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JPMorgan Early Look at the Market – Fri 8.6.10 Adam Crisafulli (212) 272-8635; email@example.com Jonathan Rich (212) 272-7069 Tim Hanks (212) 272-2151 Mike Pagliarulo (212) 622-2668 Distribution Note – the Early Look is published each morning by 6:50amET. If you don’t receive in a timely manner via email, you can check this link for the latest: www.morganmarkets.com/mi Morning Levels: • SP500 futures are flattish at 1124 • Europe: DJ Euro Stoxx up 50bp; FTSE up 66bp; CAC/DAX up 40-50bp. • Asia: Japan dn 0.1%; China +1.4%; Hong Kong +0.6%; India dn 0.2%; Australia flat • Sov CDS – some widening – Greece +7bp; Ireland, Italy, Portugal, Spain all flattish-to-out small. • Treasuries – 2yr yields ended Thurs @ record lows at 0.534% and are ticking up small to 0.549% today; 10s off small too; 30s are flattish. • Commodities: copper up 0.3%; copper off 0.3% (has been falling for last three sessions); gold flat (ended Thurs flat too). • FX – DXY up ~20bp and GBP/EUR off same amount; eurozone currencies weak after some soft eco #s (IP in Germany and UK); yen off ~20bp vs. the US$. Today’s Top Stories • Quiet morning all around with little newsflow and stocks again trading flattish for the most part. China is the major outperformer overnight (rallying 1.4%), after China Banking regulators issued a statement saying the dn 50-60% housing stress test does not mean the government’s assessment of market trends or policy has changed, providing some reassurance to the market. • In Japan, a few articles out discussing whether the BoJ would ease policy further w/a former BoJ official saying they may ease if the yen rises to under 80 however a separate Bloomberg article says the BoJ is probably not ready to ease further yet despite the rise in the Yen. • In Australia, the RBA released its quarterly Statement on Monetary Policy (SoMP) with a similar tone to that offered by the RBA on Tuesday in the statement accompanying the Board’s decision to leave the cash rate unchanged. • European eco data – weak June IP reports from UK and Germany (although people’s focus on the Jul releases, which have shown an uptick vs. June around the world). • European equities - after taking a breather for the last 2 sessions, EU financials are back to outperforming today (up >1%); once again, French banks are leading (SocGen, Agricole, BNP are some of the best performing large stocks in Europe). In London, RBS rallies >2% after earnings (rounds out earnings for the big UK banks) while BP jumps another 2% (they said they have successfully finished the "static kill" cementing process earlier than expected. Commodities stocks also strong in London (BHP, Rio), although Lonmin dips ~4% after the S African gov't imposed some bans on its sales practices. • On the downside in Europe, as wheat prices continue to rally, European food/brewers get hit (fear of higher input costs) - Carlsberg -4.5%, Heineken -3%, Anheuser -4%, SABMiller - 1.7%; food companies also weak (Nestle, Danone). Unilever falls another 2.5% (neg. sell- side reports out today following the co's disappointing earnings Thurs morning). Ag names continue to rally around the world - in the US, ADM, MON, CF, AGU, etc, were all strong on Thurs while in Europe Syngenta is up another ~3% this morning. • BAC – the co wants to be removed a MOU forced upon it during the height of the financial crisis; the sanction imposes restrictions on what moves the co can and cannot make (like raising its dividend); so far, regulators have been reluctant to set BoA free, wanting to ensure it first made permanent adjustments to certain business practices (WSJ) • KFT – Reports Q210 Earnings, Q beats w/organic topline light; Raising Synergies guidance; Reit FY eps target but tweaking down FY organic revs guidance. • Tech update from Thurs night/Fri morning - the big news in tech land over the last 24 hrs concerns LEDs and there were conflicting data points out overnight. JPMorgan's S Deshpande was in Taiwan and had the chance to visit a major LED chip vendor. The company indicated that it had indeed seen a mild reduction in orders but believes customers wanted LEDs of a different specification and would at a later time replace the cancelled orders w/orders for another type of LED chip. Also - A few LED companies in Taiwan reported sales dwn M/M in Jul. On the flip side, RBCN had v strong earnings last night and was upbeat on the outlook; mgmt was asked specifically about whether there were slowing orders in Taiwan and the co said it hadn't seen such a trend. Away from LEDs, Digitimes had two neg articles on tech overall: 1) says NA/EMEA notebook inventories now 5-6 weeks, above normal 3-4 weeks, b/c of slackening demand; 2) TSM/UMC's big customers seeing large inventory increases and as a result both foundries could see sales off 12% Q/Q in Q4. • US jobs – update from M Feroli - Labor market data received since the beginning of the week has been mixed to slightly positive. On the positive side of the ledger, both the ISM manufacturing and nonmanufacturing employment indexes moved up, each by just under a point, and the ADP report pointed to positive private employment growth. On the less favorable side, the poor print on jobless claims lifted the centered-moving average for claims during the payroll survey week. A decline in Census workers is expected to depress government employment by 145,000. In the private sector, we look for a big drop off in construction employment, though former Census workers and UI recipients could support employment in private services. JPMorgan ests: headline 25K loss; private adds +120K; hours +0.4%; earnings +0.1%; unemployment rate 9.6%; Street ests: headline 65K loss; private adds +90K; earnings +0.1%; unemployment rate 9.6%. Market ests: unlike prior months, there haven’t been a lot of “whispers” talked about in terms of upside/downside scenarios; it seems like the private number would have to be outside the ~65-130K range to really get people excited. Catalysts to Watch • GS – Bloomberg reported that the co could make an announcement as soon as Fri about spinning out its prop trading group. Economics – Daily View • Friday, Aug 6th: US (Monthly Jobs Number/Unemployment Rate, Consumer Credit) Corporate events calendar • Fri Aug 6: earnings before the open (AIG, POM, PGN, JRCC, DYN, NAT, MSG, XIDE, NOOF, PartyGaming, Dexia, Allianz, RBS); earnings after the close (BRK) • Mon Aug 9: earnings before the open (SNI, GLG, WCG, KWK, DISH, KG, TSN, LINTA); earnings after the close (GA, LOPE, RAX, QNST, MBI, ABK, THQI, CVG, CTRP, MR, GNK, BBBB, CCO) • Tues Aug 10: earnings before the open (RCNI, AIT, SMG, TSEM, TWTC, Hannover Re, Danske Bank, Intercontinental Hotels); earnings after the close (CFN, CREE, MYGN, AONE, LDK, DIS, SPWRA). • Wed Aug 11: earnings before the open (SolarWorld, Phoenix Solar, Adecco, ING, Nestle, Bank of Ireland, Standard Life, AVT, M, URS, CSC); earnings after the close (CSCO, PAAS, AAP, SLW, TK) • Thurs Aug 12: earnings before the open (BR, WEN, BGG, THI, EL, EAT, SLE, KSS, Q- Cells, K+S, BUD, Aegon); earnings after the close (ADSK, DV, JWN, BYI, SHOR, NVDA) • Fri Aug 13: earnings before the open (JCP, PBR, Hypo Real Estate) Washington • Corporate bond coupons hitting record lows amid surging demand by investors for supply - Debt sales reached $35.9 billion this the week, the most since March 26, when