Fed Printing May Create 'Final Crisis': Marc Faber - CNBC
Goldman Details Its Valuations With AIG - Wall Street Journal
German Minister Calls for Bailout Repayment - DealBook
Fed Mulls Symbolic Shift - Wall Street Journal
Options for monetary stimulus - Econbrowser
The biggest lie about U.S. companies - MarketWatch
The Real Reason Banks Aren’t Lending - New Deal 2.0
Italian Big Picture: Almost There
- 2Q10 NII Flattish, But Euribor Rising in 3Q — "2Q results are likely to show still
flattish trend on NII as repricing is limited and Euribor is flat QoQ, with also volume showing limited growth. In July, the 3-month Euribor is rising (+13bp since end of June), and also the Euribor expected curve implied by the forward contract shows an uplift for the first time in the past 2 years, as a result of ECB measures on liquidity. This could possibly result in better trends in 3Q NII."
- Too Early for a Turning Point in Asset Quality — "We expected rising bad debt
provisions QoQ (c110bp on loans in 2Q) and also a worsening of the asset quality, with possibly positions migrating towards worse classes of impaired loans (eg flows from Incagli into Sofferenze). In addition to improving macro, a key variable, to observe in future quarters, would be the potential impact of recoveries."
- Difficult Trading Conditions — "The recent results of European and US investment banks reflected the deterioration in capital markets in 2Q. Trading profits could be under pressure, as well as brokerage commissions."
- Economy Marginally Improving? — "Our Citi economists expect GDP growth of c0.8% in 2011 and 0.9% in 2011. Italian corporates could benefit from a recovery in global trade given their export-oriented activities, but domestic demand could remain weak. Business confidence is recovering and industrial production is up MoM, but consumer confidence is still decreasing."
- Marginally More Positive Long Term on Italy — "2Q results could still show weak
asset quality and flattish NII and also weak trading income. But Italy is one of the few European markets, with France, with limited need of deleveraging, and relies significantly on retail funding. The rise in market rates, recent evidence from lending data and some encouraging macro news (business confidence at 2-year high and rising industrial production), are positive indicators, but asset quality is likely to remain challenging until year end."
- Intesa Top Pick — "Intesa is our top pick given the bank’s higher recurrent profitability, better asset quality, and scope for further cost cutting. ISP’s P&L is geared on rising Euribor and improving macroeconomic conditions in Italy. ISP also has solid funding/balance sheet, and adequate capital position. ISP shares look attractively valued at c1.0x P/TBV vs 1.2x for European sector."
- Updating Estimates and Target Prices — "In this note we increase our target prices to reflect a decrease in the cost of equity, and also update our EPS marginally for the recent industry trends (see data summary table)."
Citigroup Italian Big Picture 20100730
flattish trend on NII as repricing is limited and Euribor is flat QoQ, with also volume showing limited growth. In July, the 3-month Euribor is rising (+13bp since end of June), and also the Euribor expected curve implied by the forward contract shows an uplift for the first time in the past 2 years, as a result of ECB measures on liquidity. This could possibly result in better trends in 3Q NII."
- Too Early for a Turning Point in Asset Quality — "We expected rising bad debt
provisions QoQ (c110bp on loans in 2Q) and also a worsening of the asset quality, with possibly positions migrating towards worse classes of impaired loans (eg flows from Incagli into Sofferenze). In addition to improving macro, a key variable, to observe in future quarters, would be the potential impact of recoveries."
- Difficult Trading Conditions — "The recent results of European and US investment banks reflected the deterioration in capital markets in 2Q. Trading profits could be under pressure, as well as brokerage commissions."
- Economy Marginally Improving? — "Our Citi economists expect GDP growth of c0.8% in 2011 and 0.9% in 2011. Italian corporates could benefit from a recovery in global trade given their export-oriented activities, but domestic demand could remain weak. Business confidence is recovering and industrial production is up MoM, but consumer confidence is still decreasing."
- Marginally More Positive Long Term on Italy — "2Q results could still show weak
asset quality and flattish NII and also weak trading income. But Italy is one of the few European markets, with France, with limited need of deleveraging, and relies significantly on retail funding. The rise in market rates, recent evidence from lending data and some encouraging macro news (business confidence at 2-year high and rising industrial production), are positive indicators, but asset quality is likely to remain challenging until year end."
- Intesa Top Pick — "Intesa is our top pick given the bank’s higher recurrent profitability, better asset quality, and scope for further cost cutting. ISP’s P&L is geared on rising Euribor and improving macroeconomic conditions in Italy. ISP also has solid funding/balance sheet, and adequate capital position. ISP shares look attractively valued at c1.0x P/TBV vs 1.2x for European sector."
