August 27, 2008: Morning Call

August 27, 2008: Morning Call

Fair Value: SP500 – 1271.21; NDX- 1889.05; DOW – 11408

Technical Levels:

SPX: 1205, 1235, 1250 support/1298-1300, 1337, 1365 resistance
NASDAQ: 2210, 2341, 2386 support / 2456, 2479, 2521, 2553 resistance:

Events:

Pre-market EPS: AEO (.28/709.9M); DLTR (.40/1.06B)
08:30: Durable Goods Orders (July): 0.1%; Ex-Trans: -0.4%
08:35: Fed’s Lockhart speaks on Inflation
10:35: DOE/API Crude Oil and Gasoline Inventories
Post-market EPS: GEF (1.11/969.3M); MW (.71/550.5M)

Foreign Market Summary/Key Macro News:
SP futures are trading 3 points below fair value while the NASDAQ futures are trading 2.50 points below fair value at 7:50 am ET. Although the broader averages have settled into a trading range (1262-1298) following the July 15 lows, the price action has been sloppy at best. Fears about a global economic recession and concerns that 2H earnings estimates are too high have lead to a very weak underlying bid in the broader averages. Key events today include the Durable Goods at 8:30 ET, Fed’s Lockhart’s speech on inflation at 08:35 ET, and the Crude supply data at 10:35 ET. European markets are trading weaker (-0.70%) on light volumes coming towards the end of the summer holidays. Decliners on the FTSE100 lead advancers 7-3. Best performing sectors in Europe include Materials (up 0.40%) and Energy (0.20%). Worst include Autos (-1.8%) and Banks (-1.1%). Asian markets: Asian markets were mostly higher today. Technology stocks fell, and energy stocks advanced. Japan dipped slightly on concerns about the global economy. Property shares dropped after another builder Sohken (8911.JP), collapsed. Hong Kong advanced on buying in heavyweights like China Life Insurance (2628.HK) and China Mobile (941.HK). After reporting record H1 profits, China Mobile led the region up in the afternoon and China Cosco Holdings (1919.HK) also advanced after reporting a doubling of earnings. Crude oil is trading up 1.37 to 117.60 and natural gas is up 5% on fears that Tropical Storm Gustav is going to track into the Gulf of Mexico as a Category 3+ storm. The underlying bid in commodities also appears to be getting an assist from Russia’s decision to recognize the independence of South Ossetia and Abkhazia; Russia’s President is also meeting with China’s President today to seek support for Russia’s recognition of the two break-away regions in Georgia.

Impact Research Calls/Market Moving News:

GS (155.91): Morgan Stanley cuts their Q3 estimate on GS to a new street low of 1.35 from 3.00. Morgan Stanley is citing the erosion in equity and fixed income markets and corresponding weakness in return on equity. Morgan Stanley is expecting ROE to hit a cycle-low of 7%. Weak client flows and principal investment activity headwinds have intensified. 16 analysts have taken their numbers lower on GS since August 7. According to Bloomberg, Atlantic Equities was the first firm to take numbers lower on August 7. They lowered their estimates for Q3 a second time in the last two weeks. He lowered EPS to 1.60 this morning from 3 bucks (on August 7, he lowered numbers to 3 from 3.89). Q3 consensus on GS has now dropped to 2.40 from nearly 4 dollars a little over a month ago.

WSJ Page One article on maturing bank debt piggybacks on the Bloomberg article yesterday: “At issue are so-called floating-rate notes -- securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so, at a time when banks are struggling to raise fresh funds. That's forcing banks to sell assets, compete heavily for deposits and issue expensive new debt. The crunch will begin next month, when some $95 billion in floating-rate notes mature. JPM analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months. As banks scramble to pay the floating-rate notes, they could see profit margins shrink as wary investors demand higher interest rates for new borrowings. They're also likely to become less willing to make new loans to consumers and companies, aggravating economic downturns in both the U.S. and Europe.”

WSJ Heard on the Street article says the infrastructure sector could run into problems: “Rising inflation and tightening credit seem to be damping the global infrastructure party, at least temporarily. Morgan Stanley recently estimated that 8%, or $60 billion, of the $750 billion of infrastructure projects slated for 2008 are being delayed or canceled. That is four times historical cancellation rates of 2% a year, according to the Morgan Stanley and World Bank data. The report cites 40 canceled or delayed projects so far this year, including a $2.4 billion high-speed train between Singapore and Kuala Lumpur and a $3 billion aluminum smelter in Abu Dhabi. The most common reasons cited: rising costs and tight credit. Morgan Stanley projects global infrastructure spending will grow 3% this year, down from 10% last year. Next year, the firm thinks big-project spending could be flat, or even decline.”

GOOG (474.16): Fortune article says GOOG is struggling to break into the enterprise software sector with the Apps product.

MT (74.90): ArcelorMittal faces strike by United Steelworkers - WSJ Saying negotiations have stalled, the union wants members to vote to authorize a strike. MT is "optimistic" the sides will agree on terms by 30-Aug, but the union is unhappy at the company's proposal to increase retiree health-care contributions by 39%. MT appears to feel the agreement the union reached 12-Aug with US Steel (X) were overly generous, but the company is not commenting on specific issues it has problems with.

JCG (26.64): J. Crew Group reports Q2 EPS $0.28 vs Reuters $0.32 Company reports revenues of $336.3M vs Reuters $336.8M. Company reports comps (0.4%) vs consensus of +0.9%. Gross margin decreased to 41.0% of revenues from 43.7% of revenues in Q2 of fiscal 2007. Guides Q3 EPS to $0.28-0.33 vs Reuters $0.46. Guides full year EPS to $1.44-1.54 vs prior $1.70-1.75 and vs Reuters $1.71. The company's revised expectations for the H2 of fiscal 2008 include comparable store sales growth in the range of flat to slightly negative, direct sales growth in the high single-digits and net square footage expansion of approximately 10% to 11%. Shares dropped sharply in post-market trading on Tuesday.

NOK (26.04): Nokia downgraded to hold from add at West LB Equity Markets (pre-European open): Price target decreased to €18.50 from €19.50. Firm cites lower ASP estimates for H2 2008, 2009 and 2010 and reduced margin assumptions for NSN.

AMR (9.61): AMR Corp downgraded to sell from hold at Citi: Target increased to $9 from $6.70, but downgraded on valuation. Firm also raises targets on JBLU to $6.50 from $4.65 and LUV to $15.50 from $14.50 due to the recent decline in oil prices.