Tuesday, September 30, 2008

Changing the Rules Part 2 - Let's Get Rid of Mark to Market Accounting!!

Most market participants recognize that the ban on financial stock short sales has been a joke. Of course, the rule change triggered a vicious short squeeze on September 19(you could practically hear the morons in Washington slapping each other on the back when markets closed on Friday, September 19). But, as I suspected, the demand was artifical and temporary because asset prices cannot be rigged over the intermediate and long-term. The rule is not enforceable because there are numerous strategies that easily enable institutional investors to circumvent the rule change (Buy Put/Sell Call= Synethic short stock, total return swaps, ect). The short-selling ban will be remembered as an act of desperation that actually damaged long-term confidence in the financial markets.

The reason I bring the short-selling ban up again is because there is speculation in the market that FASB and the SEC are going to change the mark-to-market accounting rules. If FASB 157 was no longer enforceable, the damage to market confidence would be far worse than the ban on short-selling. Changing the accounting rules would be an absolute disaster and would shatter longer-term confidence in the markets. Sure, the short-sellers would freak out again because they would be scapegoated as part of this rule change. But, who would actually invest long money in a bank if management was allowed to use some other kind of metric (maturity values, ect) to value the assets they hold on their balance sheet? More importantly, who would extend credit to a bank overnight or through the short-term funding markets if they did not have confidence that the assets on their balance sheets were being marked properly?

The regulators that set the rules and the politicians that approve them have no clue how the financial markets work. The regulators and politicans are in the process of shattering the price discovery mechanism. Eliminating fair-value accounting would make the financial institutions at the root of this problem MORE OPAQUE. Rules should be changed to increase transparency.

Although I believe the TARP legislation is necessary in order to protect the financial system, the biggest flaw in the bill is that the Treasury was granted wide discretion in the prices they pay for the distressed assets. The Treasury MUST pay fair value for the assets through an auction or some other kind of mechanism that establishes a "clearing price" for the distressed assets. This is the only way to rekindle demand in the credit markets.

September 30, 2008: Morning Call

September 30, 2008: Morning Call

Fair Value: SP500 – 1110.06; NDX: 1507.73; DOW – 10384

Technical Levels:

SPX: 1063, 1090 support/ 1142, 1250, 1298-1300, 1337 resistance.

Note: SPX 1063 is the August 2004 monthly and 1090 is the October 2004 monthly low)

NASDAQ: 1890, 1921 support /2020, 2210, 2264 resistance:

(Note: NASDAQ 1890 is the April 29, 2005 weekly low while 1921 is the April 29, 2005 weekly close).


Last Trading Day in Q3
09:00: S&P/CaseShiller Home Price Index (July): -16.0%
09:45: SLB Investor Day
09:45: Chicago Purchasing Manager (Sep): 54.0
10:00: Consumer Confidence (Sep): 55.0
13:00: Fed’s Lockhart speaks on the economy
17:00: ABC Consumer Confidence
21:00: Chinese PMI Manufacturing

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 34 points above fair value while the NASDAQ futures are trading 20 points above fair value in an attempt to recover from one of the most severe market plunges since World War 2; over 1.2 trillion in market capitalization was lost in Monday’s session. Although the 777 point drop in the Dow Industrial Average is getting all the attention in the press, the carnage in technology, mining, and energy sectors was far worse with many securities dropping 15-20%. The 10.3% drop in the NDX-100 was the 3rd worst percentage loss in history and a new 3-½ year low. The S&P 500 dropped to a new 4-year low. Right now, the strong futures can be attributed to less severe declines in Asian markets, benign news flow in the banking sector, and speculation that the Senate is going to bring the TARP legislation to a vote either Wednesday or Thursday. Also, the S&P dropped 28 points in the last 10 minutes of trading so the market is snapping back from the aggressive closing sell-programs. Do not read too much into this early morning advance. Asian markets closed lower but the declines were not as severe as US equity market participants were discounting at 4pm on Monday. Regulators in South Korea and Taiwan temporarily banned short selling in an effort to stem declines. Regulators in Hong Kong said they would take “more aggressive” measures against the practice. Property stocks continued to drop in Hong Kong as more banks raised mortgage rates. Regulators sought to calm investors by promising injections of liquidity into the banking system if necessary. China is closed all week for National Day holidays. Japan closed down 4.1%, Australia down 4.3%, Hong Kong up 0.75%, India closed up 2.1%. European markets are trading down 1.0% but have bounced 2% off the early morning lows. The bounce off the session lows in Europe can be partially attributed to rumors of a coordinated central bank interest rate cut. President Bush is scheduled to speak at 8:45 ET on the bailout. Atlanta Fed President Lockhart speaks on the economic outlook in New Orleans at 13:00 ET. Sep Chicago Purchasing Manager's and Consumer Confidence data will be released at 10:00 ET. Nov WTI crude is trading +$2.54 to $98.91 despite strength in the US dollar. The dollar is up 0.60% against the Euro to 1.4343.

Impact Research Calls/Market Moving News:

C (17.75): Mike Mayo issues cautious comments on Citibank’s purchase of Wachovia’s: “Citigroup gets good financial deal but with integration risks Citigroup’s purchase of most of Wachovia should give its leading deposit market share, increased core funding, and earnings accretion (before merger charges). Yet, the transaction comes with unusually high execution risk given a decade-long short-fall in Citi's retail banking combined with a myriad of management changes. We lowered our target to $18 reflecting heightened integration risks and lower FY09 est. (down 70 cents to $1.80) due slower global growth and higher credit costs. Maintain Hold as we believe merger benefits are offset by near-term risks. Protection on credit risk but need to watch revenues: The transaction is targeted to be accretive to earnings (before merger-related charges) by year 2 given expected cost savings of $3B (3% combined base). On a present value basis, this savings equals $16B of value created, or about equal to deal costs for the purchase price ($2B to Wachovia), preferred and warrant issuance to FDIC ($12B), and merger charges (present value cost of est. $2B). We see NO additional credit risk on the firm's riskiest assets ($312B of $800B in acquired assets) because any additional loan losses beyond this level is covered by the FDIC - i.e., Citi is getting mostly a clean bank. Yet, a swing factor could still be revenue loss, which is a real possibility that could make the transaction value destructive if it were to occur meaningfully. Our price target of $18 applies a 10x multiple on our '09 est. of $1.80: We believe a multiple equal to the 5-yr. avg. is warranted given integration risks and uncertain global economic conditions and the impact on Citi's credit quality, mitigated by a more stable franchise with better funding sources than in the past. Macro risks incl. A significant slowdown in the economy and adverse changes in gov't. laws and regulations. Company risks include credit risk (esp. U.S. mortgage and global cards), market & interest-rate risks (exposures to CDOs and other structured products), and operational risks (including those associated with the Wachovia integration). Upside risks include a better than expected rebound in U.S. housing values and the global economy in general.”

Hedge fund liquidation trade likely to continue – WSJ: The Journal reports that Monday's carnage in stocks could force hedge fund managers to dump more assets, a move that would spur further market declines. The paper adds that some industry insiders predict that as many as 20% of the 10K hedge funds that were operating at the start of 2008 will soon be out of business. The article also highlights the outsized losses in several stocks favored by hedge funds, including Apple (AAPL), US Steel (X) and Conoco-Phillips.

EU to propose regulatory overhaul to deal with bank failures – WSJ: Tomorrow, EU commissioner for internal markets Charlie McCreevy will propose changes that include creating groups of national regulators to supervise banks doing business across national borders. People familiar with the matter say he will also seek to force banks to set aside more capital when they sell some of the securitized credit products that were at the heart of the current crisis. Despite a European central bank, banking regulation on the continent is largely down to national regulators, leading to questions about who will react exactly how if a pan-European institution meets trouble. Bankers say the proposals will increase the price of raising debt and kill off a market already hit by the credit crunch, but critics of the current system say the weekend rescues of Fortis (FORB.BB), Bradford & Bingley, and Hypo Real Estate Holding (HRX.GR) offer little comfort. The article was written before Dexia (DEXB.BB)'s capital infusion was announced this morning.

FITB (9.11); WFC (33.25): Fifth Third (FITB) downgraded, Wells Fargo (WFC) upgraded at RW Baird. FITB downgraded to neutral from outperform. WFC upgraded to neutral from underperform

WB (1.84): UBS estimates Wachovia's fair value at $2 per share
Firm notes that it is unclear if the company will remain independent, but estimates that earnings from the retail brokerage and asset management, plus WB's preferreds and annual dividends, suggest shares are worth $2/share. Target is lowered to $2 from $16. Rating is neutral

DEXB BB (7.07): Shares are trading up 9% in Belgium on news of the EU 6.4 billion government backed capital injection. Dexia long-term counterparty rating downgraded to AA- from AA; outlook negative at S&P: Standard & Poor's Ratings Services announced that it has lowered its long-term counterparty credit ratings to 'AA-' from 'AA' on the core entities of Belgium-based banking group Dexia S.A.: Dexia Credit Local, Dexia Bank S.A., and Dexia Banque Internationale a Luxembourg. Affirmed the short-term counterparty credit ratings on the three entities at 'A-1+'. The outlook on these entities remains negative. In addition, S&P affirmed the 'AA-/A-1+' ratings on Dexia Crediop SpA and revised the outlook to negative from stable.

Irish government to guarantee all bank deposits, banks senior debt, bonds: The Irish government announced its decided to put in place with immediate effect a guarantee arrangement to safeguard all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt (lower tier II), with the following banks: Allied Irish Bank (ALBK.ID), Bank of Ireland (BKIR.ID), Anglo Irish Bank (ANGL.ID), Irish Life and Permanent (IPM.ID), Irish Nationwide Building Society and the Educational Building Society and such specific subsidiaries as may be approved by Government following consultation with the Central Bank and the Financial Regulator.

WYNN (77.93); LVS (33.10): Gaming employment vacancies in Macau plunge 85% in Q2 as casinos rein in spending - South China Morning Post: Data released by the Statistics and Census Service show job vacancies in the sector fell to 764, the lowest total since record keeping began in 2004, even though the number of licensed casinos rose from 26 to 30. Average earnings in the industry rose 7% to MOP15,565/month, but earnings for card dealers went up only 0.3% as casinos removed underutilized tables to control costs. An analysis of government data shows total payroll as a percentage of casino revenues fell to 7.4% in Q2, vs 10.0% a year ago. Recall it has been widely reported that casino operators in Macau are struggling to maintain EBITDA margins in the face of junket commissions.

