Wednesday, October 12, 2011

Morning Note Oct 12

October 12, 2011

US equity futures are above fair value, following Europe higher despite Slovakia's failed vote to approve changes to the EFSF rescue fund, though it is widely expected to be ratified later this week, and after Alcoa (AA) missed earnings expectations. Attention will likely shift to the release of the FOMC's September minutes at 14:00 ET and numerous Fed speakers on the economy scheduled for today.

Bullish sentiment unchanged at 34.4% in the latest US Investor's Intelligence poll. Bearish sentiment increases to 46.3% from 45.2%
Those expecting a market correction decreases to 19.3% from 20.4%

Libor fixings 

- Overnight Libor: Dollar: 0.141% vs prior 0.142% ; Sterling: 0.583% vs prior 0.583%; Euro: 0.910% vs prior 1.148%
- 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: 0.401% vs prior 0.394% ; Sterling: 0.963% vs prior 0.959%; Euro: 1.504% vs prior 1.504%

WTI +$0.30 to $86.14

Nat'l gas +$0.05 to $3.621

Spot Gold +$17.20 at $1683.06

Asian Markets

Asian markets were mixed today. Most markets started down on disappointment with Alcoa’s (AA) earnings, but a rally in China moved the region off its lows and into positive territory in some cases.  Banks continued their upward march inChina, stimulating the market by rising another 1-2% on news that the country’s SWF is buying shares. Infosys (INFO.IN) jumped 6% on results to lead India higher. Hong Kong erased early losses, with Chinese banks advancing again to reflect their gains in China. In Japan, shipping companies rose on a higher Baltic Dry Index, but insurers fell on worries about the effects of the Thai floods on their results. Japan August machinery orders +11% m/m vs cons +4.9%. Australia October consumer sentiment 97.2, +0.4% m/m. The yen is trading at 76.47 to the US dollar.

European Markets

European equity markets opened lower in reaction to Slovakia's parliament rejecting EFSF fund expansion, vote no confidence in government and disappointing results from Alcoa (AA) trading down (5.4%) in Frankfurt, with corporate results in Europe mixed. Most commentators expect Slovakia to reach a compromise later this week that will allow EFSF legislation to pass. Standard & Poor's and Fitch made several rating and outlook changes to Spanish and Italian banks following the sovereign downgrades. Major indices fell around (1%) before reversing declines and currently trade slightly below the day's best levels. France Sep final CPI +2.4% y/y vs consensus +2.6%. Germany Sep wholesale price index +5.7% y/y vs consensus +5.4%. UK Aug ILO unemployment rate 8.1% vs consensus +8.0%. UK Sept claimant count unemployment change +17.5k vs consensus 25.0k. Eurozone Aug Industrial production +5.3% y/y vs consensus +2.2% and prior revised +4.4% from +4.2%. Eurozone Aug Industrial production +1.2% m/m vs consensus (0.7%) and prior revised +1.1% from +1.0%. The pound and the euro are trading at $1.5709 and $1.3784 respectively

Today's Economic Releases (Eastern Time)

01:30 France CPI y/y (); consensus n/a
04:30 UK claimant count (Sep); consensus n/a
04:30 UK ILO unemployment rate (); consensus n/a
05:00 Eurozone Industrial Production y/y (); consensus n/a
07:00 US MBA Mortgage Purchase Applications (07-Oct); consensus n/a
16:30 US API Crude Inventories (08-Oct); consensus n/a
22:00 China Trade Balance (Sep); consensus n/a 

Today's Key Events (Eastern Time)

