Thursday, June 30, 2011

Morning Note

Equity futures are trading above fair value as the Greek Parliament today votes to implement the austerity measures it approved in principle yesterday. In economic data, initial jobless and continuing claims are due at 08:30 ET.

S&P would cut US credit rating to lowest level if it defaults. In a recent interview with Bloomberg, John Chambers, the chairman of the company's sovereign rating committee, said that S&P would lower its sovereign credit rating on the US from AAA to D if the government fails to raise the debt ceiling and is forced to default.
However, Chambers added that S&P continues to believe that the debt ceiling will be raised and the US will avoid a default, adding that “Otherwise we wouldn’t have a AAA rating on the U.S. government. It’s evolving as we expected.”

Libor fixings 

- Overnight Libor: Dollar: 0.128% vs prior 0.126% ; Sterling: 0.671% vs prior 0.567%; Euro: 1.78% vs prior 0.925%
- 1-month Libor: Dollar: 0.186% vs prior 0.186%; Sterling: 0.631% vs prior 0.629%; Euro: 1.281% vs prior 1.273%
- 3-month Libor: Dollar: 0.246% vs prior 0.246%; Sterling: 0.826% vs prior 0.826%; Euro: 1.491% vs. prior 1.479%

Aug WTI crude ($0.09) to $94.68

Natural gas ($0.057) to $4.258

Gold ($2.50) to $1509.75

10-year yield 3.0933%
30-year yield 4.3503%

Asian Markets

Asian markets rose today on optimism over Greece’s passing austerity measures, though some investors remained cautious in the absence of a definitive final resolution of the crisis. Financials gained across the region in response to a lower chance of a Greek default. Competing nickel miners rose 2-8%, leading Australia to a solid gain. Volume was low, as today was the final day of Australia’s FY. Large caps led rises in Hong Kong andChina. Car and bank stocks led Taiwan higher. Gains in South Korea were restrained when the country cut its growth outlook for the year from 5% to 4.5%, though the reduction had been widely anticipated. Japan remained cautious in advance of tomorrow’s tankan. Banks followed their US peers higher. Japan May housing starts +6.4% y/y. May construction orders +25.5% y/y. Australia May private-sector credit growth +0.3% m/m, +3.1% y/y. The yen is trading at 80.36 to the US dollar.

European Markets

European equity markets trade higher, but are generally off the days best levels, ahead of the Greek parliament's vote of the implementation of the austerity package approved yesterday. Peripheral markets led the regions gains. FTSE100 is an exception to the general paring of gains aided by London Stock Exchange (LSE.LN) after its terminated its merger with TMX Group (X.CN) and Lloyds Banking Group (LLOY.LN) post its strategic review. Germany May Retail Sales +2.2% y/y vs consensus +2.3%, prior revised to +3.7% from +3.6%. France May consumer spending (0.8%) m/m vs consensus +0.9%, prior revised to (1.4%) from (1.8%). Germany Jun unemployment change (8k) vs consensus (17k). EuroZone Jun flash CPI +2.7% vs consensus +2.8%, prior +2.7%. UK Jun house prices (1.1%) y/y vs consensus (1.2%), prior (1.2%). The pound and the euro are trading at $1.6018 and $1.4481 respectively.

Today's Economic Releases (Eastern Time)

02:00 Germany Retail Sales y/y (June); consensus n/a
02:45 France Consumer Spending y/y (May); consensus n/a
02:45 Germany Unemployment rate (May); consensus n/a
08:30 US Initial Jobless Claims (25-Jun); consensus 421K
08:30 US Continuing Claims (18-Jun); consensus 3697K
09:45 US Chicago PMI (Jun); consensus 53.5
09:45 US Bloomberg Consumer Comfort (26-Jun); consensus n/a
10:30 US EIA Natural Gas 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
19:30 Japan CPI (y/y) (May); consensus n/a
21:00 China Manufacturing PMI (Jun); consensus n/a 

Today's Key Events (Eastern Time)

