Tuesday, August 9, 2011

Morning Note

August 9, 2011

US futures continue to be volatile, with Dow futures oscillating between a loss of (318) points and a gain of 324 points.

Today's main focus will be the release of the Fed statement from today's FOMC meeting, scheduled for 14:15 ET.

Treasury Auction of 3-yr notes at 13:00 ET

Greece sells €812.5M 6M T-Bills, average yield 4.85% vs prior auction 4.90%, bid to cover 3.06 vs prior 2.88

Libor fixings 

Overnight Libor: Dollar: 0.136% vs prior 0.136% ; Sterling: 0.574% vs prior 0.573%; Euro: 1.189% vs prior 0.814%
1-month Libor: Dollar: 0.208% vs prior 0.206% ; Sterling: 0.644% vs prior 0.642%; Euro: 1.338% vs prior 1.347%
3-month Libor: Dollar: 0.278% vs prior 0.275% ; Sterling: 0.842% vs prior 0.838%; Euro: 1.512% vs prior 1.518%

Sep WTI crude ($0.07) to $81.24

Natural gas $0.01 to $3.95

Gold +$32.25 to $1751.70
10-year yield 2.9473%
30-year yield 4.2731%

Asian Markets

Following the rest of the world, Asian markets slumped this morning, but bargain-hunting and relative strength in China sparked an afternoon rally, taking them off their lows. Banks skidded in line with their US peers, and exporters fell again.Australia turned positive in late trading after falling as much as (5.5%) early in the day. Most gold miners gained 9-10%, Despite higher-than-expected inflation figures, investors in China bet that interest rate rises would be postponed due to a weak global economy, and the market finished flat. In extremely high volume, Japan saw early panic selling only partially offset by late bargain-hunting. Oil shares suffered from lower crude futures; South Korea saw record volume, and trading was suspended for the second day in a row as circuit-breakers kicked in when the market plunged (9.9%) in the morning. State funds stepped in to support the market, which finished down only (3.6%). The securities sector was a laggard, while car stocks fell, but outperformed. Banks and blue chips led losses in Hong Kong.Singapore was closed for National Day. China July CPI 6.5% y/y vs cons 6.3%. July PPI 7.5% vs cons 7.3%. Japan July machine tool orders +34.6% y/y. July consumer confidence +1.7 pts m/m to 37.0. The yen is trading at 77.25 to the US dollar.

European Markets

Majority of European equity markets defied early calls for a continuation of recent falls to open higher, as Asian markets pared early loses, US futures reversed declines of as much as (3%) and ECB's Trichet, without being specific, said the central bank will continue to be active in the secondary debt market. Volatility rose again, EuroStoxx50 volatility index leaping 24% to its highest level since the start of 2009, and indices quickly gave up any opening gains moving into the red. The declines accelerated, UK economic data providing little support as European markets moved to session lows, some indices technically entering a bear market having retreated over 20% since May highs. All sectors have fallen at least (3%), led by auto (5.5%), energy and chemicals both (5.0%), whilst construction (3.2%), travel & leisure (3.3%) and food & beverage (3.6%) lead relative performers. Market participants await the result of the FOMC meeting due at 14:15 ET. UK Jun Manufacturing output +2.1% y/y vs consensus +2.9%, prior +2.8%. Industrial output (0.3%) y/y vs consensus +0.2%, prior revised (0.9%) from (0.8%). The pound and the euro are trading at $1.6360 and $1.4234 respectively. The pound retreated post UK output and trade data, Jun trade balance (£8.87B) vs consensus (£8.10B).

