Monday, August 15, 2011

Morning Note

August 15, 2011

US futures are all trading higher relative to fair value following last week's unprecedented volatility.

Libor fixings 

Overnight Libor: Dollar: 0.145% vs prior 0.143% ; Sterling: 0.577% vs prior 0.576%; Euro: 0.845% vs prior 0.853%
1-month Libor: Dollar: 0.210% vs prior 0.208% ; Sterling: 0.649% vs prior 0.648%; Euro: 1.304% vs prior 1.306%
3-month Libor: Dollar: 0.292% vs prior 0.290% ; Sterling: 0.852% vs prior 0.851%; Euro: 1.489% vs prior 1.489%

Sep WTI crude ($0.56) at $84.82

Natural gas ($0.052) at $4.008

Gold ($2.10) at $1740.50

10-year yield 2.271%
30-year yield 3.754%

Asian Markets

Asian shares followed Wall Street up today. Australia rose. Eased worries about a recession boosted resource stocks; Japan rose on overseas gains and better-than-expected domestic GDP data. Exporters recouped some of last week’s losses. Banks led China to a gain on expectations that monetary tightening will slow. South Korea was closed for Kwang Bok Jul (Independence Day). Japan Q2 GDP (1.3%) y/y vs cons (2.5%). The yen is trading at 76.83 to the US dollar.

European Markets

European equity markets trade higher following gains in Asia after Japanese GDP fell less than expected in Q2, (1.3%) y/y vs cons (2.5%), though broader European averages remain subdued ahead of German Chancellor and French President's meeting scheduled for 16-Aug to discuss EuroZone debt crisis and governance along with other international issues. Peripheral debt spreads continued to narrow vs German bunds. While it is a public holiday across much of Continental Europe only Italian, Austrian, Greek and Cypriot markets are closed. Following early gains major indices became range bound slightly below the day's best levels. Advancing sectors lead decliners 15-4. Chemical +1.4%, insurance and energy both +0.8% led gainers whilst food & beverage (0.5%), retail and technology both (0.2%) lead fallers. UK Aug house price index (2.1%) m/m, (0.3%) y/y the first annual fall since Sep 2009. The pound and the euro are trading at $1.6318 and $1.4314 respectively

Today's Economic Releases (Eastern Time)

08:30 US Empire Manufacturing (Aug); consensus (0.1)
09:00 US TIC Flows (Jun); consensus n/a
10:00 US NAHB Housing Market Index (Aug); consensus 15
19:01 UK Rightmove House Prices y/y (Aug); consensus n/a

Today's Key Events (Eastern Time)

13:25 Fed's Lockhart speaks on US economy
16:15 Salient MLP & Energy Infrastructure Fund Conference Call on MLP and Energy Infrastructure space outlook: 866.939.3921
—:— Bank of America Merrill Lynch Asian Technology Tour
—:— EnerCom Oil and Gas Conference
—:— NRFtech IT Leadership Summit

Company Specific News

LOW (Lowe's reports Q2 EPS $0.68 ex-items vs Reuters $0.66)
SBSA (Spanish Broadcasting reports Q2 EPS $0.82 vs year-ago $0.95)

Positive News
COF (Capital One reports Jul US card net principal charge-offs $169M vs $198M m/m)

AKD.NO (Transocean (RIG) offers to acquire Aker Drilling)
IPG (Interpublic agrees to sell portion of its investment in Facebook and increases existing share repurchase authorization to $450M from $300M)
MMI (Motorola Mobility to be acquired by Google for $40/sh in cash)
RAH (ConAgra (CAG) emphasizes strong value of $94 per share all-cash proposal to acquire Ralcorp Holdings)
TWC (Time Warner Cable in advanced talks to buy Insight Communications for $3B)
VSEA (Varian Semiconductor shareholders approve the planned merger with Applied Materials (AMAT))