04:30 Lloyds Banking Group presents conclusions of strategic review
08:15 Eli Lilly Investment Community Meeting
09:00 Fed's Bullard speaks on quantitative easing
10:00 Chatham Lodging Trust acquires interests in 69 hotels; revises 2011 guidance and issues 2012 outlook: 866.788.0544 / Intl 857.350.1682 pc 47697398
11:00 Hyperdynamics Business Update: 480.629.9818
—:— 2011 BIO Business Forum
—:— 2011 BIO International Convention
—:— AMC Networks (AMCXV) will replace Boyd Gaming (BYD) in the S&P 400 - after the close
—:— ANSYS signs definitive agreement to acquire Apache Design Solutions: 877.883.0383 / Intl 412.902.6506 pc 5239686
—:— Biochemical & Molecular Engineering XVII
—:— Boyd Gaming (BYD) will replace StarTek (SRT) in the S&P 600 - after the close
—:— Entropic Communications (ENTR) will replace Holly (HOC) in the S&P 600 - after the close
—:— FDA PDUFA: Dendreon's sBLA for Los Angeles manufacturing facility approval (Provenge)
—:— Global Hunter Securities Summer Biotech Conference
—:— Global Hunter Securities with Natural Gas Services
—:— Harte-Hanks (HHS) will replace Hutchinson Technology (NASD:HTCH) in the S&P 600 - after the close
—:— Holly (HOC) will replace Frontier Oil (FTO) in the S&P 400 - after the close
—:— JP Morgan Cazenove UK Telecoms Conference
—:— Lincoln Educational (LINC) will replace Pre-Paid Legal (PPD) in the S&P 600 - after the close
—:— Lloyds Banking Group Strategic Review Update
—:— Marathon Petroleum (MPC) will replace RadioShack (RSH) in the S&P 500 - after the close
—:— Needham dinner with Clean Harbors
—:— NetApp Analyst Day
—:— RadioShack (RSH) will replace Harte-Hanks (HHS) in the S&P 400 - after the close
—:— Siemens Capital Markets Days
—:— Taylor Wimpey Half Year Trading Update 

Company Specific News

MKC (McCormick reports Q2 EPS $0.55 vs Reuters $0.54. Reports Q2: Revenues $883.7M vs Reuters $855.4M
MSM (MSC Industrial reports Q3 EPS $0.97 vs Reuters $0.94. Reports Q3: Revenues $532.4M vs Reuters $532.1M)
STZ (Constellation Brands reports Q1 EPS $0.39 vs Reuters $0.37. Reports Q1:
Revenues $635.0M vs Reuters $628.6M)

AEZS (Aeterna Zentaris enters into 9.5M common stock at-the-market sales agreement with McNicoll, Lewis & Vlak LLC)
AVRE (Avenue Capital Mortgage REIT files for $300M IPO)
MCBC (Macatawa Bank 4.5M share secondary priced at $2.30 per share)
PL (Protective Life files mixed securities shelf of indeterminate size)
SKT (Tanger Factory 4M share offering priced at $25.95 through Jefferies)

Newspaper Articles / Headlines

Dunkin’ Brands to set IPO price range as early as next week. Citing sources, Bloomberg reports that Dunkin' Brands may provide the initial terms of its IPO and begin investor meetings sometime next week. Recall that Dunkin' filed a $400M IPO through JPMorgan, Barclays, Morgan Stanley, BofA and Goldman Sachs on 4-May.

Business Spectator
ING Group sells Australian investment management unit to UBS (UBSN.VX), says Australian Financial Review. The AFR reports that ING Investment Management was worth A$34B -- it is not clear if that means its AUM is A$34B -- and UBS's Australian investment arm will double in size as a result of the purchase, whose price is not given.

Economic Times
Ex i-flex executives bidding for Oracle Financial Services Software's services business. People familiar with the process tell the Economic Times that Oracle is in the final stages of looking at two offers, one from the ex-executives, and one from CapGemini (CAP.FP). A decision could come next week.

Financial Times
FT discusses SEC investigation in to Monsanto for incentive payments. The FT, citing the pre-open press release, reports that the incentives were being paid to distributors to buy Roundup (herbicide) and Roundup ready seeds the SEC is looking into its incentive programmes for its 2009 and 2010 fiscal years, CEO Hugh Grant said they are co-operating fully.
British Land buys City residential complex. The FT, seemingly without citing sources, reports that the company is in advanced talks to buyWardrobe Court, its first residential purchase in the City, paying around £56M.
Google (GOOG) and Heineken strike advertising partnership. The FT reports that the companies will collaborate on digital advertising, including YouTube and mobile ads the deal covers 20 international markets Heineken will commit to a minimum ad spend on Google and will be given access to special consultancy, data and discounts.
- Lafarge (LG.FP) and Anglo American (AAL.LN) approach buyers for some of their cement assets. The FT, citing sources familiar with the situation, reports that the companies have distributed a memorandum of information to other building-material producers earlier in the week, inviting bids for the sale the items for sale are five different bundles of different assets spread across the UK, including Lafarge's Hope cement works in Derbyshire.

