TheChek News Flow

* Oil price decline is too much too soon

The recent sell-off in oil has been mostly driven by positioning based upon expected fundamental shifts as opposed to currently observable shifts. While looking into 2015 we have sympathy for these medium- to longerterm bearish views that have driven prices lower, we believe it is too much too early. Prices have also likely overshot to the downside particularly as the lower we go the tighter the near-term balances become. This leaves us near-term constructive despite being bearish as we look further out.

* Pricing a future surplus in commodities can be self-negating

Unlike financial markets which are anticipatory assets driven by expectations, commodities are spot assets, clearing today’s supply and demand. The “supply glut” is not yet here today, it exists in expectations. While we mostly agree, these expectations have created more of a sell-off in deferred prices without the usual decline in timespreads into a level of “full carry” that is required to incentivize storage of the surplus. In fact, what we have witnessed is the exact opposite with key markets in a level of backwardation which incentivizes the market to pull oil from storage, not

store it. Thus, pricing in the future can be self-negating. We estimate that for every 10% decline in oil prices, oil demand rises 0.15%; hence, price pressure from long-term surpluses can create near-term shortages.

* Net specs and negative gamma exacerbate move lower

We estimate that net specs have priced in a 300 million barrel build between now and the end of March, which is a 2.0 million b/d surplus. While potentially possible, it would require solid delivery from Libya, Iraq/Kurdistan and Brazil. The net spec selling ultimately moved prices into a region where many producers’ puts had been struck, increasing the

selling of oil futures by non-commercial traders as they manage the risk incurred from producer hedging programs in a falling price environment.

* US shale is the marginal swing barrel in the new oil order

Game theory suggests that Saudi Arabia should no longer be the sole first mover swing barrel as shale is extremely scalable both to the up and downside. Should the glut materialize to the extreme expected, we believe the shale barrel will need to balance the market, which would suggest WTI prices sub-$80/bbl for a period of time to create an adjustment in supply.

- Gloomier on economic outlook than 3 months ago due to slower global growth and greater political and financial risks

- Rates could stay lower longer without CPI risk

- Growth is well balance between consumption and investment

- There are some signs of labor shortages but wage data remains very weak especially for the middle and low income earners

- Due to uncertainty, best policy course may be to avoid risk of secular stagnation

Lundin has completed the drilling of wildcat well 33/12-10 S. The well investigated the hydrocarbon potential of the Vollgrav South prospect in PL631, which is located 150 km west of Floron the Norwegian west coast and between the Gullfaks and Statfjord fields. 

The main objective of well 33/12-10 S was to test the reservoir properties and hydrocarbon potential of the Upper Jurassic Sandstones equivalent to the reservoir in the Borg Field. 

The well encountered no hydrocarbons and is being plugged and abandoned as a dry hole.

The license was awarded in APA 2011 and the well is the first exploration well in PL631.

*New business activity slows in September

New businesses slipped in Sept to $0.8 bn, down from $1.3 bn in Aug and below the ytd average of $1.0 bn. Major agencies performed well with all in positive territory as new business came at the expense of independents. We see this supportive of our view on the importance of scale.

* WPP/PUB slow but stay positive; HAV regains some momentum

WPP delivered its 15th consecutive month of positive new business, a significant accomplishment, but momentum slowed having topped our table the last two months. Overall, September remained solid on several mid-sized wins including creative accounts for Dove Men+Care ($40 mn) and Lean Cuisine ($21 mn). Publicis also slowed after a strong August but remained in positive territory and started October well with the retention of Samsung. Notable wins include creative for Sands China ($50 mn) and global media buying for AirBnB ($50 mn). Havas, coming off three months of small losses, regained some momentum with a few small wins.

* Dentsu tops table; solid performances for Omnicom and IPG

Dentsu performed well, topping the table in its debut in our scorecard off a broad base of small wins. OMC performed well winning creative for Miller Lite ($110 mn) and Wild Wings ($40 mn). IPG also had a good month adding creative and media for Office Depot ($105 mn).

* 3Q preview: Lowering organic to reflect new GS GDP forecasts

We lower our average 3Q organic growth expectation for the EU agencies from 3.6% to 2.9% following recent revisions GS GDP forecasts in Europe, US, and China. Overall, we forecast sector organic growth to slow from 3.8% in 1H to 2.9% in 2H with FY falling from 4.0% to 3.4%. We expect Havas to lead 3Q with organic of 4.7%, WPP at 3.0%, and Publicis lagging at 1.0%. Despite lower organic, our 2014/15 EPS estimates rise by an average of 1% given better FX (all) and higher M&A growth (WPP).

