Morning Note

Asian Markets

Asian markets were mixed today. Japan opened flat, but rose in the afternoon on short-covering. Tepco (9501.JP) rose 1% after a government official denied that liquidation was likely, raising sentiment. Sony, fell again on distress with its recent victimization by hackers. Volume was thin as investors recovered from a long weekend and awaited trade figures coming later this week. Taiwan was flat, with the communications and internet sub-index the biggest winner and department stores the biggest loser. Chimei Innolux (3481.TT) rose 1% on a report that its shipments for the iPad 2 will jump starting this month. Australia fell slightly on weak market sentiment, rising from its lows when the central bank kept interest rates unchanged. In Singapore, Olam (OLAM.SP) fell 4% on a report it will sell $600M of shares to fund acquisitions. South Korea fell after a long weekend. Japan May foreign reserves $1.139T, +$3.97B m/m. April composite index of coincident indicators +0.3 pts m/m to 103.8. April index of leading indicators (3.7 pts) m/m to 96.4. May bank lending balance (0.3%) y/y to ¥415.72T. Australia keeps cash rate unchanged at 4.75%, as expected. The yen is trading at 80.16 to the US dollar.

European Markets

European equity markets trade higher, with some indices reversing initial modest declines, as investors shook off a weak close on Wall Street and mixed Asian markets, to edge indices higher. A bounce in banking shares and firmer mining shares helped the advance, with major indices currently close to session highs. A Greek government spokesman say expects parliament to vote by the end of June on medium term austerity package, with the idea of a referendum again downplayed by government officials. UK May house prices (4.2%) y/y vs consensus (4.1%), prior (3.7%). UK May retail sales (2.1%) y/y on a like for like basis; total sales (0.3%) - British Retail Consortium, says highlights tough trading conditions. The pound and the euro are trading at $1.6457 and $1.4681 respectively.

Today's Economic Releases (Eastern Time)

07:45 US ICSC-Goldman Chain Store (04-Jun); consensus n/a

08:55 US Redbook Chain Store (04-Jun); consensus n/a

15:00 US Consumer Credit (Apr); consensus +$5.57B

16:30 US API Crude Inventories (03-Jun); consensus n/a

Today's Key Events (Eastern Time)

06:30 Phoenix Solar Capital Markets Day

08:00 XL Group plc Investor Day

08:30 EnerNOC Analyst Day

08:45 Verenium Analyst and Investor Day

09:00 Genpact Investor Day

12:00 Citi Luncheon with JC Penney

12:30 Fed's Lockhart speaks on economic outlook

13:00 Ford Investor Day

13:30 The Children's Place Analyst Day

15:45 Bernanke speaks at ABA conference

17:00 THQ Investor Meeting from E3 2011

—:— American Society of Clinical Oncology (ASCO)

—:— American Society of Neuroradiology ~ ASNR

—:— Apple Worldwide Developers Conference - WWDC

—:— Bank of AmericaTelecommunications, Media & Technology Conference

—:— CapStone Investments Silicon Valley Bus Tour

—:— Citi Climate Change & Water Investment Conference

—:— Citi with JC Penney

—:— Credit Suisse Pan European Small and Mid Cap Conference

—:— Design Automation Conference ~ DAC

—:— Deutsche Bank Global Financial Services Investor Conference

—:— E3 Expo

—:— FBN Securities with Silicon Graphics CEO & CFO

—:— FBR Capital Markets NAREIT REIT Week

—:— Goldman Sachs Global Healthcare Conference

—:— Goldman Sachs Lodging, Gaming, Restaurant and Leisure Conference

—:— Infineon Investor Day

—:— International Technical Conference on Clean Coal & Fuel Systems

—:— Jefferies Global Healthcare Conference

—:— JP Morgan Diversified Industries Conference

—:— Keefe Bruyette & Woods Investment Management & Specialty Finance Conference

—:— Needham Internet & Digital Media Conference

—:— Pfizer Five-year overall survival data from a Phase 2 axitinib trial as second-line treatment for metastatic RCC patients

