Tuesday, June 28, 2011

Morning Note

June 28, 2011

Equity futures are trading below fair value as European markets pare initial gains with the focus remaining on developments in Greece as trade unions hold the first day of a 2-day general strike. With little scheduled corporate news flow, the focus will be on Consumer Confidence data at 10:00 ET.

Libor fixings 

- Overnight Libor: Dollar: 0.127% vs prior 0.127% ; Sterling: 0.566% vs prior 0.566%; Euro: 0.833% vs prior 0.833%
- 1-month Libor: Dollar: 0.186% vs prior 0.186%; Sterling: 0.629% vs prior 0.628%; Euro: 1.271% vs prior 1.270%
- 3-month Libor: Dollar: 0.246% vs prior 0.246%; Sterling: 0.825% vs prior 0.825%; Euro: 1.473% vs. prior 1.468%

Aug WTI crude +$0.32 to $90.93

Natural gas $0.01 to $4.27

Gold +$5.86 to $1501.96

10-year yield 2.918%
30-year yield 4.268%

Asian Markets

Asian markets, with the exception of Japan, failed to follow the US higher. Most markets opened higher and sold off during the day, despite hopes of a resolution to the Greek crisis, as private investors, specifically French banks, proposed a rollover of Greek. Japan led the region with yen weakness helping the exporters and the speculation that the Greek situation is coming to a resolution, helping companies leveraged to Europe. Retailers performed well as a MITI report showed retail sales slowed less than the previous two months. Hong Kong opened higher and then closed flat as developers dropped after new mortgage lending fell while sentiment towards banks improved.
Australia was also little changed as strength in banks was offset by weakness in retailers and certain commodity stocks, despite the overnight rally in commodities. China recovered from its mid-day falls as bargain-hunters stepped in, perceiving that inflation may have peaked in the country. Koreafinished the day down slightly, despite KRW strength as the country's current account surplus widened to $2.26B in May vs $1.28B sequentially. Banks rallied, benefiting from less risk-aversion towards the sector and the KRW strength. Japan May retail sales (1.3%) y/y. The yen is trading at at 80.79 to the US dollar.

European Markets

European equity markets generally edged higher in early trading aided by Wall Street's constructive close, with sentiment aided by reports that EU officials are working on a contingency plan for Greece if its parliament rejects the package of additional austerity measures in a vote tomorrow. Greek unions start a 2-day national strike today. Indices have pared earlier gains following disappointing UK GDP data, a downbeat trading update from Siemens (SIE.GR) along with the continuing uncertainty surrounding the Greek debt crisis. Germany Jul GfK consumer sentiment 5.7 vs consensus 5.3, prior revised 5.6 from 5.5. UK Q1 GDP (final revision) +1.6% y/y vs preliminary +1.8%. Germany Jun CPI due tbc (around 7ET). European Automobile Manufacturers' Association (ACEA) Commercial Vehicles Registrations in the EU +25.1% y/y in May. The pound and the euro are trading at $1.5918 and $1.4267 respectively

Today's Economic Releases (Eastern Time)

02:00 Germany GfK Consumer Confidence (Jul); consensus n/a
02:00 Germany CPI y/y (Jun); consensus n/a
04:30 UK final GDP y/y (Q1); consensus n/a
07:45 US ICSC-Goldman Chain Store (25-Jun); consensus n/a
08:55 US Redbook Chain Store (25-Jun); consensus n/a
09:00 US Case-Shiller Home Price Index (Apr); consensus (3.9%)
10:00 US Consumer Confidence (Jun); consensus 60.6
16:30 US API Crude Inventories (24-Jun); consensus n/a
19:30 Japan Unemployment Rate (May); consensus n/a
19:30 Japan Job-To-Applicant Ratio (May); consensus n/a
19:30 Japan Household Spending (May); consensus n/a
19:50 Japan Industrial Production (y/y) (May); consensus n/a
Today's Key Events (Eastern Time)

07:30 Standard Microsystems Analyst Day
10:00 Cliffs Natural Resources Analyst and Investor Day
10:00 Microsoft CEO Ballmer details latest on Microsoft Office 365
13:00 Nike Investor Update
13:00 Treasury Auction of 5-yr notes
17:00 Devon Energy Company Update @ Oil Sands School
23:30 China Gerui Advanced Materials Group Investor Event: 866.395.5819 Intl 706.643.6986 pc 78160771
—:— 2011 BIO Business Forum
—:— 2011 BIO International Convention
—:— American Diabetes Association ~ ADA
—:— APIC 2011 Annual Educational Conference
—:— Bank of America Merrill Lynch Greater China Cement / Metals & Mining Corporate Day (1on1)
—:— Bank of America Merrill Lynch Pan European Small & Mid Cap Conference (1on1)
—:— Biochemical & Molecular Engineering XVII
—:— BMO Capital Markets China Software and Services Bus Tour
—:— Brean Murray, Carret China Growth Conference
—:— Global Hunter Securities with Evolution Petroleum
—:— Global Hunter Securities with Natural Gas Services
—:— Global Hunter Securities with Warren Resources
—:— JP Morgan Cazenove Media CEO Conference
—:— Nalco Water and Process Services Business Review: 913.312.1438 pc 6595515
—:— Needham with American Software
—:— Oppenheimer Consumer Conference
—:— Small & Midcap Conference
—:— Smart Utility Summit

