Tuesday, October 11, 2011

Morning Note Oct 11th

October 11, 2011

US equity futures are following European markets lower as ECB's Trichet reiterated a sense of urgency in regard to dealing with the Eurozone Sovereign debt crisis in order to avoid contagion. The Slovakian vote on approving changes to the EFSF rescue fund is expected at ~7:00 ET is looking less likely to be approved though there are reports that the parliament can put the ratification to repeated ballot once a political agreement with the opposition is in place. Earnings season unofficially kicks off with Alcoa (AA) after the close.

EU/IMF/ECB inspectors say Greece will miss 2011 target, says Greek 2011 fiscal target no longer within reach.

Sep NFIB Small Business Index 88.9 vs. 88.1 in August

Libor fixings 

Overnight Libor: Dollar: 0.142% vs prior 0.139% ; Sterling: 0.583% vs prior 0.584%; Euro: 1.148% vs prior 0.850%
1-month Libor: Dollar: 0.243% vs prior 0.243% ; Sterling: 0.693% vs prior 0.693%; Euro: 1.304% vs prior 1.302%
3-month Libor: Dollar: 0.398% vs prior 0.394% ; Sterling: 0.961% vs prior 0.959%; Euro: 1.504% vs prior 1.504%

Asian Markets

Asian markets rose this morning, encouraged by Europe’s promise to come up with a solution to the eurozone debt crisis this month. Financial shares were the main beneficiaries. Siam Cement (SCC.TB) rose 5% in Thailand on expectations that demand for its products will rise as rebuilding projects get underway after the country’s floods recede. Apple suppliers rose in Taiwan on news of record-setting early sales of the iPhone 4S. Chinese banks rose on reports that China’s SWF was buying shares of the country’s four main banks, with the effect much more pronounced in Hong Kong than in China itself. Coal stocks in China fell as they were made subject to an extended resources tax. An eased yen-euro exchange rate helped exporters in Japan.
Rising financials allowed Australia to manage a modest gain. Australia September NAB business conditions 2 vs prior (3), business confidence (2) vs prior (13). Japan September consumer confidence 38.6, +1.6 pts m/m. The yen is trading at 76.69 to the US dollar.

European Markets

European equity markets fell in cautious early trading ahead of a key vote by the Slovakian parliament on approving amendments to the EFSF bailout package. Malta's parliament voted unanimously to pass the EFSF legislation leaving just Slovakia of the 17-EuroZone members to vote later today. The coalition government looks to remain divided as to whether to support the legislation, however the Slovak PM has tied ratification with a vote of confidence in the government and said if it initially fails to pass, the vote could be repeated. Attempts by indices to pare losses met little success as major indices moved lower and currently trade round session lows. Trichet's comments to an EU parliament committee in his position as head of the European Systemic Risk Board that risks to the economy are increasing quickly as the sovereign debt crisis has become systemic and EU leaders need to quickly act together to solve the crisis also weighed on sentiment.

Today's Economic Releases (Eastern Time)

04:30 UK Industrial Production y/y (Aug); actual (1.0%); consensus (1.2%)
04:30 UK Manufacturing Production y/y (Aug); actual +1.5%; consensus +1.5%
07:30 US NFIB Small Business Index (Sep); consensus n/a 

Today's Key Events (Eastern Time)

09:00 Fiserv Investor Conference
09:00 Scripps Networks Interactive Analyst Day:             800.230.1092       / Intl             612.288.0329      
13:00 Treasury Auction of 3-yr notes
16:15 CorMedix Conference Call on Recent Developments: 866.866.333 / Intl             404.260.1421      
—:— Association of the United States Army Annual Exposition - AUSA
—:— Bank of America Merrill Lynch Pan-European Building & Infrastructure Conference
—:— Cowen Therapeutics Conference
—:— FBN Securities with Gold Fields
—:— GHS Securities with Forbes Energy Services
—:— GHS Securities with TransGlobe Energy
—:— Global Automotive Forum
—:— Global Hunter Securities with Basic Energy Services
—:— Idea Engineer Exchange Conference iEX
—:— Novell BrainShare
—:— Wal-Mart Fall Investor Conference 

Company Specific News / Other News

BEN (Franklin Resources reports Sep AUM of $659.9B vs $716.4B m/m and $644.9B y/y. Total equity $254.2B vs $286.8 m/m and $309.8B y/y. Total fixed income $297.7B vs $314.6B m/mand $303.1B y/y. Cash management $6.7B vs $7.2B m/m and $6.2B y/y.)
DTG (Dollar Thrifty reiterates preliminary expectations for Q3 results; affirms share repurchase plans; terminates solicitation process, and will continue to execute standalone plan)
MG (Mistras Group reports Q1 EPS $0.11 vs Reuters $0.10. Reports Q1: Revenues $91.4M vs Reuters $81.1M)

