THE DAY AHEAD

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KEY ECONOMICS EVENTS Empire State Index for Apr Net capital inflows for Feb Foreign buy,T-bonds for Feb NAHB Index for Apr ET/GMT 0830/1230 0900/1300 0900/1300 1000/1400

North American Edition

REUTERS POLL 7.00 --45 PRIOR 9.24 $25.7 bln $32.3 bln 44 SOURCE

For Monday, April 15, 2013

Department of Commerce

National Association of Home Builders

MARKET RECAP
Stocks fell on Friday as financial shares dragged after weak bank earnings, while Treasuries rallied on disappointing retail and consumer data. The dollar fell from a fouryear peak against the yen. Oil fell and gold closed lower after trading below the key $1,500 mark.
STOCKS DJIA Nasdaq S&P 500 Toronto Russell FTSE Eurofirst Nikkei Hang Seng Close 14865.06 3294.95 1588.86 12337.59 942.88 6384.39 1182.10 13485.14 22089.05 Yield 0.2300 0.6938 Change -0.08 -5.21 -4.51 -143.78 -4.17 -31.75 -10.77 -64.02 -12.22 % Chng 0.00 -0.16 -0.28 -1.15 -0.44 -0.49 -0.90 -0.47 -0.06 Yr-high 14887.50 3306.95 1597.35 12904.71 954.00 6533.99 1209.05 13549.16 23944.74 Yr-low 12035.10 2726.68 1266.74 11209.55 729.75 5897.81 1132.73 10398.61 21612.05

COMING UP - NEXT WEEK

Equities turn their focus to earnings, with the first full week of reports including Goldman Sachs, McDonald's and Google. Early signs are suggesting it may be a difficult road for the earnings season. As for global markets, the yen is expected to resume its downward path against the dollar with 100 dollar/yen likely in the coming week, and a bit of additional volatility might occur in markets affected by those selling lower-yielding Japanese bonds in favor of riskier assets. Low-yield gold could continue to be affected while stocks are more likely to see continued buying interest in the coming week.

With recent data suggesting the pace of economic growth is starting to soften, investors are expected to zero in on two reports during the week on regional manufacturing. The pace of factory activity in New York state is seen slowing in April, while growth is expected to edge up from low levels in the U.S. mid-Atlantic. The reports are among the first signs of how the sector fared this month, while a separate report on industrial production for March is expected to show output slowed at the end of the first quarter. Consumer prices are seen flattening in March after rising the month before, leaving the Federal Reserve plenty of room to pursue its massive stimulus program. In addition, data on the housing market is expected to show the sector continued to gain strength, with homebuilder sentiment seen improving and groundbreaking to build new homes rising.

TREASURIES 10-year 2-year 5-year 30-year COMMODITIES May crude $ Spot gold (NY/oz) $

Price FOREX 0 /32 Dollar/Yen 5 /32 Sterling/Dollar

Last % Chng 1.3101 98.60 1.5347 1.0138 -0.01 -1.07 -0.23 0.36

1.7225 20 /32 Euro/Dollar

2.9192 50 /32 Dollar/CAD Price 90.97 1486.56 3.3370 287.72 Price 0.74 16.06 22.62 3.93 2.07 13.47 86.66 2.31

$ change -2.54 -74.18 -0.0910 -2.73 $ change -0.14 -1.72 -2.11 -0.36 0.27 1.51 7.83 0.19

% change -2.72 -4.75 -2.65 -0.94 % change -15.52 -9.67 -8.53 -8.37 15.00 12.63 9.93 8.96

Public appearances by Federal Reserve Vice Chair Janet Yellen

and New York Fed President William Dudley on Tuesday highlight the week, along with the Beige Book of economic conditions on Wednesday. Last weeks surprisingly hawkish Fed minutes has some economists predicting an earlier end to the central banks extraordinary asset-purchase program, while traders remain rattled by the fact that the market-moving data was accidentally sent to bank lobbyists, trade groups and congressional aides a day earlier than it should have been. FOMC voters Eric Rosengren, Eric Stein and James Bullard, among other Fed policymakers, will take to podiums across the country Tuesday through Friday.

Copper U.S. (front month/lb) $ Reuters/Jefferies CRB Index

BIG MOVERS
Suntech Power ImmunoGen Barrick Gold MannKind Dex One Bankrate Ashland Rite Aid

On Tuesday, Goldman Sachs posts first-quarter earnings, which

analysts expect to be particularly strong, given the bank's strength in bond trading. Although deal activity and equities trading was slow during the period, investors' demand for riskier - and pricier credit products likely helped Goldman's results. Mortgage trading, structured credit and CLOs all had strong trading volumes. As a dominant player in the bond market, Goldman should benefit, analysts said.

