Morning Note

June 21, 2011

Equity futures are trading above fair value ahead of today's two-day FOMC meeting. The Greek government is due to face a vote of confidence today, a first step towards gaining a €12B loan. If successfull, the Greek parliament will be asked to back the latest spending cuts worth €28B on 28-June.

Libor fixings 

- Overnight Libor: Dollar: 0.128% vs prior 0.128% ; Sterling: 0.567% vs prior 0.567%; Euro: 1.285% vs prior 1.309%

- 1-month Libor: Dollar: 0.186% vs prior 0.186%; Sterling: 0.628% vs prior 0.628%; Euro: 1.279% vs prior 1.277%

- 3-month Libor: Dollar: 0.246% vs prior 0.247%; Sterling: 0.825% vs prior 0.825%; Euro: 1.466% vs. prior 1.459%

August WTI crude +$1.05 to $94.68

Natural gas +$0.015 to $4.332

Gold +$3.50 to $1543.54

10-year yield 2.9689%

30-year yield 4.2031%

Asian Markets

Asian markets followed Wall Street higher today on easing concerns about a Greek debt default. Banks and steelmakers supported South Korea, but retailers fell 1% on a survey showing they are less optimistic about conditions for Q3. Australia rose. Hong Kong rose, but China Construction Bank (939.HK) fell 2%, taking peers with it, on a report that Bank of America (BAC) may sell half of its $21B holding. All 33 sectors rose in Japan, helped by a weaker yen-euro exchange rate. Furukawa Electric (5801.JP) rose 3% on a report it has developed a superconducting power transmission cable. Banks lifted Taiwan. AU Optronics (2409.TT) also fell initially on the report, though it pulled back to a 2% gain by the end of the day. The yen is trading at 80.12 to the US dollar.

European Markets

European equity markets opened higher on hopes that EuroZone will find a solution to Greece's debt crisis ahead of it's July debt payment, and ahead of Papandreou's government confidence vote later today. Continuing M&A activity buoyed sentiment with the small number of corporate results generally well received. Germany June ZEW economic sentiment (9.0) vs consensus (2.0) and prior +3.1 The pound and the euro are trading at $1.6176 and $1.4331 respectively.

Today's Economic Releases (Eastern Time)

05:00 Germany ZEW survey (Jun)

05:00 Eurozone ZEW survey (Jun)

07:45 US ICSC-Goldman Chain Store (18-Jun); consensus n/a

08:55 US Redbook Chain Store (18-Jun); consensus n/a

10:00 US Existing Home Sales (May); consensus 4.77M

16:30 US API Crude Inventories (17-Jun); consensus n/a

Today's Key Events (Eastern Time)

08:00 Cabot Corp Analyst Day

09:00 Susquehanna discusses Tower Bancorp acquisition

13:00 Resverlogix Management Market Update regarding clinical trial developments: 800.319.4610 / Intl 604.638.5340

14:30 GE Aviation & GECAS Analyst Meeting @ Paris Air Show

17:00 National Semiconductor Special Shareholder Meeting to vote on merger with Texas Instruments

—:— Coloplast Capital Market Days

—:— Drug Information Association Annual Meeting

—:— European Molecular Imaging Meeting - EMIM

—:— FDA Panel: Arthritis Advisory Committee discusses Novartis' sBLA for Ilaris (canakinumab) for gouty arthritis attacks

—:— FDA PDUFA (est): Prostrakan's resubmission of NDA for Rectogesic for anal fissures

—:— FOMC meeting

—:— Gartner Security and Risk Management Summit

—:— Goldman Sachs dotCommerce Day

—:— Goldman Sachs European Business Services Conference

—:— International Supercomputing Conference

—:— Jefferies Global Consumer Conference

—:— JP Morgan Asia Pacific Conference

—:— Macquarie SMID Cap Utilities Conference

—:— NASDAQ OMX 26th Investor Program

—:— Paris Air Show

—:— RBC Capital Markets Global Mining & Materials

Company Specific News

Negative News:

CB (Chubb (CB) estimates losses from April and May catastrophes to impact after-tax EPS by $0.55-0.68)

MO, LO, RAH (FDA releases 9 health warnings to appear on every pack of cigarettes sold in the US and in every cigarette advertisement)

Offerings

SGO.FP (Saint-Gobain (SGO.FP) confirms postponement of the IPO of Verallia)

M&A

ECA (EnCana (ECA) and PetroChina end Cutbank Ridge joint venture negotiations)

Other News

Weekly USDA crop progress report says 70% of the corn crop is in good or excellent condition. Compares to 69% last week and to 75% in prior year.

