Tuesday, August 23, 2011

Morning Note

August 23, 2011

US Equity futures are all trading sharply higher following slightly better PMI data out of China as well as Germany, even though German ZEW sentiment data was below expectations. Additionally, the markets continue to anticipate that Fed Chairman, Bernanke will pull another rabbit out of his hat and offer further stimulus at the upcoming Economic Symposium in Jackson Hole this Friday. Given the recent correction it appears investors are doing a little bargain hunting as well.

Libor fixings 

- Overnight Libor: Dollar: 0.144% vs prior 0.143%; Sterling: 0.580% vs prior 0.580%; Euro: 0.835% vs prior 0.834%
- 1-month Libor: Dollar: 0.218% vs prior 0.217%; Sterling: 0.655% vs prior 0.654%; Euro: 1.294% vs prior 1.293%
- 3-month Libor: Dollar: 0.312% vs prior 0.308%; Sterling: 0.877% vs prior 0.872%; Euro: 1.480% vs prior 1.478%

WTI +$1.06 at $85.48

Nat'l gas +$0.019 at $3.908

Spot Gold ($13.00) at $1883.79

10-year yield 2.1407%
30-year yield 3.4556%

Asian Markets

Resource stocks lifted Asia today after the HSBC Flash Manufacturing PMI for China beat expectations and came in higher m/m, though it still indicated a contraction. South Korea rebounded from three days of losses, but foreign investors continued to sell out of the market. Construction companies rose strongly on hopes that they might capitalize on infrastructure demands in Libyaif the Gaddafi regime is overthrown. Bargain-hunting saw carmakers go up 9-10%. Carmakers and LCD makers lifted Taiwan. Resource stocks lifted Australia. In Hong Kong, oil majors rose in good volume as oil prices rose. China rose. Property companies went up on a report that the country plans to limit home purchases in second- and third-tier cities this month, and IT shares gained on thoughts that government policies may soon benefit the sector. Japan rose after Prime Minister Naoto Kan told cabinet members he would resign within days; a new leader is expected to be chosen 30-Aug. HSBC August Flash China Manufacturing PMI 49.8 vs 49.3 seq. The yen is trading at 76.65 to the US dollar.

European Markets

European equity markets opened higher and extended gains as Chinese and German manufacturing PMI data was better than expected, aiding commodity prices and leading to basic resources being amongst the leading sectors. The regions corporate results were generally well received. French and German finance ministers meet today to discuss the EuroZone crisis post the meeting of Chancellor Merkel and President Sarkozy last week. Indices pared early gains and currently trade slightly below session highs. France Aug preliminary: Manufacturing PMI 49.3 vs consensus 49.7, Services PMI 56.1 vs consensus 53.5. Germany Aug preliminary: Manufacturing PMI 52.0 vs consensus 50.8, Services PMI 50.4 vs consensus 52.0. EuroZone Aug preliminary: Manufacturing PMI 49.7 vs consensus 49.5, Services PMI 51.5 vs consensus 50.9. UK Jul mortgage approvals for home purchases 33,417 vs prior 32,123 and year-ago 30,695. German Aug ZEW current conditions 53.5 vs consensus 87.0 economic sentiment (37.6) vs con (25.0). The pound and the euro are trading at $1.6549 and $1.4474 respectively.

Today's Economic Releases (Eastern Time)

