(BofA-ML) Luxury Goods - De-rating has only begun

* Sector still over-valued in light of increased risk
The BofAML Luxury Goods sector is up 10% in 2015 YTD, underperforming the broader
European market by 3%. It trades on a P/E of 21.6x 12m fwd earnings, a 30% premium
to the market. While this is down from its 40% P/E rel in June (when we argued for a
sector de-rating), we see further risk to Luxury’s premium valuation given sub-market
earnings growth and increasing risk associated with Chinese consumption. We reiterate
our negative view on the sector and see our U/P ratings on LVMH, Richemont, Prada &
Swatch as the best way to gain exposure to this theme.

* Structural changes to result in lower profitability & returns
In our awaiting a derating report we identified five structural changes taking place in the
luxury goods industry: [1] revenue growth moderating, following super-normal China
growth phase; [2] reduced pricing power; [3] Hong Kong (where product gross profit is
50% above Europe) losing its appeal & ability to over earn; [4] mix benefit on gross
margin largely done, now limited to FX tailwind (soft luxury only); and [5] ongoing rent
inflation in premium real estate likely to result in retail deleverage. In our view the
combination of all these factors creates significant risk to historic margins, earnings
growth and returns. We believe consensus remains too complacent on the structural
changes occurring in the sector. BofAML is 7-10% below consensus 2015-16 EPS.

* Increased risk associated with Chinese revenues…
We believe the recent Chinese Yuan devaluation has been priced into Luxury sector
share prices, however the risk of further devaluation has not. As a minimum, we believe
this increases the risk for the luxury goods sector, given devaluation would result in a
lower FX tailwind (on this basis UHR, SFER, CFR & BRBY would be most impacted).
However the more significant risk would be that a weaker CNY starts to impact Chinese
consumer offshore consumption and is not fully repatriated (on this basis CFR, LVMH,
TODS & SFER would be most impacted). In this report we outline FX exposure by
revenue, COGS & operating costs for each company under coverage, provide FX markto-
market and sensitivity to CNY devaluation. A 10% devaluation in CNY would reduce
sector EBIT by 7% (this does not include impact of lower tourism spend).

* …. Still not reflected in valuation
History suggests consensus is too optimistic on luxury sector earnings growth (2016
EPS revised down 16% in 18 months). We see current expectations for 12% 3-year EPS
CAGR as no different. Our forecasts imply 5% earnings CAGR in the next 3- years, below
the broader European market. A weaker CNY removes some FX tailwind and may
eventually impact offshore consumption. As such, we consider the current sector
valuation as unjustified. P/E relative stands out at a 30% premium, while history
suggests that current return and relative growth justifies a valuation range between
parity and +10%.

>>> TDC says company not for sale but could consider Nordic acquisition, Europea

TDC says company not for sale but could consider Nordic acquisition, European consolidation 

TDC's new CEO, Pernille Erenbjerg, has said the listed Danish telecoms company, is not up for sale, according to Borsen.

The Danish business daily cited Erenbjerg as saying that TDC is always seen as being up for sale, but there are no current plans to sell the company.

TDC chairman Vagn Sorensen told the paper that the company's future may entail operating independently and possibly complementing the company with a Nordic acquisition.

He added that TDC may also end up participating in a larger European consolidation. TDC would consider both scenarios, he said.

When asked if the company has attracted the interest of a possible buyer, the chairman said that it has not.

The paper commented that the future of TDC within the European market is a prime issue for Erenbjerg.

The paper cited two analysts as saying they believed that TDC is unlikely to be able to survive as an independent company in the long term.

Borsen

(FTI) Shire steps up pressure on Baxalta to break takeover deadlock


Shire steps up pressure on Baxalta to break takeover deadlock
2015-08-16 11:55:07.928 GMT


Andrew Ward and Arash Massoudi in London
Aug. 16 (Financial Times) -- Shire is stepping up pressure
on Baxalta to open its books before the UK-listed drugmaker
will consider making a higher offer as tries to ...

The full story is available on Bloomberg to Financial Times
corporate subscribers. <a href="entreq:43358">Click here</a> to receive details on pricing.

(BFW) Zurich Bid Would End RSA’s ‘Misery,’ Ex-CEO Writes in Telegraph


Zurich Bid Would End RSA’s ‘Misery,’ Ex-CEO Writes in Telegraph
2015-08-15 21:09:47.257 GMT


By Sylvia Wier
(Bloomberg) -- http://bit.ly/1Le9i5k

Link to Company News:{ZURN VX <Equity> CN <GO>}
Link to Company News:{RSA LN <Equity> CN <GO>}

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(Barron's) In Europe, It’s Time to Bet on the Banks

In Europe, It’s Time to Bet on the Banks

Dow Jones Global Indexes|Global Stock Markets
Europe’s financial firms are coming off a terrific second quarter in earnings, with average gains of 35% from a year earlier. In fact, the once-beleaguered financials are “leading the recovery in earnings growth” in Europe, says a recent Barclay’s research note. So, how come their stocks aren’t roaring ahead of the pack?


