Friday, August 19, 2011

Morning Note

August 19, 2011

US Equity futures are pointing to a sharply lower opening following another selloff inAsia and a continued sell-off across the Eurozone. Today, like yesterday the markets are bracing for a global slowdown, continued funding issues with European banks, and a credible solution to the ongoing sovereign debt crisis.

Sep WTI crude ($0.15) to $82.27

Natural gas +$0.05 to $3.94

Gold +$30.42 to $1855.05

10-year yield 2.078%
30-year yield 3.399%

Asian Markets

Asian markets fell early this morning, with banks hardest hit on concerns about a slowdown in the US economy. But most markets stabilized after the initial declines, avoiding further drops until late in the day. Resource stocks took it in the chin on fears that demand for commodities will ease.
Energy and cyclical stocks led China down, though its dip was the smallest in the region. Thailand fell. Losses in Japan widened late in the trading day when a 6.8-magnitude earthquake hit Tohoku. In Hong Kong, Esprit (330.HK) fell 4% on a report that it may sell its North American operations. Banks and miners led Australia down.South Korea fell broadly, dropping more than 6% and causing the bourse to suspend program trading. Stocks focused on the local market suffered in response to higher household debt; But seen as a defensive play. The yen is trading at 76.35 to the US dollar.

European Markets

European equity markets opened modestly lower but quickly extended declines as risk aversion pushed indices lower. Banks remained under pressure on concerns over their funding situation, whilst technology +0.8% is the only sector trading higher after Hewlett-Packard (HPQ) announced it will acquire Autonomy Corp (AU.LN) for £25.50/share in cash, Autonomy up +75.0% to £25.01, one of just a handful of stocks in the Eurostoxx600 trading higher. UK July public finances were better than expected and Spain is expected to announce further austerity measures later today, though with a general election in Nov the size of the package is expected to be modest ~€5B in savings. Greece says completion of its second bailout process is not expected before mid-Oct. Major indices currently trade above session lows that saw FTSE100 down (3.2%), DAX (3.7%) and CAC (3.3%). Declining sectors lead advancers 18-1 with auto (4.5%), chemical (3.0%) and basic resources (2.7%) leading fallers, whilst utility (1.0%), healthcare (1.9%) along with technology lead outperformers. US futures trade lower

Today's Economic Releases (Eastern Time)

04:00 France CB Leading index (Jun); actual 0.5%; consensus n/a 

Today's Key Events (Eastern Time)

08:30 Fed's Dudley speaks
13:45 Fed's Pianalto speaks financial services industry and outlook for growth
—:— Bank of America Merrill Lynch Asian Technology Tour
—:— Global Hunter Securities with Littelfuse
—:— National Investment Banking Association Conference 

Company Specific News

ADSK (Autodesk reports Q2 EPS $0.44 ex-items vs Reuters $0.41. Reports Q2:
Revenues $546.3M vs Reuters $539.3M)
ARO (Aeropostale reports Q2 EPS ($0.02) ex-items Reuters ($0.03). Reports Q2: Figure excludes a $0.06 benefit; including the benefit, EPS were $0.04 vs. guidance of $0.02-0.03 on same basis Revenues of $468.2M were previously reported on 4-Aug Q3 Guidance: EPS $0.09-0.15 vs Reuters $0.30)
CRM ( reports Q2 EPS $0.30 ex-items vs Reuters $0.30. Reports Q2: Revenues $546.0M vs Reuters $528.8M)
FL (Foot Locker reports Q2 EPS $0.24 vs Reuters $0.12. Reports Q2: Revenues $1.28B vs Reuters $1.18B)
GPS (Gap reports Q2 EPS $0.35 vs Reuters $0.33. Reports Q2: Revenues $3.39B as reported on 4-Aug FY Guidance (Jan 2012): Reaffirms EPS $1.40-1.50 vs Reuters $1.50)
INTU (Intuit reports Q4 EPS $0.02 ex-items vs Reuters $0.00. Reports Q4:
Revenues $593.0M vs Reuters $581.4M)
MENT (Mentor Graphics reports Q2 non-GAAP EPS $0.11 vs Reuters $0.05. Reports Q2: Revenues $213.7M vs Reuters $210.0M)
MRVL (Marvell reports Q2 EPS $0.38 ex-items vs Reuters $0.37. Reports Q2:
Revenues $897.5M vs Reuters $889.0M)
SCSC (ScanSource reports Q4 EPS $0.71 vs Reuters $0.64. Reports Q4: Revenues $734.9M vs Reuters $721.5M)
WTSLA (Wet Seal reports Q2 EPS $0.03 ex-items vs Reuters $0.02. Reports Q2:
Revenues $148.8M)
YGE (Yingli Green Energy reports Q2 EPADS $0.34 ex-items vs Reuters $0.27. Reports Q2: Revenues $680.6M vs Reuters $616.0M)

