Morning Note

July 15, 2011

Equity futures are modestly above fair value as the news that S&P had put US government debt on credit watch negative, and more tightening measures on the property market coming out of China, hurt sentiment. Asia came off its lows during the trading day, and US futures have risen off earlier lows.

Lipper funds reports equity fund inflows of $3.5B in w/e 13-July vs inflows of $4.8B in w/e 6-July.

Aug WTI crude +$0.51 to $96.20

Natural gas +$0.06 to $4.44

Gold ($4.75) to $1582.53

10-year yield 2.9514%

30-year yield 4.2731%

Asian Markets

Asian stocks are mixed with strength in Taiwan, Korea and Japan offset by weakness in Hong Kong and Australia with China coming back from losses. Asian markets started weak after the late-day sell-off in the US and the placing of US debt on creditwatch negative by S&P pre-market open. Commodity stocks were weak as Federal Chairman Bernanke ruled out an immediate continuation of bond purchases. China talked more about tightening the property market. Korea rose as the currency rose on oil's drop. Japan came back from being down to rally, led by retailers boosted by a Nikkei report that the government may reintroduce subsidies for energy-efficient products. China ended up slightly as property stocks were under pressure as the State Council outlined further controls in the property market. Hong Kong was weak on the Chinese property news. The commodity heavy Australian market fell on the overnight falls in New York with weakness in oil companies offset by strength in gold mining stocks. The Yen is trading at 79.22 to the US dollar.

European Markets

European indices are trading lower pressured by S&P's announcement that it is placing the US AAA/A-1+ on Creditwatch Negative and ahead of the release of bank stress test results today after the close. M&A activity is a focus with BHP Billiton (BHP) purchasing Petrohawk Energy (HK) for $38.75/sh cash. Sony Ericsson posted a Q2 loss after the 11-March earthquake and tsunami in Japan weighed. European Automobile Manufacturers' Association (ACEA) June new passenger car Registrations for the EU+EFTA (8.1%) y/y. Credit Suisse (CSGN.VX) received a letter notifying it that it is a target of the DoJ investigation regarding historical Private Banking services provided on a cross-border basis to US persons. No major economic report in Europe today with the pound and the euro are trading at $1.6099 and $1.4137 respectively.

Today's Economic Releases (Eastern Time)

08:30 US CPI (Jun); consensus (0.1%)

08:30 US CPI ex Food & Energy (Jun); consensus +0.2%

08:30 US Empire Manufacturing (Jul); consensus +3.9

09:15 US Industrial Production (Jun); consensus +0.3%

09:15 US Capacity Utilization (Jun); consensus 76.9%

09:55 US Michigan Consumer Sentiment (Prelim.) (Jul); consensus 71.5 

Today's Key Events (Eastern Time)

08:30 Seattle Genetics discusses FDA's Oncologic Drugs Advisory Committee panel meeting: : 800.762.8779 or 480.629.9771

—:— Capstone Investments with ISTA Pharmaceuticals

—:— General Cable (BGC) will replace SRA International (SRX) in the S&P 400 - after the close

—:— International Meeting on Advanced Spine Techniques ~ IMAST 

Company Specific News

Earnings

C (Citi reports Q2 EPS $1.09 ex-items. Reports Q2: It is unclear if reported EPS is comparable to Reuters $0.96; First Call $0.97. Revenues $20.60B vs Reuters $19.89B)

FHN (First Horizon National reports Q2 EPS $0.16 vs Reuters $0.11)

FLIR (FLIR Systems reports preliminary Q2 EPS $0.35 ex-items vs Reuters $0.38)

GOOG (Google reports Q2 EPS $8.74 vs Reuters $7.84)

MAT (Mattel reports Q2 EPS $0.23 vs Reuters $0.16)

PPHM (Peregrine Pharmaceuticals reports Q4 EPS ($0.15) vs Reuters ($0.15))

M&A

CLX (Clorox holder Icahn sends letter to Chairman/CEO Knauss offering to acquiring company for $76.50)

H (Hyatt Hotels acquires Lodgeworks portfolio of 24 hotels and other assets for $802M)

HK (BHP Billiton (BHP) to purchase Petrohawk Energy for $38.75/sh cash)

RLOG (Rand Logistics announces acquisition of Canadian flagged dry bulk vessel)

WFC (Wells Fargo (WFC), Capital One (COF) offer to acquire HSBC's (HSBA.LN) U.S. credit card portfolio)

Positive News

COF (Capital One reports Jun US card net principal charge-offs $198M vs $217M)

Negative News

CBST (Cubist Pharmaceuticals guides full year revenue $700-715M vs previous $686-706M and Reuters $706.7M)

RAH (Ralcorp Holdings guides Q3 adj. EPS $1.13-$1.18 vs Reuters $1.37)

Newspaper Articles / Headlines

Barron's

- Barron's Weekday Trader is positive on Teleflex. Barron's Weekday Trader is positive on Tereflex noting the company is nearing the end of its transformation from small industrial manufacturing to a medical devices company . Furthermore, the article says the company could return around 20% over the next 12-18 months, features a 2.2% dividend yield and currently trades around 14.5x forward earnings.

