Morning Note

August 12, 2011

Equity futures have reversed earlier declines and are all now pointing to a positive open following a strong reversal in Europe after a ban on short-selling in many financial stocks was imposed by France, Spain, Belgium and Italy.

EC, ECB and IMF issue press release following First Review Mission to Portugal. The assessment is that the program is on track and that economic growth and inflation for the year as a whole are expected to remain in line with the program framework. Exports have been relatively strong; consumer confidence indicators are steady; and employment has remained broadly stable
While GDP is expected to contract by 2.2% this year, a recovery remains projected to begin taking hold in early 2013.

Lipper reports equity fund outflows of ($14.4B) in w/e 10-Aug vs outflows of ($7.5B) in w/e August 3rd. Equity fund outflows were the largest since late-May of 2010. Ex-ETFs, equity fund outflows were ($11.4B) in w/e 10-Aug vs ($3.4B) in w/e 3-August.

Fed reports balance sheet assets of $2.88T on Wednesday, +$5.2B w/w and $545.3B y/y. Holdings of US Treasury securities were $1.64T on 10-Aug, +$3.8B w/w and +$867.7B y/y. Holdings of mortgage-backed securities were $897.3B on 10-Aug, unch. w/w and ($22.2B) y/y. Holdings of federal agency debt securities were $112.4B on 10-Aug, unch. w/w and ($46.9B) y/y


Libor fixings 

- Overnight Libor: Dollar: 0.143% vs prior 0.139% ; Sterling: 0.576% vs prior 0.576%; Euro: 0.853% vs prior 0.873%
- 1-month Libor: Dollar: 0.208% vs prior 0.207% ; Sterling: 0.648% vs prior 0.645%; Euro: 1.306% vs prior 1.316%
- 3-month Libor: Dollar: 0.290% vs prior 0.286% ; Sterling: 0.851% vs prior 0.847%; Euro: 1.489% vs prior 1.489%

Sep WTI crude $0.04 to $85.76

Natural gas +$0.02 at $4.12

Gold ($11.25) at $1752.68

10-year yield 2.2813%
30-year yield 3.7343%


Asian Markets

Asian markets had a lackluster response to the overnight US gains and better US jobless numbers with investors seemingly hesitant to take positions ahead of the weekend. Markets started strong but faded and closed on their lows. Australia led the region, rising 0.8% with the move up in commodities. China rose 0.5% as the currency continued to strengthen. Hong Kong ended up 0.1% after being up over more than 1% where some of the exporters harder hit recently outperformed. Japan followed the regional pattern of opening high and failing to hold onto gains after the Japanese government cut its forecast for economic growth and the market finished down 0.2%. Taiwan was strong following the Nasdaq higher but failed to hold onto gains ending down 1%. Korea also failed to hold onto early gains. July new loans in China (22.3%) m/m to CNY492.6B vs cons CNY550B. The yen is trading at 76.74

European Markets

European equity markets initially traded lower as bank stock mostly fell despite the short-selling ban on financial shares implemented by Belgium, France, Italy and Spain. France Q2 preliminary GDP 0.0% q/q vs consensus +0.3%. France Jul final CPI (EU normalized) +2.1% vs preliminary +2.3%. France Q2 Non-Farm Payrolls +0.4% q/q vs prior +0.4%. UK Q2 construction output +2.3% q/q vs preliminary +0.5%; +0.8% y/y vs preliminary (1.4%) y/y. Office of National Statistics estimates it adds 0.1% to Q2 GDP. EuroZone Jun Industrial Production +2.9% y/y vs consensus +4.4% and prior revised +4.4% from +4.0%. EuroZone Jun Industrial Production (0.7%) m/m vs consensus 0.0% and prior revised +0.2% from +0.1%. The pound and the euro are trading at $1.6275 and $1.4236 respectively


Today's Economic Releases (Eastern Time)

02:45 France CPI y/y (Jul); consensus n/a
05:00 Eurozone Eurozone Industrial Production y/y (Jun); consensus n/a
08:30 US Retail Sales (Jul); consensus +0.6%
08:30 US Retail Sales ex Autos (Jul); consensus +0.3%
09:55 US Michigan Consumer Sentiment (Prelim.) (Aug); consensus 62.3
10:00 US Business Inventories (Jun); consensus +0.5%

Today's Key Events (Eastern Time)

04:30 Troika evaluation review mission of Portugal
10:00 Fed's Dudley speaks
—:— BMO Capital Markets Fixed Income Perspectives Conference