SBH (Sally Beauty Holdings offering 15M shares held by funds associated with Clayton, Dublier & Rice through BofA, Credit Suisse, Goldman and Barclays)
UTHR (United Therapeutics announces $210M convertible senior notes offering, authorization of stock repurchase program)

Other News
Eurozone sovereign debt crisis 
- Slovak PM puts government on the line ahead of EFSF vote: Reuters reported that the SaS said it would abstain on Tuesday from a vote on expanding the EFSF, forcing the government to turn to opposition parties to push through a deal that has already been ratified by all of the other countries in the Eurozone. The article noted that Slovak Prime Minister Iveta Radicova put her government on the line by tying a vote to a confidence motion on her cabinet. Even if they lose the vote, she and two of her ruling coalition partners have voted to push through the ratification by asking for the opposition's support. Recall that the leftist opposition party Smer has said it would be receptive to a deal in exchange for major concessions such as a cabinet reshuffle or early elections
Greece loan talks advance, EU delays summit: Reuters noted that the EU postponed a summit by a week on Monday to allow time for a broader solution to Greece's debt crisis. The article cited comments from European Council President Herman Van Rompuy, who said in a statement that "Further elements are needed to address the situation in Greece, the bank recapitalization and the enhanced efficiency of stabilization tools." The article also noted that the chairman of the Eurogroup, Jean-Claude Juncker, refused in a television interview to rule out a compulsory writedown of 50-60% on Greek debt. The article also noted that in Athens, Finance Minister Evangelos Venizelos said Greece had wrapped up talks with troika and expected private bondholders to make a bigger contribution than originally envisaged.
- Close to consensus on recapitalization plan?: The FT, in an article also discussing the decision to delay the summit, noted that senior European officials insisted they were close to consensus on a bank recapitalization plan after Paris softened its demand that any Europe-wide strategy be run through the EFSF. The paper added that officials said the plan would instead call for national governments to provide funds if capital cannot be raised in financial markets. The EFSF would only be used for bank recapitalizations in extreme cases. However, the paper also noted that France is still resisting using its own national treasury to shore up its banking sector in the near term, adding that Sarkozy and Merkel could not come to an agreement last Sunday on the breadth and timetable of the recapitalization plan.
- ECB backs bond guarantee option to boost EFSF: Bloomberg noted that the ECB believes that the firepower of the EFSF should be magnified by using government guarantees rather than the central bank’s money market operations. The article cited comments from ECB Vice President Vitor Constancio, who said in a speech in Milan yesterday that EFSF resources “should be dedicated to enhance sovereign debt new issuance of securities, thus multiplying their effect."
- Europe warned of systemic crisis over debt: Reuters cited comments from ECB President Trichet, who said that the sovereign debt crisis has become systemic, adding that risks to the economy are increasing rapidly with Europe's banks in the danger zone. Trichet also said that EFSF should be made as flexible as possible, but should not be leveraged via the ECB.
- ECB newcomer says 'game changer' is needed: The FT cited comments from Jörg Asmussen, the next recruit to the ECB's executive board, who told the European parliament that a “game changer” was needed to resolve the Eurozone sovereign debt crisis and prevent a further loss of credibility by its political leaders. The article noted that Asmussen seemed to indicate that he would impose a bigger haircut on private Greek bondholders, despite past ECB objections. He also said that a revised bailout package for Greece should be accompanied by firewalls to help shore up Eurozone banks' finances and prevent contagion.
- German push for Greek default risks EMU-wide 'snowball': The Telegraph reported that officials in Berlin have told the paper that it is "more likely than not" that investors will suffer fresh losses on holdings of Greek debt, beyond the 21% haircut agreed to on 21-Jul as part of the second bailout package. The article noted that Finance minister Wolfgang Schäuble told the Frankfurter Allgemeine that the original haircuts were "probably" too low, adding banks must have "sufficient capital" to cover greater losses if needed. The paper said that estimates of a haircut near 60% have been floating around Berlin. The Telegraph cited comments from analysts who expressed concern that the shift in German policy could unleash further contagion.
- More pain for Europe banks: The WSJ discussed the further strains on Europe's troubled financial sector seen on Monday, noting that the sovereign debt crisis claimed its first banking victim (Dexia), while banks in Austria (Erste) and Greece (Proton) showed signs of distress. The article also noted that Eurozone officials say that it is increasingly likely that holders of Greek government debt will soon be forced to take larger losses than were envisioned under the deal agreed to by EU leaders on 21-Jul.
- Dutch favor tough stance for Eurozone: The FT reported that Dutch Finance Minister Jan Kees de Jager is insisting on harsh enforcement measures against countries that violate Eurozone budget agreements as the price of any new major deal to save the euro. The paper added that such measures, which the Dutch have said are "non-negotiable", may include the appointment of a top European official with the power to veto the national budgets of countries that break deficit limits. In an interview with the FT, de Jager said that the Netherlands would demand reforms from any countries applying for help from the EFSF, even if it is only for support to recapitalize banks.