—:— RBC Capital Markets Canadian REIT Investor Sessions

—:— RBC Capital Markets Communications Technology Investor Day

—:— RBC Capital Markets Global Energy & Power Conference

—:— Transcatheter Valve Therapies ~ TVT 

Company Specific News

Earnings

BAH (Booz Allen Hamilton reports Q4 EPS $0.36 ex-items vs Reuters $0.28. Reports Q4: Revenues $1.49B vs Reuters $1.51B)

GIII (G-III Apparel reports Q1 EPS ($0.03) vs Reuters $0.04; Reports

Q1: Revenues $196.9M vs Reuters $195.4M)

FCEL (FuelCell Energy (FCEL) reports Q2 EPS ex-items ($0.10) vs Reuters ($0.12))

MIND (Mitcham Industries reports Q1 EPS $0.58 vs Reuters $0.34)

PBY (Pep Boys reports Q1 EPS $0.23 vs Reuters $0.30. Reports Q1: Revenues $513.5M vs Reuters $537.1M)

TLB (Talbots reports Q1 EPS $0.08 ex-items vs Reuters $0.03. Revenues $301.3M vs Reuters $305.4M)

Positive News

FDX (FedEx increases quarterly dividend by 8.3% to $0.13 from $0.12.

Payable 1-Jul; record 17-Jun)

FTI (FMC Technologies awarded $50M subsea equipment contract for Statoil's Visund Nord project)

Negative News

LPHI (Life Partners announces receipt of amended Wells Notice from SEC)

M&A

BXP (Boston Properties terminates previously announced agreement to sell Carnegie Center portfolio)

KRC (Kilroy Realty purchases two properties for ~$247.7M)

TIN (IP proposes to purchase all shares of Temple-Inland for $30.60/sh cash)

(NBCUniversal will purchase Blackstone's 50% stake in Universal Orlando. The purchase price for Blackstone’s interest is $1.025B, subject to various purchase price adjustments. The enterprise value of this transaction is $3.165B and it is expected to close on 1-Jul. Recall that the deal was considered likely and was subject to several

reports.)

Offerings

CLF (Cliffs Natural Resources files 9M share secondary offering through JPMorgan, BofA, and Citi)

KW (Kennedy-Wilson files $250M mixed securities shelf registration.

The shelf covers common stock, preferred stock and warrants.)

ONB (Old National Bancorp files mixed shelf of indeterminate amount)

REXX (Rex Energy files $250M mixed shelf)

RSO (Resource Capital files $200M mixed securities shelf registration)

Other News

Weekly USDA crop progress report says 79% of the corn crop has emerged. Compares to 66% of corn crop emerged last week and 90% average of 2005-09.

Corn: 94% of corn has been planted vs. 86% last week and 98% average of 2006-10 period. 67% of corn crop is in good or excellent condition compared to 63% last week and 76% y/y

Cotton: 87% of cotton has been planted vs. 73% last week and 87% average of 2006-10 period. 9% of cotton is squaring vs. 7% the same week last year and 8% average of 2006-10 period

Soybeans: 68% of soybeans have been planted vs. 51% last week and 82% average of 2006-10 period. 44% of soybeans have emerged vs 27% last week and 61% average of 2006-10 period.

Rice: 86% of rice has emerged vs. 77% last week and 92% average of 2006-10 period. 59% of rice crop is in good or excellent condition compared to 53% last week and 76% y/y

Winter wheat: 34% of winter wheat crop is in good or excellent condition compared to 33% last week and 66% y/y. 10% of winter wheat crop has been harvested vs. 4% this week last year and 6% average of 2006-10 period

Spring wheat: 79% of spring wheat has been planted vs. 68% last week and 98% average of 2006-10 period. 57% of spring wheat has emerged vs. 40% last week and 92% average of 2006-10 period.

Newspaper Articles / Headlines

El Confidencial

- Barclays (BARC.LN) looking closely at Caja del Mediterraneo. Sources familiar with the situation tell El Confidencial that Santander (SAN.SM), BBVA (BBVA.SM), Sabadell (SAB.SM), and Ibercaja are also potential buyers of CAM.

