Wednesday, July 6, 2011

Morning Note

July 6, 2011

Equity futures are trading below fair value in a continuation of yesterday's weak close following Moody's downgrade of Portugal's debt to BA2 from BAA1 warning the country may need a second round of rescue funds before it can return to capital markets. International banks and insurers will meet today again to decide on a plan for the private sector to contribute to Greece's bailout effort.

China raised interest rates by 25 basis points after the Chinese market close.

June US Challenger layoffs 41.432K vs. May 37.135K

Libor fixings 

- Overnight Libor: Dollar: 0.125% vs prior 0.125% ; Sterling: 0.566% vs prior 0.566%; Euro: 0.590% vs prior 0.873%
- 1-month Libor: Dollar: 0.185% vs prior 0.185% ; Sterling: 0.628% vs prior 0.628%; Euro: 1.300% vs prior 1.298%
- 3-month Libor: Dollar: 0.246% vs prior 0.246% ; Sterling: 0.826% vs prior 0.826%; Euro: 1.517% vs prior 1.514%

Aug WTI crude ($0.68) to $96.21

Natural gas ($0.03) to $4.34

Gold ($3.50) to $1512.60

10-year yield 3.1025%
30-year yield 4.37%

Asian Markets

Asian markets were mixed today, with banks falling on the downgrade of Portugal’s sovereign debt, and gold miners and commodities stocks rising on higher prices. Continued optimism regarding a post-quake manufacturing recovery and easing worries about the US economy sent Japan up for the seventh day in a row. Financials rose in Taiwan on news that the island’s financial regulator will meet with its Chinese counterpart in Q3, raising hopes that Taiwanese banks will be able to do more business in yuan. South Korea rose slightly. Australia rose slightly. Gryphon Minerals (GRY.AU) soared 11% on positive drilling results. Bank of China (3988.HK) and China Construction Bank (939.HK) fell 4% and 3%, as Temasek placed $3.6B worth of its shares in them; their decline was more pronounced in Hong Kong than in China, which both fell on the news. The news also drove Chinese stocks down in SingaporeThailand fell, but Somboon Advanced Technology (SAT.TB) rose 2% after saying it will raise its 2011 revenue target thanks to a faster-than-expected recovery in the car industry following the 11-March Great East Japan Earthquake. Japan May composite economic index +2.4 pts m/m to 106.0. May index of leading indicators +3.6 pts m/m to 99.8. The yen is trading at 80.96 to the US dollar.

European Markets

European equity markets trade lower led by the periphery after Moody's cuts Portugal's sovereign credit rating to junk. Indices trade off the day's worst levels with M&A providing some support. Portugal (2.5%), Italy (1.9%) and Spain (1.3%). Declining sectors lead advancers 14-5. Banks (1.6%), insurance (1.0%) and media (0.8%) lead fallers whilst Healthcare +0.4%, chemicals +0.1% and technology little changed lead gainers. Germany May industrial orders +1.8% m/m vs consensus (0.5%) and prior revised +2.9% from +2.8%. UK Jun house prices +1.2% m/m vs consensus +0.0%. UK Jun new car registrations (6.2%) y/y to 183,125 units. The pound and the euro are trading at $1.6009 and $1.4362 respectively.

Today's Economic Releases (Eastern Time)

07:00 US MBA Mortgage Purchase Applications (01-Jul); consensus n/a
07:30 US Challenger Layoffs (Jun); consensus n/a
07:45 US ICSC-Goldman Chain Store (03-Jul); consensus n/a
08:55 US Redbook Chain Store (03-Jul); consensus n/a
10:00 US ISM Non-Manufacturing Index (Jun); consensus 53.7
16:30 US API Crude Inventories (02-Jul); consensus n/a 

Today's Key Events (Eastern Time)

16:30 Visa Business Update
—:— Allen & Co. Sun Valley Conference
—:— Approach Resources (AREX) will replace California Pizza Kitchen (CPKI) in the S&P 600 - after the close
—:— Assystem Seminar discusses challenges in investing and supporting offshore wind farms
—:— Global Hunter Securities with Corcept Therapeutics
—:— Mitel Analyst Day
—:— TD Newcrest Unconventional Energy Conference
—:— World Conference on Lung Cancer   

Company Specific News

CPWR (Compuware acquires dynaTrace Software (private) for $256M cash. The acquisition closed on July 1, 2011)
LVB (Steinway acknowledges unsolicited proposal for band business; announces new chairman)
PAG (Penske Auto Group completes sale of certain smart USA assets to Mercedes-Benz USA)

