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Today's US Research Highlights and Market Update
Market Intelligence – Morning Update
By Chris Hussey
Published 18 Mar 2014 6:43:46 am CDT
Stocks in Asia were mostly higher Tuesday as indices reacted to the
surprisingly bullish tone set in the US on the back of two potentially
troubling bits of news over the weekend: Ukraine and China FX band widening.
Japan's Nikkei saw the strongest gains as the yen devalued against the
dollar against a backdrop of relaxing tensions. But after the market closed
in Japan, the yen rallied back, creating perhaps a bit of a headwind to
trading tomorrow.
European equities are opening little changed with a negative bias.
Interpreting the set of news before investors is admittedly challenging. On
the one hand, we have received more information of issues tied to EM
uncertainties. On the other hand, the news we received may not turn out to
be good for risk assets (see Francesco Garzarelli's note from Monday, "A
Clustering of Risks"). Assessing risk tolerance today, all of the usual "
canaries in the coal mines" are relatively subdued with bonds and EM FX
little changed (although China's currency is continuing to weaken against
the dollar). Commodities also show little stress in the system with gold
trading lower and copper and wheat flat.
Fresh view across assets and regions. On the back of Francesco Garzarelli's
note last week ("On Bonds, and Italy") where he shifted to a bearish view on
bonds, Anders Nielsen and team downgrade our 3-month bond view to
Underweight within our global portfolio recommendation in "GOAL: Asset
Allocation Update." We are now underweight bonds on both a near-term (3-
month) and longer-term (12-month) horizon and also underweight commodities
longer-term. What would we own? Stocks. We see much better upside to
equities on a longer-term basis but given the lack of alternatives, we
prefer to own them on a 3-month view as well.
China Trusts/LGFV bonds: Rising default risks. Ben Bei and team dive into
the debate surrounding Chinese trusts and bond defaults in the wake of
recent events in "China Credit Conundrum: Assessing near-term risks." We see
higher risk of default for trusts in the coming quarters due to a
tightening of financial conditions and falling cash-flows for mining/
property companies. Most exposed- Energy and mining trusts invested in
private projects. We believe LGFV (Local Government Financing Vehicle) bonds
have lesser risk due to lower funding cost, longer duration and implicit
government backing. Overall, however, the potential contagion risk still
appears to be contained due to low systemic tolerance from the government.
Looking Ahead: We get the February CPI and Housing Starts reports this
morning as we continue to build a mosaic of how low activity was this winter.
Performance of global indices
As of March 18, 2014
Source: Reuters
Today's Events:
08:30 am - Consumer Price Index - Feb
08:30 am - CPI - Ex Food & Energy - Feb
08:30 am - CPI NSA - Feb
08:30 am - Housing Starts
US Morning Call for March 18, 2014:
US Economics Analyst, Stehn: March FOMC Preview (1st published 3/14).
Look for the FOMC to keep tapering, slightly downgrade its growth outlook,
and perhaps lower its long-run projections for the unemployment rate and
move towards a more “qualitative” description of its forward guidance (i.e
., no longer link to targets).
Tesla Motors, Inc. (TSLA, Neutral), Archambault: Quantifying disruption –
TSLA’s impact on auto and grid storage seems to be discounted.
Following a 500%+ run in TSLA shares over the last 12 months, investor focus
on valuation is intense. We layout upside scenarios looking at TSLA’s
automotive technology as disruptive on the scale of the Model T, iPhone, or
appliances. Conclusion: we raise our 6-month price target to $200 but stay
Neutral.
Building – Homebuilders, Hackel: Encouraging signs from Atlanta – spring
isn’t dead yet.
Building – Homebuilders, Hackel: LEN/KBH Preview: Look for some more
positive march thoughts.
Post our Atlanta meetings with homebuilders, we believe March demand is
shaping up well, after a lackluster Jan-Feb, and recent stock
underperformance. Remain bullish on LEN (CL-Buy) into Feb quarter results on
solid exposure to growth markets and gross margin upside. Also favor RYL
across our builder coverage.
Microsoft Corp. (MSFT, Sell), Bellini: Considering the Nokia deal.
Nokia’s business has weakened since MSFT announced it is acquiring parts of
its business, leaving MSFT’s guidance vulnerable to disappointment.
Pharmaceuticals, Rubin: Better late than never: options around MRK’s
consumer business.
News reports that MRK is looking to sell its consumer business is
encouraging if it leads to an accretive transaction (and we raise our 12-
month price target to $60). But we remain Neutral as we see even better
capital allocation in other stocks across Pharma.