Financial Times

- Landlords working on plan to have Southern Cross wound down. People close to the situation tell the FT that yesterday (6-Jun in Europe), representatives of about 20 landlords holding a third of Southern Cross's homes discussed an orderly wind-down that would not involve administration. Southern Cross would instead gradually relinquish control of its homes to other operators. The article says that the idea was one of several discussed, but no detail is provided on the others.

- Barclays ordered to pay $1B to Lehman trustee.

- BP sale of part of TNK-BP would allow exploration with Rosneft in Artic. The FT, citing someone close to the situation, reports that BP might be able to release itself from the shareholder agreement with TNK-BP (TNBP.RU) that all exploration in Russia must be done through that vehicle if it sold just one share of its 50% stake. If they sold that share then BP would be free to agree a new deal with Rosneft (ROSN.RU).

Huffington Post

- Banks have 'accepted' $20B price tag for mortgage fraud inquiry. The article, citing people who participated in the conversation, that: Associate US AG Tom Perelli who is overseeing discussions, held a conference call with a group of state AGs and told them he believed the banks were operating under the assumption that they will have to pay much more than the $5B offer they made last month. Perelli said his beliefs were based on recent talks with representatives of the five companies targeted. Unresolved issues include. The scope of bank's release from liability, the split of money between fines and restructuring mortgages, the continued monitoring of banks' behaviour post settlement.

Los Angeles Times

- Walt Disney to cut up to 250 jobs. The LA Times, citing people famiiar with the matter, reports that: The studio would cut around 5% of its 5,000 workforce globally, with the bulk of the cuts in Burbank. The cuts are expected to be highest in the distribution area.

Malay Mail

- Dassault Aviation to open Malaysian office to help bid for MRCA programme. The article, citing defence industry sources, reports: that the company is set to open an office in Kuala Lumpur in the next one or two months to boost its chances of winning the multi-role combat aircraft (MRCA) contract. The winner is set to be announced in December. Other bidders include Boeing (BA) and Eurofighter.

New York Post

- Backers of delay to imposition of debit card swipe fees making concessions. Sources tell the NY Post that Sens Jon Tester and Bob Corker are now willing to let the Fed impose a swipe fee if some conditions are met. Tester may provide specific language today.

New York Times

- Walton family could own more than 50% of the company through buybacks. The NYT writes that because of the lastest $15B buyback program, if the familty does nothing and the whole amount is bought back, its ownership will rise to 53%.

- NYT DealBook discusses Goldman Sachs's subprime bet. The NYT article discusses whether the CEO Lloyd Blankfein perjured himself when saying the firm had no big subprime short. By going through documents made available by Goldman, the Senate report and other public documents, the article notes that some of the Senate report's details are wrong and so the conclusion could similarly be wrong.

Nikkei

- Mitsubishi UFJ Financial Group near forming comprehensive partnership with CIMB Group (CIMB.MK). Without citing sources, the Nikkei reports that MUFG will probably reveal a southeast Asian strategy using the partnership today (7-Jun in Asia), when it officially announces that Mitsubishi UFJ Securities will sell its stake in Kim Eng Holdings (KEH.SP) to Malayan Banking Berhad (MAY.MK). Bank of Tokyo-Mitsubishi UFJ holds 4% of CIMB.

Techcrunch

- Experian Group has purchased SafetyWeb. Experian announced the purchase 18-May, though it did so on page 39 of its FY statement. Citing "unconfirmed reports from sources," TechCrunch says the child identity and safety startup cost $20-30M.

Wall Street Journal

- Glencore International Zambian unit asked for more tax. The WSJ, citing a Zambian tax official, reports that: the move comes after an audit of the Mopani Copper Mines' tax returns for 2006-2008. The company has been asked to voluntarily pay the taxes it 'evaded' before the authority comes up with its own figures. The article notes that the audit report concluded there were inconsistencies in production and revenue figures, and that transfer underpricing of copper, and inflated costs were part of the problem.

- WSJ is positive on airplane makers, suppliers. A "Heard on the Street" column says the companies should benefit from yesterday's announcement by IATA cutting the forecast for 2011 airline profits, because airlines will be spurred to buy more fuel-efficient planes. The column cautions, however, that while engine manufacturers will have the opportunity to sell new engines, they will also lose high-margin post-sale service revenue.