03:00 France Preliminary Manufacturing PMI (Aug); actual 49.3; consensus 49.7
03:30 Germany Preliminary Manufacturing PMI (Aug); actual 52.0; consensus 50.8
04:00 Eurozone Preliminary Manufacturing PMI (Aug); actual 49.7; consensus 49.5
05:00 Germany ZEW Survey Economic Sentiment (Aug); actual (37.6); consensus (25.0)
05:00 Germany ZEW Survey Current Situation (Aug); actual 53.5; consensus 87
05:00 Eurozone ZEW Survey Economic Sentiment (Aug); actual (40.0); consensus n/a
05:00 Eurozone ZEW Survey Current Situation (Aug); actual (19.1); consensus n/a
07:45 US ICSC-Goldman Chain Store (20-Aug); consensus n/a
08:55 US Redbook Chain Store (20-Aug); consensus n/a
10:00 US New Home Sales (Jul); consensus 311K
10:00 Eurozone flash Consumer Confidence (Aug); consensus n/a
16:30 US API Crude Inventories (19-Aug); consensus n/a
22:30 China PMI Manufacturing (Aug); consensus n/a 

Today's Key Events (Eastern Time)

10:00 Duke Energy Special Shareholder Meeting vote on proposed merger with Progress Energy: 800.862.9098 begin_of_the_skype_highlighting            800.862.9098      end_of_the_skype_highlighting/Intl 785.424.1051 begin_of_the_skype_highlighting            785.424.1051      end_of_the_skype_highlighting
—:— American Society of Retina Specialists ~ ASRS
—:— Capstone with Extreme Networks
—:— Global Hunter Securities with Panhandle Oil & Gas
13:00 Energen Investment Community Meeting

Company Specific News

HNZ (Heinz reports Q1 EPS $0.78 ex-items vs Reuters $0.76. Reports Q1: Revenues $2.85B vs Reuters $2.79B)
MDT (Medtronic reports Q1 EPS $0.79 ex-items vs Reuters $0.79, revenues $4.05B vs Reuters $3.98B; reaffirms EPS $3.43-$3.50 which includes approximately $0.04 to $0.06 of dilution from the Ardian acquisition vs Reuters $3.46)
TSL (Trina Solar reports Q2 EPS $0.17 vs Reuters $0.39. Reports Q2: Revenues $579.5M vs Reuters $590.3M)
WSM (William-Sonoma reports Q2 EPS $0.37 vs Reuters $0.36)

Positive News
GD (General Dynamics awarded $900M ID/IQ Air Force contract. The maximum indefinite-delivery/indefinite-quantity contract is to allow the Global Broadcast Service Joint Program Office to acquire approximately 1,500 new receive suites, and approximately 1,100 retrofit kits, for fielded systems.)

Corporate Actions
ANR (Alpha Natural Resources announces new $600M share repurchase authorization. The authorization remains in effect through December 31, 2014)
SIRO 9 Sirona Dental Systems board authorizes $100M share repurchase)

CCFI (Community Choice Financial files $230M IPO through Credit Suisse, Jefferies and Stephens)

OCR (Omnicare (OCR) proposes to acquire PharMerica (PMC) for $15.00 per share in cash)

Other News
Weekly USDA crop progress report says 57% of the corn crop is in good or excellent condition. Compares to 60% last week and compares to 70% in prior year.
Corn: 33% of the corn crop is dented vs 17% last week and a 37% average of 2006-10 period
Cotton: 94% of cotton crop is setting bolls vs. 88% last week and 90% average of 2006-10 period
31% of the cotton crop cotton is in good or excellent condition compared to 31% last week and 62% y/y
Soybeans: 83% of soybean crop is setting pods vs 70% last week and 88% average of 2006-10 period
59% of the soybean crop is in good or excellent condition compared to 61% last week and 64% y/y
Rice: 82% of rice crop is headed vs 73% last week last year and 86% average of 2006-10 period
67% of rice crop is in good or excellent condition compared to 66% last week and 68% y/y
Winter wheat: 94% of winter wheat crop has been harvested vs. 91% last week and 97% average of 2006-10 period
Spring wheat: 29% of spring wheat has been harvested vs. 13% last week and 56% average of 2006-10 period
62% of spring wheat crop is in good or excellent condition compared to 66% last week and 82% y/y
Figures are as of week-ending 21-Aug. Data is collected weekly and reported on the first business day of every week after 16:00 ET. AGCO, AGU, CF, CNHDE, IPI, MON, MOS and POT are some of the stocks leveraged to the report.

