Morning Note

October 13, 2011


Equity futures are trading lower as European indices trend down after having opened higher. Google (GOOG) is expected to report after the close. JPMorgan Chase (JPM) reports Q3 EPS $1.02

Philadelphia Fed President Charles Plosser speaks at 11:45 ET
Treasury Auction of 30-yr bonds at 13:00 ET.


Libor fixings 

- Overnight Libor: Dollar: 0.141% vs prior 0.141% ; Sterling: 0.584% vs prior 0.583%; Euro: 0.881% vs prior 0.910%
- 1-month Libor: Dollar: 0.243% vs prior 0.243% ; Sterling: 0.693% vs prior 0.693%; Euro: 1.304% vs prior 1.304%
- 3-month Libor: Dollar: 0.403% vs prior 0.401% ; Sterling: 0.964% vs prior 0.963%; Euro: 1.504% vs prior 1.504%

API crude inventories reported (3.805M) vs. Reuters +304K. Gasoline inventories (1.193M) vs. Reuters (63K), distillate inventories (3.119M) vs. Reuters (567K).

WTI crude ($1.34) to $84.23

Natural gas ($0.005) to $3.485

Spot Gold ($4.50) at $1668.59


Asian Markets

Asian markets followed the US higher this morning as the appetite for risk improved; encouraged by ongoing optimism that Europe is close to a solution to the debt crisis. China's trade surplus narrowed for a second month in September, with both imports and exports lower than expected. The data prompted the deputy chief of the China's customs administration to complain that a stronger yuan was hurting exports. Exporters were among the best performers, capitalizing on the encouraging sentiment surrounding the debt crisis and a weaker yen. Resource firms were also higher, driven by the improved economic sentiment as well as higher copper prices which rose on signs of increased buying from China. Sydney stocks gave back some of their early gains as the improving employment situation seemingly reduced the chance of a rate cut. The yen is trading at 77.05 to the US dollar. Australian unemployment rate fell to 5.2% from 5.3%; The Bank of Korea left rates unchanged at 3.25%, as expected.


European Markets

European equity markets have fluctuated in a relatively narrow band either side of unchanged as recent gains are consolidated, with investors reflecting on a softening in China's trade momentum, disappointing updates from heavy-weights Roche Holding (ROG.VX) and Carrefour (CA.FP) as well as deal activity involving Rolls-Royce (RR.LN), reportedly Alcatel-Lucent (ALU.FP) and surrounding Bank Sarasin (BSAN.SW) after the announcement that Rabobank is in talks with several potential buyers for its stake in Sarasin. Italy plans to sell up to €6.5B of bonds in several tranches later in another test of investors' confidence in EuroZone's ability to resolve its debt crisis. Major indices currently trade slightly below the earlier trading range, at or near session lows. All sectors trade lower led by basic resources (2.1%), banks (1.5%) and healthcare (1.3%), whilst food & beverage little changed, technology (0.2%) and construction (0.4%) led relative performers.


Today's Economic Releases (Eastern Time)

02:00 Germany CPI y/y (Sep); consensus n/a
08:30 US Initial Jobless Claims (08-Oct); consensus 405K
08:30 US Continuing Claims (01-Oct); consensus 3700K
08:30 US Trade Balance (Aug); consensus ($45.80B)
09:45 US Bloomberg Consumer Comfort (09-Oct); consensus n/a
10:30 US EIA Natural Gas Inventories (07-Oct); consensus n/a
11:00 US DOE Crude Inventories (08-Oct); consensus n/a
14:00 US Treasury Budget (Sep); consensus ($65.1B)
19:50 Japan Domestic CGPI (y/y) (Sep); consensus n/a
21:30 China PPI (y/y) (Sep); consensus n/a
21:30 China CPI (y/y) (Sep); consensus n/a 

Today's Key Events (Eastern Time)

07:30 Zogenix Investor Meeting
08:45 Gap Inc. North America Business and Global Growth Strategy Updates:             800.374.1731      /Intl             706.679.5876       pc 10818933
10:00 Mead Johnson Nutrition Investor Meeting
10:00 Rigel Pharmaceuticals Investor Day
10:30 NOVAVAX Discusses Results From Phase I Trial of Respiratory Syncytial Virus Vaccine Candidate:            877.212.6076       / Intl            707.287.9331      
11:00 PetSmart Analyst Meeting
11:45 Fed's Plosser speaks
13:00 Treasury Auction of 30-yr bonds
20:00 Overland Storage Investor and Analyst Briefing
—:— Ablynx R&D Day (2nd of 2)
—:— Capstone Investments Breakfast with Con Edison Management
—:— CTIA Wireless Power Summit
—:— Dell World 2011
—:— GHS Securities with Cheniere Energy
—:— GHS Securities with ENSCO PLC
—:— GHS Securities with Magma Design Automation
—:— GHS Securities with Minefinder
—:— Global Hunter Securities with Revett Minerals
—:— Novell BrainShare 


