Morning Note

June 20, 2011

Equity futures are trading below fair value and are following European indices lower after Eurozone finance ministers have postponed their decision on a €12B loan to Greece until it introduces further austerity measures.

PNC Bank (PNC) confirms acquisition of RBC's (RY) US retail banking operations for $3.45B.

Libor fixings 

- Overnight Libor: Dollar: 0.128% vs prior 0.128% ; Sterling: 0.567% vs prior 0.567%; Euro: 1.309% vs prior 1.293%

- 1-month Libor: Dollar: 0.186% vs prior 0.186%; Sterling: 0.628% vs prior 0.628%; Euro: 1.277% vs prior 1.277%

- 3-month Libor: Dollar: 0.247% vs prior 0.247%; Sterling: 0.825% vs prior 0.825%; Euro: 1.459% vs. prior 1.450%

Jul WTI crude ($1.04) to $91.97

Natural gas ($0.028) to $4.297

Gold ($1.40) to $1537.29

10-year yield 2.9127%

30-year yield 4.1752%

Asian Markets

After starting higher on hopes the Greek debt crisis would be solved, Asian markets fell when it was reported the deal would be delayed. Japan rose as people bought futures in response to strong performances on foreign markets June 17. Utilities rose after a minister said the government would urge municipalities to restart suspended nuclear plants. Carmakers and tech stocks rebounded to lead South Korea higher at first, but gains were limited on caution and lost in the afternoon. Property stocks fell in Hong Kong on worries that the government would do more to restrain prices. Cheung Kong Holdings (1.HK) lost 4%. China underperformed after a broker cut its forecast for the country’s 2012 GDP growth from 8.9% to 8.5% and downgraded its banks. The market was also hurt by a liquidity squeeze, as short-term money-market rates hit 7.5% as banks’ higher reserve requirements went into effect. All sectors in Australia fell. Japan May trade balance (¥853.7B) vs cons (¥744B). April composite index of coincident economic indicators revised to 103.6 from prelim 103.8. The yen is trading at 80.23 to the US dollar.

European Markets

European equity markets opened lower and extended declines, before paring losses in choppy trading, led by the periphery, as EU finance ministers delayed a decision on a Greek bailout. Whilst expecting to pay the next tranche (€12B) of the previously agreed EU/IMF bailout package by mid-July, the finance ministers delayed a final decision saying Greece must pass additional austerity measures first. EU finance ministers also said they will detail a second Greek bailout package in early July, indication the private sector contribution to this package would be substantial, and would avoid a default, but didn't say how. In addition, G7 finance ministers held a conference call over the weekend to discuss Greece. The Greek PM has scheduled a confidence vote for 21-June, as the government looks to get it's austerity package through parliament. Moody's placing of Italy's sovereign credit rating on review for possible downgrade also weighed. Reported that IMF/EU official will meet with the Greek finance ministry this week. There was little significant corporate or economic releases. Paris Airshow starts today, though there have been no confirmed orders as yet, market talk is there will be a number of significant orders placed, the FT reporting Airbus (EAD.FP) to get "way beyond 500" orders for new model A320 Neo by end of Paris air show. Germany PPI y/y (May); actual +6.1%; consensus +6.3%. Eurozone Labor costs y/y (Q1) +2.6%. The pound and the euro are trading at $1.6154 and $1.4229 respectively.

Today's Economic Releases (Eastern Time)

02:00 Germany PPI y/y (May); actual +6.1%; consensus +6.3%

05:00 Eurozone Labour costs y/y (Q1); actual +2.6%; consensus n/a

Today's Key Events (Eastern Time)

09:00 "Ford University" conference call: 877.280.4953 / Intl 857.244.7310

10:00 Ship Finance International Investor and Analyst Event

14:00 Agrium Investor Day

14:00 Agrium Investor Day

—:— Drug Information Association Annual Meeting

—:— Eurogroup and EcoFin meeting

—:— European Molecular Imaging Meeting - EMIM

—:— Gartner Security and Risk Management Summit

—:— Goldman Sachs European Business Services Conference

—:— JP Morgan Asia Pacific Conference

—:— Lazard Capital Markets Inaugural Golf Medical Technology CONFERENCE

—:— Paris Air Show

Company Specific News

Earnings

AGU (Agrium increases Q2 guidance for EPS cont ops ex-items to $4.10-4.40 vs prior $3.38-3.88 and Reuters $3.74)