SXC (SunCoke Energy files amended S-1; to offer 11.6M shares in range of $15-17 through Credit Suisse, BofA Merrill Lynch, Goldman Sachs. New information is the number of shares, the price range, and the addition of BofA Merrill Lynch and Goldman Sachs as underwriters SunCoke previously filed its IPO on 23-March)
TOO (Teekay Offshore Partners to sell 0.7M common units in direct equity placement)
(TransUnion files for $325M IPO through BofA ML, J.P. Morgan and Deutsche Bank)

Newspaper Articles / Headlines

China Securities Journal
New loans in China this year may be only CNY6.67T. Without citing sources, the China Securities Journal reaches its conclusion from estimates that new June loans will be CNY500B, making the H1 figure CNY4T. The article says that following a 3:3:2:2 ratio for quarterly lending, CNY6.67T is likely for the year, below the CNY7-7.5T target.

Daily Mail
Mounting unhappiness over Cable & Wireless Worldwide's new CEO John Pluthero. A top-ten investor tells the Daily Mail that it is not clear Pluthero is the right man to turn the company around.

Economic Times
Hershey calls off Indain JV. The Economic Times, citing bankers, reports that: The JV was called off at a recent board meeting of the company and Hershey would sell its 51% stake to its ex-partner Godrej Consumer Products (GCPL.IN). The Indian company thought the venture was progressing too slowly
Hershey's will now operate through a wholly-owned subsidiary

Daily Mail
Mounting unhappiness over Cable & Wireless Worldwide's new CEO John Pluthero. A top-ten investor tells the Daily Mail that it is not clear Pluthero is the right man to turn the company around.

Financial Times
British Land in advanced talks to buy £175M property portfolio from Société Générale (GLE.FP). Without citing sources, the FT reports that the properties currently have health and racquet clubs in them, and while British Land is expanding across the market, it is expected to maintain its focus on offices and retail.
Bank of America (BAC) settlement challenged by bond investors. The FT, citing a court filing, reports that: The group called Walnut Place has accused Bank of New York Mellon, BofA's trustees on the securitisations. of having conflicts of interest. The group said the trustee failed by not forcing Counrywide to buy back faulty home loans and putting its own interests ahead of shareholders in the trusts when it took part in the negotiations for the settlement reached with Bank of America last week.
FT discusses increased scrutiny of News International after phone hacking scandal. The FT reports that while pressure is increasing from politicians, no public inquiry is being talked about as a police investigation is still under way. News Corp has appointed its own lawyers to investiagate according to people close to the company but they added that it was a small part of the overall group.
FT discusses move by UK supermarkets into convenience stores. The FT reports that between 2010 and 2014, the big four supermarkets will increase store space by 19M sq feet and Waitrose will add 1M sq feet most of the new space will be smaller outlets with Sainsbury (SBY.LN) to open 50-100 convenience stores a year and Tesco (TSCO.LN) opening roughly 150/year
although most want to open in town centres or high-streets, there is a difficult in finding new sites.
Sports Direct International in final stages of acquiring 80% holding in two fashion retail chains for £7M. People familiar with the deal tell the FT that USC and Cruise will be run separately from Sports Direct, which will invest £20M in the chains. USC has 38 doors in the UK and had £70M of turnover in the year to 30-Jan; Cruise has 10 doors and £20M in annual sales. The article says Sports Direct will report sales of £1.59B and adjusted pre-tax profit of £155M for its FY next Thursday.

Globe and Mail
Ontario Securities Commission conducting "targeted review" of Canadian-listed companies with operations in emerging markets. The Globe and Mail reports that the OSC said it is looking at certain companies' disclosures, as well as how they attained their Canadian listings. The investigation stems from the recent well-publicized issues at Sino-Forest (TRE.CN), which bought a dormant shell company, allowing it to list inCanada without filing a prospectus with audited financials.

Il Sole 24 Ore
Digital Multimedia Tech-Mediaset (MS.IM) merger negotiations may be in trouble. Sources close to the negotiations tell Il Sole 24 Ore that Mediaset is not happy with its due diligence on DMT, and minority shareholders think the proposed deal destroys rather than creates value.

London Times
- GlaxoSmithKline changes the way it pays its salespeople. The Times notes that the change, announced yesterday for the US sales force and likely to be imposed for the British sales force, too, follows the company's having taken a £2.2B Q4 legal charge for costs resulting from an investigation of its promotional practices in the US.

New York Post
Banks' settlement on foreclosure issues could be $55-60B. Sources close to the discussions tell the NY Post that talks are "well advanced," and the settlement with the Department of Justice and 50 state AGs: could include a provision for principal reduction, would see banks paying civil penalties proportional to "the extent of mortgage carnage they've already created", would form 51 funds (one national and one for each state), would include the robo-signing issue, could be announced within weeks.