These firms, in particular the large banks, have benefited from stronger stashes of capital, a modestly improving economic picture in Europe, and signs that loan growth is finally returning. What’s more, the crisis in Greece appears to be contained, if not solved.
But the stocks of the financial-services sector have yet to distinguish themselves. In local currency the MSCI Europe Financial Index has appreciated 18% in the past 12 months, about even with the Euro Stoxx Index. The good news is that many of these companies still sport very reasonable valuations. On average the stocks trade at just around book value; before the financial crisis of 2008, banks traded at closer to two times book.
“Those banks that were looking cheap are looking even cheaper, and those banks that were looking risky are looking less risky,” says Anis Lahlou-Abid, co-portfolio manager of the JPMorgan Intrepid European fund (ticker: VEUAX). The fund is overweight financials. As of June 30, its holdings included Lloyds Banking Group (LLOY.UK) and UBS Group (UBS).
There’s no question that most of the banks are on much stronger footing than in recent years. For the large banks, their combined common equity Tier 1 capital ratio is close to 12%, up from 9.4% in 2012, according to Exane BNP Paribas. But the entire sector isn’t out of the woods just yet. Lahlou-Abid says the fund he helps run is underweight Spain, partly because of concerns about weak loan growth there.
Beyond that, the European economy, while far from robust, is improving, providing a sounder foundation for these companies. Unemployment remains high, at 11%. But it has been declining since June 2013, according to JPMorgan Asset Management. And for the banks, the all-important supply and demand of credit is improving.


“We are in a better place in Europe,” says Laurent Frings, co-head of credit research for Europe, the Middle East, and Africa at Aberdeen Asset Management in London. “We’ve seen a number of signs of activity picking up, though it’s still not even across the continent. The United Kingdom is clearly doing better than many countries out there.”
One bank drawing fresh attention is Lloyds, which trades at around 80 pence ($1.25 )—and at a reasonable 1.2 times tangible book value. “They are generating good organic Tier 1 capital,” along with respectable loan growth, says Richard Nield, a co-manager of the Invesco European Growth fund (AEDAZ). He thinks the shares could hit 100 pence, or 25% above the recent price, within 12 months. Hit hard by the financial crisis, Lloyds needed a bailout from the British government to survive; the government’s stake is now below 20%.
Similarly, Frings of Aberdeen likes Lloyds’ corporate bonds. The bank has relied heavily on selling assets, restructuring, and letting existing loans run off, or reach their maturity, he says. That has led to a smaller balance sheet requiring less funding, and improved capital ratios.
One caveat: Many U.S. investors haven’t fully benefited from the upswing in European financials because of the strong dollar. The stocks’ gains are reduced when translated into dollars, and that problem could persist. “My impression is that most Europe-focused funds in the U.S. do not hedge their currency exposure, or may just do small portions,” says Gregg Wolper, a senior analyst at Morningstar. Whether you’re investing through funds or buying individual stocks, it pays to seriously consider this issue.
NEWS OF CHINA’S DEVALUATION hit European stock markets hard last week. On Aug. 12 alone, the Euro Stoxx Index was down 3.1% amid concerns that exports from the Continent will become more expensive in China, crimping demand. The European markets regained some ground on Aug. 13, only to sell off a bit the next day after reports of slightly weaker-than-expected second-quarter euro-zone growth. For the week, the market closed down 2.73%.


In a note to clients earlier this month, Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center, warned of such a problem. “The euro area’s economic expansion lacks a domestic engine and is seriously vulnerable to adverse developments in the rest of the world, especially in emerging-market nations,” he wrote.
Nield of Invesco, however, isn’t too worried. “Based on what we think the earnings impact will be, it’s a bit overdone,” he says. He points out that exports to China account for only about 4.5% for Germany’s gross domestic product.
Just how much the yuan’s devaluation will hurt the economies of Europe is difficult to assess, but it clearly bears watching for stock investors.

(BFW) IMF: Yuan ‘No Longer Undervalued’ Even After Drop This Week


IMF: Yuan ‘No Longer Undervalued’ Even After Drop This Week
2015-08-15 00:00:00.15 GMT


By Andrew Mayeda
(Bloomberg) -- A nearly 3% drop in China’s currency this
week hasn’t changed the IMF’s view that then yuan is “no longer
undervalued,” a fund official said Friday, noting an
substantial appreciation during the past year.