Newspaper Articles / Headlines

Daily Telegraph
Germany pushing for a hard Greek default. Citing unnamed officials in Berlin, the newspaper reports Germany is pushing behind the scenes for a "hard" default in Greece with losses of up to 60% for banks and pension funds, risking a chain-reaction across southern Europe unless credible defences are established first. Citing its source, the newspaper reports officials in Berlin said it is "more likely than not" that investors will suffer fresh losses on holdings of Greek debt, beyond the 21% haircut agreed in July, adding that the exact level will depend on findings by the EU-IMF "Troika" in Athens.

Economic Times
- LM Ericsson signs LTE contract with Augere Wireless broadband. An executive with knowledge of the development tells the Economic Times that the deal, India's first, will be announced 11-Oct. A Nokia Siemens Networks executive says his company also expects to enter the market by signing contracts this quarter.

Financial Times
Toshiba loses patent case in China. The FT reports that in ruling on a case brought by Beijing Huaqi Information Digital Technology (also called Aigo), the Xi-an People's Court has directed Toshiba to stop selling some of its notebooks in China and pay CNY200K (¥2.4M) in damages. The article notes that Chinese companies have become more aggressive in protecting their intellectual property through courts, and Aigo has also sued Hewlett-Packard (HPQ).
ISS recommends News Corp shareholders vote against retaining 13 directors, including chairman/CEO Rupert Murdoch and COO Chase Carey. The FT notes that the Murdoch family holds nearly 40% of the company's votes, so change on the board is by no means guaranteed.

- Golan Telecom near signing inland roaming deal with Cellcom Israel; terms unreported. Sources tell Globes that Golan Telecom also spoke with Partner Communications (PTNR.IT), but despite requirements set out by the Ministry of Communications, Partner did not want a competitor to use its antenna infrastructure.

LA Times
Independent theaters join move against Universal Pictures's Tower Heist. The LA Times reports that independent chains have pledged to join Cinemark Holdings (CNK) in refusing to show the film if Universal offers it through video-on-demand a mere three weeks after it opens.

Les Echos
- Renault set to launch the sale of compact cars in Indian. Without citing its source, the newspaper reports Renault will soon unveil a draft version of the "Pulse". This compact car will be released for the Indian market in January 2012 and could then be commercialsied in other countries.

Montreal Gazette
China wants business aircraft, but not without conditions. The article, largely a summary from the National Business Aviation Association convention, says: The chairman/CEO of the China Business Aviation Group says jetmakers can sell a lot of planes, but production will need to be established in China. A "persistent rumor" at the show says that a Chinese company is looking to buy Cessna Aircraft (TXT).

