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Americas : Market Intelligence – Morning Update
by Chris Hussey
Published March 25, 2014
Stocks in Asia were directionless Tuesday, trading in a relative news vacuum
as investors appear to be content to coast through the end of March. In
Europe this morning, however, equities are definitively higher although you
have to squint to find a reason for the reversal of yesterday's more bearish
tone. Overall, perhaps the daily trading gyrations of individual markets
are telling us little about investor sentiment. But looking at ytd
performance, several clearer trends emerge. The S&P 500 and STOXX 600 are
both essentially flat (+0.5% and -0.3% respectively). By contrast, Hong Kong
(-6.8%), Japan (-11.5%) and Korea (-3.5%) are notably lower as investors
lean further away from Asia (and China's growth and policy uncertainties)
and tread water in developed market equities (except Japan).
Whither the great rotation. Year-to-date performance also tells us a bit
about the long-awaited (and much discussed) "great rotation" out of bonds
into equities: it may have stalled a bit in 2014. So far this year, while DM
stock markets are flat, the market for 10-year Treasuries has rallied with
the yield on the 10-year Treasury still about 25bp lower than where it
started the year (currently 2.73%). The hawkish tone that the FOMC presented
last week did spur a jump in rates but it is interesting to note that about
half the increase has now dissipated (yields on the 10-year are only about
10 bp wider than pre-Fed announcement levels.
Growth and policy uncertainty remain hurdles. The muted rates market
reaction to last week's FOMC statement is the subject of Francesco
Garzarelli's Global Markets Daily, "The Fed Tosses a Stone into the Pond."
We point to two issues that are holding back investors from asking for
higher yields to take on rate risk: (1) confidence in the Fed's resolve to
carry through with rate hikes remains shaky and (2) the growth outlook
remains cloudy. Those investors who hesitate to sell bonds because of policy
uncertainty often point to the experience of the BoJ in 2000 when it hiked
rates too early only to have to cut rates quickly into another global
recession. Additionally, the move to QE and now qualitative guidance adds a
degree of "squishiness" to a monetary policy toolkit that used to be simply
fortified with the blunter instruments of rate cuts and rate hikes.
On the growth outlook, Jari Stehn highlights why we expect growth to
accelerate soon in the US in this morning's "Four Reasons for Stronger Near-
Term Growth."
1.Data surprises appear to have bottomed. Payrolls, new home sales, Chicago
PMI, among others have recently shown positive surprises;
•Weather normalization should boost growth. With the winter-disrupted
data and extreme cold weather conditions finally fading (perhaps), we
should now see a boost in growth;
•Financial conditions remain supportive. Despite last week's hawkish
FOMC surprise, financial conditions remain a tailwind;
•Leading indicators for capex have improved. Capital spending should
now see acceleration after having weakened from about 10% growth in early
2012 to just 2% in early 2013. We also highlight our favorite stocks to
invest in a capex recovery across our Industrials coverage today in "America
Rising: US Industrial Capex."
Looking Ahead: We get home price reports and February New Home Sales this
morning plus a Consumer Confidence reading and the Richmond Fed Index in a
package of data that goes right to many of the key issues we're watching for
signs of a growth acceleration.
Performance of global indices
As of March 25, 2014
Source: Reuters
Today's Events:
09:00 am - FHFA House Price Index - Jan
09:00 am - S&P Case Shiller Home Price Index - Jan
10:00 am - Consumer Confidence - Mar
10:00 am - New Home Sales - Feb
10:00 am - Richmond Fed Survey - Mar
US Morning Call for March 25, 2014:
America Rising, Revich / Ritchie: US Industrial Capex.
We continue to forecast a recovery in US construction, transportation and
industrial capex where capital stock is low and returns are inflecting. Top
picks in US Construction: EXP, MLM, GVA, ETN, HON, APOG, AWI, LEN; Truck:
ODFL, CMI, WBC, ALSN; Aerospace: UTX, PCP, BEAV.
Machinery, Engineering & Construction, Revich: US industrial capex
inflecting, increase exposure; PCAR up to Buy, KBR down to Neutral.
