(MS) Metro Downgrade from OW to EW - Pause for a Breath

MS lower Metro to Equal-weight given the share price breached their PT this week and they struggle to identify any near-term catalysts.

*No change to FY14-FY16 earnings estimates: While we believe Media Markt’s and Kaufhof’s medium- to long-term prospects are improving, this will likely not be enough to generate meaningful earnings traction at Group level given the slow pace of change at the Cash &
Carry and Real business models and recent negative macro and FX developments.

*The potential IPO of C&C operations in Russia could be an important step… Earlier this year, we
argued that listing the Russian operations could be beneficial, given that (1) Metro’s operations there are posting a high ROIC and have attractive growth prospects – we believe the Russian division could ultimately double or triple in size – hence, acceleration of the division’s expansion has strategic merit; (2) it would allow the Russian operations to become even more
“local”; and (3) deleveraging of the Group balance sheet would help speed up the turnaround of its C&C operations in Western Europe – a strategic move not dissimilar to the one conducted by Carrefour over the past 18 months.

* … and our bull case incorporates further portfolio optimization: We estimate that a potential listing of C&C Russia could add approximately €2 to €3 to Metro’s share price. With our price target on par with the current share price we think the market may already be discounting some possibility of this taking place next year. Signs of a recovery in Media Markt’s margins or
further portfolio rationalization could drive the shares closer to our bull case.

(CITI) Road Ahead 2014 : Staying Bullish — Re-leveraging Optionality

The Only Way Is Equity — European equities have delivered c145% returns since early-2009. More recently, European equities have been sharply re-rated, from c10x in late-2011 to c16-17x now, on a trailing P/E. This is not the start of the equity cycle. But, we stay bullish due to: 
1) inflecting European GDP and better macro ahead, 
2) inflecting European earnings, 
3) super-cheap relative valuations, & 
4) the prospect of strengthening demand for equity, i.e. de-equitisation, inflows. 
Overall, we target c20% returns to end-2014. Within the market, we think investors will be
rewarded by focusing on earnings leadership, restructuring and income. We maintain our barbell of risk (REV) and quality (surplus FCF with strong balance sheets), but continue to skew further to risk. We prefer Financials to Cyclicals to Defensives. Watch tapering, politics and EM for risks.

Focus List Europe : AB Inbev, Adidas, Aviva, Axa, Barclays, BG Group, BNP Paribas, Continental, Danske Bank, Essilor, ING Groep, Kering, Linde, Novartis, Renault, Rio Tinto, Shire, Siemens

European MArket Outlook :
Macro better in 2014 — The macro environment continues to get better in two
ways: 1) reducing risks, 2) increasing opportunity. Falling macro risks are driving a
synchronised pick-up in risk appetite from capital allocators, investors, etc. Citi
economists expect global GDP growth to rise from 2.4% this year to 3.1% in 2014E.
* Profits better in 2014 — 83 straight weeks of net earnings downgrades. Better
macro, eg 20% rise in nominal GDP growth, 2014E vs 2013E, should = better
profits & less downgrades. We see c10% European earnings growth in 2014E.
Financials’ earnings inflected in 2013. Commodity earnings to inflect in 2014E.
* Valuation mixed in 2014 — Two years ago, equities = cheap in absolute & relative
terms. Now = mixed message. European equities trade 20% above post-1972
average trailing P/E, but at post-1990 average. European equities = cheap on
CAPE (15x vs 20x long-term avg.) and super-cheap relative to other asset classes.
* TOWIE in 2014 — TOWIE = The Only Way Is Equities. Equities are arguably more
attractive than at any time in the last 40 years to non-equity investors based on: 1)
positioning, 2) relative valuation, 3) extending risk-adjusted track record, 4) deequitisation
spread. This is likely to drive continuing inflows to equities in 2014.
* Market targets in 2014 — Despite re-rating, better macro, better profits, supercheap
relative valuation and inflows keep us bullish. Our end-2014 targets of 8000
for the FTSE 100 index and 370 for the Stoxx index are based on cumulative 2013-
15E earnings growth of 20-25% and an end-14 12-month forward P/E of 13.5-14.5x.
* Key risks in 2014 — Shares = more expensive, but that is not enough to turn
bearish. To be properly bearish, investors need: 1) rapid normalisation of interest
rates, eg 1994, 2) end of credit cycle, eg 2007, or 3) global recession, eg 2008.
These outcomes = unlikely, but keep close eye on tapering, politics & EM risks.
* Key themes in 2014 — 1) regime change & the 7Rs, 2) from value compression to
earnings leadership, 3) where to find re-leveraging optionality, hence earnings
leadership, 4) barbelling risk (eg REV) & quality (eg surplus), 5) income, 6)
price/market share winners, ie world champions, & 7) what next for mega-cap.
* Sector strategy in 2014 — We Overweight Financials (Banks, Insurance, Financial
Services) & Cyclicals (Travel & Leisure, Autos, Technology), which should be
exposed to better macro, deliver better profits in 2014 and also score well on our
barbell of REV & surplus FCF. We Underweight Food & Beverage, Utilities,
Chemicals, Oil & Gas.
* Focus List for 2014 — The Citi Focus List Europe combines Citi analysts’
conviction Buys in liquid stocks with our key strategy themes. The current list is:
ABInbev, adidas, Aviva, AXA, Barclays, BG, BNP, Continental (new), Danske Bank
(new), Essilor, ING, Linde, Kering, Novartis, Renault, Rio Tinto, Shire and Siemens.

