Morning Note

June 22, 2011

Equity futures are trading below value ahead of today's FOMC's policy statement due at 12:30 ET, followed by Chairman Ben Bernanke's press conference at 14:15 ET. Chairman Bernanke is likely to reiterate his forecast for a rebound in H2 of the year, though may temper that forecast based on the soft economic data of late. Greek PM George Papandreou's new cabinet was approved in parliament by 155 votes to 143, with two abstentions. The Parliament will now be asked to approve €28B of cuts, tax rises, fiscal reforms and privatisation plans.

Libor fixings 

- Overnight Libor: Dollar: 0.128% vs prior 0.128% ; Sterling: 0.567% vs prior 0.567%; Euro: 1.273% vs prior 1.285%

- 1-month Libor: Dollar: 0.186% vs prior 0.186%; Sterling: 0.628% vs prior 0.628%; Euro: 1.273% vs prior 1.279%

- 3-month Libor: Dollar: 0.246% vs prior 0.246%; Sterling: 0.825% vs prior 0.825%; Euro: 1.468% vs. prior 1.466%

II Data: Bullish sentiment increases to 37.6% from 37.0% in the latest US Investor's Intelligence poll. Bearish sentiment increases to 28.0% from 26.0%. Those expecting a market correction decreases to 34.4% from 37.0%

US MBA Mortgage purchase applications index (2.8%) in 17-Jun week; total market index (5.9%). compares to +4.5% and +13.0%, respectively, in the prior week. refi index (7.2%) vs. +16.5%. 30-year contract ARM rate +6bp to 4.57%

Aug WTI crude ($0.60) to $93.57

Natural gas ($0.019) to $4.369

Gold ($4.50) to $1542.50

10-year yield 2.95%

30-year yield 4.2031%

Asian Markets

Most Asian markets rose today as Greek Prime Minister George Papandreou survived a no-confidence motion. Unsurprisingly, exporters to Europe were particular beneficiaries of the development. The electricity and gas sector was the only one to go down in Japan, as people moved out of defensive shares. LCD makers rose in Taiwan when Chimei Innolux (3481.TT) and AU Optronics (2409.TT) both denied a report that they had forced workers to take holidays to deal with slowing demand. The market was supported by biotech and financial issues. China was flat. Hong Kong finished flat. Li & Fung (494.HK) jumped 6% on saying its business with Wal-Mart (WMT) will expand, and before news that it was buying five companies. Alibaba.com (1688.HK) jumped 6% after Alibaba group said it was making progress in its talks with Yahoo (YHOO) and Softbank (9984.JP) on Alipay. PetroChina (857.HK) edged down on walking away from its purchase of Encana (ECA.CN) natural-gas assets in Canada. Japan May domestic supermarket sales (1.4%) y/y to ¥1.05T. The yen is trading at 80.18 to the US dollar.

European Markets

European equity markets trade mixed to lower. Greece's governement survived a vote of confidence (155 to 143) with the focus now moving to next weeks votes on the new austerity measures required to attain additional loans from EU/IMF. The Greek cabinet meet today to discuss the mid-term financial plan and firm up the measures in the austerity package. Greek shares are modestly higher in choppy trading. Corporate results were mixed with Philips Electronics (PHIA.NA) falling over (10%) after a profits warning. Market participates are cautious ahead of the rate decision from FOMC due at 12:30ET and Bernanke's press conference due at 14:15ET. Eurozone April Industrial new orders +8.6% y/y vs consensus +14.2% and prior revised to +14.3% from 14.1%. Eurozone April Industrial new orders +0.7% m/m vs consensus +1.0% and prior revised to (1.5%) from (1.8%). BOE MPC voted 7-2 to keep rates at 0.5% in June, Dale and Weale vote for +25 bps hike. Spencer Dale and Martin Weale voted against the proposition, preferring to increase Bank Rate by 25 basis points. Adam Posen voted to increase the size of the asset purchase programme by £50B to a total of £250B. The pound and the euro are trading at $1.6152 and $1.4397 respectively. The pound traded lower following the dovish tone of the BOE minutes, whilst UK Gilts rallied.

