September 2, 2008: Morning Call

September 2, 2008: Morning Call

Fair Value: SP500 – 1282.59; NDX: 1874.88; DOW – 11542

Technical Levels:

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

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

Events:

05:00: Euro-zone Producer Price Index (July): 1.1% vs 1.2% consensus MoM
10:00: ISM Manufacturing (August): 50; Prices Paid: 82.
10:00: Construction Spending (July): -0.4%
11:00: HAL presents at Lehman CEO Energy Conference
11:40: SUN presents at Lehman CEO Energy Conference
12:20: EOG presents at Lehman CEO Conference
13:00: APA presents at Lehman CEO Energy Conference
14:25: CHK presents at Lehman CEO Energy Conference
15:40: NE presents at Lehman CEO Energy Conference
16:05: GOOG presents at Citibank Tech Conference
17:00: ABC Consumer Confidence
18:00: NTAP Annual General Meeting
Post-market EPS: SNDA (.51/115.2M)


Foreign Market Summary/Key Macro News:

S&P futures are trading 10 points above fair value while the NASDAQ futures are indicated 20 points above fair value at 8:00am ET. Crude oil and commodity prices are getting crushed this morning after Hurricane Gustav weakened as it approached the Gulf Coast over the weekend. Commodity leveraged stocks are indicated sharply lower (5% or more in many securities) while Airlines, Financials, and Consumer discretionary stocks are indicated higher. European markets are up 1.1% on falling crude and the UK government announced measures to help stimulate the lower end of the housing market. The British Pound and Euro are sharply lower against the dollar. Best sectors in Europe include Banks, Retail, Travel, and Building Materials. Energy and Basic materials are the weakest sectors given the carnage in the underlying physical commodities. Volumes are a little better versus last week’s holiday trade. Asian markets closed lower with Japanese markets closing down 1.75% following the resignation of the Japanese prime minister creating uncertainty over the country’s economic policies. Chinese stocks retreated 1.0%, as investors are concerned that the government will continue the anti-inflation policies; Chinese banks dropped 2%. Indian markets surged 3.8% on easing fears of inflation due to a decline in commodity prices overnight.


Impact Research Calls/Market Moving News:

GOOG (463.29): GOOG shares are upgraded at Stanford Group. Shares are upgraded to buy from hold after channel checks indicated US search market trends have stabilized as they believe GOOG’s market share gains are broadening, Q3 expectations are modest and valuation is near lows. The price target is 550 a share. GOOG shares are indicated up nearly 10 dollars in the pre-market.

GOOG (463.29): Google to introduce web browser 2-Sep - WSJ
A posting on a company site says the open-source Chrome, designed to make it easier and faster to browse the web, will be available for download. The browser will give GOOG the chance to learn more about what people do online, and it gives the company a platform from which to develop its own Internet services without needing to conform to other companies' standards. A source says GOOG has been working on the browser for about two years

AAPL (169.53): Thomas Weisel lowers numbers on AAPL. “Following recent checks with 35 retail AAPL stores (USA, UK and Canada), we are incrementally more cautious on the outlook for F4Q08 (Sep) revenue and EPS for AAPL. As such we are slightly lowering our already-below-consensus F4Q08 estimates, but maintaining our above-street FY09 estimates and Overweight rating. We continue to expect AAPL to deliver above-consensus FY09 results driven by continued market share gains, continued international expansion, and new product launches/refreshes. However, our recent survey suggests that (1) back-to-school promotions are generating strong customer interest, and contributing to the management-advertised gross margin headwind for F4Q08, (2) overall retail sales growth appear to be slowing to the corporate average growth rate of 26% in F4Q08, and (3) iPhone unit sales have slowed in the past two weeks. Our $215 12-month price target is based on a 1.15 PEG ratio on our FY09 EPS estimate of $6.22 and 30% EPS CAGR we expect AAPL to deliver from FY08 to FY11. Reducing September quarter estimates slightly. We are reducing our September quarter estimates from $8.0bn to $7.9bn and our EPS estimate from $1.09 to $1.08 (consensus is $8.1bn and $1.11). Mainly driving our reduced September quarter estimates is a more modest iPhone unit estimate from 6.9mn to 5.5mn (still street-high, we believe). We expect that the reduced iPhone sell through in the September quarter will result in better iPod Touch sell through FY09, creating no affect to our FY09 estimates of $41.1bn and $6.22 (consensus is $40.4bn and $6.06). Our F4Q08 unit estimates for iPods remain at 7.65mn (down 25% y/y) and Macs remain at 2.9mn (up 35% y/y).”

AAPL (169.53): Apple added to Alpha List at Piper Jaffray: Piper Jaffray’s Gene Munster ads AAPL to the Piper Jaffray Alpha List based on three catalysts: The firm says that on 15-Sep, AAPL will end its most aggressive back to school promotion ever and the impact on the September quarter Mac & iPod units is underestimated. Secondly, Munster is expecting a September event with new Macs and iPods. The firm also notes that the international iPhone rollout in the Sep. and Dec. quarters will be a positive. Reiterate Buy and $250 price target.


