Wednesday, August 3, 2011
August 3, 2011
Global growth worries and European peripheral debt contagion continue to weigh on investor sentiment after stocks fell for sixth straight days on continued concerns that the US recovery is faltering. Both Moody's and Fitch affirmed 'AAA' credit rating for the US while a Chinese credit-rating agency cut U.S. Treasuries from A+ to A with a negative outlook.
EU Commission to make statement later today on market situation
Italy's Prime Minister is scheduled to address parliament on the economy at 14:00UK time (9ET)
Swiss National Bank takes measures against strong Swiss franc. The SNB considers the Swiss franc to be massively overvalued at present. Current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland. SNB will not tolerate a continual tightening of monetary conditions and is therefore taking measures against the strong Swiss franc.
Portugal T-bill auction. Portugal sells €750M of 3-month T-bills in auction, indicative offer was €500M- €750M. Average yield 4.967% vs previous auction 4.982%. Bid-cover 2.6 vs previous 2.4.
Jul Challenger Layoffs 66.414K vs. Jun 41.432K. Figure for July is the highest since March 2010
Overnight Libor: Dollar: 0.178% vs prior 0.172% ; Sterling: 0.574% vs prior 0.576%; Euro: 0.821% vs prior 0.838%
1-month Libor: Dollar: 0.206% vs prior 0.201% ; Sterling: 0.634% vs prior 0.633%; Euro: 1.370% vs prior 1.373%
3-month Libor: Dollar: 0.268% vs prior 0.264% ; Sterling: 0.834% vs prior 0.833%; Euro: 1.554% vs prior 1.556%
US MBA Mortgage purchase applications index +5.1% in 29-Jul week; total market index +7.1%. Compares to (3.8%) and (5.0%), respectively, in the prior week. refi index +7.8% vs. (5.5%). 30-year contract ARM rate (12)bp to 4.45%.
API crude inventories reported +3.314M vs. Reuters +900K
WTI ($0.42) at $93.37
Nat'l gas +$0.003 at $4.158
Spot Gold +$10.50 at $1666.99
Asian markets closed markedly lower after a poor showing on Wall Street as worries now moved onto the economic situation after the debt drama has been played out. Focus is also returning to Eurozone peripheral markets as borrowing costs rise inItaly and Spain. Markets started weak and got worse through the day. China was a bright spot in a sea of red as the market ended flat after falling initially after the China Federation of Logistics and Purchasing service PMI index rose to 59.6 in July from 57 in June. This helped the banks. Car companies fell as the Economic Information Daily reported that the government may raise fuel-efficiency requirements for cars to be eligible for subsidies. Tech-heavy Taiwan fell 1.5% after disappointing consumer spending data from the US with losses in the smart phone sector on worries over lower spending. Hong Kong fell 1.9% as exporters continued to bear the brunt of investors' selling. Japan, one of the markets most geared to theUS economy dropped 2.1% with exporters feeling the pain. Australia retail sales (0.1%) m/m vs cons +0.3%; China non-manufacturing Jul PMI 59.6 vs 57 seq. The yen is trading at 77.16 to the dollar.
European equity markets opened lower, continuing recent falls and quickly extending declines as peripheral debt worries and economic growth concerns weighed on sentiment. Volatility remained high, particularly in periphery and the regions banks, as major indices pared early losses and Italian, Spanish and Portuguese markets reversed early falls. Economic data was generally supportive. Swiss National Bank announced measures to counter the rise in the Swiss franc, including cutting its interest rate target. Jul final Services PMI: France 54.2 vs prelim 54.2. Germany52.9 vs prelim 52.9
Eurozone 51.6 vs prelim 51.4. UK Jul Services PMI 55.4 vs consensus 53.2, prior 53.9. Eurozone June retail sales (0.4%) y/y vs consensus (1.0%) and prior revised to (2.3%) from (1.9%). Eurozone June retail sales +0.9% m/m vs consensus +0.5% and prior revised to (1.3%) from (1.1%). The pound and the euro are trading at $1.6391 and $1.4306 respectively. The pound was buoyed by the UK services PMI report.