- Updating Estimates and Target Prices — "In this note we increase our target prices to reflect a decrease in the cost of equity, and also update our EPS marginally for the recent industry trends (see data summary table)."
Citigroup Italian Big Picture 20100730
French Big Picture: Banking, Economic and Capital Market Trends – Summer 2010c
- Easing 'big picture' concerns — "French banks performed well through the recent
European stress-tests. French banks still pass after stress-testing sovereign risks on the banking book and using a 6% core Tier 1 hurdle rate. Moreover, the recent Basel 3 guidance eases market concerns over potential risks from NSFR, leverage ratios, and the treatment of financial investments & minority interests."
- French retail resilience — "Although we expect some deceleration through the course of the year, as favourable base effects diminish, we believe that French retail offers relative resilience. Net interest income is being supported by strong sight deposit growth and an improving funding mix, while financial fees & commission benefit from higher market levels. France is one of the few major European markets that is bucking the deleveraging trend."
- Credit Cycle Plays — "French banks are likely to continue to benefit from the turning credit cycle, notably in their wholesale and international books. Based on Moody's data, 2Q10 defaulted volume stood at US$3.5bn, significantly below the 5-year quarterly average of US$32bn."
- A Perfect Storm In Equity Derivatives — "BNP Paribas and SocGen carry amongst the leading equity derivatives franchises globally, a key area of weakness in 2Q10. In this report, we demonstrate the relationship between this business and changes in correlations, dividend expectations and volatility. We believe that this area will be the key 'soft spot' in the forthcoming results."
- Updated Estimates — "We have adjusted forecasts modestly for BNP Paribas (2011E & 12E down 1% and 3% respectively) and SocGen (2011E & 12E down 2% and up 2% respectively). We upgrade our Natixis earnings materially to €0.42 in 2011E (from €0.29) and €0.49 (from €0.38), mainly driven by lower loan loss provisions as Natixis benefits from the significant turn in the wholesale credit cycle, although we remain significantly below consensus (8-14% under). Taking into account a lower cost of equity, we upgrade our price targets for each of BNP Paribas (€62 from €60, 10.8% cost of equity), Natixis (€3.4 from €3.0, 11.2%) and SocGen (€54 from €50, 11.2%)."
- Overweight French Banks, Buy SocGen — "In our recent publication The Bank Strategist, we rated the French banks Overweight and highlighted SocGen as one of our Top 5 European bank picks. The French banks should continue to benefit from a turning credit cycle and relatively resilient pre-provision earnings trends. With the worst of the legacy assets issues behind us, we believe that SocGen remains best-placed to exploit these trends."
Citigroup French Big Picture 20100729
European stress-tests. French banks still pass after stress-testing sovereign risks on the banking book and using a 6% core Tier 1 hurdle rate. Moreover, the recent Basel 3 guidance eases market concerns over potential risks from NSFR, leverage ratios, and the treatment of financial investments & minority interests."
- French retail resilience — "Although we expect some deceleration through the course of the year, as favourable base effects diminish, we believe that French retail offers relative resilience. Net interest income is being supported by strong sight deposit growth and an improving funding mix, while financial fees & commission benefit from higher market levels. France is one of the few major European markets that is bucking the deleveraging trend."
- Credit Cycle Plays — "French banks are likely to continue to benefit from the turning credit cycle, notably in their wholesale and international books. Based on Moody's data, 2Q10 defaulted volume stood at US$3.5bn, significantly below the 5-year quarterly average of US$32bn."
- A Perfect Storm In Equity Derivatives — "BNP Paribas and SocGen carry amongst the leading equity derivatives franchises globally, a key area of weakness in 2Q10. In this report, we demonstrate the relationship between this business and changes in correlations, dividend expectations and volatility. We believe that this area will be the key 'soft spot' in the forthcoming results."
- Updated Estimates — "We have adjusted forecasts modestly for BNP Paribas (2011E & 12E down 1% and 3% respectively) and SocGen (2011E & 12E down 2% and up 2% respectively). We upgrade our Natixis earnings materially to €0.42 in 2011E (from €0.29) and €0.49 (from €0.38), mainly driven by lower loan loss provisions as Natixis benefits from the significant turn in the wholesale credit cycle, although we remain significantly below consensus (8-14% under). Taking into account a lower cost of equity, we upgrade our price targets for each of BNP Paribas (€62 from €60, 10.8% cost of equity), Natixis (€3.4 from €3.0, 11.2%) and SocGen (€54 from €50, 11.2%)."