08:30 Johnson Controls Strategic Review and 2012 Outlook Analyst Presentation
09:00 Wal-Mart Fall Investor Conference
10:00 Analogic Analyst Day
13:00 Treasury Auction of 10-yr notes
13:15 Fed's Pianalto speaks
13:20 Fed's Fisher speaks Fed operations and economy
13:30 Fed's Plosser speaks on economic outlook
14:00 FOMC minutes of September 20-21 meeting released
15:45 Hudson Pacific Properties, Inc. Investor Day
—:— Association of the United States Army Annual Exposition - AUSA
—:— Bank of America Merrill Lynch Pan-European Building & Infrastructure Conference
—:— Cowen Therapeutics Conference
—:— CTIA Wireless Power Summit
—:— Dell World 2011
—:— GHS Securites 1x1 Series - Metals and Mining
—:— GHS Securities with Forbes Energy Services
—:— GHS Securities with Magma Design Automation
—:— GHS Securities with Minefinder
—:— Global Automotive Forum
—:— Global Hunter Securities with Basic Energy Services
—:— Idea Engineer Exchange Conference iEX
—:— Novell BrainShare 

Company Specific News / Other News

ADTN (ADTRAN reports Q3 EPS $0.56 vs Reuters $0.56; Reports Q3: Revenues $192.2M vs Reuters $189.3M)
CVX (Chevron guides Q3 EPS to be comparable with Q2 results)
GKK (Gramercy Capital reports H1 FFO $1.13 vs year-ago $0.73; Reports H1:
Revenues $311.3M vs year-ago $304.7M.
HCSG (Healthcare Services reports Q3 EPS $0.15 vs Reuters $0.17. Reports Q3: Revenues $218.9M vs Reuters $216.2M)
HST (Host Hotels & Resorts reports Q3 FFO $0.16 vs Reuters $0.17; First Call $0.16. Reports Q3: Revenues $1.14B vs Reuters $1.10B)
INFY (Infosys reports Q2 EPADS $0.72 vs Reuters $0.69 (INR 2504.55); Reports Q2: Revenues $1.75B vs Reuters $1.75B)
IVZ (Invesco reports preliminary month-end AUM of $598.4B, a decrease of 4.9% month over month.)
JCI (Johnson Controls guides Q4 EPS $0.75 vs Reuters $0.78. Q4 Guidance: Revenue $10.7 vs Reuters $10.48B)
PTEN (Patterson-UTI guides Q3 revenue to $674M v. Reuters $668.8M; says EPS to be similar to Q2 EPS of $0.52 v. Reuters $0.63)
WMK (Weis Markets reports Q3 sales +6.0% y/y to $678.6M; comparable store sales +6.5% y/y. The company reports Q3 EPS of $0.63 vs $0.61 y/y)

AT (Atlantic Power Corp files amended S1; to offer 11M shares)
CHKM (Chesapeake Midstream Partners common unit secondary offering for holder priced at $26.65 through Citi, Morgan Stanley, Barclays, Wells Fargo, BofA Merrill and RBC Capital)