Europe: Luxury Goods, Hutchings: Answering the big 5 questions for Luxury
Goods.
Burberry (BRBY.L, CL-Buy), Hutchings: Strong pound hurting a strong brand;
investment case intact CL Buy.
Remain bullish on Luxury as concerns around sustainable EM demand and
eCommerce competition have created an attractive entry point into the
European-based consumer group. Buy Burberry (on CL) on solid fundamentals at
only 15X P/E. 12-month target, 2,225p.
Credit Cards, Nash: The consumer credit check-up: Disappointing trends, but
history says to buy the cards now.
Credit card trends have been challenging but March and April have been
historically good times to own card stocks as loan balances tend to grow and
delinquencies improve. Top picks: DFS and COF (both CL-Buy).
Notable Research not on the call:
Macro
•US Portfolio Strategy: Writing in the margins: Analyzing peak
profitability
•GOAL: Asset Allocation Update: Downgrade: Government bonds to
underweight over 3 months
•EM Macro Daily – How fast are Chinese exports really growing?
•Argentina: Regardless of Marginal Deceleration, Inflation Remains
Elevated
•Trade Update: Recommending long positions in German equities via the
DAX Index
•Strategy Espresso: DAX back on the tracks
•China credit conundrum: Assessing near-term risks
Energy
•Devon Energy Corp. (DVN) E&P positioning improved, execution post
acquisitions key; Neutral
Industrials
•Steel: Two self-help stories significantly underpriced; Buy X and AKS
Conference Calls & Conferences:
•Today @ 10 AM – GS Research Conf Call: “Quantifying disruption –
TSLA’s impact on auto and grid storage seems to be discounted” with Pat
Archambault; Dial-in: 973-528-0056; passcode: 856214.
•March 19 – GS TMT Leveraged Finance Conference; Goldman Sachs
Conference Center, New York;
website link: http://www.gs.com/events/tmtlf2014/attendee.
•March 24-25 – GS Chemical Intensity Days; Magnolia Hotel, Houston,
TX;
website link: http://www.gs.com/events/chemint2014.
•March 27 – GS Consumer Digital Day 2014; Goldman Sachs Offices,
London;
website link: http://www.gs.com/events/dgtlmda2014.
Today's US Research Highlights and Market Update
Market Intelligence – Morning Update
By Chris Hussey
Published 18 Mar 2014 6:43:46 am CDT
Stocks in Asia were mostly higher Tuesday as indices reacted to the
surprisingly bullish tone set in the US on the back of two potentially
troubling bits of news over the weekend: Ukraine and China FX band widening.
Japan's Nikkei saw the strongest gains as the yen devalued against the
dollar against a backdrop of relaxing tensions. But after the market closed
in Japan, the yen rallied back, creating perhaps a bit of a headwind to
trading tomorrow.
European equities are opening little changed with a negative bias.
Interpreting the set of news before investors is admittedly challenging. On
the one hand, we have received more information of issues tied to EM
uncertainties. On the other hand, the news we received may not turn out to
be good for risk assets (see Francesco Garzarelli's note from Monday, "A
Clustering of Risks"). Assessing risk tolerance today, all of the usual "
canaries in the coal mines" are relatively subdued with bonds and EM FX
little changed (although China's currency is continuing to weaken against
the dollar). Commodities also show little stress in the system with gold
trading lower and copper and wheat flat.
Fresh view across assets and regions. On the back of Francesco Garzarelli's
note last week ("On Bonds, and Italy") where he shifted to a bearish view on
bonds, Anders Nielsen and team downgrade our 3-month bond view to
Underweight within our global portfolio recommendation in "GOAL: Asset
Allocation Update." We are now underweight bonds on both a near-term (3-
month) and longer-term (12-month) horizon and also underweight commodities
longer-term. What would we own? Stocks. We see much better upside to
equities on a longer-term basis but given the lack of alternatives, we
prefer to own them on a 3-month view as well.
China Trusts/LGFV bonds: Rising default risks. Ben Bei and team dive into
the debate surrounding Chinese trusts and bond defaults in the wake of
recent events in "China Credit Conundrum: Assessing near-term risks." We see
higher risk of default for trusts in the coming quarters due to a
tightening of financial conditions and falling cash-flows for mining/
property companies. Most exposed- Energy and mining trusts invested in
private projects. We believe LGFV (Local Government Financing Vehicle) bonds
have lesser risk due to lower funding cost, longer duration and implicit
government backing. Overall, however, the potential contagion risk still
appears to be contained due to low systemic tolerance from the government.
