Tuesday, August 16, 2011

Morning Note

August 16, 2011

US Equity futures are all trading lower despite a 3 day winning streak following a negative opening across Europe after Germany reported much weaker than expected GDP figures (+2.8% y/y vs consensus +3.2%). In addition to earnings, economic data, including July Housing starts followed by July Industrial Production before the opening bell.

Libor fixings 

- Overnight Libor: Dollar: 0.143% vs prior 0.145% ; Sterling: 0.579% vs prior 0.577%; Euro: 0.843% vs prior 0.845%
- 1-month Libor: Dollar: 0.210% vs prior 0.210% ; Sterling: 0.650% vs prior 0.649%; Euro: 1.303% vs prior 1.304%
- 3-month Libor: Dollar: 0.293% vs prior 0.292% ; Sterling: 0.857% vs prior 0.852%; Euro: 1.488% vs prior 1.489%

Spain T-Bill auction.
Spain sells €4.15B 12M T-Bills average yield 3.335% vs prior auction 3.702%, bid to cover ratio 2.1 vs prior 2.2.
Sells €1.54B 18M T-Bills average yield 3.592% vs prior 3.912%, bid to cover ratio 3.2 vs prior 5.5.

September WTI crude ($1.16) to $86.90

Natural gas ($0.061) to $3.964

Gold +$7.00 to 1776.89

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

Asian Markets

Asian shares were mixed this morning, but fell in the afternoon as European and US stock futures traded lower. South Korea gained to catch up with world markets after having been closed yesterday. Samsung Electronics jumped 6% on optimism brought about by the Google (GOOG)-Motorola Mobility (MMI) deal. But pharmaceuticals plunged 9-12% after the government said it would reduce drug purchase costs next year to strengthen the state health insurance plan. Encouraged by Google’s purchase of Motorola Mobility, Japan rose early, but a strong yen has pulled the market down to flat. Megabanks rose on a report that the government might lower their deposit insurance premium rate. On fears of slowing global growth, China-focused stocks outperformed local ones in Hong Kong, which lost early gains to finish very slightly down. Foxconn International (2038.HK) soared 13% on the news that Google would buy Motorola Mobility.Thailand fell. The yen is trading at 76.79 to the US dollar.

European Markets

European equity markets fell from the open, despite mixed markets in Asia, as disappointing Q2 GDP data from German, Portugal and Holland highlighted the slowdown in the economies across the region and weighed on markets ahead of German Chancellor's Merkel and French President Sarkozy's meeting later today to discuss the EuroZone crisis. Spain successfully sold two tranches of T-Bills with lower yields and bid to cover ratios than prior auctions. Reported that the ECB has been buying Italian and Spanish bonds in the market agian today. Major indices currently trade close to session lows with peripheral markets outperforming. Germany Q2 flash GDP +2.8% y/y vs consensus +3.2%, prior revised +5.0% from +5.2%. UK Jul CPI +4.4% y/y vs consensus +4.3%, prior +4.2%. RPI +5.0% y/y vs consensus +5.0%, prior +5.0%. EuroZone flash Q2 GDP +1.7% y/y vs Reuters +1.8%, prior +2.5%. The pound and the euro are trading at $1.6374 and $1.4396 respectively. The pound traded higher post the UK inflation data.

Today's Economic Releases (Eastern Time)

02:00 Germany GDP Preliminary +2.8% y/y vs consensus +3.2% and prior revised +5.0% from +5.2%
04:30 UK RPI +5.0% y/y vs consensus +5.0% and prior +5.0%
04:30 UK CPI +4.4% y/y vs consensus +4.3% and prior +4.2%
05:00 Eurozone Q2 GDP +1.7% y/y vs Reuters +1.8% and prior +2.5%
07:45 US ICSC-Goldman Chain Store (13-Aug); consensus n/a
08:30 US Housing Starts (Jul); consensus 597K
08:30 US Building Permits (Jul); consensus 604K
08:30 US Import Price Index (Jul); consensus (0.1%)
08:55 US Redbook Chain Store (13-Aug); consensus n/a
09:15 US Industrial Production (Jul); consensus +0.5%
09:15 US Capacity Utilization (Jul); consensus 76.9%
16:30 US API Crude Inventories (12-Aug); consensus n/a 

Today's Key Events (Eastern Time)

