Monday, October 3, 2011

Morning Note Oct 3rd

October 3, 2011

US equity futures are off the worst levels of the morning following Asia and Europe lower as continuing concerns over the banking sector and slowing global growth are once again highlighted after Greece admitted over the weekend it would miss it's Fiscal targets. With no resolution in sight to the EU debt crisis, anxiety continues to weigh on markets.

Libor fixings 

- Overnight Libor: Dollar: 0.144% vs prior 0.145% ; Sterling: 0.589% vs prior 0.624%; Euro: 0.893% vs prior 1.275%
- 1-month Libor: Dollar: 0.240% vs prior 0.239% ; Sterling: 0.693% vs prior 0.692%; Euro: 1.299% vs prior 1.299%
- 3-month Libor: Dollar: 0.378% vs prior 0.374% ; Sterling: 0.954% vs prior 0.953%; Euro: 1.498% vs prior 1.495%

China Sep PMI 51.2 vs. consensus 51.5 and 50.9 in August. New Orders 51.3 vs. 51.1 in August. Output 52.7 vs. 52.3. Export Orders 50.9 vs. 48.3

Asian Markets

Markets fell, with incentive to follow Wall Street down exacerbated by disappointment that Greece admitted it won’t reach its budget deficit targets this year and next year. Japan’s tankan turned positive, but was in line with forecasts, and therefore didn’t stimulate buying. Australiafell broadly. Taiwan fell in line with the region after reporting its fourth consecutive monthly decline in PMI. Hong Kong’s malaise was extended on concerns about China’s economy. Chinese banks and insurers dropped or plunged. Macau casino stocks plunged on fears a credit squeeze on private companies in China will hurt gaming revenues in the city. South Korea is closed for Kae Chun Jul. China is closed until 10-Oct for National Day. Japan Q3 large manufacturer tankan 2 vs cons 2 and (9) sequentially.

European Markets

European equity markets opened sharply lower as the EuroZone debt crisis continued to hurt sentiment after reports, citing Greek government draft budget figures, indicating Greece will miss 2011 and 2012 deficit targets. There were also conflicting reports as to the progress being made with the Trokia delegation ahead of their report which is integral to approving the next tranche of EU/IMF bailout loan, as well as talk that the size of the 'haircut' on Greek debt to be taken by banks would be increased. EuroGroup finance ministers are due to meet today to discuss progress being made by Greece. Major indices pared initial falls aided by better than expected regional manufacturing PMI reports. All sectors trade lower led by auto (4.0%), bank (3.5%) and insurance (3.0%), whilst food & beverage and healthcare both (0.8%) and construction (1.0%) lead relative performers. US futures trade lower. Sep final Manufacturing PMI: France 48.2 vs preliminary 47.3, prior 49.1. Germany 50.3 vs preliminary 50.0, prior 50.9. EuroZone 48.5 vs preliminary 48.4, prior 49.0. UK Sep Manufacturing PMI 51.1 vs consensus 48.6, prior revised to 49.4 from 49.0. The pound and the euro are trading at $1.5514 and $1.3333 respectively.

Today's Economic Releases (Eastern Time)

03:50 France Manufacturing PMI final (Sep); actual 48.2; consensus 47.3
03:55 Germany Manufacturing PMI final (Sep); actual 50.3; consensus 50.0
04:00 Eurozone Manufacturing PMI final (Sep); actual 48.5; consensus 48.4
04:03 UK Manufacturing PMI (Sep); actual 51.1; consensus 48.6
10:00 US Construction Spending (Aug); consensus (0.1%)
10:00 US ISM Manufacturing Index (Sep); consensus 50.4 

Today's Key Events (Eastern Time)