NBR (Nabors Industries guides Q2 EBIT $165M - $170M)

Positive News

GTXI (GTx Inc initiates Phase IIb clinical trial evaluating oral Capesaris tablets versus Lupron Depot for first line treatment of advanced prostate cancer)

PFE (FDA approves Pfizer's (PFE) Oxecta (formerly Acurox) immediate release oxycodone with Aversion technology)

S (Sprint Nextel (S) reaches 15-yr deal with Lightsquared, according to various media reports)

M&A

RY (PNC Bank to acquire RBC's US retail banking operations for $3.45B)

TRV (Travelers acquires interest in JMalucelli for ~$410M)

Offerings

NKA (Niska Gas Storage Partners files $1.25B mixed shelf; registers 16.3M units for holder the Carlyle Group)

OAK (Oaktree Capital Group files $100M IPO through Goldman Sachs and Morgan Stanley. Oaktree is a global investment management firm focused on alternative markets. The company focuses on credit and contrarian, value-oriented investing. Proposed symbol for the NYSE is OAK.)

Newspaper Articles / Headlines

21st Century Business Herald

- China expected to cut tariffs on luxury goods. Informed sources tell the 21st Century Business Herald that the reduction will come by November. The current rates are as high as 60%.

Barrons

- The Trader: Cautious on the U.S. stock markets first weekly gain since April and highlights Ford Motor (F)

- International Trader (Europe): Discusses why Smiths group (SMIN.LN) would be worth more if it sold off its divisions

- International Trader (Asia): Chinese reverse-merger specialist , New York Global, is a victim of identity theft

- Current Yield: Discusses how treasuries struggled while Greece avoided a "credit event" last week

- The Striking Price: Suggests plays that could neutralize volatility and risk if Greece defaults on bond payments

- Commodities Corner: Price declines in oil highlight concerns over Greece and fears about a slowdown in the U.S. economy

- Up and Down Wall Street: Discusses why the economy needs a boost, especially with the end of quantitative easing

- StreetWise: Barron's "mystery broker" predicts that the market will stay in trading range for a while and reiterates his forecast of a 10% to 15% total return for the year

- D.C. Current: GOP negotiator Eric Cantor thinks that despite political divisions between the parties, an agreement is possible because both sides want to create jobs

- Technology Trader: Discusses why the growth curve for cell phones may be flattening

- Plugged In: Highlights the rivalry between Hewlett-Packard (HPQ) and Oracle (ORCL)

- Gadget of the Week: Features the Fiat (F.IM) 500

- ETF Focus: Weak bond-fund yields and rising market volatility increase the appeal of ETFs that target stocks with big yields

- Fund of Information: The 30-year run in bonds ends and the future for big appreciation is in the stock market

- Electronic Investor: Barron's reviews the effectiveness of security suites including; AVG Internet Security 2011, Kaspersky Internet Security 2011 and Microsoft (MSFT) Essentials 2.

- Speaking of Dividends: Iron Mountain (IRM) increases its dividend ; discusses how American International group's (AIG) warrants will be taxed

- Follow- up: Highlights Rosetta Resources (ROSE); negative on Research in Motion (RIMM) and discusses VF (VFC) and Timberland's (TBL) $2B deal.

- Barron's profile talks with David Eiswert, T. Rowe Price tech specialist. Eiswert notes that one of his key themes is mobility, which is part of why Apple (AAPL) is the fund's largest holding. Eiswert tells Barron’s the top ten holdings in T. Rowe’s Global Technology Fund (PRGTX), which are: Apple, Qualcomm (QCOM), Google (GOOG), Samsung (005930.KS), Tokyo Electron (8035.JP), Corning (GLW), Broadcom (BRCM), Blackboard (BBBB), Juniper Networks (JNPR), Baidu (BIDU).

