November 12, 2009

China: Appreciation pressure intensifies

News from Danske Research
The political pressure on China from within Asia has increased with the finance ministers from both Indonesia and Singapore yesterday calling for yuan appreciation and APEC finance ministers today pledging to embrace flexible exchange rates. The Peoples Bank of China in its quarterly report yesterday prepared the ground for a change in China's exchange rate policy. With China's exports recovering, the Chinese leadership is sounding more confident about growth, and with political pressure intensifying, we believe the conditions are ripe for a change in China's exchange rate policy. We still expect the gradual appreciation of the yuan to be resumed by mid 2010. However, the risk it could start earlier has increased. A major one-off revaluation cannot be ruled out, while a complete float is highly unlikely.

Flash Comment - China: Appreciation pressure intensifies

OECD in Figures 2009

OECD's original, simple to use, pocket-sized data book. As ever, this year’s edition contains key data on the OECD-wide economy, society and the environment. There are comparable tables covering the entire spectrum of the organisation's work.

The e-Book - PDF format is Free.

Flash Comment - G20-meeting: Tobin tax steals headlines

News from Danske Research

With G20 countries on a time schedule for coordinating and reviewing individual countries' economic policies, the process already revealed some weakness as G20 was not able to agree on more specific policy goals. UK Prime Minister's proposal to tax financial transactions is dead on arrival. However, a special tax on financial institutions to finance future bailouts remains on the agenda. Exchange rates issues were avoided in the final communiqué. However, IMF believes CNY is significantly undervalued and it will be hard to avoid exchange rates issues in the review process starting early next year. In addition, IMF put forward seven basic principles for exit policies.

Flash Comment - G20-meeting: Tobin tax steals headlines

Flash Comment - Latvia: decline has bottomed out

News from Danske Research

Latvian GDP dropped 18.4% y/y in Q3 09, slightly up from minus 18.7% y/y in Q2 09.

Flash Comment - Latvia: decline has bottomed out

Flash Comment - Baltics: on a deflationary trend

News from Danske Research

Bold
Lithuanian inflation decelerated to 1.3% in October, from 2.7% y/y in September. Latvian inflation entered negative territory, with CPI dropping to -0.9% y/y in October, down significantly from 0.5% y/y in September.

Flash Comment - Baltics: on a deflationary trend

China: A more balanced recovery

News from Danske Research:

Today's economic data suggest that China's recovery is becoming more balanced with private domestic demand and exports substituting public investments as the main growth engines. However, the October data is not as strong as today's press headlines suggest. Growth in domestic demand and imports have slowed and Chinese imports of important commodities declined substantially in October. However, some of this weakness is probably explained by an extended holiday in October and should prove temporary. Underlying inflation has stabilised around 2%, suggesting no imminent need for substantial monetary tightening.
Flash Comment - China: A more balanced recovery

What the obscure Vopak says about the oil market

LONDON (MarketWatch) -- The financial world isn't preoccupied with oil at the moment, not with issues like Goldman Sachs bonuses or Federal Reserve exit strategies to consider.
But it wasn't that long ago that oil was the number-one topic in the market, and should black gold resume prominence, the update on Thursday from a relatively obscure Dutch firm called Vopak /quotes/comstock/24s!e:vpk (NL:VPK 54.19, +2.62, +5.12%) should be eyed.
Vopak is the world's largest independent tank terminal operator, so when it comes to storing oil, liquefied natural gas and the like, they know a few things.

And on Thursday, the group raised earnings guidance for the second time this year.
The reason? There are a few, but the main one is that demand for storing oil is strong.
A major reason to store, rather than sell, oil is if there aren't buyers for it. (Another would be a bet that prices in the future will grow significantly, but the futures complex at the moment is pricing in a 7% rise in 12 months and a 16% rise over five years -- hardly an irresistible siren song.)

Also take a look at what A.P. Moller-Maersk /quotes/comstock/23u!0lqm (UK:0LQM 0.00, 0.00, 0.00%) , the shipping giant, said in its nine-month report on Thursday: "There are no short-term prospects of higher demand for oil and gas transports." About the only good news they reported in the third quarter from that division came as vessels were increasingly used as offshore storage facilities.

And what those European firms are saying tracks with what the admittedly-not-always-truthful OPEC has been maintaining all along -- the market is very well supplied.
And similarly, while the International Energy Agency on Thursday hiked its 2009 and 2010 oil demand outlook, it pointed out that demand for gasoil used in railways and trucks is still pretty weak.