Cotton:  21% of cotton is squaring vs. 12% last week and 25% average of 2006-10 period. 26% of the cotton crop cotton is in good or excellent condition compared to 28% last week and 62% y/y

Soybeans: 94% of soybeans have been planted vs. 87% last week and 93% average of 2006-10 period. 82% of soybeans have emerged vs 64% last week and 86% average of 2006-10 period. 68% of the soybean crop is in good or excellent condition compared to 67% last week and 69% y/y

Rice: 57% of rice crop is in good or excellent condition compared to 58% last week and 75% y/y

Winter wheat: 36% of winter wheat crop is in good or excellent condition compared to 35% last week and 65% y/y. 31% of winter wheat crop has been harvested vs. 22% last week and 22% average of 2006-10 period

Spring wheat: 91% of spring wheat has been planted vs. 88% last week and 100% average of 2006-10 period. 83% of spring wheat has emerged vs. 73% last week and 99% average of 2006-10 period

Newspaper Articles / Headlines

Bright Side of News

- Next Advanced Micro CEO to come from IBM (IBM). Citing "multiple sources close to subject of the matter," BSN reports that the deal is being finalized, and an announcement could come before AMD reports Q2 results 21-Jul. The new hire is not named, and the article seems to be saying that it is not certain the candidate will sign the contract.

Digitimes

- Elpida (6665.JP), Micron (MU), Nanya Technology (2408.TT) in talks to form DRAM partnership to compete with Samsung Electronics (005930.KS). Sources tell DigiTimes that talks between Elpida and Micron in late 2008 and early 2009 were stymied because of capital issues, though recovering DRAM prices also interfered.

Economic Times

- Cognizant Technology (CTSH), Capgemini among bidders for Oracle's financial services unit. People familiar with the negotiations tell the Economic Times that Wipro (WPRO.IN), HCL (), and L&T Infotech are out of the race for the unit, which Oracle valued at $400-500M, though it has reduced its price expectations.

Financial Times

- CEO of General Electric leasing arm says industry poised for aircraft spending spree. Norman Liu told the FT at the Paris Air Show that there will be the largest replacement market in the near future in North America as there are around 2K aircraft that need to be replaced in the next couple of years

- Embraer CEO says may opt out of large commercial jet market. At a press conference at the Paris Air Show Paulo Cesar de Souza e Silva said they may not proceed with a jet in the 120-150 seat range, adding it was becoming more crowded in that market.

- Boeing's (BA) civil jet head says "days of duopoly with Airbus (EAD.FP) are over". The FT reports the comments made at the opeing of the Paris Air Show. Airbus CEO Tom Enders agreed but added "The duopoly is over in the 100 to 150 aircraft segment because this is where the new entrants ... want to be – so that doesn’t mean the duopoly is over in the entire range of products” and added that he expected consolidation in the industry

- Dentsply in final talks to acquire AZN's Astra Tech unit. Citing sources, the FT reports that the deal could value Astra Tech at appx $1.8B, and says that Dentsply outbid Biomet and private equity firm EQT.

FTD

- Deutsche Bahn considers closing DB Schenker. An insider tells FTD that the decision on the logistics company could be made by August.

Les Echos

- Alstom working on a new version of the TGV. Citing sources the newspaper reports Alstom is working on a new version of the high speed train, the AGV II (automotrice à grande vitesse) that could reach a speed of up to 400km/hour

Los Angeles Times

- DIS The reason Pixar got license to make Cars 2. The LA Times reports that Cars was a disappointment at the box office, but a massive licensing success. 300 toys and other random items are now in stores to prepare people for the sequel, which opens 24-Jun. Cars 2 will be set around the world, in an effort to increase toy sales overseas. Mattel (MAT) will introduce 70 new toy characters from the movie.

New York Post

- Facebook to overtake Yahoo! in online display ads this year. Citing research firm eMarketer, the NY Post reports that the 2011 shares of the $12.33B market will be: Facebook 17.7% vs year-ago 12.2%, Yahoo 13.1% vs year-ago 14.4%, Google (GOOG), no figures provided.

New York Times

- NYT discusses next steps in Greek crisis: The NYT reports: If the Greek government wins a vote of confidence Tuesday night, it will receive €12B which will enable it to pay its debts coming due until September. Greece then has to persuade everyone who holds their debt to relend the money after the bonds are redeemed as this is the condition for the EU and IMF to put up their share of the bailout. The IMF has said the EU must underwrite the country's finances for the next year before the IMF will release its portion of the aid. Greece is asking for another €100B after receiving €110B last year. The trick is to get private investors to roll-over or extend the maturity of the bonds they own without triggering even a technical default

The next decisions will be made 3-Jul after the vote of confidence.