- Barron’s feature highlights tobacco-settlement munis. Barron’s argues that the $40B of tobacco-settlement munis offer the highest yields of any major sector of the tax-free market and that wealthy individuals could benefit from investing some of their tax-free portfolios in tobacco-settlement munis. The article points out that investors, including Bill Gross, manager of the $243B Pimco Total Return Fund (PTTRX), and muni-fund groups such as Oppenheimer Rochester have all been attracted to tobacco-settlement munis. Barron’s notes that investors bullish on tobacco-munis argue that the high yields compensate for the risk and points out that the average corporate junk bond yields 7%. The article points out that the sector has more risk than most segments of the tax-free market since the bonds typically are backed only by annual MSA payments and not by any state guarantee. Barron’s notes that an unusual feature of tobacco munis is that issuers can't seek bankruptcy protection.

- Barron's feature positive CBS Corporation. Barron’s argues that CBS is inexpensive and notes that analysts think the stock could rally to $32 in the next 12 months, a gain of 24% from Friday's close. The article notes that new sources of revenue the company has found will decrease the broadcaster's exposure to economic cycles and could increasingly drive earnings growth. Barron’s points out that CBS expects to earn $3B annually in the next few years from retransmission payments, which it receives from the big cable networks and satellite companies that carry its content. The article also notes that CBS owns 29 broadcast stations and 130 radio stations and that at 41%, the local broadcasting segment was the biggest contributor to operating income in 2010.

- Barron’s feature discusses Microsoft. Barron’s notes that investors' enthusiasm for change emphasizes the tensions between Microsoft (MSFT) and Wall Street. The article also argues that Microsoft is a value trap. The article notes that investors believe that Microsoft’s CEO, Steve Ballmer, is more interested in regaining the company's tech leadership and growth profile than in increasing the small annual dividend. Barron’s points out that Microsoft has missed two significant trends: Internet search and mobile phones. The article suggests that one way to unlock some shareholder value would be to spin off the consumer divisions, which would give investors a stake in smaller businesses and would separate the units from their constraints.

- Barron's interviews Paul Hickey and Justin Walters, founders of Bespoke Investment group. In their interview with Barron’s Hickey and Walters notes that recent economic weakness is due to Japanand, therefore, is only temporary and as Japan’s economy starts to improve, economic indicators will pick up in the summer and over the rest of the year. Hickey and Walters give Barron’s their top stock picks, which include: SodaStream International (SODA), Polycom (PLCM), Crocs (CROX).

Daily Mail

- Standard Chartered denies it has drastically cut its exposure to eurozone interbank lending over past few weeks. A spokesman tells the Daily Mail that the bank has been reducing its lending significantly "over time," and is moving the money into Asia. The bank has no exposure to Greece. The article says Barclays (BARC.LN), nervous about its exposure to Spain, is thought to have cut it from £7.2B to £6.4B over the past year.

Digitimes

- Taiwan Semiconductor (2330.TT), United Micro (2303.TT) see cutbacks in wafer starts for Q3. Industry sources tell DigiTimes that weaker-than-expected demand for handsets and tablet PCs means TSM's Q3 wafer starts may come in at +7-9% q/q vs guidance of +10-12% q/q. The sources say TSM may become more flexible with its pricing.

El Pais

- Sonatrach offers Gas Natural up to 10% of Medgaz pipeline. Sources in the energy sector tell El Pais that the issue is back on hold after last week's agreement between the companies on gas prices.

Financial Times

- Cable & Wireless Worldwide may sell international assets. The FT, citing people familiar with the situation, reports that Pacnet, a telecoms company based in Hong Kong and Singapore, has made an informal offer of about $500M for C&W's overseas business. The board is expected to consider the offer this week. Tata Communications (TATCOMM.IN) might also be interested in the busineses.

- Johnson & Johnson CEO unlikely to step down until at least next year. William Weldon told the FT that he wants to personally supervise the relaunch of consumer products withdrawn after recalls in 2010 he expects the products to be back on the market by H2 or early next year the group was performing strongly in all divisions and external macroeconomic factors would be more important in determining future growth.

