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:

Events:

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.