Schneider Electric 3Q10

Schneider Electric – 12% 3Q like for like growth and upgrade of margin guidance should trigger further upgrades - Q3 sales at €5,446mn were 6% ahead of consensus (ZoneFinance) and 4% ahead of JPM. The company upgraded guidance now expecting H2 like for like growth in high single digit growth (from around 6.5%) and an EBITA margin of 15.5-16% from 15.5%. In our model, for the comparable scope (excl. Areva) we have 6% like for like and a 15.6% margin. The higher guidance and higher Q3 revenues imply about a 5% upside to our EPS forecast for 2010. Schneider also announced a 50% acquisition of Electroshield, a leading Russian MV player for €265mn or 1.3x sales for a business with margins about in-line with group average, an attractive price at first sight. The ABI, an important measure for the health of the US non-residential market broke through the important level of 50 last night (50.4), for the first time since Jan 2008, indicating that the US non res market. Schneider reported Q3 sales of €5,446mn compared to our estimate of €5,240mn and consensus of €5,155mn, a beat of 4% and 6% respectively. Like for like sales growth at 12% was above our estimate of 8.3% and above consensus of 9.7%, which had risen into the results. Relative to our expectations, North America was in-line at 6%, Europe strong at 11% vs 7%, Asia was ahead at 20% vs 14% with the Rest of the World at 11% vs 7% expected. Schneider now expects an EBITA margin of 15.5-16% from 15.5% before. The guidance still excludes the Areva Distribution acquisition which we expect to have a dilute effect of about 60bp. In our model, we have a 15.6% margin excl. Areva. On sales growth, Schneider now guides to high single digit growth in H2 vs. 6.5% before. Assuming this means 9% and taking the 12% into account from Q3, this implies 6% in Q4 vs 2.7% implied in our model. Willi https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-489366-0.pdf

Philips cautious on sales as cost cuts lift 3Q

Philips cautious on sales as cost cuts lift 3Q – Philips said it was cautious on future sales growth due to fragile consumer confidence, although 3Q operating profits managed to beat estimates thanks to cost cutting. The company reported EBITA of 648M euros, better than estimates of 535M euros. The company said that while emerging markets should remain strong, a slowing construction market and the reduction of inventories by retailers could offset gains. Reuters

Praxair

Praxair China extends partnership with Meishan Steel – Praxair China and Meishan Iron and Steel have signed an agreement to extend their current supply contract into 2012. Reuters

Barron's: The Case For Quantitative Easing (DAB)

Vincent Reinhart, of the American Enterprise Institute, argues the Federal Reserve should resume its purchases of Treasury securities to jump-start the economy.

VINCE REINHART JOINED the American Enterprise Institute, a Washington-based think tank, in 2006, after serving with distinction for a number of years at the Federal Reserve. He rose rapidly through the Fed's ranks, eventually becoming secretary and economist for the all-powerful Federal Open Market Committee, and director of the Fed's Division of Monetary Affairs. In the latter post he was former Fed Chairman Alan Greenspan's consigliore, grappling with all sorts of financial crises.

Reinhart's wife Carmen is also an eminent economist. She co-wrote, with Harvard Professor Ken Rogoff, the best-selling This Time is Different: Eight Centuries of Financial Follies. Reinhart has collaborated on a number of influential papers with leading economists, including his wife and Fed Chairman Ben Bernanke. His specialty is crisis management through the use of aggressive monetary policy.

Reinhart has been a leading advocate of expanding the Fed's balance sheet through the purchase of long-dated bonds in an effort to fight deflationary forces, spur economic growth and avert the possibility of long-term economic despond, such as what Japan has suffered in the past two decades. The period between early 2009 and March 2010 saw the U.S. central bank acquire some $1.7 trillion of government bonds and agency securities. Read on to see what Reinhart thinks impends now that the Fed is poised to unleash another bout of so-called quantitative easing.

Barron's: You must feel some vindication that the very policy you have been pushing for several years is now being embraced, after a fashion, by the Bank of Japan, the European Central Bank and, once again, the U.S.

Reinhart: It is too early to take credit until they actually do something meaningful, and it wouldn't be in my nature to do so anyway. Central bankers realize that they must use their balance sheets, now that the short-term rates they control have effectively hit zero and the expansion in the developed world remains so sluggish. More monetary ammunition must be unleashed.