Company Specific News

NKE (Nike Q4 EPS $1.24 vs Reuters $1.16, global futures +12% vs consensus +8.2%)
SMSC (Standard Micro Q1 EPS $0.47 ex-items vs Rtrs $0.29, guides Q2 EPS $0.36-0.38 ex-items vs Rtrs $0.38)

EEP (Enbridge Energy Partners Class A common unit offering priced at $30/sh through BoA Merrill, Wells Fargo, Citi, Morgan Stanley, RBC Capital)
FRC (First Republic announces 10M share secondary for holders through Morgan Stanley, BoA Merrill, others)
SNH (Senior Housing announces proposed offering of 6.5M common shares through Jefferies, Citi, UBS)

Other News
- European Automobile Manufacturers' Association (ACEA) Commercial Vehicles Registrations in the EU +25.1% y/y in May. New Light Commercial Vehicles up to 3.5t – “vans". In May, demand for new vans were up +21.5% to 146,350 units. Of the most significant markets, France +28.4%,Germany +5.1%, UK +21.4% and Spain (18.3%). New Heavy Commercial Vehicles over 16t (excluding Buses & Coaches) – “heavy trucks”. In May, demand for new heavy trucks were up +63.1% to 21,463 units. Of the most significant markets, UK +43.1%, Spain +45.6%, Germany +48.7%, France+87.4%. New Commercial Vehicles over 3.5t (excluding Buses & Coaches) – “trucks”. The segment of trucks recorded 28,584 new registrations in May up +50.8% y/y. Strong growths were observed across markets, UK +31.5%, Spain +40.5%, Germany +44.3%and France +73.5%
New Buses & Coaches over 3.5t. In May, demand for new buses and coaches was up +5.3% y/y, sustained by the Spanish +20.5%, German +35.5% and French +47.6% markets in particular. The UK was the only major market to decline (40.0%)
- Weekly USDA crop progress report says 68% of the corn crop is in good or excellent condition. Compares to 70% last week and to 73% in prior year.
Cotton: 32% of cotton is squaring vs. 21% last week and 39% average of 2006-10 period. 27% of the cotton crop cotton is in good or excellent condition compared to 26% last week and 62% y/y.
Soybeans: 92% of soybeans have emerged vs 82% last week and 92% average of 2006-10 period. 65% of the soybean crop is in good or excellent condition compared to 68% last week and 67% y/y
Rice: 61% of rice crop is in good or excellent condition compared to 57% last week and 74% y/y.
Winter wheat: 44% of winter wheat crop has been harvested vs. 31% last week and 37% average of 2006-10 period. 35% of winter wheat crop is in good or excellent condition compared to 36% last week and 64% y/y
Spring wheat: 89% of spring wheat has emerged vs. 83% last week and 100% average of 2006-10 period. 69% of spring wheat crop is in good or excellent condition compared to 72% last week and 84% y/y

Newspaper Articles / Headlines

- Arrow Electronics (ARW) offers to buy WT Microelectronics for NT$63/share. Industry sources tell DigiTimes that Arrow is likely to run into opposition from WPG (3702.TT), who may have offered NT$59/share for WT Micro.

Economic Times
- Schneider Electric to roll out 4K retail outlets in India. The Economic Times reports that a statement says the introduction will be finished by 2012; an executive speaks of retail partners, without naming any.

El Economista
- Spanish central government looking to limit regional governments' spending. El Economista, citing government sources, reports that the central government wants to limit spending even though constitutionally, it may not be able to the expenditure rule, a recommendation from the European Commission, would mean spending growth could not exceed nominal growth in the regions.

