Wednesday, June 29, 2011

Morning Note

June 29, 2011

Equity futures are trading above fair value following gains in Europe on optimism the Greek parliament will today approve the austerity program. Indices and futures rose further after an opposition party MP said he will back the austerity package, causing a surge in the Euro. Passage of the austerity plan and an implementation law on Wednesday and Thursday are conditions for Greece to receive the next installment of the €110B bailout from the European Union and International Monetary Fund. Prime Minister George Papandreou has a five-seat majority, but some members of his party have threatened to vote against it. It's reported that the vote will probably take place between now and 15:00 BST (now and 10:00 ET)

Bank of America announces agreement on legacy Countrywide mortgage repurchase and servicing claims. The company expects to report a net loss in the range of $8.6B to $9.1B in Q2 of 2011, or $0.88 to $0.93 per diluted share.

II Data: Bullish sentiment increases to 39.8% from 37.6% in the latest US Investor's Intelligence poll. Bearish sentiment decreases to 26.9% from 28.0%. Those expecting a market correction decreases to 33.3% from 34.4%.

Libor fixings 

- Overnight Libor: Dollar: 0.126% vs prior 0.127% ; Sterling: 0.567% vs prior 0.566%; Euro: 0.925% vs prior 0.833%
- 1-month Libor: Dollar: 0.186% vs prior 0.186%; Sterling: 0.629% vs prior 0.629%; Euro: 1.273% vs prior 1.271%
- 3-month Libor: Dollar: 0.246% vs prior 0.246%; Sterling: 0.826% vs prior 0.825%; Euro: 1.479% vs. prior 1.473%

US MBA Mortgage purchase applications index (3.0%) in 24-Jun week; total market index (2.7%) compares to (2.8%) and (5.9%), respectively, in the prior week refi index (2.6%) vs. (7.2%). 30-year contract ARM rate (11)bp to 4.46%

Asian Markets

Most Asian markets rose today on growing optimism that the Greek debt crisis will be resolved. Energy shares gained on higher crude-oil prices.
All 33 sectors advanced in Japan, which was encouraged when pre-open economic data exceeded expectations. Utilities outperformed the market, rising 4-6% on a report that the LDP wants to change the compensation bill making Tepco (9501.JP) the only utility responsible for compensating people affected by the Fukushima Daiichi disaster. South Korea rose. Resource stocks led broad-based gains in AustraliaTaiwan rose. Hong Konggave up slight morning gains to finish almost exactly unchanged as investors dropped Chinese banks on worries about their exposure to bad debt. Fears of another interest-rate rise took China to a loss. Banks led the way after some institutions were censured for trying to get around lending restrictions. Japan May preliminary industrial output +5.7% m/m vs cons +5.5%. The yen is trading at 81.07 to the US dollar.

European Markets

European equity markets rallied from the open in a broad based advance following Wall Street's constructive close and firmer Asian markets as hopes that the Greek parliament would pass the austerity measures needed to attain EU/IMF bailout funds buoyed sentiment. It's reported that the vote will probably take place between 12:00-15:00BST (07:00-10:00ET) with a second vote due tomorrow on the implementation of the various elements of the legislation. Protestors have again gathered on the second day of the general strike. France Q1 GDP revised to +0.9% vs previous +1.0%, 2010 GDP revised to +1.4% vs previous +1.5%. UK May mortgage approvals 45,940 vs consensus 46,100 and April 45,447. Eurozone Jun Business climate 0.92 vs consensus 0.90 and prior revised 0.98 from 0.99. Eurozone Jun Economic sentiment 105.1 vs consensus 105.0 and prior 105.5. EuroZone Jun Industrial sentiment 3.2 vs consensus 3.0 and prior revised 3.8 from 3.9. EuroZone Jun Services sentiment 9.9 vs consensus 9.0 and prior revised 9.3 from 9.2. Eurozone Jun Consumer sentiment (9.8) vs consensus (10.0) and prior revised (9.9) from (9.8). The pound and the euro are trading at $1.6016 and $1.4392 respectively.

