Thursday, April 1, 2010

Futures are +65bps higher this morning on overall strength in global equity markets this first day of the new month and quarter.  Overnight, Eurozone, UK, Germany, and Chinese PMI releases were all in-line to slightly better-than-expected, buoying overall sentiment.  In the U.S., Initial Jobless Claims for the week ending March 27th were 439k versus the 440k expectation.  Continuing Claims for the week ending March 20th were 4.662M versus the 4.618M expectation.  In corporate news, earnings releases from RIMM, MU, and MOS last night dominated post-market trading.  This morning, RIMM is trading down ~6%, MU is up ~5%, and MOS is slightly lower.  Note that Auto Sales data will be released throughout the day today (GM at 10:45am, Ford at noon, Chrysler mid-afternoon, and Toyota at 3pm).  Here’s the Barclay’s summary:

March 2010 vehicle sales will be reported today… Industry sales of light vehicles appear to have improved significantly in March from the mid-10mm level averaged over the past 6 months, boosted by generous 0% financing offers at Toyota, which were promptly matched by most other large OEMs including GM, Ford, Chrysler, Hyundai, Nissan and most recently Honda. Based on our channel checks, we estimate that the March 2010 SAAR (seasonally adjusted annual rate) could end up around 12.5mm units, up materially vs. last month's 10.4mm rate and vs. the depressed March 2009 level of 9.7mm. Importantly, March retail SAAR will likely be above the 10mm-unit mark, for the first time since 2008, and well ahead of the 8.0mm retail sales pace of February, while fleet sales were likely slightly down vs. the 2.5mm rate averaged YTD. 

**Please note that there were 26 selling days in March 2010, one more than in March 2009, so headline comparisons will be stronger than adjusted ones.**

Later today we’ll get ISM Manufacturing Data and month-over-month construction spending.  And all eyes tomorrow will be on the Official Changer in Nonfarm Payrolls for March and the Unemployment Rate.  (Interesting aside…when taking a brief survey, not one of my contacts could recall the last time a jobs number was released on a holiday such as Good Friday…shows what we know – the last time was 2007!  The read-through is 1) this business is incredibly myopic at times and 2) amazing how little attention we all paid to jobs data back then during “boom times.”  It just wasn’t as relevant.)  Recall that the expectation is jobs growth of anywhere from 185k-250k for the month, which includes both a weather-related rebound and census hiring. 

Interesting story on Bloomberg News this morning about M&A activity indicating overall economic improvement worldwide (see quote section below).  Regarding Q2, Hedgeye posted some thoughts in yesterday’s note:

Some things to consider as we head into the second quarter:

(1) While the bond market isn't blowing up, it is sending a clear message that interest rates will be headed higher sooner than expected.
(2) The squeeze in the "pain" trade is nearly over.
(3) A +11.2% melt-up in the S&P 500 over a 7-week timeline is not normal.
(4) Can the 1Q earnings season exceed expectations and deliver continued upward guidance?
(5) Global sovereign debt issues will act as a governor on any significant upside potential.

On the sovereign debt front (and as ridiculous as ratings agencies may be), Moody's said that Aaa-rated sovereigns with financing costs at 10% or more of revenue exceeds the limits of "debt affordability." This increases the number of countries that could potentially see rating "downgrades."

China's stocks fell for the first time in four days last night, declining 0.6%. For 1Q10, this puts the Chinese market down 5.1%, the worst quarterly drop since August last year. While we have not yet officially introduced our 2Q10 themes yet, continued property-related policy risks surrounding China is still a slight MACRO headwind.

Given that China commentary, it’s interesting to note Goldman Sach’s new “top trade” from last night:

Goldman Sachs Says China’s Hong Kong ‘H’ Shares ‘New Top Trade’ 2010-03-31 22:01:43.341 GMT
April 1 (Bloomberg) -- China’s Hong Kong-listed companies are a “new top trade” at Goldman Sachs Group Inc., which said the Hang Seng China Enterprises Index will climb at least 20 percent on valuation and the outlook for economic growth. “We are recommending a new top trade,” Dominic Wilson, an economist at Goldman Sachs in New York, wrote in a report e- mailed yesterday. “We sense that Chinese equities have fallen off investors’ radars somewhat, positioning is light, and sentiment is, at best, skeptical, making us all the more keen to get involved.” The recommendation is Goldman Sachs’s ninth top trade for the year. The other top trades include owning Russian stocks, favoring the British pound against the New Zealand dollar, and the Polish zloty against the Japanese yen, according to a separate note e-mailed yesterday. The H-share index has dropped 10 percent from a 17-month high in November, compared with a 2.8 percent gain for the MSCI Emerging Markets Index, on concern policy makers will curb bank lending and raise interest rates to slow growth. The H-share index’s 3.1 percent loss this year compares to a 4.9 percent gain in the Standard & Poor’s 500 Index of U.S. stocks and 2.1 percent advance in the MSCI Emerging Markets Index of 22 developing-nation stocks.