Financial Times
European officials have begun debating contingency plans in case the Greek parliament does not approve austerity package. The FT reports, citing people briefed on the talks, that Germany is urging the discussion of contingency plans due to concern that failure to pass the austerity package in Athens will spread contagion and endanger the euro. The article cited a senior European offical who stated that there were no talks about a 'plan B,' but that Germany had been pushing for such talks.
Schlumberger CEO says Iraq "will be really big next year". Andrew Gould tells the FT, that Iraq will be one of the main revenue contributors to the company's Middle Eastern operations, second only to Saudi Arabia
he will retire from the company at the end of the year, noting he was 65 in December. He didn't want to comment on the speculation wthat he was in the running to succeed Sir Robert Wilson at BG Group (BG.LN)
Brookfield Properties to start work on Pinnacle in London. The FT reports that work will resume on the 64-storey building after the owners put a financing package together. The development is expected to take more than three years.
- LSE (LSE.LN) gets backing from key executives for merger with TMX. The FT reports that 11 financial service executives wrote an open letter saying the rival group, Maples, would have a negative impact on the market if it won. One of the signatories is Bill Holland, chairman of CI Financial, a mutual fund company which is one of TMX's biggest shareholders
- Google chairman says company has done nothing illegal. In an interview with the FT, Eric Schmidt says he is confident the compnay has done nothing illegal to become the dominant search provider in the US he thinks most of the complaints have come from competitors but they are cooperating with the authorities in the US and Europe
Google apps suspended in Taiwan. The FT reports that the issue is Taiwan's consumer laws, which require a seven-day refund period, vs the 15 minutes Google gives its customers Google has refused to change its policy and has instead suspended all paid app sales while it negotiates witht he government. The FT notes that it could very well be politicking ahead of elections in Taiwan.
- Johnson & Johnson to link consumer products to prescription medicines in marketing. The FT, citing Sheri McCoy, one of two contenders for the chairman's job, reports that the effort is to strengthen the commercial links between the different parts of the business one pilot project will offer drugs for skin cancer alongside diagnostics and skin products
the company also plans to integrate all its autonomous drugmaking subsidiaries with plans to run them all with a new logo and a single brand -Janssen Pharmaceuticals, by year-end.

Globe and Mail
Canadian sports networks seeking higher prices from cable, satellite carriers. The Globe and Mail reports that TSN (BCE.CN) and Rogers Sportsnet (RCI.B.CN) are negotiating to take advantage of the greater regulatory freedom they will enjoy starting in September.
Atomic Energy of Canada's commercial division to be sold to SNC-Lavalin Group. Sources close to the talks tell the Globe and Mail that details are still being negotiated, but the government's sale could be announced this week. SNC-Lavalin ended up as the only qualified bidder; the government will keep ownership of AECL's Chalk River laboratory and its research reactor. No terms are mentioned.

Les Echos
- Credit Agricole hires Arjil to study sale of private-equity unit, says L'Agefi, without citing sources

New York Times
- NYT discusses new prostate drugs. The NYT reports that: A group of new drugs can help sufferers but at a high financial cost. In the last 15 months, three new drugs have been approved by the FDA: Johnson and Johnson's (JNJ) Zytiga, Sanofi's (SAN.FP) Jevtana and Dendreon's (DNDN) Provenge
The cost of these treatments is very high and hard for Medicare to take as evidenced by it expecting to say that it will only pay for the drug when used according to the label.
- NYT discusses Microsoft's response to cloud. The NYT reports that: As more companies move email and Office applications to Google's (GOOG) web-based alternatives, Microsoft is getting increasingly worried. Microsoft's response is Office 365, a cloud-based version of some of its offerings, hoping to stem the outflows but not cannibalize its own business

South China Morning Post
China will need to open its airspace soon. The SCMP reports that the chairman of the Hong Kong Airport Authority made the observation yesterday, but did not provide a timeframe.

Apple to switch processor manufacturing to Taiwan Semiconductor (2330.TT) from Samsung Electronics (005930.KS). Sources tell Tech2 of the plan, but the site still calls the idea a rumor. The site notes that the Apple-Samsung relationship is currently under strain due to lawsuits.

Myspace to release at least 150 of its 400 employees 29-June. An inside source tells TechCrunch that the company will put another 150 employees on a "transition plan," which involves losing their jobs but being allotwed to work with pay briefly while they look for other jobs.

- Bank Rossiya may become cornerstone investor in PhosAgro IPO. Rosneft (ROSN.RU), Gazprom (GAZP.RU) negotiating JV to sell gas in Russia.
Vedomosti cites a Gazprom executive who does not provide details. A source close to Rosneft says talks are at an early stage.

