Wednesday, July 13, 2011

Morning Note

July 13, 2011


Equity futures are trading above fair value as European indices and the Euro bounce, on the absence of any bad news rather than good news. Asian markets started slow and rallied after the release of positive Chinese data showing the tightening measures have not slowed the economy down to date.

Fed Chairman Bernanke testifies before House Financial Services Committee at 10:00 ET

Treasury Auction of 10-yr notes at 13:00 ET

Bullish sentiment increases to 44.1% from 40.9% in the latest US Investor's Intelligence poll. Bearish sentiment decreases to 22.6% from 24.9%. Those expecting a market correction decreases to 33.3% from 34.4%.


Libor fixings 

- Overnight Libor: Dollar: 0.124% vs prior 0.126% ; Sterling: 0.564% vs prior 0.564%; Euro: 1.423% vs prior 1.069%
- 1-month Libor: Dollar: 0.187% vs prior 0.187% ; Sterling: 0.629% vs prior 0.629%; Euro: 1.406% vs prior 1.390%
- 3-month Libor: Dollar: 0.249% vs prior 0.249% ; Sterling: 0.827% vs prior 0.827%; Euro: 1.549% vs prior 1.544%

Aug WTI crude ($0.35) to $97.09

API reports crude inventories +2.341 vs. Reuters (1.8M); gasoline inventories (1.577M) vs. Reuters +200K; distillate inventories +4.754M vs. Reuters +400K

Natural gas +$0.06 to $4.39

Gold $5.00 to $1572.75

10-year yield 2.9352%
30-year yield 4.2165%


Asian Markets

Asian markets rose today on data showing that the Chinese economy is humming along. Thailand rose even though the country’s Election Committee declined to endorse the election of putative Prime Minister-elect Yingluck Shinawatra. Hong Kong property stocks surged on the Chinese data.Australia rose slightly as higher commodity prices lifted miners. But retailers slumped on lower consumer-confidence numbers. Japan managed a small gain on a break in the advance of the yen. The plastics sector supported Taiwan, allowing it to end flat. China Q2 GDP +9.5% y/y vs +9.4% cons. June industrial output +15.1% y/y vs +13.1% cons. H1 fixed-asset investment +25.6% y/y vs +25.8% cons. H1 retail sales +17.7% y/y vs +16.9% seq. Japan May industrial production index revised to +6.2% seq, vs initial +5.7% seq. The yen is trading at 79.32 to the US dollar.  

European Markets

European equity indices are mostly higher in an attempt to rebound from prior losses and following a set of mixed earnings reports before the open. Sovereign debt worries persist following last night's cut of Ireland's credit rating to junk by Moody's and after the International Monetary Fund called for "decisive implementation" by Italy to cut its public debt. UK May ILO unemployment rate +7.7% vs consensus 7.7% and prior 7.7%. UK June claimant count unemployment change 24.5k vs consensus 15.0k and prior revised to 22.5k from 19.6k. Eurozone May Industrial production +4.0% y/y vs consensus +4.8% and prior revised to +5.3% from +5.2%. The pound and the euro are trading at $1.5934 and $1.4058 respectively.


Today's Economic Releases (Eastern Time)

04:30 UK ILO Unemployment rate (May); actual +7.7%; consensus +7.7%
04:30 UK Jobless claims change (May); actual +24.5k; consensus +15.0k
05:00 Eurozone Industrial Production y/y (May); consensus n/a
07:00 US MBA Mortgage Purchase Applications (08-Jul); actual (2.6%); consensus n/a
08:30 US Import Price Index (Jun); consensus (0.7%)
10:30 US DOE Crude Inventories (08-Jul); consensus n/a
14:00 US Treasury Budget (Jun); consensus ($56.1B) 

Today's Key Events (Eastern Time)

