August 2, 2011
Equity futures indicate a lower opening following yesterday's disappointing ISM number and continued worries over potential US sovereign debt- downgrade.
The debt ceiling deal passes in House with more support than expected. The Senate will vote on debt deal at 12 EST. Given the size of the deal, the question remains whether S&P (or the other rating agencies) still cut the US credit rating.
Italian and Spanish yields hit new highs relative to German Bund yields – yesterday’s sell off blamed on concern that EFSF does not have enough funding.
Libor fixings
- Overnight Libor: Dollar: 0.172% vs prior 0.129% ; Sterling: 0.576% vs prior 0.569%; Euro: 0.838% vs prior 0.863%
- 1-month Libor: Dollar: 0.201% vs prior 0.192% ; Sterling: 0.633% vs prior 0.632%; Euro: 1.373% vs prior 1.378%
- 3-month Libor: Dollar: 0.264% vs prior 0.257% ; Sterling: 0.833% vs prior 0.833%; Euro: 1.556% vs prior 1.558%
Sep WTI crude ($0.60) to $94.29
Natural gas +$0.023 to $4.211
Gold +$10.50 to $1627.95
10-year yield 2.7077%
30-year yield 4.0628%
Asian Markets
Asian markets gave back yesterday’s gains today, as worries that the US sovereign debt rating could be cut outweighed any upside impetus from an agreement assuring the country will not default later today. Exporters fell on data showing manufacturing in the US was basically flat in July, and resource stocks fell on lower commodity prices. Large caps took China to a loss. China-based banks fell in Hong Kong. All 33 sectors fell in Japan, but a report that the government might intervene to restrain the yen supported the market. Australia fell on disappointing building-approval data. Financials lost 1-3%, giving back most of the gains they picked up yesterday. Australia June residential building approvals (3.5%) vs cons +2.5%. Japan June wages (0.8%) y/y.Japan June monetary base +15% y/y to ¥113.73T. The yen is trading at 77.35 to the US dollar.
European Market
European equity markets fell from the open following Asian and US indices lower, with the focus shifting to concerns over global growth following recent weak economic data and after the US House of Representatives passed the package agreed by US political leaders that would allow the debt ceiling to be increased. The US Senate votes on the package today and are expected to pass the legislation. Peripheral debt remained under pressure as CDS' widened and spreads vs German government bonds continued to widen, again in some instances reaching euro lifetime highs, with Italy the main focus. UK July construction PMI 53.5 vs consensus 53.0, prior 53.4. EuroZone Jun producer prices due at 5ET. The pound and the euro are trading at $1.6282 and $1.4198 respectively
Today's Economic Releases (Eastern Time)
04:30 UK Construction PMI (Jul); actual 53.5; consensus 53.0
05:00 Eurozone PPI y/y (June); actual +5.9%; consensus +5.9%
07:45 US ICSC-Goldman Chain Store (30-Jul); consensus n/a
08:30 US Personal Income (Jun); consensus +0.1%
08:30 US Personal Consumption (Jun); consensus +0.1%
08:30 US Core PCE (Jun); consensus +0.2%
08:55 US Redbook Chain Store (30-Jul); consensus n/a
16:30 US API Crude Inventories (29-Jul); consensus n/a
22:30 China PMI Composite (Jul); consensus n/a
—:— US Vehicle Sales (Jul); actual ---; consensus ---
Today's Key Events (Eastern Time)
11:30 National Instruments Investor Conference at NIWeek
17:00 OCZ Technology Group CEO overview of the evolving market for PCIe based SSDs, unveils Z-Drive R4: 877.372.0867
—:— Citi Broadlines/Hardlines/Footwear Back-to-School Bus Tour
—:— Goldman Sachs Healthcare Small Cap One on One Series
—:— Keefe Bruyette Woods Community Bank Investor Conference
—:— Needham with 3D Systems
—:— Stifel Nicolaus Retail Summer School
—:— Xen Summit North America
Company Specific News
Earnings
ADM (Archer-Daniels reports Q4 EPS $0.58 including unusual tax items)
AMT (American Tower reports Q2 adjusted EBITDA $389.1M vs Reuters $380.5M)
BDX (Becton Dickinson reports Q2 $1.51 vs. Reuters $1.43)
CTSH (Cognizant reports Q2 $0.67 vs. Reuters $0.66)
DUK (Duke Energy reports Q2 adjusted EPS $0.33 vs Reuters $0.31)
EMR (Emerson reports Q3 EPS $0.90 vs Reuters $0.91)
ETR (Entergy reports Q2 EPS $1.76 vs Reuters $1.74 and guidance $1.75)
FDP (Fresh Del Monte reports Q2 EPS $0.77 ex-items vs Reuters $0.96)
HSIC (Henry Schein reports Q2 EPS $1.01 vs Reuters $1.00)
KLIC (Kulicke & Soffa reports Q3 EPS $0.95 vs Reuters $0.83)
NYX (NYSE Euronext reports Q2 EPS $0.61 ex-items vs Reuters $0.60 and year-ago $0.64)
ROG (Rogers Corp reports Q2 EPS $0.73 vs guidance $0.62-$0.71 and Reuters $0.69)
WRC (Warnaco Group reports Q2 EPS $0.82 ex-items vs Reuters $0.75)
Other News
Weekly USDA crop progress report says 62% of the corn crop is in good or excellent condition. Compares to 62% last week and compares to 71% in prior year.