Newspaper Articles / Headlines

Apple (AAPL), HTC (2498.TT) Q4 chipset orders to be down sequentially.Sources at Taiwan-based chipset makers tell DigiTimes that the companies will probably hit their targets for Q3, but they are reducing their orders for Q4 because they are worried about the economic situation. Sources say HTC has cut its internal shipment target for the year from 70M units to 50-60M units.

Financial Times

Bunge to invest $2.5B in Brazil by end of 2016. Citing a statement, the FT reports that the investment will increase Bunge's crushing capacity in the country by 50%.

New York Post
GS Direct, Veritas Capital hope to sell Global Tel Link for $800M. The NY Post reports that the partners have owned the prison phone service provider for only 2.5 years. Global Tel Link, which partners with telecom providers to provide phone service, generates EBITDA of $125M; no buyers are named.
- Google paid $100M for Dealmap. Terms were not revealed when the purchase was announced 1-Aug.

New York Times
- Verizon customers complain as strike drags on. Some customers are reporting significant delays repairing lines or getting new ones installed
Companies such as Time Warner Cable (TWC) and Cablevision (CVC) are trying to take advantage by offering speedy service and increasing the number of technicians in the field.
NYT discusses continuing fears on European banks and contagion to US andUK banks. The NYT reports that fears are growing after a bank borrowed money from the ECB in a mostly unused facility credit-default swaps are rising on major banks the short-selling ban on financials in some countries is exacerbating selling in other markets.

Wall Street Journal
- Apple looks for trial production of iPad 3 in October. The article adds a small amount of color to the 16-Aug DigiTimes article. Citing sources, the WSJ reports: Apple has ordered key components for the device, including parts to make about 1.5M units in Q4. The official launch will be in early 2012.
Target launches new website to catch the growth in online retailing. The WSJ, citing the company, reports that the company has spent the last two years making the site making it easier to shop and a faster checkout
previously, Amazon (AMZN) handled all the operations for Target's online sales but now Target will run the whole operation itself and will no longer sell its goods via Amazon
- Volkswagen executive says sees no slowdown in demand. The WSJ, citing deputy supervisory board chairman Bernd Osterloh, reports that despite signs of an economic slowdown in Europe and the US, demand for its cars is holding up with the company introducing extra shifts to meet demand the company is struggling to keep up with demand and its order intake is enough to keep the company in full production for the rest of the year
American Axle closes another plant in blow to UAW. The WSJ reports that the company says it is closing the New York gear-making plant after 25-Feb after union memebrs failed to ratify a new contract last month. The decision puts more pressure on the UAW which is fighting to protect job security in the US while being asked to lwere wages by companies so can compete better.
- WSJ thinks Hewlett-Packard is paying too much for Autonomy (AU.LN). A "Heard on the Street" column likes the purchase, but not at this price, saying the multiple doesn't really make sense, since Autonomy's growth has tended to come from acquisitions.
WSJ is positive on United Technologies. A "Heard on the Street" column says that the stock is trading at an attractive mulitple, and UTX's exposure to energy efficiency makes it a smart play.
WSJ is cautious on Chinese internet stocks. A "Heard on the Street" column says that Baidu (BIDU) and Sina (SINA) have done well so far, but that simply increases the chance that state regulators will change the rules that such companies play by.
Bank of America may cut more than 10K jobs. CEO Brian Moynihan apparently sent out a memo this evening, though it's not clear how detailed it was. People familiar with the situation tell the WSJ: The bank is firing 3,500 this quarter, including positions in investment banking and trading.
Thousands more jobs will be eliminated as part of "Project New BAC," whose scope probably won't be determined for a few weeks. Consumer banking, mortgage, legal, marketing, and HR will be targets, though one source says the cuts may be stretched over three years. Project New BAC's second phase will probably start in Q4 and target investment banking, trading, wealth management, and corporate banking.
Private equity taking greater beating than rest of market. The article is a summary, breaking no news. The WSJ reports that private-equity firms are suffering bigger losses than everyone else because: A down market generally makes it difficult to list companies and reap large gains Recent listings are suffering, which makes additional sales of shares harder The article also notes that private equity offers the positives of large dividends, and the potential to buy targets cheaply. People close to the matter say Carlyle Group still plans to list, which Bloomberg reported 17-August.

