Thursday, June 23, 2011

Morning Note

June 23, 2011


Equity futures are trading below fair value in a continuation of yesterday's weak close. The performance follows yesterday's FOMC policy decision and Chairman Bernanke's press conference. The Federal Reserve cut its forecasts for U.S. economic growth, but offered no hint of further monetary support, saying the recovery should gradually pick up heading into 2012. Headlining economic data today is weekly jobless claims data at 08:30 ET.


Libor fixings 

- Overnight Libor: Dollar: 0.127% vs prior 0.128% ; Sterling: 0.567% vs prior 0.567%; Euro: 0.925% vs prior 1.273%
- 1-month Libor: Dollar: 0.186% vs prior 0.186%; Sterling: 0.628% vs prior 0.628%; Euro: 1.270% vs prior 1.273%
- 3-month Libor: Dollar: 0.247% vs prior 0.246%; Sterling: 0.825% vs prior 0.825%; Euro: 1.469% vs. prior 1.468%

August WTI crude ($0.2.01) to $93.40

Natural gas +$0.012 to $4.329

Gold ($4.50) to $1539.05

10-year yield 2.958%
30-year yield 4.195%


Asian Markets

Cement and construction stocks boosted China to its largest one-day gain in three months. Japan declined slightly, with carmakers gaining to make up for most of falls in other stocks. South Korea fell at the start, though it recovered some of its losses. Refiners fell 3% on a report that the government is asking them to extend their price cuts. Hong Kong fell, uncharacteristically ignoring China's rally, as Television Broadcasts (511.HK) edged down after the government extended the deadline for full digital transmission of TV signals. Australia declined broadly and extended losses on disappointing Chinese economic data. June HSBC Flash China PMI 50.6 vs 51.6 seq. The yen is trading at 80.51 to the US dollar.

European Markets

European equity markets opened lower, extended declines before becoming range bound slightly above the early lows. Federal Reserve Chairman Bernanke's weaker outlook for the US economy weighed. Generally disappoint economic data, mixed corporate reults and continuing M&A activity led to choppy trading at the lower levels. The periphery led the regions falls. Retail headed sector gainers led by J Sainsbury (SBRY.LN) post a bullish broker note, with healthcare, auto's and food & beverage are amongst the leading gainers. Chemicals, banks and construction led fallers, with Bayer (BAYN.GR) leading chemicals lower after a competitors drug had a positive update. With heightened concerns about the economic outlook, focus now moves to US jobless claims data. EU leaders will meet today at the start of a 2 day meeting with Greece likely high on the agenda. Eurozone Jun preliminary Manufactruing PMI 52.0 vs consensus 53.8 and prior 54.6. Germany Jun preliminary Manufacturing PMI 54.9 vs consensus 57.0 and prior 57.7. France June preliminary Manufacturing PMI 52.5 vs consensus 54.3 and prior 54.9


Today's Economic Releases (Eastern Time)

03:00 France Manufacturing PMI preliminary (Jun); actual 52.5; consensus 54.3
03:00 France Services PMI preliminary (Jun); actual 56.7; consensus 61.0
03:30 Germany Manufacturing PMI preliminary (Jun); actual 54.9; consensus 57.0
03:30 Germany Services PMI preliminary (Jun); actual 58.3; consensus 55.7
04:00 Eurozone Manufacturing PMI preliminary (Jun); actual 52.0; consensus 53.8
04:00 Eurozone Services PMI preliminary (Jun); actual 54.2; consensus 55.5
08:30 US Initial Jobless Claims (18-Jun); consensus 416K
08:30 US Continuing Claims (11-Jun); consensus 3683K
09:45 US Bloomberg Consumer Comfort (19-Jun); consensus n/a
10:00 US New Home Sales (May); consensus 305K
10:30 US EIA Natural Gas Inventories (17-Jun); consensus n/a 

Today's Key Events (Eastern Time)