For The Day Ahead - Canada, click here

THE DAY AHEAD

For April 15, 2013

COMING UP - NEXT WEEK (continued)

Johnson & Johnson posts results on Tuesday and the companies expected to report slightly higher earnings as generic competition for its treatments of heartburn and attention deficit disorder helped offset growth of the company's newer medicines for cancer, hepatitis C and blood clots. Shares of the company have risen more than 16 percent this year on revival of the company's pharmaceutical segment and improved prospects for its medical devices and over-the-counter medicines, units that have faced costly and embarrassing recalls in recent years. be among the key issues on which investors seek more clarity when the Internet search giant delivers its first-quarter earnings report. Google has successfully allayed worries about antitrust regulatory actions and its mobile advertising business, sending shares to all-time highs in recent weeks. Now attention is turning to its game plan for the future, such as Google Glass, Google Fiber and its struggling Motorola phone business. Also look for results from Pepsico, United Health, Verizon, Nokia, IBM, Microsoft and Morgan Stanley.

Yahoo reports quarterly results on Tuesday. Its shares have

surged 50 percent since Marissa Mayer took over as CEO in July, but the struggling Internet portal has yet to actually show a turnaround in its business. With Mayer now nine months into the job, investors are looking for signs of growth in Yahoo's ad business - particularly the display ad business which was surprisingly weak at the end of 2012 - as well as updates on its mobile strategy and its acquisition plans. Other companies reporting on Tuesday include CSX, Intel and Coca-Cola.

When McDonalds reports results on Friday, All eyes are

likely to be on new CEO Don Thompson, who took the helm at the world's biggest hamburger chain shortly before its business began to falter under the pressure of lackluster global economic growth and historically strong results. Wall Street is looking for the company's March restaurant sales results to signal improvement after January sales dropped more than expected and February sales fell less than feared. General Electric on Friday is expected to post a slight rise in quarterly earnings helped by sales of equipment for oil fields, airplanes and locomotives, and Honeywell, Schlumberger and Kimberly Clark are among the others expected to post results.

Also on Tuesday, U.S. District Judge Lewis Kaplan in Manhattan federal court holds a mini-trial over several issues linked to the international litigation about alleged pollution of the Amazon rainforest by the former Texaco, which Chevron later bought. This resulted in a $19 billion judgment against Chevron in Ecuador in favor of residents of the Lago Agrio region. Chevron says the judgment was procured by fraud. The Lago Agrio residents have sought to have the judgment enforced in the United States and other countries.

The Bank of Canada is expected to hold its benchmark interest rate steady at 1 percent at a policy announcement on Wednesday, so investors will focus on the possible toning down or elimination of hawkish language that has differentiated it from Group of Seven peers. The central banks quarterly Monetary Policy Report, released the same day, is expected to chop growth forecasts following a string of weak data. Canadian inflation data out Friday is expected to reinforce that price pressures are low and there is little need to tighten policy.

Bank of America, the second-largest U.S. bank, reports firstquarter earnings on Wednesday, and investors will be looking for signs that the bank is growing revenue and loans as it looks to put mortgage-related losses in the past. Also look for results that day from Mattel, Bank of New York Mellon, Abbott, Quest Diagnostics and American Express. For a related Reuters Insider video, click here

All Things D hosts an event in New York called D: Dive into

Mobile on Monday and Tuesday with executives from Google, Facebook, Intel and Microsoft. The conference's highestprofile speaker is Google Chairman Eric Schmidt who is due to appear on Tuesday. The event is expected to focus on the ubiquity of mobile technologies and delve into how mobile is reshaping business as well as take a look at the latest developments in devices, networks and operating systems.

Google posts quarterly results on Thursday. CEO Larry

Page's recent reshuffling of some of his top brass, including replacing the boss of the successful Android group, is likely to

COMING UP - MONDAY
Citigroup is scheduled to release results of its first full quarter
under CEO Mike Corbat. mine whether Oracle broke its contract with the computing giant and, if so, the amount of damages due.

Retail brokerage giant Charles Schwab reports results. It has

already warned that $30 million of one-time expenses in the first quarter have waylaid plans to increase business development spending, while continued low rates and tepid trading means it is likely to miss its goal of double-digit growth in revenue.

American Express CEO Kenneth Chenault speaks at Economic Club of Washington, DC on the state of the economy and future drivers of job creation.