Today's Economic Releases (Eastern Time)

04:30 UK Manufacturing production y/y (Jun); consensus n/a
04:30 UK Industrial production y/y (Jun); consensus n/a
07:30 US NFIB Small Business Index (Jul); consensus n/a
07:45 US ICSC-Goldman Chain Store (06-Aug); consensus n/a
08:30 US Productivity (Q2 (prelim)); consensus (0.7%)
08:30 US Unit Labor Costs (Q2 (prelim)); consensus +2.3%
08:55 US Redbook Chain Store (06-Aug); consensus n/a
16:30 US API Crude Inventories (05-Aug); consensus n/a 

Today's Key Events (Eastern Time)

10:00 Syntroleum Dynamic Fuels Plant Update with Q2 earnings call: 877.317.6789
13:00 Treasury Auction of 3-yr notes
14:15 FOMC meeting result
—:— Canaccord Genuity Global Growth Conference
—:— Capstone Investments with Columbia Sportswear
—:— Credit Suisse Industrials Conference
—:— Hologic Investor Meeting
—:— Jefferies Global Industrial and A&D Conference
—:— Military Vehicles Exhibition and Conference ~ MVEC 2011
—:— Morgan Keegan Security and Defense Conference
—:— Morgan Keegan Technology Conference
—:— Needham with TTM Technologies
—:— Oppenheimer Technology & Communications Conference
—:— Pacific Crest Global Technology Leadership Forum 

Company Specific News

CFN (CareFusion reports Q4 EPS $0.52 ex-items vs Reuters $0.50. Reports Q4: Revenues $964M vs Reuters $967.2M)
EPD (Enterprise Products reports Q2 diluted earnings per unit $0.51 vs Reuters $0.44. Reports Q2: Adj EBITDA $916.0M vs Reuters $833.9M)
ESV (Ensco PLC reports Q2 EPS $0.71 ex-items vs Reuters $0.68. Reports Q2:
Including $0.14 of professional fees, severance payments, and other transaction related costs related to the acquisition and $0.02 of gains from the sale of ENSCO 95, GAAP EPS $0.59. Revenues $564.2M vs Reuters $516.3M)
HOGS (Zhongpin reports Q2 EPS $0.48 vs Reuters $0.42. Reports Q2: Revenues $366.5M vs Reuters $290.1M)
KND (Kindred Healthcare reports Q2 EPS $0.53 ex-items vs Reuters $0.51. Reports Q2: Revenues $1.29B vs Reuters $1.25B)
LNCE (Snyders-Lance reports Q2 EPS $0.16 ex-items vs Reuters $0.16. Reports Q2: Revenues $413.0M vs Reuters $408.4M)
LYV (Live Nation Entertainment reports Q2 EPS $0.07 ex-items vs Reuters $0.00. Reports Q2: Revenues $1.56B vs Reuters $1.31B)
MGM (MGM Resorts reports Q2 EPS ($0.08) ex-items. Reports Q2: Revenues $1.81B vs Reuters $1.59B)
MR (Mindray Medical reports Q2 GAAP EPS $0.36 vs Reuters $0.38. Reports Q2:
Revenues $217.3M vs Reuters $212.2M)
SF (Stifel Financial reports Q2 EPS $0.50 vs Reuters $0.54. Reports Q2: Revenues $358.9M vs Reuters $379.7M)
TTWO (Take-Two reports Q1 EPS $0.02 ex-items vs Reuters $0.09. Reports Q1:
Revenues $334.4M vs Reuters $349.7M)

Positive News
AKAM (Board authorizes $250M expansion of share repurchase program)
SFI (iStar Financial announces new $65M stock repurchase program)

Negative News
MRO (Marathon Oil discloses subpoena in 10Q (08/08/2011 16:15 ET)
On May 25, 2011 MRO received a subpoena issued by the SEC requiring the production of documents related to payments made to the government of Libya, or to officials and persons affiliated with officials of the government of Libya.)

AFFY (Affymax files $100M mixed shelf)

Other News
Weekly USDA crop progress report says 60% of the corn crop is in good or excellent condition. Compares to 62% last week and compares to 71% in prior year. Corn: 93% of the corn crop is silking vs 83% last week and a 93% average of 2006-10 period. 7% of the corn crop is dented vs 4% last week and a 10% average of 2006-10 period
Cotton: 79% of cotton crop is setting bolls vs. 62% last week and 74% average of 2006-10 period. 30% of the cotton crop cotton is in good or excellent condition compared to 30% last week and 65% y/y
Soybeans: 87% of soybean crop is blooming vs 77% last week and 89% average of 2006-10 period. 61% of the soybean crop is in good or excellent condition compared to 60% last week and 66% y/y.
Rice: 58% of rice crop is headed vs 47% last week last year and 65% average of 2006-10 period. 66% of rice crop is in good or excellent condition compared to 64% last week and 72% y/y.
Winter wheat: 85% of winter wheat crop has been harvested vs. 81% last week and 91% average of 2006-10 period.
Spring wheat: 6% of spring wheat has been harvested vs. 24% average of 2006-10 period. 66% of spring wheat crop is in good or excellent condition compared to 70% last week and 82% y/y.

