Tuesday, June 14, 2011

Morning Note

Equity futures are trading higher as markets seem to have found a temporary bottom with no new negative news coming out of the Eurozone and Chinese inflation numbers coming out in line with consensus. The Chinese fixed asset investment numbers for the first five months came in slightly higher than consensus, assuaging people's fears about a slowdown in the Chinese economy.

Spain T-Bill auction 

12 month T-Bill €3.96B; average yield 2.695 vs prior auction 2.546%; bid-to-cover 2.9x vs prior 2.5x
18 month T-Bill €1.46B; average yield 3.260% vs prior 3.095%; bid-to-cover 3.9x vs prior 4.1x

Libor fixings 

- Overnight Libor: Dollar: 0.128% vs prior 0.127% ; Sterling: 0.567% vs prior 0.569%; Euro: 1.273% vs prior 1.461%
- 1-month Libor: Dollar: 0.189% vs prior 0.187%; Sterling: 0.624% vs prior 0.624%; Euro: 1.236% vs prior 1.234%
- 3-month Libor: Dollar: 0.245% vs prior 0.247%; Sterling: 0.824% vs prior 0.824%; Euro: 1.422% vs. prior 1.418%

Jul WTI crude ($0.27) to $97.03

Natural gas +$0.010 to $4.688

Gold +$1.58 to $1516.29

10-year yield 3.004%
30-year yield 4.215%

Asian Markets

Asian markets rose today after China reported inflation figures that were in line with expectations, although they also represented a 34-month high. After the market closed, China tightened policy by raising banks’ reserve requirements another 50 bp. South Korea reversed an early decline and finished up. Japan rose somewhat in the morning, and then followed China higher in the afternoon. Australia rose slightly after a long weekend, restrained by lower business sentiment. Hong Kong gave up slight gains to sink to flat in the last hour of trading when China raised its reserve requirements after the market there closed. China May CPI +5.5% y/y, matching expectations. May PPI +6.8% y/y vs cons +6.5%. Japan April capacity utilization (1.1%) m/m. Revised April industrial output +1.6% m/m vs prelim +1.0%. The yen is trading at 80.19 to the US dollar.

European Markets

European equity markets mainly trade higher following advances in Asia after Chinese inflation data was no worse than expected. An exception to the initial gains was Greece after S&P cut its sovereign debt rating to CCC from B late yesterday, though the market has pared earlier falls to trade little changed. News that China had raised bank reserve requirements by 50 bps briefly capped advances, before indices extended gains to currently trade slightly below the day's best levels. UK inflation data was in line with estimates, causing the pound to rally briefly post the release, with the FTSE paring gains. M&A activity helped sentiment with corporate results generally disappointing. UK May CPI +4.5% y/y vs consensus +4.5%. RPI +5.2% y/y vs consensus +5.2%. The pound and the euro are trading at $1.6395 and $1.4454 respectively.

Today's Economic Releases (Eastern Time)

Japan Ind Production (Apr); consensus n/a
Japan Cap Utilization (Apr); consensus n/a
04:30 UK CPI yy (May); consensus +4.5%
04:30 UK RPI yy (May); consensus +5.2%
07:30 US NFIB Small Business Index (May); consensus n/a
07:45 US ICSC-Goldman Chain Store (11-Jun); consensus n/a
08:30 US PPI (May); consensus +0.1%
08:30 US PPI ex Food & Energy (May); consensus +0.2%
08:30 US Retail Sales (May); consensus (0.6%)
08:30 US Retail Sales ex Autos (May); consensus +0.3%
08:55 US Redbook Chain Store (11-Jun); consensus n/a
10:00 US Business Inventories (Apr); consensus +0.9%
16:30 US API Crude Inventories (10-Jun); consensus n/a
Today's Key Events (Eastern Time)

03:30 TeliaSonera Investor Day
03:30 TeliaSonera Investor Day 2011
08:00 Centene Analyst Day
12:15 Sunrise Senior Living Investor Conference
14:30 Bernanke speaks on debt ceiling and budget
—:— CAPP Oil & Gas Investment Symposium
—:— Deutsche Bank Global Consumer Conference
—:— Deutsche Bank Global Industrials and Basic Materials Conference
—:— EuroZone finance ministers meeting
—:— Internet Retailer Conference and Exhibition ~ IRCE
—:— Nanotech 2011
—:— Plasma Protein Therapeutics Association ~ PPTA
—:— William Blair Growth Stock Conference