Other News
Eurozone sovereign debt crisis 
Slovakia set for new vote talks: The WSJ noted that Slovak lawmakers are regrouping on Wednesday to negotiate a deal that would lead to approval of the expanded measures for the EFSF. The article said that talks between Slovakia's coalition government parties and the opposition are set to start on Wednesday and could result in a deal later in the day. A repeat vote in parliament could come as soon as Thursday. The paper noted that Robert Fico, head of the left-of-center Smer-Social Democracy party, will represent the main opposition party in the negotiations. He is widely expected to push for new elections as the price for supporting the EFSF ratification.
France says it does not need EFSF capital for its banks: Reuters cited comments from French government spokesman Valerie Pecresse, who said that France would not need to tap the EFSF to recapitalize its banks.She added that Europe would adopt a common rule on capital levels for banks, in line with France's push for a pan-European response to the issue of bolstering capital at troubled European banks.
Allianz says its EFSF insurance plan is gaining traction: Dow Jones yesterday cited comments from top executives at Allianz, who said that their plan to expand the firepower of the EFSF by turning it into a bond insurance program is gaining traction. The firm said that the €440B EFSF could cover more than €3T in bonds under a scenario in which 20% of the debt issued is insured and it draws on the full €780B that Eurozone governments have agreed to guarantee as backstop to the EFSF. Allianz executives argued that the proposal should be attractive to Eurozone governments because it would share the risk of backing European sovereign debt between taxpayers and private investors. In addition, under the plan, the EFSF would not have to care about a triple-A rating.
Juncker lists 10 steps to stem the Eurozone crisis: Reuters said that Eurogroup Chairman Jean-Claude Juncker proposed ten steps for solving the Eurozone crisis in an interview with the German newspaper Handelsblatt published on Wednesday. Key elements of the plan include: releasing the next Greek aid trance; ascertaining the sustainability of Greek debt; strict continuation of budget consolidation with automatic sanctions for repeated failures to meet budgets; a road map toward bank recapitalization; the introduction of a financial transaction tax; a growth program for struggling countries; a different tone in Europe on budgets; stronger financial market regulation; a new way to deal with ratings agencies; and an economic government.
Berlusconi's future in the balance: The FT said that Silvio Berlusconi was left fighting for the future of his center-right government on Tuesday after losing a parliamentary vote. The paper added that opposition parties are demanding his immediate resignation. The article noted that Berlusconi's coalition failed by just one vote to secure approval of its motion to approve key budget measures. It also pointed out that Finance Minister Giulio Tremonti, whose relationship with Berlusconi has deteriorated over the passage of the austerity budget, missed the vote by minutes on his way back to parliament from attending a funeral.
Europe's banks face 9% capital rule: The FT reported yesterday that the EBA's board of supervisors has approved in principle the idea that banks should be made to raise their core tier one capital ratios to 9% (well ahead of expectations for a 6-7% range) even after absorbing writedowns on the value of their sovereign debt. However, the paper added that officials cautioned that the 9% threshold could force an aggregate capital raise of €275B. It also pointed out that the threshold is still being debated in national capitals and in Brussels. According to the article, some members of the EBA board, notably the German faction, are understood to have dissented.
- Brussels ready to impose tough capital tests on banks: The London Times reported that European authorities are set to impose draconian standards on the region's banks that could force them to raise hundreds of billions in additional capital. The paper added that it is understood that the EBA is considering a minimum capital buffer of up to 10%. However, it noted that the parameters of the tests have yet to be finalized and will be the subject of debate at meetings of EU finance ministers this month. The Times also said that estimates of how much banks would need to raise range from at least €100B to more than €275B.
- European bank buffers offer little comfort: The WSJ said that just how much more capital European banks need has become a subject of fierce debate. The article pointed out that while European banks often appear healthy in terms of capital (which is based on risk-adjusted assets), they tend to have low levels of equity. According to the Journal, while the big US banks have tangible common equity ratios ranging from just under 6% to above 7%, some of Europe's biggest banks are at 4% or less. The paper went on to note that while European leaders are not focusing on tangible equity as they debate recapitalizations, a rise to 5% would require about €140B in fresh equity, and a rise to 7% would require more than €300B.

Newspaper Articles / Headlines

21st Century Business Herald
- China Investment Corp hopes to participate in the privatization of Rosneft. According to an official involved in the negotiation, a CIC executive approached Russian Prime Minister Vladimir Putin this June and expressed interest in the investment. Sources say some preliminary communication is already underway between CIC and Rosneft. However, CIC has some concerns: The process is likely to take a long time, partially because it might involve complicated approval procedures by the Russian government. Buying a 40% or even 20% stake in Rosneft would be so expensive that CIC would need more money from the Chinese government

De Tijd
Investment fund/s make/s early-stage approach to take over Arseus

Detroit News
- UAW members at Ford plant in WayneMichigan, reject proposed contract. The union tells the Detroit News that the Wayne vote was 51.1% against, 48.9% for. The union says 7.3% of workers have voted so far, and the overall tally is 50.1% in favor of the agreement.

Economic Times
Yahoo! sells 12% stake in An investment banker aware of the development tells the Economic Times that the sale values the matchmaking portal at $190M.