Newspaper Articles / Headlines

All Things Digital
Spotify has 1.4M users, 175K paying customers in US

DuPont and Bunge JV Solae receives bids. Bloomberg reports, citing sources, that the JV has received offers from Royal DSM (DSM.NA), Tate & Lyle (TATE.LN), and KKR (KKR), as well as other private equity firms. The article states that Solae could be sold for as much as $1.75B. First round bids were received two weeks ago. Second round bids are expected after the labor day holiday.

China Daily
Prices of rare earths to remain strong in H2. The China Daily reports that a government ministry said yesterday (8-Aug in Asia) that government agencies began cracking down on illegal production and sales of rare earths 1-Aug, and the program will last through the end of the year.

Financial Times
- Pipeline consortium will help BP transport its gas from Shah Deniz field inAzerbaijan. The FT reports that The Trans-Adriatic pipeline consortium has offered to double its investment in Grece to more than eur1b to win support for its plan to bring natural gas from the Caspian basin to European markets. Three groups are competing to build the pipeline and must presnt their tariff offers to the Shah Deniz partners by 1-Oct. The Production consortium, led by BP wants to treble has production to 10B cubic metres by 2017.
Melrose (MRO.LN) still wants to proceed with Charter bid. The FT reports that chairman Christopher Miller says that the stock market turmoil had not changed the company's stance on pursuing Charter and that if Charter's board allowed due diligence, a definite offer could be made at 840p or above, although there was no guarantee. CEO David Roper admitted that it might look 'perverse' returning funds to shareholders while in the middle of a takeover.
Research In Motion assisting UK police with their inquiries. The FT reports that it has come to light that its messenger service is one of the technological tools used by rioters.

Fox Business
- Standard & Poor's may have caused selloff 5-Aug before downgrading US.Charlie Gasparino reports that a senior banking executive says S&P was meeting executives of big banks last week, "[discussing] what the impact of a downgrade of the US treasury bond might mean for the banks' own credit ratings." The executive says the meetings prepared banks for the pending downgrade; traders say that speculation of the downgrade caused the market to rise by far less than it should have 5-Aug, given better-than-expected jobs data. The article notes that the government could also have leaked the pending downgrade. Hearings have been scheduled in the Senate and may come in the House.

German air traffic controllers call off strike. The FTD reports that a spokeswoman for German Air Traffic Control says the union is ruling out a strike for several weeks.

BP files for arbitration with Renova in Stockholm. Sources tell Kommersant that BP thinks Renova is violating the TNK-BP (TNBP.RU) shareholders agreement by continuing to own gas and distribution assets in Russia and Ukraine, rather than offering to sell them to TNK-BP

London Telegraph
- DTZ Holdings CEO Paul Idzik, FD Bob Rickert resign. Without citing sources, the Telegraph reports that the two were unhappy that 55% shareholder Saint George Participations has not formally offered to buy the company.

London Times
Eurasian Natural Resources looking into itself. Sources familiar with the inquiries tell the Times that three times in the past four years, the company has brought in external investigators to look into possible corruption and financial irregularities. Executives have concluded they can't trust management; allegations span the globe, running from Kazakhstan to Democratic Republic of Congo. The company is also looking into whether it violated trade sanctions by selling iron ore toIran, though it seems to have concluded it did not.