All Things Ds D: Dive into Mobile event kicks off in New

York. (See Coming Up-Next Week)

The second phase of a legal battle between HP and Oracle

over Itanium servers kicks off in San Jose, California, to deter-

THE DAY AHEAD

For April 15, 2013

MARKET MONITOR
Stocks closed lower on Friday, retreating from the previous session's record levels as financials dropped, though major indexes notched strong gains for the week. Shares of Wells Fargo dropped 0.80 percent and JPMorgan was off 0.61 percent. M&T Bank's shares shed 4.46 percent and Hudson City Bancorp slumped 5.47 percent. Newmont Mining fell 5.90 percent The Dow was unchanged, The S&P 500 Index was down 0.28 percent and Nasdaq was down 0.16 percent. For the week, Dow was up 2.1 percent, S&P 500 gained 2.3 percent and Nasdaq rose 2.8 percent. The government debt market rallied as data showing a surprise decline in consumer spending in March darkened investors' view on the U.S. economy which might still need generous support from the Federal Reserve. "The recent data have turned out weaker-than-expected. This was reinforced by today's retail sales figures," said Jeff Given, portfolio manager at Manulife Asset Management. "Treasuries will remain fairly well bid with also what's going on in Japan," he said. The benchmark 10year note last traded up 21/32 in price to yield 1.72 percent. The 30-year bond last traded up 1-19/32 in price to yield 2.92 percent. The dollar plummeted from a four-year peak against the yen after dismal data on U.S. retail sales last month reinforced expectations the Federal Reserve will continue buying bonds to support the U.S. economy. The dollar last traded at 98.63 yen, 1.04 percent down. The euro last traded at 129.23 yen, down 1.01 percent. Click on the chart for full-size image

Oil prices pared losses in afternoon trading after earlier falling more than $2 a barrel, as concerns about the strength of the world economy triggered heavy selling in commodities. "There's an underlying anxiety in the crude market about demand growth going forward into the second half of the year," said Andy Lebow, vice president at Jefferies Bache in New York. May crude was last trading 2.71 percent down at $90.98 a barrel. Gold fell below $1,500 per ounce, a drop of more than 20 percent from its record 2011 highs, putting it in bear market territory for the first time since last May. Spot gold was last trading at $1,487.20 an ounce, down 4.71 percent. June gold futures fell 4.89 percent to trade at $1,488.20 an ounce. "We've broken the key support level (around $1,535-$1,5340 per ounce). That's 20 percent below the $1,923 Comex all-time peak, so we're now into a bear market," Societe Generale analyst Robin Bhar said.

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TOP NEWS
U.S. retail sales point to flagging economic momentum U.S. retail sales contracted in March for the second time in three months and consumer confidence tumbled in April, a sign tax hikes early this year stole momentum from the economy. Sales fell 0.4 percent in March, missing analysts' expectations for a flat reading, Commerce Department data showed. A separate report suggested the government's belt tightening was damaging consumer sentiment. The Thomson Reuters/University of Michigan's preliminary reading on the overall index of consumer sentiment fell to 72.3 in April, the lowest since July 2012 and below economists' forecasts. Another report showed wholesale prices fell sharply in March due to lower gasoline costs. Producer prices fell 0.6 percent in March, their biggest drop in 10 months, as gasoline prices tumbled, the Labor Department said. Economists polled by Reuters had expected prices to fall only 0.2 percent. JPMorgan's main businesses lukewarm in first quarter JPMorgan Chase posted higher first-quarter profit as it spent much less money on mortgage-related litigation, but most of its major businesses turned in tepid performances, and the bank's overall revenue declined. Profit in its consumer banking segment fell 12 percent to $2.6 billion, and ignoring accounting adjustments, its corporate and investment banking profit dropped 2 percent to $2.5 billion. Its overall net income rose to $6.53 billion, or $1.59 a share, from $4.92 billion, or $1.19 a share, a year earlier. Total revenue fell 3.6 percent to $25.12 billion. Results for both periods included special items. The bank's litigation expenses were close to nil in the first quarter of 2013 versus about $2.5 billion in last year's first quarter. For a related graphic, click here Wells Fargo profit beats, but mortgage business slows Wells Fargo reported a higher-than-expected 23 percent rise in first-quarter profit, but its mortgage business showed further signs of slowing and net interest margins continued to shrink. The bank made $109 billion in home loans during the quarter, down from $129 billion in the same quarter a year ago and less than the $125 billion in loans extended in the fourth quarter. Wells Fargo said net income rose to $4.93 billion, or 92 cents per share, in the quarter, from $4.02 billion, or 75 cents per share, a year earlier. Analysts on average had expected earnings of 88 cents per share. Total revenue fell slightly to $21.3 billion, missing the average analyst estimate of $21.59 billion. Drugmaker Eli Lilly to cut 1,000 U.S. sales jobs Eli Lilly plans to lay off about 1,000 domestic sales representatives, or 30 percent of its U.S. sales force, as it faces new generic competition for its top drugs, a person familiar with the matter said. The cuts include both full-time and contract sales employees. At the same time, the company plans to add 300 people to its diabetes sales force, the source said. Lilly confirmed in a statement that it is restructuring its sales force to adapt to changes including the expiration of two patents, and said it would expand its diabetes sales force. U.S. Fed anti-money-laundering concerns to delay M&THudson deal M&T Bank's proposed purchase of Hudson City Bancorp will probably take more time to close than previously expected because of U.S. regulatory concerns over anti-money-laundering procedures, the banks said. M&T has hired an outside consultant to help it address the concerns raised by regulators at the U.S. Federal Reserve, it said in a statement. It did not immediately identify the consultant. Click on the chart for full-size image

