TheChek News Flow

Belly of the Wall St bull: = credit…now 49 consecutive weeks of IG bond fund inflows; higher spreads + redemptions necessary condition for correction.

BofAML Bull & Bear indicator down to 6.7: was 7.6 end-Oct; immediate correction risk recedes but stock & credit sentiment unambiguously bullish…e.g. BofAML private client equity allocation up to 60.8% (all-time high 62.5% in Mar’15); we continue to believe peak Positioning, Profits, Policy = Big Top in markets.

Fiscal Hare & Monetary Tortoise: key policy trends past 6 weeks…1. noisy US tax reform finally priced-in via value, small cap, bank stock rally; 2. slow but synchronized Fed/ECB/PBoC/OPEC tightening priced-in via reversal in leadership of tech/HY/EM, begins reversal of Fed/ECB/PBoC/OPEC easing since 2016’H1.

Fiscal Hare inflows: biggest financials inflows in 21 weeks ($1.8bn), biggest small cap inflows in 17 weeks ($1.4bn).

Monetary Tortoise outflows: 1st tech outflows in 8 weeks (after historic $6bn past 6 weeks = 4.5% AUM); HY outflows for 5th consecutive week ($0.5bn).

Equities: inflows 23 of past 25 weeks ($7.8bn; $11.7bn into ETFs, $3.9bn outflows from mutual funds)

Bonds: inflows 36 of past 37 weeks ($5.4bn)

Precious metals: 6th straight week of inflows ($0.2bn)

US: largest inflows in 5 weeks ($4.3bn)

Japan: first outflows in 5 weeks ($0.1bn)

Europe: modest inflows ($0.9bn)

EM: inflows for 35 of past 37 weeks ($1.6bn)

By style: largest US small caps inflows in 17 weeks ($1.4bn), moderate inflows to US growth ($0.6bn), 6th straight week of outflows from US value ($0.7bn)

By sector: inflows to financials ($1.8bn, highest in 21 weeks), consumer ($0.7bn, highest in 12 weeks); outflows from tech ($14mm), energy ($0.3bn), materials ($0.3bn, largest in 19 weeks), utilities ($0.3bn), healthcare ($0.4bn), real estate ($0.7bn)

49 straight weeks of IG bond fund inflows ($5.6bn) 5th straight week of HY bond fund outflows ($0.5bn)

EM debt inflows 42 of past 44 weeks ($0.8bn)

Small muni funds inflows ($0.2bn)

Largest outflows from govt/Tsy funds in 4 weeks ($1.0bn)

Small TIPS inflows after massive week prior ($54mn)

First bank loan inflows in 5 weeks ($0.1bn)

conference in Scottsdale, Arizona, featuring around 140 companies and

over 400 investors. We hosted fire side conversations and meetings with

Capgemini, Cognizant, Luxoft, and SAP. We also had the opportunity to

interact with companies like Intuit and ServiceNow, which have direct readacross

to European stocks. Based on the conference, we reiterate our

current Outperform ratings on Capgemini and Cognizant, and our

Underperform ratings on Luxoft and Micro Focus.

■ Going digital: In terms of themes, we were repeatedly struck by the

consistency of the following 3 messages: 1) The shift from PC to mobile,

and the challenge this brings in engaging with consumers and facilitating

commerce in a mobile world; 2) the value of data and also data analytics,

and; 3) Enterprises are looking to fund the necessary investment into

digital capabilities but cutting run-rate or legacy costs. We think pressure

on legacy points to our Underperform thesis on Micro Focus.

■ Positive sentiment into 2018: As a generalization, we thought corporates

were positive about trading momentum into FY18. Meanwhile investors are

optimistic that tech will continue to outperform. Specifically, a preconference

survey indicates that investors believe tech will be the best

performing sector in FY18. Against a positive tech backdrop, we note that

IT services remains one of the least preferred sub-sectors – see Figure 1.

We believe a combination of resilient trading outlooks and low investor

expectations creates a base for IT services stocks to perform well in FY18,

just as they did in FY17. Hence, our continued positive stance on

Capgemini and Cognizant.

