Wednesday, September 7, 2011

Morning Note Sept 7th

September 7, 2011

US equity futures are all trading higher following higher openings across Asia and Europe, which got an additional boost after the constitutional court in Germany rejected lawsuits aimed at blocking participation in euro zone bailouts.

II Data: Bullish sentiment declines to 38.7% from 40.9% in the latest US Investor's Intelligence poll. Bearish sentiment increases to 37.6% from 36.6%. Those expecting a market correction increases to 23.7% from 22.5%

Libor fixings 

Overnight Libor: Dollar: 0.143% vs prior 0.143% ; Sterling: 0.581% vs prior 0.581%; Euro: 0.832% vs prior 0.831%
1-month Libor: Dollar: 0.226% vs prior 0.226% ; Sterling: 0.663% vs prior 0.663%; Euro: 1.290% vs prior 1.289%
3-month Libor: Dollar: 0.337% vs prior 0.336% ; Sterling: 0.897% vs prior 0.893%; Euro: 1.478% vs prior 1.475%

Asian Markets

Asian markets rose today, rebounding from yesterday’s losses. Chipmakers, shipbuilders, and shippers outperformed as South Korea rose, with gainers outnumbering losers more than 5-to-1. A weaker yen helped exporters in Japan. Banks and Chinese oil stocks drove Hong Kong to a gain in low volume. Hong Kong property stocks performed in line with the market, seemingly unaffected by disappointing results to a land auction yesterday. The yen is trading at 77.17 to the US dollar.

European Markets

European equity markets rose from the open in choppy trading, shrugging off a disappointing close on Wall Street and following Asian markets higher as markets bounced following three consecutive daily declines. A reiteration by Greece that its commited to speeding up structural reforms and Italy's revised austerity plan, due to be voted on today in the Italian Senate, aided sentiment. Indices spiked higher as Germany's Federal Constitutional Court rejected lawsuits aimed at blocking German participation in euro zone bailouts, subsequently extending advances to currently trade near session highs. The Swedish Central Bank left its benchmark interest rate unchanged at 2.0%, saying as global growth prospects have deteriorated the slowdown in the Swedish economy is expected to be more pronounced than was forecast in Jul. Portugal T-Bill auction: Sells €854M of 3M T-Bills, average yield 4.959% vs prior 4.854%, bid to cover ratio 2.2 vs prior 1.8. Germany Jul Industrial Output +4.0% m/m vs consensus +0.5% and prior revised (1.0%) from (1.1%).  UK July Manufacturing Production +1.9% y/y vs consensus +1.9% and prior +2.1%. UK July Manufacturing Production +0.1% m/m vs consensus 0.0% and prior (0.4%). UK July Industrial Production (0.7%) y/y vs consensus (0.5%) and prior (0.3%). UK July Industrial Production (0.2%) m/m vs consensus 0.0% and prior 0.0%. The BOE and ECB announce benchmark interest rate decisions tomorrow.

Today’s Economic Releases (Eastern Time)

04:30 Germany Industrial Production y/y (Jul); actual (0.7%); consensus (0.5%)
07:00 US MBA Mortgage Purchase Applications +0.2% in 2-Sep week; total market index (4.9%). Compares to +0.9% and (9.6%), respectively, in the prior week. Refi index (6.3%) vs. (12.2%). 30-year contract ARM rate (9bp) to 4.23%.
07:45 US ICSC-Goldman Chain Store (04-Sep); consensus n/a
08:55 US Redbook Chain Store (04-Sep); consensus n/a
16:30 US API Crude Inventories (03-Sep); consensus n/a 

Today's Key Events (Eastern Time)

08:30 PROLOR Biotech company update including Phase II trial of hGH-CTP:             800.860.2442 begin_of_the_skype_highlighting            800.860.2442      end_of_the_skype_highlighting      /Intl             412.858.4600 begin_of_the_skype_highlighting            412.858.4600      end_of_the_skype_highlighting      
09:00 Hospira Investor Day
11:00 Hyperdynamics Business Update:             480.629.9771 begin_of_the_skype_highlighting            480.629.9771      end_of_the_skype_highlighting      
13:00 Comstock Mining business update (recent permitting advances) -             877.801.2050 begin_of_the_skype_highlighting            877.801.2050      end_of_the_skype_highlighting      
14:00 Fed Beige Book
16:00 Fed's Williams speaks on policy and economic outlook
—:— Barclays Capital Back-To-School Consumer Conference
—:— Barclays Capital CEO Energy-Power Conference
—:— Barrington Research Growth Conference (One on One)
—:— Capstone with Astronics
—:— Capstone with Celadon Group
—:— Citi Biotech Day
—:— Citigroup Technology Conference
—:— comScore Investor Day
—:— Credit Suisse Automotive and Transportation Conference
—:— Dahlman Rose & Company Global Transportation Conference
—:— Deutsche Bank Global Emerging Markets One-on-One Conference
—:— Deutsche Bank TMT Conference
—:— European Photovoltaic Industry Association PV-SEC
—:— Global Hunter Securities with Revett Minerals
—:— Global Hunter Securities with Silvermex Resources
—:— Goldman Sachs European Medtech and Healthcare Services Conference
—:— Goldmans Sachs Retailing Conference
—:— Jefferies Global Shipping Conference
—:— Kaufman Bros. Investor Conference
—:— Keefe, Bruyette & Woods Insurance Conference
—:— MEDTECH China 2011
—:— Robert Baird Healthcare Conference
—:— Scotia Capital Financials Summit
—:— Shale Gas Insight 2011 Conference
—:— Showcase Ontario 2011
—:— Stifel Nicolaus Healthcare Conference
—:— Trial date of Teva patent infringement litigation against Momenta/Novartis/Mylan/Natco's generic COPAXONE
—:— William Blair Life Sciences Conference 