Monday, September 29, 2008

September 29, 2008: Morning Call

September 29, 2008: Morning Call

Fair Value: SP500 – 1217.34; NDX: 1684.78; DOW – 11166

Technical Levels:

SPX: 1136-1142 support/1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020 support /2210, 2264, 2303 resistance:


Pre-market EPS: WAG (.45/14.67B); CC (-1.04/2.5B)
05:00: Euro-zone Consumer Confidence (Sep): -19 (in-line at –19)
05:00: Euro-zone Economic Confidence (Sep): 87.3 (slightly better at 87.7)
08:00: FDX Shareholders Meeting
08:30: Personal Income (August): 0.2% MoM; Personal Spending: 0.2% MoM
08:30: PCE Core (August): 0.2% MoM; 2.4% YoY
08:30: WAG Earnings call
10:00: CC Earnings call
20:45: Fed’s Hoenig speaks on the economy and policy

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 24 points below fair value while the NASDAQ futures are trading 38 points below fair value at 7:45am ET. European markets are down 3.0% on multiple bank failures. 4 financial institutions in Europe were rescued over the weekend with HRX (Hypo Real Estate) getting EU35 billion emergency funding, Icelandic Government buying 75% stake in Glitnir for EU 600 million, Fortis receiving EU11.2 billion investment from Belgium, the Netherlands, and Luxemborg. The UK Treasury also seized Bradford and Bingley, which is the biggest rental property lender in Great Britain. In addition, the NYT and WSJ are both reporting that WFC and C are in emergency takeover talks with WB. WB shares are down over 60% this morning to 4 dollars. The USD is sharply higher against the Euro and Pound on the Euro-zone bank failures. The dollar strength is weighing on commodity prices with Crude Oil declining 4 dollars to 103. Treasury bills and bonds along with Gold are stronger as investors continue to look for safe-havens amid the turmoil. Technology stocks are also very weak on increasing fears that weakening demand is squeezing gross margins. Two analysts downgrade AAPL shares this morning on concerns about gross margins. AAPL shares are trading down 8 to 120 in the pre-market trading session. Asian markets closed lower with Hong Kong (down 4.2%) and India (down 3.8%) pacing the decline.

Impact Research Calls/Market Moving News:

WB (10.00): WB shares are down 60% to 4 dollars on speculation that the Treasury/Fed is orchestrating an emergency takeover with Citigroup or Wells Fargo mentioned as the primary suitors. NY Times article says, “Both banks are unlikely to bid more than a few dollars a share.” The Treasury and Fed are presumably resisting efforts to guarantee part of the assets. The WSJ is reporting that Wells Fargo “appears to be the preferred bidder.”

AAPL (128.24): Apple downgraded at Morgan Stanley: Target for the shares is reduced to $115 from $178 with the firm also reducing their f09 EPS growth target.

AAPL (128.24): Apple downgraded to sector perform from outperform at RBC Capital: Price target decreased to $140 from $200. The firm cites concern about consumer spending and the impact from reduced visibility on growth and margins.

NTRS (79.90): Northern Trust takes actions to support certain investment funds
Northern Trust expects to incur pre-tax charges of approximately $525M ($328M after-tax or $1.46 per share) in Q3 in connection with these actions
. Northern Trust will increase the support provided for certain cash investment funds previously covered through capital support agreements (as announced February 22, 2008, and amended July 15, 2008) and will add one additional fund to this coverage. The capital support levels provided by Northern Trust will increase in aggregate by $321M, to a maximum capital contribution of $550M. These measures will enable the funds to continue to maintain a stable net asset value of $1.00. Northern Trust expects to incur a pre-tax charge of approximately $290M ($181M after-tax or $0.80 per share) in Q3 in connection with this action. Northern Trust also will take certain actions to provide support for securities lending clients whose cash collateral is invested in five constant dollar, commingled investment pools negatively impacted by recent market events. Northern Trust expects to incur a pre-tax charge of approximately $150M ($94M after-tax or $0.42 per share) in Q3 in connection with this action. Northern Trust also announced that it will put in place a program offering to purchase certain illiquid auction rate securities that were purchased through Northern Trust for Personal Financial Services (PFS) clients under investment discretion or that were acquired by PFS clients from Northern Trust's affiliated broker/dealer. The terms of the offer will be communicated to those clients who qualify for the program. Northern Trust expects to incur a pre-tax charge of approximately $85M ($53M after-tax or $0.24 per share) in Q3 in connection with this action.

GS (137.99): Goldman Sachs had up to $20B at risk if AIG collapsed – NYT: Gretchen Morgensen article looks at the fallout from an AIG collapse. A Goldman spokesman says the company was never imperiled by AIG's troubles. But six people close to the insurer say Goldman was its largest trading partner, and several of them report the potential 11-digit damage that could have come to pass. Recall GS CFO David Viniar said 16-Sep the company saw the impact from AIG as immaterial

GS (137.99): Goldman Sachs calls NYT report of company's exposure to AIG "seriously misleading" – Reuters: A GS spokesman reiterates that the company's exposure to AIG was and is not material. Recall the NYT reported GS stood to lose up to $20B if AIG had failed.

GS (137.99): NY Times looks at the changes hitting Wall Street and especially Goldman Sachs: Article says that the former world of Wall Street is largely coming to an end as the days of easy money and supersize bonuses fade into the past. The credit boom behind the explosive growth is over and regulators have woken up and started to pay attention once more. Even Goldman Sachs, the leading firm on the Street, has been forced to change. Goldman had been successfully navigating the troubled waters of the credit crisis but once the market turned against investment banks, it changed course immediately and become a regular bank. One major difference will be in the amount of leverage the bank is allowed to use; even at today's reduced level Goldman's leverage is about twice that of regulated banks. Some analysts see Goldman's return on equity falling to about 13% from 33% in '07. Goldman says it expects a 20% return on equity in the future. One analyst speculated that Goldman might consider merging with a bank like Northern Trust (NTRS) or State Street (STT).

COP (76.24); MRO (40.83): Marathon (MRO) upgraded; ConocoPhillips (COP) downgraded at Goldman Sachs: MRO upgraded to buy from neutral; target raised to $59 from $46. COP downgraded to neutral from buy, though says it still believes the stock is inexpensive; prefers MRO.

OIH (157.62): Morgan Stanley reduces estimates for the Oil Services, Drilling & Equipment group: The firm notes the impact from the severe hurricane season and says the impact to Q3 earnings could be similar to that of Q3/05

Starwood Hotels (HOT), Host Hotels & Resorts (HST), Sunstone Hotel Investors (SHO), Strategic Hotels (BEE) downgraded at Citi: HOT, HST, SHO downgraded to hold from buy. BEE downgraded to sell from hold.

WM (0.16): Washington Mutual likely to drive private equity to sidelines in financial services – WSJ: A "Heard on the Street" column says now that TPG has lost $1.35B in WaMu, private equity will be more likely to cautiously wait for a turnaround than before. Attractive acquisitions like Goldman Sachs (GS) are few and far between in the financial services sector, and holding periods on investments there will need to expand. Though private equity likes to think it is smart enough to make winning bets in bad times, the real smart players may be the ones who wait for a collapse to go through, so they can score unequivocal bargains afterward.

Barron's summary

Cover: The bailout plan could very likely make money for the government and taxpayers. Interview: Richard Bernstein, chief investment strategist at Merrill Lynch, is cautious on equities, favoring bonds, especially Treasuries, and cash. Lead Articles: Wall Street has not credited Tyco Electronics (TEL) for its smart moves, stock could rise 50% over 12-18 months; Past experience suggests that if Congress tries to punish bankers, the bailout plan will not work; Plenty of reasons to like W.R. Berkley (WRB), stock could go to the mid-$30s when the cycle turns; Several analysts are positive on the emerging markets, positive on EEM, CHL, RIO, PBR, UBB, HDB others that might see attention include AMX, TEVA, PTR, TS, TSM, MBT, OGZPY and CX; Barron's suggests buying companies that invest heavily in R&D; There may be more upside than downside to Starbucks (SBUX), stock could rise 20-30%; JPMorgan Chase (JPM) acquisition of a big piece of WaMu was a smart move; D.C. Current notes that there are no patent cases on the current U.S. Supreme Court docket, there is a significant cigarette case involving MO; Other Voices points to the large amount of help Wall Street had from Washington in creating the current financial crisis; Editorial discusses who is really funding the bailout and who is actually getting bailed out. Columns: The Trader suggests buying gold and is cautious on Urban Outfitters (URBN); Euro Trader says it is not time to buy European autos yet and that DAI.GR and BMW.GR will suffer as the funding for car purchases dries up; Asia Trader notes the possibility of an Asian bounce in the immediate aftermath of a U.S. bailout; Current Yield notes the actions the Fed is taking to ease the crisis; The Striking Price discusses the growing concern of counter-party risk and says the OCC is very strong; Commodities Corner notes the impact high grain prices may have on meat producers like TSN, SFD and PPC; Follow Up is positive on General Electric (GE), Microsoft (MSFT) and Nike (NKE); Up and Down Wall Street calls the bailout the ultimate blind pool; Streetwise considers the notion of a 'good bank' for a bailout and wonders about the value of banning short selling; Economic Beat points to one economist who believes that GDP will remain positive; Technology Trader is cautiously positive on the GHL Acquisition (GHQ) deal for Iridium Holdings but would wait for the dust to settle before considering buying in; Plugged In notes that Google's (GOOG) target with the Android phones may not be Apple (AAPL) but Microsoft (MSFT).

Friday, September 26, 2008

September 26, 2008: Morning Call

September 26, 2008: Morning Call

Fair Value: SP500 – 1213.19; NDX: 1700.14; DOW – 11041

Technical Levels:

SPX: 1136-1142 support/1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020 support /2210, 2264, 2303 resistance:


Pre-market EPS: KBH (-1.25/725.4M); JBL (.31/3.2B)
08:30: Q2 GDP (Final Revision): 3.3%; Personal Consumption: 1.7%
08:30: GDP Price Index (Final Revision): 1.2%; Core PCE QoQ: 2.1%
10:00: University of Michigan Confidence (Sep Final): 71.0
10:00: Fed’s Bullard speaks on the economy
11:30: KBH Earnings call

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 21 points below fair value while the NASDAQ futures are trading 45 points below fair value. Equity futures are under significant pressure due to the collapse of WM, weak gross margin guidance at RIMM, and fears that the TARP legislation is going to be delayed by a House Republican measure; there are also rumors circling that John McCain may support the House Republican measure. Q2 final GDP will be reported at 8:30 ET, followed by Sep final Univ. of Michigan Confidence figures at 10 ET. St. Louis Fed President Bullard speaks on the economic outlook at 10 ET. KBH earnings call is at 11:30am. European markets are down 1.8% with mining, machinery, and financial stocks leading the decline. Fortis Bank is down 10% on heavy volume on solvency concerns. Asian markets closed lower overnight with India pacing the decline with a 3.2% sell-off. Other Asian markets were down about 1%.

Impact Research Calls/Market Moving News:

WM (1.69): Office of Thrift Supervision confirms that JPMorgan (JPM) has acquired Washington Mutual; WM shares are trading at .15 cents. OTS says that it closed down WaMu because it was in an "unsafe and unsound" condition. Adds that the FDIC held a bidding process that resulted in the JPMorgan deal. OTS also says that WaMu branches will be open for business as usual on Friday. JPMorgan (JPM) to take $29.891B in marks on WaMu's $176B home loan portfolio - conf. call/investor presentation.

JPM (43.46): Company to offer 8 billion in common stock in order to maintain capital ratio’s following the acquisition of WM’s bank deposits.

RIMM (97.53): Research In Motion expects gross margin to be decline further in Q4 (Feb) - conf. call: Recall the company guided Q3 to 47%, which is down from 50.7% in Q2. Management goes on to note that it is unlikely hardware gross margin will improve substantially going forward into fiscal 2010; further, they believe that it would be reasonable to model gross margins in the mid 40s over this period. Management cites the associated costs of new feature-rich phones on new platforms for the margin pressure and believes such costs are difficult to pass on to customers. They do believe that the operating model has "substantial" opportunities for improvement. ASP is expected to be flat at $344 during the November quarter, which is consistent with the SA consensus of $344; however, we note that Q2 came in at $344 versus a consensus of $349 and below guidance for $349.

RIMM (97.53): 4 firms downgrade and 2 firms upgrade RIMM this morning: Deutsche Bank cuts rating to sell from hold. Citibank, Pacific Crest, and RBC Capital downgraded the stock to neutral from buy. Raymond James upgraded the shares to outperform from market perform. Credit Suisse upgrades the shares to neutral from sell.

CF (110.20); TRA (37.90); AGU (74.85): CF Industries Holdings (CF), Terra (TRA) and Agrium (AGU) downgraded to hold from buy at Citi.

KBH (21.16): KB Home reports Q3 EPS ($1.87) vs. Reuters ($1.40: Company reports revenues of $681.6M vs. Reuters $724.6M. The company delivered 2,788 homes at an average selling price of $239,700 in Q3 compared to 5,699 homes at an average selling price of $267,700 in Q3 of 2007. Company-wide net orders for new homes in Q3 of 2008 decreased 66% to 1,329 from 3,907. The company's cancellation rate relative to gross orders increased to 51% vs. 27% in Q2, but was 22% as a percentage of beginning backlog. The number of homes in backlog at August 31 declined 60% from the year-earlier quarter to 4,774. The company said that market fundamentals appear unlikely to improve significantly in the near term.

MS (27.10): Hundreds of billions of dollars runs from Morgan Stanley's prime brokerage – FT: People familiar with the business say hedge funds fled last week and moved to rival banks, worried that MS might follow Lehman Brothers into trouble. Banks including JPMorgan Chase (JPM), Credit Suisse (CSGN.VX), Citi (C), Deutsche Bank (DBK.GR), Barclays (BARC.LN), and UBS (UBSN.VX) picked up significant business. The sources say the flight has basically stopped. Several clients say they will likely bring their money back once markets have stabilized.

SEC should not give banks any wiggle room on accounting - WSJ: In a "Heard on the Street" column, the Journal reports that banks are trying to get the SEC to tweak accounting rules so they do not necessarily have to recognize losses that would further dampen their capital position. According to the article, this is just another example of the banks' refusal to face reality in hopes that the markets will eventually rebound. The column goes on to note that the banks do not deserve any wiggle room, as they were the ones that blew it when they made such investments.

Government bailout won't give stocks a long-term boost - WSJ: In a "Heard on the Street" column, the Journal reports that while the $700B bailout plan may prevent stocks from sliding off a cliff, it is unlikely to offer a longer-term boost. The article notes that shareholders could suffer significant dilution if the government ultimately decides to take equity stakes in the companies participating in the rescue, something that seems likely given the need to protect the taxpayers. In addition, the Journal argues that investors need to determine which banks' problems are too big to be addressed by the bailout, and then ask whether such problems could further undermine the US financial system. The article also points out that the bailout is unlikely to offer much near-term reprieve to the credit market, nor will it spur a flurry of mortgage lending that could underpin house prices.

Thursday, September 25, 2008

RIMM: Gross Margins Under Pressure

RIMM shares are down 12 points to 85.50 after reporting earnings that missed by a penny (.86 cents vs. street at .87 cents). Revenues were in-line at 2.58 billion. For the second quarter in a row, RIMM saw clear pressure on their gross margins. Q3 gross margin guidance of 47% is well short of most analysts which are around 50%. RIMM also sees Q3 EPS of .89-.97 cents compared to consensus of .98 cents. The range is very wide and likely reflects the economic uncertainty and the potential for additional pricing pressure. Not a good report and I remain bearish on tech stocks primarily due to the gross margin compression that seems to be pervasive across the sector.

September 25, 2008: Morning Call

September 25, 2008: Morning Call

Fair Value: SP500 – 1189.54; NDX: 1673.86; DOW – 10845

Technical Levels:

SPX: 1136-1142 support/1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020 support /2210, 2264, 2303 resistance:


Pre-market EPS: DFS (.36/918.0M); TXI (.81/273.0M); MTN (-.18/256.1M)
08:30: Indian Wholesale Price Index (w/e Sep 13): 12.23%
08:30: FCX presents at CSFB Global Metals and Mining Conference
08:30: Durable Goods Orders (Aug): -1.9%; Ex-Transportation: -0.5%
08:30: Initial Jobless Claims (w/e Sep 20): 450,000; Cont. Claims: 3.51M
09:30: AKS presents at CSFB Global Metal and Mining Conference
10:00: New Home Sales (August): 510,000; -1.0% MoM
10:35: EIA Natural Gas Storage Change
11:00: DFS Earnings Call
12:00: ORCL Investor Day
17:00: RIMM Earnings Call
19:30: Fed’s Fisher speaks on “Responding to Turbulence” in NYC
Post-market EPS: RIMM (.87/2.59B)

Foreign Market Summary/Key Macro News/Commentary:

S&P futures are trading 3 points above fair value while the NASDAQ futures are trading 7 points above fair value at 7:30am ET. The S&P futures were up 11 points earlier in morning but have pared the gains after GE issued a profit warning. The resilient tone this morning can be attributed to growing optimism that a compromise has been reached on the 700 billion dollar Treasury bailout package. Following a final compromise, market participants will begin to focus on Q3 earnings and Q4 guidance. Forward guidance is expected to be weak but, like the TARP legislation, the devil will be in the details. Sustained resilience in the broader averages today would be a constructive sign that equity markets have discounted weaker guidance. Along those lines, RIMM’s earnings tonight will be a key catalyst in setting the tone for the broader tech sector earnings next month. During the last quarter, many tech companies reported gross margin pressure and the shares were punished because of concerns that end demand is weakening. Given increasing fears about pricing pressure, ASP’s will be one of the primary metrics to watch in RIMM’s report tonight (ASP’s could be even more important than the Net Addition numbers). European markets are up 0.60% despite the FTSE trading down 0.30% (French and German markets are up 0.75%). German consumer confidence came in better than analysts expected. The best groups include banks, insurance, steel and energy with weakness in Auto’s, Machinery and Consumer discretionary. Volume remains light in Europe. Crude oil is down 2 bucks to 103.50 in early trading on economic concerns despite increasing fears that supplies are threatened in Nigeria. Asian markets declined for a 3rd session in a row after Honda and Toyota both cut global production targets citing weakening demand for trucks and SUVs. Asian shipping companies were also lower after the Baltic Dry Index fell 6.1% in Wednesday’s trading. The Nikkei fell 0.90% Hang Seng down 0.15%. Shanghai up 3.9%. India and Australia down 1.0%.

Impact Research Calls/Market Moving News:

GE (24.59): General Electric guides Q3 EPS to $0.43-$0.48 vs. prior $0.50-$0.54 and Reuters $0.52: Shares are down 5% in the pre-market. The knee jerk move lower in the S&P futures was fairly muted – S&P futures dropped 8 points following the GE warning. The company guides full year EPS to $1.95-$2.10 vs. prior $2.20-$2.30 and Reuters $2.21. GE now expects its financial services businesses will earn appx $2B in Q3. Industrial earnings are expected to increase appx 10-15%, excluding Consumer & Industrial. GE also reaffirmed its commitment to its AAA credit rating. GE says its funding position is strong and it has performed well during the recent market volatility, though is taking steps to strengthen its already strong capital and liquidity position.

AAPL (128.71): BMO Capital lowers their Mac unit estimate due to the weakening consumer economy. Here are there comments: “We are reducing our revenue estimates for Apple, based on lower CPU units for both the September quarter and FY2009, as shown herein. For example, we are lowering our September CPU unit estimate to 2.71 million from 2.86 million. We have also modestly increased our gross margin assumptions owing to 1) lower component costs, and 2) previous conservatism on our part. Valuation: We are lowering our target price to $180 from $190, to reflect lower unit growth, applying the lower end of our valuation range of 30x-31x to our CY2009 EPS estimate of $6.07. Recommendation: We maintain our OUTPERFORM rating, since we believe that long-term share gains in CPUs and phones remain significant. Trough multiple has been 20x-22x. Based on our estimates, this suggests trough valuation (assuming no change to Steve Jobs' status) of ~$120. Hence, while we think Apple's stock could trade modestly lower on disappointing CPUs, we believe that downside is limited.

Bailout plan ignores Warren Buffett's teaching - WSJA "Heard on the Street" column says the proposed bailout doesn't address the main problem -- lack of capital -- as fully as it should. If Goldman Sachs (GS) needed to raise capital, it seems reasonable to conclude some other banks might, as well. Simply taking distressed assets from banks' balance sheets will not calm credit markets. Berkshire Hathaway (BRK.A) probably bet on GS because Buffett was not distressed by its balance sheet; a similar level of confidence for investors looking at the entire financial system is a prerequisite for any possible return to normalcy. The column says the government needs to, as Buffett did, shore up institutions that can survive the crisis through asset purchases and/or equity investments. And it needs to allow the weakest to be euthanized by the FDIC.