HP in massive revamp. In one of the most dramatic restructurings in corporate history, HP (HPQ) may sell or spin off its mammoth PC division, and it plans to close its tablet computer and smartphone business. The company also intends to buy cloud search-software specialist Autonomy (AUTNF.PK) for about $10B. HP, the world's top computer maker, earned $40.74B in revenue last fiscal year from the PC unit but it is the company's least profitable business. The discontinuation of the smartphone and tablet operations comes just two years after HP spent $1.8B on Palm and follows poor sales of the TouchPad tablet. The restructuring and increased focus on the corporate market signals HP's surrender in the fight with Apple (AAPL) for consumers and marks a similar trajectory to IBM (IBM). HP also reported that FQ3 adjusted EPS rose to $1.10 from $1.08, beating expectations, while revenue inched up less than 2% to $31.2B. However, HP gave guidance below Street estimates. Shares fell 10.2% premarket.
U.S. stocks set for further falls as Europe sinks. U.S. stock futures were down premarket, and following European and Asian shares lower after more sharp losses yesterday on worries about global growth and the health of Europe's banks, which suffered again today. Yesterday's drops were exacerbated by disastrous Philadelphia Fed data not seen since the worst of the recession, as well as an unexpected spike in inflation. In reaction, 10-year Treasury yields fell below 2% to their lowest levels since the 1960s. The gold rush has continued as well, with futures today reaching another new high of $1,872 an ounce. (See below for more details.)
Sprint in talks to buy 100% of Clearwire. Sprint Nextel (S) is reportedly in talks with Comcast (CMCSA), Cox and Cablevision (CVC) about a possible investment in Sprint that would give it the money to buy the shares in Clearwire (CLWR) it doesn't own. Alternatively, the cable companies could invest in Clearwire through Sprint. Clearwire needs funding to undertake a $600M upgrade of its network to better compete with AT&T (T) and Verizon (VZ). A deal would also help Sprint and the cable companies in their rivalry with the big two carriers.
BofA to slash up to 10,000 jobs. Bank of America (BAC) reportedly intends to cut 3,500 jobs this quarter as part of a larger restructuring that may see at least 10,000 positions - 3.5% of the firm's workforce - eliminated. The plan, known as "Project New BAC," is a step towards the goal of CEO Brian Moynihan to reduce annual expenses by $6B. The staff reductions add to a wave of layoffs across the global banking industry, with HSBC (HBC), for example, intending to cut 30,000 jobs. BofA shares -2.85% premarket.
National Archives criticizes SEC over document destruction. Despite the SEC saying the destruction of documents relating to thousands of preliminary investigations was not illegal, the National Archives & Records Administration said yesterday that the agency "did not have authority to dispose of" the records. NARA also said it is concerned that the SEC has been slow in creating schedules over which records to keep or discard, warning that such records "remain at risk" even though the SEC said it ended the now controversial disposal policy last year.
Liberty invests $204M in Barnes & Noble. Liberty Media (LCAPA) has abandoned its attempt to purchase Barnes & Noble (BKS) and instead opted to invest $204M in the book retailer in return for a 16.6% stake. While the deal will be dilutive to shareholders, the money will enable Barnes & Noble to spend more on its Nook e-readers as it battles Amazon (AMZN), Google (GOOG) and Apple (AAPL) in the market for online books. Barnes & Noble shares rose 3.4%post-market.
GAP's profit falls but beats estimates. GAP's (GPS) Q2 EPS fell to $0.35 from $0.36 a year ago but topped analyst forecasts while revenue rose 2% to $3.38B, with margins suffering from deep discounting and rising production costs. GAP's results are much weaker than many of its peers, several of whom have increased profits and pushed through price hikes to offset higher expenditures. GAP reiterated its FY EPS forecast of $1.88-$1.93 but warned that shoppers' confidence will probably worsen in H2. Still, shares rose +3.1% post-market.
NY AG subpoenas natural gas companies. New York AG Eric Schneiderman has reportedly sent subpoenas to Range Resources (RRC), Cabot Oil & Gas (COG) and Goodrich Petroleum (GDP) requesting information about formulas used to predict gas output from their wells and their assumptions about drilling costs. The subpoenas are part of a probe into whether the companies have accurately forecast to investors the prospects for their natural gas wells, with Schneiderman also widening an existing inquiry into Chesapeake Energy (CHK). His investigation is in addition to one by the SEC.
Pressure increases on Lagarde in French probe. A report recommending an investigation of IMF Chief Christine Lagarde from when she was French Finance Minister has found that she "seems to have personally contributed to events" that led to the approval of a €403M ($577M) settlement to a political supporter. Lagarde is now being probed for "complicity in forgery" and/or "complicity in misuse of public funds," and faces 10 years in prison and a fine of €150,000 if found guilty. The investigation will decide whether the court should try Miss Lagarde or drop the charges.
Japan's Kan set for exit. Japanese prime minister Naoto Kan could step down as early as next week if Japan’s lower House of Parliament today approves a bill, as expected, to subsidize renewable energy. The measure is the last of three Kan said must be passed before he would resign.
Spain to announce more austerity. Spain's government is due to unveil further austerity measures of around €5B ($7B) as it looks to reassure debt markets but avoid the kind of cuts that would hurt the chances of the ruling socialists winning November's election. Although the savings are comparatively small, they could offset any overspending by Spain's 17 autonomous regions, which has been a market concern. Parliament is due to vote on the proposals today.
Pennsylvania bank closed. Regulators have shut Public Savings Bank in Pennsylvania, the 65th closure this year. The estimated cost to the FDIC's insurance fund is $11M. 