07:00 Accuray Breakfast Investor Meeting at ASTRO
08:30 Sangamo BioSciences discusses results from phase 2b trial of SB-509 in diabetic neuropathy:             855.859.2056      
18:00 Fed's Lacker speaks on economics
—:— American Society for Therapeutic Radiology and Oncology ~ ASTRO
—:— China: Markets Closed for National Day
—:— Fortune Brands Home & Security (FBHSwi) will replace Overseas Shipholding (OSG) in the S&P 400 - after the close
—:— Gaming Investment Forum
—:— Johnson Rice Energy Conference
—:— Meeting of the Eurogroup (eurozone finance ministers)
—:— Obesity Society Annual Meeting
—:— Overseas Shipholding (OSG) will replace LCA-Vision (LCAV) in the S&P 600 - after the close 

Company Specific News

ACI (Arch Coal guides FY (Dec 2011) adjusted EBITDA $900M-$1.0B vs prior $1.08-1.20B and Reuters $1.17B; FY Guidance (Dec 2011): EPS $1.00-1.40 vs prior $1.75-2.15 and Reuters $2.04; First Call $2.02.)
WWW (Wolverine World Wide reports Q3 EPS $0.82 vs Reuters $0.75; Reports Q3:
Revenues $361.6M vs Reuters $357.6M)

FXA.CN (Afexa Life Sciences recommends that shareholders accept Valeant offer of C$0.85 per share)
IR (Ingersoll-Rand completes sale of majority interest in Hussmann to Clayton, Dubilier and Rice. The sale was announced 08-Aug-11).
SLG (SL green and Stonehenge partners to acquire NYC retail/residential portfolio for $416M)
SONE (ACI Worldwide to acquire S1 Corporation (SONE) for $9.55 in cash and stock. The transaction is expected to be accretive to full year earnings in 2012.)

AMPE (Ampio Pharmaceuticals files $80M equity shelf; registers 1M shares for holders)
AUMN (Golden Minerals announces private placement and filing of shelf registration)
BUSE (First Busey files $250M mixed shelf)
IGTE (iGATE files to register 26.5M shares for holders)
PLD (ProLogis files mixed shelf of indeterminate amount)
WLK (Westlake Chemical files mixed shelf of indeterminate amount)

Corporate Actions
IVD (IVAX Diagnostics CEO and COO, Kevin Clark resigns, effective 27-Mar)

Other News
S&P affirms ratings on UK at 'AAA'; outlook stable. The unsolicited ratings on the U.K. reflect the view of its wealthy and diversified economy, fiscal and monetary policy flexibility, and relatively adaptable product and labor markets. In addition, S&P view the U.K. as having deep capital markets with strong demand for long-dated gilts by domestic institutional investors.
Although the economy has exited recession, recovery has been lackluster, with output essentially stagnating since Q4 of 2010. In S&P's view, the U.K. government's efforts over the next few years to engineer a steep correction in the fiscal accounts will likely weigh on the economy. The reliance of U.K. economic growth in recent years on a limited number of sectors and regions, fueled by rising private- and public-sector debt, is an issue that the governing coalition intends to address. As a result, S&P expects the U.K. will post relatively modest growth rates of around 1.8% on average in 2011-2014, lower than the 2.5% forecast by the Office for Budget Responsibility. The stable outlook reflects expectation that the government will implement the bulk of its expenditure-led fiscal consolidation program, which S&P believe is likely to cause the net general government debt burden to peak at about 87% of GDP in 2013 and decline thereafter.
The ratings could come under downward pressure if, against expectations--and perhaps in response to weakening growth prospects--the coalition government's commitment to fiscal consolidation falters.

Newspaper Articles / Headlines

All Things Digital
Huffington Post acquires Localocracy. A source close to the situation tells All Things D that the price for the online grassroots platform is less than $1M.