Today's Economic Releases (Eastern Time)

01:30 France final GDP y/y (Q1); consensus n/a
04:30 UK Mortgage Approval (May); consensus n/a
05:00 Eurozone Business Climate (June); consensus n/a
05:00 Eurozone Consumer Confidence (June); consensus n/a
07:00 US MBA Mortgage Purchase Applications (24-Jun); actual (3.0%); consensus n/a
10:00 US Pending Home Sales (May); consensus +2.9%
10:30 US DOE Crude Inventories (24-Jun); consensus n/a
18:50 Japan Tankan Report (Q2); consensus n/a 

Today's Key Events (Eastern Time)

04:15 Siemens Q3 Trading Update from Capital Market Day Event
08:00 Dell Analyst Meeting
08:00 Spreadtrum Communications Investor Conference Call: 617.597.5380 / UK +44 2073658426 / HK + 852 30021672
09:00 Kansas City Southern Business Update
10:45 Genta Company Review and Clinical Research Update @ Bio Business Forum
11:00 Autodesk Investor Event
11:30 TransDigm Analyst Day
12:00 MAXIMUS Investor Day
13:00 Treasury Auction of 7-yr notes
16:00 Interactive Intelligence hosts Robotics Competition for Non-Profit
—:— 2011 BIO Business Forum
—:— 2011 BIO International Convention
—:— 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
—:— FDA Panel: CDRH Microbiology Devices Panel of the Medical Devices Advisory Committee discusses reclassification of devices
—:— Federal Reserve Board considers final rule on debit card swipe fees
—:— Global Hunter Securities with Evolution Petroleum
—:— Global Hunter Securities with Natural Gas Services
—:— JP Morgan Cazenove Media CEO Conference
—:— Oppenheimer Consumer Conference
—:— Peripheral Nerve Society Meeting
—:— Siemens Capital Markets Days
—:— Smart Utility Summit 

Company Specific News

FDO (Family Dollar reports Q3 EPS $0.91 vs Reuters $0.95; Reports Q3: Revenues $2.15B vs Reuters $2.17B)
GIS (General Mills reports Q4 EPS $0.52 ex-items vs Reuters $0.52. Reports Q4: Revenues $3.63B vs Reuters $3.67B)
OMN (Omnova Solutions reports Q2 adjusted EPS $0.16 vs Reuters $0.20. Reports Q2: Revenues $329.9M vs Reuters $310.0M)
ZZ (Sealy reports Q2 EPS $0.01 vs Reuters $0.00. Reports Q2: Revenues $321.3M vs Reuters $294.8M)

Positive News
KTOS (Kratos receives $6.2M in new contract awards to support U.S. Army aviation training solutions)

Negative News
FDO (Family Dollar reports Q3 comps 4.7% vs consensus +5.6%)

BJ (BJ’s Wholesale Club announces definitive agreement to be acquired by Leonard Green & Partners and CVC for $51.25 per share in cash)

CDTI (Clean Diesel Technologies 2.725M share secondary offering for company and holders priced at $3.75/sh through Roth Capital)

Newspaper Articles / Headlines

JC Flowers may take 20% of Caja del Mediterraneo for €800M. Sources familiar with the operation tell ABC that the price is a 40-55% discount to book value, which CAM is unhappy about, since it would set a precedent for future investments. By bringing in a private partner, CAM would see the public capital necessary to meet its core capital requirement fall from 10% to 8%.

Economic Times
Wipro targeting larger customers. The Economic Times reports that Wipro is seeking to get a greater percentage of its revenues from customers like BP (BP.LN) and General Electric (GE), in an effort to emulate its larger rivals TCS (TCS.IN) and Infosys (INFO.IN).

Financial Times
UK banks pressured by regulators to build up capital. The FT reports that the FSA is requiring banks to outline a path to compliance with new Basel III rules, taking into account dividends, bonuses and potential downturns. The FSA can veto bonus plans if it thinks capital is being eroded.
Carpetright to close stores. The FT reports that CEO Lord Harris said the company would be looking to "reduce stores numbers" and “With leases on 94 stores in our estate due to expire in the next five years, we have ample opportunity to reshape the portfolio, reduce the size of store footprints and lower our ongoing rent roll,”
The article also mentions that Thorntons (THT.LN) would also be closing stores
Ryanair Holdings included in companies told to stop hiding surcharges. The FT reports that the Office of Fair Trading has warned retailers face action if they levy artificially high fees for card payments recommended a change in law to limit charges to the cost of processing card payments picked out Ryanair as a particular offender, using a 'drip' method adding costs only at the end of the transaction.
Daimler to invest €2B with its local partner in China. The FT reports that the investment was announced during a visit by Chinese Premier Wen Jiabao in Berlin today the JV partners signed a framework agreement to produce several new compact cars. The investment was part of a previous commitment to invest €3B in China by 2015.

