Thursday, June 9, 2011

AM Notes

Equity futures are trading above fair value as they have grown stronger throughout the Asian trading day, despite weak markets in Asia, especially China where capital raising fears by the banks have pulled down the market. While nothing has been resolved for the Greece problem, futures are trading higher mainly as a result of markets being oversold. Texas Instruments (TXN) is trading lower after reducing the midpoints of Q2 EPS and revenue guidance.

Libor fixings 

- Overnight Libor: Dollar: 0.127% vs prior 0.127% ; Sterling: 0.569% vs prior 0.571%; Euro: 1.360% vs prior 1.079%
- 1-month Libor: Dollar: 0.190% vs prior 0.190%; Sterling: 0.624% vs prior 0.624%; Euro: 1.216% vs prior 1.194%
- 3-month Libor: Dollar: 0.250% vs prior 0.250%; Sterling: 0.824% vs prior 0.824%; Euro: 1.407% vs. prior 1.401%

July WTI crude +$0.11 to $100.85

Natural gas ($0.004) to $4.870

Gold ($2.04) to $1534.76

10-year yield 2.937%
30-year yield 4.176%

Asian Markets

Most Asian markets followed Wall Street down today. Australia ended slightly up in choppy trade. Japan recovered in the afternoon to post a small gain. Carmakers fell on a stronger yen, as did Nintendo (7974.JP), which was further weighed on by disappointment with the un-revolutionaryness of the Wii U as well as a broker downgrade, ending down 5%. Hong Kong recovered much of its morning losses in the afternoon to finish down only slightly. Property plays rose on a strong land auction that saw Cheung Kong Holdings (1.HK), which gained 1%, win some bids. South Korea went down, with carmakers falling on worries about a US economic slowdown. Financials and property shares led China lower when CITIC Bank (601998.CH) filed to issue A shares, leading to an assumption that others will follow. Japan Q1 GDP revised to (3.5%) y/y from preliminary (3.7%). May machine tool orders +34.2% y/y. Australia May jobless rate 4.9% vs 4.9% seq; total employment +7,800 vs cons +25,000. The yen is trading at 80.01 to the US dollar.

European Markets

European equity markets trade mixed, with the periphery again underperforming, as continuing doubts over Greece's bailout weighed following the Troika report and with little conviction ahead of the BOE and ECB interest rate decisions. BOE leaves benchmark unchanged at 0.5% and ECB leaves rates unchanged at 1.25% with the focus on ECB's Trichet press conference for any clues on the timing of the next rate rise. Resource shares were amongst the leading gainers, whilst generally disappointing results from retailers pressured the sector. Major indices have pared earlier gains. France Q1 non-farm payrolls +0.4% q/q vs prior +0.4%. The pound and the euro are trading at $1.6445 and $1.4627 respectively.

Today's Economic Releases (Eastern Time)

07:00 UK BOE benchmark interest rate decision (Jun)
07:45 Eurozone ECB benchmark interest rate decision (Jun)
08:30 US Initial Jobless Claims (04-Jun); consensus 421K
08:30 US Continuing Claims (28-May); consensus 3696K
08:30 US Trade Balance (Apr); consensus ($48.7B)
09:45 US Bloomberg Consumer Comfort (05-Jun); consensus n/a
10:00 US Wholesale Inventories (Apr); consensus +1.3%
10:30 US EIA Natural Gas Inventories (03-Jun); consensus n/a 

Today's Key Events (Eastern Time)

02:00 Hanwha SolarOne Special Investor Meeting from Intersolar Europe Conference
02:00 Hanwha SolarOne Special Investor Meeting from Intersolar Europe Conference
03:00 Elekta Capital Markets Day
05:00 Fed's Plosser speaks on economic outlook
08:30 Sonus Networks Investor Day
09:00 Encore Capital Group Investor Day
10:30 Under Armour Investor Day
11:30 Fed's Yellen speaks
—:— Air Products Investor Day
—:— American Society of Neuroradiology ~ ASNR
—:— Apple Worldwide Developers Conference - WWDC
—:— Bank of AmericaTelecommunications, Media & Technology Conference
—:— CapStone Investments Silicon Valley Bus Tour
—:— Credit Suisse London Oil and Gas Conference
—:— Dell Storage Forum
—:— Design Automation Conference ~ DAC
—:— E3 Expo
—:— FBR Capital Markets NAREIT REIT Week
—:— Goldman Sachs European Financials Conference
—:— Goldman Sachs Global Healthcare Conference
—:— HP Discover 2011
—:— International Technical Conference on Clean Coal & Fuel Systems
—:— Jefferies Global Healthcare Conference
—:— JP Morgan Pan-European Capital Goods CEO Conference
—:— Nanometrics (NANO) will replace TradeStation Group (TRAD) in the S&P 600 - after the close
—:— Piper Jaffray Consumer Conference
—:— Plexus Investor Day
—:— Prudential Financial Investor Day
—:— RBC Capital Markets Canadian REIT Investor Sessions
—:— Sandler O'Neill Global Exchange & Brokerage Conference
—:— Stifel Nicolaus Energy Conference
—:— TD Securities Telecom and Media Forum
—:— UBS Global Basic Materials Conference 