Company Specific News

CASY (Casey's General reports Q4 EPS $0.60 ex-items vs Reuters $0.50. Reports Q4: Revenues $1.55B vs Reuters $1.58B)
FDS (FactSet reports Q3 EPS $0.92 vs Reuters $0.92. Reports Q3: Revenues $183.6M vs Reuters $183.1M)
TRE.CN (Sino-Forest reports Q1 EPS ($0.08) vs year-ago $0.07 (C$4.98);
Reports Q1: Revenues $338.9M vs year-ago $251.0M)

Negative News
XL (XL Group announced preliminary net loss estimates of $50-75M related to the severe weather occurrences)

CAP.FP (Cap Gemini in exclusive negotiations to acquire Prosodie)
CAR / AVE.LN (Avis Budget announces agreement to acquire Avis Europe for £3.15/share in cash)

EVR (Evercore Partners files equity shelf for company and holders of indeterminate amount)
DHR (Danaher announces 17.5M share secondary offering through Citi, Morgan Stanley, Barclays Capital and UBS)
KMP (Kinder Morgan Energy Partners 6.7M unit secondary offering priced at $71.44 through BofA Merrill Lynch, Barclays, Credit Suisse, JPMorgan and Wells Fargo)
OB (OneBeacon Insurance files $1B mixed shelf)

Other News
Weekly USDA crop progress report says 91% of the corn crop has emerged:
Compares to 79% of corn crop emerged last week and 96% average of 2006-10.
Corn: 69% of corn crop is in good or excellent condition compared to 67% last week and 77% y/y
Cotton: 12% of cotton is squaring vs. 9% last week and 14% average of 2006-10 period. 28% of cotton is in good or excellent condition compared to 62% in the same week last year
Soybeans: 87% of soybeans have been planted vs. 68% last week and 89% average of 2006-10 period
64% of soybeans have emerged vs 44% last week and 76% average of 2006-10 period
Rice: 93% of rice has emerged vs. 86% last week and 95% average of 2006-10 period
58% of rice crop is in good or excellent condition compared to 59% last week and 77% y/y
Winter wheat: 35% of winter wheat crop is in good or excellent condition compared to 34% last week and 66% y/y
22% of winter wheat crop has been harvested vs. 10% this week last year and 13% average of 2006-10 period
Spring wheat: 88% of spring wheat has been planted vs. 79% last week and 100% average of 2006-10 period
73% of spring wheat has emerged vs. 57% last week and 97% average of 2006-10 period

Newspaper Articles / Headlines

Financial Times
American Express introduces 'pre-loaded' card. The FT reports that the company will announce for the US 14-Jun a prepaid card with no fees for online purchases, monthly maintenance balance inquiries and one free ATM withdrawal/month.
- Comcast (CMCSA) and Skype (MSFT) team up to bring high-definition video calling onto set-top boxes. The FT reports that the partnership was announced at the Cable Show. Comcast customers will pay a monthly fee for the service and will not need a cable TV subscription to use the service.
the calls will only be skype to skype not to other telephones.
Southern Cross chairman says will continue to control a "critical mass" of homes.
Avis Budget (CAR) close to buying Avis Europe for over £600M. The FT, citing people familiar with the matter, reports that the deal could be announced as early as 14-Jun for more than 300p/share negotiations are continuing and nothing is finalized.
India's auditor says oil groups in irregular aid from government officials. The FT, citing, people familiar with the Comptroller and Auditor General of India, reports that: The three oil companies have cost the governemnt millions of dollars. The report is being examined by the government but is not yet public
The report alleges that Cairn India (CAIR.IN), BG (BG.LN) and ONGC (ONGC.IN) were treated favourably by officials in the petroleum ministry in relation to contracts they signed with the government

Globe and Mail
- Pratt & Whitney's new geared turbofan engine becoming airlines' top choice. The Globe and Mail reports that airlines that have chosen engines for the Bombardier (BBD.B.CN) C Series planes they have ordered have all chosen the Pratt & Whitney option rather than the Leap-X being developed by a General Electric (GE)-Safran (SAF.FP) consortium.

New York Post
- Cable networks set to take in 10-12% more y/y in upfront. Market sources tell the NY Post that NBCU's (CMCSA) increase is 25%, and Discovery Communications's (DISCA) is 17-22%.