- Dairy Crest Group to buy or develop its own yogurt business. The FT, citing CEO Mark Allen, reports that it wants to fill the gap in its portfolio after selling its stake in a UK JV with Yoplait the two-year non-compete had ended in March the company has ruled itself out of bidding for Uniq (UNIQ.LN).

- UPS operations in the UK blocked. The FT reports that the government has stopped UPS from screening packages at some of its facilities in Britain until it improves its security procedures although UPS was trying to deal with the issues, delays were occurring no details were given on the specific concerns.

- Dassault (DSY.FP), BAE (BA.LN) joint development will hurt EADS (EAD.FP). The FT reports that the Telemos project to develop a military drone, costing €1B is alarming EADS who worry they will have a smaller role going forward.

EADS CEO Louis Gallois says the project risks unaffordable intra-European competition, as his company has been working for years on its own drone. other industry executives sas Dassault is outmanoeuvering EADS.

- Airbus to get "way beyond 500" orders for new model A320 Neo by end of Paris air show. The comments are made by the head of sales for Airbus, in an article in the FT discussing the new model and whether this would give Airbus a leg over in the commercial jet market as the new models are more fuel efficient.

FTD

- Drillisch (DRI.GR) again interested in merging with Freenet. People familiar with the matter tell FTD that no plan has been set yet, but Drillisch CEO Paschalis Choulidis is looking at his options.

Guardian

- Russia wants Rosneft to be "normal commercial public company". In an interview, a government official tells the Guardian that Russia may now sell $15B of shares in the company annually starting next year, vs prior plans to raise $10B annually starting with sales in 2013. He says money could be raised in London, New York, Hong Kong, Shanghai, or a combination. Russia would be happy for BP (BP.LN) to buy into the company. He syas further share sales for FGC (FEES.RU) and VTB Bank (VTBR.RU) are also possible, though the country does not plan to do anything similar with Gazprom (GAZP.RU) for now.

Het Financieele Dagblaad

- ING group to sell car lease business. Het Financieele Dagblaad, citing sources aware of the sales plan reports that The company is negotiating a sale of its car leasing business, which has a volume of around €4B. The sale is not on a list of disposals the company has already announced but it was decided some time ago to sell the company, one of the top five leasing companies in Europe. The sale would free up capital for the bank.

Il Sole 24 Ore

- AgustaWestland (FNC.IM) to buy Bell's 51% stake in companies' tiltrotor JV. Il Sole 24 Ore cites industry sources, but no terms are reported beyond calling it a "substantial amount."

Investor Business Daily

- The following changes were noted in the latest IBD 50 List.

Added: AH, CHSI, PNRA, COH, ISRG, SHOO, LO, DSW, NTES, DECK, WPI, CELG

Deleted: LULU, RVBD, APKT, TIBX, BPI, AVGO, TPX, WLT, BIDU, SMTC, SLH, DV

London Telegraph

- GlaxoSmithKline starts investigation into Augmentin. A spokesman tells the Telegraph that the company is working with regulators after China withdrew Augmentin, saying it found traces of diisodecyl phthalate (DIPD) in Augmentin syrup. Tawian and Hong kong had previously told Glaxo to recall the drug for the same reason. Glaxo is hardly the only company whose products have been found to contain DIPD in the region, and the spokesman points out that the levels are below those deemed harmful by western authorities.

- Lloyds Banking Group not to sell Scottish Widows. Without citing sources, the Sunday Telegraph reports that in his 30-Jun review, CEO Antonio Horta-Osorio will say in his review: While Lloyds and Bank of Scotland barnches will be kept, the Halifax will be the group's prime retail brand. Scottish Widows and Scottish Widows investment partnership will be retained. The group will set out on an efficiency drive to cut up to £2B in costs; thousands of jobs will go. The group's long-term cost:income ratio target could be as low 45%.