Company Specific News


LAYN (Layne Christensen reports Q2 EPS $0.54 vs Reuters $0.46; Revenues $295M vs Reuters $266.70M)
NAV (Navistar reports Q3 EPS $0.79 ex-items; Revenues $3.54B vs Reuters $3.49B; First Call $3.53B)
TLB (Talbots reports Q2 EPS ($0.51) ex-items vs Reuters ($0.45); Reports Q2:
EPS for the quarter excludes $0.03 in special items. Revenues $271.10M vs Reuters $263.40M)

Positive News
CFR.VX (Richemont announces sales for the five months ended 31 Aug +29 % at actual exchange rates. At constant exchange rates, sales increased by + 35 %.)

Negative News
GOOG (Google trades lower in reaction to Reuters headlines that its Seoul office raided by South Korean regulators.)

Corporate Actions
TIE (Titanium Metals announces repurchase of 351.6K shares of its common stock)
WMB (Williams Companies increases quarterly dividend by 25.0% to $0.25 from $0.20; provides 2011-13 Guidance reflecting separation of E&P business)

HWD (Harry Winston Diamond enters option agreement with North Arrow and Springbok Holdings for Lac de Gras diamond project)

Other News
Weekly USDA crop progress report says 52% of the corn crop is in good or excellent condition. Compares to 54% last week and compares to 69% in prior year. Corn: 71% of the corn crop is dented vs 53% last week and a 70% average of 2006-10 period
42% of cotton crop is opening bolls vs. 27% last week and 32% average of 2006-10 period. 28% of the cotton crop cotton is in good or excellent condition compared to 30% last week and 60% y/y.
6% of soybean crop is dropping leaves vs 2% last week and 78% average of 2006-10 period. 56% of the soybean crop is in good or excellent condition compared to 57% last week and 64% y/y
28% of rice crop is harvested vs 18% last week last year and 27% average of 2006-10 period. 64% of rice crop is in good or excellent condition compared to 65% last week and 68% y/y.
Spring wheat:
68% of spring wheat has been harvested vs. 50% last week and 81% average of 2006-10 period.

Newspaper Articles / Headlines

All Things Digital
Yahoo! getting ready to hire strategic advisers. Sources close to the company tell All Things D that the board is looking at acquisitions, selling units, taking on new investment partners, going private, or selling the company, and a sale is the least likely option.
- AllThingsDigitial reports Carol Bartz no longer CEO of Yahoo!. AllThingsDigital reports, citing sources at the company that Bartz is no longer the CEO of Yahoo!. According to the article, CFO Tim Morse has been named interim CEO.

- Mercedes-Benz to expand options in luxury cars, SUVs

- Hewlett-Packard asked LG Electronics (066570.KS), Samsung Electronics (005930.KS), others about selling its PC business last year.

Economic Times
BP (BP.LN) wants market to determine gas price for JV with Reliance Industries (RIL.IN)

Financial Times
Bill Gross suggests that the Fed's freezing policy rates for at least the next 2 years risks destroying the creation of credit. In an opinon piece in the paper, Gross says that, by freezing policy rates for that timeframe, the front end of the yield curve has essentially become inert, and worse flat, as opposed to steeply positive, which denies banks the ability to borrow short-term and lend at a maturity 2 years longer to make a profit. Gross says the natural tendency would be for the banks to lend at an even longer maturity, though suggests that regulators discourage such maturity extensions either through regulation or implicitly. Gross says the longer the Fed extends the freezing of policy rates, the more credit destruction occurs, and that this impact not only banks, but also other investment firms, such as Pimco.
Kesa Electricals probably won't be able to sell Comet. Sources close to the auction process tell the FT that Hilco and OpCapita have put in offers that indicated Kesa will need to provide £150-200M in cash to take care of pension liabilities and working-capital issues. The amount is thought to be higher than Kesa will be willing to consider.
The FT reports that in April, NHN (035420.KS) and Daum Communications (035720.KS) told the Korea Fair Trade Commission that Google was pressuring smartphone makers and mobile operators to not preload services from competitors; Google denies the charge.

Pfleiderer initiates the sale of its US wood unit. The newspaper reports the company is looking to sell its loss making US wood unit which generated sales of around €403M in 2010 and has 1000 employees. The newspaper also notes that the company intends to report H1 results for this unit separately.