Company Specific News

Earnings
AL (Air Lease Corp reports Q2 EPS $0.08 vs Reuters $0.08. Reports Q2:
Revenues $74.3M vs Reuters $72.2M)
BYI (Bally Technologies reports Q4 EPS $0.56 ex-items vs Reuters $0.55. Reports Q4: Revenues $213.7M vs Reuters $203.5M)
DDS (Dillard's reports Q2 EPS $0.32 vs Reuters $0.31. Reports Q2: Revenues $1.44B vs Reuters $1.46B)
Dv (DeVRY reports Q4 EPS $1.08 vs Reuters $1.03. Reports Q4: Revenues $546.7M vs Reuters $545.7M)
JWN (Nordstrom reports Q2 EPS $0.80 vs Reuters $0.74. Reports Q2: Recall the company reported Q2 revenues of $2.72B on 4-Aug)
MCP (Molycorp reports Q2 EPS $0.52 vs Reuters $0.40. Reports Q2: Revenues $99.6M vs Reuters $98.6M)
NVDA (NVIDIA reports Q2 EPS $0.25 vs Reuters $0.25. Reports Q2: Revenues $1.02B vs Reuters $1.01B)
RRGB (Red Robin Gourmet Burgers reports Q2 EPS $0.48 vs Reuters $0.36. Reports Q2: Revenues $215.8M vs Reuters $213.3M)

Positive News
KNOL (Knology authorizes 2M share repurchase program)

Offerings
PGNX (Progenics Pharmaceuticals files $100M mixed securities shelf)


Newspaper Article / Headlines

BBC
-  Calling practice "outdated," British Gas to stop doorstep sales for three months

CENS
- Taiwan Semiconductor starts trial production of A6 processor for Apple (AAPL). Industry sources tell CENS that the production design will not be announced before Q2/12. TSMC now has the chance to work with Apple because the sector-wide depression means it finally has available capacity. The sources say Advanced Semiconductor Engineering (2311.TT) will also benefit from the production.

Financial Times
- Wm Morrison seeks advice from bankers on whether to bid for Iceland Foods. The FT reports that seemingly without citing sources, the company is close to appointing Credit Suise (CSGN.VX) to advie it on a bid as its exisiting bankers have a conflict of interest people close to the situation say the company has not made an appointment yet and couls till not hire Credit Suisse.
- Lloyds Banking Group looks to recover some value from its Irish property portfolio. The FT reports that the company will transfer around €1B of properties to a venture managed by a well-known Irish property group, Green Property, to try and recover some value rather than book losses through a quick sale.
- Bank of America may struggle to sell CCB (939.HK) stake. The FT, citing people familiar with the matter, reports that Bank of America is facing difficulties in selling its 10% stake as investors are expecting a lot of new paper from Chinese banks both rights issues and new listings
Kuwait Investment Authority is one of the investors approached but they already own large stakes in other Chinese banks and don't want any more exposure. Sepearately the article continues that HSBC (5.HK) has told investors it will subscribe to a rights issue from Bank of Communications (3328.HK) where it holds a 20% stake and may also sell its 8% stake in Bank of Shanghai.
- Bank of America in talks about selling part of its stake in China Construction Bank.
- British Sky Broadcasting internal audit found "no suggestion of impropriety" at Sky News. The FT reports that the board had ordered a review into editorial practices at the unit and looked at the financial records and how money was spent. StreetAccount notes the recent hacking scandal and the claims by management that it was a lone outbreak in the organisation as well as the general corporate governance practices at parent New Corp (NWSA.LN)

New York Post
- $25B foreclosure settlement may not be coming. Sources tell the NY Post that a deal may not be possible due to disagreements among individual state AGs over things like whether banks will be released from future liabilities. A new possibility seems to be that states, either individually or in small groups, come to their own settlements with the mortgage servicers, and the article notes that banks -- who pretty much just want this whole thing to be resolved -- are unlikely to be anxious to sign a deal that doesn't include large states.


New York Times
- Investors worry about cost of potential European bailouts for banks. The NYT reports on the danger signals emnating from Europe such as it is estimated that Europe's biggest banks hold €4.7T in short-term debt that must be rolled over in the next two years increasing reliance on the ECB for short-term funding as evidenced by the increase from €2B to €4B of borrowing from the ECB on Wednesday the increased buying power of the ESSF won't be available until September whether the problem is one of solvency rather than liquidity.