Newspaper Articles / Headlines

ARS Technica
- Legal decision makes it look like music-locker operators don't need licenses from record labels. Ars Technica reports that a federal judge found today that MP3tunes was guilty of copyright infringment, but that the Digital Millennium Copyright Act basically leaves the burden on copyright holders, not locker operators, to find out if the files being stored are legal or not.

- InterDigital Communications traded higher today on rumors Qualcomm (QCOM) is considering bidding for it. In an article published at 14:30, Tech Trader Daily reports that a price as high as "an unbelievable $115/share" was mentioned, but analysts generally dismissed the rumor on the basis that Qualcomm has little to gain from buying IDCC.

- Morgan Stanley got $107B in emergency loans from Fed to survive financial crisis. Data from various public sources reveals: Though MS never told investors how much it was borrowing, it ended up leading the standings with its figure from September 2008. Citi (C) finished second, reaching a peak of $99.5B in January 2009. The voluminous article notes that no major bank makes a practice of announcing its hedge-fund balance.

Daily Mail
- British oil companies lick chops at prospect of getting (back) into Libya.
The Daily Mail really reports nothing that isn't common sense. BP (BP.LN) and Royal Dutch Shell (RDSA.LN) want relationships with whoever ends up in charge. Petrofac (PFC.LN) plans to enter the country for the first time when oil majors do.

- DRAM makers worry about effect if Samsung Electronics (005930.KS) buys Hewlett-Packard's PC unit. Industry sources tell DigiTimes that Samsung, which has more than 40% of the global DRAM market, basically sources from its own supply chain, so H-P suppliers like Nanya Technology (2408.TT) would be likely to lose out.

Economic Times
- Sanofi in advanced talks to purchase majority stake in India's Universal Medicare. Universal Medicare is a nutraceuticals company, and maker of codliver oil capsules brand Seacod. The purchase will help to bolster Sanofi's OTC business in India. Citing a person close to the deal, the Economic Times report that Sanofi could purchase either a majority stake of key brands. Universal is reportedly valued at ~Rs450 crore, and has annual sales of Rs100 core. Universal has also reportedly held talks with Abbot (ABT) and GlaxoSmithKline (GSK), though executives from Sanofi, Universal, and the investment banking firm, O3 Capital, which has the mandate for the sale, declined to comment.

Financial Times
- Union Pacific's 2010 returns on invested capital exceeded its cost of capital. The FT reports that the ratio plays a key part when regulators look at railway rates for customers. The article says executives at the US's four largest railway companies all say more containers are moving to rail from the road thanks to high gas prices.
- Man Group not planning any acquisitions along lines of last year's $1.6B purchase of GLG Partners. The information is contained in an article whose focus is that Jonathan Sorrell is leaving Goldman Sachs (GS) to become Man's head of strategy.
- McGraw-Hill board decides to replace Standard & Poor's president Deven Sharma. People familiar with the matter tell the FT: The company has been looking for a replacement for Sharma for months, since it split its data, pricing, and analytics business from its ratings unit; his departure is unrelated to the company's downgrade of US long-term debt or subsequent reports that the Justice Department is investigating S&P for its mortgage securities ratings Sharma will serve as an adviser to McGraw-Hill until the end of the year He will be replaced as S&P president by Citibank (C) COO Douglas Peterson, who the company hopes will be able to soothe ruffled feathers in Washington DC

- Mitchells & Butlers interim chairman Bob Ivell meeting shareholders to address concerns over resigning directors. The Guardian reports that Ivell promised the Association of British Insurers that the company would take stronger steps to get some independent directors on the board; there are fears that minority shareholders have too much control right now. Sources give starkly different opinions of opinions about the meeting, calling it either "routine" or "highly unusual" for a new chairman.

