Morning Note

July 1, 2011

Equity futures are now trading above fair value, inching higher as European markets modestly extend gains after a mixed start. Focus will be on Jun Michigan Consumer Sentiment figure at 9:55 ET and Jun ISM Manufacturing Index at 10 ET, ahead of the 3-day holiday weekend.. Happy Fourth of July to everyone here in the US.

Lipper reports equity fund outflows of ($6B) in w/e 29-June vs outflows of ($4.5B) in w/e 22-June.

Libor fixings 

- Overnight Libor: Dollar: 0.126% vs prior 0.128% ; Sterling: 0.568% vs prior 0.671%; Euro: 0.900% vs prior 1.780%

- 1-month Libor: Dollar: 0.185% vs prior 0.186%; Sterling: 0.628% vs prior 0.631%; Euro: 1.291% vs prior 1.281%

- 3-month Libor: Dollar: 0.246% vs prior 0.246%; Sterling: 0.826% vs prior 0.826%; Euro: 1.498% vs. prior 1.491%

Fed reports balance sheet assets of $2.87T on Wednesday, +$8.8B w/w and +$534.9B y/y 

- Holdings of US Treasury securities were $1.62T on 29-Jun, +$15.1B w/w and +$840B y/y

- Holdings of mortgage-backed securities were $908.9B on 29-Jun, ($5.5B) w/w and ($209.3B) y/y

- Holdings of federal agency debt securities were $116.7B on 29-Jun, ($1.7B) w/w and ($48.1B) y/y

Aug WTI crude ($0.76) to $94.66

Natural gas ($0.042) to $4.332

Gold ($9.36) to $1490.31

Asian Markets

Asian stocks generally rose, following a strong Wall Street overnight with volume lower as Hong Kong was on holiday today. The passing of the second Greek austerity bill gave a boost to global markets and the US economic numbers helped export-dependent Asia. China PMI came in below expectations at 50.9 vs 50.1 cons but this didn't hurt overall sentiment and nether did a below expectations tankan survey. Korea rose 1.2% following US gains on signs global economic growth may avoid the worst, and the news that exports rose 14.5% y/y. Insurance companies were strong and banks were weak as CPI came in higher than expectations at 4.4% y/y. Taiwan also had a good day rising 1% despite the central bank raising rates yesterday. Tech stocks also did well. Japan rose 0.5% despite a worse than expected tankan survey, with the US economic numbers trumping that and exporters to Europe were boosted as the Yen weakened against the Euro. China ended flat, not joining in the regional move, as the PMI showed slower growth in the country. Australia started strong but ended down slightly after the Chinese economic numbers were released with commodity stocks. Retail stocks were weak on worries of a weaker economy. China PMI at 50.9 in June vs 52 sequential and consensus 51.5. Japan Q4 large manufacturer tankan (9) vs consensus (7) and 6 seq

European Markets

European equity markets trade mixed, with major indices having fluctuated either side of unchanged thought the session. With little significant corporate news flow and disappointing economic data, indices had little to move them significantly in either direction after recent gains. ThyssenKrupp (TKA.GR) fell after it ended talks to sell its shipbuilding business to Abu Dhabi MAR Group, whilst Vestas Wind Systems (VWS.DC) was buoyed after signing a turbine supply agreement with EDF Energies Nouvelles (EEN.FP). Jun final Manufacturing PMI: France 52.5 vs preliminary 52.5. Germany 54.6 vs preliminary 54.9. EuroZone 52.0 vs preliminary 52.0. UK Jun Manufacturing PMI 51.3 vs consensus 52.1, prior revised 52.0 from 52.1. EuroZone May unemployment rate 9.9% vs consensus 9.9% and prior 9.9%. The pound and the euro are trading at $1.6007 and $1.4531 respectively.

Today's Economic Releases (Eastern Time)

03:00 France Manufacturing PMI (June); actual 52.5; consensus n/a

03:55 Germany Manufacturing PMI (June); actual 54.6; consensus n/a

04:00 Eurozone Manufacturing PMI (June); actual 52.0; consensus n/a

04:30 UK Manufacturing PMI (June); consensus n/a

05:00 Eurozone Unemployment rate (May); consensus n/a

09:55 US Michigan Consumer Sentiment (Final) (Jun); consensus 71.8

10:00 US Construction Spending (May); consensus 0.0%

10:00 US ISM Manufacturing Index (Jun); consensus 51.4

—:— US Vehicle Sales (Jun); actual ---; consensus --- 

Today's Key Events (Eastern Time)

