
even be acting as a bit of a damper while market participants contemplate
the ECB's options. Outside of equities, yields on the 10-year Treasury are
inching higher (+2bp), the yen has weakened a tad against the dollar, and
copper is flat despite the relative exuberance seen in China equity markets.
FOMC hawks and US equities: David Kostin paints an incrementally net-
negative outlook for US stocks on the back of last week's FOMC meeting in "
The marginal impact of the FOMC on our outlook." The Fed modestly lowered
its outlook for US growth yet set a more hawkish tone - a negative
development for equity valuations should rates rise faster than we forecast.
We also note that investors are focused on the near-term implications of
interest rate hikes, but they should also be mindful of the long-term
implications of a pick-up in wage growth, which should negatively affect
margins. Stocks to focus on: rate sensitive names (buy our rate sensitive
stocks basket). Separately, Jessica Graham and team also focused
on rate sensitive stocks in last week's "Connecting the “dots”: estimating
upside from higher rates in 2015." We offer a separate basket of rate-
sensitive financials stocks:.
Moving in and out of the spotlight: Stocks in Latin America remain under
pressure in the EM sell-off and our analysts continue to realign our
Spotlight List with a shifting macro- and micro-economic backdrop.
◾Back into retail and out of education: Irma Sgarz adds Lojas Renner
to the Spotlight list as solid micro execution should enable the company to
navigate the uncertain macro environment. We also downgrade SER Educacional
to Neutral from SL-Buy as regulatory risks in education are surprisingly
increasing in Brazil.
•Back into electricity out of water: Felipe Mattar removes Sabesp
from SL-Buy and adds CPFL Energia to the spotlight list. CPFL Energia is set
to benefit from the Brazilian government's measures to reduce working
capital volatility while Sabesp now faces risks from water rationing and
worse than expected final tariff review terms.
Looking Ahead: We start to close out March this week with a slew of regional
business surveys, housing data, the February Durable Goods report and the
PCE release. As we leg further away from the weather-induced consumer
malaise of this past winter, the need for the data to show the expected
bounce back becomes more intense. This week is also a mini-earnings season
week with a slew of companies with February quarter-ends releasing results.
Performance of global indices
As of March 24, 2014
Source: Reuters
US Morning Call for March 24, 2014:
US Economics Analyst, Stehn: Headwinds and the Neutral Funds Rate.
We believe that ongoing financial headwinds coupled with diminished
potential growth in the USA have lowered the “neutral” Fed Funds rate,
supporting our dovish view on rates.
Tiffany & Company (TIF, Buy), Drucker Mann: Buy thesis playing out a bit
slower than hoped; off CL but still Buy.
PVH Corp. (PVH, Buy), Drucker Mann: The simple math behind $10-plus of
underlying EPS power.
Remove TIF from CL-Buy but maintain Buy as we shave EPS estimates and
believe the margin and cash component drivers will take a bit longer to
materialize. Separately, Buy PVH as investor impatience with its acquisition
of Warnaco sets up PVH as one of the most compelling investment
opportunities in specialty retail and apparel.
Minerva Foods S.A. (BEEF3.SA, Neutral), Cipiccia: In Need of Beef: Resuming
coverage on Minerva with a Buy rating.
Buy Brazilian cattle rancher Minerva as its beef export business benefits
from a weak currency and cattle herds are growing again. 12-month price
target, R$12.
AvalonBay Communities (AVB, Buy), Rosivach: Is AvalonBay an “average”
apartment REIT? No.
Buy AVB as we believe the potential accretion from development in 2015 will
offset earnings downside from weak employment. 12-month price target: $152.
Brokers, Nannizzi: Remain bullish on brokers, moving to 2015 earnings for
valuation; Buy MMC and AJG.
Remain bullish on Insurance Brokers as the cash rich business models combine
with several macro tailwinds to provide upside earnings potential in the
year ahead. Buy MMC and AJG.
Transportation, Kim: Transportation strategy: Lean into trucking; positive
pricing momentum.
Remain positive on Trucking as we expect pricing momentum from tight
capacity to drive freight rates higher. Top picks: Buy rated ODFL (on CL)
and R. For Airlines, comps are tough in the spring but look for a 2H14 rally
to favor DAL and UAL.
