Morning Note

July 18, 2011

Equity futures and European indices are trading lower as sovereign debt concerns boost the price of gold to above $1,600/ounce and as corporate earnings kick into a higher gear this week.

Aug WTI crude ($0.41) to $96.83

Natural gas ($0.002) to $4.544

Gold +$7.50 to $1600.69

10-year yield 2.8894%

30-year yield 4.2401%

Libor fixings 

- Overnight Libor: Dollar: 0.122% vs prior 0.123% ; Sterling: 0.566% vs prior 0.566%; Euro: 1.408% vs prior 1.403%

- 1-month Libor: Dollar: 0.186% vs prior 0.187% ; Sterling: 0.629% vs prior 0.629%; Euro: 1.414% vs prior 1.128%

- 3-month Libor: Dollar: 0.251% vs prior 0.250% ; Sterling: 0.828% vs prior 0.827%; Euro: 1.554% vs prior 1.553%

Asian Markets

Asian markets fell today, as calming European-bank stress-test results were outweighed by the lack of progress in negotiations over the US debt limit. Australiafinished flat. China finished flat. A state council’s development research center saidChina’s fixed-asset investment growth will slow as stimulus winds down, hurting most development plays. Hong Kong gave up morning gains to finish slightly down.Taiwan fell, with HTC (2498.TT) losing 4% after Apple (AAPL) won a preliminary ruling that HTC had violated its patents. Heavyweight exporters took South Koreadown; Hynix fell 4% on lower DRAM prices and worries about its earnings, due next week. Japan was closed for Marine Day. China June new home prices +4.2% y/y vs +4.1% seq. The yen is trading at 79.05 to the US dollar.

European Markets

European equity markets opened lower led by banks and insurers as market participants had their first chance to respond to the bank stress test results released late Friday and continuing worries surrounding peripheral sovereign debt contagion weighed. Peripheral debt spreads and the euro were pressured ahead of the EU leaders emergency meeting scheduled for 21-Jul with the second Greek bailout package due for discussion. No significant releases scheduled. The pound and the euro are trading at $1.6088 and $1.4050 respectively.

Today's Economic Releases (Eastern Time)

09:00 US TIC Flows (May); consensus n/a

10:00 US NAHB Housing Market Index (Jul); consensus 14

Today's Key Events (Eastern Time)

12:00 Inventure Foods Analyst Day

15:00 Alkermes Analyst and Investor Day

—:— American Society for Virology - ASV

—:— Global Hunter Securities Energy, Metals & Mining, and China Conference —:—Needham with Perrigo —:— Needham with Standard Microsystems

Company Specific News

Earnings

CHKP (Check Point Software reports Q2 EPS $0.68 ex-items vs Reuters $0.66. Reports Q2: Revenues $300.6M vs Reuters $296.0M)

ETR (Entergy guides Q2 EPS $1.75 vs Reuters $1.60; FY Guidance (Dec 2011): Reaffirms EPS $6.35-6.85 vs Reuters $6.59)

FRX (Forest Laboratories (FRX) and Pierre Fabre medicament announce positive phase III results with Levomilnacipran in patients with Major depressive Disor)

GHL (Greenhill reports Q2 EPS $0.69 vs Reuters $0.33. Reports Q2: Revenues $90.8M vs Reuters $73.1M)

HAL (Halliburton reports Q2 EPS $0.81 vs Reuters $0.73; Reports Q2: Revenues $5.94B vs Reuters $5.70B)

HAS (Halliburton reports Q2 EPS $0.81 vs Reuters $0.73. Reports Q2: Revenues $5.94B vs Reuters $5.70B)

M&A

EMG.LN (Man Group to acquire at current net asset value, all the residual exposure to the Lehman (LEHMQ) estates from funds managed by GLG Partners LP)

GLEN.LN (Glencore agrees to acquire a 70% stake in the Mina Justa project)

HTZ (Hertz to acquire Donlen for $250M, and the assumption of $680M in fleet debt)

PPDI (PPD considering a sale; privately held PRA International already for sale)

SM (SM announces it has entered into agreements with a subsidiary of Endeavour International Corporation (END) to sell its Marcellus shale assets in McKean and Potter Counties, Pennsylvania for total cash proceeds of approximately $80M.)

Offerings

OAS (Oasis Petroleum files mixed securities shelf of indeterminate amount)

Newspaper Articles / Headlines

Barron's

- Barron's feature positive on Hanesbrands. Barron's argues that although HanesBrands' shares trade at just 11 times this year's earnings and less than 10 times next year's, the shares could increase by more than 30%. The article notes that Buzz Zaino, a portfolio manager of the Royce Opportunity Fund, think Hansebrands is an attractive conservative investment for his $2.4B portfolio. Barron's notes that, according to Zaino, Hanesbrands is less volatile than many of the small-cap stocks in his portfolio and has solid cash flow, good earnings, and high margins as well as strong management, which has been using cash flow to pay down debt, make acquisitions to boost domestic growth and expanding sales world-wide. The article also points out that James Duffy, a Stifel Nicolaus analyst, is confident in the company's ability to deliver at the top end of its forecast earnings and sees the shares climbing to $40 in the next 12 months, a gain of about 33%.

- Barron's feature discusses emerging markets with Jim O'Neill of GSAM and Rich Bernstein of Richard Bernstein Advisors. Barron’s discusses the conflicting signals for the future of emerging markets and invites Jim O'Neill, London-based chairman of Goldman Sachs Asset Management and prominent bull on Emerging markets, and Richard Bernstein of Richard Bernstein Advisors and prominent bear on Emerging markets to discuss their opinions. Barron’s points out that O’Neill coined the term BRICs (Brazil, Russia, India and China) and still likes those countries' prospects as well as South Korea, Turkey, Indonesia and Mexico. Barron’s notes that the stock picks of Goldman's GS BRICs Portfolio reflect O'Neill's consumer-driven vision and include; Banco Bradesco (BBD), Sberbank (SBER.RU), ICBC (1398.HK). Petrobras (PBR) and Vale (VALE) On the contrary, Barron’s notes that Bernstein limits developing-world holdings to less than 2% of his $480M Eaton Vance Richard Bernstein Multi-Market Equity Strategy Fund (ERBAX). The article notes that the fund's top holdings include; JPMorgan Chase (JPM), Google(GOOG), ExxonMobil (XOM) and the French bank BNP Paribas(BNP.FP). According to the article, Bernstein is troubled by some dangerous signs in emerging markets including inflation and that corporations in developing countries are weak relative to economies. The article notes that Bernstein’s global-equity fund portfolio leans toward small U.S.companies, because they have less emerging-markets exposure than large-cap multinationals. The article points out that Bernstein is also buying stocks in the U.K.,France and Germany. Barron’s highlights that O’Neill and Bernstein both agree that Chinese inflation is something to watch.

- Barron's feature cautious on Ebix. Barron's argues that short sellers have caused shares of Ebix (EBIX) to slide and although the company’s shrinking valuation multiple and big short interest may limit downside, doubts about Ebix still linger. The article notes that an anonymous report on the Seeking Alpha Website criticized CEO Robin Raina's business as a "roll-up" of software firms with little organic growth and an weak offshore strategy to avoid taxes caused shares of Ebix to slide sharply, while short interest is now above 12M shares, or more than a third of the free-trading float. Barron's notes that earnings growth could slow as new roll-up opportunities dwindle, and its overseas tax rates rise. The article notes that the tax-savings from Ebix's intracompany transactions with its subsidiaries in Singaporeand India have been significant to the cash flow and profit that Raina's produced at the U.S. parent. Barron’s notes that financial filings for Ebix's oldest Indian subsidiary show a number of years in which receivables from Ebix U.S. were well beyond a year's sales, although Raina told Barron's that was not true.

-  Barron's feature discusses Bob Evans. Barron's argues that shares of Bob Evans Farms (BOBE) fail to reflect the restaurant company's valuable property holdings. Barron's notes that Joshua Zamir, founder of Capstone Equities, argues that if investors appreciated the property holdings, the shares would be trading around $50, up from a recent $36 and points out that unlike most chain restaurants, Bob Evans largely owns, rather than leases, its real estate.

The article notes that Zamir values each of Bob Evans' 498 real-estate properties that it owns around $1.5M- $2M, based on a state-by-state analysis of recent sales of comparable properties, which equals a total of $835M, bringing the company's full value to $1.6B, or 45% higher than it's market value.

- The Trader: The markets downward turn and investors selling into market strength could set up a rally

- International Trader (Europe): Discusses last week's stress test results and why a closer look might provide unsettling details

- International Trader (Asia): Discusses Chinese banks and why some investors should cut out now and why other might want to buy into the cautious banks

- Current Yield: The bond markets biggest concern is the debt crisis in euro zone and U.S.' debate over raising the debt ceiling

- The Striking Price: A recent rally in put-call ratios may indicate another rallying point

- Commodities Corner: Investors should expect the price of lumber to yo-yo over the next several years

- Up and Down Wall Street: Michael Darda of MKM Partners warns that the battle over the debt ceiling isn't the only concern for investors, while Stephanie Pomboy talks about how the Treasury can attract buyers of U.S. debt

- StreetWise: Talks about home prices and why to be optimistic

- D.C. Current: Discusses Obama's new project: infrastructure banks

- Technology Trader: Last weeks memo to Microsoft (MSFT) from Ivory Investment Management suggests that Microsoft use cash and issue debt in order to buy back 20% of its shares and boost its dividend yield to 6%

- Plugged In: Highlights Cisco (CSCO) and what CEO John Chambers needs to do in order to save the company

- Gadget of the Week: Apple's (AAPL) Final Cut Pro X video-editing software makes the cut

- Electronic Investor: Suggests online investment platforms that offer comparable service to high end mutual and hedgefunds but without the cost

- Economic Beat: Discusses economists' expectations for real GDP growth

- Speaking of Dividends: Walgreens (WAG) is expected to increase its dividend while Cummins (CMI) and Cliffs Natural Resources (CLF) increase their dividends

- Follow- up: Highlights why a default by Italy could set off inflation in the euro zone; Discusses the prison death of Hermitage Capital lawyer Sergei Magnitsk

Bloomberg

- France Telecom in talks with ZTE Corp. about purchasing majority stake in Congo China Telecom. Bloomberg reports that France Telecom

(FTE) is in exclusive talks with ZTE Corp. of China (0763.HK) to purchase a majority stake in the Africa's fourth-largest mobile-phone company, Congo China Telecom. The article notes that, according to Beatrice Mandine, a France Telecom spokeswoman, France Telecom could purchase the 49% of the operator owned by the Congolese government later as part of a call for bids. A person familiar with the situation tells Bloomberg that that both transactions together could represent an investment of about $425M and that an exact valuation is hard to determine because the government tender hasn’t been completed.

- Colorado Rare Earths considering merger with privately held U.S. Rare Earths. Citing sources, Bloomberg reports that the companies are in talks, but that terms have not been agreed. Colorado Rare Earths trades on the bulletin board (CALY.OB).

- Liz Claiborne in talks to sell Mexx brand. Bloomberg reported yesterday that, according to sources familiar with the matter, Liz Claiborne (LIZ) is making presentations to private-equity firms to sell Mexx brand, Liz Claiborne’s largest division which accounts for about a third of its revenue. The sources tell Bloomberg that Leonard Green & Partners, Sun Capital and Golden Gate Capital are among the firms that have expressed interest in a possible acquisition of the Mexx business. The article notes that, according to a source, final bids will be due in a few weeks and a sale will probably be completed around early September. The same source tells Bloomberg that Liz Claiborne would like to maintain a small stake in Mexx and values the business around $100M. The sources tell Bloomberg that Liz Claiborne also plans to require any buyer to put in as much as another $100M to cover debt and capital requirements.

Detroit News

- UAW President endorses profit-sharing. In an interview with the Detroit News, Bob King says the car companies need to share their recent profits with the workers but he didn't want to turn back the clock to make the automakers uncompetitive workers need to exchange wage increaes for profit sharing.

Dow Jones

- TNK-BP Holding has agreed to purchase 45% stake in exploration project in the Amazon forest. Deal has been approved by TNK-BP's board and will be finalized within 3 weeks. TNK-BP will take a 45% stake in an oil and gas deposit in the Solimoes region in Brazil. Brazil's HRT Participacoes em Petroleo SA (HRTP3.BZ) is the operator and license holder of 55% of the Solimoes blocks. A source close to the matter had said in May that TNK-BP could pay up to $1B for the stake.

Financial Times

- Starbucks to form JV with farming group in Yunnan, China to produce and process coffee; terms undisclosed.

- Rank Group investors accept Guoco offer. The FT reports that 74.5% of investors accepted Guoco's (53.HK) offer and the company will remain listed.

- General Mills CEO claims ethanol subsidies causing rising food prices. Ken Powell told the FT in an interview that the company had to pay twice as much as last year for wheat and that corn and oats are 30-40% higher and that some of these costs will be passed through to the consumer. Other factors such as speculation and greater wealth in emerging economies was also a factor and so he saw little hope for relief from the food price inflation. The article states that the comments come as lawmakers are considering the subsidies on the industry.

- LME rules on warehouse deliveries fails to impress users. The FT reports that the LME has moved to double the rate at which warehouses must deliver aluminum, but the change, which comes into effect 1-Apr has disappointed users such as General Motors (GM), who claim it is only a minor adjustment and won't affect pricing and supply chain issues.

- Lloyds Banking Group got three solid first-round bids for its branches. The FT reports that NBNK, Virgin Money, and the Co-op put in offers thought to be toward the bottom of the £2-3B range. "Vaguer" approaches were made by National Australia Bank (NAB.AU), a private-equity firm, and Clive Cowdery.

- Aircraft manufacturers have limited capacity. The FT, citing industry executives, reports that record backlogs at Boeing (BA) and Airbus (EAD.FP) means new orders are being squeezed out. US airlines have been looking to order new planes due to high oil prices but production space is limited as orders come in globally. Boeing's order book is only 20% American vs 50% in the 1980s. Air carriers have the option of buying at the top of the market or running less fuel-efficient planes

- Bidders interest in Micro Focus cools down. The Financial Times reported on Friday that, according to people familiar with the situation, private equity funds interested in making an offer for Micro Focus have cooled since first approaching the company earlier this year. The article notes that Micro Focus had been at the centre of a potential bid war after Bain Capital and Advent International made approaches to the company. The article also points out that an anonymous bidder was also believed to be interested. People close to the situation told the Financial Times that Advent was no longer working on a potential bid. The article notes that Bain’s interest has also cooled, but that they are still considering possible options and that according to one source, their bid is “not entirely dead”.

FTD

- Daimler (DAI.GR), Deutsche Telekom (DTE.GR) may need to pay €5.1B to settle German toll-road dispute. The FTD reports that the companies have not agreed that they are to blame for the delay in setting up the system, and they have therefore not agreed to pay -- or set aside any provisions for -- any damages for the delay in setting up the toll system. Nonetheless, the FTD says that the arbitration panel recently ruled against them, increasing the chance they will end up paying something. A court order is expected within months, though the article says a settlement is more likely.

London Telegraph

- Questions as to whether James Murdoch can continue as chairman of British Sky Broadcasting. Senior figures close to the process tell the Sunday Telegraph that there isn't a shareholder revolt yet, but there are strong concerns about Murdoch's links to News International (NWSA). A board meeting will be held 28-Jul. The article also says that leading News Corp investors are lining up to suggest that the company sell off its UK newspapers.

- Labour leader Ed Miliband's calls for a break-up of News Corp's UK media empire; Telegraph says James Murdoch being investigated. The Mail reports that Miliband says the concentration of power in the UK media industry is "dangerous", and says the government should look at a "situation whereby one person can own more than 20 per cent of the newspaper market, the Sky platform and Sky News." Separately, the Sunday Telegraph reports that police are investigating whether senior News International executives, including James Murdoch, were involved in a cover-up of phone hacking at News of the World.

London Times

- NHP to announce today (18-Jul in Europe) it will take control of 250 Southern Cross homes. The Times reports that NHP will establish its own care-homes-operating business, and Chai Patel is thought likely to be named either chairman or CEO of the new company, which has tens of milliions of pounds of new funding.