Globe and Mail
Imperial Oil's Kearl oil sands mine facing "significant schedule pressure". A spokesman tells the Globe and Mail reports that the company is now looking at out-of-sequence construction and out-of-season construction. Even with a favorable ruling on using Highway 12 in Idaho issued 27-Jun, the Idaho Transportation Department may still take three months to issue its final decision. The spokesman says the company's plan -- reported by the Globe and Mail 24-Mar -- to split its megamodules into smaller, more transportable modules has also run into some problems, and the first module will now probably not be moved before the middle of July.
OttawaOntario at odds over sale of Atomic Energy of Canada's commercial division to SNC-Lavalin Group. A senior Ontario government source tells the Globe and Mail that the federal government needs to help with any cost overruns from AECL reactor projects; SNC has indicated that it will not be willing to do so. Ontario can't prevent the sale, but SNC probably wouldn't see as much value in the purchase if AECL were not able to sell reactors to the province.

BHP Billiton (BHP.AU) for Ferrexpo (FXPO.LN), somebody for Man Group (EMG.LN). The Independent notes that both of these rumors have been around before. The article gives no basis for thinking they are true, and reminds readers that Bank of New York Mellon (BK) and JPMorgan Chase (JPM) have been previously suggested as bidders for Man Group.

LA Tribune
Thales' client satisfaction declined sharply survey shows. La Tribune cites the result of a customer survey conducted in the Fall of 2010 that showed a 13% drop in client satisfaction since the arrival of the new management team in 2008. The Aeronautics Division, seems to show the highest rate of customer dissatisfaction: Thales Airborne Systems (31%) and Thales Avionics (23%). Thales Optronics (28%). However, the spatial division (Thales Alenia Space) won the support of its customers + 22% and TDA, which manufactures systems mortars and rockets + 15%.

Les Echos
Schneider Electric plans to sell its sensors division. Citing sources, Les Echos reports that the unit, which Schneider had considered selling prior to 2008, would be valued around $1B. According to Les Echos, JP Morgan has started work on the subject, which has already attracted dozens of applicants, funds and U.S. competitors. No formal decision to sell, however, has been taken.

Los Angeles Times
- Oracl (ORCL) claims $2.6B from Google for patent infringements. The LA Times reports that in the latest filing in a case initially filed in August, Oracle says it is seeking $0.9-1.4B up front and 15% of the revenues Google generates from ads on its mobile operating system.

National Business Daily
China likely to reduce domestic refined oil prices CNY200/tonne in August.  The National Business Daily does not cite sources, and may be saying that the lower prices will be achieved through a reduction in import tariffs.

New York Times
Specialists reject Medtronic studies. The NYT, citing 'The Spine Journal' reports that a group of spine specialists are repudiating another group of experts who had backed Medtronic's bone growth product, Infuse the specialists call the research misleading and biased.

