Good morning,

Markets are called lower this morning. This is what's happening today:

  • European governments put off until next week a decision on how to cover additional Greek funding needs, while giving the country two extra years to wrestle down its budget deficit. European ministers will meet again on Nov. 20 to discuss Greece;
  • Germany’s current economic situation may fall to the lowest since June 2010 even as investor confidence gain for a third month in November, economist predicted before reports from the ZEW Center for European Economic Research today;
  • 10-year Italian debt is yielding 5.019%, 10-year Spain is yielding 5.876% and 10-year Portuguese debt is yielding 8.7%;
  • Brent is trading at $108.62;
  • Apple closed the session at $542.83

Another down day for the markets in Europe and guess what…we're talking about Greece again! EU Finance Mnisters met yesterday to decide whether to save Greece or let it default on its debt. The market was expecting no decision to be taken because EU Ministers needed more time since the situation is more complex than before. This time it is not just the austerity measures put in place by Samaras that will determine whether Greece gets the bailout money. This time there is a bigger problem. Samaras put in place all the austerity measures requested by the EU. He even adopted austerity measures that he was against, but did so in order for Greece to be able to get the E31.5bln from the EU. The problem is that all the money which is going into Greece and all the austerity measures are there to be able to bring the debt/GDP ratio of the country down to 120% by 2020. And the problem is that there is no way this is going to happen. What the officials are now saying is that Greece will have a debt/GDP ratio of 120% in 2022 and this is because the country will continue to have a budget deficit till 2016.

In previous projections, the market was expecting Greece to report a budget surplus in 2014 but from the way things are going at the moment, Greece will have a debt/GDP ratio of over 190% in 2014! So the target of being in surplus is impossible. Now the problem is that Greece, Finland and the Netherlands have said NO to outright debt relief. To add to this we don't even know if the IMF will contribute to the bailout money this time round as Lagarde did not comment after the meeting.

So now EU Ministers have scheduled to meet on Nov. 20 in order to conclude whether Greece will get the E31.5bln. Regarding the E5bln maturing this week, the bonds won't default but will be rolled over giving the EU ministers more time to debate the way forward. The irony of it all is that according to the Maastricht criteria, the debt/GDP ratio of a country within the Eurozone should be close to 60%. Even the target of 120% by 2022 is double that! It just doesn't make economic sense. And it is evident now more than ever that the only reason why EU ministers want to help Greece is becuase of the contagion effect it will have on Spain and Italy. Because it just doesn't make sense that so much money is being pumped into Greece and they already know that the target is not even going to be reached. At this point in time, Greece is expected to reach a Debt/GDP ratio of 120% in 2022. But what will happen in another two years time? Is it going to be 2024 then? In the meantime billions of Euros are being pumped into a lost cause. Citigroup were right when they were saying there is a 90% probability of a Greek default because technically speaking, Greece has no choice but to leave the Eurozone. It is because the EU Ministers are allowing for the criteria to change that has not resulted in a Greek default.

Spain didn't ask for a bailout yet and investors are starting to get worried. Infact if you see the 10-year, yields have already started creeping up. In mid-October, the 10-year was yielding 5.32%. Today it yields 5.88%. Don't forget that the market was assuming that Rajoy will ask for a bailout. So the risk to the downside is much larger than the risk to the upside if he never happens. Of course both Greece and Spain are having a negative impact on Italian yields too. Monti had tried to convince Rajoy to ask for a bailout because the volatility in yields are effecting Italy but to no avail.

An important day for Germany today. German ZEW investor confidence will drop to the lowest since June 2010, according to economists’ estimates. More bad news to set a negative tone throughout the European trading session. The motor of the European economy is also slowing down as peripheral Europe is demanding less goods from Germany and so are the US and China as growth is slowing down across the board.

There is a large probability that the banking union will not happen in Europe because there are too many different opinions of the matter. It was evident from the last EU leaders meeting that countries were not agreeing between themselves and that there was a greater probability that the target of having a banking union in the EU by the end of 2012 won't happen.

Yesterday I went through a report of JP Morgan showing their strategy after the recent sell-off we saw in the markets. Their view is to be exposed to cyclicals, basic materials and techology stocks. When i say tech i also include semi-conductors i.e. that is the companies that produce the chips which are used in technological devices. JP Morgan are of the opinion that the sell-off we have seen in the markets is a buying opportunity because the economic situation is improving in both the US and China and that the US President and Congress will come to a compromise on the fiscal cliff.

Stock to watch: Nielsen (Price $28.91, Price Target $36)

Deutsche Bank Comments: We have a Buy rating on Nielsen as we believe the shares can offer investors stable and predictable leveraged equity returns at an attractive valuation. The platform that Nielsen has built commands a dominant competitive position in most of its businesses, enjoys what we regard as a sustainable competitive advantage, and can be leveraged to pursue a range of profitable growth opportunities in consumer measurement across new media and in emerging economies. Overall, we think investors should be comfortable with Nielsen's growth profile and its stability, as expected competitive challenges and any pricing pressure should be offset by growth in online/mobile measurement, consumer insights, and emerging markets. The investment case becomes even more compelling with financial de-leveraging. With net debt/EBITDA of 4.0x, Nielsen is highly leveraged but is looking to delever by one-half turn of EBITDA per annum and to ultimately get to investment grade, which we think it can do within 3-4 years. Along with a favorable tax position (tax assets, structurally lower cash tax rate), deleveraging should drive strong EPS growth over the next five years, and could be worth up to $2/share annually assuming no change in the EV/EBITDA multiple.

For further information on Nielsen or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli