Morning Note

July 12, 2011

Equity futures are trading below fair value, though off the worst levels of the overnight, as European indices fall further on concern that the debt crisis in the Eurozone may spread to Italy and Spain. The euro is under pressure trading at $1.3898 after IMF's Christine Lagarde announced that her new agency has not yet discussed Greek aid details, and made it clear that "nothing should be taken for granted on Greece". Italy sold €6.75B of 12M T-Bills at gross yield 3.670% vs prior auction 2.147%, bid to cover 1.55. Bank of Japan unanimously keeps overnight call rate unchanged at 0-0.1%, as expected.

Jun NFIB Small Business Index 90.8 vs. May 90.9; 69% of owners view the period as a poor time to expand. 75% of those blame the weak economy for their outlook, while 10% cite political uncertainty.

Libor fixings 

- 1-month Libor: Dollar: 0.187% vs prior 0.186% ; Sterling: 0.629% vs prior 0.628%; Euro: 1.390% vs prior 1.381%

- 3-month Libor: Dollar: 0.249% vs prior 0.246% ; Sterling: 0.827% vs prior 0.826%; Euro: 1.544% vs prior 1.381%

Aug WTI crude ($1.05) to $94.15

Natural gas ($1.03) to $4.244

Gold ($9.50) to $1545.96

10-year yield 2.868%

30-year yield 4.1624%

Asian Markets

Asian markets followed Wall Street down today on European debt worries, with financials leading the way down. Exporters continued to be hurt by a stronger yen, and all 33 sectors fell in Japan. Megabanks followed their international peers down, despite the fact that they are unlikely to be threatened directly by the European debt crisis. Large-cap energy and financial stocks dragged China down. Big banks and miners fell in Australia, but Macarthur Coal (MCC.AU) rocketed up 37% on getting an indicative bid from Peabody Energy (BTU) and ArcelorMittal (MT.NA). Taiwan fell. HTC (2498.TT) dropped 7% after Apple (AAPL) filed a complaint against it with a US trade panel. Large caps led South Korea down. In high volume, worries about more Chinese monetary tightening sent property shares lower in Hong Kong. Non-state-owned Chinese companies took heat from a Moody's report that raised red flags about governance in, among others. Prada (1913.HK) dropped 7% on European debt worries. Japan May tertiary industrial activity +0.9% m/m. June domestic CGPI (0.1%) m/m vs cons (0.2%), +2.5% y/y. China foreign reserves +30.3% y/y to $3.2B in June. New loans in China +3.3% y/y in June to CNY633.9B. New loans for H1 (9.7%) y/y to CNY4.17T. The yen is trading at 79.61 to the US dollar.

European Markets

European equity markets failed to be impressed by words rather than actions regarding the EuroZone debt crisis and fell sharply from the open as EuroGroup said they will present new proposals shortly to ministers to enhance the flexibility and scope of EFSF, lengthen the maturities on loans and lower interest rates as well as discussed the main parameters of a new multi-annual adjustment program for Greece. The regions corporate results were mixed, whilst Alcoa (AA) Q2 EPS missed consensus and the shares trade (1.4%) in Germany. All industry groups trade lower led by travel & leisure (3.3%), technology (3.2%) and insurance (3.0%) whilst real estate (0.7%) food & beverage (1.0%) and healthcare (1.1%) lead relative performers. France Jun final CPI +2.3% y/y vs prelim +2.2%, Germany Jun final CPI +2.3% y/y vs prelim +2.3%, UK June RPI +5.0% y/y vs consensus +5.2% and prior +5.2%, CPI +4.2% y/y vs consensus +4.5% and prior +4.5%, The pound and the euro are trading at $1.5818 and $1.3904 respectively. The pound fell and gilt futures extended gains post the better than expected UK inflation data and worse than expected UK trade data.