Wall Street Journal
WSJ is positive on large US bank stocks. A "Heard on the Street" column says that Morgan Stanley (MS), Goldman Sachs (GS), and Citi (C) are trading at valuations that are nonsensically low compared to their tangible book values. The column notes that moving up to a more reasonable multiple could take some time, though, and if Europe goes bust, so will the big US banks
China's SWF buys shares in country's banks, hoping to support market, economy. The article is a summary, not breaking any news, as reports came out post-Chinese close yesterday that Central Huijin Investment had purchased shares of Industrial & Commercial Bank of China(601398.CH/1398.HK), Agricultural Bank of China (601288.CH/1288.HK), Bank of China (601988.CH/3988.HK), and China Construction Bank (601939.CH/939.HK). The WSJ notes that investors have become highly suspicious of Chinese government statistics as well as earnings of traded companies such as Baidu (BIDU) and Sina (SINA).
WSJ discusses Netflix's strategy reversal. The front-page article is a summary, not breaking any news. It compares the decision to split the online and DVD businesses with other famous corporate debacles like New Coke (KO), Pepsi's (PEP) new container for Tropicana orange juice, and Delta's (DAL) plan to charge customers an extra $2 for buying tickets anywhere but the company website.
- Samson Investment may sell itself for $7-10B. People familiar with the matter tell the WSJ that the private 1,200-employee oil-and-gas explorer is looking at strategic options, including setting up a JV or selling itself. The article does not name any likely bidders, should Samson decide on a sale.
- Dexia's Denizbank up for sale, attracting interest. The WSJ notes that a source close to the process confirmed that Dexia's (DEXB.BB) Turkish subsidiary, Denizbank AS, is up for sale and has attracted interest from a number of Middle Eastern and Russian banks, including Sberbank OAO.
Recall that last week the FT reported that Dexia was seeking offers for Denizbank as well as other "healthy" portions of the troubled financial firm. Earlier Monday, Dexia's board approved the sale of Dexia Bank to Belgium for €4B and the WSJ notes that shares of Denizbank rose more than 20% today on speculation over a potential sale.
Uncertainty over Slovakia eurozone vote weighs on shares. Slovakia's SaS party, a junior member of the ruling coalition, has said it will abstain from a vote today to expand the eurozone's EFSF bailout fund. With the bill to be tied to a confidence vote, the government could fall as it is likely to lack the necessary support to pass the measure. However, the bill could be approved in a repeated ballot with the help of opposition votes. The uncertainty is casting a shadow over trading, with European shares and U.S. stock futures lower midday in Europe.Greece creditor losses could hit 50%-60%. Greece's bondholders may have to take a haircut of 50%-60%, Jean-Claude Juncker, the head of the eurozone's finance ministers, is reported to have said. The figures are way above the 21% agreed to in the country's second bailout deal in July, with Juncker's comments the first admission by a high-ranking official that such a drastic move is being considered. More immediately, inspectors from the IMF, EU and ECB Troika are wrapping up their visit to Greece, with their review set to influence whether the government receives the next €8B ($10.9B) of its bailout.
Settlement over foreclosure practices close. A settlement between states and major lenders over inappropriate foreclosure practices is close although some issues could "frustrate the agreement," Iowa AG Tom Miller has told Bloomberg. Any deal, which Fox reports could cost the banks $20B, won't prevent local governments from pursuing claims for unpaid mortgage fees and securities fraud, Miller said. Potentially freeing the banks from other legal liabilities has led New York and California to exit the negotiations. The banks involved are Bank of America (BAC), JPMorgan (JPM), Citigroup (C), Wells Fargo (WFC) and Ally Financial.
Alcoa forecast to kick off earnings season with profit rise. As always, Alcoa (AA) will unofficially kick off earnings season after the bell today, when it is expected to report that Q3 2011 EPS grew to $0.23 from $0.06 a year earlier and that revenue increased to $6.26B from $5.3B. Alcoa was optimistic in its Q2 report, when it forecast increased aluminum sales across a wide a range of sectors, although today's statement will show whether that upbeat view was justified or has since been undermined by the softening economy. In Q3, Alcoa's shares plummeted 40%, due to lower aluminum prices and weakening European demand.
Sony sees little Christmas cheer. The outlook for Sony (SNE) in Europe and North America for the end-of-year shopping season is "murky," CFO Masaru Kato has told Reuters, adding, "We don't see any reasons for optimism." Kato also said the company has no "tricks" for offsetting the high yen, nor does it have plans to announce a revamp of its loss-making TV division. Mizuho analyst Ryosuke Katsura said restructuring the unit was Sony's "most important task," as its losses "will outweigh" any increased profit in other areas of the corporation.
Samson considers $7B-$10B sale. Samson Investment, one of the largest privately held oil and gas explorers in the U.S., is considering a full or partial sale, as well as joint venture options, as it looks to raise funds to finance more shale drilling, The Wall Street Journal reports. A full sale of the group, which is owned by the Schusterman family, could bring in $7B-$10B.
Innkeepers, Cerberus return to talks. Innkeepers is in negotiations to sell most of its hotels to Cerberus for lower than the $1.12B initially agreed upon, The Wall Street Journal reports. The discussions led Innkeepers to yesterday delay by at least a day the start of a trial in which it is suing Cerberus and Chatham (CLDT) for backing out of the original deal.
Jobs panel to present report. The President's Council on Jobs & Competitiveness, chaired by Jeff Immelt, is today due to present Barack Obama with its second report, in which it provides a long list of recommendations that "have the potential to create millions of jobs" over the next few years. The proposals include measures to attract more foreign investment and help entrepreneurs, carrying out infrastructure projects, being more aggressive in the energy sector, and changes to the immigration rules.
Obama's jobs plan heading for Senate defeat. President Obama's own $450B job proposal is due to go to the Senate for a vote this evening, although with the GOP opposing the bill in its entirety, it's likely to be defeated. If so, Democrats will consider breaking the package into parts so that votes can be held on separate components, The Wall Street Journal reports, with a Republican aide saying there are aspects of the plan the GOP could support.
New York financial sector set for major job losses. New York could lose almost 10,000 securities jobs by the end of next year, city Comptroller Thomas DiNapoli has predicted in a report. The losses would add to the 22,000 positions already cut since January 2008, while bonuses are also expected to fall. The prediction is not a surprise given that leading banks such as HSBC (HBC) and Bank of America (BAC) have announced major cutbacks. The Occupy Wall Street movement is unlikely to shed a tear, but tax revenues will be hit.
Method for choosing "systemic" firms to be unveiled. The Financial Stability Oversight Council is today due to release proposals on how it will determine which non-bank financial firms are big enough to be labeled "systemic." It's a moniker companies are anxious to avoid, as it will mean increased Fed oversight, as well as new capital and liquidity rules, which firms fear will hit their profitability. However, companies are unlikely to find out before next year whether they're considered systemic or not.
FDIC to officially unveil Volcker rule. The Federal Deposit Insurance Corp. will today officially release its proposed version of the Volcker rule, which is expected to ban banks from trading for their own profit in securities, derivatives and certain other financial instruments. The law contains some exemptions, and the way these are formulated will significantly affect large banks such as Goldman Sachs (GS) and Morgan Stanley (MS). A draft of the Volcker rule was leaked last week and received a mixed reaction.
Senate panel: Repatriation tax holiday failed. With major corporations pressing for a tax break that would enable them to bring home hundreds of billions of dollars of overseas cash holdings, a Senate subcommittee report has found that the last repatriation holiday in 2004-5 failed. The break cost the Treasury at least $3.3B in lost revenue over ten years and "produced no appreciable increase in U.S. jobs or domestic investment, and led to U.S. corporations directing more funds offshore." In fact, 15 companies that repatriated the most later cut a net 20,931 jobs from 2004-2007.