RIMM cut to Sell at GSCO.  BLK cut to Hold at DBAB.  FINL raised at FBRC.  MICC upgrade at JPHQ.  MOS lower on earnings.  RTN wins $2044M contract.  SKIL higher on increased bid from SSI Investments III Ltd.  ATSG beats by 3c.  BGP higher on debt restructuring.  BRE announces 5M share offering.  CIM announces 85M share offering.  GPN beats by 5c.  NRP announces 4M share offering.  RYAAY raises guidance.  SPIR higher on earnings.  XRTX beats by 18c. 

Asia higher overnight.  Europe over 1% higher at the moment.  USD flat.  Oil +1%.  Gold +88bps. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
MICRON TECH                10.96    +5.69% 2650376
LEGG MASON INC           29.60    +3.24% 2000
JDS UNIPHASE               12.92    +3.19% 11930
AUTONATION INC           18.65    +3.15% 8200
GANNETT CO                 17.00    +2.91% 5742
MANITOWOC CO            13.31    +2.38% 1450
AMERICAN CAPITAL        5.19      +2.17% 6800
MBIA INC                       6.40      +2.07% 11700
GEN GROWTH PROP       15.76    -2.05%  5800
WENDY'S/ARBY'S-A        5.10      +2.0 %  13200

Today’s Trivia:  When the official start of the New Year was ordered changed in 1562 from April 1st to January 1st by Pope Gregory, many people either weren’t informed or didn’t believe it.  These “April Fools” were from which country?
                                                                                                                                                                             
Yesterday's Answer:  According to a Bloomberg News story yesterday, Israel is the largest recipient of U.S. aid outside of Iraq & Afghanistan.   
                                                                                                                            
Best Quotes:  “M&A Creeps Higher on Cross-Border, Hostile Deals 2010-04-01 07:27:30.811 GMT By Serena Saitto
April 1 (Bloomberg) -- Mergers and acquisitions gained momentum in the first quarter with more than 2,034 cross-border transactions and 10 hostile takeovers signaling a recovery from the worst deal market in six years. Global takeovers rose 5 percent to $498.24 billion from a year ago, according to data compiled by Bloomberg. Purchases by companies outside their home markets more than doubled to $249 billion, while $17.46 billion of hostile acquisitions were announced, up from $4.29 billion a year earlier. Chief executive officers are gaining confidence as stock markets rally and a thaw in credit markets makes it easier to fund deals. The Standard & Poor’s 500 Index rose 4.9 percent in the quarter, extending last year’s 23 percent climb. Interest rates slashed during the global economic crisis are at historic lows in the U.S., the U.K. and the 16-nation euro region. “Assuming the economy doesn’t double dip, we are cautiously optimistic for the rest of the year,” said Mark Shafir, global head of M&A at Citigroup Inc., which advised American International Group Inc. on the $35.5 billion sale of its Asian life insurance unit to Prudential Plc, the quarter’s largest deal. Mergers and acquisitions may increase 15 percent to 20 percent from 2009, said Shafir, returning to “more familiar conditions” than last year, when takeovers slumped 27 percent to $1.8 trillion, the lowest level since 2003

Hostile Takeovers… A pickup in hostile takeovers that began in the fourth quarter “reflects increased confidence on the part of some corporate clients,” said Shafir, whose firm advised Kraft Foods Inc. on its $21.4 billion hostile takeover of Cadbury Plc. The companies reached a deal in February after a four-month battle. Citigroup, based in New York, ranked fifth among takeover advisers in the quarter after Goldman Sachs Group Inc., Zurich- based Credit Suisse Group AG, Frankfurt-based Deutsche Bank AG and JPMorgan Chase & Co., Bloomberg data show. This year’s hostile deals include Astellas Pharma Inc.’s $3.5 billion bid for OSI Pharmaceuticals Inc. in March and Air Products & Chemicals Inc.’s $5.1 billion unsolicited offer for Airgas Inc. in February. Citibank is advising Astellas. “We’re likely to see more hostile M&A activity because companies have access to capital that allows them to pay in cash,” said Jeffrey Kaplan, global head of M&A and corporate finance at Bank of America Merrill Lynch, which is advising Airgas in its defense against Air Products. “Equity values have increased such that buyers are willing to use their stock as well.”

