Tuesday, September 13, 2011

Morning Note Sept 13

September 13, 2011

US equity futures are near fair value having rallied back from early morning lows. European markets were initially higher but then turned negative as hopes for China's interest in buying Italian bonds began to fade and attention turned once again to the banking sector as BNP Paribas (BNP.FP) denied they had liquidity problems.

Libor fixings 

- Overnight Libor: Dollar: 0.145% vs prior 0.144% ; Sterling: 0.581% vs prior 0.581%; Euro: 1.161% vs prior 0.816%
- 1-month Libor: Dollar: 0.229% vs prior 0.229% ; Sterling: 0.669% vs prior 0.668%; Euro: 1.284% vs prior 1.285%
- 3-month Libor: Dollar: 0.347% vs prior 0.343% ; Sterling: 0.912% vs prior 0.909%; Euro: 1.478% vs prior 1.479%

Italian Bond auction 

Italy sold €3.865B, Sept 2016 btp bond, gross yield 5.60%, bid-to-cover ratio 1.279
Italian sells €688M Aug 2018 btp auction gross yield 5.59%, auction bid-to-cover ratio 1.61.
Italian sells €740M Feb 2020 btp auction gross yield 5.49%, auction bid-to-cover ratio 1.636.
Italian sells €1.77B Sept 2020 btp auction gross yield 5.47%, auction bid-to-cover ratio 1.486

IEA cuts global oil demand growth forecast by 160,000 bpd for 2011

WTI +$0.64 to $88.83

Natural gas ($0.011) at $3.874

Spot Gold +$1.25 at $1814.99

10-yr yield 1.934%
30-yr yield 3.242%

Asian Markets

Asian shares mostly followed Wall Street’s recovery this morning, but they also mostly fell in the afternoon to finish down. Tech shares were strong in Japan after the news that Broadcom (BRCM) would buy NetLogic Microsystems, but most of the market’s rise may have been due to short-covering in the wake of yesterday’s fall. Energy and resource stocks led Australia up. China fell on the same old worries about European debt. Water-conservancy-related shares supported the market, adding 2-3% when the country said it would increase water-conservancy construction. Cement companies lost 4-5% early on fears that construction is going to go down, but recovered to gain 1-3%. Taiwan fell. Hong Kong was closed for Mid-Autumn Festival; South Korea was closed for Chusok. The yen is trading at 76.97 to the US dollar. Australia August business confidence (10 pts) to -8. August business conditions (2 pts) to -3.

European Markets

European indices opened higher on report China is considering buying Italian debt, and quickly turned negative with banking stocks leading the way down and French banks once again lower. BNP Paribas (BNP.FP) formally denied statements attributed to anonym source in WSJ, the story mentioning the bank's difficulty to borrow in USD. Italian treasury confirmed meeting last week between Economy Minister Tremonti and Chinese delegation though no other no comment was made. German Chancellor Merkel says disorderly process in euro area must be prevented and adds that Greece must fulfill its Troika obligations. IEA cuts global oil demand growth forecast by 160,000 bpd for 2011. UK Aug RPI +5.2% y/y vs consensus +5.1% and prior +5.0%. UK Aug CPI +4.5% y/y vs consensus +4.5% and prior +4.4%. France August final CPI +2.4% y/y vs consensus +2.2% and prior 2.1%. The pound and the euro are trading at $1.5789 and $1.3614 respectively

Today's Economic Releases (Eastern Time)

07:30 US NFIB Small Business Index (Aug); consensus n/a
07:45 US ICSC-Goldman Chain Store (10-Sep); consensus n/a
08:30 US Import Price Index (Aug); consensus (0.8%)
08:55 US Redbook Chain Store (10-Sep); consensus n/a
14:00 US Treasury Budget (Aug); consensus ($132.0B)
16:30 US API Crude Inventories (09-Sep); consensus n/a

Today's Key Events (Eastern Time)