New York Times
NYt discusses possible Fed actions. The NYT reports that as the Federal Reserve Board meet today, investors are wondering what steps Bernanke may take, if any since the last round of QE2 has ended, the economic news has got worse and markets are collapsing if the Fed buys more Treasuries it may push rates lower and will have a bigger percentage move as rates are already so low the Fed could promise a set period of low interest rates or even a period of time when it would not sell its assets the Fed could extend the maturity of its portfolio.
NYT discusses Spain and Italy's austerity plans. The NYT reports that whileGreecePortugal and Ireland were forced into austerity, Spain and Italy have been slightly more proactive their growth rates are so low now that more cuts could mean a move into recession.

Wal-Mart (WMT) talking about buying Carrefour's Brazilian subsidiary.

Wall Street Journal
- Verizon strike gets ugly. The WSJ reports that the company has found evidence of vandalised equipment and pickets stopped replacement workers entering or leaving work sites the union has said non-union workers have tried to run down strikers with their vehicles.
WSJ is worried by BHP Billiton's purchase of Leighton Holdings (LEI.AU) subsidiaries. A "Heard on the Street" column says that the $735M buy translates to $294K/person, indicating that labor costs are rising for miners even though demand for ores may be set to fall.
- Airlines take back fare hikes. The WSJ reports that the government temporarily lost its authority to tax tickets two weeks ago and the airlines raised fares effectively taking the money that previously went to the government getting an estimated $400M in two weeks. Most arilines lowered fares over the weekend as the tax went back into effect on Monday morning
- Exxon Mobil looking to sell Indonesian assets. The WSJ reports that the company is selling assets that are at the centre of a humans-right lawsuit dating back to 2001. According to the company, the assets offered include the Arun field and satellite fields, and the North Sumatra Offshore field, which produced on average 215m cubic feet of gas/day plus associated liquids.
- Jackson Hewitt set to leave Chapter 11. The WSJ, citing a judge at the bankruptcy court, reports that the company has won approval to exit bankruptcy with its balance sheet restructured and free from accusations it cheated consumers on tax-related loans.
Education Management sued by DoJ for falsely certifying it was eligible to participate in federal student loan program. The WSJ reports that
four states are also suing the company and follows on from a suit filed by former employees the suit claims that becuase the company pays bonuses based on how many students are recruited, this is prohibited and so payments received by the school are false