Wall Street Journal
- WSJ looks at battle between Apple (AAPL), Exxon Mobil (XOM) to be top dog. A "Heard on the Street" column says: Even though Apple had a larger market cap after the 10-Aug close, Exxon Mobil's enterprise value remained almost 30% higher than Apple's. Energy is fundamentally more important to the world economy than Apple's products are.
- WSJ notes uncertainties surrounding pending IPOs. A "Heard on the Street" column basically states the obvious without offering any insight:
Recent market volatility and this week's mass delayal of IPOs portends badly for the proposed listings of Toys R Us (TOYS), Groupon (GRPN), Zynga, Ally Financial (ALLY), and Avaya (1418100). Fewer IPOs means less money to be made by investment banks that underwrite them.
- WSJ is positive on Anheuser-Busch InBev. A "Heard on the Street" column says shares are trading at an extremely cheap multiple, and while there are legitimate concerns about the USeconomy and Budweiser's performance in the market, the company overall seems to be worth a second look.
- WSJ is cautious on Zurich Financial. A "Heard on the Street" column says that the company's high dividend faces a challenge, since it is paid in strong Swiss francs even though less than 10% of earnings are generated in Switzerland.
- Zynga raises $1B credit line in July. The WSJ, citing an amended S-1 filing, reports that in March a third party valuation report valued the company at $11.15B, va month earlier when another third-party report valued the company at $4.98B. Zynga didn't identify the third party but said arms-length transactions provided the "primary indication" of value.
- Google starts online games on Google+. The WSJ reports that the company is currently offering 16 games and is increasing the competition with Facebook.
- LinkedIn retreats from advertising product as privacy fears arise. The WSJ reports that in late June the company began testing a new formn of advertising which shared user's actions uch as following a company or recommendations the ads would show a user a photo of the user who had recommended it people started complaining and the ads have now removed photos this is the first time the company had had such privacy issues which have plagued over social media sites.
- General Motors plans factory in Indonesia to tap the country and use as a export hub. The WSJ, citing a person close to the company, reports that the company plans to build a plant near the capital Jakarta to produce 50K vehicles/year and use its location to export to the rest of SE Asia. The timing of a production start is unclear.
- WSJ discusses US coal companies. The WSJ reports that the companies are facing difficult issues such as utilities favouring cleaner natural gas pushing coal's shares of electricity generation to the lowest in 30 years according to the Energy Information Administration (46$ in Q1 (3%) y/y)
the closure of small coal-fired plants due to new emission standards
increased costs.


Washington Post
- Virginia sues Bank of New York Mellon for pension fraud; seeks $931M in damages, penalties. The Washington Post reports that the suit, filed in Fairfax County last night, accuses BK under the Virginia Fraud Against Taxpayers Act. The office of the state AG says that 73,000 times since 2000, BK made currency trades for Virginia at a day's best price, and then told the state the trades had been executed at the day's worst price. Similar cases have been filed by California (ongoing) and Washington (settled) against State Street (STT). In an interview, the AG says officials in other states have contacted him, and they are now looking at their pension funds contracts with BK.