Today's Economic Releases (Eastern Time)
03:50 France Services PMI (Jul); actual 54.2; consensus 54.2
03:55 Germany Services PMI (Jul); actual 52.9; consensus 52.9
04:00 Eurozone Services PMI (Jul); consensus n/a
04:30 UK Services PMI (); consensus n/a
05:00 Eurozone Retail sales y/y (Jun)
07:00 US MBA Mortgage Purchase Applications (29-Jul); consensus n/a
07:30 US Challenger Layoffs (Jul); consensus n/a
08:15 US ADP Employment Report (Jul); consensus +95K
10:00 US Factory Orders (Jun); consensus (0.9%)
10:00 US ISM Non-Manufacturing Index (Jul); consensus 53.3
10:30 US DOE Crude Inventories (29-Jul); consensus n/a
Today's Key Events (Eastern Time)
02:00 TradeDoubler Press/Analyst Meeting: 718.354.1358/ UK +44 20 7138 0827/ SWE +46 8 5853 6965
08:00 MedAssets Investor Day
—:— American Association of Diabetes Education ~ AADE
—:— Credit Suisse Midsummer Latam Conference (one on ones)
—:— Keefe Bruyette Woods Community Bank Investor Conference
—:— Xen Summit North America
Company Specific News
AGU (Agrium reports Q2 EPS $4.56 ex-items vs Reuters $4.20; First Call $4.29. Reports Q2: Revenues $6.20B vs Reuters $5.43B)
CEPH (Cephalon reports Q2 EPS $1.62 ex-items vs Reuters $2.07)
CRL (Charles River Laboratories (CRL) reports Q2 EPS $0.70 ex-items vs Reuters $0.61)
DNKN (Dunkin’ Brands reports Q2 revenues $157.0M vs year-ago $150.4M. Reports Q2: Adjusted net income $24.7M vs. $25.6M y/y. Consolidated US comps. +3.2%.)
EE (El Paso Electric reports Q2 EPS $0.78 vs Reuters $0.63)
GRMN (Garmin reports Q2 EPS $0.63 ex-items vs Reuters $0.67. Reports Q2:
Revenues $674.1M vs Reuters $634.9M)
KNOL (Knology reports Q2 EPS $0.34 ex-items vs Reuters $0.32. Reports Q2:
Revenues $131.4M vs Reuters $129.7M)
MDRX (Allscripts Healthcare reports Q2 EPS $0.22 vs Reuters $0.22)
MSTR (MicroStrategy reports Q2 EPS $0.26 vs Reuters $0.57)
PEET (Peet's Coffee reports Q2 EPS $0.38 vs Reuters $0.32)
RKT (Rock-Tenn Q3 EPS $1.29 ex-items vs Rtrs $1.21)
SAM (Boston Beer reports Q2 EPS $1.09 ex-items)
SIMG (Silicon Image reports Q2 EPS $0.05 ex-items vs Reuters $0.03)
SGY (Stone Energy reports Q2 EPS $1.17 vs Reuters $0.94)
TRW (TRW Automotive reports Q2 EPS $1.99 ex-items vs Reuters $1.71. Reports Q2: Revenues $4.23B vs Reuters $4.04B)
TWX (Time Warner reports Q2 EPS $0.60 ex-items vs Reuters $0.56. Reports Q2:
Revenues $7.03B vs Reuters $6.82B)
WBMD (WebMD Health reports Q2 EPS $0.22 ex-items vs18-Jul guidance of $0.23)
NPSP (NPS Pharmaceuticals (NPSP) signs new agreement with GlaxoSmithKline)
AMAG (AMAG Pharmaceuticals receives unsolicited proposal to be acquired for $18/share in cash from MSMB Capital Management)
GNET (Global Traffic Network agrees to be acquired by an affiliate of private equity firm GTCR, LLC for $14/sh cash)
SEE (Sealed Air (SEE) receives clearance from European Commission on Diversey acquisition)
VCLK (ValueClick signed a definitive merger agreement with Dotomi for ~$295M)
Newspaper Articles / Headlines
- Pegatron to begin shipping iPhone 5 next month
- Early bids suggest that EMI could sell for $4B. The FT, citing sources, reports that preliminary bids ranged between $3-4B. The article noted that some considered a $4B price tag to be 'aspirational.' The article also noted that the final price could depend on whether or not the business was sold in one peice or broken up between the publishing and recorded music businesses. The article stated that a price of $4B would allow Citi to recover only 75% of the money it originally loaned. Recall it was reported on 31-Jul that ten offers were made for EMI during the first round.
- Debenhams sees online kiosks in its doors as means to improving profitability. CEO Rob Templeman tells the Times that the devices, to be installed by 31-Oct, will allow the company to make sales it otherwise would have lost because a specific item was not in a specific door. Incoming CEO Michael Sharp says Debenhams should be able to raise its internet sales from the current 7% to 15% of total sales by 2015.
- Posco Engineering & Construction (005490.KS), GS Engineering & Construction (006360.KS) make final four to take over Inima.
New York Post
- Deal for John Malone to buy 70% of Barnes & Noble may have fallen apart.A source briefed on the process tells the NY Post that the deal looks "shaky," partly because the parties can't agree on a value for the Nook. A source says that at least one private-equity firm is now re-examining the company's books in case the exclusive talks are called off.
- Morgan Stanley selling Saxon Mortgage Services. Sources tell the Post that Ocwen Financial (OCN) is among the prospective buyers that MS has approached. MS hopes to achieve a sales price similar to the roughly $600M that Goldman Sachs (GS) got from Ocwen for Litton Loan Servicing two months ago.