Market direction uncertain as futures oscillate. U.S. stock futures are up but have today oscillated between positive and negative, causing uncertainty as to what shares will do following yesterday's free fall. However, if Europe is anything to go by, stocks are set to continue their declines over the session. After hitting positive territory in some cases early on, EU stocks were firmly in the red in midday trading. Asian shares had a relatively mixed time, with Hong Kong closing -5.7%, but Japan finishing just -1.7% and China ending flat.
Safe havens mixed. With European shares falling, gold and the Swiss franc have continued to play their roles as safe havens. Gold rose to yet another fresh high of $1,778.30 an ounce, putting it in line for its biggest three-day rally since late 2008 at the depth of the financial crisis. The Swiss franc also hit further records, reaching 1.0475 to the euro and 0.7359 to the dollar. However, the price of Treasurys, which attracted such a stampede yesterday despite the S&P downgrade, eased off and yields rose.
S&P just added to the bad news. It may have been the catalyst for yesterday's global stock rout, but the S&P downgrade just added to the relentless stream of bad news, from EU debt to U.S. growth. The DJIA sank 5.55% for its biggest percentage drop since December 2008 and its sixth-largest point decline ever. The Nasdaq closed -6.9% and S&P 500-6.63%, and every stock on the index ended lower. Financials were slaughtered, with Bank of America (BAC-20%.
Eyes of the world on the Fed. The FOMC is due to meet today amid calls for the Fed to take action over slowing growth, especially after yesterday's stock plunge. However, with interest rates at zero to 0.25% for nearly three years and $2.3T of bond buying not spurring growth, there doesn't appear to be a huge amount the Fed can do. One option would be to replace shorter-term securities with longer maturities to reduce rates on longer-term debt. And if the Fed is considering QE3, it's not expected to announce it today.
Senate panel probing S&P ratings cut. The Democrat-led Senate Banking Committee has reportedly started collecting information on S&P's decision to downgrade the U.S., although no decision will be made on whether the panel will hold hearings. The panel's chairman, Tim Johnson, has already called S&P's move "irresponsible." Separately, Jay Carney said he's not aware of any administration conversations to impose tougher regulation on the ratings agencies.
China inflation growth poses dilemma for central bank. China inflation rose 6.5% in July, beating forecasts and hitting its highest level in three years. The jump was once again largely fueled by soaring food prices and puts the People's Bank of China in a dilemma, as its steady tightening over the past few months has slowed production but not kept CPI in check. The high inflation shows China is still dealing with the after-effects of huge monetary expansion during the financial crisis and may have little room for further stimulus.
HSBC in talks to sell U.S. card ops. HSBC (HBC) has confirmed it's in talks to sell its U.S. credit card and retail services business following a report yesterday that Capital One (COF) is in negotiations to buy the U.K. bank's $30B U.S. credit-card portfolio. However, HSBC didn't comment on whether Capital One is involved in the discussions.
Transatlantic rejects Berkshire Hathaway's $3.25B bid. Reinsurer Transatlantic Holdings (TRH) has turned down a $3.25B offer from Berkshire Hathaway (BRK.A) unit National Indemnity, saying the proposal is not superior to an agreed bid from Allied World Assurance (AWH), which is worth $2.75B. However, Transatlantic will enter negotiations with Indemnity as it believes such talks would lead to a "superior proposal." Transatlantic has also received an unsolicited offer from Validus Holdings (VR) that is worth $2.89B. Transatlantic's shares rose 6.8% yesterday despite the market chaos.
Talks continue as Verizon strike heats up. Verizon Communications (VZ) has been continuing "high level discussions" with unions while 45,000 workers strike after formal talks halted on Sunday. Verizon yesterday said it had repaired over 12 acts of sabotage since the strike began and accused picketing workers of illegally blocking access to numerous company work centers. As of yesterday, the impact of the strike had been minimal, but the question for Verizon is how long it can operate with replacement workers before its business starts to suffer.
Education Management accused of illegally receiving $11B. The Justice Department and four states have sued Education Management Corp. (EDMC) for illegally receiving over $11B in student aid - nearly all the company's revenue since 2003 - after using improper recruitment practices. Education Management is accused of paying recruiters based on the number of students they signed up in breach of a law for colleges that get government assistance. Education Management, which is 41% owned by Goldman Sachs (GS), denies the allegations.
Freddie Mac's Q2 loss halves. Freddie Mac's (FMCC.OB) Q2 loss more than halved to $2.1B from $4.7B a year earlier, the mortgage firm said on Monday, the same day S&P downgraded its long-term credit rating and that of Fannie Mae (FNMA.OB) to AA+ from AAA. During the quarter, Freddie paid a dividend of $1.6B to the government and asked for $1.5B in new aid. So far, the net cost to the taxpayer of Freddie's bailout is $52B.
Barclays makes U.K. threat. Barclays (BCS) CEO Bob Diamond has made a veiled warning to the U.K. government over plans to make banks build a wall around their core high-street operations, indicating that his company could move its headquarters elsewhere. "It’s no longer a question of whether Barclays wants to stay in the U.K. but whether the U.K. wants Barclays," Diamond said. However, analysts have been skeptical that banks would actually be able to relocate.


Argus: upgraded CBS
Bank of America Merrill Lynch: upgraded TCLP; downgraded CLWR
Barclays Capital: upgraded CB, CPR
Brean Murrya: upgraded ARO, NWY; downgraded ENOC
BTIG: upgraded S
Citadel: upgraded QCOR
Citi: upgraded WYNN
Deutsche Bank: upgraded MJN
FBR capital: upgraded WFC, WBS, ACAS
Global Hunter: upgraded HUM, MCD, NSC, TYC, UNP; downgraded CNI, MDT, ZMH, BCR, BDX, HSIC
Jefferies: upgraded MRK
JP Morgan: downgraded ENOC
Keefe Bruyette: upgraded UMBF, AIG
KeyBanc: upgraded ROLL; downgraded ENOC
Macquarie: upgraded IBKR
Mizuho: downgraded ENS
Oppenheimer: downgraded STXS
Piper Jaffray: upgraded RAX
SunTrust: upgraded FIS
Susquehanna: upgraded MGM, MAR
ThinkEquity: downgraded STXS, ENOC
Wells Fargo: upgraded CHD
Wunderlich: upgraded CEVA, CFR


