Morning Note

July 27, 2011

Equity are trading mixed relative to fair value as ongoing debt gridlock continues to weigh on the markets. Banks in Europe are trading lower after Goldman Sachs in a strategy note downgraded the sector. Amazon (AMZN) is up ~6% in Germany after reporting Q2 yesterday after the close.

S&P statement on the rating of the United States; On July 14th, S&P placed the credit rating of the U.S. on CreditWatch Negative. In announcing the CreditWatch, S&P highlighted several factors that it will consider in determining whether to revise its 'AAA' rating on the U.S., including the need for lawmakers to agree on a plan to deal with the federal deficit and develop a credible solution to the country's debt burden. Standard & Poor's has chosen not to comment on the many and varying proposals that have arisen in the current debate.

Any statement to the contrary is inaccurate.

Libor fixings 

- Overnight Libor: Dollar: 0.122% vs prior 0.122% ; Sterling: 0.564% vs prior 0.564%; Euro: 0.889% vs prior 0.936%

- 1-month Libor: Dollar: 0.187% vs prior 0.187% ; Sterling: 0.632% vs prior 0.632%; Euro: 1.386% vs prior 1.394%

- 3-month Libor: Dollar: 0.253% vs prior 0.253% ; Sterling: 0.833% vs prior 0.833%; Euro: 1.569% vs prior 1.560%

API crude inventories reported +3.96M vs. Reuters (1.7M). gasoline inventories (639K) vs. Reuters +400K. distillate inventories +2.907M vs. Reuters +1.9M

Sep WTI crude ($0.71) to $98.88

Natural gas +$0.028 to $4.398

Gold +$1.50 to $1619.61

10-year yield 2.9473%

30-year yield 4.2731%

Asian Markets

Asian markets were mixed with little sign of direction, some recovering from earlier falls as investors hold their breath on the US debt-ceiling talks.

China ended up 0.8%, coming back from earlier losses as the markets recovered from the hit to sentiment after the train crashes in China. The statistics bureau reported net income at industrial companies rose 28.7% y/y in H1. Gold and energy shares led the market, while financials fell 1%.Korea rose slightly, adding 0.3% also coming back from earlier losses. Insurance companies due to expected higher car accidents/claims as heavy rain fell on the country. Hong Kong had similar market action, coming back from losses following China's recovery. Japan fell 0.5% on the US overnight action and the continued strength of the yen vs the dollar. Large-cap exporters were weak. Australia fell 0.8%, despite strength in gold names as higher then expected inflation numbers raised expectations of interest rate rises, dampening the general market and talking the A$ higher hurting exporters. Australian CPI 0.9% vs consensus 0.7%. China Industrial profits 28.7% Jan-Jun vs 27.9% Jan-May. The yen is trading at 77.68 to the dollar

European Markets

European equity markets fell from the open following a disappointing close on Wall Street and generally lower markets across Asia as uncertainty remains about the outcome of the budget debate in the US. The periphery led the regions declines, Italy (2.0%), Spain (1.4%), with comments reported in Corriere della Sera that Fitch says Italy may need additional austerity measures to balance its budget and comments by German finance minister that the EuroZone's debt crisis isn't over and also casting doubt on the extent the EFSF would buy peripheral sovereign debt in the secondary market, weighing.

Today's Economic Releases (Eastern Time)

07:00 US MBA Mortgage Purchase Applications (22-Jul); consensus n/a

08:30 US Durable Orders (Jun); consensus +0.3%

08:30 US Durable Orders ex transport (Jun); consensus +0.3%

10:30 US DOE Crude Inventories (22-Jul); consensus n/a

Today's Key Events (Eastern Time)

09:00 Polaris Industries Analyst & Investor Meeting:

10:00 Visteon Investor Event: 888.452.7086 / Intl 706.643.3752

11:00 GLG Life Tech business update on AN0C progress: 877.303.9126 / Intl 408.337.0130

12:00 Stifel Nicolaus Group Lunch with BCD Semiconductor

13:00 Treasury Auction of 5-yr notes

14:00 Fed's Beige Book

—:— American Association for Clinical Chemistry ~ AACC

—:— Education Technology Conference

—:— Financial Engines (FNGN) will replace Sterling Bancshares (SBIB) in the S&P 600 - after the close

—:— Global Hunter Securities with Colombia Laboratories

—:— JP Morgan with New York Times R&D, Ad Labs Investor Tour

—:— Society of NeuroInterventional Surgery ~ SNIS

Company Specific News

Earnings

ACE (ACE Limited reports Q2 EPS $2.01 ex-items vs Reuters $1.66. Reports Q2: Book value per share $71.36, vs $68.59 at December 31, 2010)

ACW (Accuride Corp reports Q2 net income $1.3M vs year-ago $6.5M. Reports Q2: Revenues $248.2M vs Reuters $239.2M)

AMZN (Amazon.com reports Q2 EPS $0.41. Reports Q2: It is unclear if reported EPS is comparable to Reuters $0.35. Q2 2011 net income was positively impacted by equity-method investment activity of $15M, including a $49M gain on the sale of an equity position partially offset by $34M in losses from equity-method investments. Revenues $9.91B vs Reuters $9.39B)

BWLD (Buffalo Wild Wings reports Q2 EPS $0.58 vs Reuters $0.60.  Reports Q2: Revenues $184.1M vs Reuters $176.7M)

DAL (Delta Air Lines reports Q2 EPS $0.43 ex-items vs Reuters $0.44. Reports Q2: Revenues $9.15B vs Reuters $9.14B)

DFG (Delphi Financial reports Q2 operating EPS $0.86 vs Reuters $0.91.

Reports Q2: Revenues $469.3M vs Reuters $465.3M)

DWA (DreamWorks Animation reports Q2 EPS $0.40 vs Reuters $0.38; Reports Q2: Revenues $218.3M vs Reuters $190.7M)

ENR (Energizer reports Q3 EPS $1.37 ex-items vs Reuters $1.25. Reports Q3: Revenues $1.23B vs Reuters $1.18B)

ELY (Callaway Golf reports Q2 EPS ($0.01) ex-items vs Reuters ($0.02) Reports Q2: Revenues $274.0M vs 29-Jun guidance of~$270M)

MTW (Manitowoc reports Q2 EPS $0.16 ex-items vs Reuters $0.18. Reports

Q2: Revenues $949.8M vs Reuters $931.2M)

NBR (Nabors Industries reports Q2 EPS $0.23 vs Reuters $0.24. Reports

Q2: Revenues $1.36B vs Reuters $1.33B)

SEE (Sealed Air reports Q2 EPS $0.40 ex-items vs Reuters $0.38. Reports Q2: Revenues $1.21B vs Reuters $1.18B)

SLG (SL Green Realty reports Q2 FFO $1.10 vs Reuters $1.06. Reports

Q2: Revenues $300.7M vs Reuters $264.8M)

TPX (Tempur-Pedic reports Q2 EPS $0.76 vs Reuters $0.67. Reports Q2:

Revenues $342.2M vs Reuters $322.5M)

TRMK (Trustmark reports Q2 EPS $0.42 ex-items vs Reuters $0.39.

Nonperforming loans declined 4.6% while nonperforming assets fell

2.3%)

Offerings

AVL.CN (Avalon Rare Metals announces 7M share secondary offering through Citi and Dahlman Rose)

BTE (Baytex Energy Trust files C$500M mixed shelf. The registration covers common shares, subscription receipts, warrants, options and debt securities) DNKN (Dunkin’ Brands 22.3M share IPO priced at $19 per share through JPMorgan, Barclays, Morgan Stanley, BofA and Goldman)

Management / Changes

USCR (U.S. Concrete appoints William Sandbrook President and CEO)

Other News

Largest short interest moves by market cap as of 15-Jul data.

The stocks included in this screen generally have a float above 15M shares. The percent changes compare the most recent short interest update to the prior 2-week period.

Market Cap $25+: Increases: POT +115.0%, MON +54.9%, UN +54.4%, SLB

+37.0%, GSK +36.2%, BP +35.5%, INTC +26.7%, CNQ +25.6%, TGT +25.4%.

Decreases: SYT -33.9%, DOW -26.8%, VMW -24.5%, MT -22.2%, BIDU -20.5%, YUM -20.2%.

Market Cap $10-$25B: Increases: AUY +54.8%, MRO +43.5%, CAH +42.7%, CAG +32.6%, LINTA +30.0%, ETN +26.9%, WYNN +23.8%, S +22.0%.

Decreases: MGA -31.1%, COV -26.4%, GR -23.5%, AEM -23.1%, BVN -21.7%.

Market Cap $2-$10B: Increases: WSM +34.5%, AGP +31.7%, STX +31.3%, OII

+30.8%, CPWR +29.9%, AGCO +29.8%, DRI +28.8%, EW +28.3%.

Decreases: AXS -46.1%, LECO -39.9%, CNW -34.5%, VTR -33.9%, HANS -32.6%, ALV -31.1%, CCE -29.2%, VSEA -26.1%.

Market Cap $500M-$2B: Increases: IRF +74.2%, SLAB +29.2%, LOOP +24.3%.

Decreases: JNS -50.1%, DAC -33.9%, SHAW -28%, QSFT -26.8%, BBBB -23.7%, CFFN -22.2%.

Newspaper Articles / Headlines

Financial Times

- Libor investigation moves to yen rates in London and Tokyo. The FT reports that UBS (UBSN.VX) announced in its results the widened scope of the investigation, and disclosed it had received "conditional leniency and conditional immunity" from the DoJ for information on those markets

according to people familiar with the investigation, regulators are seeing if traders bet on yen and dollar rates and then colluded with bank treasury departments , which help set the rates. to move them in their direction.

- Banks holding more cash in case of US debt downgrade. The FT reports that the banks are also locking in longer-term financing as they are worried about the repo market in the event of a downgrade.

- Vodafone chairman says Verizon Wireless (VZ) to resume dividend payments in 2012.

- Competition Commission may order British Sky Broadcasting to change movie business model. The FT, citing lawyers who have studied the Commission's working papers, reports that the deals BSkyB has signed with Hollywood studios present significant barriers to entry to potential competitors Virgin Media (VMED) and BT Vision (BT.A.LN) the prices charged by BSkyB to Virgin to take its movie channels are too high to allow Virgin to make money

the uncertainty over whether BSkyB would run movies on its channels would stop companies bidding for "first subscription pay television window"

- Boeing pushed into new engine option by customers. The FT reports that the company was rushed into annoucing an upgrade of 737 aircraft after analysing for months between adding a new engine or redesigning the planes completely the company had assigned two tems to assess the option and had asked customers to wait until the end of the year but the company started losing out to Airbus (EAD.FP) and its new A320Neo, especially when American Airlines (AMR) ordered with Airbus as the group had had an excusive supply arrangement with Boeing since 1996. Analysts question whetehr the company should have re-engineered the plane as a more fuel-efficient plane would have been a big threat to Airbus post 2020.

- Disney (DIS) offers $454M for balance of UTV Software Communications. UTV Software announced pre-open yesterday (26-Jul in Asia) that the offer had been made, and Disney planned to delist the company if it was successful. Disney currently owns 50.44% of UTV, and plans to buy 19.82% from UTV's founders. The board is recommending the proposal, but shareholders and regulators also need to bless it. A person close to the company tells the FT that if Disney is not successful, it plans to explore other options in India.

- AMR Corp President calls EU carbon proposal 'unwise'. Tom Horton in an interview with the FT,says that the move would be bad for the industry as a whole increasing annual costs by around eur1b and opposition is increasing internationally to the scheme. The company's JV with International Airlines Group (IAG.LN) was enabling the company to increase market share. US rules limiting foreign ownership of US airlines to 25% are an "anachronism" and predicted further domestic and international consolidation in which American airlines could participate.

- FT discusses growing cash piles at German companies. The FT reports that Large german manufacturers are generating large amounts of cash as a result of growing sales to emerging markets, and caution about the impact of the eurozone crisis. According to a PwC report, large and mid-cap corporates (excluding financials) had €121.5B in cash including Siemens (SIE.GR) with around €15B in cash,and Volkswagen (VOW.GR) with €19.6B, and Daimler (DAI.GR) around €12.4B. The companies are facing increasing pressure from shareholders to return some cash to the owners of the business.

Irish Times

- Irish Life & Permanent sets 1-Aug deadline for first bids for Irish Life Assurance unit. People close to the bidding process tell the Irish Independent that there is fear the sale, which shareholders voted against at last week's EGM, will not be completed by October. The article says Allianz (ALV.GR), Zurich (ZURN.VX), and Met Life (MET) are thought to have expressed initial interest in the division.

London Times

- Talk Talk Telecom may appeal Ofcom decision forcing BT (BT.A.LN) to cut wholesale broadband prices. The Times reports that Talk Talk is considering the move because it has spent a great deal of money putting systems into less populated regions.

New York Times

- Fox (NWSA) to limit next-day streaming on Hulu; Hulu Plus unaffected. Fox announced today that only paying customers of approved cable and satellite distributors -- Dish Network (DISH) was the only one named, though new contracts will presumably expand the list -- will get next-day access to its shows on Hulu; other people will need to wait for eight days. People with knowledge of the discussions tell the NYT that ABC (DIS) may impose similar conditions.

Wall Street Journal

- Banks argue over split of morgage penalties. The WSJ, citing people familiar with the situation, reports that Wells Fargo (WFC) has told government officials that it should pay less than Bank of America (BAC) and JP Morgan (JPM) as it had fewer risky or delinquent mortgages than the other two. Citigroup (C) also told regulators it should pay less becuase of its stronger controls on foreclosure practices. A deal has been agreed on a framework for how banks would meet their obligations once a deal is reached.

- Federated Sports & Gaming to start showing poker on CBS (CBS), Velocity (DISCA). People familiar with the plans tells the WSJ that the Epic Poker League tournament will pay CBS an undisclosed amount to broadcast it, and the deal with Velocity calls for a promotional barter. The deal is to be announced today.

- Companies prepare for possibility that US will default on its debt. The WSJ reports that a last-minute agreement avoiding default is expected, but companies are still protecting themselves in several ways: Hoarding cash for liquidity: General Electric (GE), Ford (F), Eaton (ETN). Increasing the proportion of credit they access in foreign currencies: FMC Corp (FMC)

- Intel names Andy Bryant as chairman, effective May-2012. The WSJ, citing a company spokesman, reports that he was named vice-chairman and will become chairman on the retirement of Ms Jane Shaw Bryant is currently an executive vice-president and chief administrative officer, having been at the company since 1981.

- Bondholders try to agree on concessions to prevent Jefferson County, Alabama, from declaring bankruptcy. A person familiar with the matter tells the WSJ that the holders are set to forgive $1B of the $3.14B in sewer debt they hold, though the deal is not finalized. A source says JPMorgan Chase (JPM), which arranged the bond deal and has already paid federal penalties on it, is offering to take a larger loss than any other bondholder, and the holders want insurers including Syncora Holdings (SYCRF) to come up with at least part of their promised payouts.

- WSJ is positive on Ford. A "Heard on the Street" column says today's results advertise that the company is reliable, which is probably more valuable than being sexy.

Research

Bank of America: upgraded HA

Barclays: upgraded TSS; downgraded LPS, AEIS

Brean Murray: upgraded ERTS

Citadel: upgraded SLXP

Citi: upgraded RRC; downgraded JNPR

Commerzbank: downgraded QGEN

CRT Capital: upgraded AKS

FBR Capital: upgraded NM; downgraded EGLE, GNK

Goldman Sachs: downgraded PCX

Janney Capital: upgraded SBUX; downgraded LRY

JP Morgan: upgraded BKE, ITG; downgraded SBGI, MF, JNPR

Keefe Bruyette: upgraded ARCC, OKSB; downgraded HTGC, ECBE

Keybanc: downgraded RRC

Longbow: downgraded WSH

Morgan Keegan: upgraded WAB, MD

Morgan Stanley: upgraded ESV

Piper Jaffray: upgraded DLTR, PETM, TSCO; downgraded JNPR

Rodman & Renshaw: downgraded RAM

Stephens: downgraded SONE

Stifel Nicolaus: downgraded PVTB, INCB

Susquehanna: downgraded ROSE

Wells Fargo: upgraded NSC, LSE

William Blair: downgraded JNPR

Options

During “deficit chicken” VIX call buyers have the “axe”

- The VIX is 20.23 rising 4.5% on the session and crossing the psychologically important 20 mark for the 6th time in a month. VIX options call / put ratio was about three-to-one with over 300,000 calls and only 97,000 puts trading. Investors are clearly taking a defensive position and taking advantage of the inverted term structure at the near end of the curve where August VIX < spot VIX. We note that the market propensity to throttle outsized returns in time for the market’s close was dampened realized vol (20 day realized is 14.65%) so while the risk to the upside in the VIX and ivol remains significant, the premium to realized will likely drag on the VIX in the near term. One “disaster-scenario” trade that piqued our interest yesterday was a purchase of TLT Aug 80-85-90 put fly for $.25.

Bearish Retail Rolls

- Retailers led the market higher yesterday on encouraging earnings news from Supervalu (SVU), Office Depot (ODP), and RadioShack (RSH). While welcoming news, some option investors were quick to bet the party would not last. Two large ratio puts spreads traded in the XRT and XLY in which the investor appeared to roll a deep out of the money to strikes much closer to the ETFs’ spot prices.

David vs. Goliath (with an iPad this time)

- A large performance gap has opened up this month between large cap tech stocks and their small cap brethren. The XLK, a market cap weighted tech ETF is up 4.16% mtd, but would be down (1.03%) using equal member weightings. The same dynamic can be seen in the SP500 Info Tech Index (S5INFT +5.4% mtd) vs the Russell 2000 Tech Index (RGUSTS -2.43% mtd). The rally in both being driven by large earnings beats in AAPL, GOOG and IBM and to a lesser extent MSFT and DELL while smaller-cap names including MCHP, SLAB, AVID, WBMD, HLIT, RVBD and FFIV have experienced earnings related blow ups due to their high valuations and failure to keep pace with  past growth trajectories.

- For options investors who believe the large cap outperformance will continue, one strategy to consider is buying calls on a broad based tech index such as the QQQ (where vol incidentally looks cheap), and selling further otm calls on a number of liquid, high-valuation smaller cap names that have yet to report earnings. These might include LNKD, PANL, SINA, RAX, YNDX, SIGM, OPEN, MELI, EQIX, SONS, TKLC, CAVM and DRIV. See attached report for current prices, market caps, expected earnings dates, implied moves and forward PE ratios.

GREECE�
1. ECB'S PROVOPOULOS SAYS GREECE SHOULD AIM TO EXCEED BUDGET GOALS
2. Bank of Greece Governor George Provopoulos called on the government to exceed its budget-cutting targets to restore investor confidence in the debt- ridden nation.
? U.S.A.�
1. U.S. trade deals pursued by the Obama administration may end most duties on goods from South Korea, Vietnam and potentially Japan, three of the top 10 sources of tariff revenue for the U.S. government.
2. Blinding Lasers Replace Guns as U.S. Shifts to Peacekeeping: The laser�s emerald beam is so piercingly brilliant that it temporarily blinds and disorients a would-be assailant. Few attackers would push on toward the Marine wielding the light-based weapon.
? NORWAY� Norway�s police are contacting their counterparts throughout Europe as they step up the investigation into last week�s twin attacks on Oslo and Utoeya island that killed at least 76 people.
? AUSTRALIA� Australian Consumer Prices Advance, Sending Currency to Record
? JAPAN� Japan Targets 10 Trillion Yen for Third Post-Quake Package
? RUSSIA� Russia May Sell $14 Billion Rosneft Stake in Biggest State Sale
? IRAN� Iran Cuts Oil Export to India by 90,000 Barrels a Day
? SYRIA-- Syria�s Cabinet endorsed a draft election law aimed at quelling anti-government protests while pursuing a crackdown on dissent.
? KOREAS-- North Korea Renews Call for Peace Treaty Ahead of Nuclear Talks? CALIFORNIA� California Taps Banks for $5.4 Billion Loan

BAC� faced with a glut of foreclosed and abandoned houses it can�t sell, has a new tool to get rid of the most decrepit ones: a bulldozer. BAC will donate 100 foreclosed houses in the Cleveland area and in some cases contribute to their demolition.
? GS� Goldman Sachs Head of CMBS Trading Salem Said to Leave the Bank
? BANCO SANTANDER-- said second-quarter profit fell 38% as loan losses rose in Spain and Brazil.
? LEHMAN� Lehman Brothers asked a U.K. judge to block Germany�s central bank from seizing control of a $4.2B securitization vehicle set up weeks before Lehman�s collapse.
? IRE-- Bank of Ireland Investors Order 60% of Rights Offering Stock
? AET-- Aetna Boosts Year Oper. EPS View; 2Q Rev., EPS Beat Ests.
? C-- Citigroup Seeks Dismissal of Madoff Bankruptcy Trustee�s Lawsuit
? WFC-- Wells Fargo Names Modjtabai to Oversee Consumer, Home Lending
? COMMODITIES�
1. Gold Surges to Record
2. Oil Falls on Rising U.S. Stockpiles
3. Ethanol to Brazil Hits Record on Soaring Sugar
4. Corn Drops as Rainfall in U.S. Eases Concerns
5. Cocoa Falls
6. Coffee Slides
7. Copper Declines
8. Rice Stockpiles in Japan May Drop to 4-Year Low
? AAPL� a week after reporting record sales and profit, surpassed $400 a share for the first time and is gaining ground on XOM to become the world�s most valuable company.
? BA� Boeing Sees Year EPS $3.90-$4.10, Saw $3.80-$4.00, Est. $4.11
? NOK-- Nokia�s Debt Rating Cut to Two Steps Above Junk by Moody�s
? SAP� the largest maker of business-management software, said it will reach the top end of its profit forecasts this year.
? DOW� Dow Profit Tops Analysts� Estimates as Plastics, Chemicals Gain
? AMZN� Amazon.com Surges After Kindle, Digital Media Fuel Revenue
? JNPR� Juniper Tumbles After Sales, Forecasts Miss Analysts� Estimates
? DNKN-- Dunkin� Brands Raises $422.8 Million, Pricing IPO Above Range
? WMT-- Wal-Mart Appoints Danone�s Morten Knudsen as CFO for Asia
? NEW HIGHS: 75. AAPL, SPG, ADS, NOV, COG, PM,TUP, WFM, CERN, APOL, GRA, DPZ.
? NEW LOWS: 75. HCA, OSG, JEF, UAL, LUV, LCC, GNK.
? OVERBOUGHT: 78.
? OVERSOLD: 239.

AK  Steel Holding Corp.

We are upgrading AKS shares to �Buy� from �Fair Value.� In our view, the selloff in AKS shares is overdone and the stock is likely to recover near term as steel prices stabilize. While AKS shares may be in the �doghouse� for a couple weeks, the potential for a steel price increase could lead to a 15-20% move in the stock near term.

AK Steel reported 2Q EPS of $0.32/share (excluding $0.02 tax charge) vs. CRT at $0.48 and Street $0.50.  EPS were above $0.09/share reported in 1Q 2011. Quarter results were below expectations on higher than expected costs and a $0.21/share LIFO charge. Guidance for 3Q was disappointing relative to expectations coming into the quarter.






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Position declarations are believed to be accurate at time of writing but may change at any time and without notice.