And, as the IEA also pointed out, the current price itself could derail recovery.
What it all suggests is that while demand for oil is certainly on the upswing, fundamentals aren't entirely behind the more than doubling in oil from February lows. Speculators getting ahead of themselves? Nah, it couldn't be.

In a market where oil reached as high as $147 a barrel, predicting prices is a fool's game. But know this -- there's plenty of oil sloshing around without a home.

News from Danske Research

Estonian GDP declined by 15.3% y/y in Q3 09, up from -16.1% y/y in Q2 09. Flash Comment - Estonia: decline in growth decelerates

E.ON (Buy, TP=€36.8) - Quarterly results - Better-than-expected results against a still difficult backdrop (3p)

Please find below our latest publication:

E.ON (Buy, TP=€36.8) - Quarterly results - Better-than-expected results against a still difficult backdrop (3p)

Update
The group reported Q3 adjusted EBIT of €1,959m, up 1% (vs €1,920m for the Inquiry Financial consensus and €1,848m for our estimate). We believe that this is an excellent performance against a deteriorated economic backdrop (and lower volumes), which notably reflects the company's ability to cut costs. Moreover, E.ON discussed at length certain aspects of its gas contracts and stated that it expects a pick up in gas volumes for 2011e.

Impact
For now, we maintain our estimates which, although prudent on Q3, discount a rebound in Q4, notably thanks to access to the Russian gas field Yussno Rhuskoye (management specified that this was effective from October 2009), which in our opinion will allow E.ON to reduce its gas supply costs. We note that E.ON is the second-largest “beneficiary” of take-or-pay contracts in Europe (behind ENI – see our preview). E.ON indicated it had sold its network for €0.9bn but that this disposal (as well as that of Tüega) would reduce debt only in 2010.

Target price & rating
We maintain our Buy rating on the share. The positive momentum from 2008 results (in March 2009) appears intact: debt reduction and restructuring are under way, and the company's repositioning on the gas value chain is partially complete (giving it more consistent upstream access). The company should soon present new 2012 guidance, potentially reducing capex and boosting its cost-cutting plan (March 2010? at the 2009 full year earnings publication). We maintain a target price of €36.8, as established in our note published on 17 September.

Next events & catalysts
The finalisation of the agreement between electricity producers and the government coalition should prompt a rally of about 5% (prices rose after the German general elections). Management may update guidance as of March 2010, which could take into account reduced capex and stronger cost-cutting. Further disposals (North American assets) are expected to complete the €10bn asset sale programme.

Scottish & Southern Energy (Sell, TP=960.0p) - Half-year results - No major surprises in the interim release (3p)

Please find below our latest publication:

Scottish & Southern Energy (Sell, TP=960.0p) - Half-year results - No major surprises in the interim release (3p)

Update
Scottish & Southern reported interim results (H1 09/10) close to our expectations: underlying pre-tax profit of £396m vs SGe £402m and adjusted operating profit of £579m vs SGe £523m. Note that all businesses contributed to growth with production/supply of electricity contributing £227m vs SGe £200m. The group reported net debt of £5.1bn and guided for full-year net debt of £5.5bn by year-end (March 2010).
Impact
We reiterate our full-year forecasts. The conference call on the results presentation did not provide any data to lead us to change our approach. We continue to believe that the group is overinvesting (with a five-year plan amounting to £6.7bn out to 2013) and £1.4bn projected for the current year. This policy could force the group to make a capital increase (an eventuality management has ruled out for the moment). Such a move would most definitely be required if the group opts to buy the network assets up for sale by EDF Energy (regulated asset value of £3.6bn)

Target price & rating
We reiterate our Sell rating on the share, as its main strengths are also likely to act as obstacles to any rerating: high net debt (3x 09/10e EBITDA), diversified contributions to operating profit (electricity, networks, telecoms, gas storage), large customer base (but likely increase in defaults on payment) and investment in electricity production (although, for some time, the group persisted in maintaining that it had an even spread between supply and production). We reiterate our 960p TP (see our 2 July 2009 report).

Next events & catalysts
SSE is continuing with its plans to build electricity generation facilities (wind and gas) which should come into service over the current year and subsequent years. EDF's regulated network assets are to be sold during H1 10. SSE should also start to consider construction of one or more nuclear power plants in the UK, as part of a consortium.