08:30 JA Solar to acquire Silver Age Holding: 866.713.8567 pc JA Solar

09:00 K-Sea Transportation Special Shareholder vote on merger with Kirby

—:— AMERIGROUP (AGP) will replace Nationwide Health (NHP) in the S&P 400 - after the close

—:— Canada: Markets Closed for Canada Day (observed)

—:— FDA PDUFA (est): Novartis’ NDA for QAB149 for once-daily treatment of COPD

—:— Northwest Bancshares (NWBI) will replace AMERIGROUP (AGP) in the S&P 600 - after the close 

Company Specific News

Earnings

APOL (Apollo Group Q3 EPS $1.45 ex-items vs Reuters $1.33)

AZZ (AZZ Q1 EPS $0.75 vs Reuters $0.63, guides FY EPS $2.90-3.10 vs prior guidance $2.70-3.05, Reuters $2.91)

DRI (Darden Restaurants Q4 EPS cont ops $1.00 vs Reuters $1.00)

XRTX (Xyratex Q2 EPS ($0.06) vs Rtrs $0.00, guides Q3 EPS $0.10-0.28 ex-items vs Rtrs $0.21)

Positive News

KBR (KBR awarded maintenance and small cap construction services contract by BP)

NRTLQ (Nortel (NRTLQ) announces the winning bidder in its patent portfolio auction with a purchase price of $4.5B, consortium consists of Apple (AAPL), EMC, Ericsson (ERIC), Microsoft (MSFT), Research In Motion (RIMM) and Sony (SNE))

STP (Suntech Power and MEMC terminate long term silicon wafer supply agreement)

Negative News

BCR (C.R. Bard reaches agreement to settle the majority of the existing hernia product claims; expects to incur charge of ~$184M in Q2)

EK (ITC rules against Eastman Kodak (EK) in patent dispute with Apple (AAPL) and Research in Motion (RIMM))

MRH (Montpelier Re reports initial loss estimate from Q2 storms, provides update on Q1 catastrophe events)

Offerings

DNKN (Dunkin’ Brands (DNKN) may raise $500M in IPO)

M&A

MRH (Kinder Morgan and Copano Energy JV announce new long-term contracts in Eagle Ford Shale)

KMP (Kinder Morgan and Copano Energy (CPNO) JV announce new long-term contracts in Eagle Ford Shale)

Management Announcements / Changes

WLT (Walter Energy CEO Keith Calder tenders resignation)

Newspaper Articles / Headlines

Barron's

- Barron's Weekday Trader is positive on Marsh & McLennan. Barron's Weekday Trader is positive on MMC citing the company's model which could allow MMC to take advantage of many of the positive growth drivers in the insurance industry without having to take the additional risks of its underwriter partners. In addition, the article notes the company has solid market positioning in emerging markets in both Asia and Latin America and currently trades around 15x 2012 earnings with a 2.7% dividend yield.

Financial Times

- Royal Bank of Scotland to sell £1.4B UK commercial property portfolio to Blackstone (BX). The FT reports that the final sign-off is needed from the bank's senior executives.

- Vodafone says Indian tax bill may reach $5B. The FT, citing CFO Andy Halford, reports that the Indian government have threatened to impose penalties for non-payment that could raise its liability to $5B from the original $2.5B, the company has put $2.5B into an escrow account in the event the Indian Supreme Court rules against it, but no provision has been made, the company has GBP14B in cash after recent asset sales

- Zygmunt Solorz-Zak finalises Polkomtel deal. The FT reports that The deal is for about €3.8B in cash and as assumption of the company's €700M debt Vodafone (VOD.LN) a 24.4% owner will receive €920M after deciding not to utilise its pre-emption option Polish authorities need to approve the transaction and is expected to be completed before the end of the year.

- Germany's lower house approves closure of nuclear stations by 2022. The FT reports that the final step will be ratification by the country's federal states in the upper house on 8-Jul.

La Tribune

- Bwin.fr and Sajoo.fr enter talks. Citing source, the newspaper reports, Amaury Group owner of Sajoo.fr, and Bwin have entered into preliminary talks to bring their french divisions together

New York Times

- NYT Dealbook discusses who will be Morgan Stanley's number two. Dealbook reports speculation is rife inside the bank as to who will be President, a title CEO James Gorman also holds, but considered to be the spot before becoming the head of the bank the three contenders are the co-presidents of institutional securities, Colm Kelleher and Paul Taubman, as well as gergory Fleming, president pf Morgan Stanley Smith Barney ans Morgan Stanley Investment Management people close to the CEO say he has no plan on filling the spot quickly and could even wait years.