PBR (45.30): Petrobras finds "large" natural gas and oil reserves following conclusion of drilling at Jupiter oil field. The drilling confirmed the discovery that was already announced on 21-Jan-08. Jupiter is located 290 km off the coast of the State of Rio de Janeiro and 37 km east of the Tupi area, at a water depth of 2,187 meters. The final depth that was reached was 5,773 meters from the surface of the sea. Recall that Petrobras controls 80% of Jupiter.

NKE (59.27): Shares are up 3 points on solid earnings. Q1 EPS of 1.03 versus consensus of .92 cents. Revenues of 5.43B vs. street of 5.2B. Gross margin reported 47.2% vs. SA 45.3%, and up from 44.8% in the year-ago quarter. SG&A expenses were 34.2% of revenue vs. year-ago 30.8%. Global inventories ended the quarter at $2.5B, an increase of 14% y/y; recall the increase in Q4 was 15%. Gross margin is now expected to increase as much as 100 bp for the full year, which is better than their initial forecast of essentially flat; the improvement in the balance of the year should be less than that seen during Q1. Management goes on to note that they are cautious on the margin outlook given the uncertainty around the global economy and on cost pressures

COF (52.49): Capital One 14M share secondary priced at $49 a share through Citi and JPMorgan - Dow Jones: COF shares are trading below the secondary price this morning at 48.75.

Citi notes solar legislation progress: Firm notes that House Democrats abandoned plans to bring a modified version of HR 6049 to the floor, and are apparently planning to try to negotiate a deal with policymakers in the Senate on legislation that would pass both houses, then go on to the White House for signature. Citi said that the development is a positive, with the hope that a new bill will make it to the floor as early as tomorrow, presumably including investment and production tax credits. Firm notes that any additional legislative movement should be a positive.

Semiconductor group reduced to market weight from overweight at WachoviaThe firm cites a material softening in end market demand and lowers their 2008 semiconductor sales growth projections to 4-7% from a prior estimate of 5-9.

Computer Hardware industry downgraded to market weight from overweight at Wachovia: The firm cites a softening demand environment as rationale.

Wednesday, September 24, 2008

Two Must Read Articles: Source: NY Times and Minyanville



cut and paste

September 24, 2008: Morning Call

September 24, 2008: Morning Call

Fair Value: SP500 – 1191.19; NDX: 1659.83; DOW – 10867

Technical Levels:

SPX: 1136-1142 support/1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020 support /2210, 2264, 2303 resistance:


10:00: Existing Home Sales (August): 4.94 million; -1.2% MoM
10:00: Bernanke testifies at Congress’s Joint Economic Committee
10:00: LOW Analyst and Investor Conference
10:35: DOE/API Crude Oil and Gasoline Inventories
13:00: CSCO Business Update Call
14:30: Paulson and Bernanke testify on Financial Crisis at House Panel
17:00: NKE Earnings call
Post-Market EPS: NKE (.93/5.18B); BBBY (.46/1.8B)

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 8 points above fair value while the NASDAQ futures are trading 6 points above fair value at 7:30 am ET. GS shares are trading 6 points higher after the company raised 5 billion in capital from Warren Buffett (shares are well off the after-hours high of 137-138). Separately, Goldman is pricing a 2.5 billion dollar public offering of common stock (Goldman increased the size of the offering to 5.0 billion). Buffett structured the preferred deal very conservatively and the news boosts confidence in the ongoing solvency of Goldman Sachs and the marks on the balance sheet (CDS have come down 54 basis points to 320; GS bonds indicated higher). According to Mike Mayo, earnings dilution will approach 20% (Mayo cuts 2009 EPS to 11.50 from 14.25 but the dilution will be greater now since they are raising 5 billion). Buffett is probably the only person on earth that could structure a deal this favorable with Goldman Sachs. The bottom line is that Goldman needed Buffett more than Buffett needed Goldman and the deal is structured accordingly. Other catalysts today include: Aug Existing Home Sales at 10 ET. Fed Chairman Bernanke testifies on the economic outlook before Congress's Joint Economic Committee at 10 ET. Bernanke and Treasury Secretary Paulson will testify on the bailout plan before the House Financial Services Committee at 14:30 ET. Bed, Bath & Beyond (BBBY), Nike (NKE) and Paychex (PAYX) are among the companies expected to report earnings after the close. Nov WTI crude +$2.48 to $109.09, ahead of the weekly supply data due at 10:35 ET. European markets are flat to modestly lower (London down 0.40%) in light volume. Markets were initially higher on the news of Buffett’s investment in Goldman Sachs but disappointing German IFO data weighed on sentiment. Breadth is weak with 63 of the 100 components in the FTSE 100 in the red. Asian markets rallied overnight with financials among the best performing groups on the Buffett investment in GS. Macquarie rallied 11% in Sidney.

Impact Research Calls/Market Moving News:

GS (125.05): Goldman Sachs confirms investment from Berkshire Hathaway (BRK.A): Goldman says it has reached an agreement to sell $5B of perpetual preferred stock to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 10% and is callable at any time at a 10% premium. In addition, Berkshire will also receive warrants to purchase $5B of common stock with a strike price of $115 per share, which is exercisable at any time for a five-year term. Goldman Sachs said to double size of equity sale to $5B after announcing a 2.5 billion offering last night.

GS (125.05): Goldman Sachs has moved decisively to counter credit concerns, says Bernstein: The firm believes the change in regulations, the raising of capital through Berkshire (BRK.A) and the access to the discount window should put a stop to the debate about GS's capitalization and liquidity. Target reduced to $165 reflecting the raise in capital. Rating remains market perform.

GS (125.05): Deutsche Bank analyst Mike May comments on the Buffett deal: “Reduced Leverage as Part of Transition to Bank: GS announced new equity issuance that should reduce its leverage by about 1/4th, give a boost a confidence to its ongoing solvency (since Warren Buffett is purchasing preferred and warrants), and facilitate its transition to a more conservative bank. Yet, the move also dilutes EPS by about 1/5th (est. '09 EPS goes from $14.25 to $11.50), does not reflect as much confidence by Buffett in the common stock (which he did not purchase), and comes at a time of likely business pressure with non-U.S., hedge funds, private equity, and other stock market sensitive businesses. Maintain Hold. Increased Confidence in Goldman's Solvency: In our opinion, if one thing is for sure, Goldman knows how to reorient itself for a changed environment, and this move is what was needed now. The result should be increased confidence in Goldman as a going concern. Its Tier 1 ratio increases to an est. 14% from 11.6%, which the Fed earlier this week said was "well capitalized." It is possible that Goldman will use the new capital to purchase distressed assets or even consider an acquisition. In any event, the move gives it more strategic options and aids in creating a lower risk profile during a risky time. Valuation and Risks Reflect a Business in Transition: GS is transitioning from a broker to a bank in a very short period of time, raising questions about its future earnings power (will the Fed require some scaling back of activities in trading = 2/3rd of revenues) and risk. The result is that we accord a lower than historical price-to-book ratio of 1.5x times on est. year-end 2009 book value of $106/share to get a price target of $159 (down from $165). Up- and downside risks include a worse/better-than expected economy, a rebound in the housing market, a steeper yield curve, increases in unemployment and bankruptcies (in the U.S. and abroad), and, as a Federally regulated bank holding company, changes in U.S. and foreign laws and regulations.

BK (31.81): Bank of New York Mellon sees ~$425M after-tax charge in Q3 related to money market fund encountering problems: As a result of recent market events, BK will provide support to clients invested in money market mutual funds, cash sweep funds and similar collective funds impacted by the Lehman Brothers bankruptcy filing. Company will be issuing support agreements related to five commingled cash funds used primarily for overnight custody cash sweeps and one fund used for the reinvestment of cash collateral within the company's securities lending business. The company expects to incur an after-tax charge of approximately $425M in Q3. This charge includes additional costs associated with previously disclosed capital support agreements that were outstanding at the end of Q2.

GS (125.05): Warren Buffett comments on broader markets and Paulson bailout plan in CNBC interview. Here are some quotes: Buffett on CNBC saying that the system was "very close to go over the precipice last week and the complex nature of what was unfolding could have made what we saw pale in comparison to anything we have seen in history of US financial markets." Buffett says, "A collapse of the institutions that were threatened last week would have caused other industries to grind to a halt." A few more days of "money market funds getting in trouble and bond yields getting close to zero would have caused chaos…. Last week will look like nirvana if Congress does nothing…. This is the time to do something to get the country back on the right track…. You have huge institutions that are all looking to deleverage at the same time so you need one huge institution that has the ability to leverage up and the US Government is the only institution that can leverage up right now. The government has to pay prices that they can get on the open market - not the price banks are carrying on the books or the bank's cost basis. They have to pay market price and this deal could work."

MER (26.20): Merrill Lynch downgraded to neutral from overweight at HSBC

NYX (38.56); NDAQ (33.00); NITE (14.40): Knight (NITE), Nasdaq (NDAQ) upgraded; NYSE Euronext (NYX) downgraded at Goldman Sachs: NITE, NDAQ upgraded to buy from neutral. NYX downgraded to neutral from buy.

GOOG (429.27); BIDU (263.50); YHOO (18.93); MSFT (25.44): Thomas Weisel comments on comScore search data: The firm notes that BIDU's queries were up 187% and 123% y/y in August and July, respectively, which was aided heavily by the Beijing Olympic games, which could also be reflected in the slight drop in GOOG's international query share in August. Thomas Weisel notes that GOOG still dominates the international search market with nearly 59% of the market share with a 31% y/y growth rate. The data indicated that within the U.S., GOOG continued gaining market share from its competitors, further expanding its market leader position with a 49% y/y query growth, while both YHOO and MSFT continue on a downward trend

CNQ (55.95): CONSOL Energy cuts Q3 coal production forecast to 15M tons, below prior guidance of 16.4-18.4M tons: At 15 million tons of production, the company expects unit costs for the quarter to be approximately 8% to 10% higher than the second quarter ended June 30, 2008, in which reported unit costs were $41.60 per ton produced. CNX cites several factors including: several roof falls along mainline belts, where roof conditions were affected by changing humidity levels; delays in resumption of longwall production following equipment moves at several mines because preparation of a new area to be mined was not complete; and increased frequency of inspections related to health and safety regulations which cause a reduction in mining equipment availability, for the reduction.

RIMM (96.97): Goldman’s Option Strategist comments on RIMM ahead of earnings – recommends closing down bear put spreads ahead of earnings release: “Implied vol is up ahead of earnings and shares are down nearly 4%; close RIMM put spreads at moderate profit. Last week we recommended buying Oct $85/$95 put spreads to hedge our analyst’s cautious view ahead of earnings and below consensus EPS estimate. Her concern is based on an expectation for below consensus device unit sales and weakening enterprise trends as reflected in the recent GS IT Survey results. Since last week shares are down 3.7% and 1-month implied volatility (85%, 98th percentile) and skew (99th percentile) are both up, resulting in moderate gains on put spread positions. Given extreme market volatility and macro uncertainty we would close put spreads at a profit ahead of earnings on a risk/reward basis. We estimate that options imply a +/-18.6% move on earnings versus a +/-10.7% average move over the past 4 quarters.

ENER (56.46): Energy Conversion maintained buy at Credit Suisse: Target is $86. The firm says they would be buyers of ENER at the open. Credit Suisse notes that ENER was down 18.5% on 23-Sep on a negative pre-announcement from its US customer Solar Integrated Tech. The firm says after speaking with management after the market close they believe the sell off was overdone. The firm remains confident the company will meet guidance for Sep and full year.

GOOG (429.27): Google maintained buy at Piper Jaffray after checks: Target is $785. The firm notes that although the comScore data was uninspiring, channel checks were positive for the quarter. Piper is anticipating in inline quarter for GOOG, which the firm believes will be a positive for the shares due to current low expectations.

FBI probing Fannie, Freddie, Lehman and AIG - WSJCiting senior law-enforcement officials, the Journal reports that the preliminary inquiries are focusing on whether fraud helped to create some of the problems at the four companies (nice work starting an investigation after everyone was able to carry boxes out of the offices!).

Tuesday, September 23, 2008

September 23, 2008: Morning Call

September 23, 2008: Morning Call

Fair Value: SP500 – 1209.76; NDX: 1776.90; DOW – 11026

Technical Levels:

SPX: 1136-1142 support/1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020, 2210 support /2264, 2303 resistance:


Pre-market EPS: LEN (-.52/1.06B); FDS (.64/153.3M)
09:30: Paulson and Bernanke testify on credit turmoil at Senate Panel
09:45: GRMN presents at Thomas Weisel Consumer Conference
10:00: Richmond Fed Manufacturing Index (Sep): -12
10:00: House Price Index (July): -0.2% MoM
10:30: GOOG Android powered handset to be launched at T-Mobile Press Conf.
11:00: LEN Earnings Call
11:00: SEE Investor Day
12:00: JOYG Analyst Day
17:00: ABC Consumer Confidence

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 2 points above fair value while the NASDAQ futures are trading 5 points below fair value at 7:30 am ET. Treasury Secretary Paulson, Fed Chairman Bernanke, SEC Chairman Cox and OFHEO director Lockhart will testify before the Senate Banking Committee on the financial crisis and the bailout plan at 9:30 ET. The Sep Richmond Fed Manufacturing Index and the Jul House Price Index will be reported at 10 ET. Asian markets declined overnight with financial related stocks among the weakest sectors. Hong Kong dropped 3.7%. Shanghai dropped 3.8%. India dropped 3.0%. Energy shares outperformed due to stronger commodity prices. European markets are down 1.5% in light volume on weak economic data and concerns surrounding the US government bailout package. Banks and insurance companies are among the weakest with declines of 2.5%-3.5%. The dollar is flat against the Euro after getting hammered in Monday’s trading session. November Crude Oil is down 2 bucks to 107.40 after stunning gains yesterday in October Crude (October Crude expired yesterday). Expiration, thin trading, and apparent manipulation fueled Monday’s rally in October crude oil.

Impact Research Calls/Market Moving News

Banking Sector: Oppenheimer's Meredith Whitney reduces estimates on banking group, Wachovia (WB), Bank of America (BAC), others: The firm cites deteriorating credit and charges in the quarter as rationale for the reduction in estimates.
· JPM: Oppenheimer lowers their Q308 estimate by $0.19 to $0.21, their FY08 estimate by $0.30 to $1.65, and their FY09 estimate by $0.35 to $1.45.
· BAC: Oppenheimer lowers their Q308 estimate by $0.35 to $0.40, their FY08 estimate by $0.63 to $1.85, and their FY09 estimate by $0.95 to $1.95.
· C: Oppenheimer lowers their Q308 estimate by $0.44 to ($0.36), their FY08 estimate by $0.87 to ($2.30), and their FY09 estimate by $1.65 to ($1.20).
· WFC: Oppenheimer lowers their Q308 estimate by $0.04 to $0.13, their FY08 estimate by $0.04 to $1.37, and their FY09 estimate remains at $1.50.
· WB: Oppenheimer lowers their Q308 estimate by $0.16 to ($0.31), their Q408 estimate by $0.02 to ($0.32), and their FY08 estimate by $0.18 to ($5.18).

GE (26.15): General Electric downgraded to neutral from buy at Merrill Lynch: Price target decreased to $28 from $37.50. The firm cites fundamental pressures and says its estimates are now significantly below consensus.

WSJ comments on Fed move to loosen rules for investing in banks
The decision to allow buyout firms and private investors to take larger stakes in banks has been brewing for at least two years and should encourage private-equity firms, government investment funds, and others to buy stakes in banks, "transferring capital from those that have it to those that need it." Investors can now take a 33% equity and 15% voting interest without being deemed controlling investors; they can also take two (vs. one) board seats. Washington Mutual (WM) is not affected by the change, because it is governed by the Treasury Department's Office of Thrift Supervision. The article largely praises the Fed's willingness to be flexible in trying to deal with the current situation, but notes the flexibility will need to turn taut on a moment's notice to prevent activist investors from taking advantage of the system.

GS (120.78); MS (27.09): WSJ looks at future for Goldman Sachs (GS), Morgan Stanley (MS): A "Heard on the Street" column runs through the pluses and minuses of the firms' becoming Fed-regulated bank holding companies. It notes that MS's sale of a stake to Mitsubishi UFJ Financial (MTU) essentially acknowledges the days of operating on thin capital cushions are over. The stocks risks and returns are headed permanently lower.

Moratorium on market-value accounting not a good idea - WSJ: In a "Heard on the Street" column, the Journal notes that some banks want the government to suspend market-value accounting as part of its bailout plan. These banks believe that such overly pessimistic marks fail to reflect the true long-term value of the assets and cause more problems for the beleaguered banking system as firms are forced to take additional writedowns. According to the column however, such a move would leave investors even more clueless than they are now about bank balance sheets, a dynamic that could serve to exacerbate the credit crisis. Of interest, the article notes that added confusion may also lead investors to stop lending to banks, or charge them more to borrow if they are unable to determine what the institutions are actually worth.

NTRS (71.00): Northern Trust upgraded to buy from neutral at Merrill Lynch

Monday, September 22, 2008

September 22, 2008: Morning Call

September 22, 2008: Morning Call

Fair Value: SP500 – 1258.15; NDX: 1756.77; DOW – 11401

Technical Levels:

SPX: 1136-1142 support/1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020, 2210 support /2264, 2303 resistance:


08:45: PHM presents at Deutsche Bank Homebuilders Conference
11:30: Fed’s Fisher speaks on the US economy and financial industry
13:00: NKE Annual Shareholders Meeting
14:00: CTX presents at Deutsche Bank Homebuilders Conference

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 20 points below fair value while the NASDAQ futures are trading 24 points below fair value at 7:25 am ET. The Federal Reserve has approved Goldman Sachs (GS) and Morgan Stanley (MS) to become bank holding companies. The Fed will extend credit to the US broker-dealer subsidiaries of GS and MS against all types of collateral. Asian markets rose, though the rally was more muted than Friday's. Shares in Australia soared after the securities regulator banned short-selling. Trading was postponed to 11:00 local time as the Australian Securities & Investments Commission clarified that existing hedge positions would be exempt from the ban on short-selling. Stocks in China surged after the securities regulator said it may make it easier for companies to buy back shares. European markets are trading mixed as investors digest the $700B U.S. plan to mop up mortgage assets. French Finance Minister said it isn't going to enact its own bank-rescue plan. Deutsche Bank (DBK.GR) is higher after it announced it will raise €2.0B to finance the acquisition of a minority stake of 29.75% in Deutsche Postbank. Bradford & Bingley (BB.LN) is trading higher after reports the Financial Services Authority had approached potential white knights

Impact Research Calls/Market Moving News:

GS (129.80): Goldman Sachs to become fourth largest bank holding company, to be regulated by Fed: The company says it feels the market views oversight by the Federal Reserve and the ability to source insured bank deposits as providing a greater degree of safety and soundness. GS views regulation by the Federal Reserve Board as appropriate and in the best interests of protecting and growing its franchise across its businesses

GS (129.80); MS (27.21): Federal Reserve approves Goldman Sachs (GS), Morgan Stanley (MS) to become bank holding companies: Pending a statutory five-day antitrust waiting period, the Fed has approved the applications of GS and MS to become bank holding companies. The Federal Reserve Board has authorized the Federal Reserve Bank of New York to extend credit to the US broker-dealer subsidiaries of GS and MS against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch (MER). The Board has also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of GS, MS, and MER against collateral that would be eligible to be pledged at the PDCF.

The death of Wall Street as we know it - WSJSources say last night's move to becoming bank holding companies had been under consideration for some time, and was done at Morgan Stanley (MS)'s and Goldman Sachs (GS)'s request. The former investment banks are taking on much greater supervision in exchange for far lower profitability. A GS spokesman says the move allowed the firm to "directly address issues that have become of mounting concern to market participants in recent weeks." But it suggests problems were worse than anyone has acknowledged. The banks will now be able to re-organize, be acquired, merge, make acquisitions, and possibly avoid mark-to-market accounting. A MS spokeswoman says the bank will roughly halve its leverage ratio to something more like the 10 that characterizes commercial banks over the next few years. But lower leverage is unlikely to be sufficient to cure the market's problems.

SEC to probe credit default swaps reports the WSJ: The SEC said it will require hedge-fund managers to submit, under oath, their trading activity in financial-company shares and related instruments such as credit-default swaps as part of the Commission's ongoing investigation of market manipulation and rumors.