Debt Markets… Company debt rallied for the fourth-straight quarter as U.S. consumer confidence gained in March and corporate defaults declined from record levels, according to a Bank of America Merrill Lynch index. Borrowing costs declined in the first quarter to the lowest since 2005. Kraft sold $9.5 billion of debt to finance the cash portion of its takeover of Cadbury in the biggest bond offering by a non-financial company in almost a year. The market recovery also created buying opportunities for companies looking to expand abroad. More than half of the 20 biggest deals of the quarter were cross border, including the $10.7 billion acquisition of Zain Africa BV by Billionaire Sunil Mittal’s Bharti Airtel Ltd. Bright Food Group Co., Shanghai’s biggest food company, today raised its offer for CSR Ltd.’s sugar unit to A$1.75 billion ($1.6 billion). The Australian company had rejected an earlier bid from Bright Food.

‘Opportunistic’ Buying… Deals in Latin America got off to the best start in at least a decade, driven by consolidation in the commodities, food and telecommunications industries in Brazil and Mexico. America Movil SAB’s $25.7 billion all-stock purchase of Carso Global Telecom SAB in Mexico was the No. 2 takeover of the quarter. “This is an opportunistic moment in which buyers can pay a full price at fair multiples,” said Andrew Bednar, head of M&A at Perella Weinberg Partners LP, the New York-based boutique investment bank. “As M&A heats up the equity markets follow and it becomes more challenging to pay an acceptable premium without correspondingly higher multiples.” Perella advised Merck KGaA on its $6 billion acquisition of Millipore Corp. in March. Inc., people close to the situation said. Merck’s offer was 15.3 times Millipore’s earnings before interest, taxes, depreciation and amortization, according to Bloomberg data. Merck offered 42 percent more than the shares were worth before the deal was announced.
                               
Premiums Shrink… The average premium paid for companies in the first quarter was 20 percent, down from 31.44 percent in the same period a year ago, according to Bloomberg data. The decline signals a return to a more normal conditions, said Citigroup’s Shafir. While the market for takeovers is improving, the recovery has been less robust than after the downturn in 2003. In the first quarter of 2004, takeovers more than doubled compared with the year-ago quarter. “I expected M&A activity in the U.S. to be more vibrant at this point of the year,” said Jeff Raich, head of M&A at Moelis & Co., a New York-based investment bank that advises on deals. U.S. takeovers rose 33 percent to $250.5 billion in the quarter, while acquisitions involving Asian companies more than doubled to $185.5 billion, according to Bloomberg data.

Scrapped Deals… Europe also curbed the recovery. Takeovers by European companies were flat at $185.7 billion in the quarter, as Greece’s fiscal crisis and a slower economic recovery made executives more cautious about pursuing deals. Completing deals remains a challenge. Siemens AG shelved a possible sale of its hearing-aid unit in March after bids fell short of the 2 billion euros ($2.7 billion) sought, two people familiar with the plan said. In February, Sichuan Tengzhong Heavy Industrial Machinery Co. couldn’t win Chinese approval to buy General Motors Co.’s Hummer, the maker of military-inspired sport-utility vehicles. “In spite of a high level of dialogue going on, these discussions have not resulted in many announced transactions,” said Moelis’s Raich. LyondellBasell Industries AF rejected a purchase offer by India’s Reliance Industries Ltd. in March, saying it had a superior recovery plan for the chemical maker. Lyondell filed for bankruptcy in January 2009 after a leveraged buyout in 2007 saddled it with more than $22 billion of debt. Today, Lihir Gold Ltd. rejected a A$9.4 billion cash and stock takeover from Newcrest Mining Ltd., a deal that would create the world’s fifth-biggest producer of the metal, calling the offer inadequate.

Private Equity… Takeovers by private equity-firms are starting to return after the market froze during the credit crunch. Since Jan. 1, companies have raised more than $5 billion in the high-yield, high-risk leveraged-loan market to finance buyouts, Bloomberg data show. No similar transactions were arranged in the comparable period last year. “The environment for M&A is healthy with deals that make good strategic sense,” said Bruce Evans, head of M&A for the Americas at Deutsche Bank. “While leveraged buyout activity has returned, we will not see the volume back to the level we saw in 2007 anytime soon.”

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