15:00 NGL Energy Partners LP and Osterman propane announce contribution of assets for cash and common units: 866.277.1184 pc 37910096
—:— Bank of America Merrill Lynch Asian Technology Tour
—:— EnerCom Oil and Gas Conference
—:— NRFtech IT Leadership Summit
—:— Wedbush Securities Life Sciences Management Access Conference 

Company Specific News

A (Agilent reports Q3 EPS $0.81 vs Reuters $0.73)
HD (Home Depot reports Q2 EPS $0.86 vs Reuters $0.83. Reports Q2: Revenues $20.23B vs Reuters $19.96B)
TW (Towers Watson reports Q4 EPS $1.06 ex-items vs Reuters $1.03. Reports Q4: Revenues $851M vs Reuters $811.7M)
URBN (Urban Outfitters reports Q2 EPS $0.35 vs Reuters $0.32)
WMT (Wal-Mart reports Q2 EPS $1.09 vs Reuters $1.08. Reports Q2: Revenues $108.64B vs Reuters $108.24B)

NOV (National Oilwell Varco has refiled Hart-Scott-Rodino premerger notification for Ameron (AMN) acquisition)

LCRY (LeCroy files $50M mixed shelf)

Corporate Actions
BRK.A (Berkshire Hathaway discloses new 1.5M share stake in Dollar General (DG) in 13F buying 1.5M shares)
CLF (Cliffs Natural Resources announces 4M share repurchase authorization)
CXW (Corrections Corp announces $150M expansion in share repurchase program)
GLRE (Bart Hedges named as CEO of Greenlight Re. Hedges succeeds Len Goldberg, who, as previously announced, retired as CEO effective today (see linked comment for original retirement)
MYGN (Myriad announces new $200M share repurchase program. As of June 30, 2011 the company had more than $417M of cash, cash equivalents, and marketable securities
RSH (RadioShack Corp. names Dorvin Lively CFO, Chief Administrative Officer, effective immediately)
SOPW (Solar Power, Inc. announces 9.7MW project in New Jersey as part of recently announced KDC Solar agreement)
WBMD (WebMD Health announces $75M stock repurchase program)

Newspaper Articles / Headlines

Sources tell DigiTimes that most companies are selling less than they had expected to. The only number given is that Asustek (2357.TT), which did better than most, posted shipments of 700K units and sales of 500K units from May to July. The article says: Samsung (005930.KS) and Motorola (MMI) are not seeing the demand they had hoped for Acer (2353.TT) is slowly reducing orders. Motorola, Hewlett-Packard (HPQ), Asustek, and Acer have cut their prices to $370, but the sources think Q4 will see at least two waves of price reductions, possibly to as low as $300
Apple not likely to release iPad 3 this year. Supply-chain sources tell DigiTimes that the company no longer intends to ship the 6.5-8.0M units it had planned to in H2, possibly due to the yield rate of the 9.7-inch panel supplied by Sharp (6753.JP), Samsung Electronics (005930.KS), and LG Display (034220.KS).
Intel offers notebook companies 20% discount on Ultrabook CPU, vs demands for 50%. Sources from notebook players tell DigiTimes that Intel seems to be concerned with protecting its margins. The sources say that Intel's Oak Trail platform is expensive enough that Nvidia's (NVDA) Tegra 2 is a better idea.

Financial Times
HSBC Trinkhaus in talks for weeks to buy parts of WestLB. The FT reports that the german arm of HSBC is interested in the corporate finance business
other parts such as project finance may also be examined WestLB made €370M from corporate and structured finance the bank's corporate finance operations had revenues of €352M last year and €403M from project and infrastructure finance.
Nokia says Motorola (MMI) deal will benefit Microsoft (MSFT). The FT reports that the reasoning is that some handset makers may not be inclined to use Android after Google's (GOOG) purchase of Motorola Mobility and would use Microsoft's system instead.
Asda CEO plays down Iceland bid talk. The FT, citing Andy Clarke talking at a new store, reports that they are not interested in the whole thing but could be interested in individual stores or groups of stores.
Wm Morrison seeks advice from bankers on whether to bid for Iceland Foods.
Royal Dutch Shell oil spill estimated at 200 tonnes. The FT, citing company figures, reports that the company has now significantly stemmed the leak and shut in the well but was trying to stop the remianing oil in the pipeline from leaking the company estimates current leaking at 5 barrels/day.

