Morning Note

August 10, 2011




US Equity futures are trading below fair value giving pause following yesterday's afternoon rally, which started after the FOMC policy statement noted that growth in the economy has been considerably slower than expected and therefore the Fed will keep the federal funds target rate exceptionally low through at least mid-2013.


Bullish sentiment increases to 47.3% from 46.3% in the latest US Investor's Intelligence poll. Bearish sentiment decreases to 23.7% from 24.7%. Those expecting a market correction is unchanged at 29.0%



Libor fixings 


- Overnight Libor: Dollar: 0.138% vs prior 0.136% ; Sterling: 0.574% vs prior 0.574%; Euro: 0.988% vs prior 1.189%
- 1-month Libor: Dollar: 0.207% vs prior 0.208% ; Sterling: 0.644% vs prior 0.644%; Euro: 1.329% vs prior 1.338%
- 3-month Libor: Dollar: 0.281% vs prior 0.278% ; Sterling: 0.843% vs prior 0.842%; Euro: 1.502% vs prior 1.512%


Sep WTI crude +$3.31 to $82.59


IEA trims 2011 global oil demand growth by 60,000 bpd to 1.2M bpd due to high prices, slower economic growth. Raises 2012 global oil demand growth forecast by 70,000 bpd to 1.61M bpd, partly due to Japan power needs. IEA says if global GDP growth slowed to around 3% in 2012, oil demand growth would more than halve.


Natural gas +$0.003 to $4.001


Gold +$14.8 to $1757.00


10-year yield 2.2589%
30-year yield 3.6482%




Asian Markets


Asia markets rallied following US stocks higher after the Federal Reserve Board pledged to keep interest rates low until 2013, but came off their highs as conviction levels seem low after the shellacking of the last week and the question of whether the Fed's actions can avert the ongoing economic slowdown or the European sovereign debt crisis. Taiwan led the region, rising 3.3% following Nasdaq's gains with technology shares leading the rally and amidst rumors the government was buying the market. Hong Kong rose 2.3%, outperforming after being the only market not to trade much off its lows yesterday. The commodity-laden Australian market extended yesterday's gains, rising 2.6% with all the major commodity stocks. Japan rose 1.1% but again closing off the highs with the yen again strengthening and Finance Minister Noda warning of more intervention. China rose 0.9% with the region as did the currency on the Fed's promise to keep rates low and the country's trade surplus was higher than expected. Korea rallied hard at the open after instituting a ban on short-selling yesterday after the close, but failed to hold onto early gains closing up 0.3%. China July trade surplus $31.48B vs cons $27.40B ; Japan domestic CGPI rose 2.9% y/y in July vs 2.6% seq. The yen is trading at 76.92.




European Markets


European equity markets moved sharply higher at the open following Wall Street's late rebound and firmer Asian markets with all sectors showing early gains, as the Fed signaled they would keep US interest rates low at least through mid-2013. Indices pared initial gains led by the periphery with Italy, Spain and France moving into the red. Swiss National Bank announced an expansion of measures against strong Swiss franc. French President Sarkozy called a meeting of ministers and the central bank's Noyer to discuss the financial and economic situation. Bloomberg noted that France's borrowing costs are rising as the Eurozone debt crisis makes investors wary of lending to any country other than Germany. Italy's borrowing costs fall: Italy sold 6.5B of bills today and borrowing costs fell from the previous sale. Italy sold its one-year bills at 2.959%, down from 3.67% at the last auction on 12-Jul. Demand was 1.94x the amount on offer vs 1.55x last month. Germany continues to resist EFSF expansion: Reuters cited comments from a German government spokesman who said on Wednesday that there was no need to boost the rescue fund as it was still far from being exhausted. Gold continued its recent advance trading as high as $1,766.50/oz. Germany Jul final CPI +2.4% y/y vs preliminary +2.4%. France Jun Industrial Output (1.6%) y/y vs consensus (0.6%), prior revised +1.9% from +2.0%




Today's Economic Releases (Eastern Time)