Today's Economic Releases (Eastern Time)

05:00 Eurozone Industrial New Orders y/y (Apr); actual +8.6%; consensus +14.2%

07:00 US MBA Mortgage Purchase Applications (17-Jun); consensus n/a

10:00 US FHFA House Price Index (Apr); consensus n/a

10:30 US DOE Crude Inventories (17-Jun); consensus n/a 

Today's Key Events (Eastern Time)

08:30 Cardtronics to acquire EDC ATM Business: 877.303.9205 or 760.536.5226

08:30 Sensata Technologies Investor & Analyst Day

10:00 Cornerstone Therapeutics Updates investors on strategic direction of company: 888.802.2269 pc 8030679

10:00 White Mountains Investor Meeting

12:30 FOMC policy statement

13:00 JP Morgan Conference Call with Amylin Pharmaceuticals CEO

13:00 OneBeacon Investor Meeting: 800.901.5231 pc 26538560

14:15 Bernanke press conference following FOMC statement

—:— 2nd World Cancer Vaccines Summit

—:— BMO Capital Markets North American Pipelines & Utilities Conference

—:— Coloplast Capital Market Days

—:— Coloplast Capital Markets Day

—:— CommunicAsia

—:— Deutsche Bank South Africa Conference

—:— Drug Information Association Annual Meeting

—:— Electronic Materials Conference

—:— FDA PDUFA: Fibrocell Science's resubmission of BLA for laViv (azficel-T) to treat moderate to severe nasolabial folds, wrinkles

—:— FOMC meeting

—:— G20 agriculture ministers meeting

—:— Gartner Security and Risk Management Summit

—:— GigaOM's Structure 2011

—:— IEEE Photovoltaic Specialist Conference

—:— International Supercomputing Conference

—:— Jefferies Global Consumer Conference

—:— JP Morgan Asia Pacific Conference

—:— Macquarie SMID Cap Utilities Conference

—:— Needham with Lexicon Pharmaceuticals

—:— Paris Air Show

—:— Praxair Investor Day

—:— RBC Capital Markets Global Mining & Materials

—:— Telecom World Congress

—:— Wells Fargo Securities Healthcare Conference 

Company Specific News

Earnings

ADBE (Adobe Systems reports Q2 EPS $0.55 ex-items vs Reuters $0.51, guides Q3 EPS $0.50-0.56 vs. Reuters $0.53)

AVAV (AeroVironment reports Q4 EPS $0.79 vs Reuters $0.69)

FDX (FedEx reports Q4 EPS $1.75 vs Reuters $1.72; Reports Q4: Revenues $10.55B vs Reuters $10.42B)

FSII (FSII FSI International reports Q3 EPS $0.10 vs Reuters $0.07)

JBL (Jabil Circuit reports Q3 EPS $0.58 vs Reuters $0.57, guides Q4 EPS $0.52-0.60 vs. Reuters $0.60, announces $200M repurchase program)

KMX (CarMax reports Q1 EPS $0.55 vs Reuters $0.47. Reports Q1:

Revenues $2.68B vs Reuters $2.53B)

LZB (La-Z-Boy reports Q4 EPS $0.24 ex-items vs Reuters $0.19)

SAN.FP (MHS Sanofi (SAN.FP) establishes a global agreement with Medco and UBC to improve quality of patient care through real-world evidence)

Positive News

DRQ (Dril-Quip awarded ~$39M contract for the supply of drilling and production equipment)

M&A

AZN (AstraZeneca sells its Astra Tech Business to Densply (XRAY) for approximately $1.8B in cash)

Offerings

ACHN (Achillion Pharmaceuticals 9.6M share secondary priced at $5.90 through BoA/ML and Leerink Swann.)

DPM (DCP Midstream Partners files $150M common unit shelf)

VHS (Vanguard Health Systems 25M share IPO priced at $18/sh through BofA Merrill Lynch, Barclays, Citi, Deutsche and JPMorgan.. The IPO priced below the expected $21-23 range and will trade on the NYSE under the symbol VHS)

Newspaper Articles / Headlines

Barron's

- Barron's Weekday Trader is positive on Time Warner. Barron's Weekday Trader is positive on Time Warner citing the recent box office success of The Green Lantern and The Hangover 2. In addition, the article notes the company's 2.7% dividend yield and current trading levels around 4x this year's enterprise value to EBITDA which is a discount when compared to others in the sector

Business Spectator

- Foster's Group has higher fair value than people think. Making some assumptions, Business Spectator calculates that Foster's would have a dividend yield of 5.8% at A$6/share and 5% at A$7/share.