issuance totaled $39 billion; IBM sold a bond this week w/the lowest coupon on record; “Books have been multiple-times oversubscribed…It’s not uncommon to have deals five to eight times covered. Given the depth of demand, this is a very benign environment for spreads.” – Bloomberg • “Major US Ports Predict Holiday Shopping Boom” - “We’re still a little cautious about how sustainable it is but from hearing from the retailers and some of the importers it sounds like we’re going to see that sustained business at least through the end of this year,” CNBC http://www.cnbc.com//id/38575957 • Obama tells CNBC he is confident that the US will avoid a double dip recession – CNBC/DJ • BP – the co has completed the “static kill” earlier than expected, finishing pumping cement into the well on Thurs (the move effectively seals the well) – WSJ • Fannie, Freddie – there has been speculation in the market for the last ~1.5 wks that the White House/Treasury are considering an “August Surprise” national refinancing plan (the logistics aren’t clear, but the speculation has been that all the Fannie/Freddie/FHA-backed mortgages would be automatically refinanced down to the current historically low mortgage rates). This first started to be talked about last week and early on Thurs Reuters ran another article and rekindled the talk. Treasury and White House officials later on Thurs came out and denied the story, saying there was no plan in Fannie/Freddie policy in the works. JPMorgan wrote about a large Fannie/Freddie refi a week ago: https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS- 450965-0 • Fed – the Senate returned the nomination of Peter Diamond to the Federal Reserve Board back to the White House on Thurs, thus killing it. Reuters • White House senior eco advisor Christina Romer (she chairs the White House Council of Economic Advisors), will step down from her role to teach in California; Romer will remain a member of the White House’s Economic Recovery Advisory Board – Reuters • US Equity Strategy Update - from T Lee - we remain pos. on cyclicals - Cyclicals began outperforming Defensives back in February 2009, and despite some disruptions/corrections, Cyclicals continue to outperform (17 months so far). While the macro headwinds in 2Q gave a true test to this trend, the earnings season with 79% of Cyclicals beating bottom-line estimates gave us more confidence in our Cyclical overweight thesis. While the duration and magnitude of Cyclical outperformance so far suggests further upside, we also examined 8 other reasons why the current cycle is likely to be a longer cycle for Cyclicals: 1) After a major correction, Cyclicals lead; 2) Steep yield curve supports Cyclicals; 3) Cyclicals earnings growth similar to longer cycle; 4) Revisions and surprises driven by Cyclicals; 5) Cyclicals less levered than Defensives; 6) Analyst upgrades should continue for Cyclicals; 7) Short Interest still heavier in Cyclicals; and 8) Valuation still attractive for Cyclicals. https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -454388-0 M&A/STRATEGIC ACTIONS • Tomkins - said it had not received any other approaches since recommending an offer from a Canadian consortium – Reuters • AIG - Taiwan regulators said they had started a final review of the stalled $2.2 billion deal for AIG’s Nan Shan Life unit, as the buyer group led by China Strategic had submitted all required paperwork – Reuters International Headlines • ECB supports temporary bans on naked short selling of European credit default swaps and shares in extreme market conditions, but has warned against permanent action to stop shorting (Reuters) • Spain – Bank of Spain’s eco growth accelerated in Q2 the Bank of Spain said. GDP rose 0.2% q/q. Bloomberg • German June IP – falls more than expected – came in dwn 0.6% in June vs. the St looking for a 0.7% increase. • U.K. June Manufacturing Production Weaker than expected - +0.3% m/m vs. St. +0.6%. https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -455071-0 • Russia - Drought to have limited economic impact apart from inflation; We lift end-2010 CPI forecast from 7% to 7.5%oya, and 2011 average from 6.9% to 7.5%; CBR expected to view the supply shock as transitory. Shal https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS- 454966-0 • China widening out its stress tests – now wants banks to test loans tied to building materials firms (not just home mortgages) like steel and cement companies (Reuters) • China's banking regulator issued a statement and said the dwn 50-60% housing stress tests doesn't mean the gov't's assessment of market trends or policy has changed (the statement hit after China closed and during early NY trading on Thurs). DJ • China autos – the South China Morning Post sees China auto sales slowing in H2. • Taiwan – officials are asking banks to conduct housing stress tests and assume a 25% decline in prices – Bloomberg • Japan – former BOJ official Taya says the BOJ may ease further if the yen rises to under 80 (easing could occur by extending the size or duration of a fixed interest rate funding operation). Reuters • Japan – the BOJ prob. not ready to take further easing action despite the yen’s strength – according to BBG, the BOJ is likely to hold off on increasing monetary stimulus next week as policy makers are unconvinced the yen’s approach toward a 15-year high will derail the nation’s economic recovery (Bloomberg) • Japan’s corporate lobby urges again intervention – “market intervention is internationally frowned upon. That's not something an advanced nation should do to buttress the economy," DJ • Australia - The RBA today released its quarterly Statement on Monetary Policy (SoMP), which included the Bank’s growth and inflation forecasts, to which there were only a few minor tweaks. The tone of the commentary was similar to that offered by the RBA on Tuesday in the statement accompanying the Board’s decision to leave the cash rate unchanged. The SoMP balanced the strength of domestic economic conditions against the impact of some signs of weakness offshore, and maintained that underlying inflation would trek higher over the forecast horizon (out to 2012). Kevans https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS- 454837-0 • Nippon Steel sees the current correction in Asia’s steel market abating by CQ4 as output cuts help supply and destocking comes to an end in China (Reuters) • Copper demand – Codelco sees China copper demand rising @ 8% this year and at a similar pace next year. "The growth of demand in China is practically unstoppable," Rodrigo Toro, corporate senior sales vice president of Codelco, told reporters. Sees copper prices averaging $3/LB. Reuters/DJ • Wheat prices have extended their gains w/some traders thinking they could hit $10 – Bloomberg • Wheat - Trading companies that have sold Russian wheat to millers in Asia are considering declaring force majeure on supply contracts (Reuters) http://in.reuters.com/article/idINIndia- 50672320100806 • Gold – the GLD sees its first uptick in holdings since earlier in Jul (Reuters) Int’l Earnings • Allianz reported a beat in 2Q 10 operating profit of €2,191m vs. JPMe €1,952m with the combined ratio coming in at 96.3%, ahead of JPMe 97.2% but helped by a higher reserve release of 4.2% vs. JPMe 2.5% and also lower nat cat load of -2.6% vs. JPMe -3.5%. The underlying combined ratio works out to 97.9% vs. JPMe 