08:00 Validus Holdings proposes to merge businesses of Validus and Transatlantic: 866.713.8567 / Intl 617.597.5326 pc 1208925
08:30 General Mills Investor Briefings
10:00 Bernanke testifies before House Financial Services Committee
10:00 Keyuan Petrochemicals Investor Call: 877.565.1274 pc 82926641
11:00 ASM International Analyst and Investor Technology Seminar @ SEMICON
13:00 AeroVironment Investor and Analyst Event
13:00 Treasury Auction of 10-yr notes
—:— Bank of America Merrill Lynch Washington D.C. Health Care Conference (no company presentations)
—:— Cisco Live
—:— Global Hunter Securities with TORM A/S
—:— International Meeting on Advanced Spine Techniques ~ IMAST
—:— Intersolar North America
—:— Needham with FuelCell Energy
—:— SEMICON West
—:— SonoSite (SONO) will replace Kendle International (KNDL) in the S&P 600 - after the close 


Company Specific News

Earnings
COF (Capital One reports Q2 EPS $1.97 vs Reuters $1.71; revenues $4.00B vs Reuters $3.95B)
HCSG (Healthcare Services reports Q2 EPS $0.15 vs Reuters $0.15)
PRXI (Premier Exhibitions reports Q1 EPS $0.02 vs year-ago ($0.03))

Positive
REGN (Sanofi and Regeneron report positive phase 2B trial results with sarilumab in rheumatoid arthritis)

M&A
KCI (Kinetic Concepts to be acquired for $68.50 per share in cash by a consortium of funds including Apax Partners, CPPIB, and PSP Investments)
NXG (Northgate Minerals to acquire Primero Mining for $4.215 per share in stock)

Offerings
COF (Capital One announces $2.0B common stock offering through Barclays, Morgan Stanley, BofA Merrill Lynch and JPMorgan)
CWH (CommonWealth REIT 10M share offering priced at $24.00 through Citi, Morgan Stanley and Wells Fargo)
PDC (Pioneer Drilling to offer 6M shares through Goldman Sachs and Jefferies)
RINO (Rhino Resource Partners LP to offer 2.5M common units through Raymond James)
UDR (UDR to offer 15M shares through BofA Merrill Lynch, J.P. Morgan, Morgan Stanley and Wells Fargo)

Management Changes
CMI (Tim Solso to retire as Cummins chairman and CEO)

Other News
Largest short interest moves by market cap as of 30-Jun data. The percent changes compare the most recent short interest update to the prior 2-week period. Market Cap $25+:
Increases: MOS +79.6%, JCI +60.1%, HD +35.7%, PBR +30.5%, SBUX +27.7%, C +26.8%, VMW +26.4%, UNH +25.8%.
Decreases: MON -30%, UN -29%, LOW -27.5%, LVS -27.1%, GILD -25%, COST -24.2%, TEVA -22.3%, SYT -21.9%.
Market Cap $10-$25B:
Increases: CP +46.8%, CAG +29.8%, GR +28.2%, VRX +27.4%, CAM +27.3%, PAYX +24.3%, BTU +23.5%.
Decreases: LBTYA -71.6%, PH -54.3%, CI -34.7%, SYMC -34.5%, CMI -32.8%, GFI -28.2%, CF -27.3%, WFT -27%.
Market Cap $2-$10B:
Increases: LECO +89.2%, FMC +83.6%, CE +51.3%, DGX +50.6%, WPI +46.5%, WEN +46.1%, DOX +42.4%, TDG +30%.
Decreases: ANR -61.5%, ESV -55.3%, TIBX -47.4%, STX -43%, SIRO -42.2%, VRSN -39.8%, WBC -39.8%, RVBD -39.6%.
Market Cap $500M-$2B:
Increases: ASCA +81.4%, AVAV +71.3%, EZCH +52.4%, TYPE +50.8%, RMBS +42.8%, AZPN +40.7%, WFR +32.6%.
Decreases: DAC -48.7%, IRF -48%, MLNX -41.8%, SPWRA -28.4%, TLAB -26.2%, MPWR -21%.


Newspaper Articles / Headlines

Business Spectator
Other bidders could come calling for Macarthur Coal. The article is purely hypothetical, citing no sources. But it notes that the offer from Peabody Energy (BTU) and ArcelorMittal (MT.NA) has created a template that would be easy for Xstrata (XTA.LN), Vale (VALE), New Hope (NHC.AU), Glencore (GLEN.LN), Rio Tinto (RIO.AU), or Gloucester Coal (GCL.AU) to follow. A bidder that lined up 24% shareholder Citic Group in the role that 16% shareholder ArcelorMittal is playing for Peabody would be in a particularly strong position.