09:00 Compugroup Medical has acquired a 75% stake in LAUER-FISCHER GmbH: 215.305.4495 / UK +44 16 16 01 89 02 / GER : +49 69 2 10 86 97 03
10:30 UTi Worldwide Investor Day
13:00 Red Hat Cloud Technology Update
13:00 Wedbush Management Call with Aruba Networks
16:00 Ligand Pharmaceuticals Analyst and Investor Day
17:00 ZIOPHARM Oncology Analyst & Institutional Investor Meeting
—:— 2nd World Cancer Vaccines Summit
—:— American Orthopedic Association Annual Meeting ~ AOA
—:— CommunicAsia
—:— Deutsche Bank South Africa Conference
—:— Drug Information Association Annual Meeting
—:— Electronic Materials Conference
—:— FDA Panel: Pulmonary-Allergy Drugs Advisory Committee discusses Shire/Abbotts' NDA for Firazyr for acute HAE
—:— FDA PDUFA: Lannett's NDA for the re-introduction of Morphine Sulfate Oral Solution
—:— FDA PDUFA: Pfizer/King/Pain Therapeutics' class 2 resubmission of NDA for Remoxy for moderate to severe pain
—:— G20 agriculture ministers meeting
—:— Gartner Security and Risk Management Summit
—:— GigaOM's Structure 2011
—:— IEEE Photovoltaic Specialist Conference
—:— International Headache Society Meeting
—:— International Supercomputing Conference
—:— Jefferies Global Consumer Conference
—:— Joint International Liver Transplant Congress
—:— Ladenburg Biotech Bus Tour
—:— OneMedForum
—:— Paris Air Show
—:— Telecom World Congress
—:— Wells Fargo Securities Healthcare Conference 


Company Specific News

Earnings
BBBY (Bed Bath & Beyond reports Q1 EPS $0.72 vs Reuters $0.62. Reports Q1:
Revenues $2.11B vs Reuters $2.08B)
CAG (ConAgra reports Q4 EPS $0.47 ex-items vs Reuters $0.48. Reports Q4: Revenues $3.21B vs Reuters $3.19B
FUL (H.B. Fuller reports Q2 EPS $0.50 vs Reuters $0.46. Reports Q2:
Revenues $393.7M vs Reuters $383.2M)
IHS (IHS Inc reports Q2 EPS $0.83 ex-items vs Reuters $0.85. Reports Q2:
Revenues $325.1M vs Reuters $323.5M)
LEN (Lennar reports Q2 EPS $0.07, revenues $764.5M vs Reuters $647.2M)
MLHR (Herman Miller reports Q4 EPS $0.30 vs Reuters $0.26. Reports Q4:
Revenues $441.5M vs Reuters $418.0M)
PAYX (Paychex reports Q4 EPS $0.33 vs Reuters $0.33. Reports Q4:
Revenues $522.7M vs Reuters $514.9M)
RAD (Rite Aid reports Q1 EPS ($0.07) vs Reuters ($0.12). Reports Q1: Revenues $6.40B vs Reuters $6.36B
RHT (Red Hat reports Q1 EPS $0.24 vs Reuters $0.22. Reports Q1:
Revenues $264.7M vs Reuters $253.3M)
SCS (Steelcase reports Q1 EPS $0.10 ex-items vs Reuters $0.05. Reports Q1:
Revenues $639.4M vs Reuters $589.3M)
SONC (Sonic reports Q3 EPS $0.21 ex-items vs Reuters $0.18. Reports Q3:
Revenues $152.1M vs Reuters $151.4M)

Positive News
ARS (Aleris signs five-year contract to provide aluminum plate, sheet to Airbus (EAD.FP); financial terms undisclosed)
BMY, PFE (ELIQUIS (apixaban) meets primary and key secondary endpoints in phase 3 Aristotle study)
XTA.LN (Xstrata announces that Collahuasi phase III prefeasibility study approved)

Negative News
WDFC (WD-40 Company updates guidance; expects FY2011 revenue of $333.0-340.0M vs prior of $335-350M and Reuters of $340.7M. Guides F11 The Company expects EPS of $2.05-$2.15 vs prior of $2.23-2.35 and Reuters of $2.27)