- Overweight French Banks, Buy SocGen — "In our recent publication The Bank Strategist, we rated the French banks Overweight and highlighted SocGen as one of our Top 5 European bank picks. The French banks should continue to benefit from a turning credit cycle and relatively resilient pre-provision earnings trends. With the worst of the legacy assets issues behind us, we believe that SocGen remains best-placed to exploit these trends."
Citigroup French Big Picture 20100729
China Autos: A medium-term secular growth story, despite the short-term oversupply risk
- Reviewing our views: "In our report entitled, “Running Low on Fuel,” we noted that: (1) China’s passenger vehicle sector’s (PV) FY10E earnings may surprise on the upside due to stronger-than-expected sales volume and bigger-than-expected operating leverage; (2) China’s passenger vehicle sector boasts of a medium-term secular growth story due to low penetration rate and rising disposable income; (3) in FY10, we favor foreign JVs focusing on the medium-end and above segments over China’s localbranded vehicle producers dominating China’s small car segment because the small car segment may suffer from oversupply risks as early as FY10. Three months later, we find that: (1) the industry profitability in 1H10 is better than expected; and (2) local-branded vehicle producers focusing on the small car segment are suffering from rising inventory and price erosion."
- Key investment risks: "(1) The industry’s fundamentals should worsen on rising oversupply risks in FY11, with China passenger vehicle sector’s demand supply ratio likely to drop from 94% this year to 85% next year. That said, we see a moderation in China PVs’ profitability in FY11, not a collapse in the sector’s margins, which was the case during the 2004/05 downturn because: (a) the government is more strict with the approval of new auto expansion projects; (b) auto producers are more disciplined in terms of producing cars based on market demand; (2) the industry may suffer from rising royalty fee, and the possible introduction of trademark fee as of FY11 by Honda Motor-led foreign OEMs; and (3) possible negative sales growth in 1Q FY10 due to the possible negative wealth effect arising from the slump in China’s property and stock market."
- Earnings, PT and rating changes: "We raise our earnings forecast for DongFeng/Great Wall/Brilliance by 18%/10%/12% for FY10, and raise our Dec-FY10 PT for Great Wall and Brilliance from HK$15.6 and HK$2.8 to HK$16.8 and HK$3.3 respectively. Despite our earnings upgrade, we now apply a 20% discount to our revised DCF value of HK$16.9 to arrive at our Dec FY10E PT for DongFeng of HK$13.5, given the worsening industry fundamentals. We maintain OW on Minth, with a sticky growth track record, and upside from potential M&A activities, and keep Neutral on Great Wall, Brilliance China, but upgrade China PV sectors’ leader DongFeng Motor from Neutral to OW because: (1) its valuation is now more appealing after the correction and earnings upgrade; (2) it has a proven track record in
consistently growing its core earnings during both the upturn and downturn of the cycle; and (3) its defensive growth feature due to its wide range of competitive product flow from its three different strategic partners."
JPMorgan China Autos 20100730
- Key investment risks: "(1) The industry’s fundamentals should worsen on rising oversupply risks in FY11, with China passenger vehicle sector’s demand supply ratio likely to drop from 94% this year to 85% next year. That said, we see a moderation in China PVs’ profitability in FY11, not a collapse in the sector’s margins, which was the case during the 2004/05 downturn because: (a) the government is more strict with the approval of new auto expansion projects; (b) auto producers are more disciplined in terms of producing cars based on market demand; (2) the industry may suffer from rising royalty fee, and the possible introduction of trademark fee as of FY11 by Honda Motor-led foreign OEMs; and (3) possible negative sales growth in 1Q FY10 due to the possible negative wealth effect arising from the slump in China’s property and stock market."
- Earnings, PT and rating changes: "We raise our earnings forecast for DongFeng/Great Wall/Brilliance by 18%/10%/12% for FY10, and raise our Dec-FY10 PT for Great Wall and Brilliance from HK$15.6 and HK$2.8 to HK$16.8 and HK$3.3 respectively. Despite our earnings upgrade, we now apply a 20% discount to our revised DCF value of HK$16.9 to arrive at our Dec FY10E PT for DongFeng of HK$13.5, given the worsening industry fundamentals. We maintain OW on Minth, with a sticky growth track record, and upside from potential M&A activities, and keep Neutral on Great Wall, Brilliance China, but upgrade China PV sectors’ leader DongFeng Motor from Neutral to OW because: (1) its valuation is now more appealing after the correction and earnings upgrade; (2) it has a proven track record in
consistently growing its core earnings during both the upturn and downturn of the cycle; and (3) its defensive growth feature due to its wide range of competitive product flow from its three different strategic partners."
