FX Volatility Opportunities Report - Weekly Snapshot April 18, 2011
Abstract
FX Volatility Map
The best value in gamma looks to be in EURGBP, while NOKSEK looks expensive. With USD yields being a major driver of both EURUSD and USDJPY, EURJPY vol looks expensive relative to the more risk sensitive CADJPY. GBPCAD is a good candidate for a range trade.
Volatility Radar
Most volatility curves continued to flatten over the past week, as EURJPY gamma in particular was strongly bid. Risk reversals also became more bid in all risk sensitive pairs, as equities consistently sold off. So far, the flattening of vol curves has not significantly affected the 6m-1y region of USD pairs, which remain close to their steepest levels, but all CHF and JPY crosses are now relatively flat in this region.
Correlation Radar
With JPY and CHF being negatively correlated to other currencies, but highly positively correlated to each other, the market is trading with great sensitivity to risk. The general outperformance of GBP correlation reflects the fact that GBP cross vols are generally at low levels.

High Yield Credit US HealthCare
1Q11 Company Outlook & Regulatory/ Legislative Update
Abstract
The first quarter of 2011 proved to be yet another exciting quarter as the sector was rife with activity centered on continued new issuance, M&A headlines and certain IPO activity (HCA, VANGUA S-1). While noteworthy, we remain underweight the sector as growth is now the priority and leverage is clearly back in vogue which we feel will translate into incrementally challenging credit fundamentals.
In this update report we are resuming coverage on HCA Holdings, Inc. with an OW-30% recommendation and have included a new financial summary on MedImpact Holdings, Inc.
Legislative/regulatory highlights
New focus on deficit reduction in Washington. Both House Republicans and Pres. Obama are now discussing significant future Medicare and Medicaid reforms.   
Continued Implementation of Health Care Reform Provision.   
CMS has been somewhat more favorable to several healthcare sectors: Providing higher than expected rate increases for Medicare Advantage plans; Positive revision to the budget neutrality adjustment for dialysis providers effective April 1; and, Easing of enforcement of physician signature requirements for clinical labs.   
Flexibility for states (i.e., Arizona and others) in implementing Medicaid reforms and reductions to address budget concerns.   
CMS announced a 6-month delay in Round 2 of DME competitive bidding that was to begin in 2011.  CMS now plans to begin bidding in 2012, with implementation set for Summer 2013.  
Upcoming themes
Medicare and Medicaid reductions may be a part of deficit reduction discussions this year and next.  Congress will need to raise the Debt Ceiling in the next two months, and we expect further deficit reductions to be a part of that debate.  
Hospital Inpatient FY2012 Medicare proposed regulation.  CMS will issue its inpatient hospital regulation in the next 2 weeks.  
Continued State Budget Stress as we head into FY2012 budget cycle (Most states Fiscal Year begins on July 1).  Expiration of additional federal FMAP payments on June 30, 2011 continues to contribute to difficult budget environment.   
Medicare home health volumes and payments may be impacted by CMS's recent decision to begin enforcement of the "face-to-face" physician documentation.

US Quantitative Profile
Abstract
Fundamentals are working
The first quarter saw high beta stocks take a backseat to stocks with attractive fundamental characteristics. P/E to Growth, more "mid-cycle" valuation measures (P/E, P/FCF), and growth and quality factors (Return on Capital, Long-term Growth, EPS Momentum) generally outperformed in a volatile quarter, suggesting that fundamentals are being rewarded. This broke the trend of low quality leadership that had presided over the past two years. High Beta, a leading strategy for the past 2 years, slipped to the 5th worst screen in the year to date.
New leadership emerging?
Given that crises typically give rise to new leadership, we believe that the next cycle could be led by fundamentals, particularly stable growth stocks. These stocks have lagged for a decade, but are currently trading at a deep discount to the market and actually offer the highest forecast long-term growth rates in the S&P 500. And over the last quarter, companies with volatile earnings underperformed.
Cash return strategies outperforming
Strategies based on both dividend growth and share repurchase outperformed the benchmark in the first quarter. In fact, Dividend Growth has either performed in line with or better than the benchmark each quarter since December 2009. In a "risk on / risk off" market, few strategies have outperformed as consistently. We believe that strategies based on safe, sustainable dividend yield and dividend growth should continue to lead given (1) the macro backdrop of slowing growth, as well as (2) the secular supply / demand imbalance for income generating investments