Digitimes
Hewlett-Packard wants Taiwan-based suppliers to be ready to ship 12M notebooks in Q3. DigiTimes reports that hitting the figure would mean 30% q/q growth for HPQ.

Economic Times
Mahindra Satyam may get hit with most of the INR6.17B income-tax liability for years when its books were cooked.

Financial Times
US defence department investigates hacking of Booz Allen Hamilton. The FT, citing a Pentagon official, reports that they are looking into claims the hackers have taken 90K email addresses and encrypted passwords of military personnel.
FT discusses American Superconductor's issues in China with its customer Sinovel (601558.CH). The FT reports that: Although the company hasn't revealed the sources of its dispute in China, it seems to be on technology access. The US company's most advanced components are high-frequency converters and its contract partner Sinovel has set up a company in China to produce those items, according to a Shanghai stock exchange filing.
UK white paper on clean energy released. The FT reports that the white paper guarantees a fixed price for electricity from low carbon electricity, attracting investment in the sector. Vincent de Rivaz, CEO of EDF Energy says it presents a framework to move on with plans to build four nuclear reactors in the UK. The proposals will help nuclear more than other renewables as companies benefit from when the guaranteed price is greater than the wholesale price and a wind farm may not have wind when the time is right.

New York Times
- NYT discusses senate bill to close tax havens. The NYT, citing a bill introduced by Carl Levin and Kent Conrad, reports that the measure would close the loophole that would allow CDS traders to avoid federal tax on many transactions beginning in the US and give the Treasury the power to ban foreign banks that refused to cooperate with the IRS.
NYT discusses Diageo's new management structure. The NYT, citing an interview with CEO Paul Walsh, reports that the company is working on a new management structure to be announced in August, allowing it to better track local consumer trends in China, Africa and Latin America he will shift investments from mature markets to the faster growing regions acquisition targets are focused in the emerging markets.
- NYT discusses General Motors' new Sonic model. the NYT reports that the only subcompact built in America will soon be for sale Production costs have been cut as the production line is half the space of a traditional plant, robots are clustered and workers earn half the traditional union wage
it has long been considered that you cannot build a subcompact in the US and sell it profitably as they are priced too low.
NYT discusses RIM's relationship with the telecom carriers. The NYT discusses the fact that the wireless carriers are threatened by Apple(AAPL) and Google (GOOG) and would prefer a strong RIM to act as a counterbalance. The phone companies ability to choose what phones to sell and which handets to promote will give the company some breathing room.

Nikkei
Toyota Motor to merge auto assembly subsidiaries Kanto Auto Works (7223.JP), Central Motor Co. Separately, Toyota has announced it will hold a news conference at 16:00 local (03:00 ET) to talk about its plans to build a new system to strengthen its manufacturing in Japan.

Telegraph
Buyers looking at News Corp's UK newspapers. The article seems largely theoretical, with no inside information. It says that Daily Mail (DMGT.LN) and Axel Springer (SPR.GR) are both possible buyers for the Times and Sunday Times.

