Friday, July 8, 2011

Morning Note

July 8, 2011

Equity futures reversed early gains and are now trading below fair value ahead of today's nonfarm payroll data due at 08:30 ET. President Barack Obama said yesterday Democrats and Republicans remain "far apart on a wide range of issues" in budget talks and said talks would resume on Sunday. A French court said on Friday it is delaying until 4-August its decision on whether to launch a legal inquiry into the role of IMF chief Christine Lagarde in a 2008 arbitration payout.

Libor fixings 

- Overnight Libor: Dollar: 0.125% vs prior 0.125% ; Sterling: 0.566% vs prior 0.566%; Euro: 0.574% vs prior 0.576%
- 1-month Libor: Dollar: 0.186% vs prior 0.186% ; Sterling: 0.628% vs prior 0.628%; Euro: 1.345% vs prior 1.320%
- 3-month Libor: Dollar: 0.246% vs prior 0.246% ; Sterling: 0.826% vs prior 0.826%; Euro: 1.533% vs prior 1.526%

Fed reports balance sheet assets of $2.874T on Wednesday, +$4.9B w/w and +$538.6B y/y 
- Holdings of US Treasury securities were $1.62T on 6-Jul, +$7.5B w/w and +$847.5B y/y.
- Holdings of mortgage-backed securities were $908.9B on 6-Jul, unch. w/w and ($209.4B) y/y
- Holdings of federal agency debt securities were $115.1B on 6-Jul, ($1.6B) w/w and ($49.7B) y/y

Aug WTI crude ($0.13) to $98.53

Natural gas $0.04 to $4.17

Gold ($5.46) to $1526.90

10-year yield 3.1433%
30-year yield 4.3662%

Asian Markets

Asian markets followed a strong Wall Street close, with strong US retail and employment data helping markets rally. Markets closed off their highs as profit-taking set in before the weekend and the release of Chinese inflationary data on Saturday, which had been brought forward from Wednesday. The news that the ECB would agree to suspend collateral rules for Portugal also helped. Volume is light ahead of crucial US employment data later today. Australia led the region with stocks rising following commodity prices and the A$ higher with oil and coal stocks. Hong Kong rallied as exporters rose on better US data. Most sectors were strong today with even utilities going in the rally. Japan was also strong with the export-dependent market doing well as the yen weakened also. Sentiment was also bolstered with the current-account surplus narrowing less than forecast in a sign the country is recovering from the earthquake. Energy stocks were also higher as oil gained yesterday. China fluctuated around unchanged all day as bullish sentiment was tempered by the bought forward release of CPI. Banks led the charge as they have been big underperformers and investors believe the overhang from tight monetary policy may be over. Korea was flat as financials weighed on the index after placements were done in the sector with shareholders offloading stakes. Taiwan failed to hold onto early gains with weakness in DRAM companies. The Daily News reported the government would ease curbs on allowing developers to invest in China property. Japan's current account surplus JPY590.7B vs cons 306.0B. Japan bank lending fell 0.6% in June y/y vs (0.8%) in May.

European Markets

European equity markets generally trade higher in choppy trading, though the periphery lags having given up initial gains to trade lower, Spain (0.2%), Portugal (0.4%), Italy (0.1%), Greece (0.7%). Market participants await the release of US non-farm payroll data at 08:30ET. UK Jun PPI: Core +3.2% y/y vs con +3.2%, prior +3.4%. Output +5.7% y/y vs con +5.6%, prior revised +5.4% from +5.3%. Input +17.0% y/y vs con +16.2%, prior revised +16.1% from +15.7%. Monster Employment index Europe rises 5 points m/m in Jun to 140 vs year-ago 114. The pound and the euro are trading at $1.5969 and $1.4304 respectively.

Today's Economic Releases (Eastern Time)

08:30 US Nonfarm Payrolls (Jun); consensus +94K
08:30 US Unemployment Rate (Jun); consensus 9.1%
08:30 US Hourly Earnings (Jun); consensus +0.2%
08:30 US Average Weekly Hours (Jun); consensus 34.4
10:00 US Wholesale Inventories (May); consensus +0.9%
15:00 US Consumer Credit (May); consensus +$3.9B  

Today's Key Events (Eastern Time)

—:— Allen & Co. Sun Valley Conference
—:— American Orthopedic Society of Sports Medicine ~ AOSSM
—:— China Armco Metals Merchant Investor Forum and Facility tour
—:— World Conference on Lung Cancer 