* “What has happened in the last few days, this does not
change our assessment that the RMB is no longer
undervalued”: IMF mission chief for China Markus Rodlauer
* Rodlauer, speaking to reporters in Washington on conference
call, says decision to link currency more closely to markets
is “welcome step,” may bring yuan nearer to being freely
floating
* IMF releases annual assessment of China’s economy, report
concluded on July 22, prior to yuan devaluation this week
* IMF says China should, within 2-3 years, put in place an
effectively floating exchange rate before full
liberalization of the country’s capital account
* IMF forecasts Chinese real GDP growth of 6.8% in 2015, 6.3%
in 2016 and 6% in 2017
* IMF says dampening effect of Chinese stock market volatility
on consumer spending should limited, urges authorities to
“curtail market intervention” in equities
* IMF executive board say China’s reliance on credit-financed
investment has created large vulnerabilities and these
should be reined-in as a “priority”
* China should avoid a sharp contraction in local government
spending this year and a gradual consolidation should begin
in 2016: IMF executive board
* “Monetary policy should take a wait-and-see approach,
especially as significant easing would risk exacerbating the
credit and investment vulnerabilities”: executive board


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Alister Bull

(BFW) Japan Raises Volcano Alert for Sakurajima to 2nd-Highest Level


Japan Raises Volcano Alert for Sakurajima to 2nd-Highest Level
2015-08-15 01:48:11.940 GMT


By Kevin Buckland
(Bloomberg) -- Japan Meteorological Agency raises level to
4 from 3, advising people within 3km (1.9 miles) of crater to
prepare to evacuate.

* Multiple earthquakes detected in the area in southern Kyushu
Saturday morning: JMA
* Volcano is about 50km from Kyushu Electric Power’s Sendai
nuclear plant, which restarted Tuesday


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Russell Ward

(BFW) Siemens CEO Sees Slowdown in Automotive Market in 2016/2017: PNP


Siemens CEO Sees Slowdown in Automotive Market in 2016/2017: PNP
2015-08-15 03:00:00.0 GMT


By James Kraus
(Bloomberg) -- Siemens’ Joe Kaeser says in interview that
auto industry may lose steam due to declining export momentum,
Passauer Neue Presse reports.

* German economy needs to focus more on productivity,
innovation and opportunities from digitization
* Need energy change 2.0 in which technology is at the
forefront
* Flaw of EEG was that it focused on consumption, not
innovation, which would have created 50,000 jobs in Germany
rather than in China
* Money was spent on subsidies without gaining any
technological advantage
* Greece will have to rely on transfers for a long time, won’t
be able to develope an industrial base and recover on its
own


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>>> Weekly Market Update: A Yuan Way Market

Weekly Market Update: A Yuan Way Market

China's currency devaluation upset global markets this week. While the IMF and a few others applauded the move, many analysts quickly diagnosed the devaluation as yet another panicky attempt by Beijing to stimulate China's slowing economy. Emerging market currencies and commodity prices, already suffering from China's troubles, were hit hard by the devaluation. In Europe, preliminary second-quarter GDP data was weaker than expected, taking some of the shine off the slow-motion recovery seen in many other economic data points out recently. Low inflation woes continued as WTI crude oil hit a new six-year low below $42/bbl. US markets saw sluggish, low-volume summer trading, though the worst damage from the devaluation passed quickly, allowing stocks to finish the week modestly higher, with DJIA gaining 0.6%, the S&P up 0.7%, and the Nasdaq 0.1% higher.

For years, China has taken heat (mostly from the US) for keeping its currency artificially low to aid its export-driven economy. Since 2005, Beijing has let the yuan appreciate by 30% against the dollar, thanks to external pressure as well as a real desire to liberalize the yuan and see it become a major reserve currency. Back in May, the IMF declared that the yuan was no longer undervalued, although they also urged Chinese leaders to take more steps toward a free-floating currency. This week they got more of what they wanted: the PBoC's daily yuan fixing on Tuesday set USD/CNY at 6.2298, 1.9% higher than the prior 6.1162 fixing, the biggest move up on record. This was followed by two consecutive 1.6% devaluations, for a total devaluation of approximately 5% over three days (note the yuan appreciated 0.5% in Friday's fixing). The move was clearly aimed at helping flagging Chinese growth by boosting exports, though the PBoC framed the move as an effort at greater liberalization, saying that the action was "rooted in analysis of economic data" and that moving forward the fixing would take into account the positions of market makers at day's end.