New York Post
Wall Street may lay off 5-10% of employees, starting in September. It's not clear how much of the article is news. The Post specifically names Barclays Capital (BARC.LN), Bank of America (BAC), HSBC (HSBA.LN), and Goldman Sachs (GS), all of whom have already announced that they intend or been reported to be planning to cut jobs.

New York Times
- Eurobonds may be only way forward. The NYT reports that Although the French president Nicolas Sarkozy and the German Chancellor Angela Merkel are meeting today in Paris, they are not going to discuss it Germany is against it as it will mean its own borrowing costs will rise as it effectively subsidises the weaker German members. There is added urgency to the debate as the ECB revealed yesterday that it had spenr €22B buying Italian and Spanish bonds last week versus €74B in the previous 15 months buying Greek, Portugese and Irish bonds.
NYT discusses Google's (GOOG) purchase of Motorola Mobility. The NYT breaks no news but makes the points that when Google talks about just wanting the patents it may not be the whole truth the company may actually want to enter the handset market and make the Android system proprietary
Google denied for a year that it wanted to enter the mobile market in 2004, then bought Android in 2005 and made handsets in 2008 if it just wanted patents, why didn't it bid for InterDigital (IDCC), which doesn't have the legacy handset business.

Wall Street Journal
WSJ is positive on European luxury-goods stocks. A "Heard on the Street" column says that wealthy people, especially in Asia, have not cut back spending, so luxury-goods stocks are probably protected against the economic downturn.
WSJ is negative on Nokia. A "Heard on the Street" column says that Google's (GOOG) purchase of Motorola Mobility (MMI) could mean that Nokia's patents are worth $15-32B -- but realistically, it doesn't, since it's not clear who would buy the patents
Norilsk Nickel board agrees buyback and will offer to buy Rusal's (486.HK) stake in the company. The WSJ reports that according to the company,the price of the buyback is "determined considering conditions offered to Rusal"
Rusal owns 25% of the miner but cannot participate in the buyback as its shares are held as collateral.
Federal Judge rules against Obama policy on drilling on public lands. The WSJ, citing the judge, reports that the judgment was in favour of an industry group and said that the Interior Department had no authority to adopt the drilling policy without public notice and an opportunity to comment. The policy was about letting oil and gas companies skip environmental reviews under certain circumstances.
MGM Resorts wants to implode the Harmon building. The WSJ, citing the company, reports that they want to destory the hotel because it has construction-engineering problems and could collapse in a serious earthquake. It is also embroiled in a legal battle with the general contractor who says MGM is fear-mongering to get out of paying bills.