Fox News
Nasdaq OMX Group (NDAQ) to look at London Stock Exchange. People with direct knowledge of the matter tell Charlie Gasparino that talks are imminent, and either side could initiate them -- which seems to imply that, despite the article's headline, LSE is also thinking about Nasdaq.

Globe and Mail
Cameco Corporation president Tim Gitzel says lower uranium prices mean some previously impossible acquisitions may now be possible. In an interview, Gitzel, who will become CEO tomorrow, says the company might be interested in "nearer-term" projects, meaning within the next ten years. Gitzel declines to say if any deals are close.
Maple Group turns attention to regulatory approval for purchase of TMX Group. The Globe and Mail reminds readers that Maple's offer needs 70% approval from shareholders. The article also notes that: TMX Group may now choose to let Maple look at its books, which would enable it to estimate the synergies that could be achieved by combining TMX with CDS and Alpha, and Maple may now expand to include Royal Bank of Canada (RY.CN) and Bank of Montreal (BMO.CN), who had been unable to join due to their serving as advisers on the now-discarded TMX-London Stock Exchange (LSE.LN) deal.

Virgin Media "on verge of" deal to launch new digital music service. Sources tell the Guardian that VMED and Spotify have come to an agreement in principle. VMED has also come to terms with Universal Music (VIV.FP), EMI, Sony Music (6758.JP), and Warner Music (WMG), any of whom can veto any Spotify deal they don't like. The service is to start trials in the summer and launch in Q4. The article says Virgin is thought to be considering putting the service into a bundle with products like TV, broadband, and telephone service.
HSBC Holdings expected to cut 700-1,000 jobs 30-June. The Guardian reminds readers that, as has been widely reported, Lloyds Banking Group (LLOY.LN) CEO António Horta-Osório is also expected to announce cuts of 15K jobs when he gives the results of the bank's strategic review.

New York Post
HMX Group offers more than $90M in cash for JA Apparel. The NY Post reports that Iconix (ICON) also made a more-than-$90M offer for the company in May. Sources say that there are questions about what Iconix would do with JA Apparel's wholesale suit business and Massachusettsfactory.

Hitachi (6501.JP) joins Toshiba (6502.JP)-Sony (6758.JP) talks on merging small-and-midsize LCD panel operations. Without citing sources, the Nikkei reports that the companies hope to reach an agreement in July and launch the new unit by the end of the year. Innovation Network Corp of Japan will probably pay ¥200B for a 70% stake; the three companies will split the balance, though the article does not say if the split will be equal. Without giving a timeframe, the article does say, however, that listing the company is possible.
Mitsubishi UFJ Financial Group to set up quasi-holding structure in US 1-July. Citing the company, the Nikkei reports that the new structure is aimed at speeding up the group's decisions in the US. Decisions until now have been made separately at Mitsubishi UFJ's New York headquarters and Union Bank in California.