Corn: 83% of the corn crop is silking vs 65% last week and a 84% average of 2006-10 period
Cotton: 62% of cotton crop is setting bolls vs. 46% last week and 62% average of 2006-10 period. 30% of the cotton crop cotton is in good or excellent condition compared to 29% last week and 66% y/y.
Soybeans: 77% of soybean crop is blooming vs 60% last week and 81% average of 2006-10 period. 60% of the soybean crop is in good or excellent condition compared to 62% last week and 66% y/y
Rice: 47% of rice crop is headed vs 33% last week last year and 49% average of 2006-10 period. 64% of rice crop is in good or excellent condition compared to 63% last week and 72% y/y
Winter wheat: 81% of winter wheat crop has been harvested vs. 75% last week and 86% average of 2006-10 period.
Spring wheat: 90% of spring wheat has headed vs. 83% last week and 98% average of 2006-10 period. 70% of spring wheat crop is in good or excellent condition compared to 74% last week and 82% y/y.
Figures are as of week-ending 31-Jul. Data is collected weekly and reported on the first business day of every week after 16:00 ET. AGCO, AGU, CF, CNH, DE, IPI, MON, MOS and POT are some of the stocks leveraged to the report.
Newspaper Articles / Headlines
Economic Times
- Indian Telecom Commission makes policy changes. The Economic Times, citing Telecom Minister Kapil Sibal, reports that There will be a uniform revenue share for mobile phone companies at 8.5% of sales (currently 6-10% renewd licence will be valid only for 10 years instead of the 20 years now Mobile companies will be given a maximum of 6.2MHz for GSM and 5MHz for CDMA when licencec are renewed The rules will be cleared before October.
edaily
- LivingSocial to buy Ticket Monster. edaily seems to be citing industry sources, who don't give a price for the South Korean company, but do say that the purchase will occur within two days.
Financial Times
- China announces feed-in solar tariffs. The FT reports that the tariff guarantees solar developers a payment of RMB1-1.15 per-kilowatt-hour
the new tariff will apply only to projects that are not awarded through a competitive bidding process
- Petroleo Brasileiro (Petrobras) CEO says Brazil production could mirror early days of North Sea. The FT, citing Jose Sergio Gabrielli at a company presentation, reports that the group is forecasting daily production of 6.42M boe/day by 2020 the forecats are "at the same slope of production as the first 10 years of the North Sea" the company forecasts 2.77M boe/day this year.
- Twitter financing values company at $8B. The FT, citing a person familiar with the transaction, reports that DST has invested $400M for 5% of the company, with T Rowe Price and a fund managed by JP Morgan (JPM) leading a group of other investors. Half of the $800m will be used to buyback shares from Twitter employees and other early investors
Los Angeles Times
- LA Times looks at Dish Network. The article interviews president/CEO Joe Clayton, who speaks of doing the same thing that Netflix (NFLX) is doing, but it doesn't actually break much news. Without being specific, Clayton implies that a Blockbuster streaming service will launch soon.