Financial Times
Voestalpine Chief Eder expects a drastic structural change in the Steel industry. Voestalpine's CEO Wolfgang Eder said in an interview with the FTD that unlike in previous years, demand has not picked up in September.
Prices drop on the spot market and could also impact the upcoming negotiations with car manufacturers about long-term contracts.
Mutual Series wants James Murdoch to step down as British Sky Broadcasting chairman. The president/CEO of the top-15 shareholder tells the FT that it expressed its opinion to the board this summer.
Scottish and Southern Energy to auction its electricity starting 14-October. The company announced its plans last night (11-Oct in Europe). CEO Ian Marchant tells the FT that he expects at least a couple of large competitors to do the same by Christmas. Ofgem had sought to force utilities to auction 20% of their output by 2013; SSE plans to be auctioning 25% of its electricity by the end of November, rising to 100% by early 2012.

Globe and Mail
- Bank of Nova Scotia may buy stake in Colombian bank. Citing an 8-Oct story in Semana, the Globe and Mail reports that Scotiabank is thinking about a deal to take a 51% holding in the private Banco Colpatria for roughly C$1B.
Royal Bank of Canada (RY.CN) wants Dexia's half of JV. The Globe and Mail reports that the parties are likely to have trouble agreeing on a price for Dexia's share of RBC Dexia Investor Services, which is worth C$400-800M, depending on who is making the guess. Luxembourg Finance Minister Luc Frieden told a press conference this week that RBC intends to use its right of first refusal for the stake, and talks were very advanced.

Les Echos
- SFR announces pricing of its low cost packages. The newspaper reports SFR revealed yesterday the price of its low cost packages, designed to counter the arrival of Mobile Free scheduled for early 2012. SFR Red Series offers four packages, but no obligation phone. The first will cost €12 euros per month and will call 30 minutes (sms). For €19 euros a month, subscribers can call three hours. With €29 euros per month, 8 hours. Finally, the package for €34 monthly offers 2 hours of calls and a limited mobile Internet to be 2 gigabytes.
- Areva could halt operations in Germany. Citing an interview published in Handelsblatt with chief executive Luc Oursel, the newspaper reports that all options are being considered. So far, no decision has been made, but management seems to question the future of the German unit after eight German plants were halted immediately after the disaster in Fukushima, in March.

New York Post
- Ron Burkle, Lion Capital fighting over refinancing for American Apparel. Sources tell the NY Post that Burkle, who enjoys the support of CEO Dov Charney, wants to expand the line from its current less-than-$60M to $90M, but Lion Capital does not want to allow Burkle to pass it in APP's line of creditors. A source briefed on the talks says that Burkle's ultimate goal is control of the company.

New York Times
Analysts may have been overzealous in raising their estimates of Holiday spending. The NYT reports that when Back-to-School beat expectations, people revised their Holiday guesses upward. But figures and anecdotal evidence from ports and train and trucking companies suggest that the optimism may have been premature.

Bain Capital to buy Skylark from Nomura Holdings for about ¥260B. Without citing sources, the Nikkei reports that an agreement for the private equity firm to buy the restaurant chain will probably be reached this month, and Nomura "will likely turn a profit on its investment." Nomura bought the chain in 2006.

Royal Bank of Scotland to become substantial shareholder in Miller Group. In his blog, citing sources, Mark Kleinman reports: RBS, Lloyds Banking Group (LLOY.LN), and Clydesdale (NAB.AU) may get a combined 20-30% holding in the construction company in a debt-for-equity swap. GSO Capital Partners (BX) will invest £160M for a controlling stake. Miller Group's debt will be cut from £600M to £160M. An announcement could be made this month.