GOOG (449.15): Barron's Technology Trader says the case for Google is still compelling: Google is cheap again, too cheap to ignore. Even at some newly lowered estimates for the company, it is still trading below the 22% profit growth some analysts expect. Bernstein says that even its most pessimistic outlook for the company puts the value at $535 per share. The scenarios it came up with that could drive the stock below $400 are all outlandish and exceedingly unlikely.

Government plan gives banks some breathing room says the WSJThe ban on short selling has helped valuations and the Fed's bailout is still full of questions says a Heard on the Street column. But the government moves have created some time for the banks to raise fresh capital or to arrange a deal that couldn't be done in falling markets. Both courses of action could reduce the amount of money the government will need to commit to any rescue plan. Momentum may have finally shifted in the banks' favor. The risk is that the volatility will continue and the market's rise has set some banks up to fall.

ABK (3.87): AMBAC Financial provides updated response to Moody's ratings action: Company reiterates that it was surprised by Moody's decision to place Ambac's ratings on review for downgrade. Adds that it can find no o justification for Moody's actions based on its ongoing analysis of Ambac's portfolio, its aggressive remediation efforts and progress toward commuting exposures with certain counterparties. Also points out that in the wake of the government's decision to establish the Mortgage and Financial Institutions Trust that will be authorized to acquire up to $750B of impaired assets from various financial institutions, it believes that whatever assumptions Moody's or other analysts may have employed yesterday are not valid today. Company goes on to note that the near term impact of any downgrade by Moody's would be to increase the pressure on its financial services business, which is comprised of its Guaranteed Investment Contracts (GICs) and swap obligations.

Barron's summary

Special Report: Where to Put Your Money Now: Cover: Which financials to buy and which to avoid, Winners: BK, STT, GS, MS, MER, ACE, CB and TRV. Avoid: GHL, LAZ, USB, WFC, MCO. Paulson's Rally: Despite the unknowns, financial experts are encouraged by the outline of the government's plan to buy troubled assets. Bank of America's (BAC) deal for Merrill (MER) could bring either trouble or triumph, depending on if it has the timing right. The Credit crunch is not over and the consumer will have to go through a retrenchment as credit is less available and growth worldwide slows. Interview: Felix Zulauf, founder of Zulauf Asset Management is now equity adverse and prefers gold and government bonds, if you have to go long in equities he suggests PG, GIS and maybe JNJ. Lead Articles: Falling energy prices could have a noticeable impact on retail sales and GDP growth; The drop in shares of Ciena (CIEN) may have created a buying opportunity, share could go to $17.50; Special Section on Luxury Autos: Barron's looks at the soap opera conflict between Porsche and VW, Porsche looks cheap while VW looks overpriced; The reviewers prefer the Mercedes GL320 SUV to the Smart car; positive on the 2009 Saab 9-3 Turbo X Sport Sedan; The Audi R8 may not be the most practical car but it is gorgeous and great to drive; The Cadillac CTS-V is long on performance and comfort but needs some improvement in the looks; The Cadillac Escalade Hybrid did not stint on the comfort but the responsibility element may need some more work; The Jaguar XF is elegant and could work to save the brand; The Lincoln MKS is comfortable and very powerful; The Lexus LX 570 is exceptional with a spacious interior and solid driving performance; The BMW 135i Coupe is a driver's car and well worth the price; The Audi S5 should earn the company some well-deserved fans; The Lexus IS-F has all of the brand's combination of style, graciousness and civility; Even luxury cars have discounts if you know where to look for them; Other Voices argues in favor of a progressive tax system; Editorial says that credit default swaps created a nation of speculators who don't want to take their losses, one danger is that the Fed will ignite great inflation in order to stave off a great depression. Columns: The Trader is cautious on technology and positive on Arthur J Gallagher (AJC); Current Yield notes that the past week has proved that credit matters and if it collapses, nothing else will stand; Asia Trader is positive on Japanese and Australian stocks including 9020.JP, 9843.JP, 2059.JP, 9735.JP and IPL.AU; Euro Trader notes the impact on Europe of the U.S. rescue plan; Commodities Corner notes that liquidity in commodity trading has dried up as a result of the current crisis which has caused volatility to spike and created substantial downside risk; The Striking Price notes that the ban on short-selling has impacted options and prevents certain types of hedging trades; Follow Up is negative on American International Group (AIG); Up and Down Wall Street discusses the events of the past week; Streetwise says the longer term result on the Street will be a massive reduction in capacity which, when business returns, could be positive for Morgan (MS), Goldman (GS) and some other smaller brokerage shops and the larger hedge funds will morph into true Street counterweights; D.C. Current considers who the next Treasury Secretary might be; Technology Trader says the case for Google (GOOG) is still compelling; Plugged In notes that the troubles for large investment banks could create opportunities for boutiques.

Friday, September 19, 2008

Trading on Mars - You are not allowed to manage risk!

The price discovery mechanism in the marketplace no longer exists because the SEC rule does not contain a market maker exemption. The blanket aspect of these short-sale restrictions has completely rigged the prices on your screens. For the first time in my life, I do not trust the quotes on my screen. The SEC rule not only banned short sales but it also banned effective hedging and risk management. This is a total joke.

SEC orders that stocks are no longer allowed to decline!

The bailout was inevitable because the government has a responsibility to protect the system. The ban on short-selling and corresponding chaos interpreting this new rule is a travesty. The trading halt of SKF is criminal, in my opinion. Confidence in the markets has been damaged.

September 19, 2008: Morning Call

September 19, 2008: Morning Call

Fair Value: SP500 – 1209.28; NDX: 1708.95; DOW – 11031

Technical Levels:

SPX: 1136-1142 support/1235, 1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020 support /2210, 2264, 2303 resistance:


Pre-market EPS:
10:00: Treasury Secretary Paulson announces press conference to discuss comprehensive plan for financial markets.
13:00: Fed’s Evans speaks on Economy

Foreign Market Summary/Key Macro News/Commentary:

Up is Down and Right is Wrong

The S&P futures are trading 40 points above fair value and the NASDAQ futures are trading 48 points above fair value at 8am ET capping one of the most emotional and tumultuous trading weeks in US financial market history. The S&P 500 futures have bounced 100 points (8.8%) off the 1136-1142 support area sending the broader average toward key technical resistance at 1250 on the news of an epic government intervention in US financial markets. Asian markets surged higher in the overnight session with stunning gains of 10% in China on the confirmed news that the Federal Reserve and US Treasury are proposing a plan to remove troubled assets off the balance sheets of financial firms and speculation of a plan to insure money market funds (the Treasury just officially announced the money-market fund guarantee plan at 7:29am ET). In addition, the SEC has banned short selling in 799 financial companies for the next 10 trading sessions and this news is certainly fueling some of the gains in world markets (UK was up nearly 9% at the highs and is poised to have its biggest percentage gain on records). But, the stronger bid in the markets related to short selling will likely prove temporary. There are certainly open questions about how the levered short ETF’s (SKF, SDS, DUG, FXP, SRS, QID, ect) will trade given these rules. Option traders should also expect and position themselves for significant skews in October and longer-dated option contracts in the financial sector. The regulators cannot ban put buying and there will definitely be a market-maker exemption so that the counter-party to the put purchase can establish short-hedge. Given the enormity of the rule changes, I would not rule out significant derivative skews in the broader markets and other sectors that are not impacted directly by the SEC rule because the short-sale proposal does significant damage to the efficient functioning of equity markets. The S&P 500 is now testing the 1250 resistance area and I would be scaling out of long exposure here. After the dust settles and the forced buying eases, the market will begin to focus on Q3 earnings/Q4 guidance and EPS estimates will certainly be under pressure because the global economy has effectively grounded to a halt. Initiating short positions at current levels (1253 area on the S&P futures) also makes sense but recognize that trading conditions are highly emotional. Although some type of a RTC bailout became inevitable over the last few days, the magnitude of the intervention in the markets is nothing short of remarkable and will definitely lead to a more treacherous and uncertain trading environment particularly while the short-sale rules are in place.

Impact Research Calls/Market Moving News:

Treasury announces guaranty program for money market funds
The move had been one of those contemplated by the WSJ and other media sources, as part of the administration's efforts to address the financial crisis. Funds must pay a fee to participate in the program, and those whose NAVs fall below $1 will be notified that they are eligible for the insurance program. President Bush has authorized up to $50B from the Treasury's Exchange Stabilization Fund to finance the program. The Treasury says: "This action should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss."

MS (22.55): Potential Morgan Stanley-Wachovia Corp (WB) deal has Blue Devil feel to it – NYT: Sources say MS would prefer to remain independent, but the talks are picking up pace. MS CEO John Mack and WB CEO Robert Steel are both trustees of Duke University. One option being considered is to split WB into a good bank and bad bank, and then have MS merge with the good bank. The two parties are also discussing the possibility of bringing in a third-party investor like China Investment Corporation, which is run by Gao Xi-Qing, another Duke trustee.

MS (22.55): China Investment Corp (CIC) official says Morgan Stanley (MS), Goldman (GS) can solve their own problems -- Xinhua (Bloomberg): The CIC is "cautious" on overseas investment. Xinhua is citing an unidentified CIC official. Recall there were several reports yesterday that MS CEO Mack was talking on selling a minority stake to China, with some reports indicating that stake may be as high as 49%.

Short-selling scrutiny may prevent financials from bottoming - WSJ
In a "Heard on the Street" column, the Journal reports that by targeting short-sales of financial stocks, regulators in the US and UK may make it difficult for financials to find a true bottom. The article notes that short selling is a crucial component of risk management, while adding that a ban could also wreak havoc for large pockets of the derivatives market. The column goes on to note that short-selling restrictions could also dampen the debate surrounding the health of companies.

Large oil firms think about consolidation - WSJ: The financial crisis and falling oil prices are presenting conditions favoring consolidation, as smaller producers have ample drillable land but inadequate access to debt and equity markets. Buyers are expected to be major players with lots of cash like Royal Dutch Shell (RDS.A), BP (BP), Exxon Mobil (XOM), Devon Energy Corp (DVN), or Occidental Petroleum Corp (OXY). Targets are expected to include Petrohawk Energy (HAWK) and Southwestern Energy (SWN).

BG (69.77); ADM (21.53): Archer-Daniels (ADM), Bunge Ltd (BG) target price reduced at Citi: ADM tp reduced to $25 from $30; BG top reduced to $82 from $95. Firm says companies appear to be poised for negative EPS revisions on weakening fundamentals in soybeans.