Company Specific News

Earnings
FCS (Fairchild Semiconductor reports Q3 EPS $0.28 vs Reuters $0.32; Reports Q3: Revenues $403.2M vs Reuters $404.2M)
JPM (JPMorgan Chase reports Q3 EPS $1.02; Reports Q3: It is unclear if reported EPS is comparable to Reuters $0.91)
PETM (PetSmart guides Q3 EPS $0.46-0.48 vs prior $0.41-0.45 and Reuters $0.45)
WGO (Winnebago reports Q4 EPS $0.12 vs Reuters $0.07; Reports Q4:
Revenues $130.5M vs Reuters $116.8M)
ZEP (Zep reports Q4 adj. EPS $0.24 vs Reuters $0.37; Reports Q4: Revenues $173.8M vs Reuters $175.6M)

Other News
Eurozone sovereign debt crisis 
- Insurance plan to boost EFSF's reach: The FT said yesterday that European policymakers are moving towards a plan that would enable the EFSF to insure investors against some losses on government bonds. The paper noted that officials have turned their attention to the insurance plan given that it offers the fewest legal and political entanglements. The article noted that under the insurance plan, the EFSF would guarantee between 20-40% of losses (note that this is up from the 10-20% discussed in recent reports) on bonds from struggling Eurozone countries, particularly Spain and Italy. However, the FT also pointed out that there are a number of difficulties surrounding the plan, including which countries are covered in the guarantee scheme.
- France sees bondholder haircut above 21%, backs converting EFSF into a bank: Reuters cited comments from a French finance ministry source who said that Paris believes losses for private sector investors in Greek debt will be higher than the 21% agreed to as part of a second bailout package. The source added that the new haircut level should be announced as part of a package unveiled at the 23-Oct EU summit. The source also noted that EU policymakers were looking at how the EFSF could be used to insure against losses on sovereign debt by offering partial guarantees and said that France supported the idea of converting the EFSF into a bank as the best way to boost its leverage.
- Deutsche Bank chief attacks recapitalization plan: The FT noted that Deutsche Bank CEO Josef Ackermann warned that forcing banks to increase their capital cushions will not solve the Eurozone debt crisis because the use of public funds would increase state debts. Ackermann argued that the recapitalization push is "counter-productive" because it would not address the problem of government bonds losing their risk-free status. He noted that in order to solve the problem, governments need to restore trust in state finances. Ackermann also said that he would do everything in his power to avoid a forced recapitalization.
- Deutsche Bank chief says haircuts may cause credit crunch: Reuters also has some comments from Deutsche Bank CEO Josef Ackermann. The article noted that Ackermann told a conference of corporate executives gathered in Berlin that haircuts on sovereign debts, combined with demands to boost capital, could lead to a credit crunch in the real economy. He added that before considering further measures to stabilize the Eurozone, politicians should consider the aggregate impact of proposals such as forced recapitalizations, a transaction tax and write downs on bonds.
- Deutsche Bank could need €9B to pass new EU stress test: Reuters, citing two sources with direct knowledge of the bank's finances, said that Deutsche Bank would need €9B in fresh equity if new EU stress tests imposed a 9% core tier one capital ratio. The source told Reuters that the bank would pass the latest EBA test if a 7% ratio were required.
- Revised EU stress test would see 66 banks fail: Bloomberg noted that Credit Suisse analysts said that at least 66 of Europe's biggest banks would fail a revised EU stress test and need to raise ~€220B. They added that RBS, - Deutsche Bank and BNP would need the most, a combined total of ~€47B, while SocGen and Barclays would each need about ~€13B in fresh capital. The article pointed out that only eight banks out of the 90 tested failed the EBA's 15-Jul stress test, with a combined capital shortfall of €2.5B.
- Yield on Italy's 5-year bonds falls at auction: Reuters said that the yield on Italy's 5-year BTP bonds fell to 5.32% at today's auction, down from 5.6% a month ago. Including a sale of three off-the-run bonds, Italy sold a total of €6.2B worth of debt today, compared with a target range of €4B-€6.5B.
- ECB seen buying Italian debt bonds post-auction: Reuters noted that traders said that the ECB stepped in to purchase Italian debt in the wake of the countries latest round of bond sales on Thursday. The traders said that the ECB began buying Italian BTP bonds in the 10-year sector shortly after the release of the auction results showing that the country sold €6.2B of government bonds. The article noted that earlier in the day, 10-year yields pushed up to 5.87%, their highest since the ECB began buying the debt in August.
- Mario Draghi fears Italian debt spiral: The Telegraph noted that Mario Draghi, who takes over as the president of the ECB next month, said that Italy risks a debt spiral without drastic steps to cut funding and restore confidence in public finances. He noted that "We must act fast. The sorts of interest rate rises seen over the last three months, if protracted, could lead to an uncontrollable spiral." He added that Italy needs to be aware that external support is nearing its political limits, noting that "It would be a tragic illusion to think that the help will come from outside."
- Berlusconi to face confidence vote in lower house on Friday: Bloomberg, citing comments from Chamber of Deputies Speaker Gianfranco Fini, noted that Italian Prime Minister Silvio Berlusconi’s government will face a confidence vote tomorrow in the lower house of parliament. Recall that Berlusconi recently failed to secure enough votes to approve the budget accounts. Berlusconi told parliament today that there is no viable alternative to his government and if it fell now, the only alternative would be early elections.


