Morning Note

(added some support/resistance levels on this note... let us know if its helpful or not)


August 8, 2011




US equity futures are trading sharply lower following S&P's historic US credit rating downgrade to 'AA+' from 'AAA' after the market closed on Friday. US futures did recover somewhat after the European Central Bank promised to intervene in the Eurozone Bond market, though have moved back down again.



Libor fixings 


- Overnight Libor: Dollar: 0.136% vs prior 0.136% ; Sterling: 0.573% vs prior 0.573%; Euro: 0.814% vs prior 0.815%
- 1-month Libor: Dollar: 0.206% vs prior 0.206% ; Sterling: 0.642% vs prior 0.637%; Euro: 1.347% vs prior 1.350%
- 3-month Libor: Dollar: 0.275% vs prior 0.272% ; Sterling: 0.838% vs prior 0.834%; Euro: 1.518% vs prior 1.522%


Sep WTI crude ($3.71) to $83.71


Natural gas ($0.062) to $3.879


Gold +$44.50 to $1705.80


10-year yield 2.4922%
30-year yield 4.8052%




Asian Markets


Asian markets opened lower this morning and continued steadily downward after S&P downgraded US debt. Markets seemed to ignore a statement from the G-7 promising commitment to stability in financial markets, but those that were open later recouped some losses when Europe rallied in response to the ECB’s buying Italian and Spanish bonds. Japan indicated it might intervene again to weaken the yen, which provided support for the only market to rise: precious metals. Energy stocks fell on lower crude futures as investors worried about lower demand. Exporters fell on concerns about the global economy. Hong Kong fell early on the US downgrade and a reiteration that the territory does not plan to alter its currency peg to the US dollar. But it trimmed losses late in the day on the European rally. Some banks in Australia bucked the regional trend to outperform the market, merely edging down. The yen is trading at 77.77 to the US dollar. Japan June current account surplus ¥526.9B vs cons ¥678.3B. June trade balance +¥131.5B, (82.7%) y/y.


European Markets


European equity markets opened mixed as the decision by the ECB's decision to actively implement its Securities Markets Program buoyed peripheral markets, whilst core European indices opened lower as the downgrade of US's sovereign credit rating weighed. There was little significant economic or corporate news. Italian and Spanish 10-yr bond spreads vs German bunds narrowed close to 100bps, with traders indicating the ECB had been buying the two countries government debt, though it wasn't buying Irish or Portuguese debt. Peripheral equity markets extended gains with other indices reversing losses and broader European averages moving into the black, Italy and Spain gaining over +3.5%, before markets pared or reversed gains ahead of the US market open, futures indicating sharp declines at the US open.




Today's Economic Releases (Eastern Time)


—:— France Bank of France Business sentiment (Jul); actual 98; consensus n/a
04:30 Eurozone Sentix Investor Sentiment (Aug); actual (13.5); consensus +1.9 


Today's Key Events (Eastern Time)


09:00 Great Plains Energy Analyst Meeting
—:— Capstone Investments with Columbia Sportswear
—:— City Telecom Investor Meeting
—:— Morgan Keegan Technology Conference
—:— Pacific Crest Global Technology Leadership Forum 




Company Specific News


Earnings
KWK (Quicksilver Resources reports Q2 EPS $0.07 ex-items vs Reuters $0.05. Reports Q2: Revenues $248.4M vs Reuters $219.4M)
SMG (Scotts Miracle-Gro reports Q3 adjusted EPS $1.91 vs Reuters $2.20.
Reports Q3: Revenues $1.06B vs Reuters $1.11B)
STRL (Sterling Construction reports Q2 EPS $0.25 vs Reuters $0.24. Reports Q2: Revenues $128.5M vs Reuters $134.1M)


Positive News
EDMC (Education Management's (EDMC) board increased the company's share repurchase program to $325M from $250M)


M&A
NRG (NRG Energy (NRG) completes acquisition 290-megawatt Agua Caliente solar project from first solar)
RES (RPC Inc hires Goldman Sachs to advise it on possible sale of company)


Offerings
SURG (Synergetics USA files $50M mixed shelf)
USAC (USA Compression files amended S-1; lists Barclays and Goldman, Sachs as underwriters. New information is the inclusion of underwriters. USAC previously filed its IPO on 9-June)
VR (Validus Holdings files mixed shelf of indeterminate amount. Registration also covers the potential sell of common shares by holders.)