Wall Street Journal
WSJ is cautious to negative on Aruba Networks. A "Heard on the Street" column says that the stock seems likely to fall for a variety of reasons.
- Whistleblower in Bank of New York Mellon forex-transactions cases identified. Apart from naming currency trader Grant Wilson as the informant and detailing the methods he used, the lengthy article is merely a summary of the situation.
WSJ is cautious on Eurasian Natural Resources. A "Heard on the Street" column is uncomfortable with yesterday's $600M purchase of Shubarkol Komir JSC, because Shubarkol's owners hold 44% of ENRC, and ENRC is paying a greater premium than coal miners have recently gone for. But it says that the purchase is a good strategic one, and independent directors have been told the deal is fair. The column suggests that one of the three major shareholders be put on the ENRC board.
Trump Organization puts in $170M stalking-horse bid for Doral Golf Resort and Spa. The WSJ reports that the bankrupt resort is being sold by a JV between Paulson & Co and Winthrop Realty Trust.
Hewlett-Packard analyses show PC spinoff might not make financial sense -- WSJ, citing sources. Analyses indicate that a spinoff might hurt the company's component costs.
- Paulson to reduce leverage. The WSJ reported, citing sources, that John Paulson told investors that he is planning to scale down leverage. According the the article Paulson plans to reduce leverage to 1.15 times from 1.5 times in the Advantage Plus fund. The article noted that Paulson remains optimistic, had no plans to give up managing money for outside clients and stated there would not be any trouble meeting redemptions with cash. The article also reported that another Paulson executive relayed that in a worst-case scenario the firm would have outflows of 25% if every investor eligible to redeem their funds did so. Notable Paulson holdings include: ACAS, APC, AU, BAC, BAX, C, CBG, COF, GFI, HIG, HPQ, LEA, MGM, MYL, NG, RAH, RKT, RIG, STI, WFC and WY.


BB&T: downgraded CHRW
Benchhmark: downgraded RAX
Goldman Sachs: upgraded IACI; downgraded PCX, DMD, WBMD, VPRT
Jefferies: downgraded WDR
JP Morgan: downgraded FLIR
Morgan Keegan: upgraded BWP, ETP
Oppenheimer: upgraded HS, HUM
RBC Capital: downgraded IVAN


There’s been a noticeable shift in sentiment this morning. Currently, European bourses are rallying about 1.5% and futures are pointing to a positive open on Wall Street. China’s CSI 300 surged 3.6%, likely as the country’s SWF started buying up bank shares and as the government unveiled some measures to ease a funding squeeze on small businesses. But it wasn’t always like this. The day started on a negative note, weighed by a number of developments…..where to begin? The EFSF still hasn’t been ratified. Slovakia is still the hold out. The country failed to pass the EFSF yesterday and since all governments of the 17 countries in the Euro Area must approve it, that means the EFSF has to hold off using its yet-to-be-approved-broadened powers for good, such as backstopping government bonds, not evil. There is, however, another vote later on this week and it is expected that the EFSF will pass. Then the possible start of a trade war between two major trading partners may be brewing. The U.S. bill that accuses Chinaof manipulating the CNY passed the Senate last night, although its not likely to get through the House. And the Senate turned down President Obama’s “American Jobs Act” last night and voted 50 to 49 to start a debate on the plan. It was, however, never expected to pass in its current form and the President has said that he would be agreeable to parts of the proposal getting through. So despite those three issues in the background, we’re still seeing some risk being welcomed, commodity prices are higher, the USD index is lower and most of the majors are stronger against the greenback this morning, led by the commodity-heavy currencies (NZD, ZAR, AUD and CAD).