South China Morning Post
- (SOHU) to buy $10M in Xunlei Class A common shares in private placement. The SCMP reports that in an SEC filing, Xunlei said it expects Sohu to buy 2M Class A common shares at $15/share; each Xunlei ADR represents three Class A common shares.
Risk posed by June oil spills off coast of Shandong province was under-reported. The SCMP reports that China's State Oceanic Administration said yesterday (5-Jul in Asia) that it is investigating the Penglai 19-3 oilfield's operator, ConocoPhilips (COP); the operator is responsible, by Chinese law. The maximum penalty for sea pollution is CNY200K ($31K), but compensation for environmental damage might be demanded. The government says the 4-Jun and 17-Jun spills have polluted 840 sq km of sea; CNOOC had said only 200 sq m had been affected.

Wall Street Journal
Apple planning to sell 25M iPhone 5s this year. A source at a supplier says initial production volumes will be a few million units, and components are to be sent to Hon Hai (2317.TT) in August for a Q3 launch. But sources also say that shipments may be delayed if Hon Hai doesn't improve its yield rate. The article also repeats what has been previously widely reported, that the phone will use Qualcomm's (QCOM) wireless baseband chips; the iPhone 4 uses chips from Samsung Electronics (005930.KS) and Infineon (IFX.GR).
Greek rollover complicated as companies sell bonds. The WSJ reports that
Banks have sold a large portion of their Greek bond holdings despite pledging not to do so. The EU had looked at around €30B of private-sector participation but this may not now be achieved. German banks and insurers had informally pledged not to sell around €8B in bonds for three years but for example Allianz (ALV.GR) had €1.3B left of its €3.3B holding at the time, Hedge funds and other investors may not be so open to a rollover.
Insight auction bids just above $3B. The WSJ, citing people familiar with the matter, reports that some buyers had rejected the desired price of between $3.5-4.5B. Cablevision (CVC) had dropped out of the sale process for now Time Warner Cable (TWC) would be interested below $3B. A few buy-out firms are still looking at the numbers.
- Berkshire Hathaway (BRKB) part of consortium bidding for One Main. The WSJ, citing people familiar with the matter, reports that the company is part of the group which includes Leucadia (LUK) the business could be vaued at $8B with the group borrowing a large sum to finance the purchase. One Main's book value is around $2B.
JPMorgan Chase finds it tough going outside the US. The WSJ article breaks no news but discusses the fact that a push by the bank to increase its business outside the US has not been too succesful, lagging international rivals in how much of its revenue and profits it generates outside its home markets. The article highlights the tensuion within the bank over not buying any major banks overseas and focusing on the USbanking business.


Barclays Capital: upgraded TSO
Citi: upgraded FXCM
Goldman Sachs: downgraded CPHD
ING Financial: upgraded CETV
Janney Capital: upgraded IRET
Kaufman Brothers: downgraded NTCT
KeyBanc: upgraded AXL
Merriman Capital: downgraded NFLX
Morgan Stanley: downgraded INTU
Piper Jaffray: upgraded LTM; downgraded BGS
Susquehanna: downgraded BLUD
Wunderlich: upgraded HEV


WMB – We highlighted ~2 weeks ago that skew in WMB was at a multi-year high, suggesting that there was significant downside risk being priced in by the options market. Since announcing the bid for SUG, WMB skew has actually come back in to the midpoint of its normalized range. Despite skew coming in, we believe the market is still pricing in a higher bid from WMB because implied volatility in the name remains elevated. In fact, July ATM options are trading at ~29.90% vol vs. 30-day realized of 26% (a ratio of 1.15x) vs. XLE July ATM options trading at 21% vol vs. 30-day realized of 23.2% (a ratio of 0.91x). The elevated volatility makes WMB options expensive in our view, creating an opportunity for investors to overwrite their position in WMB. Specifically, clients should consider:

1)       Sell WMB July 31 Calls at 42c (collect 1.4% over 1.5 weeks)

2)       Sell WMB August 32 Calls at 82c (collect 2.7% over ~5.5 weeks)

3)       Sell WMB Aug 28/32 Strangle at $1.33 (collect 4.4% over ~5.5 weeks)

LVS/MGM – Implied volatility in both MGM and LVS looks fair to cheap. We think this 1) is a sign of confidence from the market and 2) creates an attractive opportunity for replacing stock positions w/ upside calls or call spreads as the two names brush up against resistance at current levels. Specifically, clients could consider

1) MGM – replace stock position to buy Aug 14/16 Call Spread for 56c ((2.5x1 payout)

2) LVS – replace stock position to buy Aug 46/50 Call Spread for $1.05 (2.8x1 payout)

 *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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