(NY Post) Memory fails top witness in SAC case

Confessed inside trader Jon Horvath couldn’t remember which of his recommendations at hedge fund SAC Capital Advisors were based on illegal information — and which were not.
In fact, some of Horvath’s best calls came “the old fashioned way” — by doing “legitimate, proper research analyst work,” defense lawyer Barry Berke told jurors Wednesday, as he continued to hammer away at Horvath in a second day of brutal cross-examination.
Horvath is the government’s star witness against his former boss and SAC portfolio manager Michael Steinberg, who is on trial at Manhattan federal court on inside-trading charges that could send him to prison for up to 20 years.
The crux of Horvath’s testimony is that his illegal stock tips from another hedge fund analyst, Jesse Tortora, were fed to Steinberg, who knew they weren’t kosher.
But on Wednesday, even Horvath didn’t seem to recall when Tortora’s information crossed the line into criminality.
Berke honed in on information Horvath got from Tortora toward the end of 2007.
“Do you believe you were getting illegal inside information in December of 2007?” Berke asked, rephrasing the question and repeating it at least a half-dozen times — eliciting different responses each time.
“I don’t know exactly when it started,” Horvath said once. “I don’t remember how I viewed it at the time,” he said another.
When Horvath met with prosecutors in 2012 before confessing to insider trading, he told them he didn’t believe the late-2007 Tortora information was specific enough to constitute insider trading.
The trial continues Thursday.

(NY Post) Icahn pressures Apple with $50B buyback proposal

Carl Icahn Twitter Yesterday : "Gave notice we’ll be making a precatory proposal to call for vote to increase buyback program, although not at $150 billion level."

Carl Icahn is taking his battle with Apple CEO Tim Cook over the tech giant’s hefty cash stash directly to shareholders.
“Gave $AAPL notice we’ll be making a … proposal to call for vote to increase buyback program,” the billionaire corporate agitator tweeted on Wednesday.

“Although not at $150 billion level,” he added — hinting that he’d tone down a previous request over stock buybacks that may have been seen as too high by Apple’s adoring investors.
Sources told The Post that the proposal, which will go to a vote at Apple’s annual meeting in late February, will seek to boost the current buyback program to $50 billion through September.
The vote is nonbinding, which means the board could reject it even if it gets majority support.
By comparison, Apple spent about $16 billion during the third quarter as part of its plan, announced earlier this year, to buy back as much as $60 billion in stock over three years.
Icahn has been agitating to boost the program since he first announced taking a stake in the iPad maker in August. He sent a letter to Cook in October demanding an answer to his request for Apple to boost the plan to $150 billion. To date, he says, he has yet to receive a reply.
The once-highflying stock has been sucking wind, and is flat over the past 52 weeks, compared to the S&P 500 index’s gain of 27 percent. Apple fell $1.32 to $565 on Wednesday.
Icahn currently owns 4.7 million shares, giving him a stake of 0.53 percent of outstanding shares.
In the letter, Icahn promised not to take part in the buyback as a show of good faith.
“There is nothing short term about my intentions here,” he said.

(BFW) Linde, DSM Most Favored Into 2014; Solvay, Umicore Least: Citi

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Linde, DSM Most Favored Into 2014; Solvay, Umicore Least: Citi 2013-12-05 07:40:28.564 GMT

By Chiara Remondini Dec. 5 (Bloomberg) -- Citi says Linde, DSM most favored European chemicals stocks into 2014 (buy); Umicore, Solvay least favored (sell), according to note. * Prefers stocks with good earnings visibility, trading at discount vs peers * Says DSM, Linde have solid structural growth drivers; Clariant, Arkema are recovery plays with improving FCF, ROCE, attractive valuation * Sees nitrogen, phosphate prices near bottom, recovery next yr: rates Yara, Phosagro buy * Least prefers: * Solvay as sluggish growth, structurally challenged portfolio will probably lead to consensus ests. cuts * Umicore as low metal prices, shutdowns to weigh on recycling earnings, offset progress in other units * More “cautious” on Syngenta due to softening grain prices

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>>> Cinda (1359 HK) : biggest HK IPO this Year - what you need to know...