- DreamWorks Animation-Paramount Pictures (VIA.B) relationship will end in 2012. A person familiar with the matter tells the LA Times that DreamWorks has officially rejectedParamount's offer to extend the companies' distribution agreement by a year on the current terms. The Times notes that the decision was not a surprise, but the timing is surprising, sinceParamount's offer didn't come with a deadline. Warner Bros (TWX) is the only major Hollywood studio that doesn't have an animation unit, and knowledgeable people say that it does not want to be involved with DreamWorks.
Mint
- Lupin targeting large acquisition in Latin America. Top Lupin executives tell Live Mint of the plans, and say that the company has not finalized its decision on a target. In an interview, MD Kamal Sharma says Lupin is not planning to sell its India formulation business.
New York Post
- Apple adds TV shows to iCloud. An industry source tells the NY Post that all major TV providers signed deals, and negotiations weren't nearly as difficult as those with the music industry, since piracy is a lesser concern in television, especially given that people's shows need to be purchased through Apple.
USA Today
- Consumer Reports says Honda Civic LX is no longer on its recommended list. The report found the 2012 Civic less agile and with lower interior quality than its predecessor, as well as a choppy ride, long stopping distances and pronounced road noise.
Wall Street Journal
- WSJ thinks there's not much of a bidding war in store for Macarthur Coal. A "Heard on the Street" column notes that the current price of Macarthur is just above the A$15.50/share (A$15.66/share, including a dividend)offer from Peabody Energy (BTU) and ArcelorMittal (MT.NA), which is itself not far below the A$16/share that Macarthur's board said it would be willing to recommend to holders.
- NBC reveals ideas for new shows. Reporting from a press event, the WSJ says that the last-place network is considering animated shows for people aged 18-49.
- Eastman Kodak looking at sale of patent involved in Apple (AAPL) lawsuit. The WSJ, citing a Kodak spokesman, reports that the image-previewing patent is up for sale as well as patents that the company is litigating against Shutterfly (SFLY).
Women's Wear Daily
- Coach signs multiyear deals to enter Brazil, Vietnam. An executive tells WWD: Coach has come to agreements with Aste Group in Brazil and Luxasia Group in Vietnam. The sales won't be material in the first few years.
House passes debt deal. With barely any time to spare, the Senate is expected to today authorize a bill to raise the debt ceiling by $2.4T and limit spending after the House passed the measure yesterday despite significant opposition from both sides. However, relief is tempered by concerns about whether the ratings agencies, particularly S&P, will maintain the U.S.'s AAA rating. The vast bulk of the $2.4T spending reductions won't be made until 2014 or beyond, an approach in line with Ben Bernanke's view that cutting too much too soon could further harm the weak economy.
Italian authorities to meet as turmoil grows. Italy's Financial Stability Committee is due to meet today to discuss the increasing market turmoil as rising yields on the country's bonds threaten to make its borrowing costs unsustainable. Yields passed 6.25% today, although they then pulled back, while those of Spain also rose to well over 6%. The red line is 7%, the level that prompted Greece, Portugal and Ireland to seek bailouts.
Toyota surprises with net profit, ups forecast. Toyota's (TM) FQ1 net profit dropped 99% to ¥1.16B ($15M) as revenue fell 29% to ¥3.44T but surprised analysts who had been expecting a loss. The car maker also increased its FY net profit guidance by nearly 40% to ¥390B as it predicted a faster-than-expected rebound from the March earthquake, saying it would return to normal production ahead of schedule in September. However, Toyota warned that the stronger yen was harming its battle against its South Korean rivals.
Barclays profit plunges 33%. Barclays (BCS) H1 pretax profit beat expectations but slumped 33% to £2.64B as a decline in bond trading at its investment bank and a £1B charge for mis-sold insurance overshadowed a fall in bad-debt charges. The bank joined its peers in announcing job losses, saying it would probably cut 3,000 positions this year, which would include 1,400 in H1. Shares fell 0.1% premarket.
Pfizer net profit beats forecasts. Pfizer's (PFE) Q2 EPS fell by a cent to $0.60 but beat expectations, while revenue slipped 1% to $16.98B and was in line. The company reaffirmed its full-year guidance for 2011 and its targets for 2012.