Judge declines to expand J.C. Penney block over Martha Stewart A New York judge gave J.C. Penney the go-ahead to sell home goods designed by Martha Stewart under a "JCP Everyday" label, pending the outcome of an ongoing trial. Justice Jeffrey Oing, who last year blocked J.C. Penney from selling the goods under a Martha Stewart label, refused the request of Macy's to expand the block. A lawyer for Macy's said it would appeal the ruling. Oing said he could not ignore the economic reality of the harm that an adverse ruling would have caused J.C. Penney "even if it is the result of their own acts." He said, "J.C. Penney has been a given a proverbial bye in this case." Rosengren defends US Fed's dual mandate, policy accommodation A top Federal Reserve official defended the U.S. central bank's dual mandate of full employment and price stability, and pointed to economic trends that suggest an even more accommodative policy stance might have been needed since the Great Recession. Boston Fed President Eric Rosengren argued the Fed's inflation record over the past 15-20 years has been as good as or better than central banks in Europe that have only a single price-stability mandate. Rosengren however said there remains "strong rationale for continuing our highly accommodative monetary policy," and he predicted inflation will remain "well below" the 2-percent target over the next two years, paving the way for more easing. Talks progress on sale of Calik's ATV to Time Warner Turkey's Calik Holding has made progress in talks to sell its ATV television unit to Time Warner and a final decision could be made by the end of April, two sources close to the matter told Reuters. Dubai-based Abraaj Capital is also interested in Calik's media assets, the sources said. Rupert Murdoch's News Corp had been eyeing ATV but dropped out of the race last year, other people said at the time. "There are positive developments regarding Time Warner Group but the process is not yet completed. It should become clear at the end of April whether the sale will happen or not," said one source.

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TOP NEWS (continued)

HD Supply files for $1 bln IPO Industrial and construction supplies distributor HD Supply Holdings Inc, a former division of Home Depot, filed for a $1 billion initial public offering of its shares to take advantage of the rebounding U.S. housing market. Home Depot continues to hold a 12.4 percent stake in the company, according to HD Supply's prospectus filed with the Securities and Exchange Commission on Friday. The company plans to use the proceeds from the offering to repay debt and for general corporate purposes. Infosys revenue forecast disappoints, shares dive Infosys forecast full-year sales growth that missed analyst expectations by a margin of up to 50 percent, dimming investor hopes that India's No.2 software services firm will soon start reaping the benefits of its strategic revamp. Infosys forecast dollar revenue to grow between 6 percent and 10 percent for the fiscal year that began this month. That was less than analysts' estimates for revenue growth of as much as 12 percent. Consolidated net profit for the fiscal fourth quarter was 23.9 billion rupees, compared with 23.16 billion a year earlier. Revenue for the quarter rose 18 percent to 104.5 billion rupees.
PIC OF THE DAY

Italy's volcanic Mount Etna spews lava during an eruption on the southern Italian island of Sicily

ANALYSTS RECOMMENDATIONS
Company Name Apple Harris Corp Home Depot Noble Corp Yahoo Action RBC cut target price to $550 from $600, says the company saw weaker demand in March coupled with a mix of headwinds, cites June-quarter outlook may disappoint on lower-than-expected iPhone sales. JP Morgan cut target price to $39 from $45 after the company reduced its full-year outlook and disclosed a restructuring plan. Jefferies raised rating to buy from hold, says the company might post better than expected first-quarter comparable store sales citing bullish sales despite cool weather. RBC cut target price to $40 from $41 citing unpaid downtime that continues to impact near term estimates. JP Morgan raised target price to $26 from $22 ahead of the companys first-quarter earnings release, says positive on Yahoo based on improving engagement trends, potential search upside, and higher implied valuation for Alibaba Group.

