Friday, August 5, 2011

Morning Note

August 5, 2011

Equity futures are trading near fair value, following yesterday's sharp selloff, which sparked corresponding weakness in Asia and Europe today. All major indices are in correction mode as traders contend with weakening US economic data and the latest debt drama in Europe. Today's key will be the July employment data at 08:30ET.

EU's Rehn says political will to defend the euro should not be underestimated; finalisation of the details of the 21-July leaders agreement expected in weeks, not months. Rehn's says markets have not reacted to 21-Jul agreement as expected and work is continuing to put flesh on the bones of the agreement. The lending capacity of EFSF and its scope should be boosted.

ECB said to have purchased bonds of Portugal and Ireland for second consecutive day. ECB was buying a small amount of short-term debt, according to one source.

Lipper reports equity fund outflows of ($7.5B) in w/e 3-Aug vs outflows of ($2B) in w/e 27-Jul

Libor fixings 

- Overnight Libor: Dollar: 0.136% vs prior 0.153% ; Sterling: 0.573% vs prior 0.571%; Euro: 0.815% vs prior 0.818%
- 1-month Libor: Dollar: 0.206% vs prior 0.205% ; Sterling: 0.637% vs prior 0.634%; Euro: 1.350% vs prior 1.373%
- 3-month Libor: Dollar: 0.272% vs prior 0.269% ; Sterling: 0.834% vs prior 0.834%; Euro: 1.522% vs prior 1.553%

Sep WTI crude ($0.68) to $85.95

Natural gas ($0.25) to $3.941

Gold +$23.50 to $1665.99

10-year yield 2.9473%
30-year yield 4.2731%

Asian Markets

Asian markets collapsed after the drubbing Wall Street received last night. Volume was heavy as investors worried about future economic growth given all the fiscal tightening in the West. Investors anxiously await the US payroll report tonight for more insight into the state of the world's largest economy. China's domestic market was down the least in Asia, dropping 1.9% largely insulated from foreign investors panicking. Cyclical market Korea fell as the major export companies such as LG Electronics fell 5.9% dragging the index down 3.7%. Export heavy Japan fell 3.7% as the yen gave back some of its losses yesterday after the BoJ intervention. The commodity-laden Australian index fell hard after the central bank cut its growth forecast for the year but raised its outlook for inflation. Hong Kong dropped with the region as exporters and commodity stocks plunged. Taiwan was the worst hit market in the region with many tech stocks down the maximum 7%. Japan July foreign reserves JPY1.151T vs 1.138T seq. The yen is trading at 78.52 to the dollar.

European Markets

European equity markets opened sharply lower, seeing 14 month lows, extending recent declines and following steep falls on Wall Street and across Asia as the worries surrounding global growth prospects and EuroZone debt crisis persist. Volatility remains high, the VDAX-New volatility index hitting its highest level since May 2010. Talk that ECB's Trichet has spoken with several EU leaders and leaders ofFranceSpain and Italy are due to discuss market developments helped provide some support to the periphery. Economic data provided little support, with Italy's Jun industry output falling m/m and Spain's central bank estimating Q2 GDP +0.2% q/q, +0.7% y/y. Major indices currently trade slightly above session lows in choppy trading, with US non-farm payroll data likely to set the trend later in the session in the absence of any concrete sovereign debt news out of Europe. Germany Jun Industrial Output (1.1%) m/m vs consensus +0.1% and prior revised +0.9% from +1.2%.

Today's Economic Releases (Eastern Time)

04:30 UK PPI y/y (Jul); actual +5.9%; consensus +5.8%
08:30 US Nonfarm Payrolls (Jul); consensus +77K
08:30 US Unemployment Rate (Jul); consensus 9.2%
08:30 US Hourly Earnings (Jul); consensus +0.2%
08:30 US Average Weekly Hours (Jul); consensus 34.3
15:00 US Consumer Credit (Jun); consensus +$5.02B 

Today's Key Events (Eastern Time)