Newspaper Articles / Headlines

All Things Digital
- All Things Digital says Apple is reportedly increasing production volumes on the iPhone 4S. Sources in the supply chain indicate to the Commercial Times that Pegatron Technology has received orders to produce another 5M iPhone 4S, in addition to the 10M for which it's already contracted
Article also notes that Foxconn, which is the larger of the 4S OEM partners, had initially not been scheduled to begin deliveries on 15% of the 4S' production until early 2012, but sources indicate that AAPL is now seeking to get delivery on a few million handsets prior to year-end; says the moves may be indicative of greater demand than AAPL expected.

Daily Mail
- Daily Mail discusses EU rules effect on UK banks. The Daily Mail says British banks are likely to escape having to raise new capital under the EU's higher capital rules, and citing senior banking sources, says British banks have sufficient capital to weather large writedowns on their soverign debt portfolios. Capital to loans ratios as of the end of June, according to the Daily Mail: RBS (RBS.LN): 11.1%, Barclays (BARC.LN): 11.0%
HSBC (HSBA.LN): 10.8%
Lloyds (LLOY.LN): 10.1%

Financial Times
- Alcatel-Lucent deal to sell call centre business. Without citing its source, the newspaper reports Alcatel-Lucent has agreed to sell its corporate call centre services business for as much as $1.5B.
- Estimated size of China's copper inventories higher than expected. The FT noted that shedding some light on one of the commodity market's biggest mysteries, China for the first time revealed the estimated size of its copper inventories. Citing data from the state-backed China Non-Ferrous Metals Industry Association, the paper said that Chinese copper inventories stood at 1.9M tonnes at the end of 2010. According to the article, the estimate is significantly higher than the 1.0M-1.5M tonne range that foreign executives have assumed in the past. The paper added that the estimate implies that real Chinese copper demand may have been lower than thought in recent years. Recall that China accounts for ~40% of global copper demand.
New York Post


Research

BB&T: upgraded WSM
BMO Capital: upgraded ONXX
Duncan Williams: downgraded HCSG
Goldman Sachs: upgraded RAX
Jefferies: downgraded KR
Macquarie: downgraded PZN, HTS, LM
RBC Capital: downgraded GR
Thinkequity: upgraded EQS


Options

Yesterday's Intraday Vol / Options Color and Commentary

Broad Index/Macro Color

A pretty convincing breakdown in the VIX today, now down 2.75 (-8.37%) and matching the move made on 10/10 when the market was up 1.65% more than it is today. This is the 7th straight decline in the VIX and marks a 15.34 point (33.75%) plunge since the 10/3 high of 45.45.

A good time to buy gamma? 30-day realized vol in SPX is now 31.19, putting it solidly ahead of 30-day implied (25.5). At .82, the 30-day implied to realized ratio is in just its 9th percentile over the past year. Considering there’s been much in the way of Euro-zone commitment but little in the way of  Euro-zone action, there’s still a lot of downside risk out there. While it’s been a pain trade lately. it’s a good time to be long gamma in our opinion.