Notable Research not on the call:
Macro
•US Weekly Kickstart: The marginal impact of the FOMC on our outlook
•China: HSBC PMI indicates continued manufacturing growth weakness
•TWIG Notes: This Week in Global Research, March 21, 2014
•The GS Weekly SCOPE: Small-Cap Opportunities - March 21, 2014
Consumer
•BMW (BMWG.DE): Headed back on track: Capex easing, cash flow
improving
•Honda Motor (7267.T): China briefing: regional optimization strategy
gains traction; CL-Buy
•SER Educacional (SEER3.SA): Pronatec changes stage regulatory
concerns; down to Neutral
•Lojas Renner (LREN3.SA): Uncoupling on micro execution; Buy, add to
Latam Spotlight List
Energy
•Coal: Downside risk to quarterly met benchmark; stay Sell on ANR,
ACI
Financials
•REITs: Annual employment revisions paint a better picture for office
jobs
•China: Banks: Sector rebound likely n-t on preferred shares and
modest stimulus
•Capital Markets Monitor: Weekly Review: Rates and equities drive
further leg-up in futures volumes
Industrials
•Hutchison Whampoa (0013.HK): Sale of AS Watson stake to Temasek;
reinstating with CL Buy
TMT
•GS US Semi & SPE Weekly: What should investors do with Semis into
the best EPS season in years?
Latam
•Sabesp (SBSP3.SA): Shifting our Spotlight List preferences:
Replacing Sabesp with CPFL Energia
Conference Calls & Conferences:
•Monday, March 24 @ 11 AM EDT – GS Emerging Healthcare Research Conf
Call Series: Lithera – CEO George Mahaffey and VP Finance Susan Knudson;
hosted by Gary Nachman; Dial-in: 973-528-0056; passcode: 528407;
webcast link: http://www.visualwebcaster.com/event.asp?id=98551.
Lithera develops applications for fat reduction utilizing already FDA-
approved drugs.
•March 24-25 – GS Chemical Intensity Days; Magnolia Hotel, Houston,
TX;
website link: http://www.gs.com/events/chemint2014.
•Thursday, March 27 @ 10 AM EDT – GS Industrial Research Conf Call
Series: “Private carrier perspective on the US airline industry” with
Silver Airways CEO, David Pflieger; hosted by Tom Kim; Dial-in: 973-528-0056
; passcode: 681041;
Silver Airways is Florida based, operating 170 daily flights on the East
coast.
•March 27 – GS Consumer Digital Day 2014; Goldman Sachs Offices,
London;
website link: http://www.gs.com/events/dgtlmda2014.
Americas : Market Intelligence – Morning Update
by Chris Hussey
Published March 24, 2014
Stocks in Asia were decidedly higher Monday as evidence that China policy
makers are shifting to a pro-growth mode again mounts in the wake of
continuing disappointing data. Over the weekend, the HSBC PMI survey was
released and indicated another step down in business confidence with the
dispersion index dipping to 48.1 from 48.5 in February. Yu Song highlights
in a brief note Friday, "China: What to expect from China’s policy
loosening," that China's State Council last week kicked off a round of
fiscal stimulus to match on-going monetary stimulus that should provide
meaningful support for domestic demand growth. Policy makers also gave the
banking system a boost Friday when they allowed banks to issue preferred
shares (see Nan Li's note, "Sector rebound likely n-t on preferred shares
and modest stimulus").
While Asian stocks were broadly higher on the back of China developments,
further away from the epicenter of stimulus, investor sentiment is more
muted. Equities in Europe this morning are opening definitively lower. An in
-line mid-month PMI survey is doing little to spur investor interest and may
even be acting as a bit of a damper while market participants contemplate
the ECB's options. Outside of equities, yields on the 10-year Treasury are
inching higher (+2bp), the yen has weakened a tad against the dollar, and
copper is flat despite the relative exuberance seen in China equity markets.
FOMC hawks and US equities: David Kostin paints an incrementally net-
negative outlook for US stocks on the back of last week's FOMC meeting in "
The marginal impact of the FOMC on our outlook." The Fed modestly lowered
its outlook for US growth yet set a more hawkish tone - a negative
development for equity valuations should rates rise faster than we forecast.
We also note that investors are focused on the near-term implications of
interest rate hikes, but they should also be mindful of the long-term
implications of a pick-up in wage growth, which should negatively affect
margins. Stocks to focus on: rate sensitive names (buy our rate sensitive
stocks basket
on rate sensitive stocks in last week's "Connecting the “dots”: estimating
upside from higher rates in 2015." We offer a separate basket of rate-
sensitive financials stocks:
Moving in and out of the spotlight: Stocks in Latin America remain under
pressure in the EM sell-off and our analysts continue to realign our
Spotlight List with a shifting macro- and micro-economic backdrop.
◾Back into retail and out of education: Irma Sgarz adds Lojas Renner
to the Spotlight list as solid micro execution should enable the company to
navigate the uncertain macro environment. We also downgrade SER Educacional
to Neutral from SL-Buy as regulatory risks in education are surprisingly
increasing in Brazil.
•Back into electricity out of water: Felipe Mattar removes Sabesp
from SL-Buy and adds CPFL Energia to the spotlight list. CPFL Energia is set
to benefit from the Brazilian government's measures to reduce working
capital volatility while Sabesp now faces risks from water rationing and
worse than expected final tariff review terms.