The VIX rose 16pts, or 50% (yes, five-zero), to 48.00 - its highest close since March 2009 – as the SPX suffered its worst loss since Dec 1st, 2008th and the R2K fell into bear market territory (off 24.8% from highs). The sharp move in the VIX (marking the fear index’s first ever 5-day 100%+ increase) was accompanied by a further steepening of 2nd month 25-delta skew, a fear barometer that is at its highest levels on an absolute basis since May 2010. While some may choose to focus on more superstitious observations (SPX finished down 6.66% today!!), we wanted to highlight some interesting statistical observations that we think represent investor sentiment.  

Since August 8th 1991 (20 years)…
·         the VIX posted a +25% (or greater) one-day increase just 22 times. The VIX closed up 50% on Monday (2nd largest percentage increase ever) and two of these aforementioned 25%+ increases occurred this month. In 16 of the previous 22 cases, the SPX was trading lower (by an average of 4%) one month later.  

·         the SPX RSI has been 25% (or lower) on 21 days. The SPX RSI is at 16.5% currently and 3 of these aforementioned sub-20 RSI readings occurred this month (the worst August in S&P500 history). In 17 of the previous 18 cases, the SPX was trading higher (by an average of 6%) one month later.  

It seems as if the data supports what investors are feeling – the market appears extremely oversold (S&P risk premium is at ~5.8%; trailing P/E is 12.3x) but our fear level remains very high (CBOE Put/Call Ratio hit 1.08 – the 2nd highest reading since November 2008; XLF 2nd Month ATM Implied Volatility at highest level since May ‘09 ).  

Based on this and other collected data, conversations with clients, and our own ‘gut feeling’, we think there are two option strategies that make sense in this environment.
1)     Buy-Writes. With S&P implied volatility at such elevated levels (SPX 2ndMonth ATM options at highest level in over 2 years); we argue that clients looking to dip their toe in the market should do so via buy-writes. The strategy involves buying a stock of one’s choosing and selling upside call options to collect premium. While this caps the potential upside, the strategy also lowers the cost basis of the initial purchase and thus can enhance the potential return on the position. We will highlight attractive buy-write candidates (based on implied volatility, option premiums, and BMO’s Research Analyst views) in tomorrow’s Derivatives Daily.

2)     Rolling Protection. Many of our clients are sitting on significantly in-the-money puts and put spreads that they previously purchase for protection. While puts continue to offer protection, the leverage on the position has decreased (if deep-in-the-money, this is similar to being short the underlying). Put Spreads likely no longer offer much protection as the security, ETF, or index could be trading well below the lower strike. Rather than sit on this invested premium, we continue to suggest clients roll down their puts and put spreads to 1) gain leverage on potential further downside and 2) take some premium off the table. For further downside protection, clients could look to buy the
SPY - Buy September 108/98 Put Spreads for $2.60 (2.85x1 max net payout)
IWM - Buy September 63/55 Put Spreads for $2.25 (2.56x1 max net payout)
XLE – Buy September 60/52 Put Spreads for $2.15 (2.72x max net payout)  

ES (ESU11) - KEY Support and Resistance - Plus Analysis

Preferred Strategy 
  • Sell rallies into 1130-1135 ... secondary Sell zone at 1147-1152 ... third Sell zone at 1160-1165
  • AFTER a breakout below 1110 ... Sell rallies into local resistance (initial zone at 1115-1120)
Alternate Strategy   
  • Buy dips into 1117-1122 ... secondary Buy zone at 1097-1102 ... third Buy zone at 1077-1082
  • AFTER a breakout above 1155 ... Buy dips into local support (initial zone at 1146-1151)
  • Downside Targets ... 1115-1120 ... 1097-1102 ... 1077-1082
  • Upside Targets ... 1130-1135 ... 1150-1155 .. 1160-1165 ... 1183-1188 ... 1200-1205 ... 1218-1223 ... 1227-1232 ... 1240-1245 ... 1257-1263 ... 1270-1273
  • Short Term: DOWN ... Intermediate Term: DOWN ... Long Term: DOWN