- Sberbank may buy Bank Millennium (MIL.PW), Kredyt Bank (KRB.PW). An investment banking source familiar with the situation tells Kommersant that a purchase will not be uncontested, particularly for Millennium, though no other potential buyers are named. No potential prices are given.
Banco Comercial Portgues (BCP.PL) owns 66% of Millennium, and KBC Groep (KBC.BB) owns 80% of Kredyt Bank; the majority holders are selling out to satisfy new requirements. Kommersant reports that Sberbank is forecast to turn a RUB270B net for 2011, but it is not clear if that refers to a company's projection or analysts' estimates

London Telegraph
- Ladbrokes (LAD.LN) 75p/share bid for Sportingbet now one step closer. The article doesn't break any news. The Telegraph reports: Sportingbet's purchase of Centrebet (CIL.AU), approved yesterday, will raise its proportion of earnings in regulated markets. Sportingbet is in talks about selling its Turkish operations to Gaming VC (GVC.LN) for £50-70M in what would amount to a reverse takeover; Ladbrokes has deemed the disposal necessary if it is to buy Sportingbet.
- ARM Holdings CEO Warren East says almost no one could gain by buying his company. In an interview, East says merely changing owners would make ARM less valuable. He says Intel (INTC) would see significant regulatory hurdles to a purchase, and a buy by Apple (AAPL) would be pointless.

Los Angeles Times
- DC Comics moving simultaneously ahead and back. The LA Times reports that in an effort to appeal to more than just die-hard comic-book fans, the company plans to start making its issues digitally available at the same time that hard copies arrive in stores. It also plans to re-release numerous titles from issue #1, but provide new costumes, new origins, and simpler stories.
- Anschutz Entertainment Group to introduce Axs ticketing service 27-Aug - LA Times (08/22/2011 22:57 ET)
AEG president Tim Leiweke says the move away from using Ticketmaster at all of its venues will take two years; AEG is Ticketmaster's largest third-party client.

New York Post
- Ron Burkle has made offer to take American Apparel's debt. Sources tell the NY Post: If Burkle ends up with the almost $160M in loans, the $84M portion from Lion Capital might be refinanced to 7% vs its current 18%
But APP has gotten another refinancing offer, so Burkle's is not sure to be accepted Comps are now negative again, after having been +4% y/y for July
EBITDA is nonetheless likely to exceed $20M for the year.
- NY Post columnist bets Goldman Sachs CEO Lloyd Blankfein has hired defense attorney for insider-trading charges (08/23/2011 02:08 ET)
The NY Post column says, "You don’t take the money out of your own pocket for an attorney unless you think you really need one," but it gives absolutely no reason to think the insider-trading idea is fact.

Seoul Economic Times
- Posco to build coal gasification plant in Mongolia next year in 50/50 JV with Mongolian company

- MTS (MTSS.RU), MegaFon could end up with advantage over other 4G players in Russia. Citing sources, Vedomosti reports that a draft decision by the State Committee for Radio Frequencies will reallocate frequencies among four operators in a manner that will give MTS and MegaFon the upper hand in Moscow and its environs. Tele2 Russia (TEL2B.SS) president Dmitry Strashnov expresses disapproval of the plan.

Wall Street Journal
- WSJ advises caution on pay-TV companies. While it suggests the change will be more evolutionary than revolutionary, a "Heard on the Street" column notes that such companies are raising prices in a weak economy, and younger people are also less likely to be addicted to pay-TV.
- ConvaTec bid for Kinetic Concepts may not lead to a superior offer. KCI is concerned about lack of committed financing with regards to ConvaTec's proposal and KCI will look at valuation and deal certainty in ConvaTec proposal.