New York Times
- Worries return to the Eurozone. The NYT reports that now the US debt crisis seems to have passed, investors are back to worrying over Spain and Italy which both had their borrowing costs pushed higher Tuesday, to points which led Greece, Ireland and Portugal to apply for bailouts
- Moody's confirms US AAA ratings; assigns negative outlook. Moody's says commitment to raise the debt ceiling has virtually eliminated the risk of default leading to the confirmation of AAA rating. Says this is the first step in achieving long term fiscal consolidation necissary for the US to mantain debt metrics that would qualify it as AAA parameters on a long term basis. Moody's assigned a negative outlook to the rating indicating that there would be risk of downgrade if: There is a weakening in fiscal discipline in the coming year. Further fiscal consolidation measures are not adapted in 2013. The economic outlook deterioriates. There is a material rise in the US government funding versus what is currently expected. In addition, Moody's also says it expects interest rates to rise in the next few years. Also confirms the AAA ratings of certain US government issued bonds issued by government of Isreal and Egypt which had been placed on review as a result of theUS governments bond rating. Recall Moody's placed the AAA rating on review on 13-July.
- RWE to name deputy CEO 8-August. Sources tell Rheinische Post that the deputy could replace CEO Juergen Grossman in September 2012. Municipalities favor board member Rolf Martin Schmitz for the position, but the article says other candidates are possible
Wall Street Journal
- CommonWealth REIT (CWH) to buy tallest building in New Orleans for $107M from MetLife.
- Research In Motion set to announce new BlackBerry devices. The WSJ, citing social-network posts, reprts that the new devices could be rolled out within days.
- New York AG to take lead in investigating currency transactions. The WSJ, citing people familiar with the situation, reports that Erc Schneiderman who can use a law called the Martin Act, letting him cross state lines to lead a nationwide suit on behalf of pension funds nationwide. He is currently looking into whether BNY Mellon (BK) overcharged NY pension funds in fx transactions and he could extend this nationwide or seek a settlement on behalf of all the funds.
- Bank of America proposes settlement deal. The WSJ, citing people familiar with the talks, reports that the preliminary conversations revolve around some sort of loan forgiveness in exchange for a release from legal liability the talks are with state and federal officials but it isn't clear whether a deal will be finalized the principal reduction would mean the bank would have to pay less in cash as part of any eventual settlement.
- Chinese rating agency Dagong downgrades US to A from A+. The cut to A with a negative outlook was a result of the increased debt-limit and fights between political parties. The interests of the country's creditors are short of systematic protection both politically and economically. Dagong had downgraded the US rating from AA to A+ in November after the second round of quantitative easing was announced
Auriga: upgraded MDRX
Bank of America Merrill Lynch: upgraded SKT; downgraded BYD, GET, HST, MAR. BYD, AGP, MOH
Barclays Capital: upgraded LEAP, PCS, EXBD; downgraded PROJ
BB&T: upgraded FIX
BMO Capital: upgraded UNP
Canaccord: upgraded TRMB, ECOL
Credit Suisse: upgraded RDC, CHH; downgraded MRO, BHP
Deutsche Bank: upgraded EXBD, RKT; downgraded OSG
Evercore: upgraded FITB, FFIV, CBOE
FBR Capital: upgraded AVAV
Goldman Sachs: downgraded ALL, RJET
ISI Group: upgraded PLD
Jefferies: downgraded OSG, VMED
JP Morgan: downgraded AMR, PH
Keefe Bruyette: upgraded GGP, SLG
Merriman Capital: upgraded SIMG
Morgan Keegan: upgraded DIN
Oppenheimer: downgraded LQDT
Piper Jaffray: upgraded MDRX
RBC Capital: upgraded PNW
Rodman & Renshaw: downgraded EXAS
RW Baird: upgraded FISV; downgraded LEAP, PCS
Stephens: downgraded CACC
Sterne, Agee: downgraded DIOD, TXN, ADI
Sun Trust: downgraded PVA, KERC
Wells Fargo: upgraded PTEN, VRA
Is the VIX too Low? We received many questions yesterday about the relatively muted move in the VIX (+4.8%) relative to the SPX (-2.6%). This was a beta of just -1.8x vs. a 1yr historical beta of -5.8x. Based on the historical beta, we would have expected a +15% move in the VIX, pegging it at ~27.2. While it’s tough to pinpoint exactly why the move was “muted”, we had a few ideas
1) the VIX was already elevated into the debt vote and the ‘tail risk’ was a lot higher;
2) VIX term structure is extremely inverted and the rebalancing of the VIX calculation from August to September provided some downside pressure for the index.
3) Given the elevated levels in the VIX (closed at 25.25 on Friday), it is possible that security prices were ‘playing catch up’ to the risk already priced into the options market.
4) SPX Skew, as measured by the CSFB Fear Index, is a critical component to the VIX calculation. The CSFB Fear Index actually fell 9.6% yesterday (suggests downside risk is decreasing), thus offsetting some of the gain of overall vols.
*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.