- Southern Cross investors talking about saving parts of company with £50-100M cash injection. Sources close to the talks tell the Sunday Times that the investors are targeting landlords that can't operate their homes, and some Southern Cross debt could be rolled into "son of Southern Cross." Priory founder Chai Patel could be named CEO of the new company.

- British American Tobacco eyes the Bulgarian government’s ~80% stake in Bulgartabak. The Sunday Times reports that British American Tobacco

(BTI) is one of a few bidders looking to buy the Bulgarian government’s ~80% stake in Bulgartabak, valued at £100M. The article notes that the other bidders are thought to include financial bidders rather than other tobacco companies. The Sunday Times notes that Bulgaria kicked off the auction of its stake in Bulgartabak in April, with fully funded bids due at the end of August and a winner to be declared in September.

- Charter creates break-up plan to fend off takeover approach.

According to the Sunday Times, Charter International, is examining a break-up plan in order to fend off an unwanted takeover approach. The article notes that Goldman Sachs is exploring a sale or demerger of Howden, a subsidiary of Charter that acccounts for about a third of Charter’s £1.7B revenues. The Sunday Times points out that Former Wassall executives Christopher Miller and David Roper are running the turnaround operation and this week will urge investors to trust Melrose (MRO.LN) to deliver long-term value from Charter.

- Thomas Cook Group to sell over £200M of assets. The Sunday Times reports that Thomas Cook (TCG.LN) is to sell more than £200M of assets, including several hotels and a European office as well as its stake in NATS, the air traffic control service. The article notes that the company is also expected to try to sell its foreign exchange business in India and that Travelex is understood to be interested in acquiring the operation.The article points out that also this week, the Competition Commission is expected to announce its verdict on a planned merger of Thomas Cook’s high street travel agents with those of the Co-operative. The article notes that the company has indicated that it will not make any decisions on shop closures until after the commission’s ruling.

Reuters

- PetroChina closes refinery unit in Dalian after fire. Reuters reports that, according to an industry source, a PetroChina refinery in the Chinese city of Dalianhas shut down a unit that processes 8M tonnes of crude per year after a fire on Saturday afternoon. The article notes that the fire has been stopped and its is unclear when the unit will be restarted. The article also points out that this incident is the latest in a string of accidents that the Chinese oil industry has experienced over the past few weeks.

South China Morning Post

- AXA sets goal of doubling Asia revenue within three years. In an interview, an executive tells the SCMP that acquisitions may form part of the growth. The article mostly discusses AXA's business in Hong Kong.

- Standard Chartered does not intend to cut its stake in Agricultural Bank ofChina (601288.CH/1288.HK). In what readsas though it is an interview, CEO Peter Sands tells the SCMP that Standard Chartered is happy with the banks' partnership. Standard Chartered can start selling its A shares and H shares in AgBank today. (18-Jul in Asia).

Vedemosti

- VTB Bank to consolidate more than 75% of shares of Bank of Moscow(MMBM.RU). A source close to Vitaly Yusufov tells Vedomosti that he is willing to sell his 26.77% in Bank of Moscow for $1.6B. The Yusufov stake would bring VTB to 73.25%, after which Suleiman Karimov's 3.88% stake -- which some sources say he will sell to VTB upon being asked to do so -- would take it above 75%.

Wall Street Journal

- WSJ discusses upcoming Greek summit. The WSJ reports that ECB President Jean-Claude Trichet continues to assert that no default should happen and that the ECB would not accept Greek government bonds as collateral in that case, acording to an interview in FT Deutschland. the Institute for International Finance said in a statement today that progress has been continuing in talks between banks and EU officials, hinting at private-sector involvement. ECB board member Lorenzo Bin-Smaghi told Greek newspaper To Vima that he endorsed the option where the EFSF buys Greek bonds.

German Chancellor Angela Merkel said sunday that she isn't looking for a Greek default but acknowledged that Greece is unique in having such high debt.

- Reader's Digest for sale. People familiar with the matter tell the WSJ that the publication hopes to get a buyer to pay $1B. Sources say the sale process may lead to a partial sale/spinoff rather than a sale of the whole company. No potential buyers are named.