96.2% and consensus 97.9%, so in line with consensus. Outlook: Allianz has reiterated its FY 2010 Operating profit target of €7.2bn +/- €500m reiterated vs JPMe €7.8bn and cons €7.2bn; we expect consensus to move up toward our forecast as the run rate is now €3.9bn 1H10 and €7.8bn annualized. We also note the comment that positive P&C pricing was observed in 2Q 10 in ‘many core markets’. Huttner https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS- 454901-0 • Logica reported H1 results in line with expectations. Guidance unchanged. UK public sector does look challenging in the near term with Logica referring to slower decision making on new projects as well as the “contribution we can make to short term savings in elements of our UK public sector business” – perhaps meaning cuts to price and/or scope. Pollard https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -454962-0 • Old Mutual - OML reported 1H10 results and announced the sale of its US Life business for $350m cash on completion. US Life is carried at -₤387m in MCEV at 30 June and the sale is expected to increase MCEV by ₤718m. We view this announcement as positive given that we had argued for a disposal of this business even before the financial crisis which crystalised the geared spread risk in this business. Du Toit https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -454992-0 • RBS reported H1 2010 results with PBT at £1,582mn compared to our estimates of £800mn – note we were in line with consensus (source: company). At a net attributable level results came in at £9mn compared to our estimates of -£250mn. the 'clean' PBT is actually £1,132mn which is a more modest beat to our £969mn and consensus £900mn. Overall, on a ‘clean’ basis RBS results were marginally better than our expectations. Having said that, they confirm the trends we are expecting and are unlikely to result in significant upgrades. da Silva. https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -454993-0 Yesterday’s Trading • Market Update – the summer doldrums are upon the market, sapping both liquidity and attendance levels. After a flurry of activity at the open, trading has been falling off meaningfully for the rest of the session these last few days. However, the improved trading tone of Jul has persisted into Aug. Dips are being viewed as buying opportunities and sellers/shorts are reluctant to aggressively lay out exposure. Investors have been given plenty of opportunities to take profits/sell-off this tape in the last couple days (inc. today’s jobless claims) but there has been a lack of momentum on the downside (a prime example is the European financials – this group has prob. been the best performing in the whole world since early Jul and most would have thought the relatively disappointing #s from Barclays, Standard Chartered, etc, would have been enough to prompt some profit taking – however, the declines have been very benign as buyers step in and view the weakness as an opportunity). Buyers have been showing some signs of fatigue, esp. as the sp500 bumps up against the 100day MA (~1126), but the pain trade still feels like it is to the upside. For Q3 so far, the sp500 is up ~9%+ (a chunk of this gain came quietly this week as the sp500 has tacked on another 2%+ so far over the last 4 days) w/some groups up a lot more (like industrials +13%, transports +16%, REITs +13%, etc). The data points published around the world this week for the month of Jul have signaled that activity stabilized vs. the late- May/June trends (which were impacted by the European sovereign debt crisis). The ECB meeting today was more of a victory lap, w/Trichet acknowledging the marked improvement around spreads and sentiment (he remarked that Q2 and early Q3 trends have been coming in better than expected). Tomorrow’s BLS report is the last major catalyst for the week but hasn’t drawn a ton of attention (the BBG consensus is for 90K private adds; unlike prior months, there haven’t been a lot of “whispers” talked about in terms of upside/downside scenarios; it seems like the number would have to be outside the ~75-120K range to really get people excited). In terms of the rally today specifically, there were a few headlines people were pointing to: 1) Chinese officials earlier in the day came out and said the 50-60% home price decline bank stress test assumption didn’t signal any change in their outlook towards housing; 2) Obama spoke on CNBC and said he was confident that the US would avoid a double dip. There was talk again today of an “August Mortgage Surprise” (involving some type of a Fannie/Freddie/FHA refinance program) but TSY/White House officials denied the speculation (this has actually been discussed as an option for Washington for the last ~1 week). There remain some caveats to the equity rally though that will have to be resolved, esp. the action in TSYs – 2yr yields set another all time low today (2yr yields dropped another 4bp today to 0.52%!). • Equity sectors – Tech was the worst sector in the market, falling just over 0.4% on weakness in softwares, semis (SOX off 0.6%), TDC (earnings), and LED names (VECO, CREE) due to a neg Commercial Times article discussing lower orders for the space. Financials were off around 0.4% as earnings out of HIG weighed on regional banks and uncertainty/confusion over AXP’s return on equity guidance yesterday weighed on credit cards. Staples were off around 0.35% on weakness in food names (GIS, TSN, K) following a jump in food commodity prices after Russia banned exports for the rest of the year. Healthcare was off just under 0.1%, outperforming the tape a bit on CI’s earnings and strength in some biotechs, while managed care moves lower after outperforming the past few days. Utilities were flattish, outperforming on earnings out of AEE and TEG. Energy was up slightly, outperforming the tape on strength in solars (SOLR earnings), refiners, and a few E&Ps despite a drop in natural gas. Industrials were also up slightly, outperforming on strength in ag names (CNH, AGCO, DE), rails (EGLE earnings), and continued strength in SPW (earnings Wed morning). Discretionary was up just under 0.25%, outperforming on strength in media names (NWSA, DTV), continued strength in PCLN off earnings, and a few retailers on same store sales beats. Telecom was up 0.25% thanks to PCS’ earnings. Materials were the top space in the market, jumping 0.35% on strength in ferts (IPI, CF< MON, MOS, POT, AGU) on the Russian export ban as well as earnings out of IPI (this morning) and AGU (Wed morning). • Best performing sp500 stocks: PCS, ADM, CI, KSS, PCLN, CF, HAR, GNW • Weakest: JCP, BIG, HIG, JBL, TSN, TDC, ROST, APOL, THC, PPL CORPORATE NEWS BY SECTOR Industrials • Air France-KLM traffic rises in July – Air France said passenger traffic was up 1.2% in July and noted that revenues were up “strongly” in passenger and cargo. Reuters • Air Canada operating performance improves – Air Canada posted a quarterly loss yesterday due to FX losses, but the airline said operating results improved thanks to an increase in high-end business travel. Reuters • Ansaldo-Breda/Bombardier win bid for Italy trains – Ansaldo-Breda and Bombardier won a contract to supply Italy’s railways with 50 high-speed trains in a deal worth about 1.5B euros. Forexpros http://www.forexpros.com/news/general-news/ansaldo-breda-bombardier- win-bid-for-italy-trains-153067 