Monday, August 1, 2011

Morning Note

August 1, 2011

Equity futures are trading well above fair value following the last-minute bipartisan debt agreement, although the risks of debt downgrade are still a possibility. The debt deal still must be approved by the Senate and House. A Senate vote could occur as early as this morning.

WHAT TO WATCH: The House plans votes today and the Senate may follow suit to consider the agreement reached last night to raise the debt limit by at least $2.1 trillion and slash government spending by $2.4 trillion or more. An index of U.S. manufacturing probably slipped to 54.5 in July, economists said before the ISM report at 10 a.m. The People�s Bank of China signaled it�s too early to relax monetary policy. The Reserve Bank of Australia will likely keep the overnight cash rate target at 4.75 percent tomorrow, according to a Bloomberg survey.

Libor fixings 

- Overnight Libor: Dollar: 0.129% vs prior 0.131%; Sterling: 0.569% vs prior 0.571%; Euro: 0.863% vs prior 0.945%
- 1-month Libor: Dollar: 0.192% vs prior 0.191%; Sterling: 0.632% vs prior 0.632%; Euro: 1.378% vs prior 1.379%
- 3-month Libor: Dollar: 0.257% vs prior 0.256%; Sterling: 0.833% vs prior 0.833%; Euro: 1.558% vs prior 1.557%

Sep WTI crude +$1.30 to $97.00

Natural gas +$0.045 to $4.190

Gold ($10.50) to $1616.00

10-year yield -year yield 2.8304%
30-year yield 4.1639%

Asian Markets

Most Asian markets rose solidly today on news that an agreement to raise the US debt ceiling had been reached. Australia was led up by its major banks, which rose 2%. Resource stocks added 1-4% on the news from the US. Megabanks in Japan rose 2-4% on their earnings, bolstered by news of the tentative debt deal in the US, since they hold large amounts of US Treasuries. In light turnover suggesting investors were cautious despite the news from the USHong Kong closed up, but near its low. Macau casino stocks jumped on data showing 48% gaming revenue growth for the city in July. China was restrained to a flat finish, even though the July PMI came in higher than expectations. Profit-taking in banks offset a rise in coal stocks, which rose on a government report telling thermal power plants to keep buying coal to prevent electricity shortages. China July PMI 50.7 vs 50.1 cons and 50.9 seq. Australia July manufacturing index 43.4 vs 52.9 seq. Australia June new home sales (8.7%) m/m. The yen is trading at 77.41 to the US dollar.

European Markets

European equity markets traded higher from the open following gains in Asian indices after Republican and Democratic politicans and President Obama agreed a debt deal that would allow for an increase in the US debt ceiling. The Senate and the House are due to vote on the package, though it is unclear if the deal goes far enough to avoid a US debt downgrade by the rating agencies. European corporate results were generally well received. Most major indices have pared initial gains, an exception being the UK that has held on to most of its advance in range bound trading and despite disappointing economic data. Advancing sectors lead decliners 17-2. Basic resources +1.5%, technology and insurance both +1.1% lead gainers whilst utility (0.1%) and healthcare little changed are the only fallers. July final Manufacturing PMI. France 50.5 vs preliminary 50.1. Germany 52.0 vs preliminary 52.1. Eurozone 50.4 vs preliminary 50.4. UK Jul Manufacturing PMI 49.1 vs consensus 51.0, prior revised 51.4 from 51.3. Eurozone June unemployment +9.9% vs consensus +9.9% and prior +9.9%. The pound and the euro are trading at $1.6418 and $1.4407 respectively. The pound pared gains post the UK Manufacturing PMI data that saw the sector shrink for the first time since the recession 2-yrs ago.