China Cinda Asset Management Co., a state-backed company that gobbles up bad loans from China’s financial system, Thursday priced its initial public offering at the top of its price range, at HK$3.58 a share, to raise US$2.5 billion.
Here’s a quick primer on one of the oddest – but also hottest — IPOs of the year.
>>> Cinda is the only way foreign investors can access China’s bad loans.
One of four debt-clearing agencies launched by the government to clean up big banks, Cinda is the first bad debt asset manager in China to go public. It was created in 1999 to take non-performing loans off China Construction Bank Corp.601939.SH -0.45%’s balance sheet.
Cinda buys bad debt from banks at a discount and converts it into equity stakes in companies such a real estate developers and coal miners. It also restructures overdue accounts receivable from non-financial firms for a fee, and has insurance, leasing and brokerage operations.
The argument is that if you believe the Chinese economy is slowing and NPLs are on the rise, Cinda is a good countercyclical investment.
>>> It is the biggest IPO this year in Hong Kong.
At $2.5 billion, Cinda’s IPO tops Sinopec Engineering (Group) Co. Ltd.’s $1.8 billion listing in May to become the city’s largest this year. Including Qinhuangdao Port Co., which also priced Thursday and raised $561 million, the volume of IPOs in Hong Kong this year is about $15.6 billion, Dealogic data show.
That puts it well ahead of Australia, which ranks fifth in global new listings volume, with $9.4 billion raised in 2013 in a surprisingly busy year for IPOs. NasdaqNDAQ +2.36%and London, where almost $18 billion has been raised, are second and third, and the New York Stock Exchange stands far ahead of the pack with $40.4 billion raised.
>>> Cinda has huge investor backing.
UBS AGUBSN.VX +0.48%, Standard CharteredSTAN.LN -6.46% PLC, Citic Group’s private-equity unit and China’s national pension fund all already invested in Cinda, which is majority-owned by China’s Ministry of Finance, in 2012. The IPO has attracted a host of huge global investors who signed up as cornerstones, including Och-Ziff Capital Management Group LLC, Farallon Capital Management LLC, Oaktree Capital GroupLLCOAK -0.25% and Norges Bank. Distressed-debt specialist Oaktree is also planning to set up a joint venture with Cinda to invest in distressed assets in China.
>>> The IPO is very, very popular.
The IPO received $65 billion in orders, with books closing a day earlier than the originally scheduled date. Of those orders, $45 billion came from institutional investors.
Retail investors haven’t been deterred by the complexity and opacity of Cinda’s business model. The retail tranche of the IPO was 160 times oversubscribed. Cinda said if the retail tranche was more than 100 times oversubscribed it would allot 20% of the total offer to retail investors, from the initial 5%.
“I think pretty much everyone here subscribed to the IPO,” Arthur Lui, senior sales manager at Prudential Brokerage in Hong Kong, said as he gestured at dozens of middle- and old-aged day traders closely watching computer screens. “But Hong Kong investors like to speculate. Cinda isn’t a long-term play for them.”
>>> Cinda has a market value of $16.3 billion.
Valuing a distressed asset company isn’t straightforward. When Cinda was sold to the four big investors last year, it was valued at around $10.3 billion. Later, BOC International, one of the underwriters on Cinda’s IPO, valued the company at up to $20.4 billion in pre-IPO research. But it wasn’t clear how its debt was valued. Post-IPO, Cinda is valued at $16.3 billion.
Cinda doesn’t really have any close peers for comparisons, but Oaktree, for example, raised $380 million in its New York IPO last year and now trades at about five-times forecast 2013 book value, according to FactSet data. It has a market value of around $8.4 billion.

WSJ : Volcker Rule Won't Allow Banks to Use 'Portfolio Hedging'