Washington Post
- CEOs, others buying shares in their own companies. The article is merely a summary, and it points out the Econ 101 concept that if insiders are buying their companies' shares, they probably don't think things are as bad as the public does

Crude rises as Gaddafi's son appears after arrest. Crude oil prices rose amid resistance from government loyalists in Tripoli against the rebel forces, characterized by the surprise public appearance of Muammar Gaddafi's son Saif al-Islam, whom the insurgents said they had captured. The strength of the loyalists surprised some in the market, and Brent crude was +0.1% at 108.96 and WTI was +1.4% at 85.57. Prices were also supported by better-than-expected manufacturing data in Germany and China.
Eurozone, China manufacturing contract. Eurozone manufacturing contracted in August for the first time since September 2009, with flash PMI falling to 49.7 from 50.4 in July. Activity in China's factories also contracted, although PMI increased to 49.8 from July's 49.3 and beat forecasts. Germany's manufacturing sector topped predictions as well and is still growing, albeit at the same rate as in July, while France's service sector unexpectedly picked up pace. HSBC economist Hongbin Qu reckons the China data "provides leeway for the PBOC to keep the current tightening measures in place," as a "hard landing risk is still remote."
UBS to cut 3,500 jobs. Facing increasing regulatory expenses and a record high Swiss franc, UBS (UBS) intends to cut 3,500 jobs in order to save 2B francs ($2.54B) by the end of 2013, with almost half the losses to come from the company's investment bank. The restructuring will cost UBS 550M francs, 450M francs of which the bank will book in H2. UBS joins Goldman Sachs (GS), HSBC (HBC), Credit Suisse (CS) and other major banks in slashing thousands of jobs.
Heinz earnings top forecasts. Heinz (HNZ) FQ1 results beat expectations as revenue grew 14.9% to $2.85B and EPS excluding special charges rose 4% to $0.70. Earnings were "fueled by dynamic growth in emerging markets, and higher global sales of ketchup and the company's top 15 brands." Heinz reaffirmed its FY 2012 EPS outlook of $3.24-$3.32.
S&P chief to quit as shareholders call for breakup. S&P (MHP) President Deven Sharma will step down next month and be replaced by Citibank (C) COO Douglas Peterson. While the announcement yesterday came just weeks after S&P cut the U.S.'s rating, the agency said Sharma's departure had been underway since the start of the year and was unrelated. The disclosure also came on the day two institutional shareholders called for breaking up S&P parent company McGraw-Hill (MHP) into four: education, media & information arm, S.&P.’s ratings & financial business, and S&P indexes.
Bullard: Fed would take action if deflation became a risk. Ahead of Ben Bernanke's much anticipated Jackson Hole speech at the end of the week, St. Louis Fed President James Bullard said the central bank "would definitely take action," which he would support, if U.S. deflation became a risk again. However, Bullard, who is perceived as a hawk, said the concern right now was inflation. Still, if QE3 became necessary, Bullard said the Fed should do it "on a meeting-by-meeting basis," and not commit to "a long string of purchases that may not fit" evolving data.
Japan's Kan set to quit on Friday. Japan PM Naoto Kan is likely to announce his resignation on Friday, with the ruling Democratic Party set to choose the country's sixth leader in five years early next week. The leading candidates to replace Kan include Finance Minister Yoshihiko Noda and Foreign Minister Seiji Maehara, although expectations are low that Japan will gain a stable government. Meanwhile, Noda and Bank of Japan Governor Masaaki Shirakawa made more noises about the strong yen, but whether any intervention will have a lasting impact is questionable.
DOJ: Deutsche Bank was aware of MortgateIT problems. Deutsche Bank (DB) knew in 2006 that MortgageIT, a lender it was preparing to acquire, lied about its mortgages but made the purchase anyway in 2007, the Justice Department said. In an amended $1B complaint, the DOJ said Deutsche Bank was "on notice of and expressly assumed responsibility" for wrongdoing at MortgageIT. The DOJ is suing Deutsche Bank and MortgageIT for allegedly misleading the Federal Housing Administration about the quality of the unit's loans.
ConvaTec bid for Kinetic tops $6.3B ConvaTec's offer for wound-care company Kinetic (KCI) is reportedly worth over 40B Swedish kroner ($6.3B) compared with a proposal from Apax and two Canadian pension funds valued at $5B, or $6.3B including debt. Although the ConvaTec bid is apparently higher, The Wall Street Journal reported that Kinetic may prefer the Apax-led proposal as ConvaTec doesn't have committed financing.
Judge OKs intervention request in BofA settlement. A judge has granted the request of dozens of investors to intervene in Bank of America's (BAC) proposed $8.5B settlement with 22 major institutions that lost money on mortgage-backed securities. BofA did not oppose the request, which came from pension funds, insurers and several Federal Home Loan Banks. A hearing is scheduled for December.
Foster's tries to win over shareholders with $521M. Foster's (FBRWY.PK) plans to return at least A$500M ($521M) to shareholders via a capital reduction or a share buyback as it looks to receive support for its defense against SABMiller's (SBMRY.PK) hostile A$9.5B offer. The U.K. brewer has said it will cut its offer equal to the amount of any dividends paid out.
Deutsche Boerse-NYSE merger passes regulatory hurdle. The U.S. Committee on Foreign Investment has approved Deutsche Boerse's (DBOEY.PK) proposed purchase of NYSE Euronext (NYX). The committee is an inter-agency body that reviews the national security implications of foreign investments in the U.S. Now the deal needs to get past competition authorities in the U.S. and Europe, with the reviews by these agencies expected to take until the year-end. 