Company Specific News

BCR (C.R. Bard increases quarterly dividend by 5.6% to $0.19 from $0.18.
Payable 5-Aug; record 25-Jul.)
GEF (Greif reports Q2 EPS $1.04 ex-items vs Reuters $0.96; Reports Q2:
Revenues $1.05B vs Reuters $1.04B)
HWD (Harry Winston Diamond reports Q1 EPS $0.04. Reports Q1: EPS includes a net foreign exchange loss of $0.2M, and it is unclear if it is comparable to Reuters$0.06. Revenues $143.9M vs Reuters $182.6M)
MW (Men's Wearhouse reports Q1 EPS $0.53 ex-items vs Reuters $0.49. Reports Q1: Revenues $580.4M vs Reuters $577.3M)
TXN (TXN guides Q2 revenue $3.36-3.50B vs prior $3.41-3.69B and Reuters $3.55B; Q2 EPS $0.51-0.55 vs. prior $0.52-0.60 and Reuters $0.58, First Call $0.57)

Positive News
AMLN (Eli Lilly announces court decision relating to Amylin Pharmaceuticals litigation. LLY announced that the U.S. District Court for the Southern District of California ruled in Lilly's favor, vacating a temporary restraining order and denying a request by Amylin Pharmaceuticals for a preliminary injunction that sought to impose restrictions on the Lilly Diabetes sales force and other relief.)
HUM (Humana to reaffirm f11 EPS guidance in range $6.70-6.90 at various investor meetings between now and end of month)

Negative News
URBN (Urban Outfitters says Q2 retail comps are running low single-digit negative. Consensus for Q2 of +0.8% with estimates ranging down 0.6% to up 2.9%. The company reported Q1 retail comps of (1%) and indicated that the trends seen during Q1 could continue over the near term.

XOM (Exxon Mobil acquires Marcellus shale companies Phillips Resources and TWP for $1.69B. Total acquired acerage in Marcellus shale is 317K; the companies had proved reserves of 228B cubic feet equivalent of natural gas in 2010)
WFSL (Washington Federal to acquire 6 branches and $253M in deposits from Charter Bank in New Mexico. Three of the branches are located in Albuquerque, two in Santa Fe, and one in Rio Rancho, New Mexico. The transaction is subject to receipt of various regulatory approvals.)

BKD (Brookdale Senior Living prices $275M of 2.75% convertible senior notes due 2018 through BofA, JPMorgan and RBC Capital)
DSCO (Discovery Laboratories files $200M mixed shelf)
SPSC (SPS Commerce announces 1.2M share secondary offering by holders through Stifel Nicolaus)

Newspaper Articles / Headlines

Auto Bild
General Motors is again considering the sale of Opel. The magazine reports that GM may be losing patience with Opel as it continues to post high losses and faces increasing competition

Daily Mail
LVMH (MC.FP) readying €350/share cash bid for Hermes. Geoff Foster cites no sources, as usual, but reports that Hermes volume has picked up substantially over the past few weeks.

Economic Times
Airbus to get $6.5B orders from Indian airlines. The article, citing sources with knowledge of the matter, notes that GoAir will order a minimum of 50 A320s worth $4B while Jet Airways (JETIN.IN) will buy 10 A330s worth $2.5B. Air India plans to take 10 A330s and 16 A320s on a dry lease GoAir may order more aircraft if they can negotiate better terms.