* Reiterate CL-Buy on WPP; attractive entry point to quality asset

With shares down 13% in a month, we see this as an attractive entry point. WPP ranks Q1 in our IP framework given digital exposure and economies of scale. It trades at a 13% sector discount despite faster EPS growth (12% vs. 11%) and has 35% exposure to relatively healthy US ad markets.

We do not think the current market sell-off is justified by fundamentals. We think the recent weakness in European data is temporary and that the growth trajectory in the US remains intact. We note that global leading indicators have not declined significantly and are consistent with our growth forecasts.

* Positioning – technical

US retail sales has never before produced a 30bp swing in Treasury yields, as happened Wednesday. That's a pretty good indication that market technicals (e.g. hedging) are the dominant driver of the big moves. With the bond rally and the equity sell-off we would now need a 29% downward revision of US EPS estimates to take the equity risk premium back in line with its long-term average (40% in Europe). This, too, seems excessive.

* The key risk: self-fulfilling market move

The market move is not consistent with fundamentals. But a market move could impact fundamentals. A key space to watch is credit. We have written regularly about the fact that pricing in credit is rich, hence the potential for a correction. We have also written abundantly about the fact that illiquidity in the market is a key risk. A crash in credit (not our central case scenario) would be bad for growth. Watch credit--that remains the weakest link.

US Market closed Flat fpr S&P, small Lower for Dow and 1.25% higher for Russell, Mkt was weak but rebound on Bullard comments, he said the Fed should consider delaying the end of its Quantitative Easing program, which is set to wind down at the October FOMC meeting. The market jumped from lows in reaction to the comments, but it is worth noting that Mr. Bullard is not a voting FOMC member this year and only an alternate voter on next year's schedule. The non-voter status did not get in the way of a surge in equities while Minneapolis Fed President (and FOMC voter) Kocherlakota provided a similar view, saying there is more the Fed can do to achieve maximum employment. NFLX-19.4%, AAPL -1.3% (new iPad), GOOGL -0.8% ahead of numbers...stock was down more than 2% after Hours on non inspiring numbers...Volume were again above 1bil shares...VIX @25.20 -4%...US After Hours: QLGC +8.4%, XLNX +3.4%, AMD -4.9%, SNDK -4.8%, COF-2.5%, GOOG -2.1% following earnings/guidance...CF US -3.9% After Hours on Termination of Merger with Yara... In Japan, Kuroda reiterated the central bank will continue easing until 2% inflation target is stable. Regarding the second sales tax hike, he said it would be difficult to respond if confidence is hurt by delaying tax hikes...Nikkei -1.05% Hang Seng +0.27% ...Shanghai -0.72%

Eur$ 1.2806 S&P +0.18% EuroStoxx-0.45% DAX -0.36% FTSE -0.45% SMI +0.20%

Macro

- Bullard ‘Nervous’ of Fed Staying at Zero as Economy Improves

Keep an eye on :

- AC FP : Accor 3Q Rev. In Line With Ests., Confirms 2014 Forecast

- AIR FP : Airbus to Raise India Plane Sales Forecast: Mint Link

- AIR FP : Airbus Signs Contracts Worth EU1.3b for 6 Weather Satellites

- BAER VX : Julius Baer Sees ‘Double-Digit’ China Stock Gains, Varnholt Says

- DELB BB : Half of Delhaize Belgian Stores Shut Today in Protest: Tijd Link

- DIOR FP : Christian Dior: 1Q Fiscal Yr ’14-’15 Rev. EU7.8b, Up 6%

- ELI1V FH : Elisa 3Q EPS, Net Beat Analyst Ests.; Raises Profit Forecast

- EO FP : Faurecia 3Q Sales EU4.39b vs EU4.12b Y/y; FY Targets Confirmed, CFO Sees 1% Reduction of FY 2014 Rev. on Fx

- F IM : Fiat Chrysler CEO Marchionne Buys 6.83m Company Shares: Filing

- NHH SM : Sells 97% stake in Sotogrande to Cerberus and Orion for €225M (implies share value of €4.22)

- SBRY LN : Rumors of Potential deal next week, Qataris mentionned of course, 2007 they made a £6/share bid

- TEF SM : Telefonica Said to Plan Cutting ~20% of German Jobs After E-Plus

- TLSN SS : TeliaSonera 3Q Ebitda Slightly Above Est.; Outlook Maintained

- TOM NO Tomra 3Q Net Income NOK131m vs Est NOK135m

- YAR NO : *YARA INTL. TERMINATION OF MERGER TALKS W/ CF INDUSTRIES

*AKZO NOBEL RAISED TO BUY VS HOLD AT ING

*CARREFOUR RAISED TO NEUTRAL VS UNDERPERFORM AT EXANE

*CSR RAISED TO EQUALWEIGHT VS UNDERWEIGHT AT BARCLAYS