HAYN – 3Q10 earnings release • EPS $0.31 vs st. $0.14 for 3Q • Rev $101.3M vs st. $94.5M for 3Q • Mgmt says revenues, volumes and EPS for 4Q10 and 1Q11 will be at least equal to and possibly exceed 3Q results (EPS est for 4Q $0.23 and Rev est for 4Q $99M). • "Sales activity and overall business conditions in the end markets we serve have continued to improve. We finally saw some commitments for longer term buys from some key accounts in the quarter, however, most customers continue to make conservative buys on an as-needed basis. Destocking appears to be essentially complete and inventories are more in line with build rates and end-use demand," said Mark Comerford, president and Chief Executive Officer. "Longer term, we're very encouraged by our increased revenue levels coupled with our expanded backlog. We've redeployed some of our working capital into inventory to support the increased order book and engaged our supermarket system for faster deliveries on higher-volume alloys." Materials • Rio Tinto record profit tops forecasts – Rio Tinto said it would spend $13B over the next year and a half to increase growth, after reporting record 1H earnings thanks to rising sales of iron ore to China. Reuters • Brazil Gerdau Q2 net tops forecasts on sales jump – Brazil’s largest steelmaker posted 2Q earnings ahead of expectations thanks to strength in real estate and public works in the country. The company also said it would increase its 2010-2014 spending plan by 16% in a bet that steel demand will continue for the next few years. Reuters • Vale to expand Peru mine; sees steady iron prices – Vale said it would expand its new Peru mine and that it sees iron ore prices over the next few months to hold firm around $140/ton. Reuters • Rio Tinto – quarterly pricing has taken the testosterone out of the iron ore debate – Rio Tinto’s earnings, boosted by higher iron ore prices, were attributed to a surge in demand for metals from Asia, pushing revenues for the June quarter to $26.8B, up from $19.5B. London Telegraph http://www.telegraph.co.uk/finance/newsbysector/epic/rio/7929010/Rio-Tinto- quarterly-pricing-has-taken-the-testosterone-out-of-the-iron-ore-debate.html • Surging wheat price fuels trade, inflation fears – Suppliers of Russian wheat to Asia are closer to canceling contracts after Moscow’s ban on grain exports are forcing buyers to turn to alternative measures as wheat futures spike to a 23-month high. Reuters • China widens stress tests to steel, cement – Chinese regulators have called for stress tests in the cement and steel industry as their earnings are closely tied to property markets which many think are on the brink of a correction. Reuters • Australia's Aston cuts IPO price, raises $366 mln – Aston Resources cut the price of its IPO by 27% after investors baulked at the initial offer price of A$8.20. Reuters • Lanxess raises outlook on strong Q2, Asia demand – Lanxess raised its FY10 outlook thanks as strong demand for synthetic rubber in the auto space helped it post forecast-beating quarterly profits. The company saw profits of 131M euros vs st 92.5M euros. Forexpros http://www.forexpros.com/news/general-news/update-1-lanxess-raises-outlook-on-strong- q2,-asia-demand-153177 • Merafe: has enough ore despite Lonmin restriction – Merafe Resources said it has enough iron ore resources to get through the impact of a gov’t order preventing Lonmin from selling any associated minerals. Reuters • Umicore ups FY guidance on improved car market – The Belgian specialty materials maker raised its FY guidance after improved demand in autos and materials for rechargeable batteries helped the company beat earnings estimates for 1H. The company now sees EBIT at 315-335M euros, up from 260-290M euros. Reuters • Russian wheat-export ban means ag bull market – Cramer – CNBC’s Jim Cramer said we’re seeing a “turbo charged ag bull market” thanks to soaring demand from emerging markets which could create a massive worldwide food shortage. Cramer said plays for the rise would be POT, BG, DE, DD, and MON. CNBC http://www.cnbc.com/id/38584869?__source=RSS*blog*&par=RSS • CCK – Barron’s weekly trader is positive on the stock. CF – 2Q10 earnings release; CC Aug 6 10AM ET; 866-713-8562, pw: 45835073 • EPS $2.51 vs st. $3.14 for 2Q • Rev $1.308B vs st. $1.24B for 2Q • “The outlook for nitrogen and phosphate fertilizers is favorable. Weather permitting, the fall fertilizer season is expected to be strong due to an early harvest, anticipation of another large corn planting in 2011 and increasing application rates. Producer and customer inventories are generally low, and near-term demand from Latin America, India and other markets in Asia should continue to provide support to the market.” TC – 2Q10 earnings release • EPS $0.36 vs st. $0.24 • Rev $148.4M vs st. $146.5M • The company reaffirmed its molybendum production view and sees FY10 capex at C$293M vs prev C$298M. Energy • BP cements Gulf oil well ahead of permanent plug – BP finished pumping cement into its ruptured well in the Gulf, paving the way to permanently plug the blow-out later this month. Reuters • Transocean reassures on its coverage in Gulf spill – RIG reassured investors that BP would likely bear most of the liability linked to the Gulf spill on Thursday after reporting earnings, sending the shares up over 8%. Reuters • US Senate Democrats seek to end Big Oil tax break – Democrats proposed repealing a tax break for major oil companies effective Dec 31. The proposal, which won’t be considered until mid-Sept, would make the 6% deduction from their tax liability no longer available. Reuters • Little known about oil dispersants, experts say – Experts say it is unknown about the long- term effects of the oil dispersants used to clean up the Gulf spill for both the ea life in the Gulf or the people who eat them. Reuters • Brent’s rally to stall at top of channel – technical analysis – Technical analysts at Commerzbank are saying that brent crude’s three-week rally may be reaching a top. The recent peak corresponds to the upper limit of a channel which bounded prices sinceApril. Bloomberg • BP’s maximum $18B fine for spill is likely to be lowered – While BP could be hit for nearly $18B in fines for the spill, experts say that the number will likely be lower because both BP and the gov’t have a mutual interest in a lower number because a $20B fine could put BP into financial distress. Bloomberg • Singapore's NOL upbeat on growth after Q2 profit – Neptune Orient Lines reported its first profit in seven Qs and said it sees further improvement in earnings thanks to higher rates and volumes. Reuters • RIG downgraded to UW from N at JP Morgan. • EOG Resources (EOG) – Oil production below guidance, expecting rapid near-term growth, lowering ests, raising PT - Recurring EPS/CFPS were $0.18/$2.27 versus consensus of $0.27/$2.76 and our estimates of $0.12/$2.67. EOG’s 2Q production of 2,218 MMcfepd was ~2% below our estimate of 2,258 MMcfepd. U.S. oil production, which was below guidance, drove the production shortfall. Strong realized pricing offset the production miss, however. Additionally, EOG’s unit opex of $5.09/Mcfe was 2% better than our estimate of $5.19, mostly due to exploration expense and DD&A. The midpoint of EOG’s 3Q10 and FY10 production guidance suggests ~11% sequential growth in both 3Q10 and 4Q10. The midpoint guidance includes ~15% (0-30% range) growth