Unicredit Group (Hold, TP=€2.40) - Quarterly results - Mixed set of results, sound core tier 1 (5p)

Please find below our latest publication:

Unicredit Group (Hold, TP=€2.40) - Quarterly results - Mixed set of results, sound core tier 1 (5p)


Update
UCG reported weak core revenue (NII + net fees), 3% below market consensus and 5% below SGe. NII was weak (4% below consensus and 7% below SGe) on: 1) lower trading related income, 2) 3M Euribor drop (-45 bps qoq, and 3) a loan book reduction (-3.4% qoq). The overdraft fee impact on NII was negative by €131m, of which 50% was recovered in net fees. All divisions, but CEE and Poland, were sharply affected by the NII drop. Net fees were a touch below expectations, while trading income came in well above market consensus and SGe, thanks to the robust contribution of Rates & FX, Credit related business (former MIB division). LLP came in a touch better, at 150 bps (vs. 154 bps SGe - adjusted by the shrinking lending volumes). Without the one-off charge in Kazakhstan, LLP stood at 134 bps. LLP was better in all divisions, but CIB (148 bps vs. 144 SGe). The CEE LLP stood at 344 bps (vs. 388 SGe). Gross impaired loans grew by 8% q-o-q, with new inflows declining qoq. NPL coverage fell from 64.2% to 62.7%. Good news was the core tier 1 jumped by 70 bps qoq to 7.55% thanks to 1) earnings, 2) increasing AFS reserves, and 3) a sharp reduction in RWA (-6% qoq). The core tier 1 does not embed any dividend accruals. Net borrowing from banks was down 46% qoq.

Impact
De-leveraging actions and the reduction in the risk profile are the UCG short-term priorities, but this puts the P&L under pressure. Management is confident that the peak of LLP was touched in Q2 and that NII has bottomed, adding some ‘through the cycle' guidance: 1) €500m positive impact to NII – 1.7% of 2010e revenue- for a 100 bps parallel shift of the yield curve), 2) improving asset management mix, 3) 3,800 headcount cuts in 2010e, and 4) CEE GDP up 1% in 2010e.

Target price & rating
With €1.33bn earnings in 9M09, our €1.94bn net profit 2009e target could be demanding, but not impossible; 2010 will be another tough year if the cycle does not recover and rates don't rise: NII is the main issue. Our estimates and SOP €2.4 TP are unchanged. Hold.

Next events & catalysts
€4bn rights issue early 2010e. The lower visibility of the divisional reporting is a negative.

HSBC (Buy, TP=820.0p) - Rating upgrade - US burden easing and Asian recovery accelerating – upgrade to BUY (8p)

Please find below our latest publication:

HSBC (Buy, TP=820.0p) - Rating upgrade - US burden easing and Asian recovery accelerating – upgrade to BUY (8p)

Update
The US Finance division, which has been the group's Achilles' heel, booked much lower impairment charges in Q3 (35% lower than peak in Q4 08) and even surpassed HSBC's expectations. Elsewhere, asset quality in Asia and Latam is not an issue in our view, with impairment charges also falling in those geographies. Asia is showing signs of recovering and HSBC reported positive lending growth in the region, offsetting continuing pressure on deposit margin spreads. A core tier 1 ratio of 9% re-establishes HSBC as one of the better capitalised banks in Europe and the reversal of the AFS deficit from $18bn to $14bn should further enhance the group's capital position.

Impact
We have upgraded our earnings estimates by 8-13% for 2010/11 driven by a number of factors. Improving asset quality in the US and the absence of deterioration elsewhere should imply lower impairment charges in the near term. We are lowering our PFS US impairment charge by c.20% by 2011e. Although not immediately impacted, we expect an improvement in net interest margin from 2011 onwards as we estimate HSBC's margin is close to its trough in relation to the liability side of the balance sheet. Note that we remain cautious as we assume only moderate improvement, nowhere close to the recent peak in 2007. Looking elsewhere, we expect HSBC's investment banking division to perform in line with European peers despite its strong presence in Asian IB where economic growth could return the soonest in our view.