■ EU read-across from TMT conference. Credit Suisse hosted its annual

TMT conference last week in Scottsdale, Arizona featuring around 150

companies and 500 investors. We hosted presentations and/or 1-1

meetings with around 40 companies in the global semiconductor space,

including 5 from Europe, plus Ericsson in the telecom equipment space.

Within EU semis, we hosted fireside sessions with Infineon,

STMicroelectronics, ams and Dialog, along with ASML (covered by our US

colleague Farhan Ahmad). Overall the tone from semiconductor companies

remained positive across all days at the conference.

■ Secular drivers in Auto/Industrial semis; inventory levels still low.

Companies remained confident about the long-term growth opportunity in

both Auto and Industrial semis driven by content due to electrification,

(semi) autonomous driving, factory automation to name a few. Most

companies noted that channel inventory remains at low levels leading to

continued elevated lead times. Infineon believes that half of its 8% sales

CAGR for Auto business can be driven by EV and ADAS. STM noted

increasing traction for its SiC solution for electric cars, and low inventory

levels across its distribution channels in all regions US, EU and Asia.

■ iPhone X suppliers maintaining commentary about C1Q. While there

are some market concerns around iPhone X demand potentially slowing as

wait times for the device have been coming down, we note that companies

presenting at our conference (like AMS, Qorvo and Amkor) reiterated their

comments for seasonal decline in C1Q sales to be better than normal

driven mostly by iPhone X ramp timing.

■ Infineon (OP) – confident for FY18, investing for future. IFX noted that

it is well placed to benefit in its Auto business given its IGBT technology for

car electrification has a solid pipeline of design wins ranging until 2027, as

mass adoption for SiC technology in cars may only happen beyond 2023

(already strong in SiC for industrials). We believe IFX is well placed to

benefit from rising content in auto and industrial, along with potential for

margin expansion. Hence, we reiterate our OP rating (TP €26).

■ STM (N) – upbeat on SiC and 3D. Contrary to IFX, STM management

expects SiC related revenues to show significant growth in 2018. The

company is on track to deliver 9% growth in its overall Auto related

business. On 3D, STM believes its sensor technology along with

system/software complexity should allow it to maintain first mover

advantage.

■ AMS (OP) – still early for 3D. Management had a confident tone around

potential upside to its 2019 sales guidance underpinned by 3D content

increase at an existing customer, along with the opportunity in China

beyond 2018 and proliferation of technology into categories outside of

smartphones. We reiterate our OP rating and TP of SFr90, with potential

upside of SFr115 in our blue-sky scenario.

Media underperformed the market by 11% this year after -7% in 2016, making it one of the worst

performing sectors for the last two years. This was driven by negative EPS revisions coupled with

sometimes brutal de-rating of many names/segments, reflecting intensifying structural changes in

consumer habits. Agencies joined the ranks of TVs and Satellites as challenged sectors.

History shows that structural challenges tend to accelerate rather than abate. Ecommerce,

consumption of content online and advertisers’ quest for efficiency won’t go away next year.

It is tempting to turn more positive on stocks with low multiples and expectations. We resist that

idea. Bearing in mind that EuroZone PMI are at peak levels, we are mindful that TVs combine

structural and cyclical risk. Agencies too, but to a lesser extent. We thus favour solid, ideally

subscription-based models with limited exposure to disruptive trends: Pro. Publishers and Online.

We review the various UK scenarios and are more sanguine on the risk of Brexit. We note our UKlisted

coverage is mostly either i) multinational, or ii) operating a defensive revenue model.

Furthermore, in our view, following the recent sharp share falls, the more vulnerable UK domestics

are arguably already pricing in a negative Brexit scenario. Professional information remains a

relative safe haven. Brexit can impact our coverage through forex shifts and macro/operational

factors. We are more cautious on the scenario of a Corbyn administration for domestic UK Media.

Our key picks: VIV, UBM and Ascential

Where we are cautious: WPP, Pro, SES, Southern European TVs.