THE DAY AHEAD - CANADA

COMING UP
No major events are scheduled.

For April 15, 2013

MARKET MONITOR
Toronto's main stock index fell more than 1 percent on Friday, as weak U.S. economic data dulled hopes for Canada's export sector, while a sharp drop in gold prices pulled the materials sector to its lowest level in nearly four years. The Toronto Stock Exchange's S&P/TSX composite index was down 1.15 percent at 12,337.59. Barrick Gold was down 8.24 percent, Kinross Gold shed 7.24 percent and Centerra Gold fell 6.83 percent. The Canadian dollar was up 0.38 percent at $1.0140.

BIG MOVERS Aquila Resources B2Gold Dollarama Sandvine

Price 0.12 2.60 68.23 2.25

C$ -0.02 -0.31 3.59 0.10

% Change -11.11 -10.65 5.55 4.65

TOP NEWS
BlackBerry to ask regulators to probe report on returns BlackBerry plans to ask securities regulators in Canada and the United States to probe what it said is a "false and misleading" report that consumer return rates for its new Z10 smartphone have been high. The company went on the offensive after the report from little known Boston-based research and investment firm Detwiler Fenton sent its stock tumbling on Thursday. BlackBerry said return rates for its flagship Z10 devices have been at, or below, its forecasts and in line with industry norms. "To suggest otherwise is either a gross misreading of the data or a willful manipulation," CEO Thorsten Heins said in a statement. "Such a conclusion is absolutely without basis and BlackBerry will not leave it unchallenged." Shaw Communications profit up 2 pct, expects modest 2013 revenue growth Shaw Communications posted a 2 percent rise in secondquarter profit and said it expects a modest growth in revenue for the year. Shaw said net income rose to C$182 million, or 38 Canadian cents per share, from C$178 million, or 38 Canadian cents per share, a year earlier. Revenue at the Calgary-based company rose 2 percent to C$1.25 billion. The company also said it expects consolidated free cash flow of about C$550 million in 2013. Dollarama shares hit record high after results, dividend hike Shares of Dollarama hit a record high after the dollar-store operator reported a stronger-than-expected jump in profit and sales and raised its dividend by 27 percent. Helped by the sale of more items priced above C$1.00, net income increased to C$77.1 million, or C$1.04 a share, in the fourth quarter, from C$63.6 million, or 84 Canadian cents, a year earlier. Sales climbed 20 percent to C$561.9 million, with products priced at more than C$1.00 making up 56 percent of sales. Analysts had expected earnings of C$1.02 a share on sales of C$546.3 million. For the full year, sales at stores open for at least a year rose 6.5 percent with a 2.1 percent increase in the number of customer transactions. Canada's newest wireless players seek buyers Canada's three newest wireless operators have put themselves up for sale, with Mobilicity already in talks to sell out to Telus, the Globe and Mail newspaper reported, citing unnamed sources. The newspaper said Public Mobile, another privately held company that entered the country's wireless industry after a 2008 auction, had hired investment bankers to find a buyer. The trio of smaller players have mostly used aggressive pricing of unlimited talk-and-text plans to challenge the established operators, with limited success. Walter Energy board nominees win backing from Glass Lewis Coal miner Walter Energy said well-known proxy advisory firm Glass Lewis has recommended that its shareholders back its entire list of board nominees, over those put forward by activist investor Audley Capital. The endorsement is a boost for Walter, which has been locked in a battle with the British hedge fund for two months. Audley is aiming to replace half of Walter's board at its April 25 annual meeting.

