August 29, Morning Call

August 29, 2008: Morning Call

Fair Value: SP500 – 1300.77; NDX- 1918.01; DOW – 11715

Technical Levels:

SPX: 1205, 1235, 1250, 1262 support/1298-1300, 1337, 1365 resistance

NASDAQ: 2210, 2341, 2386 support / 2456, 2479, 2521, 2553 resistance:

Events:

05:00: Euro-zone Unemployment Rate: in-line at 7.3%
05:00: Euro-zone Consumer Confidence: weaker: 88.8 vs. consensus 89.3
08:30: Personal Income (July): 0.0%; July Spending (July): 0.2%
08:30: PCE Core (MoM): 0.3%; 2.4% YoY
09:45: Chicago Purchasing Manager (Aug): 50.0
10:00: University of Michigan Confidence (August): 62.0

Foreign Market Summary/Key Macro News:

SP futures are trading 5 points below fair value while the NASDAQ futures are trading 14 points below fair value at 7:40 am ahead of the Personal Income/Spending, PCE Core, Chicago PMI and the Michigan Confidence data. DELL’s weak Q2 earnings are the primary catalyst for the weakness in the futures. DELL cited pressure on gross margins for the earnings miss continuing a trend in the technology sector (AAPL, RIMM, MSFT, CSCO, NOK, TXN all saw gross margins fall short of expectations during the most recent quarter; technology stocks have been resilient because IT and consumer tech spending has held up relatively well during this economic downturn. In order to grow the top line, technology companies have been cutting prices. Continued gross margin pressure remains the greatest downside risk to the technology sector. Gross margins will be the most important metric to watch when tech companies begin reporting the next quarter in October. European markets are currently trading flat (up 0.10%) and have been in a narrow trading range all session. Basic materials and financials are outperforming on light volume. Asian markets closed sharply higher with the Nikkei rallying 2.3%, Shanghai up 2.4%, and India up 3.7%. Financials led a broad-based advance along with automakers and tech stocks. Japan reacted well to a report in the Nikkei saying the Japanese government was finalizing a ¥10T economic aid package, including an ¥8T measure to insure financing for small businesses. The yen is trading at ¥108.79 to the US dollar. Japan’s July unemployment rate was 4.0% vs. the 4.1% survey and 4/1% in June. July core consumer prices rose 2.4% y/y, its highest rate in a decade, vs. the 2.3% survey. Indian inflation rose 12.4% vs. consensus of 12.78% and the economy grew at 7.9% vs. consensus of 8%. Commodities: Crude oil is up one dollar to 116.60 and natural gas is flat ahead of Hurricane Gustav.

Impact Research Calls/Market Moving News:


DELL (25.21): Dell reports Q2 EPS $0.33 ex-items vs. Reuters $0.36. Note the figure excludes ($0.01) from the amortization of purchased intangibles and ($0.01) from severance and facility closures. GAAP EPS was $0.31. Revenues of 16.43B vs. street at 15.96B. Gross Margin weaker at 17.2% vs. street of 18.3%. While noting that their markets are always competitive, management confirms that their actions were not in response to heightened pressure from competitors but were rather driven by their desire to gain share. Almost all questions on the call have hit on this pricing topic, with management consistently reiterating that they can improve profitability going forward. They believe that the aggressive pricing actions can be reversed very quickly. When asked whether the consumer business will be profitable in the 2H of the year, management says that consumer profitability will improve over the next 4 quarters. Shares fell 10% in after-hours trading on Thursday night.

DELL (25.21): BMO Capital comments on DELL: “Even with revenue upside and material reduction in op ex, Dell delivered a terrible gross margin quarter, 110 bps lower than our forecast. Impact: Negative - Dell missed 1) our GAAP estimate by $0.03 (Street by $0.05, but the Street did not include charges), and 2) our non-GAAP estimate by $0.035 (Street by ~$0.03). Tax rate and share count negatively impacted the quarter vs. our estimates by $0.02. Forecasts: We are reducing our CY2009 EPS estimates to $1.65 from $1.77. Approximately $0.03 of our estimate change in FY2010 is based on higher tax rate and lower interest income. We estimate a 50 bp improvement in CY2009 op margins vs. the July 08 quarter, owing to recognition of deferred revenues, improved pricing, and operating leverage. Valuation: Given our estimate changes, we are lowering our target price to $25 from $26.50. Recommendation: We stay OUTPERFORM. Catalysts will be few until Dell demonstrates ability to both grow revenue and margins, which we don't think happens in a meaningful way until beginning of CY2009.”

DELL (25.21): Dell estimates lowered at UBS following Q2 results
Firm believes gross margins are unlikely to improve materially in the near term due to the increasing mix of consumer and indirect channels as well as from expectations of a continued challenging competitive environment that pressures ASPs. UBS also believes there is a risk that opex could increase. Target is lowered by $1 to $26. Rating is neutral.

BIDU (316.54); SINA (42.42); SOHU (77.44): Piper comments on Baidu.com (BIDU), Sohu.com (SOHU), and Sina (SINA) following the Olympics. The firm says BIDU traffic rebounded nicely after the Olympics and says the increase in traffic is better than company expectations, a positive for the September quarter. SINA and SOHU each saw essentially the same traffic trends during the Olympics with SOHU traffic declining 28% and SINA 24% by 28-Aug

BRCM (24.91): Broadcom announces that judge finds Qualcomm in contempt.
Broadcom announced that a federal judge today found Qualcomm in contempt of an injunction he ordered last December designed to prevent Qualcomm from continued infringement of three Broadcom patents. Judge James Selna found that Qualcomm violated the injunction by continuing to use and support infringing WCDMA chips and ordered Qualcomm to immediately cease such use and support. The court further found that Qualcomm violated the injunction by failing to pay royalties to Broadcom on its infringing QChat products. Citing the "egregiousness" of Qualcomm's conduct, the court ordered Qualcomm to pay Broadcom the gross profits Qualcomm has earned on its infringing QChat products. Judge Selna further ordered Qualcomm to pay Broadcom's attorneys fees in connection with the contempt proceedings. Additionally, the Court reserved determination of whether Qualcomm should also be held in contempt for post-injunction offers to sell infringing WCDMA chips pending additional discovery and proceedings.

BRCM (53.97): JPMorgan sees little impact on Qualcomm from judge's ruling yesterday in Broadcom (BRCM) case. JPMorgan sees very little impact on QCOM fundamentals since the judge did not stop the company from selling WCDMA chipsets that employ workarounds to the infringed BRCM patents. The firm notes that the ruling will prevent QCOM from servicing WCMDA chips shipped from May-Dec 2007, the impact of which it sees as minute. , Reiterates overweight rating.

ENER (76.55): Energy Conversion target increased to $100 from $79 at UBS.
Firm notes Q4 results and raises estimates on improved sales visibility. Rating is buy.

SLM (16.95): SLM placed under review for possible downgrade by Moody's