Caing

- Chinese Ministry of Finance say they are not considering reducing tariffs on luxury imports-Caing, citing unidentified ministry officials

Daily Mail

- JPMorgan Chase (JPM) looking to buy Man group in friendly deal for 400p/share in cash. As usual, Geoff Foster gives no reason to believe the idea has any basis in fact. At 400p/share, JPM would be paying £7.5B for Man group.

- Misys's original approach came from US company; that has made provisional bid of 450p/share. Without saying that any of the companies is likely to be the bidder, the Daily Mail says that Sungard, Fidelity National Information (FIS), and Fiserv (FISV) have been mentioned as possible buyers before, and some analysts think a winning bid will have to be 500p/share.

Dallas Morning News

- Amazon.com offering trade to Texas: 5K jobs for sales-tax exemption. The Dallas Morning News, which seems to have seen a written offer, reports that Amazon is also proposing to spend $300M on distribution centers for the new employees to work at, if Texas will let it not collect sales taxes for 4.5 years. Sources in the legislature say that in private negotiations, Amazon has raised the possibility of moving Woot.com out of Texas.

Digitimes

- Research In Motion lowers internal Playbook sales target from 2.4M to 800-900K units. Sources from supply chain makers tell DigiTimes that strong sales on day one have been followed by lower demand than RIMM had expected.

Financial Times

- Al Jazeera puts in bid for rights to show live French football. Sources tell the FT that Al Jaz is talking with Orange TV (FTE.FP) about buying or partnering with some of the company's sports channels if it wins the bidding. Sources say Al Jaz is unlikely to win a majority of the rights, which current rightsholder Canal Plus (AN.FP) is also bidding for. The assumption is that the annual fee for the French League will be less than the €460M Canal Plus offered in 2007; a decision is expected 24-June.

- Thomson Reuters to sell healthcare division for $1B. The FT, citing people familair with the auction, reports that, The company has appointed Morgan Stanley (MS) and Allen & Co to sell the business. Thomson wants to sell the whole business but bidders may prefer to see it broken up.

- Carrefour shareholders approve DIA spin-off.

- Ladbrokes to reorganise company. The FT, seemingly without citing sources, reports that: the head of online content Gary McIIraith will leave the company, the group will be organised around three areas-customers, products, and channels instead of retail, e-gaming, and phone betting.

- Northrop Grumman executive says US should rethink drone export controls. The FT reports that the executive says there is" insatiable appetite for drones ... the US missed the boat".

- Rolls-Royce to become exclusive supplier to the new Airbus (EAD.FP) series. The FT reports that the company will make the engine for alll three types of the A350 series analysts have put the figure of redesigning the A350-1000 series at $500M, a number Airbus CEO denied.

- The FT discusses Royal Dutch Shell's floating gas terminals. The FT breaks no news but is an article describing the new terminals as a breakthrough for the industry, enabling gas to be recovered from fields considered too small or too far offshore to be uneconomically feasible for pipelines. The article also mentions other companies which are moving forward with similar projects.

- Norilsk Nickel elects Andrey Bugrov as chairman of the board. The FT reports that he was an Inteross executive, he replaces Rusal's (486.HK) choice of Alexander Voloshin, this is another step in the saga of a battle between Rusal and Interros for control of the company.

Kommersant

- Alrosa, Evraz Group to meet today to agree on details of sale of 51% stake in Timir. Sources familiar with the negotiations tell Kommersant the price will be about RUB5B ($179.1M). The companies are also discussing the possibility of changing the license agreement so as to not build a steel plant, saving $4B.

London Times

- Best Buy (BBY) may be targeting Dixons Retail. The Times says that the rumor was on the trading floor yesterday. The article points out that there seem to be more reasons to disbelieve the idea than to believe it.

- Lloyds Banking Group bans travel for one week each month through December.

The Times reports that the bank hopes to cut its travel costs by 20% by having employees do more video-conferencing. The ban is mainly domestic, and there are exceptions.