—:— American Association of Diabetes Education ~ AADE 

Company Specific News

BRKS (Brooks Automation reports Q3 adjusted EPS $0.36 vs Reuters $0.36)
CF (CF Industries Holdings reports Q2 EPS $6.75 vs Reuters $5.91; announces capital deployment actions)
DRQ (Dril-Quip reports Q2 EPS $0.55 vs Reuters $0.58. Reports Q2: Revenues $137.0M vs Reuters $137.6M)
FSLR (First Solar reports Q2 EPS $0.70 vs Reuters $0.92)
JOE (St. Joe reports Q2 EPS ($0.14) vs Reuters ($0.10))
LNQ (Cheniere Energy reports Q2 EPS ($0.67) vs 1 Reuters estimate ($0.75).
Reports Q2: Revenues $72.8M vs year-ago $68.3M)
MCHP (Microchip reports Q1 EPS $0.55 vs Reuters $0.53 and guidance $0.53-$0.55)
MHK (Mohawk reports Q2 EPS $0.95 vs Reuters $0.93)
PCLN ( reports Q2 EPS $5.49 vs Reuters $4.89; First Call $4.87)
PG (Procter & Gamble reports Q4 EPS $0.84 vs Reuters $0.82. Reports Q4:
Revenues $20.86B vs Reuters $20.63B)
SIRO (Sirona Dental Systems reports Q3 EPS $0.78 ex-items vs Reuters $0.71; First Call $0.72. Reports Q3: Revenues $244.7M vs Reuters $217.7M)
SUN (Sunoco reports Q2 EPS $0.40 ex-items vs Reuters)
WTW (Weight Watchers reports Q2 EPS $1.17 vs Reuters $1.12. Reports Q2:
Revenues $486.0M vs Reuters $470.2M)
VIA.B (Viacom reports Q3 EPS $0.99 ex-items vs Reuters $0.85. Reports Q3:
Revenues $3.77B vs Reuters $3.52B)

Other News

Fed reports balance sheet assets of $2.87T on Wednesday, +$3.6B w/w and +$541.2B y/y 
Holdings of US Treasury securities were $1.64T on 3-Aug, +$2.8B w/w and +$863.9B y/y.
Holdings of mortgage-backed securities were $897.3B on 3-Aug, unch. w/w and ($220.4B) y/y.
Holdings of federal agency debt securities were $112.4B on 3-Aug, unch. w/w and ($46.9B) y/y

Newspaper Article / Headlines

Financial Times
- Investec (INP.SJ) to break up Evolution Group if bid succeeds. People familiar with Investec's thinking tell the FT that it basically wants Evolution's wealth-management operations and would probably merge Williams de BroĆ« with its own private-clients division and then sell off Evolution's stockbroking unit.
Blackstone Group to invest €2.5B on wind farms in GermanyThe FT, citing a senior executive at the company, reports that the company will announce Friday that it has secured financing for a 80 turbine wind farm in the North Sea which will be completed 2013 the original €1.2B project was announced in 2008 and the company will unveil a second similar project with an investment of €1.3B to be completed by 2016.

Hollywood Reporter
DreamWorks Animation (DWA)-Paramount (VIA.B) rift is personal. Hollywood Reporter says: Paramount's Brad Grey and DreamWorks Animation's Jeffrey Katzenberg can't stand each other, but they may still reach a distribution deal. AParamount source says DreamWorks is unlikely to be able to get a deal with any other studio, and a DWA insider says the company has not made any presentations to other studios.
Industry sources think Paramount's animated movies will not be as successful as Grey thinks they will.

Los Angeles Times
US District Judge orders Mattel to pay MGA Entertainment $309.9M in Bratz case. The LA Times reports that Judge David Carter supported the April jury verdict in the case, though he reduced the jury's $88.5M award to $85M. Carter then added attorneys' fees. In a statement, Mattel said it didn't find the resolution reasonable.

New York Post
Kao (4452.JP) considers bid for Clorox. A source familiar with the situation tells the NY Post that the Japanese company is concerned about its lack of scale in theUS.
Citi telling potential EMI buyers that that it will not take on the antitrust risk that any purchase might involve. The disclosure is at the end of an article reporting that former EMI CEO Charles Koppelman is combining with Apollo Global Management to bid for EMI.

New York Times
- Bank of New York Mellon accused of fraud by New York AG. The NYT, citing court papers, reports that the NY AG is claiming that the bank misled investors about its conduct and breached its duty to investors by agreeing to the deal with Bank of America (BAC) becuase there is a conflict and the trustee “stands to receive direct financial benefits” as a result of the agreement. The article continues that a court hearing scheduled for Friday to approve the settlement will be affected by this lawsuit.