We recommend investors position along 5 core macro themes:

Despite the length of the recovery, global growth can continue to expand amid very

few signs of excess in the real economy.

FX: Long BRL and CLP versus short USD and JPY

Rates: Position in 1yr forward 5s10s curve steepener in Japan

Equities: Long US industrials (XLI) versus utilities (XLU)

Easy financial conditions allow central banks to continue normalizing at a gradual pace,

while low inflation allows optionality to reverse course if necessary.

FX: Short EUR/NOK and EUR/SEK volatility

Rates: Short US rates vol via 6m strangles on 30y rates; Long 10yr Russian OFZs

Equities: Long Brazilian (Bovespa) and Japanese (Nikkei) equites

Broadening cyclical growth in Europe is likely to alleviate several areas of investor

concern, including issues of debt sustainability and balance sheet pressures.

FX: Long CZK and PLN versus short CHF and USD

Rates: Position in 3yr forward 5s30s EUR IRS steepeners; Long Greek govt bonds (22s)

Equities: Long Italian banks (IT8300)

Chinese growth has significantly rebalanced toward consumption. This should continue

to support China consumption-related assets and help keep macro and EM vol low.

FX: Long NZD versus short TWD

Rates: Long EMBI (EMB) versus short US high yield (HYG)

Equities: Long Korean equities (Kospi) and European autos (SXAP)

Our recommendations are broadly pro-cyclical, yet we are more selective versus past

Top Trades. We seek some balance to our recommendations with positions that offer

asymmetric payoffs in a downturn, but which can trade flat or positive in our base case.

FX: Long USD/CAD

Rates: Position in UST 2s10s flatteners

Equities: Long a FTSE put contingent on lower GBP/USD

Nikkei -0.49% Hang Seng +0.67% CSI +0.57% Shanghai -0.21% Shenzen -0.58%

Eur$ 1.1870 CNH 6.6174 CNH 6.6154 JPY 112.88 GBP 1.3457 CHF 0.9831 RUB 58.9145 WTI$ 57.99 -0.63%

S&P +0.56% EuroSToxx +1.16% FTSE +0.76% Dax +1.32% SMI +0.48%

Macro 

- IFO Brexit Net Trade Costs at EU16B for U.K., EU44B for EU

- Merkel Seeks to Expedite Infrastructure Projects in Germany

- Spain to Start 5G Network Frequency Auctions, Expansion Reports

- Europe Chemicals Seen as ‘Super’ Sector at Deutsche Bank

- Intesa CEO Says Bitcoin Is ’Speculative Bubble’: TG5

- U.K.’s Clark Expects Agreement on Brexit Issues: Handelsblatt

- Swiss Banks Report Suspect Saudi Activity to Regulator, FT Says

Keep an eye on :

- ADS GY : Adidas CEO Wants Spending Caps for Soccer Clubs: Rheinische

- AET US : Aetna’s Board Is Said Set to Approve $68B Sale to CVS: Reuters

- AIR FP : Airbus Still Sees Record 2017 Deliveries, Bregier Tells Echos

- ALKB DC : ALK-Abello to Temporarily Suspend Dividend Amid New Strategy

- AAPL US : Three New IPhones to Drive 22% Unit Growth in 2018, Nomura Says

- ATC NA : Altice Starts Asset Sales With Swiss Data Centers Disposal

- BNP FP : BNP Paribas Chairman Says Europe Economy Has Entered ‘New Cycle’

- CRG IM : Intesa, Unipol, Generali to Take Part in Carige Cap Hike: Ansa

- DIS US : Disney Is Said to Have Re-Engaged in Talks for Fox Assets: WSJ

- EOAN GY : Germany Should Make CO2 Polluters Pay More: EON CEO to Spiegel

- FCA IM : Fiat in Talks With U.S. to Settle Diesel Case, Marchionne Says

- FCA IM : Marchionne in Talks With Hyundai on Partnership, Not Merger, Fiat To Push Ahead With Marelli, Comau Spinoffs: Marchionne, Alfa Romeo-Maserati Spinoff Not For Many Years: Marchionne