Target price & rating
We raise our TP by 20% from 680p to 820p on the back of (i) our earnings upgrade (c.10%); (ii) $/£ movements; and (iii) a lower cost of equity and higher growth given the improving outlook. At our TP, the implied P/TB is 2.1x 2010e vs 1.6x for Euro banks, a ratio we regard as undemanding given management's target ROE of 15-19%. A premium valuation is warranted in our view given HSBC's strong capital position, liquid balance sheet and genuine diversification in both geography and product mix – all without government support.

Next events & catalysts
HSBC will present at SG's Premium Review on 2/3 December

Traders comments

Mike Xifaras: Tier 1 Perps

surprisingly busy day given the U.S. was out. LLOYDS was the most traded name as the company upsized its £/euro ECN issue to £7bn which boosted the 13% deal 9 points to 123. the other LLOYDS deals were unchanged and i'll buy some here (3 points below exchange). saw continued buying of the big step deals eg ACAFP 7.875 BBVASM 8.5 ISPIM 8.375 SOCGEN 9.375 which also dragged ISPIM 8.047 higher to 100.75 from 99.75. traded BACR 4.75 and 7.5 and left a buyer of both. BNP remains better offered in most maturities. BPCEGP 9.25 is just off its 95 low. traded 5m BPCEGP 6.117 today - follow is 73.25/74.25. traded CMZB 5.012 between 44 and 45 left a 44 buyer. I traded DPB 5.983 at 64, HVB 7.055 between 86 and 87 left 86.25 buyer. bought ISPIM 8.126 at 97 pay on - and sold RBS 7.092 - left 43 bid. picked up SEB 7.092 and can sell at 85.5 (the 9.25 is up 1/4 pt today). Bought SOCGEN 5.419 again at 82.5 and pay. picked up UBS 8.836 and i'll sell them at 97. overall the market feels around half a point better in liquid names and unchanged in illiquid.

David Forgash: Autos/Retailers

Full bull mode. We rallied once again, with cash 5bps tighter virtually across the board. Though I was lifted out of chunks of auto and retail paper, by far the most active was the new Fiat '15 deal. After dropping 1/2 pt yesterday in the grey, we opened down another 1/4 today before the flippers exhausted and the retail engine kicked in. The deal ended up closing at 99 7/8 with what appeared like the leads trying to cover syndicate shorts with deep bids. Adding up the blotter, we traded over 100mm of the bond. It feels like the deal is in much better shape at this point. I think that as we get above par we're likely to see cds get smacked down to the mid 250's. You can't argue with the stellar numbers the company has seen out of Brazil (+47%), and that is as big a market to them as the whole of Italy. I like that long trade. Another favourite long, CONTI, closed 15bps tighter. In airlines, BAB was put on watch neg at Moody's. CDS closed virtually unchanged at 500. Retail is pretty quiet, though I'm starting to reload in a few tight cds names such as Tesco. I also think a short in MRWLN has very good upside in the high 50's. Dixons went from spread to point to spread trading in a 60bp range today (880-940). Clearly a lot of bets are being placed on the xmas season. Not a ton of conviction, but I'm certainly too scared to be long the credit.


Gareth John: TMT

Reed pre-released Q3 statement this morning although had no numbers in it. Said 1H trends (org rev -7%) have broadly carried into 2H. Outlook disappointing talking of "late cycle" effects and "further margin declines next yr". Also CEO has left after only 8mnths. Overall negative and Reed cds was 5bps wider 65/70. We continue to like short reed/long pson 5y, differential now 16/19 (reed above). Bertel results good with 3Q rev only -4.5% compared to the 7% drop in 2Q. Also is cutting costs well to inc margin to 7.9%, up 1.3% yoy. 5y cds was unch at 165/175 and seeing better byrs at these levels, it is now in around 70bps in the last month and we see cds as equal weight now. CDS generally quiet today but bonds active, seeing a few real money acc's start peeling off blocks of tmt where they see little value left, and taking some profits in new issues telefo 19s b+118/116 portel b+158/156 both unch today after tightening 2bps a day over the last week.

Gareth John: Metal/Miners/Builders

Holzsw results beat, with rev inline but ebitda ahead by 11%. Net lev of 2.8x unch. 5y cds 5bps tighter at 113/118, we think it's the strongest credit vs peers but looks fully valued here. We like long holzsw vs short Sgofp, as sgofp fundamentals will continue thanks to exposure to W.Eur property. SGOFP 5y 115/120 [-3]. Other cds drifted tighter with Xtaln 5y 174/179 [-2] Aalln 138/143 [-2] Gleint 210/215 [-5] lgfp 180/185 [-5], with the street a keen seller of protection.