Headlines screamed that China's devaluation had opened a new front in the currency wars. The policy tightening drumbeat out of the Fed had already begun the stampede of capital out of emerging markets, and Beijing's new FX policy put more hurt on delicate FX crosses. The ruble dropped to six-month lows against the dollar, South Africa's Rand hit 14-year lows against the dollar and the Malaysian Ringgit plumbed a fresh 17-year low. South Korean authorities were said to have sold up to $4 billion to slow the decline of the won, while Mexico Central Bank Governor Carstens warned that interest rates could be raised at any time to defend the peso, which is at record lows. MSCI's emerging equity index fell to four-year lows. The AUD has already suffered mightily from China's slowdown, and AUD/USD touched a fresh six-year low around 0.7240 on Wednesday before ending the week back around 0.7400. EUR/USD remains squarely in the middle of the range it has traded in since May; the pair gained two and a half big figures, from 1.0966 to 1.1214 Monday to Wednesday.

It's only a month until the September FOMC meeting and the consensus was that Beijing's excellent FX adventure would not significantly impact the Fed's thinking on interest rates. Early in the week, Fed moderate Lockhart said he was very disposed to a possible September liftoff, with July payrolls satisfactory and shorter-term inflation figures firming up. Fed dove Dudley said rates could hopefully be raised "in the near future." Dudley also said the Fed will closely watch developments in the Chinese economy and warned what happens with the yuan has huge implications for global demand. In a widely read note, JPMorgan warned that the firm continues to view short-term yields as underestimating both the timing and pace of the coming Fed rate hikes.

The June JOLTS report - Fed Chair Yellen's favorite gauge of labor market health - showed job openings were slightly fewer than expected, while the hiring rate rose to a YTD high of 3.7%. Other details in the survey stayed relatively unchanged for the month, with the quits rate steady at 1.9%. Despite the narrow miss, job openings are up more than 11% y/y. The US July retail sales report indicated the US consumer continues to boost spending, with the headline figure +0.6%, in line with expectations. The June ex auto, ex auto and gas, and control group components were revised up to modest growth from small declines, however the headline June retail sales were left at -0.3%.

Greece wrapped up talks with its European creditors on the details of its €86B third bailout package this week and the Greek parliament approved the agreement. The package includes €85.5B in aid and anticipates €6.2B in privatization revenues. The IMF is still not an official participant, but the Germans indicated that providing certain conditions are met, it is prepared to get onboard again, possibly as soon as November. Doubts remain about Greece's debt sustainability, and skeptical press reports indicated some officials feel the bailout isn't big enough. As the EU kept up pressure on Germany to offer some form of debt relief, Berlin reiterated its mantra that debt haircuts were not and would not be part of the deal. An EU debt sustainability analysis found that even with better-than-expected implementation of reforms, Greece's debt would stand at a relatively unsustainable 148% of GDP in 2022. Partial implementation would put Greek debt to GDP at 174% in 2022.

Google rolled out a new holding company organizational structure on Monday. Management will place Google's sprawling family of operating units under Alphabet, which will replace Google as the publicly-traded entity. Google will become a wholly-owned subsidiary of Alphabet. Basically, the company breaks its financial performance into two baskets: Google (with its lucrative search and ads business, YouTube and Android) and everything else, including Nest home automation, Google Fiber, Google X, Calico and Google Capital.

Shares of Chinese ecommerce giant Alibaba sank a little further this week after a disappointing second-quarter earnings report, with BABA closing out the week around $75, not far from its November 2014 IPO price of $68. Alibaba only just met expectations in the quarter. The firm's revenue grew 28% y/y in the quarter, which was not enough to meet investors' heightened expectations, and the currency chaos in China hardly helped. In other earnings, department stores Macy's and Kohl's lost ground after both firms missed top- and bottom-line expectations it second-quarter reports. JC Penny saw good gains on a solid report. Cisco's growing software sales revenue suggested the firm continues to make progress in its effort to reorient to cloud services from hardware sales.

Berkshire Hathaway reached a deal to buy Precision Castparts in a $37.2 billion deal, in a transaction valued at $235 per share in cash - a 21% premium to the stock's closing price on Friday. Precision Castparts manufactures some of the metal components that go into aircraft engines and industrial gas turbines. After announcing the deal, Warren Buffett said he was "done hunting elephants," closing out his hunt for a jumbo acquisition that began back in 2011. In addition, Buffett poured cold water on the idea that Berkshire's Heinz would consider buying Mondelez. Just last week, activist Bill Ackman's Pershing Square took a 7.5% stake in Mondelez and encouraged the board to begin looking for a buyer.