Eurozone growth slows. Eurozone GDP growth fell more than expected to 0.2% on a quarterly basis from 0.8% in Q1 - the slowest since the end of the recession in 2009. Of particular concern is that the German economy almost stalled at +0.1%, down from 1.3% in Q1. Today's figures come on top of France showing no growth in Q2, and spark questions about the ability of the eurozone's major economies to support the weaker ones.
Sarkozy, Merkel to meet amid fears for euro's future. Nicolas Sarkozy and Angela Merkel are due to meet today amid fears that if they don't move towards closer monetary union through the creation of eurobonds, the eurozone could break apart. Merkel and much of Germany are opposed to collectivizing debt, and the issue won't apparently be on the agenda today. But some believe eurobonds are the only way for distressed nations to obtain affordable financing. That was brought home yesterday when the ECB disclosed it spent €22B ($32B) last week propping up Spanish and Italian bond prices.
Wal-Mart profit rises 12.4%. Wal-Mart (WMT) beat Street estimates in Q2 as diluted EPS rose 12.4% to $1.09 and revenues climbed 5.5% to $108.6B. Most of the company's operations made contributions, with Walmart International increasing its net sales 16.2% to $30.1B, although U.S. sales fell 0.9% The retailer raised its full year EPS guidance range to $4.41-$4.51.
Home Depot tops forecasts, ups guidance. Home Depot's (HD) Q2 earnings beat expectations as net profit climbed to $0.86 per diluted share from $0.72 and sales increased 4.2% to $20.2B, with results "driven by a rebound in our seasonal business, storm-related repairs and strength in our core categories." Home Depot also raised its 2011 profit guidance and now expects EPS from continuing operations "to be up approximately 16% to $2.34" vs. consensus of $2.30. Shares +2.9% premarket.
Android rivals support Google-Motorola deal. Handset makers that use Android have released statements supporting Google's (GOOG) proposed $12.5B purchase of Motorola Mobility (MMI) amid reassurances from Google it won't show favoritism to the unit. The endorsements from Samsung (SSNLF.PK), Sony Ericsson (SNE ERIC), HTC and LG Electronics comes because the acquisition provides Google with a portfolio of over 17,000 patents it can use to defend Android device makers in an increasing number of IP disputes with Apple (AAPL) and Microsoft (MSFT).
Buffett's latest trades. Verisk Analytics (VRSKjumped 6.2% in post-market trading and Dollar General (DGclimbed 3.9% after Berkshire Hathaway's (BRK.A) latest 13-F filing showed it bought stakes in the companies. Berkshire also increased its holdings in Wells Fargo (WFC) and Mastercard (MA), but reduced its position in Kraft (KFT). Of other major investors, John Paulson slashed his holdings in Bank of America (BAC) and Comcast (CMCSA) but increased his positions in Capital One (COF) and Wells Fargo (WFC), while Carl Icahn reported new stakes In Vector Group (VGR) and El Paso (EP).
Carlyle in talks to buy PPD. Pharmaceutical Product Development (PPDIsurged 18.5% yesterday following a report that Carlyle is in talks to buy the drug R&D outsourcing firm, possibly for up to $4.3B. PPD's shares closed at $31.51, valuing the company at $3.59B. Although the talks are exclusive, Carlyle is negotiating with other private-equity firms about joining it in buying PPD.
Major insurers may escape surcharges. Sources say insurers assessed as "systemically important" will avoid the type of capital surcharges facing banks under rules being formulated to ensure that no insurer is too big to fail. The reason: insurers aren't exposed to a run on their money in the same way as banks. The proposed regulations will probably be finalized by the G20 meeting in Mexico next year, and would be designed to prevent a repeat of the problems caused by AIG's failure.
Sky goes dark on Evergreen Solar. Evergreen Solar (ESLR) filed for Chapter 11 bankruptcy, surrendering in its battle against strong Chinese competition and slumping European demand. Shares in the solar-panel maker reached an all-time high of $113.10 in late 2007 on optimism about its String Ribbon wafer technology. However, a huge fall in silicon prices meant the company's advantage became less meaningful. Shares yesterday fell from $0.42 to $0.18.
Moody's cuts U.S. growth outlook. Moody's didn't downgrade the U.S., but it did lower its growth forecast to 2% for the rest of the year and 3% for next year from a prior estimate of 3.5% growth for H2 and for 2012. The likelihood the U.S. will fall back into recession in the next year is one in three, with the odds increasing if stocks drop. Moody's cited the disputes over the U.S. debt ceiling and the EU debt crisis as leading factors for its gloomier outlook.
High-frequency traders make high profits. High-frequency traders made record profits during last week's violent market swings after months of poor returns. Research firm Tabb Group estimates they made $60M in U.S. stock exchanges on August 8, when the Dow closed down 5.5% and the NYSE composite volume saw its fourth-biggest trading day on record, and $40M-$56M on other days. However, regulators are scrutinizing some of the tactics involved for possibly distorting prices and hurting other investors, including the making of large batches of lightning-fast orders and rapid cancellations.
Feds make further progress in fraud battle. Mark Kaiser, the former marketing head at U.S. Foodservice, faces almost five years in prison after pleading guilty to participating in an $800M securities fraud. Separately, Joseph Skowron, a former manager at hedge fund FrontPoint Partners, admitted insider trading by using tips from a French doctor working on clinical drug trials. Skowron also faces up to five years in prison. Kevin Cassidy, the former CEO of commodities broker Optionable, admitted to being involved in a plot to inflate the value of Bank of Montreal's (BMO) natural-gas trading portfolio. Cassidy faces just over three years.


Barclays: upgraded VMW
BB&T: upgraded WSO
Benchmark: upgraded HES
Brean Murray: downgraded TRIT
Credit Suisse: upgraded AGN
Evercore: downgraded MMI
Goldman Sachs: upgraded EIX; downgraded MMI; added PPL, EE to conviction buy list
Oppenheimer: downgraded ALB
Piper Jaffray: upgraded ALNY
Rodman & Renshaw: downgraded SIHI
Societe Generale: downgraded RIMM
UBS: downgraded MMI


*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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