Today's Economic Releases (Eastern Time)

01:30 France CPI y/y (June); actual +2.3%; consensus +2.2%

02:00 Germany CPI y/y (June); actual +2.3%; consensus +2.3%

04:30 UK CPI y/y (June); consensus n/a

04:30 UK Retail Price Index y/y (June)

07:30 US NFIB Small Business Index (Jun)

07:45 US ICSC-Goldman Chain Store (09-Jul); consensus n/a

08:30 US Trade Balance (May); consensus ($43.8B)

08:55 US Redbook Chain Store (09-Jul); consensus n/a

12:00 US EIA monthly energy outlook (Jul); actual ---; consensus ---

16:30 US API Crude Inventories (08-Jul) 

Today's Key Events (Eastern Time)

09:00 Alange Energy announces farm out to YPF of two Colombian assets: 888.231.8191 / Intl 647.427.7450 pc 82849705

09:00 Campbell Soup Outlines Growth Strategies at Analyst Meeting

09:00 FP InfoVista announces preliminary financial results for Q4: 631.510.7498/UK +44 (0) 1452 555 566/FRA +33 (0)176 742 428 pc 81311875

09:00 Holdings to acquire M*modal for total consideration of $130M: 212.231.2903

11:00 Applied Materials to Hold SEMICON West Briefing Meeting

11:00 Pandora Media Financial Analyst Day

12:00 Verizon Opens LTE Innovation Center

12:00 VMware unveils Cloud Infrastructure next step forward

13:00 Treasury Auction of 3-yr notes

13:30 Lam Research Analyst and Investor Meeting

13:30 Wedge Partners call with Omnivision CFO

14:00 FOMC minutes of June 21-22 meeting released

15:45 KLA-Tencor Analyst Briefing at SEMICON West

18:30 Research In Motion Annual General Meeting

—:— Acorn Energy Investor Day

—:— Cisco Live

—:— Global Hunter Securities with TORM A/S

—:— Intersolar North America

—:— SEMICON West

—:— Stifel Nicolaus Orphan Drug One on One Conference

—:— Stifel Nicolaus with Advance Auto Parts 

Company Specific News

Earnings

AA (Alcoa reports Q2 EPS $0.32 ex-items vs Reuters $0.33; Reports Q2:

Revenues $6.59B vs Reuters $6.32B)

FAST (Fastenal reports Q2 EPS $0.32 vs Reuters $0.31; Reports Q2:

Revenues $701.7M vs Reuters $688.6M)

QSFT (Quest Software guides Q2 EPS $0.22-0.24 vs Reuters $0.28. Q2 Guidance:

Revenue $201-204M vs Reuters $205.1M)

WWW (Wolverine World Wide reports Q2 EPS $0.48 vs Reuters $0.46. Reports Q2:

Revenues $310.1M vs Reuters $294.3M)

Positive News

CVX (Chevron guides Q2 earnings to be higher than Q1)

M&A

CV (Central Vermont to be purchased by Gaz Métro for $35.25/sh cash)

XOHO (XO Holdings and subsidiary of ACF industries holding Corp. announce merger)

Offerings

GPOR (Gulfport Energy's 3M share offering priced at $28.75 through Credit Suisse)

MRD (MacDermid files for $200M IPO through Credit Suisse, Morgan Stanley and Deutsche Bank)

NLY (Annaly Capital 120M share secondary priced at $17.70 through Credit Suisse, others. Size of the offering was increased from 100M shares to 120M shares.)

Newspaper Articles / Headlines

Business Day

- Massmart applies for Competition Commission permission to buy The Fruitspot. Business Day reports that Massmart announced the application yesterday, and that the company saw sales for the year to June rise 13% to ZAR53B.

Globes

- Licensees ask for two-month drilling delay at Myra, Sarah. Without giving a reason for the request, Globes reports that the licensees are supposed to start drilling by 1-Jan, and they would like the deadline extended to 28-Feb.

Globe and Mail

- Only one Magna International shareholder has really cashed in from buyout of Frank Stronach. In an article that is merely a summary, breaking no news, the Globe and Mail reports that that shareholder is Frank Stronach, who has sold most of his holding. The article notes that while Magna is up some 50% since the plan was announced in May 2010, it has only done a little bit better than its peers, and its enterprise-value-to-EBITDA multiple remains below peers'.