Barron's
- The Trader: Discusses the debt-ceiling deal, Europes debt concerns, and the Dow's 6% decline last week.
- International Trader (Europe): Weak European markets make clear that the debt-rescue fund is not likely to be enough
- International Trader (Asia): Asia's market suffers from a slow U.S. economy and European debt concerns
- Current Yield: Discusses Dows 6% decline last week and its impact on Treasuries
- The Striking Price: Suggests investors who aren't yet hedged, and are interested in cost-effective portfolio protection, buy the VIX September 32.50 call and sell the VIX September 37.50 call.
- Commodities Corner: Gas prices may fall as the economy struggles
Up and Down Wall Street: All eyes are on the Fed after the Dow falls 6%
- StreetWise: FAQs about the stock market after last week's decline
- D.C. Current: The U.S. economy is struggling with fear of higher taxes and uncertainty even after the debt deal
- Economic Beat: Discusses the July jobs report
- Technology Trader: Google (GOOG), Apple (AAPL), Microsoft (MSFT), Intel (INTC) and Qualcomm (QCOM) fell less than the market did last week, while others such as Nvidia (NVDA) were not as lucky
- Plugged In: Highlights Keynote Systems (KEYN)
- Gadget of the Week: Samsungs (005930.KS) RF4289 refrigerator
- ETF Focus: Highlights the Maxis Nikkei 225 Index ETF (NKY)
- Fund of Information: Discusses new challenges for Muni-bonds
- Electronic Investor: Highlights financial websites that provide insight for long-term results
- Speaking of Dividends: Leggett & Platt (LEG) and Intersections (INTX) raise dividends, Fresh Del Monte Produce (FDP) reinstates its dividend and Overseas Shipholding Group (OSG) halved its quarterly common dividend
- Follow- up: Positive on Fastenal (FAST), Cautious on RadioShack (RSH)
- Barron's interviews Horizon Kinetics CIO, Murray Stahl. Stahl talks to Barron's about ETFs, the significance of qualitative insights and names his top 3 picks and one dislike. Top 3 picks: WisdomTree Investments (WETF), CBOE Holdings (CBOE), Beijing Capital Intl Airport (694.HK), Dislikes:
Carmike Cinemas (CKEC).
- Barron's profile features Rajiv Jain, Virtus portfolio manager. Barron's notes that Jian likes defensive consumer stocks like large-cap cigarette makers, brewers and diaper companies, which makes up for about 36% of Virtus' portfolio compared to 8.4% for most other emerging funds, according to Morningstar. The article notes that Jain wants to protect his portfolio from the ups and downs of commodity markets and other cyclical factors and relies on internal emerging-market growth, rather than external demand from U.S. and European consumers. The Virtus Emerging Markets Opportunities Fund's (HEMZX) top 10 holdings include: Housing Dev Fin (HDFC.IN), HDFC Bank (HDFCB.IN), Souza Cruz (CRUZ3.BZ), AmBev (ABV), ITC (ITC.IN), Baidu (BIDU), Brit Am Tobacco (BATS.LN), Itau Unibanco (ITUB4.BZ),
SABMiller (SAB.LN), Semen Gresik (SMGR.IJ)
- Barron's feature positive Mistras Group. Barron's argues that Mistras (MG), which went public in 2009, is expected to boost earnings by ~30% per year over the next two years by expanding its customer base, making more acquisitions and improving profit margins through the sale of higher-priced services. The article notes that analysts expect profits to rise to $0.78 a share in fiscal 2012. The article also highlights Marshall Kaplan, a managing director at Morgan Stanley Smith Barney, who thinks $1 a share is possible in fiscal 2013 and that Mistras' shares could rally to the the mid-20s in the next 12 to 18 months.
- Barron's feature positive Prudential Financial. Barron's argues that if Prudential's expectations for Japan are met, shares could jump 38% or more.
The article notes that the stock looks cheap at 0.8 times book value.
Barron's points out that for insurers like Prudential, Japan is a solid opportunity because as clients age they spend more on insurance and the number of Japanese retirees is expected to rise to 37M by 2030, from ~26M in 2005. The article points out that since Prudential's withdrawl from areas such as brokerage, property/casualty and investment banking, Japan has become Prudential's top customer. Barron's highlights that in Q2 Japan generated about 56% of the Prduential's total premiums, or $3.1B. The article notes that Alan Devlin, an Atlantic Equities analyst, has an $80 price target for the stock and expects Prudential to make $3.35B, or $7.02 a share, on an estimated $40B in revenue in 2011 vs. $3B, or $6.27 a share, on $31B y/y.
- Barron's feature positive PepsiCo. Barron's argues that PepsiCo's (PEP) strong earnings outlook, growth potential in the developing world and ownership of Frito-Lay could cause the stock to rise to $75, from its current $65. Barron's notes that food and beverages each account for about half of world-wide sales and points out that Frito-Lay North America's core operating profit was up 8% last year and 6% in Q2. According to the article, PepsiCo generates about 30% of sales in developing countries. The article notes that Pepsi raised its dividend earlier this year for the 39th consecutive year, bringing its annual payout to $2.06 per share, which, if the dividend rises at historic rates, could double in 10 years. Barron's argues that investors could also benefit if the company boosts its payout ratio or spins off its Frito-Lay franchise.


Daily Mail
- UK hopes to raise £1B by selling its third of Urenco. Without citing sources, the Daily Mail reports that the Treasury is thought to want to sell the stake within a year, despite protests that the technology should not be auctioned off. The balance of the uranium enrichment company is currently owned by the Dutch government, E.On (EOAN.GR), and RWE (RWE.GR).


Economic Times
- Cairn Energy accepts government's conditions for Vedanta (VED.LN) deal. The Economic Times reports that Cairn chairman Bill Gammell sent a letter to the Petroleum Secretary last week saying that the company is willing to share the royalty burden currently born by ONGC (ONGC.IN) in the Rajasthan block.


Financial Times
- Cinven in exclusive talks to buy Guardian life Insurance. The FT, citing people close to the situation, reports that the private equity frim has been given a few weeks by the seller, Aegon to negotiate a more than £250M deal to buy the company. StreetAccount notes the company announced restructuring of its UK operations 28-September.
- BT Group allowed to raise rates by Competition Appeal Tribunal.
The FT, citing the tribunal, reports that he company can charge higher rates to mobile operators for connecting certain numbers, overturning a ruling by Ofcom.
- Carphone Warehouse and Dixons (DXNS.LN) were in merger discussions. The FT, citing people close to Dixons, reports that the talks were advanced enough for the board composition to have been decided the deal was to be structured as a takeover of Carphone Warehouse but with their shareholders having a majority stake and Best Buy (BBY) also having a large stake the talks broke down on valuation grounds and were terminated a few weeks ago
- FT discusses US retailers move to smaller-format stores. The FT reports that companies sucha s Walmart (WMT), Office Depot (ODP), and Best Buy (BBY) are introducing smaller stores in urban areas due to a slowing economy, demographic shifts, high fuel prices, and a desire for convenience the move is creating competition for plots of land and the stores may not be as profitable as the larger format.
-  E.ON says details of possible job cuts to be announced on wednesday with H1 results. The FT reports that the company didn't comment on weekend press reports that it was cutting around 12% or 10K of its staff but said “Possibly there will be some more information on the situation then" the decision may be a result of Germany's decision to close nuclear power stations earlier than expected.
- Oil & Natural Gas Corp chairman looking to sell deepwater stakes to oil majors. The FT, citing AK Hazarika, reports that the company is in talks with companies such as BG (BG.LN), Eni (ENI.IM), and Shell (RDSA.LN) to sell some stakes and get some technological expertise. The company is already collobarating with those companies but wants to boost the development of its 85 deepwater blocks in the Indian Ocean. He said the company was willing to offer 30% stakes in returm for the technical expertise.


Globe and Mail
- Effect of US downgrade on Canadian banks expected to be minimal. The Globe and Mail cites a statement from a spokesperson for the Office of the Superintendent of Financial Institutions. But the article notes that Canadian banks are unlikely to emerge completely unscathed if liquidity disappears in Europe and the US.


Investor Business Daily
- The following changes were noted in the latest IBD 50 List. Added: IPGP, SWI, BWLD, SHPGY, EDU, HUM, LO, DSW, INT, BBBY, CXO, IAG. Deleted: BPI, CRR, HS, CHSI, AVGO, SOHU, COH, WLT, RADS, ACOM, CELG, SSRI


London Telegraph
- Kesa Electricals prepares £100M dowry for Comet. According to The Sunday Telegraph, Kesa Electricals is preparing a dowry of up to £100M in order to offload Comet. The article notes that the auction process is now in the second round and that participants are said to believe that a potential dowry will be flagged by Kesa as the process continues. The Sunday Telegraph notes that the size of the dowry is expected to be discussed towards the end of the month at a series of meetings between Kesa management and bidders.
The article reports it is understood that three bidders have made it to the second round, including private equity group OpCapita. A source tells The Sunday Telegraph that a final decision on the size of the dowry had not been made and that the board will focus on the quality of the turnaround plans proposed set against the price of the offering and deliverability of any final bid.


London Times
- Tesco plc breaks commitment to national pricing policy. The Sunday Times reports that Tesco has broken its commitment to a national pricing policy and has cut prices in Scotland, but nowhere else. The artcile explains that in 2000, Tesco and the other big supermarket chains gave the Competition Commission a commitment to a national pricing policy to calm fears over their dominance of the grocery market. The Sunday Times notes that the policy was created to ensure that Tesco and its rivals would not increase prices in towns where there was no competition. The Sunday Times notes that industry figures showed that Scottish shoppers have been paying on average 5% less for the past three weeks on a range of 800 items. The article points out that Tesco insists that it had “absolutely” not broken its national pricing policy and blamed a technical error for the differences.


New York Post
- Wal-Mart (WMT) offered more than $55/share for BJ's Wholesale in mid-April. Sources tell the Post that Wal-Mart gave up the chase when its bid was rejected. One source says that the bid seemed serious, but another says that BJ's was far from convinced that Wal-Mart wanted to do anything more than simply see its financials.