Irena Tzekina: Chemicals/Food

Very slow day with the US and parts of Europe out. CDS marginally tighter on very low volume; curves continue to trade; front end has steepened somewhat over the past couple weeks. In cash, the new Cokes continue to quietly move tighter driven by retail buying; DCPRIM also getting picked at. Hit small Dow 11s, looking for more, same goes for LXSGR 12s. Traded some BASGR 14, 2 more to go at 85, CARLB (unch), HEIANA 14 (cheapest bond on the curve), and EVONIK (pay 350 for a few). Looking forward to having more market participants tomorrow. Night, Irena

Kevin Edwards: € Insurance

Active in insurance cash today with sub bonds up 1/2 to 1 pt and senior bonds 2-5 bp tighter.With earnings continuing to come in strong and the equity market stabilizing we saw better buying from institutional and retail customers. We were active in Swiss Life on the back of strong numbers and most importantly improved solvency. Names that continue to look cheap to us include Swiss Life, OLDMUT LT2, CLMD UT2, and INTNED LT2.

Nikhil Sethi: € Financials

Good 2way flows today (1:1 buys/sells). The new ANZ 2 5/8 12 performing well on very good flow (traded >75MM today, we closed +92 1/2/92, -2bps) and as anticipated, retail loving the deal. Additionally, LLOYDS Snr (?) paper caught a bid after ECN/ECA conversion terms revised favourably for T1/UT2 bonds. LLOYDS 19s closed +182/80 (-3), 16s +190/189 (-2), 14s traded up @ +164, lft 166/64 (-1), better slr, LT2 5 5/8 13-18s still sticky closing +547/537 (+3). Seeing buyers of all Ozzie names in LT2 land; CBA 19s lifted @ +165, lft 168/64 (-3), ANZ 19s closing +167/64 (-1), NAB 18-23s +204/194 (-2). UT2 names been relatively quiet w/ exception of HBOS 5 1/8 49 that are nigh on impossible to source (77-80, +2pts) w/ scrap retail selling.

Anthony Wainer: HY TMT

My market was focussed today on the aftermath of the WDAC call ...

..yesterday when the CEO stated that WDAC would pay their Dec01 coupon payment, this is eur22mm out the business. He also made reference to an eur18mm payment on a short dated cross currency swap. I believe these payments would be value destructive to the senior parts of the capital structure, as the sub bonds are quite clearly out of the money in this stressed captial structure. The bonds rallied from a low of 9/11 pre call, to close 14/16 post call yesterday, today they drifted lower all day to close 12/14. The loans rallied a touch today to close 60/62 from the lows of 58/60 yesterday. Strange behaviour from a cap structure that really believes that the coupon would be paid. I'm negative on bonds and loans at these levels and would be looking for lower levels to get back involved in the loans. In the rest of the directory secotr, Yell paper closed up another point, with the As closing 81/83. SEAT was marginally higher at the sub bond entity although I did pick up some scrappy sellers into the close.

Sylvain Lebre: Indices

As expected this was a very quiet session as most people were out. Deep offer on Xover throughout the day with a quick incursion sub 500. Stocks coming back a little made us widen slightly to close very close to unch but not on genuine flows, more on reversal of the day punters hits so tough to draw a line. Overal we actually bought protection on Xover. Main more resilient, at the tights we had genuine profit taking buyers than same story than xover but with a good offer going out as we are unch on the day with US market very offered on tuesday. Curves muted. Fins ok bid still. Good evening. Sylvain

Benjamin Hasted: Eurosterling

The market in financials today was very firm, both in sub and senior paper - even before the latest Lloyds announcement. Sub insurance paper has been particularly well bid, and with the LGEN news we saw a further move of ~4pts higher in the T1 and UT2s, e.g. LGEN 6.385s closed 74/78 [+4].

Of course, Lloyds upsizing their £/€ ECN issue to £7bn was the big news of the day. This mattered most to 3 groups: i) those that were previously on the cusp in terms of the waterfall, which are now certain to be exchanged (if desired) [e.g. the 13% 2019-call perps]; ii) those that were previously considered unlikely to be included as they were too far down the waterfall, but now are on the cusp [most obvious example being the 13% 2029-call perps]; and iii) those bonds so far down as to not be considered to be exchanged, which now have a chance (even if small) [e.g. HBOS 7.286 and 7.281s].