Investors look to shake up McGraw-Hill. Investment firm Jana Partners and the Ontario Teachers' Pension Plan have increased their stakes in McGraw-Hill (MHP) to a combined 5.2% as they look to unlock shareholder value with a sale of assets, a merger or some other reorganization. One possibility could be a separation of McGraw-Hill's lucrative S&P unit from its struggling education business. The news sent McGraw-Hill's share rising 5.6% in post-market trading. Jana has a history of prompting company break-ups, including with El Paso (EP) and Dutch postal service TNT (TNTTY.PK).
Fresenius to buy two companies in $2.1B deals. Germany's Fresenius Medical Care (FMS), the world's largest dialysis company, has agreed to buy privately held Liberty Dialysis Holdings for $1.7B including assumed debt. FMC is acquiring American Access Care Holdings for $385M as well. The consolidation comes as a new payment scheme from Medicare, which provides insurance for about 80% of FMC's U.S. patients, puts pressure on dialysis clinics to increase efficiency. FMC also said that Q2 net profit rose 5% to $261M and that it expects to post net profit of $1.07B-$1.09B this year.
Sony plans to restructure TV ops. Sony (SNE) is preparing a reorganization of its ailing TV business to reduce costs and better compete against the likes of Samsung (SSNLF.PK). Details may come next month and would follow the replacement of the head of the division last week, when Sony also cut its FY forecast for the business. Despite outsourcing much of the production of the TVs and slashing jobs, the division hasn't turned a profit in years.
Kodak mulls sale of key photo-preview IP. As part of a prospective sale of 1,100 patents, Kodak (EK) is considering selling its technology for previewing photographs, which is one of its most important pieces of IP and is the subject of lawsuits against Apple (AAPL) and RIM (RIMM). Yesterday, the company said it had adopted an anti-takeover plan that a source said was designed to prevent an investor gaining control of the patents by acquiring a large stake in the company.
Ford recalling 1.22M pickup trucks. Ford (F) is recalling 1.22M older pickup trucks in the U.S. and Canada to replace straps that hold fuel tanks in place and which could corrode and break. There have been reports of three vehicle fires and one injury related to the issue. The recall follows an investigation by the National Highway Traffic Safety Administration.
Apple vs. Samsung goes down under. Samsung (SSNLF.PK) has agreed not to sell the latest version of its tablet computer, the Galaxy Tab 10.1, in Australia until a patent lawsuit filed in the country by Apple (AAPL) is resolved. Samsung's move is the latest development in a dispute that began in April, when Apple sued Samsung in California, and has spread to a number of other countries.
Italian authorities to meet as turmoil grows. Italy's Financial Stability Committee is due to meet today to discuss the increasing market turmoil as rising yields on the country's bonds threaten to make its borrowing costs unsustainable. Yields passed 6.25% today, although they then pulled back, while those of Spain also rose to well over 6%. The red line is 7%, the level that prompted Greece, Portugal and Ireland to seek bailouts.
Toyota surprises with net profit, ups forecast. Toyota's (TM) FQ1 net profit dropped 99% to ¥1.16B ($15M) as revenue fell 29% to ¥3.44T but surprised analysts who had been expecting a loss. The car maker also increased its FY net profit guidance by nearly 40% to ¥390B as it predicted a faster-than-expected rebound from the March earthquake, saying it would return to normal production ahead of schedule in September. However, Toyota warned that the stronger yen was harming its battle against its South Korean rivals.
Barclays profit plunges 33%. Barclays (BCS) H1 pretax profit beat expectations but slumped 33% to £2.64B as a decline in bond trading at its investment bank and a £1B charge for mis-sold insurance overshadowed a fall in bad-debt charges. The bank joined its peers in announcing job losses, saying it would probably cut 3,000 positions this year, which would include 1,400 in H1. Shares fell 0.1% premarket.
Pfizer net profit beats forecasts. Pfizer's (PFE) Q2 EPS fell by a cent to $0.60 but beat expectations, while revenue slipped 1% to $16.98B and was in line. The company reaffirmed its full-year guidance for 2011 and its targets for 2012.