08:00 Hertz Investor Meeting
09:00 Cummins Analyst Meeting
11:00 Cisco Analyst Meeting
11:30 Nielsen Investor Deep Dive
12:00 Avondale Partners call with Universal Display CEO and CFO
12:00 Stantec Investor Day
13:00 Treasury Auction of 10-yr notes
18:00 Collins Stewart Investor Dinner with BioMarin Pharmaceutical
—:— Barclays Capital Global Financial Services Conference
—:— C L King Best Ideas Conference
—:— CLSA Asia Tech Tour
—:— College of American Pathologists ~ CAP
—:— Deutsche Bank Aviation and Transportation Conference
—:— Deutsche Bank Technology Conference
—:— Global Hunter Securities with Callon Petroleum
—:— Goldman Sachs Financial Technology Conference
—:— Heart Failure Society of America ~ HFSA
—:— KeyBanc Basic Materials and Packaging Conference
—:— Microsoft Professional Developers Conference
—:— Morgan Keegan Industrial and Transportation Conference
—:— Morgan Stanley Global Healthcare Conference
—:— Peters & Co. North American Oil & Gas Conference
—:— Raymond James European Investors North American Equities Conference
—:— Rodman & Renshaw Global Investment Conference
—:— ThinkEquity Growth Conference
—:— VeriFone Systems (PAY) will replace The Timberland (TBL) in the
S&P 400 index - after the close

Company Specific News

DIOD (Diodes provides Q3 guidance update; lowers gross margin guidance to 27.5-30.5% from 30.5-33.5%)
FARM (Farmer Brothers Company reports Q4 EPS ($1.47) vs year-ago ($1.40))
ISIL (Intersil guides Q3 revenue $184-188M vs prior $205-213M and Reuters $209.0M)
STLD (Steel Dynamics (STLD) guides Q3 EPS $0.18-0.22 vs Reuters $0.29)

Corporate Actions
SPWRA (SunPower announces proposal to reclassify class A and class B common stock into a single class of common stock)

Negative News
BSX (Boston Scientific (BSX) receives notice of deficiency from the IRS for $154M plus interest in taxes)

Other News
MAN (ManpowerGroup Q4 employment survey demonstrates uncertainty in growth in hiring, though shows stronger confidence y/y in majority of locations)

The Fed 

- Fed inflation hawks downplay need for easing: Reuters noted that two regional Fed presidents on Monday cast doubt on the widely prevalent notion in the markets that the central bank will further ease monetary policy when it meets next week. The article pointed out that Dallas Fed President Fisher (FOMC voter) said that there was little more that the Fed could do to help the economy, while St. Louis Fed President Bullard (not an FOMC voter) said that no decision has been made on further easing and that the Fed has already been very aggressive in lowering borrowing costs. Reuters noted that while Bullard and Fisher do not represent the consensus view pushed by Fed Chairman Bernanke, they do remind investors that the FOMC will not be united if it decides pursue further policy accommodation.
- Fed's Fisher sees high bar to support yield curve 'jujitsu': Bloomberg noted that Dallas Fed President Fisher said he probably will not support further monetary easing by the Fed, arguing that measures that would boost the recovery are the responsibility of fiscal policy. In a speech yesterday in Dallas, Fisher said that “If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it". However, he added that "the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary".
- Fed twist poses risk to Treasury bond trade: The FT reported that while there are growing expectations in the Treasury market that the Fed will attempt to "twist" lower yields on long-term debt, the plan is not without its risks. The paper noted that it could disrupt trading flows in the bond market, while reducing earnings for banks. It added that there is also the possibility that once the Fed starts buying long-term debt, yields could push higher, as was the case last year when QE2 commenced. The article went on to discuss the uncertainty surrounding the potential aggressiveness and duration risk of any renewed Fed buying.
- Frank seeks to end regional Fed chief votes: The FT noted that Representative Barney Frank, the top Democrat on the US House financial services committee, said that the Fed's regional bank chiefs should no longer be allowed to vote on monetary policy. The article pointed out that    Frank is concerned that the Fed's regional heads are more concerned with inflation than unemployment. According to the paper, Frank is tweaking a bill he introduced in April that would strip regional Fed chiefs of their voting rights on the FOMC and instead grant them to White House appointees.
Republican candidates unite to attack Fed: The FT reported that while
- Republican candidates squabbled over a number of high-profile issues in Monday's debate, they presented a largely united front on one issue - the need to rein in the power of the Fed. The article noted that Texas Governor Perry declined to back away from his recent statement that Fed Chairman Bernanke has behaved in in an “almost treasonous” manner in his management of monetary policy. The paper pointed out that the candidates questioned about the Fed said it should be audited and limited to a single mandate to preserve the integrity of the currency.