Wall Street Journal

- Bombardier to receive order for 20 of its new CSeries Jet. The WSJ, citing people familiar with the matter, reports that Korean Air (003490.KS) is set to announce the order this morning. The deal could be delayed at the last minute.

- WSJ is cautious on Gazprom. Without saying that Gazprom's stock price is headed down, a "Heard on the Street" column says that the company is losing its ability to charge premium prices as gas markets globalize and energy options diversify.

- Federal regulators sue banks for over $800M over mortgage bonds sold to credit unions. The WSJ, citing lawsuits filed earlier today inKansas, reports that JP Morgan (JPM) and Royal Bank of Scotland (RBS.LN) are accused of selling more than $3B of mortgage bonds that were "destined to perform poorly". Officials at NCUA, the federal regulator for credit unuions expects to file lawsuits against eight more banks and securities firms that pooled the mortgages and sold them to five credit unions which failed in 2009 and 2010. The NCUA has threatened to sue Goldman Sachs (GS) and other firms according to people familiar with the matter.

- Banks margins suffering as competition heats up in leveraged loans market. The WSJ, citing people in the industry reports that the loans are being priced without regard to the risk being taken on as the demand by investors for these loans and the desire by banks to increase revenues is taking centre-stage. The average yield on leveraged loans has fallen from 7.22% at year-end, and 6.57 in the same period a year-ago, to 5.65% now. The main concerns are the floating-rate market which have attracted lots of investment recently, and these funds have taken in $21B in new money from investors +50% in five months and doubled in the last year to $70B

Libor floors have also been reduced, implying borrowers are in a good bargaining position

- WSJ looks at future of Borders Group. The article is a summary, breaking no news. It discusses Jahm Najafi and Alec Gores, who are separately attempting to buy the company. An auction is scheduled for 19-Jul, and Borders could go for $250-350M. The article notes that Gores is talking with Hewlett-Packard (HPQ) about featuring H-P's new ereader in Borders.

- MLB commissioner Bud Selig rejects Los Angeles Dodgers' 17-year, $2.7B media deal with Fox Sports. In a statement, Selig says that the deal would have amounted to mortgaging the Dodgers' future. A spokesman for owner Frank McCourt notes that the deal had been approved in court, which is where sources say this entire affair could be headed back to.

- Citi could sell EMI's publishing, recorded-music units separately. People familiar with the matter tell the WSJ that EMI will probably go for $3B, including debt. An internal memo suggests that a winner will probably be picked by the beginning of Q4.

Research

Cowen: downgraded GPS

Credit Suisse: downgraded MMI, RIMM

Deutsche Bank: upgraded BIIB

Keefe Bruyette: downgraded PNC

Macquarie: upgraded DFS

UBS: upgraded PLD

Wunderlich: upgraded SPWRA

Options

VIX Down But We Don’t Like Everything We’re Seeing

The VIX is at 19.99 falling 1.86 (8.5%) on the session reflecting easing concerns about the risk of a Greek default crisis, other developments in the volatility and credit space are giving us cause for concern. These include: Rising volatility among European Indices and major European bank, Rising single stock skew and Widening high yield bond spreads.

Hedging Greeks with Greeks

Option ideas to hedge against a further deterioration in the Greek debt saga:

Currency Hedge: In FXE (CurrencyShares Euro Trust)), buy the July 142-138 put spread for $1.18.

Country/Index Hedges: In EFA (iShares MSCI EAFE Index Fund) buy the July 58-54 put spread for 1.20 or in EWP (iShares MSCI Spain Index Fund) buy the July 40-36 put spread for 1.20.  

Fixed Income Hedge: In HYG (iShares iBoxx High Yield Corp Bond) buy the July 89-86 put spread for $.65.

Housing Data’s Coming, But Don’t Hold Your Breath

This week we get a slew of housing data starting w/existing home sales Tues, FHA home prices on Wed, and new home sales on Thursday. The XHB has risen 3 days in a row and in 5/6 past sessions all the while the picture for homebuilders and house-ware retailers seem rather bleak. Right now XHB (S&P Homebuilder ETF)- July atm vol is ~25, relative to 30-day realized at 21.77. While at face not cheap realized has been steadily rising since reaching a low on May 9th.

Look at buying the XHB Jul 18 puts for $.63. With the puts already .32 (1.8%) in the money, this is a cheap and effective way to get protection/downside exposure over 3 housing data releases plus FOMC on Wed.

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.