Wall Street Journal
Fed extends swap lines with foreign central banks. Citing an interview with St. Louis Fed President Bullard, the Journal reports that the Fed has extended its dollar-lending agreements, or swap lines, with the ECB, as well as with the central banks of EnglandCanadaJapan and Switzerland. The swap lines were scheduled to expire on 1-Aug. According to the article, Fed officials voted to extend the program, which was first introduced during the financial crisis and has allowed foreign central banks secure more than $600B in dollar loans, at last week's FOMC meeting. The Journal notes that the Fed acted now amid concerns about the potential chaos in the financial markets if Greece fails to pass its latest austerity package and is unable to stave off a default.
- WSJ is critical of analysts from banks involved with LinkedIn's IPO. A "Heard on the Street" column notes that Bank of American Merrill Lynch (BAC), UBS (UBSN.VX), and JPMorgan (JPM) seem to be irrationally positive on LinkedIn. Analysts from firms that didn't work on the IPO are substantially more reserved.
Three South Korean private-equity firms submit letters of intent to bid for government stake in Woori Finance Holdings. People familiar with the situation say the letters came from MBK Partners, Touchstone Capital, and Vogo Fund. Bidders have to be willing to bid for at least 30% of the company; the government currently holds 57%.
UAW and carmakers to start contract negotiations next month. The WSJ reports that The UAW'a bargaining committee will gather 11-Jul to prepare for talks with General Motors (GM), according to a person familiar with the union's timetable. The union will push for a commitment to build more cars and trucks in the US, raise the $14/hour entry-level wage agreed to four years ago, discuss wider-use of profit sharing plans and may also ask for seats on the board. The car companies want to lower their health-care costs and tie bonuses to profits.
Devon Energy CEO says to increase capex by $1B more than originally planned this year. The WSJ, citing company executives from a webcast meeting with analysts, reports that the increase to between $5.5-5.9B will allow a ramp-up in already drilled fields and launch programmes in new areas
the proceeds from the sale of Brazilian assets will be used to fund the capex.
US automakers pushing for delay in new mileage regime. The WSJ, citing people with knowledge of the proposals, reports that US automakers are in talks with regulators and the White House to allow them to make slower progress to the targets and maybe to lower the target in the future
the companies don't want to publicly speak out as the proposals are popular with consumers and don't want to look like they are fighting the development of hybrids and electric vehicles. The plan would set a mileage standard for 2025, but with the bulk of the gains in the later years, with a review in say 2020, to determine if the targets can be scaled back
WSJ is negative on Groupon. A "Heard on the Street" column notes that the company's current terms allow it to use merchants' cash to expand. But as its rivals grow and steal merchants from it, and as its business matures, Groupon won't be able to keep functioning that way. It may also be forced to pay out more for unredeemed vouchers. Changing its terms will cut Groupon's cash flow, making it less attractive to investors.
WSJ discusses Google Plus. The WSJ makes the point that the service is intented to take on Facebook in an area where it is preceived to be flawed - sharing everything with all your 'friends', whether they be real friends, work colleagues etc.
WSJ is cautious on Chinese stocks. A "Heard on the Street" column says that the Ministry of Finance's encouraging companies to use Chinese auditors rather than the big four could cause investors to raise the already high risk premium they impose on Chinese stocks. The column specifically mentions China Mobile (CHL), International & Commercial Bank of China (IDCBY), and PetroChina (PTR), but merely as examples of companies that might tempted to switch to Chinese auditors.


Bank of America Merrill Lynch: upgraded C
Credit Suisse: downgraded PVA
Deutsche Bank: upgraded X, AKS
Jefferies: upgraded SUSQ
Oppenheimer: upgraded AUDC
RBC Capital: upgraded GIB
Stifel Nicolaus: downgraded SHAW
Wedbush: upgraded DOX


- The 1.29% move in the SPX yesterday served to lift short-dated realized volatility measures. With implied vol falling sharply yesterday, the 30-day implied/realized ratio in SPX and QQQ fell to 1.06 and .99 respectively- levels not seen since mid-April. The same dynamic is playing out in the ETF space with XLE, OIH, XLV, XHB, XLI, XRT, RTH, SMH, XLK and IYT all falling into sub 50th percentile. This dynamic in equities stands in stark contrast to widening implied vs. realized vol spreads in most commodities; the current 30-day implied/realized vol ratios in USO, SLV and GLD are at levels not seen since early May.

- What conclusions can we draw here? For one, equity vols looks almost universally cheap making a compelling case for swapping long positions with calls or call spreads in higher beta ETFs with low implied/realized ratios. Consider the following:

XLE: Sell stock to buy the Aug 75-82 call spread for $1.70

OIH: Sell stock to buy the Aug 150- 165 call spread for $4.20

XRT: Sell stock to buy the Aug 54-59 call spread for $1.46

SMH: Sell stock to buy the Aug 34-38 call spread for $.80

- On the commodity side, look at selling puts to monetize high levels of implied volatility as a bet on continued price stabilization. Consider the following:

USO: Sell the Aug 35 puts for $1.10

SLV: Sell the Aug 30 puts for $.85

GLD: Sell the Aug 142 puts for $1.60


 *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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