Today's Economic Releases (Eastern Time)

03:50 France Manufacturing PMI (Jul); consensus n/a
03:55 Germany Manufacturing PMI (Jul); consensus n/a
04:00 Eurozone Manufacturing PMI (Jul); consensus n/a
04:30 UK Manufacturing PMI (Jul); consensus n/a
05:00 Eurozone Unemployment Rate (Jun); consensus n/a
10:00 US Construction Spending (Jun); consensus (0.1%)
10:00 US ISM Manufacturing Index (Jul); consensus 55.3
Today's Key Events (Eastern Time)

—:— Canada: Markets Closed for Civic Holiday
—:— FDA PDUFA (est): Allergan’s Botox sBLA for OAB (spastic bladder)
—:— Needham with 3D Systems

Company Specific News

CYOU ( reports Q2 EPADS $1.02 vs Reuters $0.93. Reports Q2: Revenues $105.0M vs Reuters $98.8M)
HUM (Humana reports Q2 EPS $2.50 ex-items vs Reuters $2.06. Reports Q2:
Revenues $9.25B vs Reuters $9.35B)

EAD.FP (EADS acquires Vizada for its Astrium division for $960M)
MCC.AU (Peabody Energy (BTU), ArcelorMittal (MT.NA) reject proposal that they offer A$16/share for control of Macarthur Coal)

GABC (German American Bancorp files $100M mixed shelf)
HBI (Hanesbrands files mixed securities shelf of indeterminate amount)
LPDX (LipoScience files amended S-1; proposes to list on the Nasdaq Global Market under the symbol "LPDX". Company had initially filed an $86.3M IPO through Barclays, UBS and Piper Jaffray on 23-Jun, though did not disclose a proposed symbol at that time)
MVIS (Microvision files $35M mixed shelf)
RAS (RAIT Financial Trust files $600M mixed shelf)
SVBT (South Valley Bancorp files $46M IPO through DA Davidson

Newspaper Articles / Headlines

All Things Digital
Private equity interest in Yahoo! picks up again in light of agreement on Alipay

- The Trader: The Dow falls 4.24%, Boehner passes bill through the lower house to raise the debt ceiling , Dunkin' Brands Group (DNKN), Teavana (TEA) and Chef's Warehouse (CHEF) all go public and Barron's sees a positive outlook
International Trader (Europe): European Banks begin to own up to the Greek-bond impairments on their books
International Trader (Asia): Temasek Holdings is meeting with investors to discuss new bond issues, Barron's argues a likely option to raise debt is a dim-sum offering
- Current Yield: Investors still find safety in U.S. government bonds, despite the-debt ceiling and potential of a downgrade
The Striking Price: Discusses how investors are protecting their stock portfolios from stock declines that might be triggered by a default or downgrade.
Commodities Corner: Highlights a positive outlook for Gold
StreetWise: Investors have low expectations for stocks and bonds have a bullish outlook
- D.C. Current: Argues that both political parties lost in the debt ceiling debate and notes that a downgrade of U.S. debt it inevitable
- Technology Trader: Discusses when a good tech company is on the wrong side of market trends, specifically mentions Sequans Communications (SQNS) and Stec (STEC), among others
Plugged In: Highlights Workday, an on-demand version of PeopleSoft (ORCL) created by former PeopleSoft co-founders
- Gadget of the Week: Apple's (AAPL) OS X Lion operating system includes touch screen gestural controls for computers and laptops
- ETF Focus: Highlights the WisdomTree Global Real Return Fund (RRF) where Its managers choose Treasury Inflation-Protected Securities, or TIPS, from issues available throughout the world.
- Fund of Information: Highlights three funds that protect investors in an unstable market by gathering payouts from many different asset classes
- Speaking of Dividends: Highlights Newmont Mining (NEM), Barrick Gold (ABX), Norfolk Southern (NSC), Rayonier (RYN) and Simon Property Group (SPG)
Follow- up: Positive on Johnson Controls (JCI) and Aflac (AFL)
Barron's profile features MFS New Discovery portfolio manager Tom Wetherald. Tom Wetherald manages the $1.5B MFS New Discovery A Fund (MNDAX). Wetherald's portfolio resembles a bell curve with 20% in out-of-favor stocks which investors have overreacted to short-term issues; 60% is in best-of-breed companies with long-term growth prospects; and 20% is in emerging-growth stocks. The article notes that Wetherald prefers companies that are fast-growing with high returns on equity, improving margins, and strong balance sheets. MFS New Discovery Fund's top 10 holdings include: P.F. Chang's China Bistro (PFCB), Green Mountain Coffee Roasters (GMCR), Brookdale Senior Living (BKD), F5 Networks (FFIV), Polypore Networks (PPO), Cabot Oil & Gas A (COG), Petrohawk Energy (HK), Quin Street (QNST), Owens-Corning (OC), Urban Outfitters (URBN).