New York Times
- AIG (AIG) suing Bank of America over mortgage-backed securities. The NYT, citing people with knowledge of the complaint to be filed Monday, reports that the suit is looking to recover more than $10B in losses from $28B of investments the suit claims the bank and its Merrill Lynch and Countrywide units misrepresented the quality of the mortgages placed in the MBSs AIG plans to file a request to intervene in the $8.5B settlemt between Bank of America and Bank of New York Mellon (BK)


The Independent
- H&M brings three brands to the UK. According to The Independent on Sunday, H&M is bringing three of its brands to the UK. The article notes that young fashion brands Monki, Weekday and Cheap Monday are in talks with Carnaby Street owner Shaftesbury to take over a former Boots shop. The article reports that H&M has also signed a deal to sell the Monki brand in Selfridges from next month.


Wall Street Journal
- HNA group confirms it is a bidder for Hochtief's airport assets. The WSJ, citing an executive at the Chinese company, reports that HNA is one of four to five bidders that have been shortlisted to move to the second round of bidding HNA believes the assets are valued at over €1B. HNA expects the seller to assign the winning bid within two months recent stock market volatility wouldn't deter the group's expansion plans.
- HTC buys mobile services company Dashwire for $18.5M. The WSJ reports that the purchase could give HTC mored defenses against future patent litigation as Dashwire owns or licenses more than 20K patents including many more smartphones.
- Preliminary findings point to pilot error as cause of 30-Jul Caribbean Airlines crash in Guyana.
- DIRECTV sued by Comcast (CMCSA) over NFL marketing. The WSJ, citing a court filing, reports that Comcast is accusing DirecTV of false advertising, saying its NFL deal is not free of charge and requires a two-year contract.
- Research In Motion gets short shrift from publishers. The WSJ reports that
When Time magazine said it would be aon all 'leading tablet platforms' last week, it didn't mention Research in Motion's playbook. The company has struggled to get developers tro create apps for its device as it doesn't seem to justify the big investment.
- Chicago utilities push for modernization. The WSJ reports that Commonwealth Edison (EXC) had a plan, put to the legislature, to make its system better protected against power outages during storms which would cost around $2.6B and could be recouped from customers. Illinois governor Pat Quinn says he will veto the bill as it could give the utilities windfall profits as the rate of return is 6% above 30-year Treasury Bonds rather than the cost of capital which could give them large profits if rates rise. The plan also covers neighbouring utility Ameren Illinois (AEE)
- Daimler CEO will decide Maybach fate by the end of the year. The WSJ, citing Damiler executives, reports that one option is for a collaboration with British firm Aston Martin which has expertise in low-volume anufacturing. Another option is to discontinue the model
- Liberty Starz Group makes deal with BBC Worldwide Productions. The WSJ reports that Starz recently made a deal with BBC Worldwide Productions to co-produce original television shows. People close to the company tell the WSJ that the deal could provide Starz with $300M for programming and generate more than 100 hours of original television depending on the number of seasons produced. The article notes that Chris Albrecht, CEO of Liberty's Starz LLC unit, says tha deal would allow the company to produce shows with higher production value and that have a premium look. The WSJ notes that, according to people close to the situation, Starz and BBC Worldwide can make two shows together and have an option to make another two series under their agreement. The article also highlights that for each of those productions, Starz will contribute 60% to 70% of the budget and BBC Worldwide would pay the remainder and that in exchange for that financing, BBC Worldwide receives all international rights to the shows.
- News Corp hopes this week's board meeting, earnings will move people's focus from scandal to operations. People familiar with the matter tell the WSJ that the company is not likely to unveil any purchases or management changes anytime soon, even though News Corp is sitting on $12B in cash that will no longer be needed to buy BSkyB (BSY.LN). One source says a higher dividend is a possibility.


Wirtschaftwoche
- Bayer CEO Marijn Dekkers calls Germany "unattractive" as production base. Dekkers warns that the company may choose to shift production to countries that offer cheaper electricity.