- WSJ is positive on Apple. A "Heard on the Street" column says that iCloud is not revolutionary technology, but it will make customers substantially less likely to leave the company.

- The WSJ discusses Chinese acquisitions of European companies. The WSJ article breaks no news but discusses the fact that: There has been increased interest in Chinese outbound investment for Europe, such as Lenovo's (992.HK) purchase of Medion (MDN.GR) announced last week. There have been lots of smaller deals and the Europeans are worried that the Chinese will simply strip them of their technology. The trend has been accelerated by a lack of an agency which can block such deals unlike the Committee on Foreign Investment in the US.

- WSJ discusses uncertainty caused by Dodd-Frank. The WSJ reports that: More than 100 new derivative requirements will come into effect 16-Jul but regulators have not yet issued final rules in some areas. The OTC derivative markets could be in a legal gray area and market participants could slow operations as they are unsure over legal reprecussions of their conduct. The SEC is aware of the situation and some guidance will be given prior to the deadline.

- Maple Group in talks to add three or four more financial-services firms to join it. A person familiar with the situation tells the WSJ: The Maple Group is talking with Desjardins Financial Group, GMP Capital (GMP.CN), Dundee Capital Markets (DCM.CN), and another unidentified company. The additions could be agreed to and announced this week. If Maple expands and the offer for TMX Group goes through, Maple's current members would give up some equity in TMX Group. The banks' holding would fall to 22% from 25%.

Research

Bank of America Merrill Lynch: upgraded MTL

Citadel Securities: downgraded UTHR

Citi: downgraded SCCO

Cowen & Co: upgraded SYMC; downgraded GNOM, CA

Credit Suisse: upgraded PFCB

Deutsche Bank: upgraded CPO

Evercore Partners: upgraded JNPR

First Analysis: upgraded WOOF

Goldman Sachs: upgraded XLNX

JP Morgan: downgraded CTXS
Macquarie: upgraded SUSQ; downgraded FTR

William Blair: upgraded QDEL

From the Desk: 

Options

- The moved ~.54 higher to 18.49 in response to a 1%+ sell off in the SPX. Following Friday’s drop in the VIX in the face of a ~1% drop in equity markets. Give the low absolute level, we expected out sized not under sized moves in the VIX when the market sells off. Here’s a historical perspective on how unusual the past few days have been: 1) Not since Aug ’05 has the SPX sold off more than 75bps and a sub-20 VIX moved lower. 2) Not since Mar ’02 has the SPX been down over 1.8% over a 3-day period and a sub-20 VIX been up less than 2%. We’re down 2.15% in the SPX while the VIX is up just 1% over the last 3 days.

- While only hypothetical, here is what we think is going on: 1) The vol market views last week’s job number as a one-off soft-print. Prices may have been re-set lower but not expecting a massive sell-off. 2) Expectations of a debt ceiling increase and corresponding fiscal spending cuts. 3) Expectations of further Fed purchases (QE3?) or other form of quantitative easing. 4) Utter complacency with no-one willing to bid vol higher considering 30-day realized is still only 12.82.

Small Cap with a Big Bang

- For those looking to add broad market protection we continue to prefer IWM over SPX, given high relative valuation and beta of the small caps. While relatively more expensive we think it worth the extra upfront cost. Consider buying the IWM June quarterly (expiring 6/30) 78-73 put spread for $1 debit (1.26% spot).

Go with the 1x2 Put-Spread If You Think You’re Late to the Party

- If one believes the sell-off is nearing an end or there is only limited further downside risk, we suggest looking at 1x2 put spreads. We recommend taking advantage of ETF’s with high skew including RTH, XRT and IYR. Take a look at the following low cost 1x2’s expiring in June:

RTH: buy 1 105 put to sell 2 100 puts (collect 4.75 vols) for $.85 (.81% spot) net premium

XRT: buy 1 50 put to sell 2 47 puts (collect 5.5 vols) for  $.51 (1.01% spot) net premium

IYR: buy 1 60 put to sell 2 56 puts (collect 7.25 vols) for $.66 (1.1% spot) net premium

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.