Daily Mail
- Electricite de France wins £6.8B contract to supply electricity to UK government for four years. The Daily Mail talks to EdF CEO Vincent de Rivaz and "the Government," though it does not make clear who reveals the value of the contract.

Economic Times
Jack Palmer no longer willing to settle with Infosys out of court. Palmer is the employee that claims Infosys is illegally using B1 visas when H-1B visas would be appropriate.

Financial News
President Obama announces bipartisan, bicameral debt-ceiling deal. Though Obama made the announcement, Rep John Boehner still needs to sell the deal, which extends the debt ceiling through December 2012, to Republicans. S&P futures have been trading sharply higher on the news that a deal was near.

Financial Times
Barclays Private Equity to rebrand itself as Equistone Partners Europe this fall. Citing people with knowledge of the situation, Financial News reports that at about the same time, the unit will raise €1.5B in funds and then be spun off from Barclays Bank.
British Sky Broadcasting chairman James Murdoch likely to be questioned by MPs again. The FT reports that the culture, media and sport select committee will write to Murdoch ans three former employees asking about evidence they had previously given on the phone-hacking scandal. Some members of the committee wanted to recall him immeadiately but they agreed to first send letters requesting more information. StreetAccount notes the FT reported 21-Jul that senior News of the World Executives have disputed Murdoch's testimony.
Two ex-News of the World executives challenge James Murdoch's testimony.
Former AIA CEO Mark Wilson plotting bid for Aviva's non-core emerging markets businesses. People familiar with his plans tell the FT thatWilson is still in the early stages of his thinking and could proceed to find private-equity backing, or could use a different strategy. The article says that analysts think Aviva's operations in RomaniaHungary, and the Czech Republic might be worth £100M, and the operations in SingaporeMalaysia,South KoreaIndonesiaSri Lanka, and Hong Kong, could be worth £400M.
Finmeccanica CEO responds to market falls. The FT, citing a statement by Giuseppe Orsi, reports that The current share prices "grossly undervalues the group" a new three-year business plan will be presented by the end of October some division could be sold off such as Ansaldo Breda, the train maker, as well as some assets of DRS Technology.
Petroleo Brasileiro (Petrobras) to increase ethanol production. In an interview with the FT, CFO Almir Barbassa says. The company is spending $1.9B to triple its share of domestic ethanol production. The company will grow by making new factories and buying existing ones, always working in partnerships The company is producing 5% of the country's ethanol but distributing 40%.

ThyssenKrupp plans to talk with France about merging naval shipbuilding operations. Insiders tell the FTD that initial contacts have been made about a combination of the relevant operations currently belonging to ThyssenKrupp, Thales (HO.FP), and DCNS Paris. The idea has long been promoted by the French, but the article says the Germans have been suspicious due to the French dominance at EADS (EAD.FP).

- Deutsche Telekom considers cutting up to 1600 administrative jobs at its headquarters. A spokesman tells Handelsblatt that the company is looking at its headquarters as part of a medium-term cost-cutting program, but it is not clear if Handelsblatt is citing a source on the cuts themselves. The article says the firings will involve €320-400M in severance costs.

Investor Business Daily
The following changes were noted in the latest IBD 50 List. Added: CERN, WPI, RGLD, V, ROST, ICON, BKE, SHOO, CELG. Deleted: SRCL, ARMH, ILMN, CLF, DECK, TPX, TNAV, SOLR, AGP.

London Telegraph
DTZ Holdings senior executives urge non-executives to consider put-up-or-shut-up warning. The Telegraph reports that it is understood that senior executives at DTZ Holdings (DTZ.LN) have advised the non-executives, including chairman Tim Melville-Ross, to consider a put-up-or-shut-up warning to majority shareholder Saint George Participations because of the uncertainty the talks are causing the company. The article points out that the takeover panel can only issue a put-up-or-shut-up warning if it is requested by the targeted company and notes that it is believed DTZ and its advisers have not yet requested one.