Newspaper Articles / Headlines

- Barron's cover remains bullish on quality stocks. Barron's argues that U.S. stocks, as measured by the S&P 500 index, are valued at around 12 times this year's earnings and notes that the current S&P forward price/earnings ratio combined with low interest rates makes for good relative value.
The article highlights companies including Microsoft (MSFT), Merck (MRK), Intel (INTC), ExxonMobil (XOM) and JPMorgan Chase (JPM), noting that their dividend yields are appealing. Barron's highlights Michael Jamison, portfolio manager at Barrett Asset Management, who thinks stocks such as IBM (IBM), Procter & Gamble (PG), Kraft Foods (KFT), ConocoPhillips (COP) and Kimberly Clark (KMB) offer an opportunity to build a defensive portfolio with a good income stream. The article also highlights Barclays Capital strategist Barry Knapp who argues that profits will remain steady over the upcoming quarters, and cites good earnings reports from Macy's (M), Kohl's (KSS), Nordstrom (JWN) and Cisco Systems (CSCO). Barron's argues that the banking industry is better capitalized than it was in 2007-2008 and cites Barclays credit analyst Jonathan Glionna who notes that Citigroup (C), Bank of America (BAC), JPMorgan Chase and Wells Fargo (WFC) have $471B of tangible common equity, nearly double their total in June 2007, reducing the risk of a repeat of the 2008 crisis.
- Barron's profile highlights TIAA-CREF Mid-Cap Value Fund's Tom Kolefas. Kolefas looks for cases where the stock is depressed, but the there is intrinsic value and strong management supporting the company. TIAA-CREF Mid-Cap Value's top 10 Holdings include: CenturyLink (CTL), Discover Financial (DFS), Lorillard (LO), Frontier Comm/B (FTR), CBS/B (CBS), KBR (KBR), W.R. Grace & Co. (GRA), Huntington Bancshares (HBAN), Boston Properties (BXP),
Vornado Realty Trust (VNO).
- Barron's interviews Keith Trauner and Larry Pitkowsky, founders of the GoodHaven Fund (GOODX). Trauner and Pitkowsky believe the best way to manage money is to buy value and earn the highest returns that they can, without taking a lot of risk by buying great businesses with strong management teams at reasonable prices. GoodHaven's top picks include: Microsoft (MSFT), Hewlett-Packard (HPQ), Google (GOOG), Spectrum Brands (SPB), Berkshire Hathaway (BRK.A), GoodHaven is cautious on shares of giant financials and bearish on long-term bonds.
- Barron's feature discusses last week's market and stock picks with members of the Barron's Roundtable. Barron's notes that the roundtable believes that unmanageable debt and weak policies in both the U.S. and Europe are more likely the cause of the markets disturbance than the Standard & Poor's downgrade a week ago of the credit rating. The article notes that the roundtable expects the markets to stay unstable until Western economies can figure out these problems, although many see significant bargains in common stocks. Archie MacAllaster likes Bank of America (BAC) and Hartford Financial Services (HIG). Fred Hickey likes Agnico-Eagle Mines (AEM), Newmont Mining (NEM) and Yamana Gold (AUY), Scott Black likes Arrow Electronics (ARW), Meryl Witmer likes Macquarie Infrastructure (MIC), Rockwood Holdings (ROC), Innophos (IPHS), Six Flags (SIX) and Packaging Corp. of America (PKG), Abby Joseph Cohen likes ExxonMobil (XOM), Wells Fargo (WFC) and Pfizer (PFE), Mario Gabelli likes NextEra Energy (NEE) and National Fuel Gas (NFG), Oscar Schafer likes Anixter International (AXE)
Marc Faber mentions Apple (AAPL). (AMZN) and Netflix (NFLX) and recommends shorting (CRM)
- The Trader: Discusses last week's violent market, material stocks and mention Merck (MRK) and AT&T (T)
- International Trader (Europe): Policy makers curbed short-selling after fears about the spreading sovereign-debt crisis in the euro zone and the prospects for economic growth pushed European markets into bear territory
- International Trader (Asia): Positive on Singapore Technologies Engineering (STEG.SI)
- Current Yield: Discusses how last week's auction of 30-year U.S. Treasuries fell flat
- The Striking Price: Positive on CBOE Holdings (CBOE); suggests buying stocks of large companies with loads of cash that pay high dividends and creating a "synthetic bond"
- Commodities Corner: A change in margin requirements and extreme market anxiety is likely to further agitate the gold futures market
- Up and Down Wall Street: Discusses this summer's market's extreme movements, the S&P downgrade of U.S. debt, worries about Europe and the outlook for our economy and growth.
- Economic Beat: The Blue Chip Consensus chopped a percentage point from its estimate for the current quarter, among other major cuts but still doubts that there could be another recession
- Plugged In: Discusses highlights from last week, including Apple (AAPL) becoming the biggest stock in the world, surpassing ExxonMobil (XOM)
Gadget of the Week: Features Motorola's (MMI) Photon 4G phone
- ETF Focus: Recent market uncertainty has ETFs heavily in cash and waiting for the market to fully stabilize
- Fund of Information: Recommends Blackrock (BLK) and suggests Franklin Resources (BEN) and Cohen & Steers (CNS) as an interesting play
- Electronic Investor: Highlights TradeStation (, which has a technique for testing your trading theories in real markets
- Speaking of Dividends: Discusses how to find the best dividend stocks in an unstable market
- Follow- up: Cautious Education Management (EDMC); positive Kindred Healthcare (KND); positive MetroPCS (PCS)