- The Trader: Discusses market unpredictability; the Dow is down 12% in Q3
- International Trader (Europe): Highlights the market's uncertainty surrounding the European Debt Crisis
- International Trader (Asia): Investors should look into Hong Kong property shares despite the global slowdown
- Current Yield: The credit and copper markets indicate a recession ahead
- The Striking Price: A German study reveals that traders desire to win is stronger than that of psychopaths
- Commodities Corner: Positive outlook for copper
- Up and Down Wall Street: Cautions investors that a recession, rising joblessness and financial distress may be in the future
- Economic Beat: Despite 2008's stimulus package, the economy remains weak while the size of the budget deficit jumps
- D.C. Current: Discussed the dispute between the SEC and China's Ministry of Finance over accounting concerns
- Technology Trader: Discusses Facebook's move towards its IPO
- Plugged In: Hewlett-Packard is the most inexpensive of all tech names in the S&P 500 index and could nearly double in wake of management problems
- ETF Focus: Taxable bond ETFs continue to top stocks
- Fund of Information: Discusses Obama's Jobs Act proposal and why munis will still be attractive even if it the proposed bill passes
- Speaking of Dividends: HSN (HSNI) declares its first dividend while CH Energy Group (CHG) and Hickory Tech (HTCO) increase their quarterly dividends
- Follow- up: Positive on Boeing (BA); Positive on Tyco International's (TYC) breakup; Bullish on Mela (MELA)
- Barron's mutual fund profile features Chris Bonavico and Ken Broad of the Delaware Smid-Cap Growth Fund (DFCIX). Bonavico and Broad reveal their strategy for picking their holdings, including determining how well the investment candidate stands up to the fund's scrutiny as well as looking for cheap entry points, possibly stemming from a spinoff or acquisition that could cause a change in price. The fund's top 10 holdings include: Weight Watchers International (WTW), Core Laboratories (CLB), J2 Global Communications (JCOM), Perrigo (PRGO), SBA Communications (SBAC),
Techne (TECH), Affiliated Managers Group (AMG), Strayer Education (STRA), IntercontinentalExchange (ICE), Peet's Coffee & Tea (PEET).
- Barron's feature positive Lowe's. Barron's argues that Lowe's (LOW) same-store-sales, earnings and new focus on self-improvement could bring the stock to around $30 in the next year, up from its recent $20. The article notes that Lowe's, which operates 1,753 stores in North America, is recently focusing on self-improvement, by shifting away from frequent promotions to provide everyday low prices. Barron's points out that bullish analysts and investors also expect to see the stock heading toward $30 in the next year. The article suggests that Lowe's consider a more balanced mix of dividends and buybacks, since it will pay out 35% of this year's projected profit and notes that a 50% payout ratio would result in a 4% yield that likely would attract more investors. Barron's also notes that the stock's downside is limited due to the company's strong market position, earnings power and a $13 book value.

Daily Mail
BP CEO Bob Dudley could lose job if sale of Pan American Energy stake doesn't go through. The Daily Mail doesn't cite any sources, giving the impression that the article is nothing more than speculation on the part of the author.
- Wm Morrison interested in Garden Centre. Without citing sources, the Mail on Sunday reports that Morrisons has asked for sale documents from Lloyds (LLOY.LN), and Tesco (TSCO.LN) is not expected to make an offer for the chain. Bridgepoint is also named as a possible buyer; bids are expected to be for less than £300M.