London Times

- Quatar Holdings in talks about acquiring British arm of Santander. According to The Sunday Times, Qatar Holding has held talks about acquiring a stake in the British arm of Santander, headed by Ana Patricia Botin, ahead of the£15B float planned for the end of the year. The article notes that Santander is in detailed discussions with Qatar and other sovereign wealth funds about becoming cornerstone investors prior to, or at flotation of, the group. The Sunday Times notes that Santander would sell a minority stake about 25% that could see the demerged group go into the FTSE 100 and would pay about half of its forecast profits of £2B a year as dividends, in order to mak shares more attractive.

- Ferrovial in talks with Alinda Capital Partners regarding the sale of its 10% stake in BAA. According to The Sunday Times, Ferrovial (FER.SM) is in talks with Alinda Capital Partners to sell a 10% stake in the group that owns Heathrow and Stansted airports. The article notes that Alinda Capital Partners owns South Staffordshire Water as well as several other pension and sovereign wealth funds. According to the article, Ferrovial wants to sell its 56% stake down to less than 50% so it can remove BAA’s £10B debt from its balance sheet. The article notes that it is understood the stake sale is on course to be completed this year.

- Babcock International group emerges as bidder for Learn Direct. According to The Sunday Times, Babcock International (BAB.LN) is one of about 10 parties creating bids to buy Learn Direct from Ufi, a charitable trust set up by the government. The article points out that Rothschild is handling the sale. The Sunday Times notes that It is not clear how much the business is worth, but according to a person involved in the process, Learn Direct could be worth anywhere between £30M and £50M, although others have claimed that this is too high.

New York Post

- Leonard Green/CVC bid for BJ's Wholesale was $50/share. Citing sources, the Post reports that Leonard Green and CVC Partners bid "roughly" $50/share for BJ. A source close to these private equity firms said the bid was an "acceptable price", and the firms don't plan to increase it much beyond this current offer.

New York Times

- Greek bailout decision delayed until July. The NYT, citing a ministerial statement, reports that Europe's finance ministers have failed to agree on the expected disbursement of €12B in aid to Greece, delaying the decision until July. The ministers have also demanded that Greece approve spending cuts and privatizations. The ministers did agree that any bailout would include private investors. Seperately, the IMF was insisting that the EU underwrite the Greek government according to a European official, but governments are reluctant to do that as they don't know the extent of the financing gap.

- Boeing to decide this year on 737. The NYT, citing a company executive reports that the company will decide this year on whether to revamp the 737 with a more fuel-efficient engine or develop a new jet.

- NYT discusses foreclosure delays. The NYT reports that the rate of foreclosures in many states where courts are involved is very slow compared to states where courts play no role-as an example, theNew Jersey pipeline would take 49 years while in California it would take three years. The banks do not seem to be in a hurry to add foreclosed houses to their books. A Bank of America (BAC) spokesman says that there is no strategy to delay foreclosures. There seems to be multiple reasons for the delay - a large backlog, sensitivity after the robo-signing disclosures, and increased requirements for discussions between home owners and banks.

- NYT discusses how some early employees of tech companies are cashing out. The NYT notes that 8some early employees at Facebook have left as they are unable to sell stock while still working for the company 45% of the trades at SecondMarket have been Facebook trades. Groupon (GRPN) is an extreme example,as of the $946M Groupon raised from investors last winter, $810M went to top executives.

- Companies pushing for tax breaks on foreign cash repatriation. The NYT reports that some large companies are pressing the Administration for the tax break which they say will help generate jobs at home under the proposal the tax owed on such profits would fall to 5.25% for one year, from 35% a similar proposal by Bush in 2005 led to companies paying that money out to shareholders via stock buybacks and dividends, according to the National Bureau of Economic Research companies which took advantage of this such as Merck (MRK) actually cut investment and jobs in the three years that followed. Microsoft (MSFT) has $29B offshore, Apple (AAPL) $12B and Google (GOOG) $17B.

Techcrunch

- Netflix site, streaming goes down. TechCrunch reports that users are saying the site was down for about three hours, though users reported around 00:00 ET that the site is back online.