Daily Mail
- Investment-banker consortium looks likely to buy Healthcare Locums. Sources involved with the business tell the Daily Mail that "major City players" will probably buy the company's £130M in debt for near market value, eliminating a hostile takeover as a possibility. The article says that market conditions seem to have stalled a £60M cash call, which could mean that the planned 6-Sep relisting of the company's shares will be delayed.

Economic Times
- Coal India expected to get government approval to buy foreign mines this month - Economic Times, citing government official. The Economic Times reports that with the permission, Coal Indiawill be able to buy 15% of Peabody Energy's (BTU) $600M Wilkie Creek project in Australia.

Financial News
- Markit in exclusive negotiations to take over LCH.Clearnet. Sources familiar with the situation tell the Financial News that Nasdaq OMX Group (NDAQ), which had been looking to take a stake in LCH.Clearnet, is not involved in the talks.

- E.ON to break up Ruhrgas unit. Sources close to the company tell the FTD that E.ON hopes to sell the gas-transport network, while retaining its gas production activities.
- Praktiker supervisory board to name Thomas Fox to succeed Wolfgang Werner as CEO. Sources tell the FTD that Fox, who will be named today, will only briefly take the job, though the exact period is not defined. Fox is to cut costs, possibly by closing some branches.
- European food companies call for abolition of sugar quota. The FT reports that companies such as Nestle (NESN.VX) say there is not enough supply in the region to meet demand the region still has quotas limiting imports despite cutting subsidies for producers as prices have risen, producers have sold elsewhere causing shortages in some parts of Europe.

- Ratio Oil Exploration submits two plans for partnership structures for offshore Gal permit. Without citing sources, Globes reports that Ratio's two ideas for the permit, which covers an area near Leviathan, are:
Ratio to own 60%, and ATP Oil & Gas (ATPG) to own 40%. Ratio to own 60%, Israel Opportunity Energy Resources (ISOP.IT) to own 10%, Modiin Energy (MDIN.IT) to own 20%, EZ Energy (EZ.IT) to own 5%, and AGR Petroleum Services to own 5%

Investor Business Daily
- The following changes were noted in the latest IBD 50 List. Added: BPI, GOLD, ABV, TDG, GG, EGO, AVGO, SOHU, ABX, RES, HDB, GFI, SSRI

Los Angeles Times
- Selling EMI to an existing music-industry player might not raise antitrust hackles. The article is theoretical. Antitrust experts tell the LA Times that because the industry has changed so much recently, music labels just don't have the amount of power that causes concerns. But the article does not guarantee that regulators in either Europe or the US will look the other way if Warner Music, Universal Music (VIV.FP), or Sony Music (6758.JP) tries to make the purchase.

New York Times
- Telecom operators complain about Greek spectrum auction. The NYT reports that the Greek government wants to raise around eur300m from the auction of mobile spectrum at rates which seem to be above what other countries are charging, according to one of the telecom companies.
- Royal Dutch Shell tries to control an oil leak in the North Sea. The New York Times reported yesterday that, according to the British subsidiary of Royal Dutch Shell (RDS.A) and a Scottish official, oil is spreading into the North Sea after a platform flow line in the seabed began leaking.
The article reoprts that the company has been vague about the how much oil spilled as well as the cause of the rupture, but, the article notes Reuters reported earlier that Alex Salmond, leader of the Scottish regional government, said that around 110 tons of oil had poured into the sea.
According to the New York Times, Shell announced the spill on Friday, but revealed in their press release that they had been trying to control the leak since at least Wednesday.