Investors look to shake up McGraw-Hill. Investment firm Jana Partners and the Ontario Teachers' Pension Plan have increased their stakes in McGraw-Hill (MHP) to a combined 5.2% as they look to unlock shareholder value with a sale of assets, a merger or some other reorganization. One possibility could be a separation of McGraw-Hill's lucrative S&P unit from its struggling education business. The news sent McGraw-Hill's share rising 5.6% in post-market trading. Jana has a history of prompting company break-ups, including with El Paso (EP) and Dutch postal service TNT (TNTTY.PK).
Fresenius to buy two companies in $2.1B deals. Germany's Fresenius Medical Care (FMS), the world's largest dialysis company, has agreed to buy privately held Liberty Dialysis Holdings for $1.7B including assumed debt. FMC is acquiring American Access Care Holdings for $385M as well. The consolidation comes as a new payment scheme from Medicare, which provides insurance for about 80% of FMC's U.S. patients, puts pressure on dialysis clinics to increase efficiency. FMC also said that Q2 net profit rose 5% to $261M and that it expects to post net profit of $1.07B-$1.09B this year.
Sony plans to restructure TV ops. Sony (SNE) is preparing a reorganization of its ailing TV business to reduce costs and better compete against the likes of Samsung (SSNLF.PK). Details may come next month and would follow the replacement of the head of the division last week, when Sony also cut its FY forecast for the business. Despite outsourcing much of the production of the TVs and slashing jobs, the division hasn't turned a profit in years.
Kodak mulls sale of key photo-preview IP. As part of a prospective sale of 1,100 patents, Kodak (EK) is considering selling its technology for previewing photographs, which is one of its most important pieces of IP and is the subject of lawsuits against Apple (AAPL) and RIM (RIMM). Yesterday, the company said it had adopted an anti-takeover plan that a source said was designed to prevent an investor gaining control of the patents by acquiring a large stake in the company.
Ford recalling 1.22M pickup trucks. Ford (F) is recalling 1.22M older pickup trucks in the U.S. and Canada to replace straps that hold fuel tanks in place and which could corrode and break. There have been reports of three vehicle fires and one injury related to the issue. The recall follows an investigation by the National Highway Traffic Safety Administration.
Apple vs. Samsung goes down under. Samsung (SSNLF.PK) has agreed not to sell the latest version of its tablet computer, the Galaxy Tab 10.1, in Australia until a patent lawsuit filed in the country by Apple (AAPL) is resolved. Samsung's move is the latest development in a dispute that began in April, when Apple sued Samsung in California, and has spread to a number of other countries.
Research
Argus Research: upgraded LVS
BB&T: upgraded AMNB
Benchmark: downgraded ERT
Bernstein: upgraded TLM; downgraded SLE
BMO capital: upgraded BRY
Cowen: upgraded TTWO; downgraded PAET
Credit Suisse: upgraded SOHU
Deutsche Bank: downgraded NNA, TNK
FBR Capital: upgraded CPT
Jefferies: upgraded RSYS; downgraded WMT
Kaufman Brothers: upgraded TQNT
Mizuho: upgraded CYOU
Morgan Stanley: upgraded IPG
Nomura Securities: upgraded SOHU
Oppenheimer: downgraded TEVA
Stifel Nicolaus: upgraded NLY
SunTrust: upgraded PRSP
UBS: downgraded PKY
William Blair: upgraded CLC
Options
The VIX traded in a 12.5% range yesterday closing down 1.59 (6.30%) at 23.66. This pullback in the VIX fails to highlight the fact that spot VIX still sits comfortably above every point on the futures curve save for March’12. This steep inversion in term structure is rare and signals the pure (short term) unadulterated fear that remains in the market.
Don’t Get Fat on Earnings Comfort-Food
- Some of the positives we can draw from earnings season thus far: 1) 313 SPX members, 78% have reported upside EPS surprises, and 73% have reported upside surprises to sales 2) Profit margins are at historically high levels with ex-financials median operating profit margin and EBITDA at 15.8% and 20.9% respectively according to Bloomberg 3) The SPX currently trades at roughly 13x this year’s earnings (actual+estimated) vs. a long-term average multiple closer to 14.5x (suggesting 11-12% upside).