THE DAY AHEAD

For April 15, 2013

ANALYSIS AND INSIGHT

When options trading ahead of deals raises eyebrows By Angela Moon and Doris Frankel Within 36 hours of Warren Buffetts announcement of a deal to buy H.J. Heinz, U.S. authorities froze an account linked to possible insider trading. The speed of the crackdown on a lucrative options bet, combined with successful prosecutions of insider trading rings, suggested that regulators were quickly jumping on any suspicious activity. Yet some veterans of the options business are unconvinced. They worry that very profitable options trading ahead of big corporate news is undermining investor confidence in the fairness of markets. A study for Reuters by options research firm Schaeffers Investment Research of 181 such announcements in the 14 months to the end of February shows that such activity prior to news of takeovers, big stock repurchases or a major investment occurs on a regular basis. There were 41 examples of companies, or 23 percent of the sample, where the volume of new call options positions effectively bets that the underlying stock would rise - had risen by at least 50 percent in the five days before the news when compared with the average of the previous six months. For 33 of these companies, the volume more than doubled. The U.S. Securities and Exchange Commission has announced litigation or enforcement action for alleged insider trading involving options trading in two of these companies - Heinz and Shaw Group, a nuclear power plant builder acquired by Chicago Bridge & Iron for $3 billion. Neither Heinz nor Chicago Bridge & Iron would comment on the trading. A sudden increase in bets in a particular stock does not indicate there was any wrongdoing, as questionable trades often have innocuous explanations. Some of the bets, while prescient, may have been due to lucky speculation, smart analysis, or hedging strategies rather than inside information. You can't look at an option trade in a vacuum; it could be a hedge. The regulator has to look at what the pattern and practice of trading was in that account," said Thomas Sporkin, a partner at law firm BuckleySandler LLP and a former senior SEC enforcement official. The SEC could also be investigating some of these instances of well-timed trading, as many in the industry term it, but have made no public announcement. It can sometimes take several years to build a case and many probes get dropped because insider trading is difficult to prove. When asked for comment, an SEC spokesman said the options market "has been and will continue to be an area of focus, adding that a simple search of the SEC website will show many, many insider trading enforcement actions involving options. Investors use call options - which give the right but not the obligation to buy a stock at a certain price - as a way of betting a stock will rise. Speculators often use out-of-the-money call options, which mean they will expire worthless unless the underlying stock price rises above the strike price. If the stock surges, the options can be worth many times their initial cost. For example, Heinz had been trading around $60 a share, but an unnamed investor bet on shares rising to more than $65 each by late June an investment that cost about $92,000. After the deal was announced, that bet produced a $1.7 million profit. Still, without some kind of additional knowledge, many of these call options are no better than lottery tickets, said Randy Frederick, managing director of active trading and derivatives at Charles Schwab. But with inside information, it is like knowing what the lottery numbers are before they are announced, he said. Public remarks from SEC officials on the Heinz case point to the potential for more action in the future. "It may well have been the swiftest enforcement action that we have ever filed," Sanjay Wadhwa, senior associate director of enforcement in the SEC's New York office who was involved in the Heinz case, said at an event in February. As global deal activity rebounds, "I dare say you will see more of these actions coming out of the SEC," he said. Options trading specialists said such trades add to concerns there isnt a level playing field for smaller investors. So-called mom and pop investors have not returned to the equities market in large numbers after the battering they took in the financial crisis and following market disruptions such as the flash crash. "The bigger point is the damage that is done to the underlying confidence in our market and the perception that things are not fair," said Ed Boyle, senior vice president of business development and strategy at the BOX options exchange. Since the beginning of 2012, the SEC has issued about 90 different releases related to litigation of insider trading, of which 18 involve the options market. Some of those cases date back as far as 2006. Market makers, those who facilitate orderly trading by providing the market with both buy and sell quotes on a security, say they find themselves taking the losing side of the bets made by those with inside information. When a market maker sells a call option, they are exposing themselves to the chance the stock will rise sharply or become more volatile. These firms attempt to offset that risk, but these hedging strategies won't fully cover a market maker's exposure to extreme moves in a stock. We estimate that insider traders who use the derivatives market end up being a very significant expense for market-making firms like ourselves," said Jeff Shaw, head of trading at Timber Hill, a division of Interactive Brokers Group. Aside from the damage to market makers, insider trading can force the prices of takeover deals higher - costing the shareholders of the acquiring companies - and it can leave the shareholders of target companies, who sold ahead of a deal announcement feeling cheated. It can even scuttle a takeover proposal altogether if the target gets too expensive as a result of insider trading. Each of the 181 transactions that Schaeffers studied for Reuters had a value of at least $200 million and were revealed publicly through the media or a corporate announcement - between Jan. 1, 2012 and Feb 28, 2013. Schaeffers only looked at new call options positions, which are the most often used to express fresh expectations that a stock will rise, rather than new put (bearish) positions, or already existing options contracts. Schaeffers surveyed trading on three major options exchanges accounting for more than half of the market's activity. The data shows that options for many big names - including NYSE Euronext, Dollar General and US Airways - saw a huge increase in bullish bets before major news became public knowledge. The companies did not comment on the trading activity. Of the transactions studied, 43 were excluded because there was too little trading for meaningful analysis, 85 cases showed the same or less trading activity, and 12 cases showed increased activity of less than 50 percent. That left the 41 with more than 50 percent. When the ratio of trading over the five days compared with the previous six months soars, it may raise suspicion that information has been leaked, said Alan White, quantitative analyst at Schaeffers, who conducted the research. The results of the study are at least partially supported by another recent analysis by Livevol, a San Francisco-based options analytics firm, which showed that call and put volume rose, on average, by 71 percent and 60 percent, respectively, in the five

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For April 15, 2013

ANALYSIS AND INSIGHT

trading days before M&A activity was announced when compared to the prior six months. Livevol looked at all opening and closing options positions for 100 U.S. deals in the first eight months of 2012. Some of the timing of the questionable trading looked shrewd. According to Schaeffer's, activity in new call options of NYSE Euronext more than doubled in the five days before it announced it had agreed to be bought for $8 billion, or $33.12 per share, by IntercontinentalExchange (ICE) on Dec. 20, 2012. Neither NYSE nor ICE would comment on the trading. There were bets that NYSEs stock would close above $24 by mid-January. About 9,000 calls at this strike price were bought for about 60 cents a contract, a total cost of about $540,000. The price of those contracts jumped to $8 each, or $7.2 million total, when the deal was announced, for a potential profit of about $6.6 million, said Ophir Gottlieb, managing director of Livevol. In another instance, investors bet on Nov. 9, 2012 that Titanium Metals Corp, which that day hit three-month lows of $11.30 a share, would jump to more than $15 by late January. Hours later, after the close of trading, Precision Castparts said it would buy Titanium for $16.50 a share, or $2.9 billion. About 2,300 of those call options were bought that day for 10 cents each, and they rose in value to $1.50 each after the announcement. Precision Castparts, which completed its purchase of Titanium in November, declined to comment on the activity. The SEC declined to say whether there was a probe into the trading in either the NYSE or Titanium Metals. To trade or not to trade, when the Fed sends you inside info By Jonathan Stempel What would you do if you got your hands on a closely watched report that often moves stocks, bonds and currency markets, and it was sent to you by the U.S. Federal Reserve the day before its official release? Would you trade on the information it contained? If you did, would that be insider trading? Some bank employees were faced with that dilemma on Tuesday when a member of the Fed's congressional liaison office accidentally sent emails to more than 100 people with the normally closely guarded minutes of the Fed's March 19-20 policy meeting, 24 hours before the official release time. There was no immediate sign that anyone traded improperly, and markets did not move much on the minutes, either on Tuesday or after the Fed released them officially on Wednesday. While most of the recipients were congressional staff and trade groups, some worked at banks, raising questions about whether their employers could have gotten an unfair advantage. Legal experts say that whether the recipients knew that the information was confidential, how they stumbled upon it, and whether anyone in fact traded on the contents would be big factors in determining any liability for insider trading. Among the early recipients were people who worked for Barclays Plc, Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, UBS AG and Wells Fargo & Co. The banks declined to comment, and it was not clear what positions the recipients at all the banks held. One early recipient was an employee in Goldman's government affairs office, who did not forward the email or use its contents inappropriately, a person familiar with the matter said. "One could argue that the dissemination was wide enough that the news wasn't a secret any more," said Michael MacPhail, a partner at Faegre, Baker & Daniels in Denver and a former senior lawyer at the U.S. Securities and Exchange Commission. "I would if I were defending someone caught up in this kind of situation." STATE OF MIND The Fed learned of the leak early Wednesday morning, and then released the minutes five hours ahead of schedule. It said it would review what happened, and had alerted the SEC and and Commodity Futures Trading Commission. The SEC confirmed discussions with the Fed but declined further comment. "We don't know the state of mind of the people involved," said Mark Fickes, a partner at the law firm BraunHagey & Borden in San Francisco and a former SEC senior trial lawyer. "It would be hard to imagine liability if the early release were totally accidental and the recipient didn't know the release was early," he added. MacPhail said investigators could look for possible misappropriation - the idea that something in the Fed minutes would have alerted anyone that trading would be wrong. In this case, an attachment to the leaked email noted that the information was not for release until 2 p.m. on Wednesday. But MacPhail said this can go only so far. While the government will go "far down the food chain" to uncover illegal trading, he said "the evidence is often difficult to establish, given that the ultimate recipients may have been far removed from the initial tip." Brad Simon, a white-collar criminal defense lawyer at Simon & Partners in New York, said that absent "nefarious" activity at the Fed, the key question is whether a recipient "knows he got information that most people don't have." THIRD-PARTY TIPS Lawyers said legal problems could arise if a recipient of the information were to provide it to a third party who then traded on it. They pointed to Dirks v. SEC, a 1983 Supreme Court decision, for guidance. There, the court said receivers of inside tips about a company could be liable for insider trading if they knew or should have known an insider breached a fiduciary duty to shareholders in providing the tips. This depends in large part on whether the insider received a personal benefit for the disclosure. MacPhail also noted that one difference between a Fed leak and other kinds of leaks is that the Fed is a government agency, not a corporation. He said it might be tough for prosecutors to show a recipient had any duty to the Fed. That likely wouldn't be the case if the Fed insider who released the information traded on it. In March 2012, former U.S. Food and Drug Administration chemist Cheng Yi Liang was sentenced to five years in prison after pleading guilty to trading on confidential information he learned there. His trades led to $3.77 million of illegal gains. Here, however, the Fed said the release was "entirely accidental." A copy of the email indicates it was sent by Brian Gross, a member of the Fed's congressional liaison staff. He has not been accused of wrongdoing. Gross declined to comment on Thursday. The Fed releases minutes of its meetings to the public a few weeks after each of its eight regular annual meetings. They can shed light on U.S. monetary policy, such as when the Fed might begin winding down its monthly bond purchases. Thousands of professional and amateur traders depend on getting market-moving data instantly. Getting the minutes early could be a huge advantage for traders in stock, bond, currency, commodity, derivative and other markets.

