Morning Note

June 16, 2011

Equity futures are trading below fair value and currently moving lower, following European markets, which are lower as fears of a Greek default intensify on the EU's ongoing failure to agree on the role of private sector participation in the next bailout package. Greek PM George Papandreou plans to form a new cabinet today. The IMF's Zhu said he is 'very concerned' by Greece, adding that the situation has changed very dramatically in the last 24 hours, and also following reports Germany is seeking to delay the second Greek rescue package until September.

US foreclosures decline (33%) y/y in May according to RealtyTrac. The online marketplace releases a report showing filings totaled 215K in May; the figure was a (2%) m/m decrease. By state, Nevada, Arizona, and California had the highest rates for the month. By totals, California, Florida, and Michigan had the most.

Libor fixings 

- Overnight Libor: Dollar: 0.128% vs prior 0.129% ; Sterling: 0.567% vs prior 0.567%; Euro: 1.258% vs prior 1.211%

- 1-month Libor: Dollar: 0.186% vs prior 0.185%; Sterling: 0.628% vs prior 0.624%; Euro: 1.261% vs prior 1.245%

- 3-month Libor: Dollar: 0.247% vs prior 0.245%; Sterling: 0.825% vs prior 0.824%; Euro: 1.438% vs. prior 1.429%

July WTI crude ($0.12) to $94.68

Natural gas ($0.006) to $4.573

Gold ($1.48) to $1525.9

10-year yield 2.9328%

30-year yield 4.1852%

Asian Market

Asian markets followed Wall Street down today on worries about Greece’s sovereign debt, disappointing US economic data, and a threatened Moody’s downgrade of France’s top three banks. Oil companies fell 1-4% on lower oil prices, and as was the case in the US, banks were generally weaker. China went down on fears of an interest-rate rise after the yield on three-month bills unexpectedly rose 8 bp. Hong Kong fell with the region. Resource and financial stocks led broad-based declines in Australia. Large-cap exporters and securities firms led South Korea down. Acer (2353.TT) brought Taiwan down, falling 2% on cutting its 2011 tablet PC shipment target. HTC Corp (2498.TT) dropped 7%. The yen is trading at 80.66 to the US dollar.

European Markets

European equity markets trade lower as concerns over the outlook for economic growth and the debt crisis in Greece persist, with political discord in Athens adding to the fears over a Greek bailout. Indices have pared some of the initial losses. Declining shares in the Stoxx Europe 600 lead advancers by 9:1. Comments by BOE governor in London late yesterday played down the prospect of an early rate rise, and disappointing UK retail sales data looked to endorse this stance. The Chancellor's comments endorsing Independent Commission on Banking proposal of a ring fence around better capitalised high street banks, additionally pressured the banks with Moody's saying UK Treasury support for ring-fencing proposals is credit negative for banks. UK May Retail Sales +0.2% y/y vs consensus +1.5% and prior revised +2.4% from +2.3%. EuroZone May final CPI +2.7% y/y vs preliminary +2.7%. EuroZone May final CPI 0.0% m/m vs preliminary 0.0%. EuroZone Q1 employment +0.1% y/y vs prior revised +0.2% from +0.3. EuroZone Q1 employment 0.0% q/q vs prior revised +0.2% from +0.1%. The pound and the euro are trading at $1.6140 and $1.4134 respectively.

Today's Economic Releases (Eastern Time)

04:30 UK Retail Sales y/y (May); actual 0.2%; consensus +1.5%

05:00 Eurozone CPI y/y (May); actual +2.7%; consensus +2.7%

06:00 Eurozone Employment q/q (Q1); actual 0.0%; consensus n/a

08:30 US Initial Jobless Claims (11-Jun); consensus 422K

08:30 US Continuing Claims (04-Jun); consensus 3680K

08:30 US Housing Starts (May); consensus 544K

08:30 US Building Permits (May); consensus 556K

08:30 US Current Account Balance (Q1); consensus ($128.5B)

09:45 US Bloomberg Consumer Comfort (12-Jun); consensus n/a

10:00 US Philadelphia Fed Index (Jun); consensus 6.7

10:30 US EIA Natural Gas Inventories (10-Jun); consensus n/a 

Today's Key Events (Eastern Time)

