European Strategy
How We Think About the
Euro-zone Sovereign Debt
Crisis
Bottom line: We lay out our framework against
which we will measure forthcoming policy
announcements related to the euro-zone sovereign
debt crisis. For now, we think the euro-zone
sovereign debt crisis is likely to get worse before it
gets better. We would look to sell financials into any
hope-inspired rallies.
Our Euro-zone sovereign debt framework
Recent developments in euro-zone debt markets have
taken a material change for the worse, in our opinion. It
is important that investors have a framework against
which they can judge future pronouncements. Here is
ours:
#1 � A weak economic growth outlook is a significant
impediment to an ultimate solution to the sovereign debt
crisis. MS economists forecast just 1.2% GDP growth in
the euro-area in 2012.
#2 � Policy initiatives are ultimately likely to fail unless
they lead to a situation where a country�s nominal GDP
grows above its cost of capital.
#3 � Investors� long-term concerns have now become
short-term concerns. Anything less than a final and
comprehensive solution is likely to produce only tactical
rallies that investors should sell.
#4 � Of itself, a primary budget surplus is not a cause for
optimism unless a country can combine this with
sufficient nominal growth to allow it to reduce its debt
burden.
#5 � Financials are uniquely exposed to the euro-area
problems of weak growth and sovereign stress.
Interesting to note that Wednesday and Thursday both fell into that weird category that has appeared recently in which very negative NYSE TICK action coincides with a relatively flat market. This combination never occurred prior to 2008. If Cumulative TICK was -100,000, the market was down huge. Of the 35 occurrences since mid-2007 in which the S&P closed lower on a -100k Cumulative TICK day, the S&P�s average loss was 3.8%. It�s therefore unusual to see the S&P lose less than 1% or actually manage a gain with such negative TICKs. That�s what happened on both Wednesday and Thursday, the first time ever we�ve seen back-to-back occurrences. There have only been six total occurrences in the last decade, all of which led to a higher market one month later�
S&P Higher or Down <1%, Cumulative TICK <-100,000
07/14/11� S&P ??? one month later
07/13/11� S&P ??? one month later
04/13/11� S&P +2.6% one month later
12/13/10� S&P +2.7% one month later
11/09/10� S&P +1.2% one month later
09/13/10� S&P +3.9% one month later
07/14/08� S&P +6.3% one month later
03/06/09� S&P +23.3% one month later
Google - 2Q�11 Earnings Review
Event
� GOOG beat our top line estimate by ~6% and our EPS estimate by ~10%.
Impact
� The Bottom Line - Google's very strong 2Q results support our view that the explosive growth of mobile Internet access is accelerating the shift of offline activity to online. Google sees this shift and has been accelerating its investments to position itself to benefit from the clearly accelerating revenue opportunities. Post GOOG's 2Q results, we think more investors will agree that the aggressive investments are sensible and that the strategy is sound.
� GOOG posted solid results across the board. Most importantly, the key revenue strength came from Google's O&O (owned and operated) sites, which grew 39% y/y (accelerating from 32% in 1Q and 23% last year). This impressive acceleration reflects strength from search, display and mobile. Notably, growth accelerated across all geographies, as the U.S. grew 26%, the U.K. was up 19%, and the rest of the world was up 32% (FX neutral). On the cost side, GOOG's opex was in line with our expectations. In fact, while we are actually slightly raising our non-GAAP opex for 2011 and 2012, we are raising our EBITDA margins by about 100bps for both years. Importantly, commentary directly from CEO Larry Page was encouraging on many fronts: strategically, financially, and operationally. Most notably, he suggested that hiring levels would moderate. He also clearly articulated a vision for product design and noted that the new management structure is speeding execution. We believe that Page's statements on the call will help soothe investor concerns.
� The bottom line is that throughout this year, investors' primary concerns around Google have been: 1) Facebook, 2) margins, and 3) management. We think that 2Q's results will meaningfully raise estimates and, coupled with the initial success of Google+, will help to ease investors' fear. While many valid concerns and challenges remain, we continue to think that Google is well positioned to benefit from and help drive accelerating Internet usage trends. Finally, we believe GOOG's results have positive read-throughs for both AMZN and EBAY, as we think both companies are benefiting from the same trend of accelerating Internet activity from mobile devices.
Earnings and target price revision
� Our 2011 EPS est. increases by ~8% to $36.40. Target goes to $750 (from $725).
Price catalyst
� 12-month price target: US$ 750.00 based on a DCF methodology.
� Catalyst: New product announcements, potential CEO events, 3Q earnings.
Action and recommendation
� Reiterate Outperform.
STOCKS: Neutral short term, bearish intermediate and long term.
Expecting a resumption of the decline after a top due Monday.
T-BONDS: Neutral short term, bullish intermediate term. Change to
short and intermediate term bearish if the September T-Bond contract
closes below 125-19/32 (Osc Unch�d).