Upgrade PCAR to Buy and raise 12-month price target to $80 to capture pure-
play exposure to a still-early recovery in US and European truck capex.
Downgrade KBR to Neutral on disappointing LNG bookings.
Steel, Tharani: Five reasons to own integrated steel producers; Buy X and
AKS.
We see bullish near-term catalysts for the flat-rolled steel market: scrap
prices have bottomed, price hikes are sticking, bad weather has created pent
-up demand. Longer-term, consolidation and tight supply should support
better returns. Top picks: Buy-rated X, AKS.
Paper & Forest Products, Ovshey: More positive on UCFS pricing post deep
dive; Upgrade Domtar to Buy.
We upgrade UFS to Buy despite the recent run in the stock as we believe
planned paper price hikes will stick better than the market currently
discounts and there is SOTP upside from its growing personal care business.
12-month target $138.
NPS Pharmaceuticals, Inc. (NPSP, Buy), Singh: Gattex and Natpara are both
underappreciated; initiate at Buy.
BioMarin Pharmaceutical Inc. (BMRN, Neutral), Singh: Downgrade to Neutral
due to lack of near-term catalysts
Launch NPSP at Buy as we forecast its short bowel syndrome drug Gattex to
gain better traction outside the US than the market currently discounts;
plus its Natpara drug for calcium deficiency should be approved in October.
12-month target $45. Downgrade BMRN to Neutral as it approaches our $84 12-
month price target and catalysts are further out.
Healthcare Facilities, Zimmerman: Raising hospital price targets following
recent developments.
Remain Attractive on hospitals as Affordable Care Act registrations are
finishing relatively strong which should drive further reductions in bad
receivables for hospitals. We also believe the environment is increasingly
favoring larger hospitals and consolidation. Top pick: HCA (CL-Buy) where we
raise our 12-month price target to $60.
Notable Research not on the call:
Macro
•Global Markets Daily: The Fed Tosses a Stone into the Pond
•US Daily: Four Reasons for Stronger Near-Term Growth (Stehn)
•FX Views: Parsing the Signal from the Noise
•EM Macro Daily – CNY: regime shift or a temporary bout of
volatility
•Venezuela: SICAD II Finally Launched at a Weaker Than Expected
Exchange Rate
Consumer
•Automobiles: Forecast a back-end loaded recovery in March SAAR to 16
.0mn
•Lojas Americanas (LAME4.SA): A jewel in the bricks: Discount creates
attractive entry point; to Buy
•B2W (BTOW3.SA): Growth, margin gains and capital increase map path
to breakeven
Healthcare
•Healthcare Services: CROs: Society of Toxicology conference
confirmatory of improving trends
Industrials
•Europe: Capital Goods: EM competition: A silent storm developing
TMT
•Microsoft Corp. (MSFT): Office as it moves to mobile – a scenario
analysis
Conference Calls & Conferences:
•Today, March 25 @ 10 AM EDT - GS Research Conf Call" "Perspective on
the cycle from a Private Trucker" with Hermann Transportation EVP, Jeffrey
Hermann; hosted by Tom Kim; Dial-in: 973-528-0056; passcode: 177695.
•Today, March 25 @ 11 AM EDT - GS Research Conf Call: "The impact of
energy efficiency and improving technologies on residential development"
with Meritage Homes VP C.R. Herro; hosted by Eli Hackel; Dial-in: 973-528-
0056; passcode: 587621; webcast link: http://www.visualwebcaster.com/event.asp?id=98651.
•Day 2 today , March 24-25 – GS Chemical Intensity Days; Magnolia
Hotel, Houston, TX;
website link: http://www.gs.com/events/chemint2014.
•Thursday, March 27 @ 10 AM EDT – GS Industrial Research Conf Call
Series: “Private carrier perspective on the US airline industry” with
Silver Airways CEO, David Pflieger; hosted by Tom Kim; Dial-in: 973-528-0056
; passcode: 681041;
Silver Airways is Florida based, operating 170 daily flights on the East
coast.
•March 27 – GS Consumer Digital Day 2014; Goldman Sachs Offices,
London;
website link: http://www.gs.com/events/dgtlmda2014. | f******t
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