Treasury yields, stock futures fall. Treasurys benefited from a flight to safety in European trading and fell to below their level prior to S&P's downgrade of U.S. debt on Friday. The yield on 10-year Treasurys climbed as high as 2.586% early in Asia but fell back to 2.51%. Other safe havens also rose, with spot gold passing $1,700/oz for the first time and hitting $1,714, its 11th record in 19 sessions. The Swiss franc and the yen rose against the dollar and the euro. However, U.S. futures fell after an early comeback attempt from Asian losses failed.
Treasury slams "flawed" S&P. The fall in U.S. bond yields has given credence to the Treasury's assertion that the "collective judgment" of investors "is that the U.S. has the means and political will to make good on its obligations" despite S&P's downgrade. In a blog post, the Treasury criticized S&P's decision, citing the $2T error in the agency's original analysis and the speed with which it changed its "principal rationale...from an economic one to a political one," and made the downgrade anyway. The U.S. also received support from several foreign holders of its debt, including from Japan, China, Russia and France.
Spanish, Italian bond yields fall. Yields on Italian and Spanish bonds fell sharply to well below 6% after the ECB started buying the countries' debt in order to try to stop the eurozone debt crisis from spinning out of control. The bank had indicated it would make the purchases following an emergency session yesterday, saying it would "actively implement" its bond-buying program to address "dysfunctional market segments." However, European shares fell after rising earlier, and while Italian shares were in positive territory, Spain was flat and the U.K., Germany and France were in the red.
Geithner to stay on at Treasury. Tim Geithner, the remaining top official from President Obama's original economics team, will stay on as Treasury Secretary at least until after the 2012 election. Geithner had considered stepping down once the debt ceiling was increased. His decision, made at Obama's request, removes one element of uncertainty for the markets and enables the White House to avoid a fight in the Senate over a successor.
Munis renew debt in Q2 but market waits for downgrades. States, cities and other municipal issuers were able to replace $26B of expiring letter-of-credit agreements and other backstops in the second quarter, Moody's said. Three quarters of agreements were renewed or replaced by a different bank, with the rest mostly refinanced via new bonds or loans. However, the muni-bond market expects S&P to cut its ratings on debt secured by the federal government following the agency's downgrade of the U.S. Matt Fabian of Municipal Market Advisors told Bloomberg this could amount to "hundreds and hundreds" of ratings cuts.
Buffett enters Transatlantic bidding war. Berkshire Hathaway (BRK.A) unit National Indemnity has offered to buy Transatlantic Holdings (TRH) for $3.25B, topping two prior bids. Transatlantic has until tonight to decide on Warren Buffett's proposal of $52 a share, which represents a 15% premium to Transatlantic's closing price of $45.24 on Friday. Berkshire's offer is somewhat of a departure for a company that usually avoids bidding wars. The value of the other offers has dropped as they contain stock elements. An agreed bid from Allied World Assurance (AWH) is worth $2.75B, while an unsolicited proposal from Validus (VR) is worth $2.89B.
AIG to sue BofA for $10B. AIG (AIG) reportedly intends to sue Bank of America (BAC) over hundreds of mortgage-backed securities and will seek to recover more than $10B in losses on $28B of investments. AIG argues that BofA and its Merrill Lynch and Countrywide Financial units misrepresented the quality of the securities. AIG is also preparing similar suits against other major banks, including Goldman Sachs (GS), JPMorgan Chase (JPM) and Deutsche Bank (DB). AIG will join an increasing number of investors seeking redress over toxic mortgage bonds - so far at least 90 suits have been filed, demanding $197B.
Mortgage probes stall. The private-sector actions over mortgage bonds are in contrast to the relatively few cases brought by the Justice Department. Sources said federal criminal investigations into failed lenders IndyMac Bancorp and New Century Financial have stalled, although New York recently opened its own probe into IndyMac. In addition, the DOJ has closed an investigation into Washington Mutual (WAMUQ.PK) after it was dormant for over a year.
45,000 Verizon workers go on strike. Verizon (VZ) has activated a contingency plan to limit disruption after 45,000 unionized workers, mainly at its wireline unit, went on strike following the failure of contract talks. The union has said the concessions the firm wants over healthcare, pensions and work rules are unjustified given that Verizon is highly profitable. The company has argued it needs the concessions to offset the long-term decline of the wireline business.
Q2 home lending slumps. Home lending in the second quarter tumbled as residential originations contracted nearly 20% from a year earlier. Bank of America (BAC), the No.2 lender, was the biggest loser with volume down 29%; Wells Fargo (WFC), the largest lender, was off 24%; and Chase (JPM), the third biggest, fell just 5%. However, Ally Financial experienced a 4% increase.
Two banks closed. Regulators shut two more banks on Friday, bringing the total failures so far this year to 63. The banks closed were in Washington and Illinois, with the combined cost to the FDIC's insurance fund expected to be $160.4M.
Rio Tinto, Mitsubishi bid for full control of Coal & Allied. Rio Tinto (RIO) and Mitsubishi Corp. (MSBHY.PK) have offered to buy the 14% in Australia's Coal & Allied (CAIQF.PK) they don't already own for A$1.49B ($1.56B), valuing the miner at $11.1B. Perpetual Investments, the company's largest institutional shareholder with 6.3%, has backed the bid, making it almost certain the takeover will be completed. 
Research

AURIGA: upgraded NTAP, EMC
Bank of America Merrill Lynch: upgraded GEL, HME, XTEX
BB&T: downgraded IBI
Bernstein: upgraded H, HOT
BMO Capital: upgraded ROSE, VTR
Canaccord Genuity: upgraded ERF, BBG
Citi: upgraded MLM, EOG
FBR Capital: upgraded ATML; downgraded TXN
Goldman Sachs: upgraded JNY; downgraded OMX, ARW, IT supply chain and components sector to neutral
JP Morgan: upgraded UFS
KeyBanc: downgraded INN
Macquarie: downgraded LPS
Mizuho: upgraded COV; downgraded ZMH
Morgan Stanley: upgraded KLAC
RBC: downgraded AGII
Roth Capital: upgraded CPT, HME, UDR, CCG, SBUX, YUM; downgraded CAKE, TXRH
Wells Fargo: upgraded SPH
William Blair: downgraded DLB
Wunderlich: upgraded PRA


Options

Given the unprecedented move by Standard and Poor's, I would like to highlight some of the comments from BMO’s Economist/Strategy Team:

- Mkts not worried about inflation but now stagnation in terms of a new recession
- Tsy’s are rallying despite downgrade – people still confident they get paid here but don’t know where else they will.
- EU on edge of what they can possibly do w/ bailouts – can’t guarantee Spain and Italy (EU epicenter of concern).
- Gold at record– not an inflation trade but a currency trade (gold viewed as money)
- Gold miners should outperform SPX on NAV increase (gold up, oil down)
- Potential QEIII announcement at Jackson Hole not enough to spur inflation
- Tech stocks way over-valued and have led the way down – will continue
- S&P earnings yield jumped to 8% or 6% higher than 10yr Tsy yields. Earnings have to be $80 and that’s consistent w/ even a decline in growth.
- Corporate bal sheets are healthy and drop in oil prices will help the consumer.
- FOMC unlikely to hint at QEIII Tues as jobs growth 2x last year and inflation still elevated
- BAC 1-yr CDS has gone up 5x to 100bps, CMBS prices falling apart, Agency MBS/Tsy Spread at wides in 2+ yrs




Focus Items
US Equity Views: Uncertainty and fear trump fundamentals and           1
valuation, for now
Americas: Banks: Separating the past from the present                  2
OfficeMax Inc. (OMX): Downgrade to Neutral; inexpensive, but tough     3
positioning
The TJX Companies, Inc. (TJX) Buy: Add TJX to CL: asymmetric           4
risk/reward in an uncertain environment
The Coca-Cola Company (KO) Buy: Solid growth story within Consumer     5
Staples; Add to Conviction Buy
The Boeing Company (BA) Buy: Add to CL: secular and visibility in a    6
tougher macro, with catalysts
Embraer (ERJ): Remove from Americas Conviction and Latam Focus Lists;  7
still Buy
HomeAway, Inc. (AWAY) Buy: Structural winner in emerging vacation      8
rentals market; initiate Buy
Americas: IT Supply Chain & Components: Coverage view down to Neutral  9
on lower estimates; ARW to Neutral @ gs


&P strips long-term US debt of triple-A rating
Last Friday, Standard and Poor�s stripped long-term US debt of the AAA rating it
has held for 70 years to AA+ and reiterated a negative outlook. The other major
rating houses � Fitch and Moody�s � have kept the US on negative outlook. This
will likely make it difficult for the US to regain its top rating in the near-term and
suggests another downgrade over the next several months. At AA+, the credit
rating on US long-term debt ranks below more than a dozen countries and puts
the US on par with the likes of Belgium and New Zealand.
A short-term psychological impact, but risks remain
Here, we argue that the S&P�s decision to downgrade long-term US debt will: (1)
not cause a major disruption in US financial markets; (2) have more of a shortterm
psychological impact than an economic one; (3) not change the fact that US
Treasuries remain a safe global investment; finally, (4) significant risks remain.
Looking for sensibility and credibility, and getting neither
Throughout the recent debt drama, S&P made it clear that it wanted to see two
things from the US government: (1) cut the deficit by at least $4 trillion over a 10
year period and (2) a sensible budget process. We never expected either; so, our
growth forecast since mid-July has assumed that a rating downgrade was likely.
Credit plan requires revenue and entitlement reform
Given the scale of the debt problem, a credible plan requires both revenue
enhancement measures and entitlement reform. Washington�s recent debt deal
did not include either. Indeed, even the $2.1 trillion in cuts will likely not be
completed because the cuts are too draconian to be sustained. The plan freezes
discretionary spending at very low levels, despite the budgetary pressures of
population growth and inflation.
Sensible process means everything is on the table
S&P also cited the �effectiveness, stability, and predictability� of policy as one of the
reasons for its downgrade. A sensible process is where everything is on the table,
most of the negotiation is done in private and each side gives a little. Instead, there
was a game of brinkmanship, including a threatened shutdown and/or default. The
economy was damaged in the process. In our view, the creditworthiness of a
country, like a company depends in part on its income growth: playing a game of
brinkmanship damages income and undermines credit worthiness @ ml


WHAT TO WATCH: U.S. stock futures, the dollar and oil dropped, while gold rose above $1,700, after S&P�s downgrade of the U.S. credit rating. Bonds of Europe�s most-indebted nations surged as the ECB started buying Italian and Spanish debt. The G-7 said it will inject liquidity and act against disorderly currency moves as needed �to support financial stability and growth.� The G-20 issued a similar communique. Japan said it is ready to sell yen again following last week�s move if it sees speculative trades driving the currency higher. The Reserve Bank of India pledged to provide �adequate rupee and forex liquidity� to curb excess moves in interest and exchange rates.