- Nissan Motor to merge its two domestic sales networks. Without citing sources, the Nikkei reports that Nissan will make the move in the next few years, after which Toyota (7203.JP) will be the only Japanese carmaker with more than one sales network in the country.

Wall Street Journal
WSJ is lukewarm on Kraft Foods. A "Heard on the Street" column says that the plan to split the company won't be enough to bring any huge gains, partially because a smaller domestic Kraft will have less power to deal with retailers and try to pass on cost increases.
WSJ is cautious on AT&T's proposed acquisition of T-Mobile USA (DTE.GR). A "Heard on the Street" column notes that bad results from Leap Wireless (LEAP) and MetroPCS Communications (PCS) are likely to give antitrust regulators pause as they consider the possibility of blessing a market with one less player.
WSJ is positive on Swiss Re. A "Heard on the Street" column says the stock is likely to rise, given that its credit rating will probably be raised, and it will probably return capital to shareholders next year.
FSA asks British banks for Belgian exposure. The WSJ reports that UKregulators are asking them for their exposure to countries such as Belgium, indicating problems are spreading beyond the original southern European countries. Discussions have been held with banks as to how to improve disclosure of the issue and Lloyds (LLOY.LN) made the disclosure of Belgian exposure after a request from the FSA
- WSJ discusses Kraft Foods split. The WSJ notes that although the CEO said in an interview that she beagn planning the split in 2007 and the trigger is now that the two ciompanies can stand on their own, people familiar with the situation say that activist investors were pushing for a split.
NYSE Euronext suffers more problems at its European operations. The WSJ, citing a company notes sent to participants, reports that some derivatives markets opened late and and some customers got incorrect index values
settlements on impacted contracts would be delayed.
PMI Group warns it could stop selling new coverage. The WSJ, citing the company, reports that a back-up plan allowing the company to stay in business if its subsidiary fails has "no assurance" of working the company reported earlier today that the subsidiary didn't meet capital-adequacy targets and so could be shut down.