08:00 AOL Investor Day

08:00 SCANA Analyst Day

10:00 Copano Energy Analyst Meeting

11:00 Hormel Investor Day

12:15 Compass Diversified Holdings Investor and Analyst Event

13:10 Fed's Fisher speaks

—:— AlwaysOn OnMobile Conference

—:— American Association for Vascular Surgery

—:— Bank of America Merrill Lynch Specialty Pharmaceuticals One-on-One Conference

—:— Bank of America Merrill Lynch Utilities and Renewables Conference

—:— BOE holds first meeting of Interim Financial Policy Committee (minutes will be release on 24-Jun)

—:— Citi with Saks

—:— Deutsche Bank Global Consumer Conference

—:— Deutsche Bank Global Industrials and Basic Materials Conference

—:— Haynes International (HAYN) will replace Volcom (VLCM) in the S&P 600 - after the close

—:— IADC World Drilling 2011 Conference & Exhibition

—:— Internet Retailer Conference and Exhibition ~ IRCE

—:— Investment Trends Summit

—:— Lippert/Heilshorn Life Sciences & Medical Technologies Virtual Conference

—:— Nanotech 2011

—:— William Blair Growth Stock Conference 

Company Specific News

Earnings

ATU (Actuant reports Q3 EPS $0.51 ex-items vs Reuters $0.46. Reports Q3: Revenues $392.8M vs Reuters $379.1M)

CWST (Casella Waste reports Q4 EPS $1.85. Reports Q4: It is unclear if reported EPS is comparable to Reuters ($0.30). Revenues $109.5M vs Reuters $111.0M)

FNSR (Finisar reports Q4 EPS $0.33 ex-items vs Reuters $0.33. Reports Q4: Revenues $236.9M vs Reuters $242.8M)

LWSN (Lawson Software guides Q4 EPS $0.15-0.16 ex-items vs Reuters $0.15. Q4 Guidance: Revenue $208-212M; non-GAAP $210-214M; Reuters consensus is $212.5M)

PIR (Pier 1 Imports reports Q1 EPS $0.12 vs Reuters $0.11. Reports Q1: company reported Q1 comps +10.2% and revenue $335M on 2-Jun)

SFD (Smithfield Foods reports Q4 EPS $0.85 ex-items vs Reuters $0.82. Reports Q4: GAAP EPS $0.59. Revenues $3.12B vs Reuters $3.23B)

WGO (Winnebago reports Q3 EPS $0.04 vs Reuters $0.13. Reports Q3: Revenues $135.6M vs Reuters $151.4M)

M&A

BYD (Boyd Gaming to acquire the IP Casino Resort Spa in Biloxi, Mississippi for $278M in cash)

MDMD (DG to acquire MediaMind (MDMD) for $22/sh cash)

SUG (Energy Transfer Equity to acquire Southern Union company for $7.9B)

TEX (Terex raises offer for Demag Cranes to €45.50 per share)

WPCS (Multiband (MBND) signs letter of intent to acquire WPCS International for $3.20/share)

Newspaper Articles / Headlines

Barron's

- Barron's Weekday Trader is positive on BCE. Barron's Weekday Trader is positive on BCE citing prospects for growth in the Canadian market, a rising dividend, and planned investments in the company's wireless network over the next 12 months. In addition, the article notes the stock currently trades around 13x earnings and Barron's mentions BCE track record of mantaining margins through cost cutting in more difficult economic climates.

Business Standard

- Oil & Natural Gas Corp to sell up to 30% stake in K-G block. The Business Standard, citing two ONGC board members, reports that the company has been in discussions with ENI (ENI.IM) and BG India (BG.LN) for technological assistance ONGC and its partners plan to spend around INR360B ($8B) on developing the block. The block has ten gas discoveries and the in-place reserve is 140B cucic metres.

China Daily

- China Minmetals expects to be one of top three heavy-rare-earths companies in southern China. An executive tells the China Daily that the government has not yet selected which three companies will fill the roll announced by the State Council in May, under which the chosen ones will control 80% of southern Chinese heavy rare earths within two years. Industry sources say Minmetals, Chinalco, and Ganzhou Rare Earth may end up being the three.

Dayton Business Journal

- Talks continue between Penn National Gaming, Ohio Governor John Kasich.

An agreement announced today allows slot machines at the state's horseracing tracks, for a $50M license fee per racetrack.