Barclays: upgraded LULU
Berenberg: downgraded TIF
Cowen: upgraded CERN
Deutsche Bank: downgraded HPQ
FBR Capital: downgraded GET
First Analysis: upgraded INTU
Janney Capital: upgraded G
Jefferies: upgraded RIMM
JMP Securities: downgraded CREE
JP Morgan: upgraded GWR
Keefe Bruyette: upgraded VRSK
KeyBanc: upgraded COH; downgraded LULU
Morgan Keegan: upgraded CMG
Oppenheimer: downgraded MMI
RW Baird: downgraded HPQ
Sterne Agee: upgraded BKE
ThinkEquity: downgraded LDK
Ticonderoga: upgraded APC
UBS: downgraded HPQ


The VIX rose 11pts, or 25%, to 42.67, its highest close since last Monday’s 48.00. While SPY vol term structure inverted dramatically. However, it is interesting to note that most of this inversion came from a massive increase in Aug & Sept Vol but Jan13 vol was largely unchanged. We still believe that Jan13 options are largely under-priced on a vol basis.

Of the 118 consumer names in the SPX, 22, or 20%, have yet to report 2Q earnings. Given how stocks have reacted on a cautious outlook (ANF, TGT are prime examples), we think buying protection or replacing stock w/ calls into earnings remains a wise strategy for even favored longs as it’s difficult to see how guidance will be upbeat given the current macro backdrop. Consumer co’s scheduled to report earnings pre-Sept expiration w/ liquid option markets include: BBY, BIG, HRB, TIF, CPB, HNZ, HRL, and KR.
For sector-wise protection, consider the

XRT Sept 43/39 Put Spread for $1.04 (2.85x1 max net payout)
XLP Sept 29/26 Put Spread for 50c (5x1 max net payout) 

 *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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