Financial Times

- Banks offering easier terms to hedge funds. The FT, citing Federal Reserve survey data reports that the Fed's poll of 20 of the largest securities dealers found that none of them had tightened credit in the March-May period and 11 had eased terms. Of the lenders that had eased terms, nine said it was because of increased competition, eight cited increased counterparty strength, and seven cited a willingness to take on risk. Leverage was roughly halfway between the 2007 peak and the post-crisis trough.

- Wm Morrison planning promotions around payday. The FT citing CEO Dalton Philips, reports that as the UK consumer is under pressure and buying more at the beginning of the month, the company would do money-saving promotions at the end of the month "to scoop up that money that's around at the end of the month". The trend has been visible for around 12 weeks everywhere outside London.

- Online retailers cut ties to Californian sites. The FT reports that more companies are following Amazon.com's (AMZN) lead after the new tax law, such as Overstock.com (OSTK) and Blue Nile (NILE).

- Siemens considering acquisitions for city and infrastructure division. The FT, citing the head of the new division, reports that the aim is to acheive €100B in sales in selling to urban centres the new division has representation on the executive board, putting the company ahead of its rivals. The IPO of Osram is still going ahead.

- Europcar to offer General Motors' electric Ampera model. The FT reports that Europe's largest car rental company will offer the cars inGermany from November, then Belgium and the Netherlands later this year. From early next year, the car will be available in France, italy, Portugal andSpain. The article notes initial sales of electric cars have been slow and fleet deals are a way of getting critical mass for the cars.

Guardian

- News International papers besides News of the World tried to get information on Gordon Brown.The Guardian reports that over a ten-year period, including when he was Prime Minister, the Sun, News of the World, and Sunday Times got legal, medical, and possibly financial information of Brown's. The papers may also have tried to hack into Brown's voicemail. The Guardian notes that Brown is merely the latest add to a lengthy list of Labour politicians that News International publications have targeted. The article says that the publication of medical information appears to have violated the Data Protection Act.

London Times

- Lloyds Banking Group gets limited interest in its 632 branches. Sources close to the auction tell the Times that a few parties submitted initial bids, which Lloyds surprised people by imposing a 11-Jul deadline for. The Times reports that Virgin Money and NBNK expressed interest. The Guardian reports that National Australia Bank (NAB.AU) told Lloyds that it wanted more time to put an indicative offer in; the article gives no indication of whether Lloyds has granted NAB an extension.

- Laird Group advisers think its shares are worth at least 215p. The article summarizes the earlier Cooper Industries (CBE) statement advising that it is considering its interest in the company. Cooper has offered 185p/share.

Los Angeles Times

- FCC's Enforcement Bureau says Comcast should be penalized for discriminating against Tennis Channel. The LA Times reports that an FCC attorney said 8-Jul that Comcast has been unlawfully treating its own channels better than competitors; he recommends that the government force Comcast to more widely distribute the Tennis Channel and pay a small fine. The companies will make their arguments today to the presiding judge, who will give his decision to the FCC. The FCC has the final say.

Moscow Times

- Sberbank signs memorandum to invest up to $800M in Skolkovo. The Moscow Times reports that at the signing ceremony, Sberbank president/chairman German Gref said the bank will build a technology park for the bank's IT and R&D departments. No timeframe is given.

Silicon Valley Mercury News

- Google buys digital-loyalty-card company Punchd; terms undisclosed.

South China Morning Post

- Cessna talking with Avic about tie-up in China. A Cessna executive tells the SCMP that talks are still preliminary. The article says that Gulfstream (GD) and Bombardier (BBD.B.CN) basically own China's private-jet market, and Gulfstream, Bombardier, and Embraer (EMBR3.BZ) are all thought to be in talks with Avic about ventures in China

Vedemosti

- Russia to expand privatisation program to RUB6T by 2016. Vedomosti, citing sources, reports there were several meetings last week to discuss the issue resulting in annual receipts of RUB1.2T pa vs current budgets of RUB300M pa. It is planned for the government to exit completely from 10 companies including Rosneft. 10-15% of Rosneft in 2012 could be sold and then the complete shareholding except for a 'golden share'.