EURO (FX Cash) - KEY Support and Resistance - Plus Analysis

Preferred Strategy 
  • Buy dips into 14190-14220 ... secondary Buy zone at 14120-14150
  • AFTER a breakout above 14320 ... Buy dips into local support (initial zone at 14250-14280)
Alternate Strategy   
  • Sell rallies into 14260-14290 ... secondary Sell zone at 14340-14370
  • AFTER a breakout below 14170 ... Sell rallies into local resistance (initial zone at 14200-14230)
  • Upside Targets ... 14300-14350 ... 14400-14450 ... 14500-14550 ... 14650-14700
  • Downside Targets ... 14200-14250 ... 14100-14150 ... 13950-14000 ... 13850 ... 13700-13750 ... 13500-13550
  • Short Term: DOWN ... Intermediate Term: UP ... Long Term: UP

Crude Oil (CLU11) - KEY Support and Resistance - Plus Analysis

Preferred Strategy   
  • Sell rallies into 8200-8250 ... secondary Sell zone at 8450-8500
  • AFTER a breakout below 7980 ... Sell rallies into local resistance (initial zone at 8050-8100)
Alternate Strategy   
  • Buy dips into 7880-7930 ... secondary Buy zone at 7700-7750
  • AFTER a breakout above 8400 ... Buy dips into local support   (initial zone at 8300-8350)
  • Upside Targets ... 8250-8300 ... 8450-8500 ... 8650-8700 ... 8800-8850 ... 9250 ... 9350-9400 ... 9500-9550
  • Downside Targets ... 800-0150 ... 7850-7900 ... 7700-7750
  • Short Term: DOWN ... Intermediate Term: DOWN ... Long Term: DOWN

Treasury Notes (ZNU11) - KEY Support and Resistance - Plus Analysis

Preferred Strategy   
  • Buy dips into 127-24 - 128-05 ... secondary Buy zone 127-03 - 127-13
  • AFTER a breakout above 129-08 ... Buy dips into local support (initial zone at 128-12 - 128-24)
Alternate Strategy   
  • Sell rallies into 128-17 - 128-24 ... secondary Sell zone at 129-00 - 129-16
  • AFTER a breakout below 127-14 ... Sell rallies into local resistance (initial zone at 127-24 - 127-28)
  • Upside Targets ... 128-12 - 128-24 ... 129-04 - 129-12
  • Downside Targets ... 127-00 - 127-16 ... 128-00 - 128-08 ... 126-12 - 126-20 ... 125-28 - 126-04 ... 125-01 - 125-12 ... 124-17 - 124-23 ... 124-05 - 124-10 ... 123-16 - 123-28
  • Short Term: UP ... Intermediate Term: UP ... Long Term: UP

Focus Items
Americas: Healthcare: Upping exposure to defensives and dislocated     1
Pfizer Inc. (PFE) Buy: Can't ignore dislocation; adding as CL-Buy      2
United States: Healthcare: Medical Technology: Repositioning portfolio 3
- Attractive on Supplies; Neutral on Devices
Americas: Managed Care: Maintain Attractive coverage view; Upgrade HUM 4
to Buy
Americas: Multi-Industry: Recalibrating for lower growth outlook: TYC  5
to Buy; UTX, PH to Neutral; ITW to Sell
Americas: Machinery & Diversified Industrials: Repositioning for       6
rising macro headwinds - key themes to drive performance
McDonald's Corp. (MCD) Buy: Upgrade to CL Buy: Double-digit            7
uncorrelated returns, EPS upside @ gs