New York Times
- SEC stops stock sales by two Chinese companies. The NYT, citing SEC orders, reports that the SEC is seeking stop orders to keep the firms and shareholders from selling stock under faulty statements. the SEC says China Intelligent Lighting and Electronics (CIL) and China Century Dragon Media (CDM) didn't disclose that their independent auditors had resigned after questioning the accuracy of their financial statements

London Telegraph
Southern Cross landlords approve emergency rescue plan. The Telegraph reports that: The draft will be presented to Southern Cross management, the government, and banks tomorrow. Landlords who are care home operators will take control of their homes; others will be able to choose between finding new operators or staying with a revamped Southern Cross, which will be much smaller and have new management. Property owners will make "significant financial concessions."
News Corp (NWSA), regulators finish talks on bid for British Sky Broadcasting. Sources close to the situation tell the Telegraph that discussions with the Office of Fair Trading and Ofcom have resulted in significant, but "not dramatic," changes to Jeremy Hunt's original plan, and a further consultation is now underway. An announcement from the government could come within days.

London Times
Northwest & Ethical Investments calls for Research In Motion to really split chairman, CEO roles. The Times reports that the suggestion will be considered at next month's shareholder meeting. The company has split the roles, but they are both held jointly by Mike Lazaridis and Jim Balsillie, which NEI says means the company is not actually splitting them.

South China Morning Post
Hong Kong Airlines to order Airbus A380s. Citing an SMS, the SCMP says the order, for an unspecified quantity, will be announced at the Paris Air Show. The story notes that Cathay Pacific (293.HK) has ordered 32 Boeing (BA) 787s, six 777s, 30 Airbus A380s,12 A330s, and 15 A350s as of 31-May.

Wall Street Journal
- WSJ says Microsoft (MSFT) may want to put money into Nokia. A "Heard on the Street" column says both companies might end up happier after such a development. Nokia would be able to maintain its investment-grade credit rating, which is currently in danger, and Microsoft would get hardware help that would boost its case against Apple (AAPL) and Google (GOOG) in mobile software.
General Motors investing into start-ups. The WSJ reports that the company is doing so to provide the next breakthroughs in technology, entertainment and fuel-free engines, rather thena the traditional path of their own R&D. The investments are donw via its venture capital arm, GM Ventures.
ING Group board expected to decide on sale of ING Direct USA 15-June. People familiar with the matter tell the WSJ that given current offers, Capital One Financial (COF) will probably win in a cash-and-stock deal in the high-single-digit billions. General Electric (GE) is less likely to win, because it is stuttering at the chance to take on ING Direct's mortgage-related assets, and ING wants to get rid of the entire unit.
WSJ is cautious on Greece. A "Heard on the Street" column takes a particular interest in Greek banks, saying that if the European Central Bank fails to provide a great deal of funding, the banks will continue to face high borrowing costs with limited ability to lend more.


Bank of America Merrill Lynch: upgraded TW
BMO Capital: upgraded TFM, WABC
Canaccord Adams: upgraded PETD
FBR Capital: upgraded FE
Goldman Sachs: upgraded WFR, DMD; downgraded SPWRA
Kaufman Brothers: downgraded SPWRA
Keefe Bruyette & Woods: upgraded ZION
Nomura Securities: downgraded AAP
RW Baird: upgraded AH
Wells Fargo: upgraded DRYS


- The VIX is 19.61 up 3.9% on the session, despite a positive day for the equity markets. This jump in short dated futures is having the effect of flattening the VIX term structure - a phenomenon that has historically reverted quickly in the absence of a true market shock. This “steepener” trade can be played by buying the July 18 puts for $1.15 to sell the Sep 18 puts for $.85.

Service Without a Smile

- OIH options have offered a compelling way to establish directional (and/or long-vol) exposure to the oil service sector. What caught our attention recently is the fact July OIH options are trading on a 30 vol compared with 30-day realized vol at 28.14- the cheapest ratio of any ETF we follow. Along with this fact we have seen 30-day, 20-day, 10-day and 5-day realized each successively higher with much of the uptick in realized vol being explained by increasing pair-wise correlation rather than an increase in the realized volatility of its constituents.

What do we like option wise?

- Hard to fight what looks like an ugly tape in OIH. For anyone looking for protection against a long book, we like buying the July 140 puts for $3.75 (given the flat skew in OIH, the 38 delta puts offered on a 32 vol - look like a great deal to us). For volatility players, consider buying the OIH July 140 puts delta-neutral vs selling SPY July 125 puts also delta neutral. This trade benefits from both the relative attractiveness of OIH vol but also from the relatively higher skew in SPY.

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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