VentureBeat

- Electronic Arts buys Ohai. A source familiar with the matter tells VentureBeat of the purchase, but the site says: The price for the social gaming company is unknown, though VentureBeat suspects it was "relatively low." It is unknown when the purchase will be announced. Ohai raised $6M in January 2009.

Wall Street Journal

- White House discussing new strategies to help housing market. The Journal reports that weak demand and a stream of foreclosed properties have put renewed pressure on home prices, triggering concern within the White House and prompting the Obama administration to ramp up talks on how to revive the market. According to the article, policy ideas under consideration include having Fannie and Freddie relax their lending rules for investors to help clear excess inventory; allowing the GSEs to rent some of their inventory of foreclosed homes; and providing more incentives for banks to reduce principal.

- WSJ worries about Bank of America. A "Heard on the Street" column says the bank's mortgage problems and thin capital ratio are rightly causing concern among investors, and BAC needs to address at least one of those issues.

- WSJ notes that Peabody Energy (BTU) has substantially raised its offer for Macarthur Coal. A "Heard on the Street" column notes that the difference isn't that noticeable to Macarthur -- A$15.50/share vs last year's A$15/share offer -- but a stronger US dollar means Peabody is paying 23% more than its final 2010 proposal. The column does not really take a position on the takeover, but it does observe that it probably means good things for Macarthur peers Gloucester Coal (GCL.AU) and Whitehaven Coal (WHC.AU).

Research

Bank of America Merrill Lynch: upgraded CYN, MTB, SNV; downgraded BOH, CBSH, HFC, TSO

Barclays Capital: upgraded OI, SEE

Canaccord Adams: downgraded PEGA

Credit Suisse: downgraded CHU

FBR Capital: downgraded PLD

Jefferies: downgraded PG
Morgan Stanley: downgraded MSI

Nomura Securities: downgraded RUE

Piper Jaffray: downgraded ANN

RBC Capital: upgraded ACI

RW Baird: upgraded WTFC

Sterne Agee: upgraded IGT

UBS: upgraded HSFT; downgraded MCHP, MXIM, FIRE< QLIK

Wedbush: downgraded WM, RADS

Options

VIXated on Risk

The VIX moved up 2.44 to 18.39 (15.3%), its largest one-day gain since June 15th. What is less known is the fact that this move was actually understated given the index overnight dropped July and added September options to its’ calculation. The IWM seemed to embody yesterday’s mentality as option volume was 144% of the 20-day average and the put call ratio clocked in at 5.24- well above its ytd average of 2.86 (a level topped only 2 other times this year). The SPX 30-day implied vol jumped 15% putting it almost exactly on par with 30-day realized vol. Vol movements in Financials, Tech and Consumer-related ETFs also showed rising fear as August implieds rose by mid-teen percentages in XLF, XLK and XLY. 30-Day vol in GLD (Gold ETF) moved higher by 1.5 points (11%) (a large move in gold which generally exhibits fairly subdued vol-of-vol). What was interesting is gold skew is once again inverted- a phenomenon not observed since early June and perhaps indicative of a bullish outlook for the precious metal. We like positioning for further upside in GLD via buying the August 152-159 call spread for $2.

Once Bitten, Twice Shy

- The mean-reverting (& range bound) dynamic of this market; while potentially benign from a price return standpoint, has served to wreak havoc on option premiums. After the 2-day 2.5% downturn in the SPX and keeping with our “once-bitten twice shy” mentality, we like looking at July 1x2 call spreads to capture a meaningful upside reversion over the next 4 days for minimal cost. The below ideas all cost around 50bps with a maximum payout around 4x the initial premium paid. 

GDX buy the 56-58 1x2 call spread for .39 (.7% upfront, 4.12x max payout)

GDXJ buy the 36-37 1x2 call spread for .20 (.56% upfront, 4x max payout)

IWM, buy the July 84-86 1x2 call spread for .40 (.48% upfront, 4x max payout)

OIH Buy the July 152-156 1x2 call spread for .80 (.53% upfront, 4x max payout)

XLE buy the July 76-78 1x2 call spread for .38 (.51% upfront, 4.26x max payout)

http://seaofopportunity.blogspot.com/

 *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.