JPMorgan China Autos 20100730
Zero interest rates and liquidity injections
- "Central banks are keeping key intervention rates very low and continuing to buy assets by injecting liquidity."
- "There are two clashing views about the central banks’ stance on this issue:
• a positive view: this policy facilitates the balance sheet restructuring of private economic agents (deleveraging, sales of risky assets, raising capital, etc.), and therefore the return to a normal financial situation;
• a negative view: this policy artificially keeps alive borrowers that in reality are insolvent - and which will become insolvent again as soon as monetary policies are normalised. Moreover, it leads to continued inefficient investments."
- "It is difficult to decide which view is right, as the two types of situation can be seen:
• actual improvement in the balance sheets of companies, households and some countries (Greece, Ireland, etc.); bank provisioning and recapitalisation;
• insolvency situation for some banks, masked by monetary policy (particularly in Spain and the United States). Moreover, the whole banking sector - and perhaps also some countries (United Kingdom) - benefit from the slope of the yield curve; accumulation of bonds at abnormally low interest rates by banks and institutional investors."
- "There are two clashing views about the central banks’ stance on this issue:
• a positive view: this policy facilitates the balance sheet restructuring of private economic agents (deleveraging, sales of risky assets, raising capital, etc.), and therefore the return to a normal financial situation;
• a negative view: this policy artificially keeps alive borrowers that in reality are insolvent - and which will become insolvent again as soon as monetary policies are normalised. Moreover, it leads to continued inefficient investments."
- "It is difficult to decide which view is right, as the two types of situation can be seen:
• actual improvement in the balance sheets of companies, households and some countries (Greece, Ireland, etc.); bank provisioning and recapitalisation;
• insolvency situation for some banks, masked by monetary policy (particularly in Spain and the United States). Moreover, the whole banking sector - and perhaps also some countries (United Kingdom) - benefit from the slope of the yield curve; accumulation of bonds at abnormally low interest rates by banks and institutional investors."
Natixis Flash Economics 375 20100722
Different collective preferences: Maintaining a large industrial base in Germany; consuming more in many other euro-zone countries
- "In our opinion, the differences in economic policy options between Germany and other euro-zone countries are understandable, considering that Germany and the other countries have different objectives, related to different collective preferences:
• in Germany, do everything to maintain a large industrial base, exporting and paying high wages;
• in many other countries, try to maintain high growth in consumption, hence in wage income and employment, of whatsoever kind."
- "The wage, fiscal, budget and credit policies of Germany are therefore inevitably different from those in other European countries."
• in Germany, do everything to maintain a large industrial base, exporting and paying high wages;
• in many other countries, try to maintain high growth in consumption, hence in wage income and employment, of whatsoever kind."
- "The wage, fiscal, budget and credit policies of Germany are therefore inevitably different from those in other European countries."
Natixis Flash Economics 374 20100722
How can potential growth be increased in the euro zone?
- "In this Flash we will look at the long-term problem - and not the cyclical problem - of shortfall in potential growth in the euro zone, which is spectacular in a period of population ageing."
- "If long-term growth is to be increased in the euro zone, a number of structural economic policies must be implemented:
• despite the high risk aversion among savers, regulators and wage earners, ensuring that:
1) savings are used for financing of long-term investments, and not "wasted";
2) the financing of social welfare does not choke off growth and investment;
3) wage earners head into the most efficient jobs and sectors;
• reindustrialisation, and development of sophisticated services, to prevent jobs from moving downmarket into unsophisticated services; this raises the issues of the most pertinent sectors, the most efficient methods and countries’ comparative advantages;
• not implementing a "macro-prudential supervision" that kills off growth by imposing useless constraints that eliminate the advantages of monetary and economic unification."
- "If long-term growth is to be increased in the euro zone, a number of structural economic policies must be implemented:
• despite the high risk aversion among savers, regulators and wage earners, ensuring that:
1) savings are used for financing of long-term investments, and not "wasted";
2) the financing of social welfare does not choke off growth and investment;
3) wage earners head into the most efficient jobs and sectors;
• reindustrialisation, and development of sophisticated services, to prevent jobs from moving downmarket into unsophisticated services; this raises the issues of the most pertinent sectors, the most efficient methods and countries’ comparative advantages;
• not implementing a "macro-prudential supervision" that kills off growth by imposing useless constraints that eliminate the advantages of monetary and economic unification."
Natixis Flash Economics 373 20100722
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