Quantitative easing has very little history in economics.

There was one other important case study, the 1930s, when short-term rates were about zero from 1932 onward. When [President Franklin D.] Roosevelt devalued gold it was an effective quantitative easing, because the amount of monetary assets the U.S. had suddenly went up, even as the interest rate didn't change. That quantitative easing is seen as pretty effective.

B: What about the Japanese attempt early in the decade? It didn't seem to get much traction even though it was massive.

VR: And that is also why you don't want to declare victory too soon as the Fed seems ready to act again, because it isn't just about what you do, it is how you do it. It is just as important that the Fed has the proper commitment and executes the policy properly. The problem with the Japanese is they went about easing in a half-hearted way. When they brought their policy rate down to zero, Japanese officials termed the move an "abnormal" one. If you call something abnormal you are signaling to markets that the policy will only be short-lived. Even after they began to expand their balance sheet aggressively, the tentativeness of their conviction reduced the psychological impact of the policy.

B: We've already had one spasm of quantitative easing in the U.S. Was it executed well? What should we do differently this time?

VR: Events were different in 2008 and 2009 than now, and that calls for a different mode of execution this time around. Last time markets were still very frayed. There was lots of uncertainty. Financial-market players were terrified. Risk capital was paralyzed. So the Fed had to step in and make large purchases and announce a big number at the beginning in order to achieve a pronounced effect on market rates. There was a compositional problem. They bought so many mortgage-backed securities that they probably impaired the functioning of that market. But QE1 [the first round of quantitative easing] did work in changing markets, lowering market yields and encouraging financial markets generally.

This time markets are in better shape. The Fed has to work with markets rather than set prices. That means the Fed must tie its actions more to the economic outlook than repairing the functioning of security markets.
What are the economic metrics that the Fed should say it is targeting?

Four times a year the FOMC participants do an economic forecast. These are published in the meeting minutes. So four times a year the Fed has something it can show market participants, and then gear its policy to whether the forecast is above or below its mandate with regard to price stability and adequate employment levels. The first thing the Fed should do is explain that its asset purchases will be linked to its mandate relative to the FOMC's outlook. That sends a clear signal that any market participant can use to extrapolate how much the Federal Reserve will be purchasing. This rule-based commitment would reassure the market of Fed discipline.

The expectation of further quantitative easing is already being priced into the market even though it hasn't taken place. We've had a 50- to 65-basis-point [0.5 to 0.65 of a percentage point] decline in yields along the Treasury term structure. When the Fed announces more quantitative easing, we might not see that much of a reaction in security prices.

B: Shouldn't it boost other asset prices along with Treasuries?

VR: There will be a spillover effect on other asset classes such mortgage securities, other asset-backed debt, corporate debt and even the stock market, lifting prices some. Quantitative easing will also help in other respects. When the Fed purchases Treasuries, that also puts downward pressure on the exchange value of the dollar, and upward pressure on commodity prices.

B: Is that a good thing or bad thing?

VR: That depends on your outlook. Certainly you can't expect the chairman of the Fed to go around making speeches saying 'hooray, we are depreciating the currency.' Yet dollar weakness is a good thing as long as it is limited, controlled and gradual. A currency decline helps exports become more competitive. Rising commodity prices and more expensive import prices help fight deflationary forces. Remember, the Fed has said inflation is below its mandated level at present.

A modest boost in inflation also lowers interest rates in real terms by narrowing the gap between nominal rates and underlying inflation. The lower real rates are, the more borrowing and economic activity one can expect. Just recognize how unique a position we are in right now. It isn't often that Fed policy involves inducing inflation rather than fighting it. That's why execution really matters. One has to be careful not to create too much inflation.
What must the Fed do? Just announce limited asset purchases at each meeting and make them contingent on the performance of, say, unemployment and inflation expectations?
Two aspects are really important. You have to announce how much you want to buy during each period between Fed meetings. I think $80 billion to $100 billion in securities purchases sounds about right. That's about the pace operationally that the Fed can do.