Company Specific News

AMN (Ameron reports Q2 EPS $0.11 vs Reuters $0.60, FC $0.23)
CCF (Chase Corporation reports Q3 EPS $0.33 cont. ops. vs year-ago $0.43)
FCN (FTI Consulting guides Q2 EPS $0.54-$0.59 vs Reuters $0.57)
WDFC (WD-40 Company reports Q3 EPS $0.47 vs Reuters $0.52)

Positive News
AVL.CN (Avalon Rare Metals updated prefeasibility study confirms significantly improved economics for the Nechalacho REE deposit, Thor lake, NWT, Canada. The updated PFS produced a discounted cash flow analysis yielding a 39% Internal Rate of Return on a pre-tax basis compared to 14% in the original study and a 34% IRR on an after-tax basis compared to 12% in the original study. The NPV at a 10% discount rate is now CAD$1.77B pre-tax and CAD $1.27B after-tax)

Newspaper Articles / Headlines

Q2 earnings expected to show smallest gain in two years. Bloomberg reports that US corporations are set to report the smallest earnings gain since the recession ended. The article notes that EPS for all S&P 500 companies are expected to increase 13% in Q2, down from 18% in Q1 and 37% in 2010. Earnings headwinds (all of which have been widely discussed already) mentioned in the article include rising oil and commodity prices and dampened consumer confidence.

Daily Caller
Coal industry says new EPA rules costly. The article, citing the American Coalition for Clean Coal Electricity, reports that the new regulations will be the most costly imposed on coal-fueled power plants and will raise electricity prices the new rules will require coal companies to reduce emissions of sulfur dioxide and nitrogen dioxide by 73 percent and 54 percent, respectively, from 2005 levels by 2014.

RWE may decide upon a capital increase at its special meeting in early August. Citing sources, the newspaper reports that CEO Juergen Grossman yesterday hinted that the company may decide upon a capital increase when it mets in early august in order to strenghten its weakened balance sheet and to secure its credit rating. A company spokesman declined to comment.

Financial Times
British Sky Broadcasting decision expected to be delayed until September. The FT, citing government insiders, reports that the delay is due to there being many last-minute submissions on the deal which have to be gone through. They continues that there would certainly be no decision before Parliament recessed on 19-Jul and could take until September.

Les Echos
PPR looking to sell Redcats in H2 for €2B. The newspaper reports that as noted on the 6-June by La Tribune (see related link), PPR is willing to sell its Redcats unit in order to make a major acquisition in the luxury sector. Last Tuesday, PPR has made a step in this direction by inviting banks to a presentation of Redcats' acitivities. Sources report that the formal disvestment process has not started yet and should be launch in Septembre after the banks have received the "info Memo" end of July.

New York Times
Regulators approve some new derivatives rules. DealBook reports that the rules give greater ability to police insider trading and other fraud the rules require hedge funds and other large firms to turn over details of derivatives trading to the CFTC the CFTC can now survey the swaps market with hedge funds, energy firms and other large traders turning over daily reports.
Ford sued over electronic patents. The NYT, citing a filing, reports that the company is being sued by Eagle Harbour Holdings that says it developed the technology behind Ford Sync and some safety devices. The company could be liable for millions of dollars in license fees if it loses or settles.
^TWITTER NYT DealBook says latest financing round values Twitter at $8B. The NYT, citing people briefed on the matter, reports the company is in the process of raising $400M giving it an $8 valuation the financing, split into two portions, will be led by DST Global.
- NYT discusses ethanol subsidies. The NYT reports that: There is increasing pressure on lawmakers to cut subsidies to the industry. Three senators earlier today put out a compromose which would cut financial support and end a tariff on foreign ethanol by the end of July the federal mandate that gasoline blenders mix ethanol with gasoline is not being touched corn prices have rocketed, ethanol producers are viable without subsidies at the current oil price level and companies are in much better financial shape.