Los Angeles Times

- LA Times looks at gambling in Singapore. The article is a summary, breaking no news. It reminds readers that Singapore will pass Las Vegas for second place on the world's gambling destinations list next year.

- Universal Music Group (VIV.FP) expected to compete for EMI. A person close to one of the two labels (probably Universal, though the article does not spell it out) tells the LA Times that Universal thinks a combination with EMI will not face as many regulatory hurdles as a Universal-Warner Music Group (WMG) combination might have. The article says Universal primarily wants EMI's recorded music business, though it could try to buy the whole company.

New York Post

- Time Warner losing interest in buying OK!'s US edition. A Time Warner insider tells the NY Post that the publication would need to make money, and a Northern & Shell filing indicates that the US edition lost $25M last year. A source suggests that Time Warner would be interested in buying the profitable British edition of the magazine, but it does not appear to be for sale.

- America's new highest-paid reality TV star: Donald Trump. Sources familiar with the contract tell the NY Post that Trump's new deal with Comcast (CMCSA) for The Celebrity Apprentice will see him earn $65M/year, more than American Idol judges or the Kardashians.

- Sears Holdings looking to capitalize from moving its HQ. One source close to Sears tells the NY Post that by moving, the company would have an excuse to fire thousands of people, which chairman Eddie Lampert is itching to do. A long-term tax break from Illinois, reportedly worth $240M, will expire next year, so the company is shopping for a new deal for locating its headquarters somewhere.

New York Times

- Agency overseeing Fannie Mae (FNMA) and Freddie Mac (FMCC) failed to refer complaints. The NYT, citing a report by the Federal Housing Finance Agency, reports that the agency failed to refer to criminal investigators or any other authorities almost 100 complaints about foreclosure abuse and mortgage fraud at the companies over a recent two-year period.

- NYT discusses Greek banks. The NYT breaks no news reports that the banks were seen as well-managed before the crisis but have fallen victim to their government's debt problems. They are being pressured to reduce funding from the ECB and so cannor provide credit to the economy. Foreign banks could be hurt as some have subsidiaries in Greece which own Greek governmentr debt, such as Société Générale (GLE.FP) and Crédit Agricole (ACA.FP). The banks are being used as a pawn in the game as the ECB threatened to cut off financing to the banks if private investors share in the pain of a Greek restructuring.

Techcrunch

- Yahoo! did not approach Hulu. A source close to Yahoo tells TechCrunch that though Hulu is looking for a buyer, Yahoo has not meaningfully discussed the issue with Hulu. The article cautions, however, that the source "has her own agenda," implying that the author is not certain whether to dismiss the earlier LA Times report or not.

- Yahoo! looking to replace CEO Carol Bartz. Multiple sources tell TechCrunch: Fox Digital's Jon Miller has had unofficial discussions about taking the job, Yahoo board member David Kenny is thought to be a candidate,

Bartz may know that an unofficial search is underway, chairman Roy Bostock may also be targeted for removal.

Wall Street Journal

- WSJ seeks to debunk Greek myths: A "Heard on the Street" column says:

Greece may not want to pay back its debts, but it is not insolvent. Defaulting would be contrary to Greece's interests. A Greek default would not have the same severe-market-shock effect that Lehman did. Even if a default becomes inevitable, delaying it will be a good idea. The eurozone would be well advised not to charge Greece the punitive lending rates that it is.

- WSJ is cautious on Best Buy. A "Heard on the Street" column warns that the $5B share buyback announced yesterday will only carry the company's stock so far, and at some point, BBY will simply need to raise its sales.

- Citi to lose less than expected on EMI. A "Heard on the Street" column says that EMI could go for £1.9-2.5B, vs previous expectations of £1.5B.

- WSJ discusses defense sector. The WSJ, citing Pentagon leaders and industry executives, reports that although contractors are expecting shrinking military budgets in the US and Europe, they are expecting only marginal reductions over the next few years. Most of the US cuts will be delayed until the Pentagon finishes a strategic review and in the meantime, many big programs are insulated from large reductions David Van Buren, U.S. Air Force's chief acquisition official, said at the Paris air show that cuts would not be as bad as the end of the cold war and that budgets will be down a little bit.