Financial Times
- Medtronic CEO wishes US approval process was as fast as Europe's. Omar Ishrak tells the FT that Medtronic has not seen higher incidences of safety problems from devices that have been approved in Europe. But the FDA says importing the EU approval model would amount to a lowering of the US standard.
- Jack Ma's interest in Yahoo! is real ... probably. A source close to the situation tells the FT that Ma's 30-Sep public statement of interest was intended to let other possible bidders know that he is willing to exercise his right of first refusal. Though he hasn't yet visited Yahoo on this trip, the article notes that Ma is due to be in California for another two weeks, which would allow for talks about a deal. But sources familiar with Ma's thinking say the fact that Yahoo is searching for a new CEO indicates the board is not united in looking to sell, which at the very least makes any possible purchase more complicated.
- E.ON hires Goldman Sachs (GS) to sell its gas distribution network. People familiar with the situation tell the FT that the unit could be sold for €2.0-2.5B by Q2/12. One source says Enel (ENEL.IM) may be an interested bidder.
Iberia board to consider establishing low-cost airline at 4-Oct meeting. The FT reports that a decision to do so would aid the bottom line, but might lead to a strike by Sepla, the pilots union.
Goldman Sachs is biggest potential winner of the proposed sale of the London Metal Exchange. The FT reports that Goldman Sachs is biggest potential winner from the proposed sale of the London Metal Exchange, since the company has more than quadrupled its stake in the LME over the past two years. The article notes that last week, the LME, the centre for global metals trading, said it had been approached by more than 10 suitors over a sale that shareholders hope will value it at more than $1.6B.
According to The FT, the potential sale of the LME will be a main topic at LME week, which begins in London on Monday. The FT reports that Goldman declined to comment on whether it was advising any party in the potential sale, however, according to bankers, it would be unlikely to do so given its large stake in the exchange. The article reports that LME is being advised by Moelis.
Ronald Perelman joins competition for EMI. The Financial Times reports that Ronald Perelman, the billionaire buy-out investor, is competing with four of the world’s largest music companies for control of EMI, after private equity bidders backed off before this week’s deadline for second-round bids. The article notes that, according to people involved in the auction, Citigroup could get offers on 5-Oct in the range of $1.1B-$1.5B for the group’s recorded music business and $2B-$2.5B for its publishing arm. The Financial Times notes that the auctions outcome is unpredictable since volatile markets had already left two banks unwilling to lend to an EMI deal. According to the article, Citigroup is expected to name a winner of the bids within two weeks, but could hold onto EMI if offers are disappointing. One source tells the Financial Times that BMG, the publishing venture between KKR and Bertelsmann, will decide this week whether to bid for the whole company or just music publishing. Two people close to the auction tell the Financial Times that Perelman could look for a bidding partner interested in publishing or seek a distribution deal with a larger music company if it wins control of EMI Music. The article also notes that, one person familiar with the action process told the newspaper that other parties including Ron Burkle could still join the competition, but people close to the auction said private equity bidders had lost interest.

Globe and Mail
Competition Bureau looking closesly at Maple Group's bid for TMX Group. People familiar with the review tell the Globe and Mail that regulators are interested in many things, including Maple's plan to combine Alpha with TMX, and Maple's plan B if it is prohibited from combining Alpha with TMX. The investigation is expected to last for months.

EMC to acquire Zettapoint for $10M. According to Globes, EMC (EMC) is to acquire database optimization company ,Zettapoint. The article notes that the imminent announcement by EMC will not disclose the amount paid for Zettapoint but sources tell Globes that it is around $10M. The article adds that Zettapoint was founded in 2008 and has raised $1.5M from Jerusalem Venture Partners.

- Pressure grows for UBS to release the report regarding the investigation of the rogue trader. The article notes that pressure is mounting on UBS to move quickly to publish the results of its investigation into how a rogue trader was able to run up a $2.3B loss in its Londoninvestment banking division. The article notes it is understood that Carsten Kengeter, the head of UBS's investment banking arm, is close to finalizing the review, which is likely to lead to big cuts to its London trading activities as well as significant job losses. The Independent on Sunday notes that an announcement regarding the report is due this week but now may be postponed till the week after. Sources suggested to The Independent on Sunday that Kengeter is being urged by his Swiss bosses to move more rapidly in order to contain the damage to the bank's reputation.

LA Times
- Chevron to reveal solor oil field project on Monday. According to The L.A. Times, Chevron (CVX) will reveal a solar oil field project that serves as a showcase for the technology of Chevron-backed solar thermal company BrightSource Energy. The L.A. Times points out that on Friday, three of Chevron's executives said that they would attend the launch of the "demonstration project" in Coalinga, which is designed to use solar power to create steam to inject into wells to improve the flow of heavy oil. The article notes that the 65-acre project consists of 7,600 mirrors focusing sunlight on a 327-foot tower. The article points out that besides Chevron, other BrightSource investors include Google (GOOG), Alstom (ALO.FP), BP (BP), Morgan Stanley (MS) and VantagePoint Capital Partners.