Looking Ahead: We get the February CPI and Housing Starts reports this
morning as we continue to build a mosaic of how low activity was this winter.
Performance of global indices
As of March 18, 2014
Source: Reuters
Today's Events:
08:30 am - Consumer Price Index - Feb
08:30 am - CPI - Ex Food & Energy - Feb
08:30 am - CPI NSA - Feb
08:30 am - Housing Starts
US Morning Call for March 18, 2014:
US Economics Analyst, Stehn: March FOMC Preview (1st published 3/14).
Look for the FOMC to keep tapering, slightly downgrade its growth outlook,
and perhaps lower its long-run projections for the unemployment rate and
move towards a more “qualitative” description of its forward guidance (i.e
., no longer link to targets).
Tesla Motors, Inc. (TSLA, Neutral), Archambault: Quantifying disruption –
TSLA’s impact on auto and grid storage seems to be discounted.
Following a 500%+ run in TSLA shares over the last 12 months, investor focus
on valuation is intense. We layout upside scenarios looking at TSLA’s
automotive technology as disruptive on the scale of the Model T, iPhone, or
appliances. Conclusion: we raise our 6-month price target to $200 but stay
Neutral.
Building – Homebuilders, Hackel: Encouraging signs from Atlanta – spring
isn’t dead yet.
Building – Homebuilders, Hackel: LEN/KBH Preview: Look for some more
positive march thoughts.
Post our Atlanta meetings with homebuilders, we believe March demand is
shaping up well, after a lackluster Jan-Feb, and recent stock
underperformance. Remain bullish on LEN (CL-Buy) into Feb quarter results on
solid exposure to growth markets and gross margin upside. Also favor RYL
across our builder coverage.
Microsoft Corp. (MSFT, Sell), Bellini: Considering the Nokia deal.
Nokia’s business has weakened since MSFT announced it is acquiring parts of
its business, leaving MSFT’s guidance vulnerable to disappointment.
Pharmaceuticals, Rubin: Better late than never: options around MRK’s
consumer business.
News reports that MRK is looking to sell its consumer business is
encouraging if it leads to an accretive transaction (and we raise our 12-
month price target to $60). But we remain Neutral as we see even better
capital allocation in other stocks across Pharma.
Europe: Luxury Goods, Hutchings: Answering the big 5 questions for Luxury
Goods.
Burberry (BRBY.L, CL-Buy), Hutchings: Strong pound hurting a strong brand;
investment case intact CL Buy.
Remain bullish on Luxury as concerns around sustainable EM demand and
eCommerce competition have created an attractive entry point into the
European-based consumer group. Buy Burberry (on CL) on solid fundamentals at
only 15X P/E. 12-month target, 2,225p.
Credit Cards, Nash: The consumer credit check-up: Disappointing trends, but
history says to buy the cards now.
Credit card trends have been challenging but March and April have been
historically good times to own card stocks as loan balances tend to grow and
delinquencies improve. Top picks: DFS and COF (both CL-Buy).
Notable Research not on the call:
Macro
•US Portfolio Strategy: Writing in the margins: Analyzing peak
profitability
•GOAL: Asset Allocation Update: Downgrade: Government bonds to
underweight over 3 months
•EM Macro Daily – How fast are Chinese exports really growing?
•Argentina: Regardless of Marginal Deceleration, Inflation Remains
Elevated
•Trade Update: Recommending long positions in German equities via the
DAX Index
•Strategy Espresso: DAX back on the tracks
•China credit conundrum: Assessing near-term risks
Energy
•Devon Energy Corp. (DVN) E&P positioning improved, execution post
acquisitions key; Neutral
Industrials
•Steel: Two self-help stories significantly underpriced; Buy X and AKS
Conference Calls & Conferences:
•Today @ 10 AM – GS Research Conf Call: “Quantifying disruption –
TSLA’s impact on auto and grid storage seems to be discounted” with Pat
Archambault; Dial-in: 973-528-0056; passcode: 856214.
•March 19 – GS TMT Leveraged Finance Conference; Goldman Sachs
Conference Center, New York;
website link: http://www.gs.com/events/tmtlf2014/attendee.
•March 24-25 – GS Chemical Intensity Days; Magnolia Hotel, Houston,
TX;
website link: http://www.gs.com/events/chemint2014.
•March 27 – GS Consumer Digital Day 2014; Goldman Sachs Offices,
London;
website link: http://www.gs.com/events/dgtlmda2014.