Bloomberg

- Lee Enterprises offering higher rates and equity interests to lenders in attempt to avoid bankruptcy. Bloomberg reports, citing sources, that the company has been in talks with lenders, including Monarch and Goldman Sachs, to refinance its debt. Lenders are also being asked to approve a pre-pack in case an out-of-court restructuring does not receive enough support.

Financial Times

- Glencore International to stop quarterly reporting. The FT reports that Glencore has offered to pay upto $2.4M to persuade bondholders to allow them to stop the quarterly reporting condition. The release of 1Q results upset Xstrata (XTA), which doesn't release quarterly results as analysts implied weak results at the miner. Xstrata has decided to stop providing quarterly financial results to Glencore, according to a person close to the company. Glencore will continue to give quarterly production reports, according to a person familiar with the company

La Tribune

- Thales and Dassault Aviation (AM.FP) likely to has won a $2.4B contract in India. Citing sources, the newspaper reports that Dassault Aviation and Thales will be able to announce the signing of a contract that could be worth up to $2.4B in India. The Secretary of State for Defence approved the proposal submitted by group Dassault, Thales and MBDA for the modernization of the Mirage 2000, according to sources. According to La Tribune the contract offered by MBDA weapons has not yet been approved by the Interdepartmental Committee on Security Cabinet (NSC), chaired by the Prime Minister, Dr. Manmohan Singh, who decides on all investments in defense. This part of the contract is expected in September, at which time the CCS would then give the green light.

Wall Street Journal

- White House offers some concessiosn to automakers on mileage plans. The WSJ, citing people familiar with the matter, reports that the automakers can improve fuel efficiency of pickups and SUVS at a slower pace than for passenger cars out of several options put forward at meetings, one option would be for a 3.5% improvement pa less than the 5% required for passenger cars the measures are to try and gain support for the measure which is opposed by the industry.

- Groupon investigated in Conneticut. The WSJ, citing an assistant AG, reports that the state is looking at whetehr thed eals should be considered as gift certificates and so whetehr the company is breaking consumer-protection laws that ban expiration dates.

- Fiat preparing Chrysler merger. The WSJ, citing people familiar with the matter, reports that CEO Sergio Marchionne is selecting a single executive team to oversee the company's business rather then the two teams that now exist. Details are likely to be discussed on 26-Jul when Fiat will report consolidated results for the first time.

- Murdoch defends News Corp in interview. The WSJ, which is owned by the company, spoke with Rupert Murdoch and in the interview he defended the company's handling of the situation, but stated the company would form an independent committee to investigate. Murdoch also stated that his son's postion at the company has not changed.

Research

Bernstein: downgraded TSP

BMO Capital: upgraded PCX, TCK, WLT

Canaccord Genuity: upgraded ANGO

CapStone: downgraded CY

Deutsche Bank: downgraded DMND

Jefferies: downgraded QLIK

JP Morgan: upgraded RKT; downgraded TSYS

Keybanc: downgraded HK

Morgan Keegan: downgraded FLIR

Stephens: downgraded FLIR

Stifel Nicolaus: downgraded OZRK

UBS: upgraded DV

Wells Fargo: upgraded SM

William Blair: upgraded PPDI

Options

VIX to the Market: Fasten Your Seatbelts, Turbulence Ahead

The VIX is now 20.80 (+4.5%) climbing for a 4th straight session as VIX futures trading volume set a record of 104,773 contracts. VIX term structure continued to flatten and is now slightly inverted at the front end of the curve (spot VIX is higher than Jul & Aug). While this is a clear sign of market anxiety, note that the last 2 times the VIX curve was inverted, 3/16/11 and 6/29/10, the market went on to rally immediately thereafter, in both cases  climbing more than 5% over the subsequent month.

Broad based index/ETF option volume was also heavy yesterday with ADV in SPY, SPX and QQQs all >125% and put / calls falling in line with historical average. Given the subdued close-to-close moves over the past 3 sessions realized volatility has now fallen, while implied vol has climbed making current 30-day implied/realized vol ratios closer to historical averages.

At the sector level, worry is surfacing in the REIT’s with IYR Aug vol climbing 7.5% yesterday and 27% over the past week with a number of large bearish yesterday. Silver hit a new two-month high, skew in SLV has flattened dramatically to the point of being inverted (something we haven’t seen since late April.), reflecting the perception of asymmetrical upside risk in silver over the near-term. If looking to get long exposure to silver, consider taking advantage of SLVs flat skew by buying the Aug 38-44 1x2 call spread (buy 1 38 call, sell 2 44 calls) for $1. Max payout is $5 or 5x the initial outlay.

Our recommendation to sell Aug 55 puts and buy Aug 60 calls for a .07 credit in GDX on Tuesday is getting a boost on the back of a WSJ article saying that gold mining stocks may have lagged gold’s recent rise and speculation that gold miners will see a more dramatic move than the price of gold.

Oh Those Precious Curves!

Using call spreads and put spreads we can back out the implied probability of a security reaching various strike prices by expiration- we plotted GLD’s implied probability distribution using Dec11 option prices (see attached report for chart). While most stocks exhibit negative skew meaning the left half of the curve exhibits a fatter tail than the right. Not so for this precious metal, where skew is almost dead flat. Check out the chart.

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.