The first group didn't react too much, as they were considered likely to be taken out anyway, LLOYDS 13% 19s closed +1 1/2at 120 1/2/121 1/2. The third group felt a bit more positive push, e.g. the HBOS 7.286s closed 75/77 [+4] and the HBOS 7.281s at 73/75 [+3]. Finally, however, it was the 2nd group - namely the 13% 2029s that really felt the heat - these went from being unlikely candidates, to likely candidates and so rallied 8pts to close 125/126 1/2. ECN- equiv yields tend to be around 11% for those sure to be exchanged, increasing towards 12% for the more cuspy issues. Within those high on the waterfall, I was most active in the LLOYDS 7.834s, closing them 89 1/2/90 1/2.

Corporates, meanwhile, were very strong, with full offer side lifts prevalent and a couple of reaches for paper from those taken short. Particularly active names on this desk included MKS (11s 280/270), GFSPLN (19s 207/197), GSK (39s 104/94), WELLTR (36s 78/70) and NGGLN (38s 113/105). Also saw prints across the curve in FGPLN, 19s 245/235, 21s 240/230 and 24s 240/230. Will leave it there, been a long day! Have a good evening... Ben

GS: MARKET DATAPOINTS

1) S&P 500 +0.2% after the EU close - closing +0.5% at 1098. Volumes light, NASDAQ and NYSE both 20% below 10-day averages. Financials (+1.4%) and Materials (+0.9%) outperforming. Retail (-0.3%) and Utilities (-0.2%) underperforming. After the close, Hewlett-Packard announced a $3 bn cash bid for 3Com, a 39% premium to the closing price.

2) Lower rates + weaker dollar + tighter credit = tailwinds for stocks. Tony Pasquariello: the attached chart (first attachment) is our GS Financial Conditions index back 20 years (ex-SPX). this puts into context how extremely accommodative the asset markets are for growth and - by extension - corporate profits. while it's easy to argue that poor fundamentals demand such an extreme policy response -- and that there will be a price to pay in the future for it -- over the short term this chart is a reminder to be careful when shorting S&P's on the back of weak macro data (e.g. payrolls).

3) Massive M&A buying power in the US tech sector. The 15 largest tech companies in the US had $270 bn of cash on their balance sheets at the end of 3Q.

4) Inability to capture the unusually poor performance by small firms might have overstated US 3Q GDP by 0.5 to 2 ppt. Jan Hatzius: We have attempted to gauge whether the recent official estimates might have overstated the economy’s true growth because of an inability to capture the unusually poor performance of small firms. Our tentative conclusion is that the economy might have grown between ½ and 2 percentage points more slowly than indicated by the Q3 “advance” estimate of 3.5% (annualized).

5) China set to see the largest decline in the savings rate - likely to decline by -5ppt by 2015 & -12ppt by 2015-2020 - significant implications for global spending patterns. Swarnali Ahmed: The underlying pressure to dissave is strongest in China, where we expect the savings rate to decline by 5ppt of GDP before 2015 and by another 12ppt in 2015-2020. This would have positive implications for consumption in China, and significant implications for global spending patterns, given that on our baseline projections China can overtake the US to become the largest economy in the world by 2027.

6) Chinese income tax receipts, appliance sales & auto sales growing strongly. Income tax receipts grew 18% yoy in September, the largest increase YTD. Appliances sales grew by 35% yoy in October, while auto sales were still strong at 44% yoy.

7) Sharp declines in Chinese copper & iron ore imports in October. (i) Chinese imports of unwrought copper and semi-finished products fell -34% mom in October. After stripping out our estimate for products, anodes and alloy, we estimate that imports of refined copper fell almost -50% mom to 150,000 tonnes in October, the smallest monthly total since November 2008. Chinese imports of copper scrap also fell sharply in October, down -37% mom to the lowest monthly import rate since February. (ii) Chinese imports of iron ore fell -30% in October, from September’s record level.

8) October saw the largest monthly outflow out of US equity funds since October. TrimTabs: We estimate that U.S. equity mutual funds lost $15.5 billion in October, their largest outflow since March 2009.

9) Leverage ETF investors were bearish in October. TrimTabs: Leveraged long ETFs lost $534 million (1.7% of assets) in the past month, while leveraged short ETFs took in $1.1 billion (8.9% of assets).