Wall Street Journal

- Cable channel rates have risen from 9-16% y/y. The WSJ, citing people close to the negotiations, reports that although the negotiations will continue until the end of the month, the ad deals are almost wrapped up.

the increase reflects growing audience numbers for cable. Cable's total volume of ad commitments for the season have grown by about 15% which would mean cable ad spend would roughly equal spending on broadcast networks

- Boeing aiming for growth in cyber opportunities and drones. The WSJ, citing a Boeing executive, reports that these areas are considered to have a lot of potential despite overall Pentagon cuts. The company also is looking to sell more traditional defense products around the world including Asia, the Middle East and Latin America.

- WSJ discusses increased use of regulators 'embedded' in banks. The WSJ reports that the Federal Reserve Bank of New York and the OCC are doing this to try and prevent another crisis. About 150 such regulators from the NY Fed are across banks and brokerages and will double by the fall, according to a person familiar with the situation. Names mentioned include Bank of New York Mellon (BK), Barclays (BARC.LN), Citigroup (C), Credit Suisse (CSGN.VX), Deutsche Bank (DBK.GR), JP Morgan (JPM), and UBS (UBSN.VX). The OCC has around 500 examiners on location at the big banks and is expected to increase that number by 10%. The top regulator embedded at each bank is expected to meet the CEO once a month at a minimum.

- WSJ is positive on financial stocks' warrants. A "Heard on the Street" column notes that warrants are riskier investments than stocks are. But it says that JPMorgan Chase's (JPM) warrants could be in the money if the stock gains a not-inconceivable 35% in six years. Hartford Financial's (HIG) warrants will be in the money with an 8% stock-price rise.

- WSJ is positive on Tupperware. A "Heard on the Street" column says the company has a great deal in its favor: It keeps salespeople's incentives aligned with the company's. It is growing fastest in emerging markets, where margins are higher. Its recently raised debt target is still conservative, but may permit more share buybacks.

- Target employees vote against joining retail union. The WSJ reports that employees voted 137 to 85 against joining the union at a Valley Stream, NY store. The vote was widely watched as it was the first Target store in two decades to to vote on whether or not to organise.

- Aegis Group CEO says company is not for sale. Jerry Buhlmann tells the WSJ that a merger with Havas (HAV.FP) is also not the right way to go. The article notes there has long been speculation of a takeover of Aegis.

- General Motors prices new subcompact at a similar level to imports. The WSJ reports that the Chevrolet Sonic will sell for $14,995, $2,500 more than the model it replaces. If the carmaker cannot generate sales then it will be stuck with a money-losing plant as it agreed with unions to be the first and only manufacturer of subcompacts in the US. Some GM executives questioned the logic of the move according to people familiar witht the discussions.

Ford (F) at one point looked at making a subcompact in the US but ruled iy out according to people familiar with the matter.

- Ford spending $1B in last-ditch effort to rescue Lincoln brand. Dealers briefed by the company tell the WSJ that Ford plans to introduce seven new or upgraded Lincolns over the next four years in the hopes of repositioning the brand as a combination of the best aspects of BMW (BMW.GR) and Toyota's (7203.JP) Lexus. At a meeting, the company said it expects Lincoln sales to fall from 85,828 last year to 78K this year, rising to 162K by 2015.

Wirtschaftwoche

- Telekom Austria likely to try for majority of Telekom Srbija again next year. Without citing sources, WirtschaftsBlatt reports that Hellenic Telecom (OTE .GR) was happy with Telekom Austria's offer, but the Serbian government was under pressure to insist on a higher price. A Telekom Austria executive tells WirtschaftsBlatt that taking a minority of Telekom Srbija would not make any sense.

Research

Citi: downgraded HSNI, LINTA, GRM

Deutsche Bank: upgraded NTGR, ASH; downgraded MDMD, SWKS

Goldman Sachs: upgraded PCX, BTU, CNX; downgraded CPRT, WLT

ISI Group: upgraded BIIB

Morgan Stanley: upgraded BOKF, TXRH; downgraded PFCB

RW Baird: downgraded AFAM, GTIV, LHCG

TD Newcrest: upgraded MFC

UBS: initiated MOS

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.