02:00 Germany Final CPI (Jul); 2.4% consensus +2.3%
02:45 France Manufacturing production y/y (Jun); consensus n/a
02:45 France Industrial production y/y (Jun); consensus n/a
05:30 UK BOE Quarterly inflation report (Q3)
07:00 US MBA Mortgage Purchase Applications (05-Aug); (0.9%) in 5-Aug week; total market index +21.7%
10:00 US Wholesale Inventories (Jun); consensus +1.0%
10:30 US DOE Crude Inventories (05-Aug); consensus n/a
14:00 US Treasury Budget (Jul); consensus ($134.8B) 


Today's Key Events (Eastern Time)


08:00 Navistar provides guidance at Jefferies Global Industrial A & D
13:00 Treasury Auction of 10-yr notes
—:— BB&T Capital Markets One-on-One Conference
—:— Canaccord Genuity Global Growth Conference
—:— Capstone Investments with Columbia Sportswear
—:— Credit Suisse Industrials Conference
—:— FDA PDUFA: Gilead/Tibotec's NDA for the single-tablet regimen of Truvada and TMC278 for HIV-1 infection in adults
—:— Jefferies Global Industrial and A&D Conference
—:— JP Morgan Auto Conference
—:— JP Morgan with ReachLocal
—:— Military Vehicles Exhibition and Conference ~ MVEC 2011
—:— Oppenheimer Technology & Communications Conference
—:— Raymond James Bank Conference
—:— Wells Fargo Midwest Healthcare Investor Forum 




Company Specific News


Earnings
DIS (Walt Disney reports Q3 EPS $0.78 ex-items vs Reuters $0.73)
DTV (DIRECTV (DTV) announces that federal judge denies Comcast's (CMCSA) request for a temporary restraining order)
LORL (Loral Space & Communications (LORL) reports Q2 EPS $0.91 vs year-ago ($0.66))
NUAN (Nuance Communications reports Q3 EPS $0.35 vs Reuters $0.34)
RL (Polo Ralph Lauren reports Q1 EPS $1.90 vs Reuters $1.45)
SPWR (SunPower reports Q2 EPS ($0.19) ex-items vs Reuters ($0.19))




Newspaper Articles / Headlines


BBC
- Tesco to fight price-fixing fine "through the courts if necessary". The BBC reports that Tesco, which was the only one of the nine companies fined this morning to not admit liability, is denying that it colluded.


GigaOm
- Vudu sets up streaming system for iPad that allows it to not share revenues with Apple (AAPL)


Globe and Mail
- Air Canada wants to pay flight attendants at new discount leisure airline less than current attendants. Citing the letter of understanding signed with the Canadian Union of Public Employees, the Globe and Mail reports that Air Canada wants to hire hundreds of attendants, but feels the need to make the new airline competitive with tour operators. No "mainline" attendants would have to transfer to the new airline. The tenative agreement that was signed gives attendants salary increases of 2% , 2%, 2%, 3%, and 3% annually over a five-year period starting 1-Apr-2011.
- SEC investigating Royal Bank of Canada for sales of risky derivatives to Wisconsin school districts. The Globe and Mail reports that the school boards, who lost some $205M, filed a civil lawsuit on the deals against RBC and Stifel Nicolaus (SF) in 2008. The SEC investigation was disclosed in a Stifel filing, and was vaguely alluded to in RBC's Q2 report to shareholders.


Financial Times
- Lehman estate pushes ahead with Archstone sale. The FT, citing people familiar with the matter, reports that banks are working on documents for an IPO which could be filed by the end of the month the group is also in discussions about a potential sale or just a stake sale potential buyers include Blackstone (BX), Avalon Bay (AVB).
- Credit union regulator sues Goldman Sachs for $491M in damages over mortgages
- Apple (AAPL) wins injunction against sale of Galaxy tab in the EU. The FT, citing a court ruling in Germany, reports that Apple has won a preliminary injunction barring the sale in every EU member state except Holland. The article notes that Samsung says it has no notice of the injunction and no chance to present evidence.
- Cairn Energy wants to extend Indian sale timetable. The FT, citing a letter written by chairman Bill Gammell to India's petroleum ministry, reports that the government's deadline to have new conditions in place for the sale to Vedanta Resources (VED.LN) is not possible. The chairman is asking for flexibility on the end of August deadline as for example security approval for Vedanta may not come in time. Cairn is hoping for shareholder approval by 14-September.
- News Corp subsidiary hacking case referred to DoJ. The FT reports that senator Frank Lautenberg has referred the case, settled in 2009 to the US justice department.


Independent
- Hilco still in competition to acquire Comet. Some of what the Independent reports contradicts an article in the 7-Aug Sunday Telegraph: OpCapita is also in the running, and it's unclear if anyone else passed through to the second round; the Sunday Telegraph reported that OpCapita and two other bidders remained. Kesa Electricals would like an agreement to be reached by the 15-Sep AGM, though sources close to the company say the timing is not set in stone. Sources close to the process say a dowry is not yet being discussed; the Sunday Telegraph reported that Kesa was preparing a dowry of up to £100M


Mint
- India wants to buy 20-25% of Belaruskali. Government officials tell Mint that the idea will be discussed at a meeting including Prime MInister Manmohan Singh today, and that the Belarusian government says the company is worth $30B.


New York Post
- Shareholder Capstone Equities says it's not clear that Syms Corp is really investigating the sale of its real-estate assets. The Post reports that Capstone has accused the company of putting a leasing broker that is a JV player rather than an all-star onto the assignment, and this broker hasn't been asked to appraise the properties in question. Without giving details, a Syms spokeswoman denies the investor's allegations.
- NYT discusses News Corp's board. The NYT reports that some of News Corp's independent directors are all people with close and long-standing ties to the company or to the family a list of directors and their ties to the company many investors have complained about the independence of the board and corporate governance generally at the firm.


New York Times
- Lions Gate planning "Tyler TV," cable channel to feature Tyler Perry. An industry official briefed on the amtter tells the NYT that three distribution methods are under consideration: branding some or all of the TV Guide Network Buying a small cable channel Bringing in Comcast (CMCSA), which needs more minority-run programming


Nikkei
- Petroleo Brasileiro (Petrobras) CEO says company will sell some of its stake in Nansei Sekiyu KK. The Nikkei says talks are underway, but the article does not give details on the amount or timing of the sale. Nansei Sekiyu has the capacity to refine 100K bpd.


Vedemosti
- Sistema negotiating to buy back 50% of Kosmos-TV from Russian Television and Radio Broadcasting Network. Vedomosti reports that the Federal Antimonopoly Service is allowing Sistema to take complete control of the pay-TV operator. No price or timing is reported, but an analyst tells Vedomosti that paying more than $35M would be unreasonable.


Wall Street Journal
- SEC looking into whether Goldman Sachs violated Foreign Corrupt Practices Act. A glib disclosure appeared in yesterday's 10-Q. People familiar with the probe tell the WSJ that the investigation centers on Goldman's activity with the Libyan Investment Authority. The WSJ first reported the SEC's interest in the matter 9-Jun.
- VTB Bank teams up with TPG to buy 44% privately-owned Russian retailer Lenta for $1.1B. The WSJ reports that they are also teaming up with the European Bank for Reconstruction and Development according to a person familiar with the deal, the company is valued at $2.6B but financial terms were not disclosed according to news reports, this was a bitter battle and Walmart (WMT) was thought to be interested previously VTB and TPG held 30% and the EBRD held around 10% and boosted their stake in proportion to their holdings.
- WSJ says Verizon can't give strikers much ground. A "Heard on the Street" column says that the company has no choice but to protect the profitability of its wireline business.
- WSJ discusses Visa's new technology. The WSJ reports that the 'chip' cards are unavailable in the US because banks say there isn't enough demand
stores don't want to invest in the technology if banks don't want to issue the new card and also think mobile payments will leap-frog the cards.
Walmart (WMT) said the new technology would create a greater risk of fraud
- Norilsk Nickel auditor has limited documents related to share sale. The WSJ, citing documents seen by Dow Jones, reports that the company's auditor hasn't received sufficient documentation relating to an 8% sale of the companyin the last year on 12-Oct the company sold a call option to an undisclosed buyer for $67 for the buyer to purchase 68.8M ADRs at $18.10/ADR and was exercised in 2011 the company also agreed to sell 84.8M ADRs for $18 in a deal completed in December. The article continues that in December the company said it had agreed to sell 8% of the company from treasury stock to Trafigura.
- Goldman Sachs discloses that has been threatened with litigation by AIG (AIG), Manulife (MFC), and Allstate Insurance (ALL). The WSJ, citing a Goldman filing, reports that the potential suits relate to mortgage securities that Goldman was involved in.
- General Motors stake sale postponed. The WSJ in an article discussing postponed IPOs due to the current market turmoil, reports that, according to people familiar with the situation, the share sale has been put on hold due to poor performance of the share price.