Economic Times

- Indian government panel doesn't recommend banning email services that can't be monitored. The article notes that the panel says the forms of communication including Gmail (GOOG), Blackberry (RIMM), Nokia's (NOK1V.FH) service and Skype (MSFT) shouldn't be banned. The panel reiterates that servers should be located in the country ar encryption keys should be given to security agencies.

Financial Times

- Britain to start selling bank stakes. The FT, citing a speech by George Osborne Chancellor of the Exchequer, reports that he favours a straight sale of Northern Rock. The article continues that he is likely to begin sales of government stakes in Royal Bank of Scotland (RBS.LN) and Lloyds (LLOY.LN) next year. StreetAccount notes SkyNews reported 28-May that the government was preparing for the sale of Nortern Rock (see linked comment)

- Citi reveals 360,069 card account details affected by hacking. The FT, citing filings by the company to state regulators, reports the new number and compares it to the widely reported 200K number. The breach was identified 10-May and customer accounts identified 17-May and the company began notifying cutomers 3-Jun. The article alos notes that the Department of Homeland Security has joined with federal law enforcement to advise financial institutions on how to protect themselves from online attacks

- Southern Cross reaches agreement with landlords on restructuring. The FT reports that the two sides will form a committee to restructure the company over the next four months to stop it going into bankruptcy and the landlords expressed full support for the management team. The article notes that previously the landlords wanted.

- eBay reinvents China business. The head of Asian operations, Jay Lee tells the FT. Very stiff competition from local rivals and high entry barriers for foreign firms makes it unrewarding for eBay. Nobody makes any money in China

the ease of funding for Chinese internet companies has made economic rational behaviour disappear. The company will continue to to help local companies sell their products on global eBay sites and that gross merchandise value had grown to $4.4B last year.

FTD

- Oman Investment Fund may buy Hapag-Lloyd from TUI. Citing sources, the FTD seems to be reporting that the fund has signed a letter of intent, but HNA is not out of contention yet, either. The article does not name a price, but notes that the fund has $9B.

- German cut in solar power subsidies may not have intended effect. Environment Secretary Katherina Reiche tells the FTD that Installations from March to May were below the desired annual rate. But the article notes that June is traditionally the country's largest installation month.

Globe and Mail

- Maple Group's pension funds asked for non-compete clause with respect to Alpha Group. A source close to Maple says three of the pension funds who don't own Alpha wanted to be sure that Alpha owners would not be able to make the trading system a competitor to TMX if Maple is not allowed to combine the two.

- Canadian banks focusing on first-nations opportunities. The Globe and Mail reports that in response to the Canada First Nation Joint Action Plan announced last week, banks are scrambling to have first nations choose them to manage their portions of the C$1B that will be paid out each year to settle outstanding land claims. Bank of Montreal (BMO.CN), Royal Bank of Canada (RY.CN), and Toronto-Dominion Bank (TD.CN) are specifically mentioned.

La Tribune

- Areva CEO Anne Lauvergeon likely to be replaced by Luc Oursel. Citing sources, the newspaper reports French president Sarkozy has decided not to rename Anne Lauvergeon for another mandate at the head of Areva and is likely to name Luc Oursel to replace her by today or tomorrow.

New York Times

- NYT discusses JC Penney's new efforts. The NYT discusses whether the company can succeed in reformating its retail chain, comparing the failed attempt by Edward Lampert to turn around the Sear's (SHLD) format.

- NYT discusses American retailers targeting Europe again. The NYT article talks about how many US retailers, such as Abercrombie & Fitch (ANF) and Gap (GPS) are successfully expanding into Europe as young Europeans embraces US fashion. The article notes that while sales are small, profits are higher as discounting is not expected. The article contrasts this with retailers' experiences in the nid-1990s where they found rent was high, lots of regulations and little demand.

- NYT discusses delay in implementing overhaul of derivatives market. The NYT reports, The SEC announced today that market participants would not have to comply with many aspects of derivatives reform scheduled to take effect from mid-July, with no specifics as to how long the delay would last.

- The CFTC announced a similar delay yesterday but imposed a year-end deadline. citing people at the meeting, that the Republicans at the CFTC wanted an extension without a deadline but the Democrats wanted a specific date to keep the pressure on.

Nikkei

- Teijin Pharma plans to use Feburic (febuxostat) to expand globally. In an interview, president Kentaro Arao tells the Nikkei that the company will use the drug to move into South Korea, China, and the Middle East by 2014.