Eurozone sovereign debt crisis 

FranceGermany to make statement on Greece: Reuters, citing a senior French government official, said that leaders of France and Germany will make a statement on Greecelater on Tuesday. The article noted that the source said that French President Sarkozy and German Chancellor Merkel spoke by telephone on Monday and were "determined to do what is necessary" to calm the confidence of crisis surrounding Greece and the region's debt problems.
Italy pays heavily at debt sale, concerns mount: Reuters noted that yields on Italian five-year bonds hit their highest level since the introduction of the euro a decade ago following an auction today. The Treasury sold a total of €6.485B worth of fixed rate BTP bonds, just under its maximum target of €7B. However, it was forced to pay a record yield of 5.6% on nearly €4B of five-year paper. The bid cover fell to 1.279, meaningfully below the 1.93 on a previous auction of five-year paper.
US money funds' lending to French banks seen forcing asset sales: Bloomberg noted that William Prophet, a desk analyst at Deutsche Bank, said that US money-market fund managers, led by Vanguard and Legg Mason, have cut their lending to French banks at a pace that may force the banks to raise capital by selling assets. The article noted that JPMorgan analyst Alex Roever published a similar report recently, noting that US money funds' combined holdings in French CDs and commercial paper declined $47B in August.
- Wary investors start to shun European banks: The NY Times reported that as European investors race to dump shares in French banks, banks, brokerages and other financial institutions in the US are quietly reducing their exposure as well. The paper said that they are turning down requests for fresh loans and pursuing alternative investments. The article noted that it is not just money market funds that are getting nervous, as sources said that some big American banks have also become wary of derivatives tied to French banks. In addition, hedge funds and other firms have withdrawn hundreds of millions of dollars from prime brokerage accounts held at French banks since last month.
- Pain mounts for European banks: The WSJ noted that European banks are cutting back on dollar-denominated loans, a troublesome sign of credit contraction at a time when American and European economies can least afford it. The paper added that the pressure on the banks is closely linked to Europe's sovereign debt crisis, particularly concerns about a Greek default. It dded that despite some initial excitement about speculation that Italy may be trying to entice China to buy its bonds, past talks between China and other Eurozone governments facing debt problems have not yielded significant volumes of new investments.
- The trouble with French banks: The WSJ's oped column, written by Nicolaus Lecaussin, director of development at France's Institute for Economic and Fiscal Research, cited comments by a bank executive for BNP Paribas who said that 'We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore". The executive added that "Since we don't have access to dollars anymore, we're creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore."
Italy confirms China meeting as debt pressure mounts: Reuters noted that a Treasury spokesman confirmed an FT report from Monday that Italian Economy Minister Giulio Tremonti met with Chinese officials last week. The spokesman declined to comment on the substance of the meeting, though both the FT and WSJ reported that Italy askedChina to purchase meaningful amounts of its debt. Reuters noted that while Chinese leaders have repeatedly expressed support for the Eurozone, similar reports that Beijingwas buying peripheral Eurozone debt have not had much credibility/lasting impact.
- Merkel warns against Greek default: Reuters reported that German Chancellor Merkel said on Thursday in an interview with RBB inforadio that Europe was doing everything in its power to prevent a Greek default. She added that a Greek exit from the Eurozone would unleash "domino effects" and should be avoided at all costs. Merkel also said that everyone should balance their words more carefully to avoid further market volatility.
German leader faces key choices on rescuing euro: The NY Times said that
- German Chancellor Merkel faces far-reaching decisions about how to deal definitively with the debt crisis in Europe and whether to allow Greece to default or even to leave the euro. The paper added that American officials are concerned that if she does not act more decisively, bank lending could freeze up and the result would be another sharp financial downturn in both the US and Europe. The article noted that critics say that Merkel has focused too much on protecting her political standing inside Germany.
- Greek default probability is 98%: Bloomberg said that Greece has a 98% chance of defaulting on its debt in the next five years as Prime Minister George Papandreou fails to reassure investors his country can survive the Eurozone sovereign debt crisis. The article said that the default probability is based on a standard pricing model that assumes that investors would recover 40% of the bonds' face value if the country fails to meet its obligations. According to Bloomberg, CMA lowered its recovery assumption to 38% late yesterday, which would give Greece a 95% chance of default.
- Spanish Treasury says no chance of euro breakup: Reuters cited comments from Fernandez-Palomero Morales, the Spanish Treasury's public debt manager, who said that he does not see the euro breaking up at all. He noted that markets are not good at pricing in political uncertainty and said that "everything is going in the right direction".
- Geithner to attend Eurogroup meeting this week: Reuters, citing Eurozone officials, noted that US Treasury Secretary Geithner will attend a meeting of Eurozone finance ministers on Friday to show support in the face of market turmoil and risks to the global economic recovery. The article noted that it will mark the first time that a US Treasury Secretary will attend a meeting of Eurozone finance ministers.