THE DAY AHEAD

For April 15, 2013

KEY RESULTS vs. THOMSON REUTERS I/B/E/S ESTIMATES

Company Name Quarter EPS Estimates Year Ago Rev Estimates (mln)

Citigroup

Q1

$1.17

$1.11

$20,171

** Includes companies on S&P 500 index. Estimates may be updated or revised.

ON THE RADAR
ECON INDICATOR TUE: ICSC/GS report ww for w/e 04/13 CPI mm for Mar CPI yy for Mar CPI ExFood/Energy mm for Mar CPI ExFood/Energy yy for Mar CPI Index level nsa for Mar Real earnings for Mar Housing starts for Mar Building permits for Mar Redbook mm w/e for 04/13 Industrial output mm for Mar Capacity utilization for Mar Manufacturing output mm for Mar Cleveland Fed CPI for Mar WED: Mortgage Index for w/e 04/12 Refinancing Index for w/e 04/12 Fed's Beige Book THU: Initial claims for w/e 04/13 4 Week average for w/e 04/13 Continuing claims for w/e 04/06 Leading indicators for Mar Philly Fed business for Apr SEMI Book/Bill for Mar FRI: ECRI Weekly Index for w/e 04/12 ET/GMT 0745/1145 0830/1230 0830/1230 0830/1230 0830/1230 0830/1230 0830/1230 0830/1230 0830/1230 0855/1255 0915/1315 0915/1315 0915/1315 1130/1530 0700/1100 0700/1100 1400/1800 0830/1230 0830/1230 0830/1230 1000/1400 1000/1400 1800/2200 1030/1430 REUTERS POLL -0.0 pct 1.6 pct 0.2 pct 2.0 pct 232.99 0.1 pct 0.930 mln 0.940 mln -0.2 pct 78.4 pct 0.1 pct ----350,000 -3.080 mln 0.1 pct 3.0 --PRIOR 0.7 pct 0.7 pct 2.0 pct 0.2 pct 2.0 pct 232.166 -0.2 pct 0.917 mln 0.939 mln 0.7 pct 0.8 pct 78.3 pct 0.6 pct 0.2 pct 826.1 4453.9 -346,000 358,000 3.079 mln 0.5 pct 2.0 1.10 130.1 Semiconductor Equipment & Materials International Economic Cycle Research Institute Conference Board Federal Reserve Board of Governors Labor Department Federal Reserve Bank of Cleveland Mortgage Bankers Association Redbook Research Federal Reserve Board Census Bureau SOURCE International Council of Shopping Centers/Goldman Sachs Bureau of Labor Statistics

The Day Ahead - North American Edition is compiled by Karan Khemani, Benny Thomas and Chandrashekhar Modi in Bangalore; Franklin Paul and Meredith Mazzilli in New York. THE DAY AHEAD - North American Edition is produced by Reuters News For questions or comments about this report, email us at: TheDay.Ahead@thomsonreuters.com Or call us at +91 80 4135 5929 Visit the Thomson Reuters Equities Community Site at: http://customers.reuters.com/community/equities/ For more information about our products: http://thomsonreuters.com/products_services Or send us a sales enquiry at: http://thomsonreuters.com/products_services/financial/contactus/ or call us on North America: +1 800 758 5555 2013 Thomson Reuters. All rights reserved. This content is the intellectual property of Thomson Reuters and its affiliates. Any copying, distribution or redistribution of this content is expressly prohibited without the prior written consent of Thomson Reuters. Thomson Reuters shall not be liable for any errors or delays in content, or for any actions taken in reliance thereon. Thomson Reuters and its logo are registered trademarks or trademarks of the Thomson Reuters group of companies around the world.