M&A
JOYG (Joy Global and Rowan (RDC) announce the completion of LeTourneau Technologies Inc. acquisition)

Offerings
AGNC (American Capital Agency 43.2M-share secondary priced for total gross proceeds of approximately $1.2B through Citi, J.P. Morgan, UBS, and Wells Fargo)
EXL (Excel Trust announces 12.5M share follow-on offering through Morgan Stanley, Barclays, KeyBanc and Wells Fargo)
FPTB (First PacTrust Bancorp 1.58M-share secondary priced at $15.50/share through RW Baird)
PLD (ProLogis announces 30M share secondary offering through BoA/ML and JP Morgan)
PODD (Insulet announces 1.15M share secondary offering for holders through JPMorgan. Note company also announced a $110M convertible note offering as previously announced)

AAII Trader Sentiment for week ending 6/22/2011: Bullish from 29% to 37%, Neutral from 28% to 27%, Bearish from 43% to 36%.

Newspaper Articles / Headlines

Barron's
Barron's Weekday Trader is positive on Johnson & Johnson. Despite quality control issues and a recent string of recalls, Barron's Weekday Trader is positive on JNJ citing the company's restructruing of its medical devices business, new drug launches, recent acquisitions and a 3.4% dividend yield. In addition, the article notes the company's AAA bond rating, product line diversity and says the company could generate nearly 20% in returns over the next 12 months.

Bloomberg
Permira Advisers has received several bids for Provimi. Bloomberg reports, citing sources, that Cargill, DSM, New Hope Group and Nutreco have made offers for Provimi and that the sale could be worth €1.8B. The article states that final bids are due around the end of next month.

China Daily
CSR Corp plans to apply for patents for its high-speed CRH380A train in US. An executive tells the China Daily that the decision follows lawyers' initial assessment that the company's chances were good. The article notes that industry insiders have said that patents would help CSR take part in US high-speed train projects.

Contra Costa Times
Cerus Corporation CEO says company "needs to make figuring out what the FDA wants a priority". The Contra Costa Times seems to have interviewed William Greenman, but the article doesn't really break any news. It notes that the company's clinical studies to remove pathogens from platelets and plasma are farther along than the study removing them from red blood cells.

Daily Deal
Lloyds Banking Group looking at selling some international businesses. City sources tell the Daily Mail that CEO Antonio Horta-Osorio plans to get rid of those that he deems too small or inefficient. The Irish operation appears not to be sellable, because it has too many property-related loans. The article does not make it clear, but it seems the plans could be announced in Horta-Osario's 30-Jun review.

De Tijd
Citi selling Belgian subsidiary. Without citing sources, De Tijd reports that the process is still in its early stages.

Detroit News
Fiat, Chrysler unions agree to negotiate togeether on issues of mutual interest. The Detroit News reports that Italian union leaders are hopeful that the Canadian Auto Workers and South American unions will join them. In an interview, UAW president Bob King says the UAW, which reached a similar agreement with Ford (F) unions last year and is working on one with General Motors (GM) unions, seeks to prevent car companies from playing the unions off against one another.

ET Net
Zara's parent (Inditex - ITX.SM) looking at Giordano. ET Net cites market sources, but stresses that there is no confirmation whatsoever of the story.