Update European Sovereign Debt Crisis

- Greek-Finland deal reopens bailout debate: The FT reported that Greece's new €109B bailout package came closer to falling apart on Monday amid a growing dispute over the collateral deal struck between Finland and Athens. The article noted that the deal has reopened the debate over the entire bailout. The paper added that Moody's warned that the proliferation of collateral requests could sap Greece of financial resources and raised fresh concerns about Eurozone countries' willingness to continue bailing out heavily indebted fellow members.
- Bailouts need collateral: Reuters reported that German Labor Minister Ursula von der Leyen told public broadcaster ARD that future bailouts should only be made against guarantees. She noted that "Several states are making big efforts to service their debt. This must be honored. But to keep up those efforts in the long term, collateral is needed." The article said that one official responded as saying her comments were not the German government's position.
- Greek austerity hits hard: The WSJ noted that Greek households and small businesses have come under heightened pressure from government austerity measures. The paper added that while the government, with support from the EU and IMF, has argued that the changes are necessary to get the country back on its feet, Greece may be pushing toward a political and social crisis. The Journal, which also discussed the collateral complications now plaguing the next bailout package, pointed out that consumer spending has fallen 7% over the last year, while one in four retailers in central Athens has closed. The Athens Chamber of Commerce and Industry estimates that ~80K businesses across Greece have gone bankrupt since the crisis began in early 2010, while ~200K are expected to close by the end of next year.
Spain on track: Reuters reported that Spanish Prime Minister said that the government is on track to meet its target to cut the public deficit to 6% of GDP by the end of 2011. The article noted that he said in Parliament that the budget deficit target will be achieved thanks to new economic measures announced last week, which will also help to create jobs.
- Failure to solve bank crisis haunts markets: Bloomberg said that four years since the global credit crisis began, European lenders remain dependent on central bank liquidity, weighing on markets and economies worldwide. It added that such support is needed as worries about a recovery slowdown and sovereign debt exposure have prompted European banks to curb lending, stockpile dollars and hoard cash at the ECB. The article, which pointed out that signs of distress are widespread and mounting, noted that not enough has been done by politicians, regulators and bankers to address the root cause of the problem: that some European lenders are at a growing risk of insolvency.
- European banks will have to pay up to borrow $100B: Bloomberg noted that European banks with more than $100B of cash to raise by the end of the year will have to pay up due to investor concerns about their credit risk. The article pointed out that the cost of insuring the senior and junior bonds of 25 banks and insurers has doubled since April to record levels, while the Euribor-OIS spread, a gauge of banks' reluctance to lend to each other, reached the widest since April 2009 this month. In addition, the cost for European banks to fund in dollars is hovering near a 2 1/2-year high.