London Times
More than ten offers come in at first-round deadline for EMI. Insiders close to Citi tell the Times of "robust" interest. The article contains no specifics, however, speaking only of parties that are "believed" or "said" to have put bids in. Sony Music Entertainment (6758.JP), Universal Music (VIV.FP), and Access Industries are listed. The article says that BMG Music Rights (KKR) is one of several bidders that only wants EMI's publishing business, for competition reasons, though Access is thought to have put in an offer for the recording division, as well. The article gives no hint as to the size of any bids that were received.
Associated British Ports wins control of Immingham oil terminal from Humber Oil Terminal Trustees in court. The JV between Total (FP.FP) and ConocoPhillips (COP) was hoping to have its exclusive lease renewed. ABP would like HOTT to continue to operate the terminal, but not exclusively. The Times reports that HOTT can appeal the ruling.
UK asking brewers to share cost of anti-smuggling system. The Times reports that HM Revenue & Customs would like members of the British Beer & Pub Association to help it combat duty fraud that costs an estimated £550M annually. A person involved in the discussions says duty rates could go up, and a penalty may be imposed on breweries thought not to be taking sufficient precautions to prevent duty-free export followed by re-import of their products.

Toyota Motor expects global production to be more than 8M units in 2012

Wall Street Journal
Merck plans 13K job cuts by 2015. The WSJ reports that Merck & Co. plans to eliminate 13,000 jobs or about 14% of its work force, in addition to some 17,000 job cuts already planned as part of a cost-cutting effort due to an aging product lineup. According to the WSJ, Merck said the layoffs would cut spending by an extra $1.3B when finished at the end of 2015, which does not include the the additional savings contributed by the closings of unspecified offices and manufacturing plant. The article explains that Merck and its competitors have been cutting costs in preparation to lose patent protection on blockbuster medicines, including Merck's Singulair, which has almost $5B in sales.

Women's Wear Daily
- PPR hopes to sell Redcats this year. But in an interview, chairman/CEO Fran├žois-Henri Pinault tells WWD that the company won't go ahead with a sale if markets drop due to debt issues in either the US or Europe. Pinault does not comment on rumors that the company may be interested in Brioni and/or Pomellato.


Barclays: downgraded KND
Citi: upgraded EV
Credit Suisse: upgraded ALK, DAL, JBLU
FBR Capital: upgraded EWBC
Goldman Sachs: upgraded RSH
Jefferies: upgraded JAZZ
Morgan Keegan: downgraded NHC, SKH, SUNH
Morgan Keegan: upgraded FIRE
Oppenheimer: upgraded EMC; downgraded SUNH
RW Baird: upgraded SPF, EXC
Weeden: upgraded KEG
Wells Fargo: upgraded CSE

Newspapers/Websites: Europe's biggest hedge fund, Lansdowne Partners, sold its entire $850M stake in Goldman Sachs (GS), the Telegraph reports...Apple (AAPL) escalated its legal battle against Samsung Electronics, requesting an Australian court to block the Samsung Galaxy Tab 10.1 there because it infringes 10 Apple patents, Bloomberg reports...HSBC (HBC) said it will cut another 25,000 jobs between now and 2013 on top of the 5,000 it already announced, Reuters reports...Private equity investors weighing bid for Yahoo (YHOO), All Things Digital reports...Under a new round of restructuring as Merck (MRK) prepares for generic competition for its asthma medication Singulair, as well as slower revenue growth in the U.S. and Europe, the company plans to cut up to 13,000 more jobs, the Associated Press reports.

Debt deal agreed. Both houses of Congress are due to vote today on a bill to raise the debt ceiling by $2.4T in two stages and slash spending after Democrats and Republicans last night finalized a deal. The agreement provides for a $917B fall in debt over 10 years, while a bipartisan committee will work on finding another $1.5T in cuts. The panel will have until December 23 to come up with at least $1.2T in reductions, or automatic cuts will kick in. The deal is expected to pass the Senate, although things may be more dicey in the House, where it will probably hit opposition from both sides. 