Bank of America Merrill Lynch: upgraded CFN, SYK, SFD, TSN
Barcalys: upgraded VLO
Dahlman Rose: upgraded MT, NUE
Deutsche Bank: upgraded WPP; downgraded UFS
Goldman Sachs: upgraded GIS
Jefferies: upgraded ARO
MacQuarie: downgraded WLL
RBC Capital: downgraded PDLI, SNSS
SunTrust: downgraded HSII
UBS: upgraded SLG


Up Up and Oy Vey!

The VIX dropped 3.18 (8.78%) yesterday but interestingly, the 3+% move in the market increased SPX 30 day realized to 32.94, setting it above the 30-day implied of ~30 for the first time since 9/21. Normally we would view this as a bullish indicator except for the fact it materialized on a very light volume day in the option market. The pain trade is on but we’re not convinced (just yet).

Short Term Memory Loss

One thing we can’t fathom is why skew in materials and energy, the worst performing sectors over the two week period ended Oct 3rd still have flattest skew curves of all sectors we follow. It seems that the market is discounting on a wholesale basis, the possibility that we will fall back to last week’s lows or worse. 

That said, November options (11/19 expiry) capture the bulk of Q3 earnings we think investors should take advantage of the flat skew curve in energy and material ETFs to set up hedges via collars (sell upside calls to buy downside puts).  

Examples include:

XLE (ref $63.66) Sell the Nov 70 calls to buy the 60 puts for $1.17 (1.84%)

XME (ref $48.59) Sell the Nov 53 calls to buy the 46 puts for $1 (2.06%)

OIH (ref $114.80) Sell the Nov 126 calls to buy the 107 puts for $1.99 (1.73%)

XLB (ref $32.42) Sell the Nov 36 calls to buy the 30 puts for $.59 (1.82%)

GDX (ref $56.84) Sell the Nov 61 calls to buy the 53 puts for $.14 (.25%)  

When Flat is Phat

With earnings season upon us we looked for a way to obtain downside protection and minimizing the cost of doing so. Specifically, we screened names where the option market is implying a one-day earnings move > 5% and where you can sell Oct puts (which miss earnings) to reduce the cost of buying buy Nov puts (which capture earnings) by at least 25%. This long forward vol trade works best if the stock fails to move significantly away from the strike by Oct expiration but has a big move on earnings. The risk of the trade is limited to the net premium spent.


 *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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