in U.S. natural gas production in 3Q and ~40% oil production growth in 4Q. Allman https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -454828-0 ALJ – 2Q10 earnings release; CC Aug 6 10AM ET; 877-941-2332 • EPS -$0.55 vs st. -$0.50 for 2Q • Rev $840.4M vs st. $1.04B GTE – 2Q10 earnings release • EPS $0.07 vs st. $0.08 for 2Q • Rev $84.1M vs st. $88.2M for 2Q KOG – 2Q10 earnings release; CC Aug 6 11AM ET; 877-257-3168, pw: 88686410 • EPS $0.01 vs st. $0.02 for 2Q • Rev $6.3M vs st. $7.4M for 2Q ME – 2Q earnings release • EPS $0.02 vs st. $0.06 for 2Q • Rev $210.8M vs st. $223.2M for 2Q NFG – 3Q10 earnings release; CC Aug 6 11AM ET; 866-783-2142, pw: 60304436 • EPS $0.51 vs st. $0.51 for 3Q • Rev $354.1M vs st. $387.6M for 3Q • FY10 EPS guided to $2.60-2.70 from $2.45-2.70 (st. $2.65) • FY11 EPS guided to $2.60-2.90 (st. $2.84) SWN – 2Q10 earnings release; CC 10AM ET • EPS $0.35 vs st. $0.36 for 2Q • Rev $589.9M vs st. $438.5M for 2Q Financials • Corporate bond coupons hitting record lows amid surging demand by investors for supply - Debt sales reached $35.9 billion this the week, the most since March 26, when issuance totaled $39 billion; IBM sold a bond this week w/the lowest coupon on record; “Books have been multiple-times oversubscribed…It’s not uncommon to have deals five to eight times covered. Given the depth of demand, this is a very benign environment for spreads.” – Bloomberg • “Wall St. Faces Specter of Lost Trading Units” – the NYT discusses how Wall St’s largest firms are grappling to comply w/the new fin reg reform, inc. potentially spinning out their “prop” desks; the article doesn’t really offer anything too incremental; more discusses all the recent talk in the market this week (inc. how Goldman could be making an announcement imminently). NYT http://www.nytimes.com/2010/08/06/business/06wall.html?_r=1&ref=business • BAC – the co wants to be removed a MOU forced upon it during the height of the financial crisis; the sanction imposes restrictions on what moves the co can and cannot make (like raising its dividend); so far, regulators have been reluctant to set BoA free, wanting to ensure it first made permanent adjustments to certain business practices (WSJ) http://online.wsj.com/article/SB10001424052748704657504575411602370266826.html?mod =WSJ_hps_LEFTWhatsNews • Fannie Mae - reported today a net loss of $1.2 billion in the second quarter of 2010, compared to a net loss of $11.5 billion in the first quarter of the year. Including $1.9 billion of dividends paid on its senior preferred stock held by Treasury, the company’s net loss attributable to common stockholders was $3.1 billion, or ($0.55) per diluted share. Credit- related expenses, which are the total provision for credit losses plus foreclosed property expense, were $4.9 billion, down from $11.9 billion in the first quarter of 2010. Almost all of the company’s realized credit losses in 2009 and 2010 on single-family loans are attributable to single-family loans that it purchased or guaranteed from 2005 through 2008. While these loans will give rise to additional credit losses that it has not yet realized, the company estimates that it has reserved for the substantial majority of these losses. Fannie to ask the Treasury for another $1.5B. • Fannie Mae – housing forecast - The company expects home prices to decline slightly for the balance of 2010 and into 2011 before stabilizing, and that home sales will be basically flat for all of 2010. Residential mortgage debt outstanding is expected to decline for the third year in a row. • Mortgage rates - The 30-year fixed-rate mortgage averaged 4.49% for the week ended Thursday, its lowest point since Freddie Mac began tracking it in 1971 (WSJ) • AIG - Chartis, the property and casualty unit of AIG, has stopped slashing commercial- insurance rates (DJ) • AIG - Taiwan regulators said they had started a final review of the stalled $2.2 billion deal for AIG’s Nan Shan Life unit, as the buyer group led by China Strategic had submitted all required paperwork – Reuters • CNS - the Company's Board of Directors declared a special cash dividend in the amount of $2.00 per share of common stock. This special dividend will also be payable on September 27, 2010 to stockholders of record at the close of business on September 7, 2010. Media/Telecom • Net – Neutrality: The FCC has ended their discussions with companies on internet regulation. The FCC’s Chief of Staff, Ed Lazarus, said that talks (which included AT&T, Verizon, Google, Skype, and the National Cable & Telecommunications Association) haven’t “generated a robust framework to preserve the openness and freedom of the Internet.” [Bloomberg] • VZ: Verizon released a statement yesterday that said, “The FCC talks made good progress toward consensus on a number of points. We will continue to work with the FCC, Congress and all interested parties to find a solution that ensures that: (1) the Internet remains open and provides consumers with the Web experiences they want, and (2) investment remains robust so that broadband is the premier platform for innovation for the next decade." [PR Newswire] • Reactions to the FCC’s Announcement: John Kerry (D-MA) said of the FCC’s decision yesterday, “While this is an imperfect solution, it's his only real option to maintain the proper role of government oversight in communications" [Broadcasting & Cable] http://www.broadcastingcable.com/article/455727- Reactions_Mixed_Towards_FCC_Halting_of_Stakeholder_Meetings.php • T: CEO Randall Stephenson said the FCC’s proposal to regulate the internet, “doesn’t make a whole lot of sense” He also said, “It’s hard to explain why the FCC would be compelled to change anything, especially when we can’t explain what needs to be fixed.” [Bloomberg] • VZ/GOOG: The Financial Times recaps the talks between Google and Verizon. [Financial Times] http://www.ft.com/cms/s/2/1eba7812-a0b6-11df-badd- 00144feabdc0.html?ftcamp=rss • Cable: The WSJ’s Heard on the Street says that some households could be turning to free video over the internet instead of TV subscriptions. The story cites TWC’s earnings which showed that internet access subscriptions held up better than video/telephone subscriptions [WSJ/DJ] http://online.wsj.com/article/SB10001424052748703748904575411694198626882.html?mod =WSJ_Heard_LEFTTopNews • Android vs. iPhone: According to iSuppli, Android’s software will outpace the iPhone worldwide by 2012. iSuppli said that Android will be used in 75M smartphones in the next two years and the iPhone’s software will be in 62M. [Bloomberg] • The Oprah Winfrey Network will have Rosie O'Donnell's new daytime talk show in 2011. Rosie O’Donnell’s return to daytime TV was announced earlier in the year. [Broadcasting & Cable] http://www.broadcastingcable.com/article/455728- OWN_Grabs_Rosie_O_Donnell_Talk_Show.php • CBS: The updated “Hawaii Five – 0” will air on September 20th on CBS, which could benefit from built in marketing and an existing audience. [WSJ] http://online.wsj.com/article/SB10001424052748704017904575409730624410338.html?mod =WSJ_hpp_editorsPicks_2 • DIS: Disney has raised ticket prices at Disneyland and Disney World from 3.7% to 9.6%. Disney will report earnings next week. [Daily Finance] http://www.dailyfinance.com/story/investing/walt-disney-raises-ticket-prices-at-theme- parks/19583039/ • Spectrum: Senator Jay Rockefeller (D - W VA.) introduced a