Wall Street Journal
WSJ is cautious on Cisco Systems. A "Heard on the Street" column says that the company is headed in the right direction with its streamlining moves, but the stock is still likely to get cheaper, and Cisco may need new leadership before its price rises.
WSJ not thrilled by Chesapeake Energy's work to encourage Americans to use natural gas. A "Heard on the Street" column says the company would be better off avoiding any new business ventures, as it already spends more than its cash flow.
Severstal to get $730M loan from US government. The WSJ, citing people familiar with the matter, reports that the loan will be used to upgrade a Michigan factory supplying the auto industry.
Montana questions Exxon Mobil spill estimate. The WSJ, citing a letter from the state's department of Environmental Quality, reports that the state is questioning why the estimate of the volume of oil spilled in the river has not gone up given "Exxon Mobil has increased its estimate of the duration of the spill event 10-fold from its original assertion of six minutes"
Verizon seeks big concessions from its workers. The company is set to replace three-year contracts, expiring 6-Aug and wants to tie pay increases with performance, make it easier to fire workers, halt pension accruals this year and require union workers to contribute to health-plan premiums
the negotiations are at an early stage and cover 45K workers in the Mid-Atlantic and Northeast.
- Vantiv plans to file for IPO this year. People familiar with the matter tell the WSJ that the payment processor, nĂ© Fifth Third Processing Solutions, is looking to raise $750M-1B in a listing that could value the company at $4.5B. The company is owned 51% by Advent International, 49% by Fifth Third (FITB).
WSJ is negative on Spanish banks. A "Heard on the Street" column warns that being undercapitalized, Spanish banks face more fundamental problems than their Italian peers do.
WSJ is negative on Thomas Cook Group. A "Heard on the Street" column says that the stock faces enough difficulties that it is unlikely to rise, even at its relatively low new multiple of 3.7 times forecast September 2012 earnings.
News Corp contemplates selling UK newspaper titles. The WSJ, citing people familiar with the situation, reports that: News Corp has informally explored whether there are any buyers for the newspaper unit. There does not seem to be any interest at this time and the company could either revisit the idea or spin off the company in the next six months. A range of deals with a range of asset sizes are on the table but no more details are given

Xinhua
China's State Oceanic Administration orders ConocoPhillips to stop production at Penglai oil field.



Newspaper Articles

Bank of America Merrill Lynch: upgraded CLNE
BB&T: downgraded DLTR, VTNC
Goldman Sachs: upgraded MHP, downgraded TV
KeyBanc: upgraded MGM
RBC Capital: upgraded LOPE
RW Baird: upgraded MAR
Stifel Nicolaus: upgraded CNQ, XCO


Options

Meet VIX’s Cousin VSTOXX

- Yesterday was a volatile session for volatility as the VIX traded in a 1.88 point (~10%) range over the last 1.5 hours of the session- crossing into negative territory then moving higher to close at 19.87 (+8.0%) near the high of the session. Looking across the VIX curve, we saw all futures moved higher, while the exaggerated move at the front end (spot & July) served to flatten the term structure. As we’ve seen many times in the past, look for an escalation in risk perception to cause further flattening of the term structure followed by a violent steepening after the situation(s) either come to a head or become ignored. We are on the sidelines for now.

- The ascent of the VIX pales compared to that of its European cousin, the VSTOXX (V2X on Bloomberg).The VSTOXX is up 7.66 points (37%) since last Thursday with volumes soaring over the past few sessions. Interestingly both the VSTOXX/VIX spread as well as the spread between European & US investment grade CDS have more than doubled over the past month. Derivative markets in both credit and volatility are painting a frightening picture of relative risk perception in the Euro-zone.

- At the sector level, RTH (retail HLDRs) stands out – RTH vol fell modestly today against the backdrop of rising vols in most other sector ETFs. With earnings coming, August RTH vol looks particularly cheap at ~17 or .94x thirty-day realized vol. Given it’s top 3 members (WMT, AMZN, HD) at 44%, we think there is potential for high pair-wise correlation as nearly every component stock reports earnings before Aug. expiration.

The Best (and Possibly Only) Thing at the End of the Rainbow…

- 30-day implied volatility in gold is now up nearly 3 points (20%) this week, the largest two-day vol advance in a year. At the same time, inversion of GLD skew has become quite pronounced, at .95 the 25-delta put/call skew ratio is now in its 2nd percentile and a full two-standard deviations off its one-year average. This change in skew complexion appears to be a direct by-product of declining confidence in global sovereign debt and therefore the currencies that underpin them. In our opinion, gold stocks may be the relatively better play at this point, most senior gold producers are trading at compelling NPV multiples (BMO has OP ratings on 47%/75% GDX constituents covered). Unlike GLD, Aug options in GDX still exhibit some degree of neg. skew meaning, leverage this skew dynamic to get upside exposure via selling the GDX Aug 55 puts (31.5 vol) to buy the Aug 60 calls (31.25 vol) for a net credit of $.07.



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 *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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