Morning Note

July 7, 2011

Equity futures are trading above fair value with today's interest rate decision from the BOE and the ECB and ahead of the ADP employment report. The BOE left benchmark interest rates unchanged at 0.5% and maintains Quantitative Easing Asset Purchase Programme at £200B. The ECB is expected to raise benchmark interest rate 25bps to 1.5%.

Taking questions over Twitter yesterday at a White House, President Obama didn’t rule out using the 14th amendment to the Constitution to order Congress to raise the debt ceiling. He added that Congress and the White House can strike a deal to cut the deficit and raise the debt ceiling “over the next week to two weeks.

Greece's Finance Minister Evangelos Venizelos will meet with ECB President Jean-Claude Trichet in Frankfurt today.

Libor fixings 

- Overnight Libor: Dollar: 0.125% vs prior 0.125% ; Sterling: 0.566% vs prior 0.566%; Euro: 0.576% vs prior 0.590%

- 1-month Libor: Dollar: 0.186% vs prior 0.185% ; Sterling: 0.628% vs prior 0.628%; Euro: 1.320% vs prior 1.300%

- 3-month Libor: Dollar: 0.246% vs prior 0.246% ; Sterling: 0.826% vs prior 0.826%; Euro: 1.526% vs prior 1.517%

Aug WTI crude +$0.60 to $97.25

Natural gas +$0.006 to $4.225

Gold ($2.50) to $1524.36

10-year yield 3.1191%

30-year yield 4.3738%

Asian Markets

Asian markets pulled back from morning gains this afternoon, ending the day mixed. Thailand rose on a report that Prime Minister-elect Yingluck Shinawatra plans to continue to let the baht appreciate to fight import-price inflation. Hong Kong finished flat, with banks and insurers providing support against weakness in property and energy stocks. Chinese banks did not do as well as their Hong Kong peers, suggesting that worries remain about local government debt in China. Utilities dropped 7-8% on the government’s plan to conduct stress tests on every nuclear plant in Japan, but trading stayed in a narrow range, and the market finished flat. The property sector took China down after yesterday’s post-close rate hike. JapanMay core machinery orders +3.0% m/m vs cons +2.6%. Australia June jobless rate 4.9%, matching expectations. Jobs created 23,400 vs cons 15,000. The yen is trading at 80.92 to the US dollar.

European Markets

European equity markets generally trade higher, with the periphery lagging and Greece (1.1%), Spain (0.4%) trading lower. Major indices pared initial modest gains ahead of interest rate decisions from the ECB at 7:45ET, expected to raises benchmark interest rate 25bps to 1.5%. Spain successfully sold total €3B in 3-yr and 5-yr bonds with solid bid-to-cover ratios and the 5yr average yield 4.871% up 32bps vs prior auction. UK May Manufacturing output +2.8% y/y vs consensus +2.1% and prior revised +1.2% from +1.3%

Industrial output (0.8%) y/y vs consensus (0.5%) and prior (1.2%)

Germany May Industrial Output due at 11ET.

Today's Economic Releases (Eastern Time)

07:00 UK BOE benchmark interest rate decision (Jul)

07:45 Eurozone ECB benchmark interest rate decision (Jul)

08:15 US ADP Employment Report (Jun); consensus +64K

08:30 US Initial Jobless Claims (02-Jul); consensus 422K

08:30 US Continuing Claims (25-Jun); consensus 3700K

09:45 US Bloomberg Consumer Comfort (03-Jul); consensus n/a

10:30 US EIA Natural Gas Inventories (01-Jul); consensus n/a

11:00 US DOE Crude Inventories (02-Jul); consensus n/a

—:— US Chain Store Sales (Jun); actual ---; consensus ---

Today's Key Events (Eastern Time)

08:00 Bristol-Myers, Innate Pharma announce investigational immuno-oncology biologic global license agreement: 212.444.0895/Fance +33 (0)1 70 99 42 87 /UK +44 (0)20 7136 2054 pc 9124296

10:00 Catalyst Health Solutions guides FY (Dec 2011) EPS: 866.791.6248 pc 5554639

12:00 U.S. Home Systems Present at the Singular Research "Compelling Values" Webcast: 866.469.3239 650.429.3300 pc 574 246 038

12:30 Fed's Hoenig speaks

—:— Allen & Co. Sun Valley Conference

—:— American Orthopedic Society of Sports Medicine ~ AOSSM

—:— Global Hunter Securities with Corcept Therapeutics

—:— Monthly Retail Sales

—:— TD Newcrest Unconventional Energy Conference

—:— World Conference on Lung Cancer

Company Specific News

Retail Sales

BEBE (Bebe Stores reports Q4 comps +7.0% vs consensus +2.7%. Reports Q4:

Revenues of $122.4M)

BKE (The Buckle reports June comps +10.8% vs consensus +8.9%; Reports June:

Revenues +15.2% to $79.6M)

COST (Costco reports June comps +14.0% vs consensus +14.0%)

LTD (Limited Brands reports June comps +12.0% vs consensus +4.8%; Reports June: Revenues +11.9% to $1.08B)

WTSLA (Wet Seal reports June comps +7.3% vs consensus +1.3%; Reports June:

Revenues +15.3% to $57.9M)

Positive News

BMW (BMW Group June car sales +15.9% y/y to 165,855 units, highest level of monthly sales ever)

VOW.GR (Volkswagen's Audi reports H1 worldwide sales rose +17.7% y/y to 652,950 units)

Newspaper Articles / Headlines

Barron's

- Barron's Weekday Trader is positive on Mohawk Industries. Barron's Weekday Trader is positive on Mohawk Insustries citing a rebounding commercial market, effective cost control during the recent recessionary environment and the company's ability to take advantage of any increase in activity in the housing market in the future. In addition, the article notes the company is expected to see earnings growth around 28% in 2011, 27% in 2012, and currently trades around 15x 2012 earnings.

Economic Times

- FDA bans import of products made at Dr. Reddy's Mexico facility for violation of current good manufacturing practices. The Economic Times reports that Industrias Quimicas Falcon de Mexico had gotten a warning letter in June.

- Indian Supreme Court allows Lafarge to resume mining limestone in Meghalaya. The Economic Times reports that the decision ends a 17-month interruption in operations.

Financial Times

- Pension plan sells its 12% stake in Hammerson. The FT reports that the company is using an investment bank to carry out an accelerated book build, with the placing expected to be at a 3-5% discount to the closing price.

- Chairman of Grupo Pão de Açúcar (PCAR4.BZ) says he has "not broken up the shareholder pact". The FT, citing an interview in Le Figaro with Abilio Diniz, reports his comments and adds that he wants to convince Casino CEO Jean-Charles Naouri that the deal is good for everyone, at a scheduled 2-Aug meeting.

- Racing industry asks government for 'betting rights'. The FT reports that the industry is asking for legislation that will force bookmakers to pay for the right to bet on races to replce the betting levy which has declined in recent years as companies have moved offshore.

- Citi reduces size of consumer lending assets to be sold. People familiar with the matter tell the FT that Citi has removed roughly $4B in property assets from the sale of OneMain, leaving a $9B unit that buyers will be able to more easily fund. But the sources say the assets for sale have not been definitively decided upon.

- Bidvest considering sale of food service unit. The FT reports that

The South African conglomerate is considering selling its Foodservice group after receiving unsolicited bids. The company has not said whether the bidders are trade or financial buyers.

Hollywood Reporter

- DreamWorks Animation may end up at Warner Bros (TWX) ... or not. Various sources tell Hollywood Reporter: Paramount (VIA.B) has offered DreamWorks a one-year extension on their current deal, but only on improved terms for Paramount.

Los Angeles Times

- Nielsen SoundScan says H1 music sales rose 8.5% y/y. The LA Times reports that the figures -- which are units, not dollars -- break down as follows:

digital tracks +11%, digital albums +19%, vinyl albums +41%, all albums (including digital and physical) +1%.

Maeil Business News

- Microsoft, Samsung Electronics (005930.KS) struggling on royalties Android-based handset. A senior electronics industry official tells the Maeil that Microsoft wants Samsung to pay $15/unit, and Samsung would like the number to be lower.

New York Post

- David Einhorn's exclusivity to negotiate buy-in to New York Mets expires.

Without citing sources, the NY Post reports that the Mets are nonetheless continuing to only speak to Einhorn about the purchase of a 33% stake in the team. The article does not mention SportsNet New York, a stake in which was at one point being mentioned as part of the sale.

Times of India

- Tata Motors to sell commercial, passenger vehicles at same dealerships. A source with knowledge of the development tells the Times of India that the company feels the move will allow it to take advantage of its strengths in both segments. The article says that the company has 254 passenger-vehicle dealerships and 200 commercial-vehicle dealerships running a combined 1,600 outlets in India. No timeframe is provided for the plan.

Wall Street Journal

- Google+ makes WSJ cautious on Facebook. A "Heard on the Street" column says that Google+ appears to be better than Facebook, and while its true value will depend on its getting users, the plan to integrate it with Gmail seems likely to work. The column suggests that Facebook may have lost the upper hand it has enjoyed for the past few years.

- BHP Billiton suspends operations at iron-ore hub after death. The WSJ reports that a worker was crushed to death by a crane and port and rail operations at Port Hedland have been suspended while the incident is being investigated.