US OUTLOOK: JPM says US downgrade should not have a major effect on Fed forecasts but mkt skittishness "probably increased the potential costs to the economy of the Fed appearing hesitant to deliver further accommodation." JPM still calls for FOMC to incorporate "reinvestment policy into the extended period language," and extend the duration of reinvestments. They say doing nothing "would not be well-received by mkts" but Fed in a liquidity trap is out of its most effective
By Liz Moyer and Brett Philbin

  New York (Dow Jones)--Goldman Sachs Group Inc. (GS) said in its quarterly
regulatory filing Tuesday that the downgrade of the U.S. government's credit
rating by Standard & Poor's Corp. has "had an adverse effect on financial
markets and although we are unable to predict the longer-term impact on such
markets and the participants therein, it might be material and adverse."
  Goldman's filing was released four days after S&P's downgrade, which sent
shock waves through the financial markets on Monday, including a greater
than 634-point drop in the Dow Jones Industrial Average.
  The investment bank, which in recent years has made most of its money in
trading, experienced difficulty in that activity in the second quarter, like
several other banks. Whereas in the first quarter it only had one day of
trading losses, Goldman's traders lost on 15 days during the second quarter,
including one day when they lost more than $100 million. The firm posted 48
days of trading gains during the period, making between $75 million and $100
million on nine days and exceeding $100 million on four occasions.
  Goldman also said in the filing it is in discussions with the Securities and
Exchange Commission and the Financial Industry Regulatory Authority to
resolve proposed charges concerning Goldman's research communications.
  In June, Goldman paid $10 million to the state of Massachusetts and agreed
to make certain changes to settle an investigation that focused on Goldman's
so-called research huddles, and communications between analysts and top
clients. Massachusetts alleged certain Goldman clients got special access to
the firm's stock analysts and allegedly got information and short-term tips
that other clients didn't get. The SEC and Finra have been investigating
similar matters, Goldman said.
  Also in the filing, Goldman disclosed it had lowered its "reasonable
possible" loss estimate on legal charges above and beyond what it has
already reserved to $2 billion, from $2.7 billion in the first quarter.
  In expense disclosures, Goldman said it would take a charge of $130 million
for a U.K. tax on certain financial services activities of large banks,
including their subsidiaries, that operate in the region. Goldman said it
would take three-fourths of the charge in the third quarter, with the
remainder in the fourth quarter and warned that the final amount could vary
from its estimate.
  In a lengthy legal disclosure section, Goldman outlined the various ongoing
legal actions facing the company, including a previously disclosed ongoing
investigation by the Commodity Futures Trading Commission into Goldman's
role as a clearing broker for an SEC-registered broker dealer and the
European Commission's investigation of various firms, including Goldman, in
connection with the supply of data related to credit default swaps and
profit sharing and fee arrangements for clearing of credit default swaps.
  The Department of Justice has been investigating the data supply issues as
well, the firm said in the filing. It said it is cooperating with the
investigations and reviews.
  A new disclosure for the second quarter was Goldman's ensnarement in a
European Commission investigation begun in July raising allegations of an
industry-wide conspiracy to fix prices for power cables including by an
Italian cable company. Goldman owned a stake in the unnamed company in
various of its investment funds from 2005 to 2009 and faces liability for
part of any fine that may be levied.
  Shares of Goldman Sachs, which fell 6% Monday, were up 1.8% to $119.80 in
recent premarket trading.

Large cap banks � impact from the S&P downgrade.  Borrowing costs are also likely to rise, particularly for long-term debt.  However, the worst case scenario is if all long-term debt costs were to rise by 50bps�we would only expect this to impact �12 EPS by 3.4% on average and �13 by 2.5%. BAC and C would be impacted a little more by 5-7% net of expected debt runoff.  Fears seem overdone and we do not expect this downgrade to result in the need for capital issuance by our banks nor do we expect S&P to downgrade any banks. The group is at 0.8x BV and 1x TBV.  Bank stocks are down sharply over concerns about the fallout, trading at 1.0x tangible book and 0.8x book value on average. We�d play buyback theme and expect USB and WFC to actively repurchase stock at these attractive valuations. BAC- at some point they probably sell their China Construction position. - JPM


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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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