Secondly, you want all purchases tied to the Fed outlook, which, of course, is a forward-looking measure. If you keep purchasing Treasuries until you get the current inflation rate to where you want it, then the Fed might inadvertently overshoot its target. There's a lot of inertia to inflation once it gets stoked.
Quantitative easing has its share of critics. A lot of folks regard it as financial kryptonite, just another step by the U.S. on the path to Zimbabwe's status.

There are several fears. The big one is that quantitative easing can be used to monetize government debt and effectively print money to cover huge budget deficits. That's how many emerging-market economies have gone off the rails in the past and behaved very badly. Hyperinflation occurs when central banks lose their discipline and monetary policy gets into the hands of the politicians. Once you turn the printing presses on it's hard to stop the process. And tamping down inflation afterwards is just as painful.

That's why you want a commitment tying any quantitative easing to a forward-looking outlook. The Fed should say it is going to be purchasing securities as long as inflation in its outlook is below mandate. By doing so it is implicitly saying it will not only stop all purchases but actually sell bonds once inflation in the outlook exceeds its mandate.

B: So that outlook provides an exit strategy?

VR: Right. Monetary policy is based on the views, many of them differing, of lots of people. If the Fed tries to figure out today how much in Treasury securities to buy in the next year to get the outlook it wants, you have got problems. The Fed could wind up being wrong in just a couple of weeks. Data could come out differently than the Fed expected, and it might regret its commitment to purchase a certain amount of Treasuries. Or it might feel the need to buy more. You don't want to tie your hands by announcing a number upfront.

Second, if you look out a year and say it is going to take that long to provide enough lift to the economy, there will be bank presidents that will be troubled by the idea of having to vote on a resolution that says, say, let's purchase another $1 trillion of securities. They would be much more comfortable agreeing to a resolution that says, we'll purchase $100 billion per meeting. Then, if circumstances improve more quickly, the spigot can be turned off quicker.
Some critics of quantitative easing point to the fact that the Fed, at least in the last round, appeared to be pushing on a string. In other words, the money it ladled out into the banking system remained unlent, and returned to the Fed balance sheet as excess reserves.

Even those critics will have to admit that quantitative easing pushes the economy in the right direction when inflation is unacceptably low and unemployment too high. Should one sit on one's hands instead, and not use all the tools at our disposal? That's just not acceptable.

Critics also ignore the fact that under double-entry accounting, quantitative easing isn't just about the creation of a liability on the Fed's balance sheet. The Fed is also acquiring assets in the bonds it purchases, and by buying the bonds it diminishes their supply and thereby raises their prices. The downward pressure on Treasury prices as a result of quantitative easing favorably affects other asset markets and the economy as a whole, even without the excess reserves being lent out

Also, by putting more reserves into the banking system, it at least creates the incentive for banks to use those reserves. One regional Fed president recently observed that by creating excess reserves, the central bank is giving a license to banks to create money. The banks might not exploit that license in the near term. But the potential and the ability is there, which is almost as important for the future.

B: Good point. Thank you.

CREE.O, Cree, Inc. ($55.86) /Earnings Preview: Pricing Pressure Intensifying

CREE.O, Cree, Inc. ($55.86) /Earnings Preview: Pricing Pressure Intensifying

Joshua.Paradise@morganstanley.com, Smittipon.Srethapramote, Timothy.Radcliff

Cree is scheduled to report F1Q/11 earnings Tues 10/19 after the close. Our channel checks show accelerating LED lighting adoption (good news), but also more pressure on pricing (bad news). We see little risk to the September quarter and are above consensus, but are concerned that margin guidance may disappoint.Fears of declining margins will continue to weigh on the stock. To reflect our concerns about pricing pressure, we are reducing our GM forecast for F3Q and 4Q/11 by 200 bps to 45%. This lowers our FY11 EPS to $2.60 and our target price to $65 from $75.

Cree, Inc. (CREE.O): Earnings Preview: Pricing Pressure Intensifying

Return to Index

GOOG: GS Earnings First Take

Stock Meeting 10/14/2010

Stock Meeting 10/14/2010

AMLP and TYG-review NAV, etc. Not passed for buy or watch.
SWI removed from watch
PELBX added to the Buy list
MSMLX added to the Watch list

SCIN not passed, passive management not something we want to invest in. We would prefer to find actively managed fund.