- Gruppo Campari CEO says open to "meaningful acquisition opportunities". In an interview with the WSJ, Bob Kunze-Concewitz said any deals would be in countries where it has direct subsidiaries and that he would prfer to buy brands rather than companies what matters now is "having increasing scale in a given geographical market." rather than by category of product he sees more potential in South America and Eastern Europe rather than India and China.

- Apple files complaint against Samsung (005930.KS) with the International Trade Commission. The WSJ, citing an Apple filing, reports that the company has asked the agency to bar the importation of Samsung tablets and smartphones.

- Luxury cars could get hit by new fuel law. The WSJ reports that Future regulations could mean big fines for car companies of as much as 25K/vehicle beginning in 2016. Some models could even be banned. The EPA would enforce and fine companies rather than the National Highway Traffic Safety Administration currently. Daimler (DAI.GR) was critical of the plan at White House meetings last week according to people familiar with the talks.

- Goldman Sachs biggest borrower in crisis, Fed reveals. The WSJ reports that Goldman borrowed $15B from the Fed in late 2008 out of a peak loan total loan amount of $80B in April 2008 after Bear Stearns collapsed

Other companies borrowing in that time included Credit Suisse (CSGN.VX), Barclays (BARC.LN) and Royal Bank of Scotland (RBS.LN).

- WSJ discusses growth in data-centres. The WSJ discusses whther the growth of internet traffic will make up for the huge ongoing and planned investment in data-centres. The article notes that a lot of large tech companies such as Google (GOOG), Apple (AAPL) and Facebook are building their own to avoid paying rent.

Research

Bank of America Merrill Lynch: downgraded FST

Barclays Capital: upgraded GEN

Bernstein: downgraded NOC

Davenport: downgraded IBM

Deutsche Bank: downgraded PNC, LMIA

Exane BNP: downgraded KLAC

Fitch: Banco Popular Espanol long-term issuer default rating downgraded to A- from A, outlook negative at Fitch

Gleacher: downgraded ISRG

HSBC: upgraded TSL

Jefferies: downgraded LEDS

JP Morgan: upgraded WDC, STX

Keefe Bruyette: upgraded COF; downgraded FNF

KeyBanc: upgraded MPG

Morgan Stanley: upgraded URBN

RBC Capital: upgraded HUBG

UBS: upgraded AVP, KLAC, ENR

Wunderlich Securities: downgraded ETP

Options

If it Aint Broke Don’t VIX it

-          Volatility levels had little reason to move yesterday, so they didn’t. The VIX is 16.34 up .28 (1.7%) on the session. The shape of the VIX term structure is nearly unchanged in 3 sessions.

-          On the ETF front, August atm vol in OIH and XRT moved higher by 5% apiece yesterday. The OIH vol move could be simply attributed to the 12% vol spike in RIG (9.22% weighting in OIH) but the rest of the vol increase seemed driven by expectations for higher correlation among constituent stocks going forward. Simply put, the weighted average vol move among OIH constituents (including RIG) was approx. +2.28%. Since correlation in OIH is <1, the only way it can move more (5%) is if implied correlation moves up. Not completely surprising considering every member of OIH reports earnings between 7/21 and 8/5.

-          XRT some large single stock vol moves ahead of today’s SSS comps explained most of the increase in short-dated vol. URBN, WMT, BJ, ARO, GPS, JWN, TJX and ROST all saw Aug vol move higher  by 4% or more. Yesterday we suggested selling July atm options in GPS, KSS and MCD.

-          We highlighted a large trade in XLF yesterday in which an investor paid $.23 for 24,000 September 16-17 call spreads- identical to a trade initiated Friday for a $.25. Despite that August vol climbed another 4% yesterday, we think atm vol still looks cheap, with skew quite elevated, otm puts look expensive. Look to leverage this vol complexion via buying the XLF Aug 15-14 1x2 put spread for $.11. Max payout on the trade is $.89 or  8.1 to 1. 

If There’s Pain in Spain, Try Not to Complain

-          Considering what’s going on in Greece and Portugal, we thing volatility in EWP (Spain ETF) looks way too cheap. Rapidly widening CDS spreads and rising bond yields across Italy, Spain and Belgium reflect the fact that the risk of contagion is very real. Still the implied vol levels in EWP (Spain ETF) remain relatively subdued. October atm vol is currently offered at 32- a fairly small premium to 60 and 90 day realized vols of 31.09 and 29.82. Our own regression of Spanish 5 Yr CDS spreads on EWP 3 month implied vol over the past 2 years predicts that 3 month atm implied vol should be closer to 37 (at the midpoint) given a current CDS spread of 294.09. In EWP- look at buying the Oct 42-36 put spread for $2.40.

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.