Newspaper Articles / Headlines

Bangkok Post
- Bangkok Airways cancels order for four Airbus A350 jets. The Bangkok Post reports that the private airline said yesterday (12-Sep in Asia) that Airbus did not confiscate the deposits for the order, placed in 2005.

Daily News & Analysis
- Infosys thought to be in due diligence to buy US-based IT company. People familiar with the developments tell DNA that the purchase could end up being $500-750M. The target is not named.

Financial Times
- Joe Lewis offered 230p/share for Mitchells & Butlers. The FT reports that Lewis made the announcement post-close yesterday (12-Sep in Europe). Lewis'Piedmont holds 22.8% of the company and has two of M&B's five directors; the other three say they can't recommend the offer.

Les Echos
- Starwood Capital likely again to sell the bulk of its high-end hotels of Groupe du Louvre. Without citing its source, the newspaper reports that two years after the failure of the negotiation with the group of Sheikh MBI Al-Jaber, Starwood Capital is again ready to cede the bulk high-end hotels and luxury of Groupe du Louvre. Reportedly, the firm commissioned two brokers to test the market, UBS (UBSN.VX) on the one hand and Jones Lang LaSalle (JLL) on the other.

London Times
- HSBC Holdings seeks $1B for its general insurance business. A source close to the bank confirms to the Times that HSBC is considering options. for the division. The Times says that initial bids are due in the middle of next month.

New York Times
- Microsoft set to "preview" version of Windows 8 OS at conference this week. The article notes cites two industry consultants with knowledge of the plans as saying that MSFT plans to give away an early "preview" version of Windows 8 and thousands of tablets, made by Samsung (005930.KS), to developers at the conference. Windows is intended to run on chips from ARM Holdings (ARMH) and Intel (INTC) microprocessors. Products using Windows 8 are not expected until 2012. The NY Times notes that the release is critical, given that MSFT has seen revenue and profits slipping in the latest fiscal year (Jun).

- Suzuki asks Volkswagen (VOW.GR) to dissolve their alliance. The Nikkei reports that Suzuki said yesterday (12-Sep in Asia) that it has offered to buy back Volkswagen's 19.9% holding in the company, which Volkswagen purchased for about ¥220B (€2.09B at current exchange rates) . The article notes that Suzuki holds 1.5% of Volkswagen but does not explain what is to become of that stake.
- NTT DoCoMo (9437.JP) et al to design next-gen smartphone chips with Samsung Electronics (005930.KS). Without citing sources, the Nikkei reports: The companies are near an agreement to establish a JV that DoCoMo will probably have the majority of. Fujitsu (6702.JP), NEC Corp (6701.JP), and Panasonic Mobile Communications (6752.JP) will also probably take part.The chips will be used by the partners and sold to other manufacturers; the chips' manufacture will be outsourced. The article notes that Qualcomm (QCOM) currently dominates the market for such chips

- Italian government says it does not expect a Moody's downgrade. Reuters headlines only. Italy says it is determined to achieve budget balance in 2013. Prime Minister Berlusconi says the Italian parliament will approve the new budget proposals tomorrow. According to sources, the Italian government meeting with investors on sale of state assets could take place as early as next week.