Link to article :{http://on.wsj.com/IFlRrr}

In a defeat for Wall Street, the "Volcker rule" won't allow banks to enter trades designed to protect against losses held in a broad portfolio of assets, according to people familiar with the rule.
The practice, known as portfolio hedging, has become a focal point of regulators drafting the rule, a controversial plank of the 2010 Dodd-Frank financial law that seeks to prevent banks from putting their own capital at risk in pursuit of trading profits.
The rule, named after former Federal Reserve Chairman Paul Volcker, is expected to be approved next week, ending a three-year period of regulatory uncertainty for some of the securities industry's most-profitable businesses.
But it won't contain language permitting portfolio hedging, which has been "expunged" from earlier drafts of the rule, according to a person familiar with the matter. Regulators decided to remove portfolio hedging from the rule after J.P. Morgan Chase JPM +0.58% & Co. disclosed billions of dollars in losses from its so-called London whale trades in 2012.
The bank initially described the trades as a portfolio hedge. Now, it is likely other Wall Street firms also will end up paying for J.P. Morgan's slip-up. Regulators, in response to the J.P. Morgan disclosure, pushed to write a rule that would ensure banks couldn't engage in such trades.
The move will come as a blow to banks, which lobbied regulators to keep language allowing portfolio hedging in the rule. Banks often hedge to offset the risks that accompany trading with clients. Sometimes, though, there is no perfect counterweight to those clients' trades. Banks look to portfolio hedging to manage a broader array of risks.
A recent version of the Volcker rule, reviewed by The Wall Street Journal, defined hedging activity as "designed to reduce or otherwise significantly mitigate…one or more identifiable risks."
What hedges don't do, regulators wrote, is "give rise…to any significant new or additional risk that is not itself hedged contemporaneously." The excerpt reviewed by the Journal didn't mention portfolio hedging.

Portfolio hedging has drawn the ire of critics who say it opens a gaping loophole banks can use to make big market wagers. The proposal for the Volcker rule released in November 2011 said it would permit "the hedging of risks on a portfolio basis."
Critics said that opened the door for banks to make all manner of bets on the market because a bank might define the risk to its portfolio broadly, such as the risk of a U.S. recession.
Sens. Jeff Merkley (D., Ore.) and Carl Levin (D., Mich.), architects of the rule in Congress, wrote a letter to regulators slamming portfolio hedging as a loophole "big enough to drive a 'London Whale' through." Regulators, in response, say they have worked to make sure the Volcker rule wouldn't permit trading activity that led to the London whale losses.
Banks view portfolio hedging as an important tool in the way they manage trading risks. J.P. Morgan Chief Executive James Dimon said in June that he thinks banks "need to be allowed to portfolio hedge."
"My attitude on portfolio hedge would be if you look at what we did in the whale, we made a mistake," he said. "It was portfolio hedging badly done."
Regulators still are putting the finishing touches on the rule as they prepare to vote. Commissioners at the Commodity Futures Trading Commission received a new version of the rule Tuesday night. Staffers are combing the rule for typos and spelling errors.
In the past few weeks, regulators have been hammering out details such as how the rule should apply to trades executed overseas and which kind of funds banks can invest in, in addition to complex hedging restrictions, say people familiar with the talks.
The Securities and Exchange Commission, meanwhile, will vote on the rule Dec. 10 in "seriatim," in which commissioners vote on a rule outside of a public meeting.
While the agencies will breathe a sigh of relief after finishing the rule, for bank executives and their traders, the five government agencies' adoption of the rule may provide little closure.
Banks will have to interpret what those new rules mean and how they can ensure they remain in compliance.
"Volcker has morphed a bit, thanks to the Whale," UBS AG UBSN.VX +0.48% analyst Brennan Hawken said. "Now a big component of it has become about hedging. What can you hedge, and what can't you? It's really unclear."
Banks have been mum in recent days about the impact of the rule until they see the final product being voted upon.
But Bill Lockyer, California state treasurer, said Wednesday that he is concerned that state borrowing costs could rise because of the rule. If banks "don't make a profit…from leverage or proprietary trading, they have to make a profit [another] way," Mr. Lockyer said. "Borrowing costs may increase. It's what their fee is on a deal."
A strict interpretation of Volcker "would dry up liquidity," or make it more difficult for investors to trade, said Peter Tchir, founder of hedge-fund advisory firm TF Market Advisors.

(BFW) Drax Potential as M&A Target Boosted on Final Strike Price: UBS

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Drax Potential as M&A Target Boosted on Final Strike Price: UBS 2013-12-05 07:24:24.367 GMT

By Nadine Skoczylas Dec. 5 (Bloomberg) -- Increased rev. confidence, debt carrying capacity after U.K. Treasury yday confirmed final strike prices for biomass conversion at GBP105/MWh increase probability Drax could become M&A target, UBS writes in note. * Drax’s U.K. high thermal efficiency should let co. get returns nearer 20% from biomass vs sub-10% for avg developer: UBS * Sees possibility for 4th unit at its coal-fired plant to be converted to burn biomass as “highly likely” * 1,220p “blue sky valuation” if 6 units converted * NOTE: U.K. published a list of final strike prices for biomass and electricity from renewables in its national infrastructure plan yday * Confirmed draft proposal first announced in June of GBP105/MWh, that was ahead of analyst ests. at the time * NOTE yday: Drax also said U.K. confirmed both of co.’s two remaining units to be converted meet eligibility for early Contracts for Difference program

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