- And the negative: 1) 66% of companies that just reported failed to offer quarterly outlooks - the highest percentage since Q1 2009, and above the typical range of 45-60% recorded since 2002. 2) Contraction in government spending will likely pare earnings forecasts for those who rely on the public sector for revenue and 3) the lasting effects of 9% unemployment, weak-GDP growth and high food and gas prices are likely hard to quantify when it comes to future earnings.
Retail Regurgitation
Of the S&P’s 10.64% Consumer Discretionary weighting, 6.35% (~60%) have yet to report Q2 results. Teamed with retail sss comps Thursday, we expect a good deal of focus on the sector if only for the fact it should provide some transparency into the condition of the US consumer. For investors with exposure or interest in trading the group we compared the 3 consumer-related ETFs that have listed options.
RTH- The least liquid of the three and wide bid offer spreads. The top 3 members WMT, AMZN and HD make up 45% of the ETF. That said, 65% of the constituents report before Aug expiry (highest of the 3), vol is lowest on an absolute basis and with strikes are listed in dollar increments. For downside exposure to RTH, we suggest buying the Aug 107-100 put spread for $1.60 (1.48% of spot).
XLY- A much more liquid product (open interest >500k contracts) and bid/offer of Aug near the money options around $.03. XLY continuants include media, auto, retail and restaurant stocks and nearly 48% of its members (by weight) report before August expiration. XLY has the most compelling 30-day implied/realized vol ratio at 1.15. For downside exposure in XLY, we suggest buying the Aug 39-36 put spread for $.65 (1.64% of spot).
XRT- Also very liquid XRT gives diversified exposure (total of 96 companies with weightings from 65bps to 1.38% weight) within the specialty retail space. The higher beta of specialty retail explains the higher realized and implied volatility. Roughly 43% of the XRT report earnings before Aug expiry. For downside exposure in XRT, we suggest buying the Aug 53-48 1x2 put spread for $1 (1.88% of spot). Inclusive of bid offer, this trade captures roughly 5.25 points of vol skew.
Focus Items
Americas: Healthcare: Sizing the exposure to Medicare cuts under the
1
deficit planFocus Items
Americas: Healthcare: Sizing the exposure to Medicare cuts under the
1
deficit plan
United Therapeutics Corporation (UTHR): Detailing the path to upside
2
following a strong 2Q
Americas: Machinery & Diversified Industrials: Emerging themes and
trends 3
from 2Q earnings
Principal Financial Group, Inc. (PFG): In-line EPS, but key areas of
4
concern surprise to the upside
Americas: Real Estate: REITs: Apartment REITs: 2Q2011 recap - Near-term
5
outlook remains positive
Yum! Brands, Inc. (YUM): Lowering estimates further after developed
market 6
deep dive
R): Detailing the path to upside
2
following a strong 2Q
Americas: Machinery & Diversified Industrials: Emerging themes and
trends 3
from 2Q earnings
Principal Financial Group, Inc. (PFG): In-line EPS, but key areas of
4
concern surprise to the upside
Americas: Real Estate: REITs: Apartment REITs: 2Q2011 recap - Near-term
5
outlook remains positive
Yum! Brands, Inc. (YUM): Lowering estimates further after developed
market 6
deep dive
Americas: Healthcare: Sizing the exposure to Medicare cuts under the
1
deficit planFocus Items
Americas: Healthcare: Sizing the exposure to Medicare cuts under the
1
deficit plan
United Therapeutics Corporation (UTHR): Detailing the path to upside
2
following a strong 2Q
Americas: Machinery & Diversified Industrials: Emerging themes and
trends 3
from 2Q earnings
Principal Financial Group, Inc. (PFG): In-line EPS, but key areas of
4
concern surprise to the upside
Americas: Real Estate: REITs: Apartment REITs: 2Q2011 recap - Near-term
5
outlook remains positive
Yum! Brands, Inc. (YUM): Lowering estimates further after developed
market 6
deep dive
R): Detailing the path to upside
2
following a strong 2Q
Americas: Machinery & Diversified Industrials: Emerging themes and
trends 3
from 2Q earnings
Principal Financial Group, Inc. (PFG): In-line EPS, but key areas of
4
concern surprise to the upside
Americas: Real Estate: REITs: Apartment REITs: 2Q2011 recap - Near-term
5
outlook remains positive
Yum! Brands, Inc. (YUM): Lowering estimates further after developed
market 6
deep dive
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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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