Sunday Times
- Thomas Cook Group considers cutbacks. The Sunday Times reports that the company may close hundreds of doors, shrink its airline, and cut back on sales of low-end package deals in an effort to boost margins. The article does not clearly cite sources and may be based only on analysts' hypotheses.
- United Biscuits may be broken up. Without citing sources, the Sunday Times reports that the private-equity owners of the company are considering separating UB's biscuits division and snacks division this year. The article says Campbell Soup (CPB) is likely to again register interest in the biscuits division.
- JC Flowers bid for Northern Rock may be backed by state investment fund CIC. The Sunday Times reports that JC Flowers is one of the frontrunners to buy Northern Rock, along with Sir Richard Branson’s Virgin Money.
The article notes that it is understood the JC Flowers bid will be supported with cash from CIC. According to The Sunday Times, CIC set up a $4B fund with Flowers to buy distressed USfinancial companies after the credit crisis.
- Indicative offers received for Northern Rock's good bank. MSFT Microsoft's Ciao receives lower than expected bids. The Sunday Times reports that the sale of Microsoft's Ciao is uncertain after bids came in lower than expected.  The article notes that Microsoft is thought to be reconsidering whether to sell the website, which it acquired three years ago as part of a $486M deal. The Sunday Times points out that Microsoft welcomed bids for Ciao earlier this year in an auction handled by BofA which was expected to raise close to $100M.

Wall Street Journal
- WSJ is negative on Boston Beer. A "Heard on the Street" column says the edges that the company used to have on its competition are being whittled away as more distributors and retailers add specialty beers, and big producers like Anheuser-Busch InBev (ABI.BB) buy specialty brewers.
- WSJ is positive on midcap robot-makers. A "Heard on the Street" column cites ATS Automation Tooling Systems (ATA.CN), Kuka (KU2.GR), and Nachi-Fujikoshi (6474.JP), saying that they offer a purer play on robotics than do than more diversified companies like ABB (ABBN.VX), Panasonic (6752.JP), or Rockwell Automation (ROK).
- FDA and generic drug companies agree fees to speed-up drug approvals. The WSJ reports that although discussions are ongoing, an agreement is in place whereby the drug companies would pay as much as $299M to speed up approvals and increase the frequency of FDA inspections of foreign drug plants the agreement would still need congressional approval but after the initial payment, companies would pay a fee for each new drug.
- Bank of New York Mellon now sued by Florida. The WSJ, citing a filing last Thursday, reports that the Florida AG claims some clients were favoured by the bank and not charged higher fees but the Florida Retirement System Trust Fund was not one of those favoured clients.
- WSJ discusses Microsoft in the post-PC world (08/14/2011 23:08 ET)
The WSJ article breaks no news but discusses
the fact that Windows is still critical for the company's future, providing half of the company's operating profit last fiscal year
the fact that more functions are being done on tablets and smartphones and sales of such devices are surging giving companies such as Google (GOOG) and Apple (AAPL) bigger sway amongst independent software developers
Microsoft is counting on the new Windows to resrat growth but it will not be ready until autumn 2012 at the earliest but a conference next month for software developers will be crucial.
- WSJ discusses switch to internet television. The WSJ reports that
Although companies are starting to make money from internet video, it seems that fewer young people are watching traditional tv. Recent statistics show the number of 18-34 year olds watching TV was down 2% y/y and down 3.4% from two years ago. Companies such as Netflix (NFLX), Amazon(AMZN) and Google (GOOG) are trying to get into people's living rooms while cable operators are fighting back by letting people watch their shows on devices such as tablets and restricting the amount of free tv on the internet. Big media companies are getting revenue from new digital streaming deals but trying to balance this by selling older shows not the new ones which bring in ad revenue
- Nobody is happy about company audits resulting in laid-off illegal workers. The article, which focuses on a Mexican couple that worked for ABM Industries (ABM) until regulators audited the company, is basically a summary. The WSJ reports that: Immigrant advocates are concerned that such workers are being forced into the recesses of society, and they point out that working in such conditions results in less tax revenue for all levels of government. Opponents of an immigration-law revamp say the audits are pointless if offenders are not deported. Employers say that despite the economic gloom, Americans won't take the jobs that the audits are kicking people out of.
- WSJ discusses SL Green Realty's help of embattled property projects. The WSJ breaks no news but talks about how the company run by Stephen Green, has helped out rival developer Joseph Moinan fight off a takeover of his development at Columbus Circle and now he is helping him with respect to Maiden Lane. The help comes at a price as Green is also taking a stake in the office tower.
- Scripps Networks Interactive (SNI) near deal to buy Virgin Media's 50% of UKTV. People familiar with the matter tell the WSJ that the purchase involves an enterprise value of £585M ($952M), though debt is included.
- News Corp investigation advances in U.S. The WSJ reports that, according to people familiar with the matter, U.S. authorities have expanded their investigation to see whether they can find a pattern of more recent misconduct at the News Corp's operations. The article notes that, according to people familiar with the investigation, British police have told the Federal Bureau of Investigation there are no names or telephone numbers of Sept. 11 victims in the evidence they have gathered to date. Sources tell the WSJ that London's Metropolitan Police Service has examined several phone records of what could be thousands of potential phone-hacking victims, but those records don't suggest 9/11 victims were targets of the hacking.
The sources tell the WSJ that the bureau is continuing to probe the 9/11 hacking claim. The article explains that, according to sources, the new, broader investigation is in early stages and may prove a dead end but notes that it involves past allegations of misconduct made against News Corp., including a supermarket-coupon and advertising unit that settled a lawsuit from a competitor alleging computer hacking.