GLOBAL NEWS
? U.S.A.�
1. S&P CUT AMERICA�S DEBT.
2. 2 YEAR� Treasury Two-Year Yield Falls to Record Low 0.2520 Percent
3. MUNIS� The $2.9T municipal bond market is preparing for �hundreds and hundreds� of downgrades.
4. CASH� Cash held by U.S. banks surged 8.4% to a record $981B during the week ending July 27, according to the FED. That�s more than triple the amount firms had in July 2008, before the collapse of Lehman. POSITIVE FOR BK, STT & NTRS.
5. DIVIDENDS� The combination of the past two weeks� $1.94T equity wipeout , record cash levels and rising dividends means the S&P�s 500 Index is offering comparable values to Treasuries.
6. CORPORATE BONDS� Corporate bond sales  are skidding to the slowest pace this year.
7. BILL GROSS��I think S&P has demonstrated some spine; they finally got it right.�  The U.S. has �enormous problems.�
8. WARREN BUFFETT-- Berkshire Hathaway disclosed its biggest quarterly purchase of equities in almost three years.
9. GEITHNER� Geithner Decision to Stay Gives �Continuity� Amid Market Turmoil
10. UNEMPLOYED� Employers Ready to Hire Can�t Find Workers Among 9.1%. Employers are having a difficult time filling some positions, even as 13.9 million Americans remain without work.
11. S&P-- S&P�s Chambers Says U.S. Debt Problems Need Bipartisan Solution
12.
? ECB-- ECB President Trichet started buying Italian and Spanish assets today in his riskiest attempt yet to tame the sovereign debt crisis.
? G-7� G-7 finance ministers and central bank governors pledged in a statement  to �take all necessary measures to support financial stability and growth.�
? FRANCE� France as the AAA country most likely to lose its top grade.
? QATAR� Qatar plans to sell $1.1B in treasury bills  today.
? GLOBAL BANKS�
1. Central bankers may have to decide which is their worst nightmare: the Great Inflation of the 1970s or Great Depression of the 1930s.
2. The biggest global banks are cutting jobs at the fastest rate since 2008 as a weak U.S. economy squeezes revenue.
? SAUDI ARABIA� Saudi Spare Oil Falls to Three-Year Low With Record Demand. Saudi Arabia is consuming more of its own oil than ever, eroding the ability to cover global shortages as demand rises to an all-time high.
? SYRIA-- Syria�s crackdown on protesters left at least 100 people dead yesterday, according to activists, as it draws growing condemnation from the Arab world.
? PUERTO RICO-- Puerto Rico Plans $225 Million Issue After U.S. Cut
? U.K.� more than 160 people were arrested and at least 35 police officers injured during two days of rioting in London


THOUGHTS OF THE DAY
? MERGER & DEAL NEWS�
1. Berkshire Makes Unsolicited $3.25 Billion Bid for Transatlantic
2. RPC Inc. said to consider selling itself and hired Goldman Sachs for advice
3. Rio, Mitsubishi Bid A$1.49 Billion for Rest of Coal & Allied
4. Kraft Faces $11 Billion of Debt Cuts in Split
5. Orix to Invest $1 Billion in China for Water, Plane Leasing
? COMMODITIES�
1. Gold Tops $1,700 for First Time
2. Commodities Drop as U.S. Credit-Rating Cut May Worsen Slowdown
3. Oil Falls to Trade Near Eight-Month Low
4. Copper heads for Biggest Monthly Drop Since December 2008
5. Wheat Falls for Fourth Day
6. Sugar Resumes Decline
7. Coffee Retreats


Goldman's O'Neill Doubts Stock Bull Run Is Over Despite Selloff
8/7/2011 14:19:01




-Developments in China could restart bull stock markets
-China, not U.S., Europe, will control destiny for world growth, markets in long run
-Rate downgrade is a blow to U.S. prestige but won't cause problems for Treasurys
-Yen, Swiss franc "ludicrously overvalued" By Min Zeng Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The bullish forecasts for global equities that Goldman Sachs Asset Management Chairman Jim O'Neill made took a blow last week, when U.S. stocks saw their biggest selloff since the 2008 financial crisis. But he is not ready to throw in the towel.
Like many other market participants, O'Neill is getting more cautious about the global economic outlook, which has been tainted by disappointing data in the U.S. and the debt troubles in the euro zone. Adding to the toxic mix, ratings company Standard & Poor's cut the U.S. AAA rating for the first time in modern history, and many investors are worried about its potentially negative impact on financial markets and global growth.
"While there is no denying the loss of global economic momentum, and it is possible that the bull move since early 2009 is over, I still doubt it," said O'Neill in his latest newsletter released Sunday. "A fresh bull market move is likely to start when Chinese inflation has clearly peaked and their policy makers can move away from tightening policy."
O'Neill, whose views on the financial markets are closely tracked by many global investors, is best known for creating in 2001 the term "BRIC," the now-ubiquitous acronym for the four biggest emerging-market economies--Brazil, Russia, India and China--each of which is playing an increasingly significant role in the global economy.
Since the start of the year, O'Neill has been bullish on global stocks due to his optimistic outlook for the world economy. In an interview with Dow Jones Newswires in May, he said he thought the U.S. economic recovery would pick up speed in the second half after the soft patch earlier this year.
Yet he appeared to put his upbeat view down a notch lately, especially after U.S. economists Friday cut their growth forecast again for the world's largest economy--1.7% average this year, down from 1.8% previously forecast and 2%-2.5% for 2012, down from 3% originally predicted.
"I find myself starting to doubt whether the underlying trend rate of growth of the U.S. economy is indeed as robust as I had persuaded myself this past 12-18 months," said O'Neill.
Still, he emphasized his view that it is China, along with the other growth-market countries that "will control the world economy and its markets' destiny in the years ahead," even as the local challenges in the U.S., and especially Europe, "will feel bad and weigh on us all."
While O'Neill is not a big fan of U.S. Treasurys at their current high prices, he said the U.S. rating downgrade is unlikely to shatter the Treasury market's status as a haven.
"U.S. bond markets continued to benefit from global investor risk aversion during last week's panic, I am not sure that this news is really that important in the short term," said O'Neill. "It is certainly a blow to the prestige of the U.S. But, will this move cause problems for U.S. bonds? I doubt it."
O'Neill also said the yen and the Swiss franc are "ludicrously overvalued." The two favored safe-harbor currencies that have rallied sharply against both the dollar and the euro in recent months, though their strength was dented last week by measures from the Swiss National Bank (SNB) and the Bank of Japan (BOJ) to rein in their ferocious gain which undermines the two nations' export sectors.
O'Neill said that "both of their individual moves have been generally regarded as inadequate and insufficient to reverse their currencies, and in view of the S&P news after the Friday market close, this may be the correct judgment." But he said the two currencies are not good investments over the longer term.
"I am completely unsure as to where things will move next week or through the remainder of what could be a treacherous August. But looking into the autumn and beyond, I suspect that you wouldn't want to have stayed long either the Swiss franc or the yen," he said.