Update US Economy

- White House to scale back business regulations: The WSJ reported that the Obama administration will release final plans today for ending or cutting hundreds of business regulations. The paper added that the move is designed to reduce the burden on business and dampen criticism that the White House is not cognizant of business concerns. The White House estimates that about a dozen of the changes will save businesses ~$10 over five years. However, the Journal also discussed thoughts that the changes do not go far enough and do not effect some of the major initiatives from the administration that have drawn criticism from businesses.
- Obama looks to Buffett for advice: Bloomberg reported that President Obama talked to Warren Buffett about how to bolster job creation and economic growth while preparing for a post-Labor Day speech in which he will unveil measures to stimulate the economy. The article noted that Obama also talked to Ford CEO Alan Mulally about developments in the auto and manufacturing sectors of the economy. Bloomberg reiterated that Obama is considering an expanded infrastructure spending program, tax incentives for hiring workers, a payroll tax cut for employers and worker retraining programs.
- Weaker data triggers cuts to growth estimates: The WSJ said that sluggish economic data and weeks of stock market volatility are prompting forecasters to cut projections for US growth for the second half of the year and beyond. The article noted that some now see the US economy growing at an annual rate of just 1% for the rest of 2011, while as recently as last month, many economists believed that growth would accelerate to a pace of 3% or more. The paper said that while not all signs (ie auto production, claims, profits) are negative, some surveys suggest that consumer and business confidence are lower now than during the depths of the recession in 2008 and 2009.
- Baby Boomer impact on stocks: The WSJ noted that a recent paper from the San Francisco Fed said that the retirement of the Baby Boom generation may remove a key source of support for equities. According to the paper, while the ongoing wave of retirees will not crater the market, it may be “a factor holding down equity valuations over the next two decades". The Journal added that the paper also noted that such demographic shifts may present headwinds today for the stock market's recovery from the financial crisis.
- Obama in tight race against Republican rivals: Reuters, citing a Gallup poll issued on Monday, said that President Obama is in a deadheat with Republican presidential candidates Mitt Romney, Rick Perry, Michele Bachmann and Ron Paul among registered voters.


“Everyone’s Got a Plan ‘Till I Punch Them in The Face”. - Mike Tyson...  We note that the market is getting increasingly desensitized to moves intended to “come to the rescue” of struggling financial markets. Cases in point: a 4.15% drop in the SPX since the Fed’s pledge to keep rates low into 2013 and an 8% drop in the SX5E since the announcement that the ECB would buy Italian and Spanish debt and expand the powers of the EFSF to do the same. For those who believe this Friday’s Jackson Hole Summit will bring news of QE3, we ask what reaction can we expect if it does happen?

Energy vs. Consumer: Moving on to correlation, We note that the jump in SPX pair-wise correlation (30-day in the mid .70's a/o Fri!) has been largely driven by energy and materials. This high level of correlation is probably not sustainable, even if a rebound for the market is not in the cards. Further to this "rel val" mentality, we continue to like long energy vs short consumer discretionary from a directional perspective and believe that the respective volatility complexions in XLE (energy) vs XLY (consumer) set up well to express this view using options. Looking at the options mkt in XLE (energy) vs XLY (consumer), not only is vol cheaper in XLE (.92 vs 1.02 on a 30 day implied/realized basis), but skew is also flatter, meaning u get more juice for out of the money XLE calls than for equivalent XLY calls.
You can leverage both our directional view and the respective volatility complexions of XLE/XLY thru the following trades:

-  Buy the XLE Sep 65-70 call spread for 1.55 (ref $62.73)
-  Sell the XLY Sep 35 calls for .99 (ref $34.15)

HRL – On the back of Ken’s view that upside in HRL may be limited, clients could consider selling covered calls against a position to generate additional yield. Specifically, clients could sell the HRL December 30 Calls at ~80c (~2.9% yield) against a position. If HRL were to trade through the $30 level by December expiration, HRL would be called away at the equivalent of $30.80 (0.6% from Ken’s new PT; 10.1% from last night’s closing price).