Revisit HLEMX and our investment

Alternative Energy – Takeaways from Solar Power Int’l

Alternative Energy – Takeaways from Solar Power Int’l – No problems in the near-term, but 2011 likely a different story - We spent this week meeting with companies up and down the solar value chain at Solar Power International, the largest annual tradeshow for the U.S. solar industry. While data points mostly affirmed recent fundamental trends, our discussions provided additional visibility on 2011, particularly with respect to global demand expectations, pricing negotiations, and the risk of potential oversupply in the module food chain. C3Q is fine, but cracks starting to appear in German project activity. Our talks with European project developers suggest project activity in Germany will begin to wane meaningfully in mid to late November with December installations continuing to look soft at this point. This is in stark contrast to typical C4Q seasonality in Germany as it would appear projects were pulled in ahead of the two-step, midyear Feed-in-Tariff (FiT) cuts in July and October, unlike in previous years when installers simply tried to get projects in by the end of December before the annual FiT step-down in January. Pricing steady as she goes. Checks at the show suggest wafer & cell prices continue to tick up marginally while module ASPs continue to hug a flattish trend line through the end of 4Q10 (like-for-like currency basis) as supply conditions remain fairly tight even despite some emerging softness in Germany. Commentary around C1Q11 suggests module ASPs will see a reduction of ~5% on average with many module makers expecting ASPs down no more than 10% YoY for the full year. Visibility on 2011 growing, but still a lack of firm pricing. While many module makers suggested visibility into 2Q11 with some talking up their ability to “sell-out” 2011 capacity based on quoting activity today, we think pricing remains a key fly in the ointment. Our talks with downstream players suggest very little pricing is actually being locked down outside of C1Q11 deliveries, with most discussions focused primarily on volume needs based on project pipelines. We remain longer term cautious on solar stocks. We acknowledge that near-term fundamentals are solid, and a strengthening euro plus higher crude pricing will work in the group's favor near term. That said, we see big fundamental oversupply risk and ongoing subsidy digression in Europe weighing on the group longer term. Blansett https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-486277-0.pdf

Monday 10/11/2010

Monday 10/11/2010

For Thursday
Focus on EM: what appeals to us, whittle down our list
Reviewing bonds, bond funds

Matthews Asia Small Companies Fund: 73 holdings at mid year, holds stocks, trying to tap into money streams of the growing middle classes (sending around a tear sheet)

13d: read the China section, long term view

We have strong relationships with Matthews and with Harding, we should use them more.

EM at 15-20% eventually

WSJ: Consumers in China and Brazil Discover Debt

Number of the Week: Consumers in China, Brazil Discover Debt.Number of the Week
17.1%17.1%: The rise in Chinese credit-card balances in 2009.

While consumers throughout the developed world struggle to shed debt, their counterparts in China and Brazil are piling it on.

In 2009, the year the global recession hit bottom, the aggregate credit-card balances of Chinese consumers rose 17.1% even as those of U.S. consumers fell 8.7%, according to a study by financial consultancy Lafferty Group. Brazilians increased their balances by 28.9%, part of a 9.2% rise throughout Latin America.

More people going into debt might not sound like a desirable development, but in some ways this could be. One of the global economy’s biggest problems has been its dependence on an overstretched U.S. consumer. If folks in places such as China and Brazil are now stepping up and taking on some of the burden, that could provide some much-needed rebalancing.

To be sure, the picture is still unclear. The U.S. is running a large current-account deficit, which means Americans are still spending more than they earn, while the rest of the world — including China — saves to make up the difference.

The data from Lafferty, though, suggest at least the potential for that picture to change. As of 2009, China, Brazil, India and Russia had a total combined credit-card balance of $143 billion, still a far cry from the U.S.’s $849 billion but getting into the same league. Two Chinese banks were among the global top ten by number of cards issued.

The danger, of course, is that consumers in the developing world get themselves into the kind of credit bubble that triggered the most recent global crisis. By international debt standards, it looks like they have a way to go. China’s total credit-card balances amounted to only 2.4% of the country’s annual economic output, compared to 6.0% in the U.S. Brazil’s stood at less than 1%, and India’s was even smaller.

In other words, a little well-placed profligacy might yet do the world some good.