- Intel acquires Telmap Reuters reports that Intel has agreed to acquire mobile navigation software maker Telmap,. The article notes that details of the deal were not disclosed but, according to Israeli media, Intel is paying about $300M to $350M. Telmap CEO Oren Nissim declined to comment on the price but told Reuters the deal was expected to close before the end of the year. The article notes Nissam told Reuters that pairing up with Intel will allow Telmap to provide a "true alternative" to offerings from large companies such as Nokia (NOK) and Google (GOOG).
Old Mutual looks to sell $45B Dwight Asset Management. Reuters reports that, according to several sources familiar with the discussions, Old Mutual Asset Management, a subsidiary of Old Mutual (OML.LN), is looking to sell Dwight Asset Management Company, an institutional fixed income asset manager that specializes in stable-value funds for retirement plans. The article notes that Dwight advises three fixed-income funds for Old Mutual Asset Management, including: the Old Mutual Dwight High Yield Fund, the Old Mutual Dwight Short Term Fixed Income Fund (OIRAX.O) and the Old Mutual Dwight Intermediate Fixed Income Fund, which, according to Lipper, altogether have $240M in assets. Sources tell Reuters that Morgan Stanley is a banker on the deal. Reuters notes that, according to Geoff Bobroff, a mutual fund consultant, Old Mutual may be selling Dwight as part of its effort to streamline its business pre-IPO.

- Vivendi may look for Polish partner to help buy TVN. Chairman Jean-Rene Fourtou tells Rzeczpospolita that "good chemistry" and money are the only two requirements for the partner

South China Morning Post
Airbus working on aviation-biofuel supply chain in China. An executive tells the SCMP that a partnership -- similar to that among Boeing (BA), Air China (753.HK), and PetroChina (857.HK) -- won't be announced until later this year.

Wall Street Journal
- Barclays (BARC.LN), Bank of America (BAC) to sell out of Archstone. People familiar with the matter tell the WSJ that the banks are seeking to unload their combined majority stake in the apartment company; sources say the combined stake is probably worth $2-3B. Blackstone Group (BX), Brookfield Asset Management (BAM), Equity Residential (EQR), AvalonBay Communities (AVB), and two unidentified parties are potential buyers. The article says that Lehman has the right of first refusal on the banks' stake.
WSJ is unenthusiastic about AMR Corp. A "Heard on the Street" column says the company is almost certain not to declare bankruptcy, but it won't look attractive -- especially compared to other airline stocks -- until it gets its labor costs under control.
China's bullet-train technology is more foreign than country will admit. People familiar with the situation tell the WSJ that a July train crash in Wenzhou used systems made by Hollysys (HOLI), some of which contained Hitachi (6501.JP) circuitry. To protect its IP, Hitachi sold the components under a "black box" design that makes copying difficult, but it also interferes with troubleshooting and safe integration. Foreign companies are basically prohibited from bidding to take part in China's bullet-train program.
Citi considers new measures, people at top in Japan in light of regulatory investigation.
- WSJ looks at challenges Apple is facing with iPhone 5. The article is basically hypothetical, focusing on the fact that due to its track record of overachievement, Apple may have created expectations that are simply too large for it to satisfy.
- Boeing and Cargolux reach tentative agreement over contract dispute. According to the WSJ, Cargolux Airlines International has tentatively resolved a contract dispute with Boeing (BA) over deliveries of the first two 747-8 jets. The article notes that in a statement on Saturday, Cargolux said that it reached a tentative agreement with Boeing "over contractual issues" and will provide more details about the deliveries after a board meeting Friday. The WSJ notes that, according to media reports, Akbar Al Baker, CEO of major Cargolux shareholder, Qatar Airways, said Friday that Cargolux postponed the deliveries because the jets, carrying General Electric (GE) engines, didn't meet fuel-efficiency guarantees.
The article notes that, according to Al Baker, the first 747-8 delivery now will take place around 12-Oct.