Financial Times
Bank of Italy may take control of Banca Popolare di Milano. The FT, citing people failiar with the matter, reports that the central bank may decide this if the board remains in deadlock between unionists and management. The article notes that disputes have escalated as a crucial meeting to finalise plans on an emergency share issue comes due.
- 'Shadow housing inventory' declines in the US. The FT reports that Lender Processing Services stated that 18% fewer loans were delinquent in May vs year-ago. CoreLogic said that the shadow inventory-properties not currently listed for sale but likely to come onto the market soon, dropped 18% to 1.7M units in April an 18% decline from Jan-2010 peak.
Imagination Technologies CEO forecasts 1B unit shipments by 2016 up from 500M. The FT reports that the CEO made the comments after reporting FY results.
Kesa Electricals' Comet up for sale. The FT, citing people familiar with the situation, reports that interest has been received from 10 groups all financial buyers rather than rival retailers. StreetAccount notes the FT reported 9-Jun that Kesa may sell some Comet stores and The Sunday Times reported 15-May that there was pressure from activist shareholders to exit the UK business.
British Airways cabin crew vote for peace deal. The FT reports that 92% of union members Unite votes in favour of a deal with a 72% turnout. In the two-year pay deal, staff will get a rise of up to 4% this year and 3.5% next year, linked to productivity.
Misys bidder is reported to be FIS Global (FIS). The FT reports, citing sources, that FIS Global has made the preliminary bid that Misys said it had received on Tuesday. The article states that talks are progressing and could finish within one month. Recall it was previously reported that Misys had been approached by a US company with a provisional bid.

Hollywood Reporter
Some reasons why Hulu probably really is on the block. In a somewhat detailed article, Hollywood Reporter says the media owners' decision to sell the streaming service is not a surprise, because: If a buyer is willing to pay $2B, Disney (DIS), Comcast (CMCSA), and News Corp (NWSA) would get fast returns on their investments. Acting in concert has not always been easy for the owners, who are actually competitors.

Independent
Debenhams offers to buy Jane Norman's stock and brand. Without citing sources, the Independent reports that Debenhams does not want to purchase the women's fashion retailer's 91 high-street doors. The Debenhams offer is, however, thought to have offered to buy some of Jane Norman's stock from its shops "at a sizeable discount."

London Times
- Treasury considering plan to give every British adult shares in Royal Bank of Scotland (RBS.LN), Lloyds Banking Group (LLOY.LN). The Times reports that the proposal, revealed by Deputy Prime Minister Nick Clegg yesterday (22-Jun) in Brazil, could see people being given 1,450 RBS shares and 450 Lloyds shares, worth £771 at yesterday's close. People would not be able to sell their shares for a profit until the government makes back the money it spent to buy shares during the 2008 rescue of the two banks. The Times notes that the idea would remove the chance for investment banks to make money from a conventional privatization of RBS and Lloyds.

MIC Gadget
- Apple COO Tim Cook spotted at China Mobile (941.HK) headquarters. In her blog, a First Financial Daily reporter suggests Cook was probably visiting to discuss the iPhone, but she seems to be purely hypothesizing.

New York Post
BJ's Wholesale wants $55/share from Leonard Green/CVC. Sources tell the NY Post that BJ's let the firms know yesterday that it was open to more talks, but it was "not thrilled" with the $50/share offer it has received. One source says the private-equity firms are not likely to raise their offer by the 10% that BJ's seeks. Another says BJ's might actually accept $51 or $52/share.

New York Times
- Foursquare to announce national discount deal with American Express today. The NYT reports that Foursquare will not get any revenue from the deal, which will give discounts to AmEx cardholders if they check in on their cellphones at participating retailers. The companies ran a test in March at a conference and found that people in the program spent 20% more than cardholders not in the program. An American Express executive says that the company hopes to use the idea to make itself relevant to the younger set. Discounts will initially be offered at Sports Authority, H&M (HMB.SS), and New York restaurants.
US wants exemption for its airlines from EU rules on emission. The NYT reports that the US demand will make the dispute more lengthy as it now stands from 1-Jan, the EU emissions standards will cover most international flights using European airports, meaning US carriers will have to buy carbon credits to offest their emissions. The Europeans don't want to change their laws and a hearing will be held 5-Jul at the European Court of Justice
- Bombardier C-Series now viable-divisional head says. In an interview with the New York Times, Gary Scott, president of the Commercial Aircraft division, says that orders at the Paris Air Show meant they were now "way beyond any uncertainty about the C-Series program" the company has 123 orders from seven customers from the plane, as well as a similar number of options the company may have one more C-Series order during the show.
NYT discusses Greek crisis and potential for derivatives problems for financial markets. The NYT article discusses, the question of whether there is an AIG (AIG) equivalent in the Greek crisis - ie an entity that may have insured billions of dollars of European sovereign debt. The fact that generally these contracts are concentrated in the hands of a few companies and there may be single company standing behind them all Markit's data shows there are gross outstanding positions in CDS related to Greece debt of $78.7B, while the BIS says there are $44B of other guarantees tied to Greece
the opaqe nature of the derivatives market and the unknown amount of exposure is a major reason, the regulators and the banks do not want a default by Greece.