>>> US Close Dow+0.49% S&P+0.39% Nasdaq+0.29% Russell+0.66%

Closing Market Summary: Stocks End Week on Upbeat Note

The stock market ended a volatile week on a modestly higher note with the S&P 500 adding 0.4%. The benchmark index extended its weekly gain to 0.7% while the Nasdaq Composite (+0.3%) underperformed, ending the week higher by 0.1%.

The first four trading days of the week were jam-packed with macroeconomic events, but the Friday affair was very quiet with fewer than 700 million shares changing hands at the NYSE floor.

Equity indices began the final session of the week near their flat lines and spent the first two hours of action alternating between gains and losses. However, heavily-weighted sectors like financials (+0.7%) and industrials (+0.6%) displayed relative strength from the early going while the top-weighted technology sector (+0.5%) contributed to the afternoon strength.

The financial sector continued its rebound off Wednesday's low with today's move lifting the influential sector to a weekly gain of 0.3%. Meanwhile, industrials received support from transport stocks, evidenced by a 0.7% increase in the Dow Jones Transportation Average. The bellwether complex gained 0.8% for the week with 19 of 20 components contributing to today's advance. Freight carrier Con-way (CNW 37.45, +0.71) was the top performer, climbing 1.9% while shipper Matson (MATX 40.79, -0.05) shed 0.1%.

Elsewhere, the technology sector overcame relative weakness among high-beta chipmakers with large cap components like Apple (AAPL 116.00, +0.85), Google (GOOGL 689.37, +2.86), and Microsoft (MSFT 47.00, +0.27) gaining between 0.4% and 0.7% while the PHLX Semiconductor Index lost 0.6% and contributed to the underperformance in the Nasdaq.

Similarly, biotechnology names also weighed on the Nasdaq, but iShares Nasdaq Biotechnology ETF (IBB 364.06, -2.33) was able to narrow its loss to 0.6% by the close. The ETF surrendered 1.3% for the week while the health care sector added 0.3% today, ending the week flat.

On the downside, the energy sector (-0.2%) was among the early leaders, but retreated as crude oil slid from its morning high. The energy component added 0.5% and settled at $42.47/bbl, but still lost 3.6% for the week. Meanwhile, the energy sector climbed 3.2% during the week, ending ahead of the remaining nine groups.

Treasuries registered slim losses after slipping in reaction to a July PPI report that came in just ahead of expectations. The 10-yr note ended just below its flat line with the benchmark yield adding one basis point to 2.20%.

Also of note, today's eurogroup meeting with Greek representatives produced an agreement, which puts Greece on track to receive EUR13 billion in bailout funds next week.

Economic data included PPI, Industrial Production, and the Michigan Sentiment Index:
  • Producer prices increased 0.2% in July after increasing 0.4% in June while the consensus expected an increase of 0.1% 
    • Energy prices, which provided the bulk of the gain in June, fell 0.6% in July. Gasoline prices increased 1.5%, but that was offset by big declines in the prices of home heating oil (-9.5%), liquefied petroleum (-4.3%), diesel fuel (-2.6%), and residential natural gas (-2.4%) 
    • Food prices fell 0.1% in July after increasing 0.6% in June 
    • Excluding food and energy, core prices increased 0.3% for a second consecutive month in July while the consensus expected an increase of 0.1% 
      • The entire increase in core prices resulted from a 0.4% increase in services prices 
  • Industrial production increased 0.6% in July after increasing a downwardly revised 0.1% (from 0.2%) in June while the consensus expected an increase of 0.3% 
    • That was the largest increase since a 0.9% increase in November 2014 
    • Manufacturing production increased 0.8% in July after declining 0.3% in June 
    • Nearly the entire increase in industrial production resulted from historic gains in the auto industry. Excluding autos, total industrial production was flat in July and manufacturing production increased only 0.1% 
  • The University of Michigan Consumer Sentiment Index declined to 92.9 in the preliminary August reading from 93.1 in July while the consensus expected an increase to 93.7 
    • Concerns over a downward trending stock market were offset by improvements in labor market conditions, as shown by the historic lows in the initial claims level, and lower gasoline prices 
    • Both the Current Conditions (107.1 from 107.2) and Expectations (83.8 from 84.1) Indices were virtually unchanged in August 
On Monday, the Empire Manufacturing Index for August will be released at 8:30 ET while the August NAHB Housing Market Index will be reported at 10:00 ET.
  • Nasdaq Composite +6.6% YTD 
  • S&P 500 +1.6% YTD 
  • Russell 2000 +0.6% YTD 
  • Dow Jones Industrial Average -1.9% YTD