So what brought about the turnaround in financial markets this morning? Optimism that Slovakia will pass the EFSF later this week. (Pressure came from the EU to “rise above” the political fray and to “swiftly” pass the agreement.) European Commission President Jose Barroso will be unveiling a plan for bank recapitalisation later on today. And it also helps boost badly beaten up confidence with a round of better-than-expected economic indicators. In Japan, after yesterday’s BoJ monthly report’s line that “economic activity has continued to pick up”, a couple of data releases last night threw their support behind that line. Machine orders grew 6.5% in August (or 3.3% below a year ago) but private (or core) orders jumped 11.0% in the month following an 8.2% dive in July, leaving core orders 2.1% above a year earlier. And in a separate release, machine tool orders climbed 20.3% y/y in September. In Europe, Euro Area industrial production unexpectedly rose in August, up 1.2% in the month or 5.3% year-over-year. That’s the second increase in a row and sets up for better third quarter following the weak Q2. And easing pressure a bit on the ECB was the latest inflation report out of France. Consumer prices were unchanged in September, helping keep prices steady at 2.4% above a year ago. In the U.K., the think tank NIESR reported that the British economy grew 0.5% in the three months to September, which is a small improvement from the 0.4% gain in the in the three months to August. Now overall, that’s nothing to write home about but it is an improvement. Then there were the jobs data. The claimant count rose 17,500 in September, which in itself is bad news but the increase wasn’t as much as expected. Still, it lifted the claimant count rate to a 1½-year high of 5.0% from 4.9% in August. Finally, down under, Aussie consumer confidence edged tentatively higher in October. The Westpac confidence index rose 0.4% this month to 97.2, buoyed moreso by expectations (+2.7%) and not the view of current conditions (-2.6%).

In the US

On the U.S. docket, the Minutes from the September 20-21 FOMC meeting will be released @ 14:00 (all times EDT). Having eased policy at this meeting (a $400 billion maturity extension program to be completed by mid-2012) and at the meeting before (a conditional commitment “to exceptionally low levels for the federal funds rate at least through mid-2013”), we’ll be looking for clues on what the Fed might do next. There is still lots they can do… increasing twist operations, giving more guidance (say, on the time profile for its balance sheet or policy-desired path for the unemployment rate), more sterilized credit easing (buying mortgages but absorbing the reserves created by ramping up Treasury’s Supplementary Financing Program), lowering the interest rate paid on excess reserves (currently 0.25%), and more quantitative easing (QE3). We judge the Fed will feel compelled to ease again, owing to an unemployment rate that should fail to fall below 9% until that latter half of next year and even drift up a bit during the next few months.

Further on the Fed front, Cleveland Pres. Pianalto (non-voter) will speak on “Leadership in Challenging Times” @ 13:15, Dallas Pres. Fisher (voter and dissenter) will speak on the Fed and the economy @ 13:20, and Philly Pres. Plosser (also a voter and dissenter) will speak on the economic outlook @ 13:30. Finally, we get the Job Openings and Labor Turnover Survey (JOLTs) for August @ 10:00. This is the BLS’ third employment survey after the establishment and household surveys which were just released last week for September. For August, these latter two surveys showed 57k and 331k gains, respectively.

In the Treasury market: the Fed will sell $8.0-to-9.0 bln of notes in the Mar/Oct-2013 range @ 11:00, $30 bln of 4-week bills will be auctioned @ 11:30, and $21 bln of 10-year notes will be auctioned @ 13:00.
Just in: The MBA mortgage index increased 1.3% for Oct. 7 with gains on both the purchases and refinancing fronts.

In this morning’s media: President Barack Obama’s drive to enact a $447 billion jobs plan was derailed by the U.S. Senate, falling short of the 60 votes needed to advance what he has proposed to revive a faltering economy. Two Democrats joined the Republican minority to block the plan in a test vote. Yesterday’s tally was 50-49, shelving the measure in its current form.

The U.S. Senate voted Tuesday to pass legislation targeting China's management of its currency, the yuan, underscoring U.S. frustration with one of its largest trading partners. Although the bill is unlikely to become law, the Senate debate has kept a public focus on the currency issue as the two countries remain at odds over China's control of the yuan. Despite wide support for the legislation in the House, Republican House leaders have signaled they have little interest in scheduling a vote. Majority Leader John Boehner (R., Ohio) has called the approach "dangerous," and has insisted he will resist pressure for a House vote. 

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 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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