Tuesday, February 16, 2010

Americas Equity Morning Summary 02.15.10

Companies Featured
AMAT.O, APD.N, BWLD.O, CRM.N, EVVV.O, GILD.O, GPS.N, JCP.N,
JWN.N, PNRA.O, PX.N, RHT.N, STR.N, ZION.O


Commodities/Commodity Market Report-

Energy prices increased last week, as did most commodities, as risk aversion eased slightly. Oil
led the pack, despite a bearish US DOE report which showed crude, gasoline and distillate
inventories registering weaker-than-expected. Base metals reversed the past couple of weeks’
weakness following a more upbeat mood in equity markets and benign Chinese inflation data.
Precious metals last week recovered from recent weakness after the dollar lost some ground
against the euro ahead of a meeting of Eurozone finance ministers, although concerns over
sovereign risk in the region may continue to support the US currency. Agriculturalprices finished
higher, following the general commodity rally on reduced risk aversion.

US Economics/A European Slowdown Would Only Nick the US

The European sovereign debt crisis may net to slower European growth. Rising risk premiums on
the region’s sovereign debt, constraints on its banks, and fiscal tightening will weigh on growth in
peripheral economies and may spill into the core countries. A weaker euro will be an offset. We
estimate that a one-percentage-point slowdown in European growth might shave 0.2% from that
in the US. Three channels matter: exports, earnings and financial linkages. Europe accounts for
about 29% of our exports, 8% of S&P revenues, and 4.6% of US banks’ totals assets. Contagion
spreading from the European banking system is the biggest tail risk. If the crisis spills over into
broader risk aversion and a drying up of liquidity — the functional equivalent of the US subprime
crisis — the consequences could be more dire.

STEP Commentary/Changes to the Growth STEP

We are adding a 4% position in Express Scripts ($86.43), Ricky Goldwasser’s top pick in her
recently launched coverage of the Healthcare Services group and also one of five top global
picks highlighted by Morgan Stanley's healthcare analysts around the world. Express Scripts
looks well positioned to benefit from the shift to generics from branded drugs over the next five
years, increased exposure to specialty drugs, and meaningful earnings accretion from the NetRx
acquisition, and Ricky sees earnings more than doubling over the next three years. We are
removing the portfolio’s 4% position in Amgen ($56.48). There is no change to Steve Harr’s OW
rating on Amgen, but for the purposes of the Growth STEP, we prefer to move to the sidelines
and shift the portfolio’s position into what we view as a more robust growth story.

Economics Calendar

02/17: Housing Starts (January), forecast: 540,000
02/17: Industrial Production / Capacity Utilization (January), forecast: + 1.1 % / 72.9%
02/18: Producer Price Index/ Core (January), forecast: +0.8 % / +0.1%
02/18: Leading Indicators (January), forecast: +0.3 %


FULL REPORT
HERE
02/19: Consumer Price Index/ Core (January), forecast: +0.3 % / +0.1%


M O R G A N S T A N L E Y R E S E A R C H
N O R T H A M E R I C A

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