- WSJ discusses European bank stress-test results. The WSJ, citing stress-test data, reports that the tests seem to portray a healthy banking system with only 8/90 lenders failing officials at the agency conducting the tests argue that the ral value is the mountain of data from each bank about their balance sheets the dats shows there could be another problem other than holdings of sovereign debt-huge piles of loans to individuals and institutions in those problem countries. French banks seems most exposed after Spain and Italy with the four largest banks holding €300B in loans in Portugal, Ireland, Greece and Spain, dwarfing their holdings of sovereign debt. In Germany, they have €174B of loans to those countries vs €70B of sovereign debt.

- Walmart (WMT), JC Penney (JCP) in advanced lease negotiations for Brooklyn Mall. The WSJ reports that according to people familar with the matter,that the site is just west of Howard Beach in Brooklyn and the realtor is The Related Cos. It would be Walmart's first location in the city

- WSJ is positive on Royal Caribbean. A "Heard on the Street" column says cruise lines' consumers are back and willing to pay more than the depressed prices that prevailed during the financial crisis. And Royal benefits from hedges that mean more than half of its fuel through 2012 will cost it about what fuel costs today. The column thinks that Royal is likely to rise from its current trading multiple of 11 times 12-month forward earnings to one closer to its historical multiple of 13.5 over the last ten years.

- WSJ is positive on Ann. A "Heard on the Street" column likes the fact that the company has bought its fabrics in advance, insulating it from rising input prices for H2. Ann also has pricing power, and dynamite operating margins at its outlet business and web store. The column notes, however, that if Talbot's (TLB) liquidates, Ann will need to deal with the short-term concern of cheap goods on the market.

-  Borders Group bid deadline passes without offers, moving the company closer to liquidation. People familiar with the matter tell the WSJ that Borders Group Inc. is closer to liquidation today after a bidding deadline passed without offers. The article notes that bids for Borders were due at 5:00 p.m. EDT today ahead of a bankruptcy-court auction scheduled for Tuesday. A source tells the newspaper that Borders held discussions with one possible buyer over the weekend although it is unclear whether talks could leave to a potential offer for the company. The WSJ notes that if a new bidder does not emerge in the next 48 hours or so, the 400 remaining Borders stores, including about 259 superstores would liquidate, accelerating the decline in sales of hard covers and paperbacks. The possible shut down could also increase sales of electronic books at Amazon.com Inc.

(AMZN) and other online retailers and would leave Barnes & Noble Inc. (BKS) as the only remaining national book chain.

- Samsung Electronics files complaint with ITC about Siemens Osram. The WSJ reports that Samsung LED (005930.KS) has filed a complaint with the U.S. International Trade Commission seeking to ban imports of products made by Osram (SIE.GR) and its two affiliates into the country. The article notes that Samsung LED accused Osram, a unit of Siemens AG, of infringing eight patents on "core" light emitting diode technologies as well as filed a lawsuit in the U.S. District Court inDelaware to seek damages and a permanent injunction to bar Osram's alleged patent infringement.

- TTI Floor Care, owner of Hoover and Dirt Devil, puts itself up for sale. The WSJ reports that, according to people familiar with the matter, TTI Floor Care North America, which owns Hoover and Dirt Devil brands, put itself up for sale and is hoping for as much as $900M.

Sources tell the WSJ that TTI Floor Care has hired BofA Merrill Lynch to advise it on a potential sale.The article points out that Techtronic bought the Hoover floor-care business from Whirlpool Corp. (WHR) in 2007 for about $107M in cash and that business has improved since the acquisition, but the article notes that some believe Techtronic has high price expectations for the possible sale.

Research

Bank of America Merrill Lynch: downgraded ALGT, LCC, RJET

Barclays Capital: upgraded STJ; downgraded BSX, MDT

BB&T: downgraded AWI

Citi: upgraded ACI

FBR Capital: upgraded EOG

Goldman Sachs: downgraded DLTR

JP Morgan: downgraded LNKD

Morgan Stanley: downgraded SNI

Oppenheimer: downgraded CLX

Stifel Nicolaus: downgraded ENTR

Ticonderoga: upgraded EXC

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.