Financial Times
- UK Bank heads disagree on extent of ringfencing retail businesses. The FT, citing talks at a governemnt committee hearing, reports that RBS (RBS.LN) and Barclays (BARC.LN) want a narrow definition which includes just retail deposits. HSBC (HSBA.LN) and Lloyds (LLOY.LN) want to include a broader seperation which would allow more diverse assets to be protected
The article notes that the differences stem from the view of how much moral hazard would be created and whetehr the move would actually encourage nore risk-taking.
- Barclays CEO says issue of cocos could be delayed. The FT, citing Bob Diamond speaking before a government committee, reports that the bank was very close to having a coco which was regulatory compliant but that the issue would probably happen at the end of the year as U regulators wait for a global agreement on the instruments
Pfizer to try new online system for clinical trials. The FT, citing a company statement, reports that the attempt to perform clinical drug trials outside of clinics with people remotely sending in results could bring drugs to market faster.
Tesco to expand multi-channel operations to boost domestic business. The FT, citing CEO Philip Clarke talking at the sidelines of a conference, reports that: The company will launch a range of three new brands, called 'venture brands' owned by Tesco but not branded Tesco. More brands will be launched but not "hundreds of them". Tesco would double the number of UK stores where customers can order online and collect at the store
Tesco will also expand its online operations overseas
Toyota on track to catch-up on the 40K units the company lost in Europe after the disaster in Japan. The FT, citing an interview with CEO of Europe also said the company's European sales would hit 1M in 2012 or 2013, a level last reached in 2008.
Bristol Water (BRWA.LN) put up for sale by owner Agbar, majority owned by Suez Environnement (SEV.FP). The FT, citing people familar with the matter, reports that Agbar have appointed Citigroup (C) to advise on a possible sale.
Solar power in US to be price competitive without subsidies within three years. The FT reports that the cost of solar power in California is close to that of gas-fired plants during peak demand costs have dropped due to technological advances, manufacturing efficiency and overcapacity in manufacturing. The article cites CEO of First Solar, who said he expects to be able to sign contracts with Californian utilities to sell power for 10-12c/KWh, in line with cost of power from gas-fired plants during peak demand. The company would reach that target by cutting the cost of of its thin-film solar modules by 1/5th by 2014.

Softbank (9984.JP) to reject NTT DoCoMo's request to disclose how it calculates its network connection fees. Without citing sources, the Nikkei reports that Softbank will give details of its process to the Telecommunications Business Dispute Settlement Commission for its assessment, even though it has no enforcement power. Softbank also plans to ask DoCoMo to refund an unspecified portion of the interconnection fees it paid before FY10. DoCoMo filed its complaint 18-May.

PC Advisors
Brief review of Call of Duty: Modfern Warfare 3. The article is written by someone who was only able to watch two single-player missions, rather than actually play the game, at E3. He says the experience is "over the top" in some ways, but unchanged in others, and he wonders if the unchanged parts aren't old hat by now. He notes that he was given no information about competitive multiplayer, for which plenty could change in any case before the game is launched 8-Nov.

- German carmakers cutting summer holidays due to unexpectedly high demand. Handelsblatt reports that: VolkSwagen (VOW.GR) has gotten 3,500 employees to move their holidays so it can raise production in july and August. BMW (BMW.GR) has cut holidays in two factories from four weeks to one week. Daimler (DAI.GR) is hoping to get workers to agree to come in on Saturdays.

London Times
The peace is over at L'Oreal. The Times reports that Françoise Bettencourt-Meyers has gone to court to have Liliane Bettencourt placed under legal protection now that a judge has found Bettencourt not to be fully compos mentis.

New York Post
Vultures licking chops at prospect of buying Warner/Chappell. Sources tell the NY Post that BMG Rights, Universal Music (VIV.FP), and Sony/ATV (6758.JP) would all be interested in Warner Music group's publishing arm, which Len Blavatnik would probably need to sell if he buys EMI. But sources say Citi might not be willing to bide the time that Blavatnik would need to work through regulatory issues for the purchase. One source says EMI could go for $3.3-4.0B due to its global reach; StreetAccount notes that estimates since January have ranged from £1.5B to "Blavatnik could justify paying more than $7B."

New York Times
NYT discusses the Senate rejection of the Tester amendment. The NYT's take on the result is that banks were close to victory and so will be emboldened to fight other Dodd-Frank regulations such as putting derivatives on an exchange, increased margin requirements for derivatives and the structure of the new Consumer Financial Protection Bureau

Winning bidders for Tavan Tolgoi will need to build infrastructure. Mongolian government sources tell the Nikkei: Development rights will be awarded to more than one of the six remaining bidders, if they agree to add infrastructure to the project. A bidder notes to the Nikkei that this means each winner's allocated mining operations will be smaller and less profitable. The government wants the Mitsui (8031.JP) consortium, Peabody Energy (BTU), Vale (VALE), and Xstrata (XTA.LN) to manage the mine and build the power plant and steel plant. ArcelorMittel (MT.NA) and the three-country consortium are being asked to build railroads, coke ovens, and a steel plant.

- Sony says it has restarted Qriocity everywhere except Japan

- Warburg Pincus and TPG are joining for a bid for General Electric's railcar leasing business. Reuters reports, citing sources, also reports that other bidders include Cerberus and Apollo. Final bids are expected around 23-Jun. Reuters reported that Trinity Industries is not invovled in the process.