GDM & GOLD: Bullish short and intermediate term. Change to
short and intermediate term bearish if the August gold futures contract
closes below $1550.90/oz (Osc Unch�d).
Note: Time frames mentioned refer to trading styles, and not to the duration of a forec MCLLELAN
MERGER & DEAL NEWS�
1. BHP agreed to buy HK for about $12.1B in cash.
2. ICAHN OFFERS TO BUY CLOROX FOR $76.50, ~$10.2B.
? MUTUAL FUNDS� Mutual funds that invest in U.S. equities have lost an estimated $8B to redemptions this year through June 29, putting them on track for an unprecedented five straight years of withdrawals.
? CONSUMER� Consumers are turning more pessimistic about their income prospects, an indication that household spending will grow at a slower pace compared with a year earlier.
? BCS-- In what may end up being the busiest year for U.S. initial public offerings in a decade, an unlikely player has taken the top spot in underwriting: BCS.
? CS-- is a target of an investigation by the Department of Justice over former cross-border private banking services to U.S. customers.
? COMMODITIES�
1. Oil Heads for First Weekly Decline in Three on U.S. Debt Concern
2. Gas Glut Produces Record U.S. Exports to Mexico
3. Gold Falls
4. Copper May Fall Before Release of European Bank Stress Tests
5. Sugar fell for a second day
6. China Increases Rare-Earth Export Quota
7. Rubber Advances
? GOOG� Google Climbs as Sales Gain Shows Page�s Progress in Expansion
? NVS-- Novartis Fails to Win U.K. Backing for Lucentis in Eye Condition
? FUTURES�1307.30, PLUS 0.60
? NEW HIGHS: 107. AZO, PNRA, FOSL, MCD, KCI, YUM, SUG, CPX, SPWRA, PCYC, RUTH, WTSLA, WOLF.
? NEW LOWS: 53. NTRS, CMA, MS, KBW, BAC, DAL, LCC, AMR.
? OVERBOUGHT: 80. ? OVERSOLD: 165.
THE EUR VS. THE US
DOLLAR: The world seems
suddenly greatly enraptured by
the EUR, or greatly disdainful of
the dollar, but this chart argues
otherwise, suggesting that an
important upward sloping trend
in the EUR�s favour was broken
quite some while ago and that
since then each new high has
been steadily lower, and so too
each new low. Bullishness for the
EUR? We fail to see evidence
here of that fact.gartman
Wall Street is heading for its worst week in nearly a year Friday, with index futures little changed Friday as macroeconomic concerns keep markets volatile and overshadow the start of U.S. corporate earnings season.
Europe's sovereign debt crisis, stalled budget talks in Washington and an uncertain economic backdrop have sent Wall Street on a roller coaster ride since the spring.
A health check of European banks is expected to show that as many as 15 lenders need more capital to withstand a prolonged recession, with criticism growing that the tests do not encompass the impact of a Greek default.
MAGNITUDE 5.5 QUAKE HITS JAPAN'S KANTO REGION, XINHUA SAYS
Macro concerns persist; be selective
Macro economic factors continue to weigh on the Oil Services sector, but oil prices
remain at levels that support more than a 10% increase in oil service revenue during
2012. Accordingly we are selective within the context of a positive long-term sector
view. Into 2Q11 results, we recommend BHI, ESV and NOV. Our top 12-month
picks are HAL, ESV, DRQ and SLB.
July 15 (Bloomberg) -- Tudor Pickering sees broad rally in E&Ps after BHP/HK deal; says next best takeout candidates are BEXP, COG, CRZO, OAS, RRC, SWN, UPL.
* Least likely takeout targets, according to Tudor:
* CHK, EOG may be too large
* APC, BG Group prev. targets for BHP
* KWK, XCO recently ended failed take-private deals
* CLR, SM, XEC may not want or may not be incentivized to
sell
Google target raised to $790 from $680 at RBC Capital - RBC Capit
al raised its target on Google after the company rep
Google target raised to $790 from $680 at RBC Capital - RBC Capital raised its t
arget on Google after the company rep
Google target raised to $790 from $680 at RBC Capital - RBC Capital raised
its target on Google after the company reported stronger than expected Q2
results. The firm believes that fears that the company's revenue will
decelerate due to competition are "completely overblown," and it maintains an
Outperform rating.
BHP for HK deal is well known by now, so I'll try to add something of value: 1) BHP has long been rumored to be looking at Woodside Petro of Aust (WPL AU). The HK deal prob puts those rumors to bed. WPL is down 2% in Aust. 2) Eagle Ford names to run today; SM, ROSE, PXD, SFY, GDP, Haynesville names: XCO, SWN, CRK, COG, GDP. RRC is also often rumored to be a takeout candidate. ..
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.
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