Looking Ahead: We start to close out March this week with a slew of regional
business surveys, housing data, the February Durable Goods report and the
PCE release. As we leg further away from the weather-induced consumer
malaise of this past winter, the need for the data to show the expected
bounce back becomes more intense. This week is also a mini-earnings season
week with a slew of companies with February quarter-ends releasing results.
Performance of global indices
As of March 24, 2014
Source: Reuters
US Morning Call for March 24, 2014:
US Economics Analyst, Stehn: Headwinds and the Neutral Funds Rate.
We believe that ongoing financial headwinds coupled with diminished
potential growth in the USA have lowered the “neutral” Fed Funds rate,
supporting our dovish view on rates.
Tiffany & Company (TIF, Buy), Drucker Mann: Buy thesis playing out a bit
slower than hoped; off CL but still Buy.
PVH Corp. (PVH, Buy), Drucker Mann: The simple math behind $10-plus of
underlying EPS power.
Remove TIF from CL-Buy but maintain Buy as we shave EPS estimates and
believe the margin and cash component drivers will take a bit longer to
materialize. Separately, Buy PVH as investor impatience with its acquisition
of Warnaco sets up PVH as one of the most compelling investment
opportunities in specialty retail and apparel.
Minerva Foods S.A. (BEEF3.SA, Neutral), Cipiccia: In Need of Beef: Resuming
coverage on Minerva with a Buy rating.
Buy Brazilian cattle rancher Minerva as its beef export business benefits
from a weak currency and cattle herds are growing again. 12-month price
target, R$12.
AvalonBay Communities (AVB, Buy), Rosivach: Is AvalonBay an “average”
apartment REIT? No.
Buy AVB as we believe the potential accretion from development in 2015 will
offset earnings downside from weak employment. 12-month price target: $152.
Brokers, Nannizzi: Remain bullish on brokers, moving to 2015 earnings for
valuation; Buy MMC and AJG.
Remain bullish on Insurance Brokers as the cash rich business models combine
with several macro tailwinds to provide upside earnings potential in the
year ahead. Buy MMC and AJG.
Transportation, Kim: Transportation strategy: Lean into trucking; positive
pricing momentum.
Remain positive on Trucking as we expect pricing momentum from tight
capacity to drive freight rates higher. Top picks: Buy rated ODFL (on CL)
and R. For Airlines, comps are tough in the spring but look for a 2H14 rally
to favor DAL and UAL.
Notable Research not on the call:
Macro
•US Weekly Kickstart: The marginal impact of the FOMC on our outlook
•China: HSBC PMI indicates continued manufacturing growth weakness
•TWIG Notes: This Week in Global Research, March 21, 2014
•The GS Weekly SCOPE: Small-Cap Opportunities - March 21, 2014
Consumer
•BMW (BMWG.DE): Headed back on track: Capex easing, cash flow
improving
•Honda Motor (7267.T): China briefing: regional optimization strategy
gains traction; CL-Buy
•SER Educacional (SEER3.SA): Pronatec changes stage regulatory
concerns; down to Neutral
•Lojas Renner (LREN3.SA): Uncoupling on micro execution; Buy, add to
Latam Spotlight List
Energy
•Coal: Downside risk to quarterly met benchmark; stay Sell on ANR,
ACI
Financials
•REITs: Annual employment revisions paint a better picture for office
jobs
•China: Banks: Sector rebound likely n-t on preferred shares and
modest stimulus
•Capital Markets Monitor: Weekly Review: Rates and equities drive
further leg-up in futures volumes
Industrials
•Hutchison Whampoa (0013.HK): Sale of AS Watson stake to Temasek;
reinstating with CL Buy
TMT
•GS US Semi & SPE Weekly: What should investors do with Semis into
the best EPS season in years?
Latam
•Sabesp (SBSP3.SA): Shifting our Spotlight List preferences:
Replacing Sabesp with CPFL Energia
Conference Calls & Conferences:
•Monday, March 24 @ 11 AM EDT – GS Emerging Healthcare Research Conf
Call Series: Lithera – CEO George Mahaffey and VP Finance Susan Knudson;
hosted by Gary Nachman; Dial-in: 973-528-0056; passcode: 528407;
webcast link: http://www.visualwebcaster.com/event.asp?id=98551.
Lithera develops applications for fat reduction utilizing already FDA-
approved drugs.
•March 24-25 – GS Chemical Intensity Days; Magnolia Hotel, Houston,
TX;
website link: http://www.gs.com/events/chemint2014.
•Thursday, March 27 @ 10 AM EDT – GS Industrial Research Conf Call
Series: “Private carrier perspective on the US airline industry” with
Silver Airways CEO, David Pflieger; hosted by Tom Kim; Dial-in: 973-528-0056
; passcode: 681041;
Silver Airways is Florida based, operating 170 daily flights on the East
coast.
•March 27 – GS Consumer Digital Day 2014; Goldman Sachs Offices,
London;
website link: http://www.gs.com/events/dgtlmda2014.