- Medtronic investigated by Senate Finance committee for pay-offs. The WSJ, citing people familiar with the matter, reports that

they are looking at whether surgeons who received money from the company failed to note complications with the use of 'Infuse Bone Graft'

the inquiry was triggered partly by a upcoming paper showing many problems with the product in clinical trials but were not reported in research papers Medtronic sponsored between 2000 and 2009

authors of the studies have received millions of dollars from the company in the forms of consulting fees or royalties

- WSJ discusses JPMorgan Chase settlement for mortgage-bond failures. The WSJ reports that the SEC now has a 'playbook' for forcing banks to settle : investors were kept in the dark about hedge funds' role in creating them

JP Morgan is only the second bank after Goldman Sachs (GS) to settle with the SEC over mortgage-bond deals and now more banks are expected to settle

- WSJ discusses Columbia Sportswear's antitrust complaint against W. L. Gore. The article is largely a summary. People familiar with the matter tell the WSJ that General Electric (GE) has told the FTC that its eVent has been excluded from the market. Gore calls GE "very much a head-to-head competitior."

- UBS helping investigators look into possible manipulation of Libor. It's not clear how much news this article is breaking, as a spokeswoman tells the WSJ to refer to a March statement that the bank was cooperating with investigators. The WSJ says the extent of UBS's cooperation is unknown.

- Hulu considering options after receiving offer. Citing sources, the WSJ reports that Hulu is deciding whether to sell itself.

- WSJ discusses the mixed legacy of QE2. The Journal's Fed watcher, Jon Hilsenrath, notes that QE2 will end this month with a mixed legacy. He points out that while the Fed succeeded in stomping out deflation risks, economic growth is slower now than when the program began, the labor market recovery is losing traction and there have been both positive and negative takeaways from the financial-market impact.

Research

Argus: upgraded FRX

Barclays: upgraded FFIV

BB&T: upgraded PPC

Credit Suisse: upgraded BIIB

Deutsche Bank: upgraded WNR

FBR Capital: downgraded ESS, UDR

Janney Capital: upgraded SUSQ

Keefe Bruyette: upgraded SUSQ

KeyBanc: upgraded HXL

Mizuho: upgraded LONG

Stifel: upgraded FST

Susquehanna: upgraded HS

UBS: upgraded PSE

Wells Fargo: upgraded DO

Options

Have All the Black Swans Left the Pond?

- The VIX is at 18.86, down 5.65% continuing their descent. But while the VIX is back to its June 10th level the changes to the volatility complexion have not been erased. While the SPX is now higher than it was on 6/10, net-net, at the money vols are higher across the term structure. 30-day realized volatility in the SPX is now 14.67, nearly 2 points (14%) higher than 30-day realized on 6/10. While implied vol is higher, it now looks significantly cheaper as a function of realized vol than it did on 6/10 (1.12 vs 1.24). Given this dynamic ETF vols look a lot more reasonable as well. 30-day implied/realized ratios in XHB, XRT, IYR, XLP and BBH are all below their 20th percentiles. See attached report for complete table of etfs and ratios. With plenty of near-term risks remaining both on the domestic and global front, including: Greek parliament vote on new austerity/privatization measures next Tuesday (June 28), FOMC meeting and Bernanke press conference today, Negotiations over a debt ceiling increase/debt reduction plan running up against the Aug 2 “D-day”, Earnings from a slew of May-end companies and speculation of a China rate hike continuing to build. It might be time to look at some inexpensive hedges using the ETFs listed above.

The REITs are Starting to Reek

- Yesterday we got home sales data, today MBA Mortgage Applications, House Price Index and tomorrow New Home Sales. While we acknowledge home housing data has only indirect implications for the REIT space there are some warning signs that give us cause for concern: 1) Put/Call open interest in the IYR is at 2.47, near a one-year high (2.71 standard deviations above its one-year average). 2) Put activity has dominated the tape and activity yesterday was decidedly bearish. 3) 60-day 25-delta put/call skew is 1.46, or 1.77 standard deviations above its one-year average.

Given its cheap vol and elevated skew, look at buying the IYR July 60-55 put spread for $1.03

http://seaofopportunity.blogspot.com/

*Special thanks to Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!

 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.