bill that allows for an auction that reimburses broadcasters for spectrum retained by the government, if the spectrum was given back voluntarily. Regarding the FCC, “The Commission may not reclaim frequencies licensed to broadcast television 3 licensees or other licensees, directly or indirectly, on an involuntary basis." [Broadcasting & Cable] http://www.broadcastingcable.com/article/455733- Rockefeller_Introduces_Spectrum_Bill.php • iPhone: China Unicom is planning to selling a version of the iPhone with Wi Fi next week. [WSJ] http://online.wsj.com/article/SB10001424052748704017904575410381880118078.html?m od=googlenews_wsj • Mobile Advertising: The WSJ highlights how marketers are using “rich media ads” which cover an entire cell phone screen. [WSJ] http://online.wsj.com/article/SB10001424052748704657504575411644004713662.html • International Cable: Carlos Slim offered ~$2.6B to buy all of the preferred shares of Net Servicos de Comunicacao. [WSJ] http://online.wsj.com/article/SB10001424052748703748904575411210798161240.html • CSTR: In a deal between Redbox and CVS, there will 700 Redbox kiosks in CVS stores by the end of 2010. [NY Post] http://www.nypost.com/p/news/business/cvs_stores_get_redbox_SNKfWLmu6RKrdiF76G pFGL • WIN: Mentioned positively by Jim Cramer [CNBC] http://www.cnbc.com/id/38584883?__source=RSS*blog*&par=RSS ****************************************************************************** *********** ATVI Reports Q2 Earnings • EPS: 6c vs. ATVI 4c & St. 5c • Revs: $683M vs. ATVI $700M & St. $719M • Q3 2010 • EPS 8c vs. St. 11c • Revs $725M vs. St. $911M • FY 2010 • EPS 72c vs. ATVI 72c & JPM 74c • Revs $4.4B vs. ATVI $4.4B & St. $4.55B LYV Reports Q2 Earnings • EPS (20c) vs. St. (7c) • Revs: $1.266B vs. BBG $1.379B Gaming, Lodging, & Leisure • Australia Gaming: The CEO of Tabcorp said yesterday that the company will spend $146M to attract high stakes players from Crown, Macau, and Singapore to Star City in Sydney, Australia with jets, luxury suits, and private gambling rooms. [Bloomberg] Note: This was out yesterday • Station Casinos: Yesterday, an independent firm concluded that the Fertitta’s “stalking horse” bid of $772M in the Station Casinos bankruptcy auction was highest.. [LVRJ] http://www.lvrj.com/business/fertittas--bid-seen-as-highest-for-station-casinos- 100079489.html?ref=489 • Lodging: A lack of demand at hotels outside large cities is weighing on the hotel recovery. According to Smith Travel Research, occupancies in large cities (e.g. NY, Chicago, Washington) increased to 65% in the first 6 months of the year (from 61% last year during that time) while occupancies in smaller towns and those close to highways didn’t change much at 49%. Jan Freitrag of STR said that companies might not be able to increase rates across the country until 2H 2011. [Bloomberg] http://www.bloomberg.com/news/2010- 08-06/small-town-demand-trailing-new-york-drags-on-rebound-in-u-s-hotel-market.html • NJ Gaming: A “gaming summit” at the Atlantic City Convention Center will start today. [North Jersey.com] http://www.northjersey.com/news/080610_Atlantic_City_gaming_summit_kicks_off_today.h tml • MAR: Marriott wants Innkeepers USA Trust to change the name of the Residence Inn in Troy, Mich., though Innkeepers filed papers yesterday which said they didn’t plan to change the name by the end of the month. Marriot wants Judge Shelly Chapman to “complete the deidentification process" [WSJ/DJ] http://online.wsj.com/article/SB10001424052748703748904575411640633609032.html?mod =wsjcrmain • Online Gaming: PartyGaming reported a 30% increase in revenue for the first half of the year, along with a 23% rise in casinos sales & 89% increase in sports betting. PartyGaming’s acquisition of Bwin Interactive is expected to be complete early in 2011. [Bloomberg] • IGT: The Barcrest Group and the Global Draw reached a partnership that includes installing games in Landbrokes shops across the U.K. [PR Newswire – FirstCall] ****************************************************************************** ********************************* SGMS Reports Q2 Earnings • EPS (5c) vs. St. 13c & JPM 14c • Revs $233M vs. St. $211M & JPM $220M • Instant Tickets $121.2M vs. JPM $116M • Lottery Systems Group $62.2M vs. JPM $59.4M • Diversified Gaming Group $49.7M vs. JPM $48M • EBITDA: $81.5M vs. St. $75M & JPM $77M Consumer KFT – Reports Q210 Earnings, Q beats w/organic topline light; Raising Synergies guidance; Reit FY eps target but tweaking down FY organic revs guidance. • Revs: $12.3B vs. St. $12.3B • EPS: 60c vs. St. 52c • GM: 38.3% vs. JPM 36.8% • Synergies: Increased to at least $750M from at least $675M • Income Tax: 25.6% vs. JPM 30.5% Topline Breakdown: • Organic: +2.2% vs. JPM +2.5%, • Vol/Mix: +2.2% vs. JPM +1.2%, • Pricing: dn 0.2% vs. JPM +1.3%, Guidance • FY10 Organic revs: +3-4% vs. prev. up at least 4% • Reit FY10 EPS: at least $2.00 eps vs. St. $2.03 NILE reports earnings – results miss and outlook a bit light • Revs cme in $76.6MM vs. the St $80.96MM = below expectations • EPS came in 0.19 vs. the St 0.23 = below expectations • While we experienced high growth throughout most of the quarter, we saw a slowdown in consumer demand in the month of June," said Diane Irvine, Chief Executive Officer. "Consumers overall began to pull back on high ticket purchases, unlike earlier in the year, based on economic concerns such as high unemployment levels and market volatility • For F10, sees revs $325-335MM vs. the St $348.9MM • For F10, sees EPS 0.94-1.00 vs. the St 1.02 ******************************** • “Major US Ports Predict Holiday Shopping Boom” - “We’re still a little cautious about how sustainable it is but from hearing from the retailers and some of the importers it sounds like we’re going to see that sustained business at least through the end of this year,” CNBC http://www.cnbc.com//id/38575957 • Macy’s (M) – WSJ’s Heard on the Street is positive on M over JCP. Says that Macy’s outcomping JCP is a sign that the co has begun to steal market share from JCP. Says that Macy’s is still cheaper than JCP despite it’s 20% run this year (9.2x vs. JCP’s 10.7x). http://online.wsj.com/article/SB10001424052748703748904575411690117301142.html?mod =ITP_moneyandinvesting_13 • MHK – Reports Q2 eps ahead of the St. (77c vs. St. 70c) however revs were light (+1% adjusted vs. JPM est. +2%) w/core Mohawk dn 3% vs. JPM est. +2%. From JPM’s M. Rehaut – “we believe volume was less than expected due to the company’s discipline in implementing its April price increase of 5-7%.” Q3 guidance encompasses the St. 70-77c vs. St. 72c. • Barney’s – NY Post article looks at discussions between Barney’s and a potential new CEO M. Lee. Article says that Lee does not want to take over unless Istithmar makes a cash injection into the co. http://www.nypost.com/p/news/business/lee_to_barneys_owner_show_me_the_woojIwQ0ztt m8yKpP3ISQN?CMP=OTC-rss&FEEDNAME= • TBL – Upgraded to Positive from Neutral by Susquehanna • Unilever – WSJ’s Heard on the Street is cautious. Says that the co’s strategy of investing in emerging markets in the downturn is a sensible one but that investors may be slow to give the co credit. Article doesn’t think Unilever will close its valuation gap w/PG (13.6x vs. 16.3x) until investors see evidence Unilever is growing sales and margins. http://online.wsj.com/article/SB10001424052748703748904575411344192594702.html?mod =djemheard_t • PM – Plan to Increase Tobacco Prices approved by Japanese government. Bloomberg • CCE – Files automotive mixed securities shelf registration. • Unilever – Downgraded to Neutral from Buy by UBS • Beiersdorf – Downgraded to Underperform from Hold by Jefferies. • European Consumer Staples & Wheat - As wheat prices continue to rally, European food/brewers get hit (fear of higher input costs) - Carlsberg -4.5%, Heineken -3%, Anheuser - 4%, SABMiller -1.7%; food companies also weak (Nestle, Danone). • Wheat prices have extended their gains w/some traders thinking they could hit $10 – Bloomberg • Wheat - Trading companies that have sold Russian wheat to millers in Asia are considering declaring force majeure on supply contracts (Reuters) http://in.reuters.com/article/idINIndia- 50672320100806 • Autos – WSJ article looks at a shortage in the electronics industry (i.e. key components such as transistors, capacitors and integrated circuits) and its impact down the supply chain. http://online.wsj.com/article/SB20001424052748704905004575405491505513242.html?mod =rss_todays_us_nonsub_marketplace • HOG – To sell its MV Agusta unit to former owner Castiglioni, Il Messaggero reported. Castiglioni will pay by forfeiting the remaining Eur20M that HOG was due to pay him for its purchase of MV Agusta in 2008. Bloomberg • CTB – Downgraded to Hold from Buy by BB&T. Tech • Tech update from Thurs night/Fri morning - the big news in tech land over the last 24 hrs concerns LEDs and there were conflicting data points out overnight. JPMorgan's S Deshpande was in Taiwan and had the chance to visit a major LED chip vendor. The company indicated that it had indeed seen a mild reduction in orders but believes customers wanted LEDs of a different specification and would at a later time replace the cancelled orders w/orders for another type of LED chip. Also - A few LED companies in Taiwan reported sales dwn M/M in Jul. On the flip side, RBCN had v strong earnings last night and was upbeat on the outlook; mgmt was asked specifically about whether there were slowing orders in Taiwan and the co said it hadn't seen such a trend. Away from LEDs, Digitimes had two neg articles on tech overall: 1) says NA/EMEA notebook inventories now 5-6 weeks, above normal 3-4 weeks, b/c of slackening demand; 2) TSM/UMC's big customers seeing large inventory increases and as a result both foundries could see sales off 12% Q/Q in Q4. • Notebook inventory levels in the channel in North America and Europe are currently at 5-6 weeks, higher than the normal levels of 3-4 weeks, due to weakened demand – Digitimes • TSM/UMC – market watchers worried that inventory levels at the foundry’s large customers have risen significantly – both TSM/UMC may see their revs fall ~12% Q/Q in Q4; wafer starts could decline in Q4 b/c of high inventory levels – Digitimes. • Solar Power - Spot prices for solar cells could be on the rise in August, as some Taiwan- based manufacturers are attempting to quote at 3% higher than the current spot price – Digitimes • NAND memory - A price correction occurred in the NAND Flash spot market this week (August 2-6) amid widespread concerns about pricing pressure from the upcoming launch of products made by new processes – Digitimes • RIMM – MacWorld says that RIMM appears to be going the way of Palm; the article speculates that RIMM could wind up being an acquisition target for MSFT. http://www.macworld.com/article/153176/2010/08/rim_torch9800.html?lsrc=rss_main • RIMM – senior US (inc. Sec of State Clinton) and Canadian officials have spoken out in RIMM’s defense after a couple countries (inc Saudi Arabia and the UAE) have said they would ban the co’s products (w/more threatening to follow them); the US and Canada said they would seek to find a solution to the impasse; separately, RIMM said talks w/Saudi Arabia were progressing (WSJ/Reuters) • RIMM –Algeria became the latest country to indicate it would review the use of Blackberrys within the country; Algeria threatened to ban the devices if they are found to threaten national security (Reuters) • RIMM – Bahrain won’t ban Blackberrys - Bahrain's Telecommunications Regulatory Authority, or TRA, said on Thursday that it has not directed mobile operators in the country to ban or partly suspend any BlackBerry functions. http://www.arabianbusiness.com/594268- bahrain-wont-ban-blackberry-services---report • Tech supply chain remains very tight, w/OEMs still not receiving adequate levels of stock; sales in Q2 held back by outages; manufacturers haven’t been able to ramp up supply fast enough (WSJ) http://online.wsj.com/article/SB10001424052748704905004575405491505513242.html?mod =WSJ_hps_LEFTWhatsNews • FCC/net neutrality – the FCC has abruptly ended talks w/the industry on securing internet traffic rules; the FCC had hoped to use the negotiations instead of having to adopt controversial new rules; the FCC cut off talks amid reports that GOOG and VZ had reached a separate traffic deal (both GOOG and VZ denied that a deal had been reached that involved GOOG paying for preferential access). WSJ • NTT DoCoMo may exceed its April target for smartphone sales of 1 million units this fiscal year, helped by demand for Sony Ericsson Mobile Communications AB’s Xperia. Bloomberg • BIDU – this was out earlier on Thurs – the co says it is “increasingly keen” on acquisitions; “In the past few years, Baidu has made very few acquisitions because our core business has been growing very rapidly,” CEO Li said at a press conference at the company’s headquarters in Beijing late yesterday. “Going forward, we are increasingly keen on making this kind of strategic move.” Bloomberg • ADBE – the FTC is said to be investigating AAPL’s anti-Flash stance – Apple Insider. http://www.appleinsider.com/articles/10/08/05/ftc_believed_to_be_investigating_apples_anti _flash_stance.html • AAPL - is in takeover talks with Chinese software maker Handseeing – Reuters • AAPL + The Beatles – Yoko Ono says a deal isn’t near to bring The Beatles music to iTunes (Reuters) ******************************** LED Newsflow Update • RBCN earnings last night – Q and outlook both came in better than expected (see details below); on the call, mgmt was asked about the Commercial Times article specifically – this was mgmt’s answer: “In fact I have heard about this through the news just like you did. No, I am not seeing any evidence from any customer or any part of the world regarding any slowdown. Demand continues to be very, very strong and supply is still very limited. So, I have not seen. I was there last two weeks I just came day before yesterday so from all those Asian countries, I was there. So, I have not seen from any customer on any one of those items that you mentioned” • While RBCN has strong earnings, a few LED companies in Taiwan namely Unity Opto, BrightLED and Lextar reported 4.7%, 11% and 10% revenue decline in Jul respectively. https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -455028-0 • LED update - from JPMorgan's C Blansett - We are reiterating our BULLISH call on LED stocks CREE and VECO following Thursday’s 5-10% pullback in the group. We note the stock weakness was driven by news reports out of Asia citing order cuts in the LED supply chain from TV panel makers combined with growing concerns about margin pressures for LED makers as pricing leverage shifts downstream to OEM customers. We believe LED demand will