Talous Sanomat
Nokia CTO Rich Green takes personal leave, says Helsingin Sanomat. Helsingin Sanomat reports that Green is unlikely to return to Nokia, due to disagreements over the decision to use Windows Phone rather than MeeGo.

Wall Street Journal
Pension Benefit Guaranty Fund sues Morgan Stanley for $25M for its handling of investments. The WSJ, citing a person familair with the situation, reports that The PBGC is joining the original suit bought by a now bankrupt New York hospital system in 2009. The suit claims Morgan Stanley concentrated the plan's investments in MBSs even though the firm became aware of a "rapid and dramatic deterioration" in that market in 2007 and 2008 and also exceeded the plan's investment guidelines.
The PBGC is reviweing other plans where similar concerns may exist.
Decline in texting may hit bottom line for wireless carriers. The WSJ notes that Apple (AAPL) introduced iMessage this week, and a person familiar with the matter says Google (GOOG) is also working on a messaging application. The article notes that the growth in texting has been slowing even before the possibility of free services was introduced.
- SEC looking at whether Goldman Sachs et al violated Foreign Corrupt Practices Act in their dealings with Libya's SWF. People familiar with the matter tell the WSJ that Goldman agreed to pay $50M to the Libyan Investment Authority, seemingly in 2009, as part of a plan to help the fund recover $1.3B it had lost through complicated trades. The money would have gone to an outside advisor, and while the payment was never made, it still looks like a bribe, since the advisor was run by the son-in-law of the head of Libya's state-owned oil company. A Goldman spokesman expresses confidence that no laws were broken. The article reiterates that Société Générale (GLE.FP), HSBC Holdings (HSBA.LN), Bear Stearns (JPM), and Och-Ziff Capital Management Group (OZM) all dealt with the SWF, and some of them used middlemen; they all either decline comment or echo what Goldman said. Sources say the Libyan investigation is separate from the SEC's broader look at the financial industry's dealings with SWFs.
US regulators divided over bank capital regulations. The WSJ reports that while all agree that higher bank capital is necesssary, they are split over how much higher: Fed Governor Tarullo said in a speech last week that 8.4-14% range depending on the riskiness of the assets, people familar with the matter say the Fed supports a 10% buffer or 3% more than agreed by global regulators in Basel last year, some government officials say the Treasury and other global policy makers support a range of 2-2.5% over Basel rules
Analysts had expected 1-2% over Basel rules.
WSJ discusses the Senate rejection of the Tester amendment. The WSJ breaks no news but notes that the banks and credit-card companies say this will cost them billions of dollars this confirms the view that Dodd-Frank will not be rolled-back as long as the Democrats control the Senate the Fed will proceed with the rule and will take effect 21-Jul-fees will be capped at 12c/transaction vs the current average of 44c, but it is widely expected the final fee will be less restrictive although the credit card companies are not directly affected, the rules would loosen their control over the process and allow merchants to choose rival payment networks.
WSJ warns that banks that are too big to fail will need to deal with their status. A "Heard on the Street" column says that JPMorgan Chase CEO Jamie Dimon's comments yesterday betray the fact that the banks are terrified that at their current size, they are essentially threatened with becoming regulated public utilities.
NBCUniversal in talks to sell majority stake of its G4 gaming network to Ultimate Fighting Championship. Any deal would give UFC a distribution outlet for its competition. A price of the potential transaction and the size of the majority stake could not be ascertained and the article says it isn't clear how close the two sides are to a deal.


Barclays Capital: upgraded SWY, M; downgraded BJ, HBI
Berenberg: downgraded VMED
Citi: upgraded ODFL; downgraded RIMM
Dahlman Rose: downgraded ICO
Jefferies: upgraded SEE
JMP Securities: upgraded BIRT; reduces PC and tablet forecasts
Leerink: downgraded MDAS
Wedbush: downgraded ITG
Wells Fargo: upgraded OAS


SPX futures are indicating a higher open this morning following 6 consecutive days in the red. Interestingly, IWM skew (measure of implied downside risk relative to implied upside risk) is extremely flat/low. Said differently, downside puts are at their cheapest level to upside calls in over 1.5 years. As we pointed out in the past week, we think IWM provides the best instrument for protection/leverage given its higher beta nature. The low skew provides an attractive opportunity for:

- Bullish: Buying the IWM July 80/83 1x2 Call Spread for 53c (4.7x1 payout; upside leverage thru $83, risk is getting short at equiv of $85.47 if it trades above $83)

- Bearish/Cautious: Sell the IWM July 81 Calls to buy IWM July 78/75 Put Spread; Collect 6c ($3 in downside leverage/protection, risk is getting short IWM at equivalent of $81)

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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