- GSK LN : GSK Is Said to Invest in U.K. Research Ahead of Brexit: FT

- HMB SS : H&M’s Structural Headwinds Lead Goldman to Cut to Sell

- ISAT LN : potential target for Echostar & Dish - FT

- LHA GY : Lufthansa Plans Extra Charge for Business-Seat Selection: WiWo

- LHN SW : Three Men Charged as Part of French Lafarge Syria Probe

- MRK GY : Nestle, Stada Are Said to Prepare Rival Bids for Merck Unit:Rtrs

- MUV2 GY : Munich Re to Increase Investment in Equities: Boersen-Zeitung

- NESN VX : Nestle, Stada Are Said to Prepare Rival Bids for Merck Unit:Rtrs

- NOKIA FH : Nokia Is Said to Stop Pursuing Juniper After Reports: CNBC

- OHL SM : OHL Calls EGM to Approve Sale of Concessions Unit to IFM

- PRY IM : Prysmian to Buy General Cable for $30 Per Share Cash

- PUB FP : Publicis Groupe’s Zenith Sees 2018 Global Ad Market Rise of 4.1%

- REP SM : Repsol Is Said to Weigh Sale of $4.4 Billion Gas Natural Stake

- RIO LN : Rio CFO Says Co. Winning Lot of Interest in Coking Coal Assets

- ROG VX : Roche Granted FDA Orphan Drug Status for Idasanutlin, Takeda Pharma Treatment Granted Orphan Drug Status by FDA

- RYA LN : Ryanair Bids for Landing Rights at Berlin Tegel Airport

- SAN FP : Sanofi Ends Development of Clostridium Difficile Vaccine

- FTI FP : Technip, Samsung, Tecnicas Get $4.2B Deal W/ Bahrein Petroleum

- TIT IM : Telecom Italia Board Is Said to Discuss Network Options: Reuters

- TEVA IT : Teva Rises With Mylan on Prospects For Own Herceptin Biosimilar

- TMG NA : De Mol Sells Entire TMG Stake To Largest Shareholder Mediahuis

- TRYG DC : Tryg Buys Alka for DKK8.2b

- VOD LN : Vodafone May Seek New Audit Firm to Replace PwC: Sky

- VOW3 GY : Detained VW Manager Says Company Told Him to Lie, Bild Reports

- VOW3 GY : VW Is Said in Talks to Buy Stake in Russia’s GAZ: Reuters

- WPP LN : WPP’s GroupM Sees Global Advertising Spending Up 4.3% in 2018

If Facebook, YouTube and Twitter won’t police online content, there are new services and apps to do it

America is finally waking up to the fact that the internet is an increasingly hostile and unsafe place to do business, hang out or share with friends.

The epicenter of the problem tends to be at social media networks—specifically Twitter , TWTR 0.63% YouTube and Facebook —where Russian bots, fake news, creepy ad tracking, political polarization, sketchy videos and oh so many internet trolls can be found. While the ad revenue is still pouring in, it’s no wonder people are limiting what they share and how they interact online.

Evan Spiegel, chief executive of Snap Inc., creator of Snapchat, articulated it well—if self-servingly—this week in a post: “The combination of social and media has yielded incredible business results, but has ultimately undermined our relationships with our friends and our relationships with the media.” Mr. Spiegel unveiled a redesign of Snapchat that separates professional content from personal sharing.

A new breed of apps and services takes this to heart. Having learned from the tech giants’ mistakes, they are emerging as islands in the internet storm—I call them “safe spaces.” They filter content without asking for personal data and without lulling us into the cycle of mindless engagement that mostly rewards advertisers. Smaller in scope, they are teams of people assisted by algorithms—not the other way around.

Here are a few that exemplify this trend:

Jellies

App developer Ken Yarmosh is also the father of four children under the age of 6. They inspired him to build Jellies, a children’s video app that avoids many problems that the dominant service, YouTube Kids, suffers from.