Wall Street Journal
AMR in active negotiations with Airbus and Boeing on major order for at least 250 planes. Citing sources, the WSJ reports that AMR is interested in both the current Airbus A320 and the A320neo, or the Boeing 737 family. The total order value could exceed $15B, and could be split between Airbus and Boeing. AMR currently has only Boeing planes in its fleet.
- Samsung Electronics files complaint with International Trade Commission to stop sale of Apple (AAPL) products in the US. The WSJ reports that
Samsung has also filed a lawsuit against Apple in a Delaware district court alleging violations of its patents, as well as in the UK and Italy
the steps are to counter a lawsuit bought by Apple two months ago
Bank of America can't shake effects of unfortunately-timed purchase of Countrywide Financial. The article is a summary, not really breaking any news. A person involved in the process tells the WSJ that BAC's due dilgence on the purchase could have been conducted a lot better.
WSJ is cautious on Bank of America. A "Heard on the Street" column says that investors were right not to react to the bank's $8.5B mortgage settlement with wild abandon today, because BAC still faces numerous mortgages issues. The column says
Southern Union in "wilful" breach of merger agreement says Energy Transfer (ETE). The WSJ, citing a letter filed by Energy Transfer with regulators earlier today, reports that the offer was "highly speculative" and although the talks with Wiliams (WMB) wouldn't lead to a cancellation of its merger offer, it "could materially damage the business that Energy Transfer will be acquiring,"
Kraft Foods delaying retail launch of Gevalia until January. The WSJ reports that the company needs more time to build up supply to meet expected demand.
WSJ thinks Nokia should consider selling out of Nokia Siemens Networks. A "Heard on the Street" column disapproves of the fact that neither Nokia nor Siemens (SIE.GR) is willing to sell its entire stake. A source familiar with the situation says that Nokia may in fact end up putting more cash into the venture as it restructures, which shareholders aren't likely to be thrilled by. The column thinks selling NSN to a trade buyer like Samsung Electronics (005930.KS) or Huawei might bring Nokia $3-5B in cash.
Italy looking to raise prop trading tax. The WSJ, citing people familiar with the matter, reports that
it is looking to increase the tax to 35% from 17% and at a 0.15% tax pn trades performed by banks and other HFTs.
the measures were included in a draft plan put to Prime Minister Silvio Berlusconi as the country trys to balance its budget
California passes online sales-tax law. The WSJ reports that the law is different than the one passed by other states, in that the "long-arm statute' means the Board of Equalisation can determine which businesses must collect sales tax, and it captures subsidiaries selling the company's products the law could affect Amazon (AMZN) as it has offices in the state of some subsidiaries. The article notes Amazon has cut ties with affiliates in other states which have used these provisions against its affiliates.


Bank of America Merrill Lynch: upgraded CBD, HES, EBAY
Barclays Capital: upgraded PLD, LSTZA
Citi: upgraded EBAY
Deutsche Bank: upgraded ARW, CLS, LCAPA
Mizuho Securities: upgraded MY
Nomura Securities: upgraded TJX
Piper Jaffray: upgraded HNSN
Roth Capital: downgraded OXGN
Sterne Agee: downgraded LULU
Think Equity: upgraded MELI


Optional Option Opportunities

1. Current quarterly & weekly option listings in SPY, QQQ and IWM present a unique opportunity to get long one-day volatility (isolated only to July 1st) by selling quarterly options (expiring 6/30) to buy July weekly options (expiring 7/1). 

We think Friday could be a volatile one for two reasons, 1) ISM Manufacturing will be in focus. 2) The end of the quarter/month-end reallocation trade. As investors have been rotating out of Treasuries and into stocks going into the end of the quarter, we could get a reversal of this dynamic after the quarter/month ends this Friday. Look to sell the quarterly and buy the weekly straddle in in SPY 131s, QQQ 56s, and IWM 82s.

2. For several retailers August options capture 2 potential catalysts-  same store sales comps (expected on 7/7) and Q2 earnings reports.

Look at the following names (GPS, BKE, JCP, ZUMZ, BONT, LTD) where August options capture both events and pay attention to names where vol looks cheap as a function of implied/realized. See attached report for details.

3. Use GDX/GLD options as a way to monetize high implied volatility and steep skew as well as bet on the spread between Gold vs. Gold Equities to continue narrowing

The spread between gold and gold mining stocks has narrowed sharply over the past week and a half, likely due to the fact that both the falling price of crude (diesel estimated to be 30% of mine operating costs) as well as easing concerns about high labor costs eating into the profit margins of mining co's. We expect not only a continuation of the "rational thinking" that has led to the recent spread narrowing between gold and gold stocks, but a potential acceleration of that process as senior gold stocks begin to report earnings in mid-July. Both GLD and GDX options look somewhat expensive on an 30-day implied/realized vol basis and skew in GDX is trading well above its historical average setting up the following trade which 1) bets on continued outperformance of GDX over GLD 2) makes us a net seller of volatility (and collector of premium) and 3) bets on skew reverting to its mean in GDX

In GLD, sell the Aug 152 calls for $1.34

In GDX sell the Aug 52 puts to buy the Aug 56 calls for $.23

 *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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