Globe and Mail
Rogers Communications applies to incorporate small in-house bank. The Globe and Mail reports that the idea would allow Rogers to offer its own credit cards, though it could take some time for the idea to come to fruition. Company officials say Rogers does not want to become a bank

- RWE (RWE.GR), EON (EOAN.GR) planning to sell holdings in Urenco. The article, citing a person familiar with both companies, says that the UK and Dutch governments, which also are part-owners of Urenco, must approve the sale. The article reports that Britain has considered selling its stake, while the Dutch government wants to keep its holding and may seek to stop a transaction.

London Times
Alstom, SFO talk about resolving bribery allegations. Insiders tell the Times that Alstom has approached the Serious Fraud Office in hopes of reaching a deal that will bring an end to the investigation of the company that has gone on since 2009.

- TechCrunch proposes two options to AOL (mid-day yesterday). In his blog, Michael Arrington says that TechCrunch no longer has the complete editorial independence it was promised when AOL bought it, so for him to remain involved, one of the following two paths must be adopted: The site's editorial independence must be reaffirmed, or The site has to be sold back to its original owners.

Wall Street Journal
WSJ discusses Yellow Media. A "Heard on the Street" column notes that the company has the option next year to convert C$264M of preferred stock to common stock next year at an extremely money-saving rate. The company has said thus far, however, that it plans to buy the preferred stock for cash, which would be less advantageous for current holders.
WSJ is cautious on banks. A "Heard on the Street" column notes that banks are facing numerous different lawsuits, and while the impact of losing cases could be years away, estimates of potential losses vary by factors of ten.
- Standard & Poor's left large bond investors with impression that US long-term debt downgrade was more likely than 50/50. Some people who attended meetings in the weeks after a 14-Jul advising that chances were at least one in two tell the WSJ that S&P officials privately met with Pacific Investment Management (ALV.GR), Western Asset Management (LM), and BlackRock (BLK). A Western Asset executive says it found a 20-Jul meeting "sobering." The article says that S&P did not break any regulatory rules.
Four companies put in offers for Archstone. People familiar with the matter tell the WSJ that: The offers aren't final, and if they are raised, the chances will rise that Lehman -- which still wants to list Archstone at this point -- will favor a sale. None of the bids are all-cash. Equity Residential (EQR), AvalonBay (AVB), and Brookfield Asset Management (BAM) want to buy all of Archstone, and Blackstone (BX) is offering to buy different pieces of it.


Bank of America Merrill Lynch: downgraded SMT
Barclays Capital: upgraded TWX; downgraded SNI
Benchmark: upgraded SUN
BMO Capital: upgraded SAPE
Citi: upgraded DHI
CLSA: upgraded CVX
Cowen & Co: upgraded WSM
Deutsche Bank: upgraded NDAQ
Goldman Sachs: upgraded LVS
Jefferies: upgraded CPO
JP Morgan: downgraded DOV
Longbow: downgraded TIN
Morgan Stanley: upgraded MWE, XTXI, MGA, PAG; downgraded CPNO, GT, MTOR
Oppenheimer: upgraded COF; downgraded BX, GS, KKR
William Blair: downgraded SONC
Wunderlich: upgraded SPWRA


Note that term structure has inverted over the last week, making buying calendar spreads an attractive strategy for those looking to buy protection. Specifically, we like selling SPY Sept ATM Calls to buy Sept 30th ATM Calls on a delta-neutral basis. You collect 2 vols on the trade and capture two very important catalysts (FOMC Meeting & potential passage of EFSF)

On Valuation & Yield   
S&P 500 fwd P/E is 12.0x

- Lowest since depths of bear mkt in March 2009
- Prior to that, you’d have to go back to 1990 to find a lower fwd P/E mult
S&P 500 fwd earnings yield is 8.3%
- 620bps higher than 10-yr Treasury yields (400bps is normal)
- Earnings yield vs BAA bond yield spread widest on record since 1982
S&P 500 dividend yield is above 10-yr Treasure yield
- Except for depths of 2008/09 bear mkt, haven’t seen this since 1950s.

We would argument against reading too much into these facts:
1) The E in the P/E could be significantly different;
2) Why does this necessarily have to be any better than 2008/2009? Yes, 2008/2009 was an unprecedented time for global economies/markets but there is nothing to say that this crisis cannot be worse. Europe is in a much greater bind that the US in terms of what the monetary system will allow (in its current form). Banks have not done much to clean up their balance sheets over the last 18 months and a sovereign credit crisis offers some ‘sprinkles’ on top of an already melting economic rebound. The SPX could rally back in its current channel to the ~1250 level before seeing major resistance at the 50-day MA. For protection, clients should consider the following ‘Europe-based’ hedges as we think our friends across the Atlantic will take us lower (w/ the USoutperforming on a relative basis):

EFA – Buy Oct 49/43 Put Spread for $1.25 (3.8x max net payout)
FXE – Buy Dec 138/132 Put Spread for $1.50 (3x1 max net payout) 

* Px’s adjusted for pre-mkt price for spot

 *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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