Some investors apparently disagree with us as VIX put flow is running twice the normal pace, with 230K contracts trading at midday vs 133K calls. Nov 25 Puts lead the most actives, with early buyers paying $.50 for 3000 when the index was near 32 and a recent block of 10000 printing at the $.65 midmkt level. Other large put flow involved the Dec 20-21 put spread trading at $.12512000x

We still favor IWM which has realized  44.87 vol over the past 30-days and has made three moves > +/- 4% so far this month. For investors looking to avoid the protection ‘bleed’ experienced over the past week, look at put spread collars as a low-cost hedge. Specifically, we like the sell the IWM Nov 76 call to buy the 67-60 put spread for a net cost of $.62

For 88bp cost you get 7.7% upside with protection from -5.2% to -14.3%

With doubts about Slovakia's vote in focus and cautious comments from Trichet who describes the crisis as reaching a "systemic dimension", the dollar index is back up about .4% this am.

Given UUP's (bullish dollar ETF) low implied vol and negative correlation to energy and materials, investors might consider buying the UUP Nov 22-23 call spread for $.25 as a cheap hedge on a long equity portfolio.

Seeing Lots of Bullish Asian/Emerging Market Flow…

In  EWJ (Japan)- Similar to EWM (Malaysia- see below) large bullish call bets being made with 25,000 Nov 10s bot for $.13. Another 9,600 Dec 10 calls were purchased for $.21 cents. Shares still remain well below (16.8%)the 52-week highs of $11.6 seen in mid-Feb before the earthquake.

 EWM – (Malaysia) A large purchase of 20,000 Nov 14 calls went up at $.25 as an investors is betting on add’l upside after a 11.3% rally since last-Monday

EEM – (Emerging Markets)  An investor bought 48,000 Dec 42 calls for $1.12. It might add to positions opened over the past two days. 48,000 were bought to open for $.85 cents on Monday and 48,000 for $.89 cents yesterday. The contract is 7.8% OTM with a .33 delta

Sector Color

Sector vols are getting annihilated across the board. Importantly, Financials, often considered the best barometer of global contagion risk are leading the vol sell-off with XLF 30-day atm implied vol down 6 points (-14%). Right behind are XLP (Cons. Staples), XLB (Materials), XLE (energy) and XLI (Industrials) all down 10-12%. Not surprisingly Tech, which is lagging on the day is seeing the most modest vol decline.

Interestingly the break-down in the dollar’s uptrend, and subsequent boost in commodity prices has failed to put a commensurate dent in commodity vols. DBA, SLV, GLD, USO 30-day vols are only down 5-6% on the day.

Skew in GLD and SLV is fairly steep by historical measures (85th and 92nd %-iles respectively). For bullish investors would look at risk reversals (selling puts to buy calls) as an alternative to buying the ETFs . In GLD for instance, you can sell the Nov 155 puts to buy the 172 calls for even $.