Wall Street Journal
WSJ discusses latest Greek plan. The WSJ, citing people familiar with the talks reports that bankers met today in Rome exploring more aggressive solutions even one that would trigger a default. There seems to be a deadlock with talks going nowhere. Dutch Finance Minister Jan Kees de Jager is the first official to say publicly that public sector involvement might have to be forced.
WSJ discusses changes in Social Security for reducing deficit. The WSJ reports on apotential way of cutting the deficit: the changes are likely to be a changed formula determining how fast those benefits go up over time rather than direct cuts to benefits this has been discussed for some time and includes other benefit programs such as federal pensions. It is appealing as it would slow growth of government spending without directly cutting the benefits package
Vacancy rates at US malls and strip-mall centers continued to rise in Q2. Citing data from real-estate research company Reis Inc., the Journal reports that the average vacancy rate at malls in the top 80 US markets increased to 9.3% in Q2 from 9.1% in Q1. The paper adds that the latest vacancy figures are the highest Reis has recorded for malls since it started tracking them in 2000. According to the article, the situation is similar for strip-mall centers. The average strip-mall center vacancy rate increased to 11% in Q2 from 10.9% in Q1 and is expected to exceed 11.1% later this year, the peak level from the recession of the early 1990s. Rising vacancy rates at malls have been attributed to the fallout from closures of big anchor stores over the last few years, while strip-mall centers face a number of headwinds, particularly overcapacity.
- Air France-KLM move towards new corporate structure. The WSJ, citing company officials, reports that governance changes to be decided later this year or early 2012 will prepare the company for future expansion the plan would actiavte the dormant holding company that would then manage the two airlines and integrate support services the structure would enable it to absorb new partner airlines.
Blackrock says BofA (BAC) settlement could break mortgage logjam. The WSJ, citing a Blackrock money manager, reports that the deal may help reconcile all the conflicts of interest in this arena as well as the money, the bank will send some of its highest-risk mortgages to 'special servicers', adjusting financial incentives, so they will investigate who can afford modifed loans or speed-up foreclosure if no deal can be made. The principal reductions could be involved which banks have been reluctant to do
the new approach will apply to 300K loans owned by the parties to this agreement, but could me a model for others.
- Regulators cut fees customers must pay to file complaints against rail-industry. The WSJ reports that the price has dropped to $350 from $20,600.
Renault delays production start at car-battery plant. The WSJ, citing a Renault spokesman, reports that the plant will be delayed for two years until 2014, and "The problem is with the complex legal and financial structure of the project,", adding the French government would no longer help finance the plant.
UAW contract talks may suffer as plant closes. The WSJ reports that American Axle & Manufacturing Holdings (AXL) may close a Detroit plant after contract talks failed. The company says the plant is not viable at the current labor rate and no agreement was made despite a union proposal for lowering wages combined with returning some work from Mexico The contract talks with the Big 3 auto companies is centered around re-opening plants in the US and increasing US production
- Apple looking to fix iPhone flaw. The WSJ, citing the German Federal Office for Information Security, reports that when users view PDF files, hackers can get administrative rights to the phone and read all confidential information. Apple released a statement saying it was aware of the problem and was working on a fix.


Bank of Merrill Lynch: downgraded VMED
Bernstein: upgraded SNY; downgraded BBVA, SAN
Citi: upgraded TJX
FBN Securities: upgraded WDC
Goldman Sachs: downgraded FBR
Morgan Stanley: downgraded GOOG
Needham: downgraded ARX
Oppenheimer: downgraded ARX
Roth Capital: upgraded CRIS
RW Baird: upgraded MDAS; downgraded BLUD
Stifel Nicolaus: upgraded NFX, PXD, CLR, XEEC
Susquehanna: downgraded OCR
Ticonderoga: upgraded TJX
Wells Fargo: downgraded SUNH
William Blair: downgraded APAC
Wunderlich Securities: downgraded SFG


Three Things Every Trader/PM Should know about the Options Market (and Related Trade Ideas)

1. Despite higher realized (past) volatility, the implied (expected) volatility being priced into short-dated options has fallen dramatically, not only making options look cheap on a historical basis, but broadcasting expectations for lower volatility going forward. This dynamic makes calls and puts look like an attractive alternative to long/short stock positions. Look at replacing long stock with the following calls:

QQQ (5 day return= +5.13%): Buy the Aug 60 calls for $.96
SMH (5 day return=5.93%): Buy the Aug 36 calls for $.68

2. Option term structure is generally steep, reflecting a relatively greater degree of uncertainty in the longer-term (6 month) than the short term (2 months). The current ratio of SPX  6 month / 2 month implied volatility is approx. 1.15, (its 90th percentile over the past 10 years). This dynamic allows for leveraging directional views via calendar spread. Take advantage of this dynamic in GDX where term structure is steep and skew is flat.

GDX buy the Sep 58 calls (3.11% otm) and sell the Dec 65 calls (15.56% otm) for a net cost of $.49

3. Options are currently exhibiting more negative (or steep) skew than they have historically, meaning that downside put prices are elevated relative to that of upside calls and reflective of greater (than average) downside vs. upside risk perception. The current ratio of SPX 3-month 25-delta put vol to 25-delta call vol is approx. 1.44 (its 86th percentile over the past 10 years). We like taking advantage of highly negative skew in the REITs to express a bullish view.

IYR sell the Sep 58 puts (7.82% otm) to buy the Sep 66 calls (4.9% otm) for zero cost

 *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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