ANF – Skew, a measure of implied downside risk relative to implied upside risk, in ANF is ‘sky high’ (at its highest level since 1Q09) as investors have rushed to buy protection/downside exposure in this beloved name (21 Buys vs. 2 Sells). With implied volatility (97th percentile) and skew (97th percentile) at such elevated levels, this sets up an attractive opportunity for bullish investors to sell puts to buy calls or a calls spread. We have seen significant call short-term buying in the name over the last 3 days. Here are two trades we like that come at no cost and provide upside leverage:

Sell Oct 50 Puts to buy Oct 62.50 Calls – Zero Cost – Upside leverage through $62.50, Risk is being put stock at $50 should it trade below that level.

Sell Nov 45 Puts to buy Nov 60/67.50 Call Spread– Zero Cost – Upside leverage from $60-$67.50, Risk is being put stock at $45 should it trade below that level.

WHAT TO WATCH: Sales of new U.S. homes probably fell 0.6 percent in July to a 310,000 annual pace, economists forecast, 10 a.m. Germany�s top constitutional court will rule on Sept. 7 in three cases challenging the country�s participation in the Greek bailout and the euro-area rescue fund. Spanish Prime Minister Jose Luis Rodriguez Zapatero supports amending the nation�s constitution �immediately� to include language forcing budget discipline on governments. Hungary�s central bank may keep its benchmark interest rate unchanged for a seventh month, 8 a.m. China has expanded cross-border yuan settlement to the entire nation.

By Gaurav Panchal and Laura Kaster
     Aug. 23 (Bloomberg) -- Bank of America can digest much
higher mortgage putback losses than currently expected, still
maintain capital levels above Basel III requirements,
Bernstein�s John E. McDonald says.
� BofA only needs to sell China Construction Bank stake from 10.2% (of common shares outstanding) to below 10% to avoid being excluded under Basel III: Bernstein
� Says entire CCB stake, or ~$14b, is included in BofA�s TCE as of 2Q11
� Says capital raise cannot be ruled out with certainty, still a less likely outcome
� Says BofA can�t put to rest concerns about capital levels by a share issuance
� Some level of share issuance dilution already reflected in valuation: Bernstein
� Maintains outperform, PT $13
� BAC potential support levels to watch
� $6.31: 8/8 52-week low
� $4.09: 2/20/09 intraday high
� $3.79: 2/20/09 close
� $2.53: 2/20/09 intraday low
� NOTE: On Aug. 22, BofA may have to raise $40b-$50b, says Jefferies: WSJ {NSN LQCKP96S972D <go>}
� NOTE: BoA will hold China Construction Bank stake in long run {NSN LQBNU66K50XS <go>}

BAC-BREAKING THE BANK.There is an interesting, and very painful, battle now going on at BAC. It appears that short sellers and state attorney generals have banded together to break this bank.  The theory is that if BAC's price can be pushed low enough the bank will be forced to raise capital. Moreover, it is believed that if the bank goes to court to protect its interests it will lose more money than the $20B already set aside for these litigation expenses. In order to break a bank, one has to either cause a run on its deposits or force the immediate repayment of its liabilities. Clearly there is no run on BAC's deposits. It is quite possible that BAC added as much as $20 billion in deposits in the past two weeks. Thus, BAC cannot be broken by traditional means. It can certainly be harmed but not broken.-- BOVE



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