Wall Street Journal
SEC expands investigation of Stifel Financial's selling mortgage bonds. People familiar with the situation tell the WSJ that the SEC is looking into whether five Wisconsin school districts should have been sold different CDOs than they were. The districts lost $45M in cash on CDOs created by Royal Bank of Canada (RY.CN). A former Stifel investment banker is also under investigation in relation to the sale.
CJ Group named preferred bidder for control of Korea Express. A person familiar with the situation tells the WSJ that the conglomerate's offer was more than KRW210,000/share, higher than the one from Posco (005490.KS)-Samsung SDS.
WSJ is positive on Apple's music service compared with Google's (GOOG) and Amazon's (AMZN). A "Heard on the Street" column says that Apple's system, whereby people keep their own music, is cheap for consumers and profitable for the company, which makes money by selling people devices with more and more memory. Customers using the Google and Amazon services, in contrast, rely on internet bandwidth, whose cost is going up.
WSJ discusses Akzo Nobel's profit warning. Without indicating which way it thinks the shares are likely to go, a "Heard on the Street" column says the warning was partially down to Akzo itself, and partly down to a broader margin squeeze.
- Research In Motion urged to split Chairman and CEO roles by ISS. The WSJ, citing a report from the proxy advisory firm, reports that this is the second advisory firm to come out in favour of the resolution put forward by NEI. StreetAccount notes the London Times reported 13-Jun that the investment firm NEI had called for the split (see linked comment)
- General Motors says new fuel regime "tough". The WSJ, citing a GM executive, reports that the standards will be tough to meet and that the issue was "how you get there with cars and trucks [that] consumers want to buy." citing a person familar with the matter, reports that the UAW won't take a stand on any specific fuel requiremnt, but would push for new technology to be produced inn the US and with government aid
- PepsiCo working to promote Pepsi again. The WSJ reports that the company is launching its first new campaign for Pepsi-Cola in three years after the brand embarrassingly fell to third place in the US last year, behind long-time number-one Coke (KO) and also Diet Coke. The drop caused people to question CEO Indra Nooyi's strategy of emphasizing the company's healthier offerings, which still account for only 20% of sales, at the expense of its core product. In an interview, Nooyi tells the WSJ that Pepsi needs to diversify its offerings. The article details the company's declining spending on advertising for Pepsi-Cola; the decision to increase spending this year makes bottlers happy.

Women's Wear Daily
- IPO on cards for Michael Kors. Sources tell WWD that Kors expects to list right after conducting a private placement, though other sources say an IPO might not take place until 2012. WWD says the financing round is closed and should be finalized next month.


Bank of America Merrill Lynch: upgraded GFI
Benchmark: downgraded SVVS
BMO Capital: downgraded MMI
Brean Murray: upgraded YGE; downgraded JASO, SOL
Canaccord Genuity: upgraded OVTI
Cowen & Co: upgraded UDR
Duncan Williams: upgraded RDC
FBR Capital: upgraded EGP
Goldman Sachs: upgraded TJX
Keefe Brueytte: upgraded NYX
RW Baird: downgraded AXE
TD Newcrest: downgraded ABH


What Lies Beneath

- The VIX is at 20.56, down 0.54 from Friday’s session. The under-sized fall in the VIX exposed the market’s continued anxiety ahead of the Greek austerity vote this Thursday. Option volumes, while anemic, reflected a gravitation toward protection buying as put/call ratios in SPX, SPY and IWM all topped 2. While fixed strike vols in the U.S. fell modestly. Looking to Europe, short-dated SX5E implied vol has been climbing steadily and despite today’s modest gain in the index, 30-day vol was up 9.3% (48% month-to-date). A similar story could be told in CAC, DAX and the MIB.

We like using EWP (Spain ETF) as a hedge here. At 40 vol, we are surprised a greater risk premium is not being demanded considering 30-day realized vol is 36. Look at buying the EWP July 39 puts for $1.10 as a cheap hedge.

- While the Basel agreement lays to rest some financial regulatory uncertainty, it does not amerliorate deteriorating financial industry fundamentals. Short-dated skew in XLF is approaching a 1-year high as we approach earnings season. With both JPM and C reporting right before July expiration (7/14 and 7/15 respectively), look at buying the XLF July 15-14 put spread for $.25.

- Also worth paying attention to is the upcoming USDA soft commodity stocks report on 6/30. In what has likely been a speculator-driven sell-off, the price of corn has been pushed out-of line with the tightening supply fundamentals. Look to position for downward revisions to planted acreage (bullish for corn) via selling the July 40-45 risk reversal in CORN (selling the 40 put to buy the 45 call) for even money.

When it Comes to P/E’s, Believe Only Half of What you See

- An interesting article came out of the WSJ over the weekend pointed to the growing discrepancy between earnings forecasts made by “bottoms up” individual analysts forecasting $112 in S&P earnings v.s. $105 from “top down” strategists/economists. While the article notes that negative earnings surprises may be “mitigated” by the fact that the S&P 500 is trading at 12.8 times 12-month forward earnings- the cheapest level since May 2009, note that companies which have lowered guidance for the second quarter now outnumber those who have raised by a margin of five to one.

- We looked across our optionable single stock universe to identify those names which 1) were scheduled to report earnings between July and August expiration 2) had August atm implied vols that were no more than 10% higher than July implieds and 3) over the past 4 weeks, saw their upcoming quarterly EPS consensus estimate reduced by 5% or more.

Look at calendar put spreads (selling July puts to buy August puts) in these names (see the attached report for a complete list and table) as a cheap way to finance protection around earnings.


 *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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