Credit default swaps quickly dropping, according to CMA: WB, MS, GS (Bloomberg): WB default swaps fall 94bp to 552 bps (was 638 bp in 07:16ET comment) MS default swaps fall 168bp to 700 bps (was 829 bp in 07:16ET comment) GS default swaps fall 120bp to 372 bps (was 440 bp in 07:16ET comment).

Wilmington Trust (WL), KeyCorp (KEY), Pacific Capital (PCBC) upgraded at RBC Capital
All three banks were upgraded to sector perform from underperform. The banking sector was upgraded to overweight.

U.S. Financial stocks raised to overweight from neutral at Morgan Stanley--Bloomberg

Thursday, September 18, 2008

September 18, 2008: Morning Call

September 18, 2008: Morning Call

Fair Value: SP500 – 1158.84; NDX: 1643.59; DOW – 10618

Technical Levels:

SPX: 1136-1142 support/1235, 1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020 support /2210, 2264, 2303 resistance:


Pre-market EPS: CCL (1.58/4.84B); CAG (.24/2.8B); FDX (1.18/9.8B)
08:30: FDX Earnings Call
08:30: Initial Jobless Claims (w/e Sep 13): 440,000; Cont. Claims: 3.525 million
08:45: MCO presents at Goldman Communicopia Conference
09:30: AT&T presents at Goldman Communicopia Conference
10:00: Philly Fed (Sep): -10.0
10:00: Leading Indicators (August): -0.2%
10:15: S presents at Goldman Communicopia Conference
10:15: MHP presents at Goldman Communicopia Conference
10:30: EIA Natural Gas Storage Change
10:55: MDR, SGR,FWLT, FLR, JEC all present at DA Davidson Engineering and Construction Conference between 10:55am and 13:10pm ET.
13:00: MON presents at Credit Suisse Chemicals Conference
Post-market EPS: ORCL (.27/5.4B); PALM (-.18/324.1M); CTAS (.52/1.0B)

Foreign Market Summary/Key Macro News/Commentary:

The SP futures moved sharply higher at 3am in the overnight session as global central banks announced their most aggressive concerted effort to pump liquidity into the financial system. The Fed and other central banks announced a plan to pump 247 billion dollars into the US dollar short-term funding markets in an attempt to ease what is perceived to be the worst financial crisis since the Great Depression. S&P futures are trading 18 points above fair value while the NASDAQ futures are trading 22 points above fair value at 7:30am. Also of note, UBS is saying that Goldman Sachs has not seen a material movement in client balances, according to the Goldman’s CFO David Viniar. Energy, investment banks, fertilizer, and pockets of technology are the strongest sectors in the pre-market while the airlines are indicated lower. Asian markets got crushed on the open and saw a big reversal on the coordinated central bank announcement. Hong Kong tumbled (7.4%) as investors dumped Chinese financial stocks, but rallied to close little changed. China’s Shanghai Composite also rebounded from session lows (6.5%) closing down only (1.7%) as bank shares rebounded. In Taiwan, the government said conditions are right for the National Stabilization Fund to buy stocks. European markets have seen extremely volatile and hectic trading as well and the initial knee-jerk move on the concerted central bank action was 2% lower before a sharp recovery. Euro-zone markets are up 1.5% at 7:30am. The rumor mill continues to work overdrive with vague chatter about counter-party issues and hedge fund/bank problems. Crude is trading near the $100/bbl level this morning, and December gold nearly hit $900/oz in the overnight session, on continued weakness in the dollar.

Impact Research Calls/Market Moving News:

GS (114.50): UBS comments on Goldman Sachs following meeting with CFO: Firm thinks that while the company is not immune to the ongoing crisis in confidence, GS is in a much better position to deal with the situation than BSC, LEH, and MER were. UBS notes that if reality were to catch up with perception, the firm is confident that management would protect the franchise and do the right thing for shareholders. Firm does not see any material movement of client balances. UBS adds that it is pretty confident that management is lining up all viable options and the firm thinks there are many global institutions that would team up with GS in several forms. Rating is neutral. Target is $145. (My comment: A press release from Goldman giving more specifics on client balance flows would do more to mitigate the rumor mongering).

MS (21.75): WSJ summarizes Morgan Stanley situation: People familiar with the matter say the firm may strike a deal with HSBC Holdings (HBC), Banco Santander (STD), Nomura Holdings (8604.JP), a Chinese financial institution, or a domestic partner such as Bank of New York Mellon Corp (BK). Sources say a phone call yesterday between CEO John Mach and Goldman Sachs (GS) CEO Lloyd Blankfein did not involve talks about a merger, but rather about how to stop short-sellers betting against the two firms. Deutsche Bank (DB), UBS (UBS), Credit Suisse (CS), and others worked to take hedge-fund clients from MS as the stock slid yesterday.

MS (21.75): Morgan Stanley seeks merger despite being in good shape - WSJ
A "Heard on the Street" column says that investment banks live by confidence, and since the market is rapidly losing it in the Wall Street business model, finding a buyer may be preferable to doing nothing. Goldman Sachs (GS) and MS mange their leverage well, but at the moment, credit markets may simply view their ratios (23.7 times shareholder equity for GS, 27.6 for MS) as unacceptable. But the column notes that confidence is only helped by strong partners, which Wachovia (WB) isn't. The column also notes that if MS finds a deal, GS could be left to twist in the wind with no decent partner available as the market beats it.

Regulators changing rules on the fly - NYT
Regulators at four federal agencies -- FDIC, the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve -- quietly proposed significant changes in accounting rules 15-Sep and 16-Sep to encourage consolidation by making banks more attractive to purchasers. The changes largely relate to more favorable treatment of goodwill, and stand to be adopted after 30 days of public comment.

GOOG (414.49): Lehman says comScore Aug US data shows accelerating y/y search growth for Google: GOOG's US queries rose 33.4% y/y, up from the high-20s % y/y growth in H1 and compare to the 1.7% aggregate growth for YHOO, AOL (TWX), MSFT's MSN and Ask (IACI). GOOG's Aug share was 63% vs. 61.9% in Jul.

GOOG (414.49): Bernstein comments on Google, sees the shares as cheap relative to other tech shares: The firm believes that concerns over the economy are generating excessive pessimism about GOOG. Even in a worst case economic scenario, Bernstein sees GOOG worth $660/share with no further dollar appreciation and $535 if there is. The firm sees shares as cheap vs. other tech shares such as AAPL and reiterates their outperform rating.

FDX (88.07): FedEx reports Q1 EPS $1.23 vs preannouncement of $1.23 and Reuters $1.23: Company reports revenues of $9.97B vs. Reuters $9.87B. Total combined average daily package volume in the FedEx Express and FedEx Ground segments grew 1% year over year for the quarter. Guides Q2 EPS to $1.40-$1.60 vs. Reuters $1.35. Reaffirms full year EPS guidance of $4.75-$5.25 vs. Reuters $5.20.

Wednesday, September 17, 2008

Goldman Sachs End of Day Market Comment: September 17, 2008

Source: Goldman Sachs

*Pressures on US money markets increased substantially further today on a wave of risk aversion and flight to quality. The sharp rally in Treasury bills and
rise in spreads to unsecured credit appears to be rooted in a more
generalized reassessment of counterparty risk.

* The turmoil in money markets represents a sharp tightening in
financial conditions at a time when the economy is already struggling.
If it persists, Fed and Treasury officials are likely to escalate the
degree of intervention until they succeed in stabilizing market
functioning (if not market prices).

* Options for Fed and Treasury officials include 1) cutting the funds
rate (a growing possibility), 2) expanding existing liquidity facilities
(possible, though the scope is limited), 3) creating new facilities
(less likely), 4) expanding Treasury issuance (announced today, with
terms yet to continue), 5) paying interest on Fed reserves (an issue of
when rather than if), and 6) buying assets directly in the marketplace
(a last resort move).

Blame the Shorts Part 6

So, the evil short selling forces are to blame for the current carnage in the market? That is what John Mack, James Cramer, and cheerleaders on CNBC would have you all believe. Counterparty risk fears are to blame. In fact, market participants long credit default swaps and complex derivatives are actually afraid that they won't get paid on their profitable bearish positions! Time and again, the easy answer is to blame a short selling conspiracy. Dedicated shorts are simply not that powerful a force in the market. At least, not as powerful as James Cramer would have you believe. The pressure on the market will ease when counterparty risk eases. Maybe a statement by the Fed on counterparty risk or a joint appearance by GS CEO Blankfein and MS CEO Mack on CNBC would do more to calm the waters. Blaming the shorts is not going to cut it. This was tried with BSC, FNM, FRE, LEH, and AIG already.

Where is the dry powder?

Deep value investment managers and long/short equity hedge funds appear to be buckling today. Poor manager performance, redemption requests, and the lack of dry powder are weighing on all of the "cheap" equity sectors and asset classes. I put the word "cheap" in quotes because the market no longer knows how to prescribe a valuation to most assets because the model inputs are changing by the hour and day.

The quantitative risk models like VaR broke last year when multiple standard deviation asset price movements became common place after the credit markets began buckling. The value models are now breaking down and maybe the final liquidation of these strategies will form a sustainable bottom. I just don't have any convinction on where that bottom will be because there does not appear to be an awful lot of dry powder dedicated to buying equities.

That said, I continue to lean on the 1136-1142 level on the SPX as an important support area (April 22, 2005 weekly lows) and would look for tactical long side opportunities at this level particularly if we see a waterfall pattern in the broader averages and this level comes quickly. As I have highlighted previously in this blog, pressure has been building on the buy the dip crowd due to the vicious sector rotations in the Long Commodity/Short financial trade following the July 15 lows.

The recent failures at FNM, FRE, LEH and finally AIG just exacerbated the pressure on this group of market participants. In the final analysis, I don't think there are many market participants who would have predicted that we would see the SPX close at 1213 last night if you were told that BSC, FNM, FRE, LEH, and AIG were going to fail in the beginning of the year. I guess you could view this as good news or bad news but we will only find that out in hindsight. But, for the sake of the system, I hope calmer heads begin to prevail here soon. The financial situation for many people and families are at stake.