Stocks rise on debt deal. Shares across the world rose in reaction to the U.S. debt deal, with Dow, S&P and Nasdaq futures all increasing after U.S. stocks ended their worst week in a year on Friday due to the stalemate in the talks. The Nikkei and Hang Seng closed higher today, while the FTSE 100 and the Dax increased in morning trading. The dollar rose against the Swiss franc and gold fell as investors unwound safe haven positions. (See "Todays Markets" below for more details.) 

HSBC to slash 30,000 jobs, sell branches; profit up. HSBC (HBC) is to axe 30,000 jobs between now and 2013 as it looks to save $2.5B-$3.5B, although hiring in some countries may limit the net headcount reduction. HSBC has also agreed to sell 195 branches, mostly in New York, to First Niagara Bank (FNFG) for $1B as part of its plan to pare its U.S. operations and exit non-core markets. In H1, HSBC's pretax profit edged up 3.3% to $11.47B and beat analyst forecasts, with net interest income rising 2.4% and loan impairments dropping 30%. Shares rose 5% premarket. 

Peabody, ArcelorMittal go hostile with $5.2B Macarthur bid. Peabody Energy (BTU) and ArcelorMittal (MT) have taken their A$4.7B ($5.2B) bid for Macarthur Coal (MACDF.PK) directly to the Australian firm's shareholders after it turned down what it termed an "opportunistic" offer and said it was working on a rival proposal. Macarthur, the world's largest producer of pulverized coal, has been a target for over a year as major companies look to exploit the demand created by Asia's rapid industrialization. 

Factory activity slows across the world. Hopes for global economic growth have taken a dent after factory activity in China and Europe decelerated in July and contracted in the U.K. Eurozone PMI fell to 50.4 from 52 in June, its lowest level since September 2009. New orders, an indicator for future prospects, contracted with a fall to 47.6. China's official PMI dropped to 50.7 from 50.9 previously, and while new orders rose, PMI data from HSBC showed manufacturing contracted in the country, as well as in Taiwan and Russia. 

U.S. Manufacturing activity forecast to be mostly unchanged. Better manufacturing news is expected in the U.S. this morning, with the July ISM Manufacturing Index forecast to slip only slightly to 55 from 55.3 in June. However, any major deterioration beyond this would hit hopes for a rebound in growth in the second half, especially after Friday's dismal GDP numbers. It could also be another factor that prompts the Fed to embark on QE3. 

Major hedge fund exits Goldman Sachs. Lansdowne Partners, one of Europe's largest hedge funds, has reportedly sold its entire $850M stake in Goldman Sachs (GS), underlining investor concerns about prospects for the global banking sector due to regulatory changes. The divestiture has echoes of Lansdowne's exit from the industry in 2008, ahead of the financial crisis, although this time it has only pulled out of investment banks and moved more capital to the retail segment. Goldman rose 1% premarket. 

DOJ intensifies Nortel patent investigation. The Justice Department is intensifying a probe into whether the six companies that recently bought $4.5B in patents from Nortel could use the IP to unfairly hinder smartphones that operate Android (GOOG). In particular, the DOJ is asking the companies, which include Apple (AAPL), Microsoft (MSFT) and RIM (RIMM), whether they plan to file patent infringement suits. 

Three banks closed. Regulators shut three banks on Friday, bringing the total failures in 2011 to 61 so far. The banks closed were in Indiana, Virginia and South Carolina, with the combined cost to the FDIC's insurance fund expected to be $253.4M. By this time last year, regulators had shut 108 banks. 

EADS to acquire satellite company for $960M. EADS (EADSY.PK) is to buy satellite communications service provider Vizada for $960M from private equity owner Apax France. The purchase is part of EADS's strategy to lower its reliance on cyclical manufacturing revenues, particularly from Airbus. It is also the latest in a series of deals as EADS uses an €11B ($15.9B) cash pile to grow through acquisitions. 

Here's the link to today's MrTopStep Global Insights Report (PDF) for August 1, 2011:

 *Special thanks to Option Radar, BMO Capital, MEB Options, Bloomberg, Reuters, Optionistics, LiveVolPro, CBOE, AMEX, 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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