ES (ESU11) - KEY Support and Resistance - Plus Analysis

Preferred Strategy 

• Sell rallies into 1184-1189 ... secondary Sell zone at 1220-1225
• AFTER a breakout below 1153 ... Sell rallies into local resistance (initial zone at 1161-1166)

Alternate Strategy   

• Buy dips into 1160-1165 ... secondary Buy zone at 1145-1150
• AFTER a breakout above 1193 ... Buy dips into local support (initial zone at 1183-1188)

Comments 

• Downside Targets ... 1126-1131 ... 1145-1150 ... 1160-1165
• Upside Targets ... 1183-1188 ... 1200-1205 ... 1218-1223 ... 1227-1232 ... 1240-1245 ... 1257-1263 ... 1270-1273

Trend  

• Short Term: DOWN ... Intermediate Term: DOWN ... Long Term: DOWN

Crude Oil (CLU11) - KEY Support and Resistance - Plus Analysis

Preferred Strategy   

• Sell rallies into 8550-8600 ... secondary Sell zone at 8800-8850
• AFTER a breakout below 8230 ... Sell rallies into local resistance (initial zone at 8280-8330)

Alternate Strategy   

• Buy dips into 8280-8330 ... secondary Buy zone at 8100-8150
• AFTER a breakout above 8600 ... Buy dips into local support   (initial zone at 8500-8550)

Comments 

• Upside Targets ... 8450-8500 ... 8650-8700 ... 8800-8850 ... 9250 ... 9350-9400 ... 9500-9550
• Downside Targets ... 8250-8300 ... .8100-8150

Trend  

• Short Term: DOWN ... Intermediate Term: DOWN ... Long Term: DOWN

EURO (FX Cash) - KEY Support and Resistance - Plus Analysis

Preferred Strategy 

• Buy dips into 14190-14220 ... secondary Buy zone at 14120-14150
• AFTER a breakout above 14320 ... Buy dips into local support (initial zone at 14250-14280)

Alternate Strategy   

• Sell rallies into 14260-14290 ... secondary Sell zone at 14340-14370
• AFTER a breakout below 14170 ... Sell rallies into local resistance (initial zone at 14200-14230)

Comments  

• Upside Targets ... 14300-14350 ... 14400-14450 ... 14500-14550 ... 14650-14700
• Downside Targets ... 14200-14250 ... 14100-14150 ... 13950-14000 ... 13850 ... 13700-13750 ... 13500-13550

Trend  

• Short Term: DOWN ... Intermediate Term: UP ... Long Term: UP

Gold (GCZ11) - KEY Support and Resistance - Plus Analysis

Preferred Strategy   

• Buy dips into 1698-1703 ... secondary Buy zone at 1681-1688
• AFTER breakout above 1630 ... Buy dips into local support (initial zone at 1615-1620)

Alternate Strategy   

• Sell rallies into 1715-1720 ... secondary Sell zone at 1728-1733
• AFTER breakout below 1664 ... Sell rallies into local resistance (initial zone at 1670-1675)

Comments 

• Downside Targets ... 1705-1710 ... 1690-1695 ... 1675-1680 ... 1655-1660 ... 1632-1647
• Upside Targets ... 1715-1720 ... 1728-1733 ... 1745-1750

Trend  

• Short Term: UP ... Intermediate Term: UP ... Long Term: UP

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 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.