Reuters
- GoAir orders 72 A320neo planes from Airbus; worth $6.6B at list

Techcrunch
Yandex, Rambler sign search-and-advertising-services network deal. TechCrunch Europe says the deal will put more pressure on Google (GOOG).

Wall Street Journal
BP's Russian partners may buy-out BP. The WSJ, in an article discussing the saga of BP and AAR, cites a shareholder of AAR saying Trust has been irreversibly damaged between the two companies AAR could swap its shares in TNK-BP (TNBP.RU) for shares in BP aligning both companies' interest AAR could buy out BP for as much as $25B.
- WSJ is negative on Research In Motion. A "Heard on the Street" column says the company has loyal customers and a new OS coming next year. But its momentum is basically down, and Microsoft (MSFT) seems unlikely to take a chance on buying RIMM. The column says that "fresh blood" would help, especially as co-CEOs Jim Balsillie and Mike Lazaridis hold an unsettling 10% of the company's stock.
WSJ is negative on AstraZeneca. A "Heard on the Street" column says the stock's discount to its large-cap peers still isn't enough, since the company is not diversified enough to protect against a potential fall in earnings.
General Motors wants Treasury to sell its stake as soon as possible. The WSJ, citing people familiar with the matter, reports that the company wants to do so as they feel government ownership constrains them in certain ways such as paying for top-talent. GM is considering a plan to buy back shares from existing shareholders now after being rebuffed by Treasury officials earlier in the year in an offer to buy back the government's stake
- WSJ discusses French banks' exposure to GreeceThe WSJ, citing analysts, notes that Credit Agricole's and Société Générale's foray into Greek banking was a key reason for the downgrade review by Moody's (MCO) Emporiki, owned by Credit Agricole, has loan-loss provisions at the 12.5% level while SG's Geniki provisions are at 21%, protecting them from all but a worst case scenario - a disorderly Greek default.


Research

BB&T: upgraded DECK
Bernstein: downgraded STJ
Credit Suisse: upgraded SMS
Goldman Sachs: downgraded NLC
JP Morgan: downgraded POR, FFIV
Morgan Stanley: upgraded BMY; downgraded DG
S&P: Anglo Irish Bank downgraded to CCC from CCC+; outlook negative
Susquehanna: upgraded CCRN
UBS: upgraded GEVO, CAVM, ISS; downgraded DISCA, TWX


Options

- On June 15th, we sent around a note arguing that we are living in a range-bound world. Needless to say it has been a wild ride (2 of the last 6 sessions featured >1.3% moves in the SPX) – but surprisingly, the SPX closed yesterday right where it was when we sent our note – 1287. Skew in IWM has risen significantly since June 15th, and we think the pullback in the VIX over the last few days presents an attractive opportunity for investors to buy protection through quarter-end on our ‘range-bound’ thesis.
For macro-protection, consider buying IWM June Quarterly 79/75 Put Spread for 67c (5x1 payout)

- Crude Has Another Leg Down? – BMO’s Technical Analyst Mark Steele pointed out yesterday that the energy sector has fallen into negative territory in his relative strength filter and that the XLE formed a distribution top w/ downside risk to the $65 level. If we look at all 566 energy stocks as one portfolio – 1) underperformers outnumber outperformers. 2) momentum sell list is 2x larger than buy list and 3) severed market outperformers vastly outnumber severed market underperformers. We want to add that WTI’s 50-day is crossing below the 100-day MA this morning.
For protection, consider buying XLE June Quarterly 72/69 Put Spread for ~53c (4.7x1 max payout)


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 *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.

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