Reuters

- Germany is pushing to delay second Greek rescue package until September. The article says that the delay exemplifies the problems that Europe is having at figuring out the details of the rescue package, while one EU source reported that Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble wanted a delay. Another "high level" German banking source said that Germany was looking towards September when all the problems could be solved.

Telegraph

- Eurasian Natural Resources chairman Johannes Sittard to step down after corporate governance review. Without citing sources, the Telegraph reports that Sittard told directors of his plan in May.

Xconomy

- Nuance Communications to acquire SVOX. A source with knowledge of the deal tells Xconomy that the private, Zurich-based embedded speech software company will probably go for triple-digit millions of dollars.

Wall Street Journal

- WSJ likes fact that Bank of America can boost its capital by selling its stake in China Construction Bank (601939.CH). A "Heard on the Street" column notes that selling part of its holding -- most of the lockup expires in August -- would be a painless way for BAC to raise capital.

- Immigration and Customs Enforcement to look at hiring records of another 1K companies. The article does not name any of the companies, though it reminds readers that American Apparel (APP) and Chipotle Mexican Grill (CMG) have recently had to let workers go as a result of similar investigations. The audits were announced yesterday, and officials said the companies were in areas including food production, IT, financial services, and construction.

- Alibaba restructures Taobao unit. The WSJ, citing an email from chairman Jack Ma to employees, reports that the e-commerce platform will be split into three seperate companies focused on different market segments in order to adjust to increased competition the company may IPO to reward employees and shareholders.

- China jails people who tried to steal iPad 2 designs before release

West Australian

- Unclear that Australia's MRRT will collect the revenues anticipated. Industry sources tell the West Australian that BHP Billiton (BHP.AU), Rio Tinto (RIO.AU), and Xstrata (XTA.LN) will use their ability to claim depreciation of their assets to "significantly" reduce their tax bills. The government has predicted that the tax, which becomes effective 1-Jul-2012, will bring in A$11.1B in its first three years.

Research

Auriga: upgraded MTD

Bank of America Merrill Lynch: downgraded RF, SPWRA

Barclays Capital: upgraded CAG

Citi: downgraded SLRC

Credit Suisse: downgraded FNSR

FBR Capital: upgraded AMD; downgraded INTC

Goldman Sachs: upgraded YOKU; downgraded GIS

Jefferies: upgraded OHI, SBRA, CELL

JP Morgan: upgraded DIN

Macquarie Research: downgraded VMED

Morgan Stanley: upgraded EWBC, ALTR, XLNX

RW Baird: downgraded KFY

Stephens: upgraded CAB

Stifel Nicolaus: upgraded LXP

Susquehanna: upgraded WLL

Options

Two-by-Four to the Head

- The VIX is at 21.32, finishing 3.06 higher on the session (+16.76%), its highest closing price since March 18th. 30-day at-the-money index vols in SPX, NDX, IWM moved up 14-16%, also closing at their highest respective levels since March 18th. While it’s a scary time to stick to any short vol thesis, the fact remains that despite today’s uptick in implied, 30-day realized vol in the SPX is still just 14.37. Over the past few days we have steered clear of recommending outright put sales (& uncovered call sales in the VIX). We continue to recommend this approach regardless of one’s view on the market or volatility going forward.

If You’re Looking for Direction, Break out the Heat Map

- Option volumes were generally heavy and put/call ratios high reflecting a somewhat panicked level of demand for protection. In SPX, volume was 2.23x the 20-day average and the put/call ratio was 2.94- a level not seen since Jan 31st. Puts were in relatively greater demand across most high-beta ETFs including IWM (put/call ratio=3.48), SMH (5.39) and IYR(14.07), XLY (5.98) and GDXJ (3.75).   

- Like the broader indices, single stock vols were sharply higher. Aggregated by industry group average (equal weighted) single stock vol increased the most in Utilities. Not surprisingly Banks (+8.69%), Insurance (+8.2%) and Diversified Financials (+7.68%)  saw a slew of double digit vol increases in certain names. We like put spreads (1x1 or 1x2) to monetize the high skew in this space.

- Semiconductor vols registered the smallest average gain (+1.86%) among all industry groups we follow. Average semiconductor single-stock skew fell slightly and is flat relative to other groups at approx 7% of atm vol. Names with flat or inverted skew include RMBS, RBCN, AMD, LSI, MIPS, NXPI, ATML, MU, ENTR, and SOLR.

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.