Telegraph

- Middle East holders of LSE are not sellers. The Telegraph, citing sources close to the situation, reports that Both Borse Dubai and Qatari Investment Authority want the LSE to remain independent and will block any takeover bids.

- Google sees 'insane demand' for Google Plus. The Telegraph, citing Google's head of social, reports that "We've shut down invite mechanism for the night. Insane demand. We need to do this carefully, and in a controlled way." The launch is similar to Google mail where a few people were invited and extended it to friends and family.

Wall Street Journal

- Lloyds Banking Group to pull out of 15 of the 30 countries in which it operates. The WSJ, citing people familiar with the matter, reports that the bank hasn't decided on which countries to exit. The article notes this follows other banks' moves to follow a similar strategy.

- IBM develops more reliable memory storage. The WSJ reports that the technology, phase-change memory, seen as an alternative to flash, can be used in servers and the whole cloud-computing movement. The company is likely to license the technology rather than produce it itself

- Chrysler says average cost of union labour fell 35% since 2006. The WSJ. citing the company's website, reports that the cost of labour fell to $49/hour vs $75.85/hour in 2007.

- First Solar confirms gets $4.5B in loan guarantees from the DOE.

- Citi enters exclusive talks to sell One Main. The WSJ, citing a person familiar with the sale, reports that the talks are with private equity firm Centerbridge and holding company Leucadia National (LUK). The article notes that Citi has been in talks with other firms before this, such as Blackstone (BX) and that the sale has long been delayed due to issues over financing.

- Borders Group chooses Najafi Cos as opening bidder. The WSJ, citing a person familiar with the matter, reports that liquidators could still bid at the auction and win if they offer a higher bid. StreetAccount notes the WSJ had a discussion piece on the future of the company 20-Jun.

- FTC reviewing Twitter. Note that blog reports of an FTC investigation of Twitter have been circulating earlier today prior to the WSJ article, and it notes specifically the report by Business Insider blog. The WSJ article says the focus of the review is unclear, and the reviews oftern do not result in any legal action or penalty

The FTC requested information from UberMedia Inc., which Twitter considers to be a potential competitor, according to people familiar with the matter.

Spokesmen for Twitter and the FTC declined to comment.

Research

Argus Research: downgraded GIS

Bank of America Merrill Lynch: downgraded IACI

Craig Hallum: downgraded NTAP

Deutsche Bank: downgraded ABCO

Goldman Sachs: downgraded CETV

JP Morgan: upgraded MUR; downgraded BMTI

Stephens: downgraded DAR

SunTrust: downgraded RVBD

Options

The 1st half/2nd half swing in market sentiment was on full-display as the VIX started the month at 18.30, reached a high of 22.73 on 6/16 and closed the month on its low at 16.52

- During this time the VIX term structure flattened dramatically with the Spot/Dec VIX future spread narrowing to 1.72 points only to revert back to an even steeper shape at the end of the month than where it started. Look at buying the VIX Sep 18-16 1x2 put spread for .50 as a way to play the VIX “rolling down” the curve over the next 3months.

Vols end the month looking cheap but the market’s range-bound tendency has made it hard to capitalize.

- At the end of the month, 30-day atm vol in SPX fell below 30-day realized- something we haven’t seen since mid-April – due to falling implied vols and rising realized vol. Sector ETF vols also looked cheap with 30-day implied/realized vol ratios <= 1 in 12 out of the 20 most liquid optionable names we follow. With earnings season around the corner August options offer an attractive way to get directional exposure. (OIH, RKH, RTH, SMH, XHB, XLB, XLE, XLF, XLI, XLK, XLY, XRT).

The ride in commodities looked like more of a downhill ski event with a jump at the bottom

- Most commodities were hit in June on the general move out of risky assets as things heated up in Greece but rebounded as risk appetites returned in the last week. Crude dropped $7-$8 to end around $95. Precious metals dropped on the month with gold down 2.3%, silver off 9%. The grains took a beating in the second half of the month particularly on the last day of the month following the WASDE report showing more acreage planted than analysts expected.

- Implied vols fell steadily during the second half of the month in oil, gold and silver, but did not keep pace with even steeper declines in realized volatility. Grains on the other hand (using DBA as a proxy) maintained a fairly steady implied/realized ratio throughout the month. Considering the post-WASDE move and tight implied to realized vol spread, we think DBA Aug 32 puts look attractively priced at $1.10 (20.5 vol).

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 *Special thanks to Option Radar, BMO Capital, MEB Options, LiveVolPro, CBOE, 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.