Bernstein: downgraded HP, PTEN
Citi: upgraded VIT, IR, MOBI; downgraded GWW
Deutsche Bank: upgraded FCX, GG; downgraded AA
MKM Partners: upgraded RGC
Morgan Stanley: upgraded PCLN; downgraded CENX, NOR
RW Baird: downgraded KIOR
Stifel Nicolaus: upgraded AMZN


Ahead of our Equity & CDS Pricing for REITs / Banks conference call, we wanted to highlight that skew, a measure of implied downside risk relative to implied upside risk based on option pricing, remains extremely elevated in the financials and REITs.

XLF Skew – 94th percentile.
IYR Skew – 96th percentile.

The steep skew, while a concerning indicator, also presents an attractive opportunity for hedging via put spreads. Buying a put spread involves buying one put option and selling another lower strike put option. The steep skew, thus, allows the investor to sell the lower strike put at a much higher implied volatility level. The trade provides protection b/w the two strikes.

For protection in XLF (financials ETF) and the IYR (REIT ETF) into year-end, clients should consider
1)     Buy XLF Dec 11/8 Put Spread for $0.67 (~3.5x1 max net payout; buying Dec 11 Put for ~60% vol and selling Dec 8 Puts at ~$75% vol; spend 5.7% for ~32% downside protection).
2)     Buy IYR Dec 47/35 Put Spread for $2.15 (~4.6x1 max net payout; buying Dec 47 Puts for ~50% vol and selling Dec 35 Puts at ~66% vol; spend 4.3% for 30% downside protection)

Notable option market trades from Friday’s session: 

Macro / Thematic

GLD - 30,000 of the October 140 put / December 190 call bullish risk reversal at $0.90. The combo was tied to 690,000 shares at $157.09.

IYR - 5000 of the November 35 / 40 put spread was bought for $1.40. The put spread was bought to open.

JNK - 6000 December 36 puts appeared to be sold $1.45 to buy 2500 of the November 32 / 36 put spread was bought for $0.90.

QQQ – 44,000 of the October 50 puts were bought for $1.20. The puts were bought to open.

SPX – 15,000 x 30,000 of the December 1150 / 1300 1x2 call spread was bought. The 2 December 1300 calls were bought and the December 1150 calls were sold. Separately, 15,000 of the December 550 puts were bought for ~$1.075, representing approximately $1.725 billion notional.

VIX - A total of 20,000 of the December 20 puts were bought for $0.125

XHB – 10,000 of the January 8 / 16 bearish risk reversals traded early in the session at $0.28. The risk reversal was sold to open.


HTZ - 6300 of the November 9 puts were bought for $1.10. The puts were bought to open.


HAL - 4200 of the January'13 30 puts appeared bought for $7.30. The position is to open.

Industrials / Materials

HRBN - 9000 October 18 puts were sold at $1.40. The puts were sold to open.

MOLX – 3500 of the November 22.5 puts were bought for $2.395. The puts were bought to open with the stock trading at $21.25.

USU - ~3000 of the October / November 2.5 call spread was bought for $0.20. The trade appears to be a roll of a bullish bet from October to November.


FSL – ~3500 block of March 10 puts were bought for $1.60. The puts were bought to open.

QCOM - 8,100 November 46 puts were sold at $2.08. The trade was tied to 267,000 shares at $49.60.

RIMM - 22,000 of the March 30 calls were bought for $1.05. The calls were bought to open. The position was tied to 531,000 shares at $20.80 and appears to be to open.


BAC- A block of 19,000 of the January'13 7.5 calls were bought for $1.52. Separately, 9000 of the November 4 / 7.5 bullish risk reversal was bought for $0.12.

DB - 8750 October 25 / 35 put spreads were sold at $2.65 and 7650 of the October 20 / 35 put spread was sold at $3.20 to buy 14,000 of November 25/ 35 put spread for $3.40.

MS - 5000 of the April 20 calls were bought for $0.99. The calls were bought to open.


LIFE - 1500 LIFE November 40.0 Puts were bought for $3.70/ The puts were bought to open.

 *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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