Auriga: upgraded WAT
Bank of America Merrill Lynch: upgraded BMS, MWV, SEE, GWW, TYC; downgraded ATR, PCL, CFX, ITW
Barclays: upgraded LTD; downgraded PETM, HGG, PIR
BB&T: upgraded RAH, ESRX
BMO Capital: upgraded TSN;; downgraded SAFM
Collins Stewart: upgraded VMW
Cowen: upgraded BBBY
Credit Suisse: upgraded CEA, ZNH, VMW
Duncan Williams: downgraded ENDP
FBR Capital: upgraded UA, GIL, ZQK, TCB
Goldman Sachs: upgraded GDOT, FFIV, IBM; downgraded CSGS, FIS, GIB, BRCD, JNPR, LXK
Jefferies: upgraded PNM, ECL; downgraded CYT
Kaufman: upgraded VIT
KeyBanc: downgraded AKS, MUSA
Oppenheimer: downgraded MOBI
Piper Jaffray: upgraded HOTT, NTAP
Rodman & Renshaw: upgraded EXAS
Ticonderoga: upgraded GM
UBS: upgraded OAS


Watch the Vol Compression: Equity futures are indicating a slightly higher open and rather quiet trading session. While certain credit/’fear’ metrics continue to indicate a high level of risk (VIX Sep future closed higher on Fri; Mark Steele points out Asian CDS Index breaking out) and thus warranting protection, we do want to give clients a “heads up” that ‘quiet’ days like Fri and today will lead to some volatility compression. As vols come in from such elevated levels, option premiums will drop. This is a good time to roll protection (both down in strikes and out in term structure) as decay on these options will be less than at near-term ATM options.

Some may look to sell options (calls/puts/straddles/strangles) to collect premium against positions given elevated vol levels – here is a list of names w/ the highest 2nd month implied vol / 30-day realized vol (ratio >1.05) :


TSN – Option activity in TSN has been rather light and quite balanced over the last 10 days with 31% of the trade bearish, 36% neutral, and 33% bullish per OptionAlert (data provider we use on the desk). One interesting thing to note is that upside skew in TSN has flattened considerably over the past few days. In other words upside/out-of-the-money calls are now trading at the same volatility level as at-the-money calls, an indicator of increasing upside risk in a name. (To help understand this concept, think of volatility as a measure of price. Demand for upside calls leads to a higher price for these options relative to others, thus it’s seen as a bullish indicator). Check out a chart of the upside skew in TSN on the bottom half of the chart below.

We want to note that this flat upside skew sets up an attractive opportunity to buy call spreads in a name (because you are buying the ATM call and selling the OTM call). Specifically, clients that agree with Ken’s bullish thesis on the name should consider buying the TSN January 17.50/21 Call Spread for $1.15 (3x1 max net payout). This spreads provide upside leverage right to Ken’s $21PT.

*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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