Research


Argus: upgraded LLY
Bank of America Merrill Lynch: upgraded ARG, SHW, MON; downgraded SLB, CE, EMN, HEV
Barclays: upgraded SWN
BB&T: upgraded FOSL
Bernstein: upgraded PCS
Brean Murray: downgraded JRCC
Canaccord: upgraded CREE
Citi: upgraded AZO, CREE; downgraded FII
Davenport: upgraded LO, MO
Deutsche Bank: upgraded ECL, CINF, EFC
FBR Capital: upgraded NAT,, BEXP, O, VMW, EQR, REG, DCT, PLD; downgraded FRO, GMR, OSG
Gleacher: upgraded CSCO
Jefferies: upgraded PRCL, ONNN, FSLR
Keefe Bruyette: upgraded CLNY
Lazard: upgraded WYNN
Macquarie: upgraded CHKP
Mizuho: upgraded PKI
Needham: upgraded ABB, SI
Piper Jaffray: upgraded BMRN, ENDP
RBC Capital: downgraded PAET
RW Baird: upgraded ITRI, WWD, TYN
Sterne Agee: upgraded GBCI
Stifel Nicolaus: upgraded SNX, RAH, NEM
Ticonderoga: upgraded EOG, LCC, MOS
UBS: upgraded LPX, PCL, WY, LPX, PCL, WY, ALL, WLK
Wells Fargo: upgraded KND
Wunderlich: downgraded DIS




Options


Down Goes VIX! Down Goes VIX! – The market staged an Ali-like rally in the final hour yesterday (S&P +56 points or 5%) as the oversold market received some morphine from the Fed (rates to remain exceptionally low until mid-2013). The VIX cratered 12.94 points, or 26%, in the final 75 minutes of trading. While the initial reaction might be to call the bottom – we’re not sure we are there just yet. Problems in Europe, where the central bank is much more hawkish, remain in focus as Germany receives significant pushback in terms of raising the EFSF. We think yesterday’s move might be more comparable to Buster Douglas than “The Greatest”.


Is The Inflation Trade Back On? We don’t know and might not until at least August 26th (Bernanke speaks at Jackson Hole) but we recommend clients that are looking to dip their toe into energy, base metals, and ag/ferts use a prudent approach. Two limited risk strategies for gaining upside leverage: 1) buy call spreads – can only lose debit, upside leverage. 2) sell put spreads to buy calls – can only lose debit and spread but unlimited upside leverage.


ANF, EXPR, and PLCE – The market sell-off over the last few weeks has, not surprisingly, led to a sharp steepening of skew in the options market as investors have been forced to buy downside protection. Recall skew is a measure of implied downside risk relative to implied upside risk. ANF, EXPR, and PLCE are no exception with skew in these names at its highest levels in over a year (puts are most expensive relative to calls in over a year). This creates an opportunity for bullish investors to replace stock with risk reversals (selling downside puts to buy upside calls) to gain upside leverage into back-to-school in these oversold names (EXPR and PLCE RSI still below 30). Specifically, bullish clients can look to replace stock with:


ANF – sell Sept 60 Puts to buy Sept 72.50 Call Spread; collect ~40c – risk is being put stock at $60


EXPR – sell Sept 15 Puts to buy Sept 20 Calls; pay 30c – risk is being put stock at $15


PLCE – sell Sept 35 Puts to buy Sept 45 Calls; collect ~30c – risk is being put stock at $35


HAL – We saw a large bullish trade in HAL yesterday – and this was even pre-FOMC! Someone bought 5,000 Sept 50 Calls and sold 10,000 Sept 55 Calls (paid 24c for the package. This “1x2 Call Spread” provides upside leverage in HAL to the $55 level through September expiration (9/17). This trade likely comes from a HAL shareholder looking to gain upside leverage from a bounce and willing to sell the stock should it trade >$55.




http://seaofopportunity.blogspot.com/


 *Special thanks to Option Radar, BMO Capital, MEB Options, Bloomberg, Reuters, Optionistics, LiveVolPro, CBOE, AMEX, 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.