- Royal Bank of Scotland looks for big City name to be chairman of its insurance arm. In his blog, without citing sources, Mark Kleinman reports that the bank plans to list the business on the LSE next year, and it will probably be called something like Direct Line Group. Brussels has ordered RBS to sell the division as a result of the state aid it received. Kleinman says the separately listed company is likely to gain immediate entry into the FTSE-100.

South China Morning Post
- Wynn Macau's land deal on Cotai Strip could indicate that Macau  rivals are also on verge of getting similar rights. The SCMP article is entirely hypothetical, relying on analysts' predictions and assumptions rather than any sourced insider information. It notes that a previously disclosed agreement says that Wynn Macau will need to pay $50M to Tien Chiao Entertainment and Investment, which gave up the rights to the Cotai site. Wynn Macau accepts terms and conditions for 51-acre land concession contract in Cotai, Macau
- Novelis begins operations in China. Novelis president/CEO Philip Martens tells the SCMP that the company is investing $400M to build capacity in Asia this year

Valor Economico
- Casino Guichard, Rallye Group spend $1.1B in 90 days buying Grupo Pão de Açúcar (PCAR4.BZ) shares.

Wall Street Journal
- WSJ is positive on Technip's purchase of Global Industries (GLBL). A "Heard on the Street" column says that for a relatively inexpensive price, Technip may have just bought itself a return on capital employed over its target.
- How many people will follow Michael Arrington out of AOL? The WSJ notes that TechCrunch columnist Paul Carr has already said he will leave, and employee defections have reduced traffic to other AOL sites: comScore figures indicate that August traffic to Engadget fell (17%) y/y after some employees departed to start up a competing site.
- WSJ profiles Berkshire Hathaway's second investment manager, Ted Weschler. The WSJ calls Weschler "an heir apparent to Warren Buffett" and says he has taken care to maintain a low profile throughout his career.
- WSJ is positive on Technip's purchase of Global Industries (GLBL)A "Heard on the Street" column says that for a relatively inexpensive price, Technip may have just bought itself a return on capital employed over its target.


AURIGA: upgraded SPWRA
Barclays: downgraded HSP
Brean Murray: upgraded MGM
Citi: upgraded KSU
CLSA: upgraded DOW
Cowen & Co: downgraded HCA
Goldman Sachs: upgraded LMT
Jefferies: downgraded NETL
JMP Securities: upgraded CAVM
JP Morgan: downgraded SHO
Leerink: upgraded ALNY
Mizuho: downgraded NETL
Morgan Stanley: downgraded QLIK, SWI
Oppenheimer: upgraded HMA
RBC Capital: downgraded FDX
RW Baird: upgraded QRE
Sterne Agee: downgraded NETL
Stifel Nicolaus: upgraded KEX, JPM, UMPQ; downgraded NETL
UBS: upgraded NRGY, PNG, CCE; downgraded NETL


Motion Sickness

The VIX is 38.59 or 0.1% higher on the session yesterday as equity markets rallied in the last hour of the day to the end the day in the green on news China is in talks to invest in Italian bonds. The fact that Europe is currently the true source of risk is plainly evident in the ever-increasing spread between the Vstoxx (V2X; Euro Stoxx Volatility Index) and the VIX which is now at its widest level since October 2008. Compare the implied volatility in French vs. US banks where French banks short-dated implied vol sits well above realized (past) vol, while for US banks implied is trading at a discount to recent realized vol. This contrast in vol pricing tells us that the market is discounting the likelihood of correlation among global financial institutions going to one.

Fantasy Options League Rule #1; Pick Offense over Defense

Looking across our sector ETF universe, it seems somewhat counter-intuitive to us that skew in defensive sectors such as XLP (Cons Staples), and XLU (Utilities) would be as high as or higher than skew in some of the cyclical, relatively higher-beta sector ETFs such as XLI (Industrials) and XLY (Consumer Disc).

We think the relative mispricing of skew provides a great opportunity to sell downside puts in defensive sector ETFs including XLP and XLU and buy downside puts in higher-beta cyclical sector ETFs including XLI and XLY

We like structuring the trade using strikes that are closest to 10% OTM.  A hypothetical trade might look like this.

XLP sell the Jan12 27 put for $.75

XLU sell the Jan12 30 put for $.90


XLI buy the Jan12 27 put for $1.62

XLY buy the Jan12 32 put for $1.72


 *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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