Relentless Assault on GS and MS

The assault on GS and MS is relentless. CDS up sharply. Stocks getting hammered. The perception in the market is that counterparties are now questioning whether they want to have their trades with highly leveraged investment banks that require access to the short-term funding markets in order to meet their obligations. This is a huge reversal in sentiment as GS was seen a bullet proof on the counterparty risk side (GS is probvably still bullet proof but perception is always reality in situations like this). Put simply, this is all rumor and conjecture. Nobody seems to have any facts. Is there really any concrete evidence of counterparties pulling business away from GS or MER and sending it to a commercial bank because of the stable depositor base? GS and MS management are in a trap here because of the precedent established by BSC's (and FNM, FRE, AIG, ect) failure to calm the markets. GS and MS are going to need to defend their business models at some point if the carnage continues. This is nuts - the market (or government as a colleague just noted)is in the process of forcing these two companies to do deals with commercial banks.

September 17, 2008: Morning Call

September 17, 2008: Morning Call

Fair Value: SP500 – 1215.81; NDX: 1735.48; DOW – 11065

Technical Levels:

SPX: 1136-1142 support/1235, 1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020, 2112 support /2210, 2264, 2303 resistance:


Pre-market EPS: GIS (.88/3.2B)
04:30: Bank of England Minutes of Interest Rate Decision
07:00: MBA Mortgage Applications
07:00: Bloomberg Global Confidence Index
08:30: Current Account Balance (Q2): -180.0B
08:30: Housing Starts (August): 950,000; Building Permits: 925,000
09:20: AGU presents at Credit Suisse Chemicals Conference
09:30: CMCSA presents at Goldman Sachs Communicopia Conference
10:35: DOE/API Crude Oil and Gasoline Inventories
11:00: COP presents at Bank of America Investment Conference
12:00: NDAQ presents at Bank of America Investment Conference
13:00: POT presents at Credit Suisse Chemicals Conference
14:00: DVN presents at Bank of America Investment Conference
15:00: CF presents at Credit Suisse Chemicals Conference
15:30: RYL presents at BAC Investment Conference
16:30: TEX presents at BAC Investment Conference
Post-market EPS: CKR (.20/352.8M); DBRN (.30/372.3M)

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 6 points below fair value while the NASDAQ futures are indicated 9 points below fair value despite news of the best-case scenario for AIG: namely, a bridge loan instead of a conservatorship. The S&P futures had rallied to almost 1230 in the overnight session on the AIG headlines but have pulled back 20 points on continued fears that the broad based decline in asset prices is not abating but rather picking up steam. GS and MS have been all over the map and the Credit Default swaps on the last two major independent investment banks remain extremely high on questions about whether counter-parties still trust the business model (counter-party risk with a major commercial bank seems more palatable given the deposit base is more stable). The underlying supply suggests that the easy money was made on the AIG catalyst before the news was even announced. That said, short covering could also kick in and take the market but toward those overnight session highs. But, the general trend for equities remains to the downside. As a result, market participants should have more conviction on their short side bets and tighter stops on the long side bets. In a side note, Bloomberg is reporting that “Russian market’s stopped trading for a second day after emergency funding measures by the government failed to halt the biggest stock rout since the debt default a decade ago.” The Russian Micex Index is down 55% YTD. Hong Kong and Shanghai dropped sharply last night (-3.5%). India fell 1.9%. Japan bucked a general trend lower with a 1.2% rally. European markets are nearly up 1% in a very volatile morning after markets reacted favorably to the AIG news, and then fell on concerns about HBOS. News reports that Lloyds TSB were in advanced talks to buy HBOS lead to a turnaround. 72 components in the FTSE 100 are trading higher in London.

Impact Research Calls/Market Moving News:

GS (133.01): Goldman Sachs estimates reduced at Oppenheimer
Meredith Whitney reduces Q4 EPS to $2.60 from $3.45 (consensus s 3.67) and reduces f08 and f09 to $12.23 (2008 consensus is 13.53) and $12.05 (2009 consensus is 16.86). Rating remains perform, as GS is fairly valued. Oppenheimer says it remains cautious on the brokerage sector as it deals with the negative operating leverage.

Money Market Fund Problems (News hit after the close of trading Tuesday): Source NYT. This is an issue to watch because investors were not made whole as was the case in prior money market fund issues during this credit crisis. This fund also is marketed as not taking “risks with their clients money” and was run by a well-known manager in the space, who was perceived to be a very conservative. “In a sign of how the financial crisis is hitting small investors, a huge money-market fund, the Reserve Primary Fund, announced Tuesday that it lost money as its net asset value fell below the hallowed $1-per-share level (to .97 cents), the first time one of these conservative funds has had a loss in 14 years… The news raised the prospect more losses might be in store for other money-market funds holding paper from Lehman, which collapsed Monday, and from other problem-ridden firms. As of Friday, the Reserve Fund had assets of around $62 billion, but they have fallen considerably since…..The Reserve is a New York cash-management firm that prides itself on creating the first money-market fund. It has dubbed itself "the world's most experienced money fund manager" with $125 billion in assets through June. It didn't return calls for comment. The firm notes that its Primary Fund Class Institutional was the top-performing money fund through 2007 among peers, returning a net 5.37%…..”Breaking the buck" is a rare phenomenon that hasn't occurred since the aftermath of the Orange County, Calif. bankruptcy in 1994. Since then other money-market funds have had losses on securities they hold, but their managers have injected fresh capital into the funds to restore them to full value and make investors whole. But in this case, investors are left with the loss, a blow to confidence in these funds, which are often treated like bank accounts.”

GS (133.01): Goldman Sachs target lowered to $145 from $185 at UBS following Q3 results: Firm expects macro issues and higher funding costs to continue to weigh on earnings and valuation. Rating is neutral.

GS (133.01): Goldman Sachs upgraded to outperform from market perform at Wachovia (133.01): The firm sees more pricing power as capacity is reduced.

MS (28.70): Morgan Stanley target lowered to $31 from $41 at UBS following Q3 results: Rating is neutral. Firm expects the stiff headwinds to weigh on earnings and valuation.

MS (28.70): Morgan Stanley weighing whether to remain independent or not – CNBC: People close to the matter say as of late 16-Sep, MS officials are not in merger discussions. But senior people at the firm say further fluctuations in its stock could force it to seek a merger, probably with a well-capitalized bank.

SNDK (15.04): Sandisk rejects Samsung’s hostile 5.85 billion takeover offer. SNDK shares are up 7 dollars in pre-market trading to 22 dollars. There is a huge arbitrage discount vs. the 26 cash offer due to anti-trust issues. Samsung has 42% market share in NAND.

MS (28.70); GS (133.01): Morgan Stanley (MS), Goldman Sachs (GS) Q3 results show how quickly Wall-Street fortunes change – WSJ: But a "Heard on the Street" column says that MS's stellar performance is no guarantee of future returns. MS did better than GS, but on substantially higher leverage. GS's profit came from a lower tax rate and only limited losses on mortgage holdings. And the lack of disclosures on asset valuations was nettlesome. And with credit-default swaps for both firms at almost unthinkably high levels, there is a risk that borrowing costs for large independent brokerages are not coming down, which will make big returns more elusive and foster doubts about their abilities to remain independent.

MON (112.97): Monsanto upgraded to buy from hold at BB&T Capital Markets:

NYT Article: Good Read for big picture issues but nothing market moving http://www.nytimes.com/2008/09/17/business/17leonhardt.html?_r=1&hp&oref=slogin

ADBE (38.14): Adobe Systems reports Q3 EPS $0.50 vs Reuters $0.46 (38.14)
Guidance was for $0.45-0.47. Non-GAAP operating margin was 39.7% vs guidance of 38.5% (Comment: this a break from the weaker gross margin trend we have seen across the technology sector. But, ADBE essentially withdrew 2009 guidance in order to be conservative given the significant uncertainty). Piper Jaffray is reiterating buy and 50 target based on the view that the “model remains conservative and investors focus will shift towards the upcoming launch quarter for CS4. Q4 guidance assumes a non-GAAP operating margin of 39.5%.

Exchange/Market Structure Sector: GFIG, ITG, NDAQ upgraded, CME downgraded at Keefe, Bruyette: GFIG, ITG and NDAQ upgraded to outperform from market perform. Target prices: GFIG reduced to $8 from $14; ITG increased to $37 from $33; NDAQ remains $35. CME downgraded to market perform from outperform, target reduced to $325 from $480. The firm also reduced targets on FCSX, IBKR, ICE, NITE and NYX.

Crude Oil (91.15): Crude is up 3.10 on AIG Fed rescue and strength in the Euro. Goldman Sachs reduces its 3 mo WTI crude forecast to $115/bbl vs prior $149/bbl – wires: Firm also reduced its 6 mo target to $125/bbl vs. prior $142/bbl and its f08 target to $123/bbl vs. prior $148/bbl.

Tuesday, September 16, 2008

The CNBC Comedy Show!

CNBC's coverage of the unfolding liqudity crunch at AIG has been hysterical. It would be very funny if it was not so insane.

CNBC's chief bimbo correspondent Michelle Caruso-Cabrera just asked the Standard and Poors analyst who downgraded AIG last night whether he "spoke to God before he made that decision to downgrade AIG's debt?"

Ummm, wow!

I am looking forward to when I can put CNBC back on mute.

"Private Sector Solution for AIG Definitively Dead" - Faber

Reports David Faber. Knee jerk higher on a definitive AIG government backstop is unlikely to take the S&P 500 through 1235 and 1250 resistance so position accordingly. There has been tremendous damage done to the fabric of the US financial system and that will certainly weigh on 2H EPS estimates.

CNBC or the Fed/Treasury to the Rescue???

CNBC's Charlie Gasparino reports his sources are saying government assistance MAY be on the table. I would not take this as 100% fact. David Faber's sources are saying the government is still opposed to government assistance. Obviously, the situation is very fluid and the government's response is capable of changing very quickly due to the systemic risk to the financial system.

Where is the political will?

When will the politicans blink is the key question as the trading day progresses? So far, Senator's McCain, Biden, and Shelby have all signalled an unwillingness to have the government back-stop AIG counter-party risk. The comments were obviously carefully crafted but the market responded with dismay. Former AIG CEO Hank Greenberg was the first AIG affiliated official to explicitly state that AIG would pose a systemic issue for the financial markets. Greenberg said that the government, Fed, and private markets need to solve this liquidity event. The bounce off the lows suggests that market participants are anticipating a speedy resolution to the AIG counter-party risk. Although he is a typical grandstander, Senate Banking Chair Chris Dodd has a history of making market friendly comments during this financial crisis. A Dodd statement at some point today will likely be a key catalyst and signal whether there is the political will to solve this AIG problem. The private markets have unlocked the trigger and are ready to blow the government's head off with sharply lower asset prices in order to force action. Cooler heads will likely prevail but the downside is too great if they do not.