10) Inflows into bond funds are slowing - inflows into equity funds are accelerating - trend shift? TrimTabs: (i) Bond funds have received an estimated $7.9 billion (0.4% of assets) in November. This month’s inflow could be the first in five months below $30 billion. (ii) We estimate that mutual fund investors pumped $7.7 billion (0.2% of assets) into U.S. equity funds on the three trading days ended Tuesday, November 10, putting this week’s inflow on track to be the highest this year.

11) NYSE short interest decreased 3.3% or $10 bn in the second half of October. TrimTabs: The New York Stock Exchange reported Tuesday that short interest at its member firms fell to 13.0 billion shares in late October, down 3.3% from 13.5 billion shares in early October. The decline in late October more than reversed the increase in early October and brought short interest to its lowest level this year. If the average stock price is $20 per share and short interest dropped about 500 million shares in late October, then declining short interest added about $10 billion in buying power to the market in just a couple of weeks.

12) Continued strength in corporate buying. TrimTabs: Hewlett-Packard announced late Wednesday that it is buying 3Com for $3 billion in cash, the only new cash takeover announced this week. In addition, eight new stock buybacks totaling $2.9 billion have been unveiled this week, including three buybacks totaling $500 million announced Wednesday.

13) Hedge funds took in $40 billion in the past three months compared to outflows of $408 billion between September 2008 and July 2009. TrimTabs: Based on very preliminary data (406 hedge funds), we estimate that hedge funds took in $12.4 billion (0.9% of assets) in October, following a revised inflow of $10.2 billion (0.8% of assets) in September.

14) Continued redemptions from funds of hedge funds explains why flows into hedge funds are so low. TrimTabs: Funds of hedge funds lost an estimated $3.6 billion (0.6% of assets) in October.

15) Correlation between FX and risky assets still close to record highs. See second attachment, p. 1, bottom-right chart.

16) Implied volatility likely to decline. Stuart Kaiser: The average 3-month implied volatility of S&P 500 stocks is on par with average realized volatility over the past month indicating that the market expects the elevated volatility typically reserved for earnings season to persist into early next year. This was also the landscape following 2Q09 earnings and realized volatility did not match implied volatility levels in the 3 months leading up to 3Q09 earnings season.

17) Research focus today...
Reed Elsevier.....................................Trading statement broadly in line, CEO change could be a positive SBM Offshore.....................................Capital raising and trading update; more upside elsewhere - Sell Imperial Tobacco.................................Buy: GARP at its best; reiterate Buy

Centrica (Buy, TP=290.0p) - Corporate news - Lower tax rate means slightly higher EPS (3p)


Centrica (Buy, TP=290.0p) - Corporate news - Lower tax rate means slightly higher EPS (3p)

Update

Centrica released its trading update this morning, showng good news in Downstream businesses (British Gas Residential, British Gas Business and British Gas Services). For Centrica Energy, oil & gas production suffered from lower spot prices and lower production volumes, while the Power Generation performed well. According to the press release, 2009 operating profit from the upstream business is going to be less than half of 2008 despite the four month contribution from Venture, but note “The reduction in profits from the highly taxed UK upstream business will reduce the Group's effective tax rate which is now expected to be around 36% for the full year." Centrica storage and Direct Energy are trading in line with full year expectations.

Impact
This puts a dent in our operating profit for 2009e, now £1,810m vs £1,826m previously, but also implies higher group net income before exceptional costs. Our 2009e EPS improves from 19.5p to 19.9p. Note though that “some one-off costs will be incurred for the integration of British Gas, with an exceptional charge of around £50m expected in 2009, and additional exceptional costs expected in 2010” according to the press release.

Target price & rating
We reiterate our Buy rating. Our unchanged 290p TP is based on a blend of SOTP (290p) and DCF (284p: 7.6% WACC, 12.9% norm. EBITDA margin, estimated CO2 price of €23/t in 2013e). Consensus currently stands @: Buy 67%, Hold 13% and Sell 20%. We expect the greater hedge position to firm up this positive stance on Centrica in the medium term.

Next events & catalysts
A decision from the European Commission on the sale of the 51% stake in Belgian business SPE to EDF is due imminently. Approval will allow the sale to complete, simultaneous with the acquisition by Centrica of a 20% stake in British Energy. If the deal goes ahead as we expect, Centrica's share price should move positively.

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