remain robust for some time given continued acceleration in adoption rates by high-growth applications such as TVs, and eventually general lighting, and this should continue to support outperformance in LED stocks. We would recommend buying CREE and VECO on any weakness. https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -454784-0 • LED update - from JPMorgan's S Deshpande - What LED vendors are saying. By chance we were in Taiwan yesterday and had the chance to see a major Taiwanese LED chip vendor. The company indicated that it had indeed seen a mild reduction in orders but believed that the customers wanted LEDs of a different specification and would at a later time replace the cancelled orders with orders for LED chips of new specification. It was not clear to us that the new orders replacing the cancelled orders had been placed thus whether they would be placed remains a question. Is this the end of the LED backlighting cycle? In our view not. These reported order cuts should be a short-term phenomenon. https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS -454989-0 • Cramer was pos. on LEDs Thurs night – mentions RBCN, POWI, and CREE. DIOD reports earnings • Revs came in $149.2MM vs. the St $148.2MM • GMs came in 35.8% vs. the St 35.14% • EPS came in 0.41 vs. the St 0.39 • For next Q, sees revs $158-164MM vs. the St $154MM ELX reports earnings – Q a touch light and guidance weak • Revs came in $103.1MM vs. the St $102.24MM • HSP revs came in +4% Q/Q • ESP revs fell 6% Q/Q • GMs came in 66% vs. the St 67.15% • EPS came in .16 vs. the St .17 • For next Q, sees revs $100-104MM vs. the St $105.3MM • Sees EPS .08-.11 vs. the St .18 LLNW reports earnings • Revs came in $42.2MM vs. the ST $42.5MM • EPS came in .05 vs. the St .00 • EBITDA came in $5.6MM vs. the St $5.17MM • For next Q, sees revs $46.5-48.5MM MCHP reports earnings – strong results + guidance • Revs came in $320.8MM vs. the St $319.28MM • GMs came in 63.6% vs. the St 62.76% • EPS non-gaap came in 0.55 vs. the St 0.52 • Raises dividend to 0.343/shr • They guide revs up 6-7% Q/Q – this implies $340-343MM vs. the St $329MM • MCHP sees its Dec revs up 3% Q/Q from Sept – this means $350-353MM (vs. St $330MM) • "Microchip's inventory days on its balance sheet decreased from 97 days at the end of March to 96 days at the end of June. Distribution inventory dropped one day, to 40 days at the end of the June quarter. Overall inventory combining Microchip and distributor balances was down two days on June 30, 2010 compared to the balances at March 31, 2010. Inventory days remain well below our internal target of 115 and we continue to ramp our factories to increase capacity to meet our customers' demand." • Microchip's book-to-bill ratio for the June quarter excluding SST was approximately 1.41, providing us with a record high opening backlog. In the September 2010 quarter, we expect net sales from Microchip's business including SST to be up approximately 6% to 7% sequentially. • Microchip’s lead times extended yet again, from 8-12 weeks in F4Q10 to 8-15 weeks in F1Q11, well above the average range of 4-5 weeks and the highest since 2000. The company expects lead times to remain stable in F2Q11. MFLX reports earnings • Revs came in $181MM vs. the St $181MM = inline w/expectations • GMs came in 12.3% vs. the St 12.3% • EPS came in @ 0.23 vs. the St 0.18 • For the fourth quarter of fiscal 2010, the Company expects net sales to range between $220 and $240 million, and gross margin to range between 13 and 15 percent based on the projected product mix. The St is at $228MM w/GMs 13.5%. • MFLX says they expect a sharp increase in revs during Q4 N reports earnings ;raises full year guidance • Revs came in $47.1MM vs. the St $45.32MM • EPS came in +.03 vs. the St .01 • Calculated bookings for the quarter reached $48.2 million, representing the highest quarterly total in the Company's history and growing 23% year-over-year. • For next Q, sees EPS .03 vs. the St .02; revs came in $48.5MM vs. the St $46.9MM; for the year, sees revs $188-190MM (vs. the St $185MM); sees EPS .11-.12 (vs. the St .08). NILE reports earnings – results miss and outlook a bit light • Revs cme in $76.6MM vs. the St $80.96MM = below expectations • EPS came in 0.19 vs. the St 0.23 = below expectations • While we experienced high growth throughout most of the quarter, we saw a slowdown in consumer demand in the month of June," said Diane Irvine, Chief Executive Officer. "Consumers overall began to pull back on high ticket purchases, unlike earlier in the year, based on economic concerns such as high unemployment levels and market volatility • For F10, sees revs $325-335MM vs. the St $348.9MM • For F10, sees EPS 0.94-1.00 vs. the St 1.02 OPNT reports earnings – Q and outlook disappointing • Revs came in $31.1MM vs. the St $31.55MM • EPS came in .09 = inline w/the St • "While we are disappointed that total revenue fell short of our guidance for the quarter, we are pleased that the $1.2 million of delayed June deals discussed during our last conference call have all been closed” • Deferred revenue for the quarter decreased sequentially 6.8% • For next Q, sees revs $32-34.5MM vs. the St $34MM; sees EPS .06-.11 vs. the St .13 OPWV reports earnings • Revs came in $43.6MM vs. the St $42.6MM. • EPS came in .00 vs. the St .00 • Bookings for the fourth quarter of fiscal 2010 were $35.8 million. The company ended the quarter with $119.4 million in cash and investments. OPXT reports earnings – revs miss and guidance disappointing • Revs came in $78.9MM vs. the St $82.7MM • EPS came in (.13) vs. the St (.14) • "During the quarter, we continued to see improving demand across most of our product lines, one notable exception being 40Gbps subsystems," • sees revs $80-85MM for the Sept Q vs. the St $87MM PRO reports earnings • Revs came in $17.8MM vs. the St $17.5MM • EPS came in .05 vs. the St .05 = inline • For next Q, sees EPS .04-.05 vs. the St .06 • For next Q, sees revs $18.2-18.6MM vs. the St $17.8MM RBCN - strong Q and outlook • revs came in $15.8MM vs. the St $14.5MM = better • GMs came in 46% vs. the St 40.58% • EPS came in 0.18 vs. the St 0.14 • for next Q sees revs $19.5MM (vs. the St $17.8Mm) • sees EPS 0.28 vs. the St 0.19 • sees GMs low 50%s for Q3 vs. the St 43.8% • The Company`s revenue increased 37 percent sequentially to $15.8 million in the current quarter driven by strong demand from the LED market. The strong demand enabled the Company to increase pricing on its sapphire substrates by 16 percent on average over prices in the prior quarter. • "We see an even stronger pricing environment in the third quarter and expect our substrate prices to increase by at least 20 percent on average sequentially" SAPE reports earnings • Revs came in $200.4MM vs. the St $195MM • Op margins came in 9.9% • EPS came in .09 vs. the St .07 • For next Q, sees revs $208MM+ vs. the St $200MM • Sees op margins 11-12% VCLK reports earnings • Revs came in $99.6MM vs. the ST $96.9MM • EBITDA came in $27.3MM vs. the St $23.6MM • EPS came in .20 vs. the St .12 • For next Q, sees revs $100-104MM vs. the St $99.7MM • EPS came in 0.18-0.19 vs. the St 0.13 This material is prepared by J.P. Morgan Securities Inc. Institutional Equities Division for distribution to J.P. Morgan clientele. It is not a product of J.P. Morgan’s Research Departments. 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