French economy flatlines. French Q2 GDP unexpectedly showed zero growth vs. a +0.3% forecast and +0.9% in Q1 as household consumption dropped 0.7%. The figure won't do anything to calm fears about the government's ability to cut the deficit and the country's AAA rating. Economist Philippe Waechter said France would need to expand 0.5% in Q3 and Q4 to reach the government's 2% target for the year but that may not happen.SEC looks into S&P downgrade. The SEC has reportedly started a preliminary inquiry into potential insider trading in connection with S&P's (MHP) U.S. downgrade, asking the firm who knew about the ratings cut before it was announced. However, proving a leak could be difficult, as many in the market anticipated the downgrade and trades can occur across numerous securities or currencies. Earlier this week, Naked Capitalism reported "compelling evidence" S&P leaked the decision to banks and hedge funds prior to the announcement.
European shares rally after opening down. European shares are yo-yoing again today and were higher in midday trading after opening lower despite a ban on short-selling in four countries. The latest rally came after the ECB said the use of its overnight loan facility by banks plummeted to €227M from €4B the previous night. This eased fears that banks were facing liquidity problems. France, Italy, Spain and Belgium are temporarily banning short-selling on select stocks to try to calm the volatility, although major doubts exist about the effectiveness of the measure.
Stocks rebound once more as volatility continues. U.S. shares bounced back again with sharp gains yesterday following steep falls on Wednesday, ensuring the week will go down as one of the most volatile on record. The DJIA ended +3.9%, the S&P +4.6% and the Nasdaq +4.7%, with the Dow completing four straight days of 400-point movements for the first time. The volatility has been magnified in the last hour of trading by orders from ETFs, accounts that hedge against the market's ups and downs, and high-frequency traders. As for today, premarket futures were mostly flat at the time of writing after dropping over 2% earlier. (see below for details).
Postal services looks to cut 120K jobs. Facing a second year of losses of $8B or more, the U.S. Postal Service has proposed slashing 120,000 jobs, and to withdraw its employees from federal health and retirement plans and set up its own systems. The service has also said it will be unable to make a $5.5B payment due on September 30 to cover future employee health care costs. The job cutting requires the approval of Congress, and if passed could have major ramifications for government workers and the national labor movement.
BofA sale of CBC stake hits hurdles. Bank of America (BAC) has reportedly encountered problems in selling its 10% holding in China Construction Bank (CICHY.PK), partly because Chinese banks are expected to embark on a wave of rights issues, share sales and new listings. One prospective suitor, Kuwait's sovereign wealth fund, already holds large stakes in two other banks and believes it has "enough exposure" to the sector.
Nvidia swings to profit as shares surge on guidance. Nvidia (NVDA) matched Street expectations in Q2 as it swung to a net profit of $0.25 a share from a loss of $0.25 a year earlier and revenue climbed 26% to $1.01B. The graphics processor company forecast Q3 revenue of $1.05B-$1.07B vs. analyst estimates of $1.05B, a prediction that helped send shares soaring 11.9% in after-hours trading. Nvidia is gaining customers from AMD (AMD) and it has started winning more orders for its Tegra processors for mobile phones, with Samsung (SSNLF.PK) agreeing to install the chip in its new Galaxy R smartphone.
China to keep yuan stable. China's central bank said in its quarterly report it will aim to keep the yuan at a "reasonable and balanced level" but reiterated it will use "multiple policy tools," including interest rates, exchange rates and bank reserve requirements, to try to bring down inflation. The yuan has risen steeply this week and reached a record against the dollar for the third straight day today. In addition, speculation is rife in the Chinese press that the PBOC will let the yuan strengthen further to help fight high prices.
Validus sues Transatlantic. Reinsurer Validus (VR) has sued Transatlantic (TRH) to force the latter to consider Validus' takeover offer over a deal with Allied World (AWH). Validus argued that Transatlantic is "arbitrarily" refusing to enter into talks even though its offer was worth more than Allied's when Validus made the proposal in July. However, due to market fluctuations, the two bids, which contain stock elements, are now worth about $2.8B. This is below Berkshire Hathaway's (BRK.A) $3.25B offer.
States sue Bank of New York Mellon over forex. The Virginia and Florida Attorneys-General yesterday filed civil suits against Bank of New York Mellon (BK), accusing it of cheating pension funds in the states with improper prices for currency trades the bank processed for them. The Virginia suit cites a 2008 email from a senior banker warning that if the company provided "full transparency" to clients, they would be able to "carefully monitor each and every trade at the time of execution," which would cut "margins dramatically."
AT&T hires bank to advise on divestitures. AT&T (T) has hired Bank of America (BAC) to advise it on possible asset sales to help smooth the way for antitrust regulators to approve the carrier's $39B acquisition of T-Mobile (DTEGY.PK). Most of the divestitures would come from T-Mobile and would include customers and wireless spectrum. The scale of any sale would depend on what regulators ask for and could amount to $8B or more.
Italy cabinet to meet on further austerity. Italy's cabinet is due to meet later today to approve measures to balance the budget by 2013, a year early, as the government attempts to convince investors it can retain control of the country's debt. The proposals include easing labor-market laws, selling local services, and possibly hiking capital-gains tax to 20% from 12.5%.

Research

Axiom Capital: downgraded ASYS
Bank of America Merrill Lynch: upgraded MELI, BUD, CX; downgraded FLEX, JBL, PLXS
Barclays: downgraded WYNN, MFC
BMO Capital: upgraded AA
Citi: upgraded DISCA, ATI, PCX; downgraded TRH
Credit Suisse: upgraded EW, EIX; downgraded IL
Exane BNP: upgraded BHP
Goldman Sachs: upgraded ARG; downgraded DOW, EMN, LYB
JMP Securities: upgraded MNKD
JP Morgan: upgraded VAL; downgraded BYI, CF
Mizuho: upgraded BDX
Morgan Stanley: upgraded HII
Oppenheimer: upgraded AZO, BBBY, PETM, RNET
Pritchard: upgraded ADES
RW Baird: upgraded WEC, WTR, XEL, SWN; downgraded DV
Stifel Nicolaus: upgraded CHKP, JWN; downgraded WBSN
Wells Fargo: upgraded PII
William Blair: upgraded FFIV


Options

“Inexpensive Upside Leverage”: Many investors we have spoken to want to be positioned for a potential rally in the market but do not want to have the downside exposure if macro issues continue to increase volatility/pressure the overall market. In response to this feedback, we screened for call buying/stock replacement candidates by scanning for oversold names (RSI <30) with relatively inexpensive optionality (2nd month implied vol < 30-day realized vol):

Consumer: ARO, AVP, SWY, MDC, FOSL, DIS

Tech: S, PCS, NVTL, CSC, MENT, ADSK, FFIV

Energy: KWK, MUR, NBR, TS

Financials: GTY, TCB, HCBK, ZION, HST, NTRS, STI

Materials: OI, MT, X, AKS, STLD

Industrials: OSK, CNW, NOV, TEX, UTX, PCAR, HON, BA

Healthcare: DNDN, LIFE, DGX

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.