By Yaser Anwar, CSC of Equity Investment Ideas
This week I’d like to talk about: 1) Europe
Europe: Economics, Earnings, Bonds & Trade Data
- (a) Economics– EU data is currently giving mixed signals as industry is lagging but the labor market is improving and sentiment is upbeat. The ECB should continue to raise the REPO rate but is in no rush of doing so.
- According to Thomson: (b) Earnings wise– Looking ahead to the Q1 07 earnings, the proxy with quarterly estimates stands to grow earnings by 1.1%, excluding oil & gas growth jumps to 8.4% accounting for -17% projected growth for 07. At the moment, the leading sectors are Utilities with 54% growth and Industrials with 20%.
- (c) Bonds– Things do not look rosy for bonds if 4% breaks on German 10-year yields another prop will have been removed from the markets. At the same time the curve has steepened up aggressively with the long end leading the way after a period of flattening where the short end has underperformed. Lots of supply next week- New German 5-yrs & 5-yr index linked Italian offerings on Wednesday.
- (d) Trade wise– On a 12-month cumulative basis, the current account remains in a deficit, albeit a small one, at US$ 17 billion (rounded from 16.992), but the trend has been improving since August when it topped at a deficit of US$ 38 billion. The improvement should limit concerns about currency valuation for now, and should provide the Euro some cushion in the event that risk appetite takes a prolonged turn for the worse.
- The capital account numbers show the EU continues to export direct investment while brining in strong levels of portfolio investment, but at US $6.6 billion the deficit in the FDI balance was at its least negative level since last May.
- (e) In the UK– Data has strengthened markedly with PPI, headline Earnings, CPI (headline CPI rate ticked higher to 2.8%), and Retail Sales (as did retail price inflation, excluding mortgage interest costs, stands at 3.7%) all surprising on the upside. Despite a dovish set of MPC minuets in February, the market is pointing to a 25 basis point hike.
L-3 Communications (LLL)- Insider Trade Worth Noting
- On Feb 27th Robert Millard, Director & Independent Board Member of L-3, purchased a large open market purchase of L-3 Communications stock (aerospace/defense) in the industrial sector. Totaling over $1 million, this was the first purchase of its kind for the industrial sector this year.
- This purchase is noteworthy because there have been only two such large purchases for the industry since 02. When considering insider buying/selling it is crucial to note whether the person conducting the buy/sell is an executive level member, is he/she buying/selling into strength or not.
- In L-3’s case, the stock was up 20%+ in 06 and historically, L-3 is trading at 15x forward earnings, which is near its cheapest levels in 5 years. Hence I’d strongly suggest taking a look at this stock.
Retail Take- AEOS, JCP look solid
- At the end of March we’re going to have retailers will reporting #s. Overall, the majority of sectors are expected to report higher comps this month compared to March 06. Why higher? Thanks to Easter holidays. The Easter holiday falls during the week first of April this year, creating the possibility of Easter related sales lifting March numbers.
- My favorites are: American Eagle (AEOS) which is expected to report the highest comp estimate (in Teen Apparel) 11% vs. 3% in 3/06. Also, I like high-end stores such as: JC Penney (JCP) 7.4% vs. -1.1% & Saks (SKS) at 11% vs. -.6% (the latter #s being for Mar 06).
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