Costing $5 a month, Jellies has no ads. All the videos, which stream from other sites such as YouTube, are screened by two different editors. Algorithms help them find content, but what appears in each of the app’s age-graded channels is ultimately decided by a human, Mr. Yarmosh says. Jellies has only about 3,000 videos—far from the essentially infinite depth of YouTube—but that’s not the point, he says. Children should only consume so much content, after all.

Soon after the launch of Jellies in October, sketchiness within YouTube Kids came to light—from insipid unboxing videos that feel like barely masked toy ads, to cartoons that recast Mickey, Peppa Pig and other beloved characters in disturbing ways.

What many parents had assumed was a completely safe space got bungled by Big Tech. YouTube has said only a tiny fraction of videos have been removed from the site for being inappropriate, but it’s clear that screening content on the site through automatic filters, user feedback and reviews simply hasn’t been enough.

Neverthink

A millennial-focused site, Neverthink has “channels” of video content scoured daily from all over the internet and streamed directly from their sources (typically YouTube) by a team of 15 editors. You can’t skip videos. It’s exactly like cable TV, except the content is very internet—short clips, fast cuts, lots of first-person narrative.

Younger children who never knew television find it revelatory, says Aviv Junno, Neverthink’s co-founder. “For them, not having this choice of what to click on next means so much less stress,” he says. “To have all that choice means I’ll always keep looking, and that’s why people get hooked on scrolling endlessly and swiping.”

Like Jellies, Finland-based Neverthink uses a number of tools and algorithms to help surface content for its human editors, but Mr. Junno contrasts his company’s approach with that of the internet giants.

“Content that goes viral on Facebook is not necessarily what you need to know or is interesting or valuable to you, but it is the most engaging, so it keeps you on the platform,” Mr. Junno says. It’s the same on YouTube, he adds, where the algorithms may have priorities other than giving you the “best” content—like what you’re most likely to click on, or what will be appropriate for advertisers.

A Facebook spokesman said, “Whether posts on Facebook are authentic, informative, entertaining, and ultimately meaningful are the principles that guide how News Feed ranking works.” He continued, “It’s a mistake to ignore the fact that the overwhelming majority of stories people share on News Feed every day aren’t meant to go viral—but are meaningful stories people connect with their friends about.”

A spokesman for YouTube parent Google, a unit of Alphabet Inc., said search results and recommendations aren’t determined by whether a video is monetized or not.

Otto Radio and NPR One

Human curation is how Otto Radio, launched in 2014, assures that the podcasts it surfaces are the highest quality, says CEO Stanley Yuan. The app offers a mix of breaking news, entertainment and information. Mr. Yuan says that while algorithms help Otto classify content, they can’t yet make good quality judgments.

The human and machine “editors” of NPR One, which is owned by National Public Radio Inc. but includes content from a variety of sources, operate in a similar way: Humans decide what content everyone will hear on the service, while the algorithms personalize the content.

One of its goals is to avoid “filter bubbles,” the tendency of algorithms to continue feeding us things we’ll like, rather than viewpoints that might expand our horizons, says Tamar Charney, NPR One’s managing editor.

Snapchat

Snapchat is still primarily a messaging platform, owned by a $14 billion public company that makes money through advertising, but Mr. Spiegel is savvy to attempt to align it with this trend.

Like other giants, Snapchat can’t pay humans to vet every piece of content that it surfaces. But clips that go into Snapchat’s news stories are fact-checked, a company spokeswoman says. Though Snapchat’s overhaul includes algorithmically curated news stories, all of them will be seen by a human before they go live.

Messaging apps can still be conduits for fake news, but Snapchat’s lack of viral sharing mechanisms could make it less likely. Mr. Spiegel said content choices won’t be determined by your friends’ interests, but by your own—short-circuiting one route by which people are drawn into extremist content on Facebook.

Whether these safe spaces can stay in business, let alone challenge Big Tech, depends on their ability to attract users. TBH, a teen social survey app that only lets you say nice things, did draw a large audience—and was consequently snapped up by Facebook, which clearly understands this trend.

Will people choose to spend time in safe spaces, rather than in the addictive, endlessly scrolling services that currently dominate? That will require not more technology, but a potentially slow and difficult cultural transformation.