GLOBAL NEWS
? CHINA�
1. China�s exports  rose the least in seven months and the customs bureau warned of �severe� challenges as the global economic outlook dims. Exports rose a less-than-forecast 17.1% in September from a year earlier.
2. China may move to restrain the  yuan, which has gained  the most against the dollar among 25 emerging-market currencies in the past four years.
3. China�s inflation, which has exceeded the government�s target each month this year, is moderating more slowly than expected as food prices remain high in the biggest pork-consuming nation.
? EUROPE�
1. Treasury Secretary Geithner will increase pressure this week on his European counterparts to act forcefully amid U.S. concern that the continent�s debt crisis is hurting the global economy.
2. Risks to Europe�s bank industry are �rapidly� mounting as the fallout of Greece�s debt crisis engulfs the whole region.
3. At least 66 of Europe�s biggest banks would fail a revised EU stress test and need to raise about $302.3B.
4. Bankers may have to give up bonuses and shareholders forego dividends at lenders that need capital injections to meet tougher EU standards.
5. Investors are paying the biggest premium since February 2008 to insure against losses in Germany�s stock market.
6. Ireland Prime Minister Kenny has a word of warning for Germany and France as Europe�s sovereign debt crisis spreads to the region�s banks: move fast. Ireland�s initial failure to get to grips with its banking woes cost the nation its economic sovereignty and drove 10-year borrowing cost above 14%.
7. Rates at which the world�s banks say they can borrow from each other in dollars are diverging by the most in more than two years, a sign European leaders are still struggling to contain the region�s debt crisis.
8. German Inflation Accelerates More Than Initially Estimated
9. B.O.E. Deputy Governor Bean became the third policy maker to signal the central bank might add to its emergency stimulus plan.
10. French Socialist Finalists Seek Greater State Control of Banks
11. Protesters to �Occupy� London Exchange After Wall Street
? ITALY�
1. Italy sold $8.5B of bonds, less than the maximum target.
2. Enel, Italy�s biggest power company, said it will be forced to review dividends and spending to meet debt reduction targets after the government increased taxes on energy companies.
3. Berlusconi Calls for Confidence Vote to Prove He Has Majority
4. German Air-Traffic Controllers Halt Strike After Deal
? U.S.A.�
1. A year after the start of a nationwide investigation of foreclosure practices , state and federal negotiators haven�t settled with banks and face infighting that might leave some states outside any agreement.
2. The U.S. Congress approved free- trade agreements with South Korea, Colombia and Panama, bringing an end to years of stalemate and offering what supporters said was the biggest opportunity for exporters in decades.
3. The U.S. launched a full-court press portraying Iran as an outlaw state that threatens global security.
4. A widening gap between rich and poor is reshaping the U.S. economy, leaving it more vulnerable to recurring financial crises and less likely to generate enduring expansions. Left unchecked, the decades-long trend toward increasing inequality may condemn Wall Street to a generation of unimpressive returns and even shake social stability. Income inequality in this country is just getting worse and worse and worse.
5. Perry Pins Presidential Race Comeback Hopes on His Texas Tenure
6. Galleon�s Raj Rajaratnam will be sentenced today for masterminding the biggest hedge-fund insider trading scheme in U.S. history. Depending on the result, Rajaratnam, 54, may spend much of the rest of his life in prison.
? SOUTH KOREA� South Korea�s military raised its level of combat readiness as a result of President Bak�s visit to the U.S. and not because of any unusual movement from North Korea.
? ARGENTINA-- Buenos Aires may take out a bridge loan with C and two other banks as the worst sell-off in emerging-market bonds in more than a year prompts the capital to consider delaying a $500MM  overseas debt offer.
? RUSSIA�
1. Russia�s biggest injection of money into banks in more than two years is helping ease investor concern over cash shortages.
2. Russia May Cut Oil Export Tax 4.6% Next Month After Urals Falls
? JAPAN�
1. Japanese Smoking Ratio Falls on Aging, Tax, Japan Tobacco Says
2. Rice Farmers in Japan Set Tougher Radiation Limits for Crops
3. Rice Farmers in Japan Set Tougher Radiation Limits for Crops
? COMMODITIES�
1. The 28% plunge in zinc that drove the metal into a bear market may be ending as record demand from steelmakers erodes stockpiles.
2. Oil Falls a Second Day
3. Sugar Rises
4. Cocoa Climbs
5. India to Cut Cooking Oil Imports
6. Copper Drops
7. Gold Falls
8. China Copper Imports Gain to 16-Month High
9. Palm Oil Declines for First Day in Four



JPM-- said profit fell 4%, a smaller decline than analysts estimated, as the company benefited from accounting changes in the value of its liabilities.
? GOOG-- The IRS is auditing how Google Inc.  avoided federal income taxes by shifting profit into offshore subsidiaries.
? GM-- Conspicuously absent from this week�s celebrations in Detroit for the 100th anniversary of Chevrolet: any talk of the overdue seventh-generation Corvette. GM delayed overhauling the sports car in the unprofitable era leading up to the automaker�s 2009 bankruptcy. Now the Corvette is in a slump, headed toward sales of 13,000 this year, or about a third of the level five years ago. 87% of buyers are over age 50.
? RIMM-- customers in Canada and the U.S., its largest market, still face delays after disruption to its BlackBerry network.
? SNE-- Sony Recalls 1.6 Million Bravia TV Sets Because of Fire Risk
? ALU� Alcatel-Lucent Rises as FT Reports Permira to Buy Call Centers
? WGO-- WINNEBAGO SAYS 4Q EARNING CUT BY LIFO INVENTORY EXPENSES
? CHRYSLER-- Chrysler to Pay $3,500 Signing Bonus to UAW Members in 2 Parts
? FUTURES�1192.10, DOWN 6.10.
? NEW HIGHS: 41. IBM, VFC, DECK, ROST, CEPH, DLTR, KMB, DG, BMY, MO.
? NEW LOWS: 14. FSLR.
? OVERBOUGHT: 19.
? OVERSOLD: 25.





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 *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.