Futures point to more losses. U.S. stock futures fell in European trading, signalling further losses following yesterday's carnage. Asian and European shares also dropped across the board as multiple worries combined, particularly the weak U.S. economy and the EU's sovereign-debt vortex. The latter continued to spiral, with Italian and Spanish debt yields increasing again and the ECB flittering on the edges by confining its bond buying to Portuguese and Irish debt. France's Nicolas Sarkozy is due to discuss the crisis with Germany's Angela Merkel and Spain's Jose Luis Rodriguez Zapatero amid calls for EU leaders to gain a grip.
Investors await employment figures. A key moment for gauging today's market direction will come with U.S. employment figures this morning. Economists estimate that nonfarm payrolls climbed by 85,000 in July following a measly 18,000 increase in June, which was way below expectations. The July unemployment rate is expected to have stayed at 9.2%. Trader Manoj Ladwa said the market seems to have factored in weak employment numbers, so shares "could recover some losses later in the session."
Switzerland, Japan struggle against safe haven status. The Swiss franc hit a fresh record high of 1.071 to the euro, although it later retreated following a report the Swiss National Bank is ready to intervene again. In midday European trading, the franc was -0.6% vs. the euro and -0.2%vs. the dollar. The yen also rose, although concerns about further intervention by the government impeded gains here too. Notwithstanding, the yen was +0.6% vs. the euro and +1% vs. dollar.
Surveying yesterday's wreckage. The S&P 500 and Nasdaq - both solidly red for the year - have managed to reach correction status (10% drop) in just 9 days, while the Russell 2000 is down 7% for year. The worst performing sector was energy, falling 6.8% as crude oil plummeted a similar amount. Transports fell 5.1% and are down 7.7% for the year.
No end in sight for BofA's mortgage costs. Bank of America's (BAC) mortgage liability woes continued yesterday after New York Attorney General Eric Schneiderman asked a judge to reject the bank's proposed $8.5B settlement with investors over toxic loans. Schneiderman, who joined a growing number of investors in opposing the deal, said the proposed payment is far less than the losses suffered. In addition, BofA said yesterday it may face further claims from Fannie Mae (FNMA.OB) and Freddie Mac (FNMA.OB) to purchase bad loans despite coming to a $3B agreement with them earlier this year.
RBS plummets after H1 loss. RBS (RBS) made a far greater-than-expected H1 net loss of £1.43B ($2.33B) compared with a net profit of £9M a year earlier, sending its shares down 8.8% in London, although that was up from -20% at the open. RBS's loss was due to a £733M impairment on its Greek government bonds and an £850M provision for missold payment-protection insurance. Group revenue fell 7.6% to 14.34B.
AIG Q2 profit $1.84B. AIG (AIG) swung to a Q2 net profit of $1.84B from a loss of $2.66B a year earlier, when it was saddled with charges tied to discontinued operations. AIG also benefited from a rise in the market cap of Asian life insurer AIA Group (AAIGY.PK), in which it owns a third. However, AIG's operating income of $0.69 missed expectations, while the combined operating income of its two main insurance units, Chartis and SunAmerica, fell a combined 15%.
Priceline soars as guidance, Q2 profit top estimates. Q2 earnings that beat analyst expectations and a forecast that it will do the same in Q3 sent Priceline's (PCLN) shares soaring 9.65% in after-hours trading. The travel Web site's EPS more than doubled to $5.02 a share while Q2 gross travel bookings jumped 70% to $5.8B. Priceline also forecast Q3 EPS excluding items of $9.10-$9.30 vs. Street estimates of $7.97. The company is benefiting from bargain-hunting shoppers against the background of the weak economy, and its ability to take share of the international hotel market through
Telecom Italia takes huge writedown but shares soar. Telecom Italia (TI) posted a €2B net loss ($2.8B) in the first half compared with a net profit of €1.2B a year earlier after taking a goodwill write-down of €3.2B due to the deterioration of the financial markets and rising interest rates. However, revenue grew 10% to €14.5B and TI confirmed its full-year targets of broadly stable revenue and EBITDA, easing fears of a possible guidance cut. The writedown had been on the cards and shares are soaring 11.24% premarket.
Hitachi, Mitsubishi Heavy merger in doubt again. Talks between Hitachi (HIT) and Mitsubishi Heavy Industries (MHVYF.PK) about a tie-up are reportedly in danger of collapsing, as Hitachi wants a full merger while Mitsubishi prefers to combine selected businesses. News of the talks surfaced yesterday, although they've been denied by officials at both companies despite Hitachi's president admitting them on TV. A full-blown merger would create an infrastructure company with revenues of $150B a year, second only to GE (GE).
California subpoenas Citigroup. California Attorney General Kamala Harris has reportedly subpoenaed Citigroup (C), seeking information about how it sold mortgage-backed securities in the state. The move comes after Harris announced in May the creation of a fraud task force to investigate "every step" of the mortgage process.
Senate to approve FAA funding bill. The Senate is due to today vote on a House-passed bill that will temporarily end the partial shutdown of the FAA after the Democrats and Republicans agreed on a deal yesterday. Once the measure is approved, the FAA's funding will be extended into September, allowing 4,000 furloughed FAA employees to return to their jobs and 70,000 workers to idled construction projects. The agreement puts off until after the summer recess the broader issues that divided legislators, including union representation.


Bank of America Merrill Lynch: downgraded CLGX
Cantor Fitzgerald: upgraded SSW
Citi: upgraded BRKS
Credit Suisse: upgraded DF, HTWR, MHK; downgraded WMS, HK, EXH
Evercore: upgraded CTXS; downgraded LNKD
FBR Capital: upgraded SYMC; downgraded ORN, BSCI
Goldman Sachs: upgraded BYD; downgraded DTV
JMP Securities: downgraded SBX
JP Morgan: upgraded CSTR, PLL
Morgan Keegan: downgraded EM, ASEI
Morgan Stanley: downgraded LNKD
RW Baird: upgraded YSI, LOPE; downgraded NLC
Sun Trust: downgraded SPR, SMRT, CLR, DNR
Susquehanna: upgraded NDAQ
Wells Fargo: upgraded CRM, VMW, MDC; downgraded BC, CMA, BAC 

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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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