GS (163.97); LEH (16.09); MS (40.83): Wachovia analyst Doug Sipkin previews Q3 earnings for the November year-end investment banks and says it “will be a quarter to forget. Seasonal slow markets, reluctant investors, declining valuations in both fixed income and equity, and more marks will highlight a challenging third quarter for the industry. MS should report the strongest quarter in the group while LEH the weakest with an estimates loss per share of 3.46. Widening debt spreads continues to make fixed income a challenging business. Combined with tougher trading markets and poor performance, a more sustained slowdown from in flows from hedge funds is becoming more likely. A bottom in housing and signs of an economic recovery are critical to an improving banking sector. GS’s Q3 EPS estimate is lowered to 2.08 from 4.22. LEH Q3 EPS is lowered to a loss of 3.46 from a prior estimate of a profit of .19 cents. MS Q3 EPS is lowered to a loss of .94 cents from 1.14.

RIMM (121.60): Research In Motion estimates raised at Piper: August channel checks indicated continued steady sell through trends for BlackBerry products at the four largest US carriers. Improved sales of Curve, and a ramp in the sales of Bold are cited. November quarter estimates are raised with f09 and f10 EPS estimates raised to $3.78 and $5.00 vs. Reuters $3.83 and $5.42. Shares remain neutral rated given valuation.

DB1 GR (64.10): Deutsche Bourse is up 6% in Germany after TCI and Atticus Capital team up to seek changes and unlock shareholder value. TCI and Atticus will examine all options to create value, which may include changes on the supervisory board. The two hedge funds hold about 19% of DB1 shares.

V (75.90); MA (242.55): Morgan Stanley raises estimates for Visa (V) and Mastercard (MA): The firm notes increased conviction that V and MA will enjoy low single digit or less annual growth in their spending for advertising and marketing. Morgan Stanley sees the A&M costs as a key factor in both companies' operating leverage. F09 estimates for MA and V are raised to $11.21 and $2.76 from $11.03 and $2.74 vs. Reuters $11.13 and $2.76.

RIMM (121.60); NOK (25.17); MOT (9.42): Oppenheimer comments on handset market after channel checks
The firm says channel checks suggest that handset demand trends have been mixed so far in Q308. Oppenheimer anticipates shipments of 315M, up from 303M in Q208, with strong demand in the high-end offsetting some weak spots in the low-end of the market. The firm says checks suggest weakness at Samsung and LG, which is offset by a strong smart phone push. Oppenheimer also expects generally in-line quarters at NOK and MOT. Oppenheimer says their top picks remain RIMM and NOK.

LEH (16.09): Heard on the Street notes Lehman Brothers is very much between rock, hard place with real-estate assets – WSJ: The firm needs to divest its troubled real-estate holdings, but in doing so, could incur a devastating loss. LEH needs to soften the coming blow, which makes spinning off the assets into a separate company attractive. But the new company will require adequate capitalization, which will probably partially come from an outside investor who would drive the buy-in price down, raising LEH's potential loss. The only ways to raise the price an outside investor might pay seem to increase LEH's risk, the abolition of which is the point of the entire exercise.

PCLN (92.98): priceline.com upgraded to outperform from neutral at Credit Suisse:
The firm believes the growth story for PCLN is intact and raises f08 and f09 EPS estimates to $5.65 and $7.00 vs. Reuters $5.68 and $7.04. Credit Suisse notes increased confidence in low 40% incremental EBITDA margins. Target for the shares is $145.

Disasters could be coming for debt-laden private-equity owned companies says Barron's: The Cover Story says that private equity is in crisis as the old business model is broken and no quick fix is in sight. Financing is coming at a higher price, when available at all. Also, the reputation of private equity has been damaged by various attempts to walk away from deals that had gone south. Barron's has been bearish on the industry and sees little reason to change its view. The industry overpaid for deals and now has billions stuck in a bunch of leveraged buyouts. The good news is that the firms have time since the debt mostly carries loose restrictions. Equity writedowns have already started. Apollo and Lehman have written down investments and shares of CCMO are trading well below the buyout price. Apollo seems to be in the worst shape with a string of poorly performing buyouts. One indication of trouble is the share prices of AAA.NA and KPE.NA, publicly traded funds established by Apollo and KKR. But even at reduced stock prices, the companies do not look like bargains and traditional asset managers like AllianceBernstein (AB), Franklin Resources (BEN), BlackRock (BLK) and T. Rowe Price (TROW) look like better bets on a recovery in the markets.

CHK (48.40): BP (57.63): Chesapeake Energy and BP America announce Fayetteville Shale JV: CHK and BP America (BP) announced the execution of a Letter of Intent for a joint venture whereby BP will acquire a 25% interest in Chesapeake's Fayetteville Shale assets in Arkansas for $1.9B. The assets have current daily net production of approximately 180M cubic feet of natural gas equivalent and include approximately 540,000 net acres of leasehold which the companies believe could support the drilling of up to 6,700 future horizontal wells. As a result of the transaction, BP will own approximately 135,000 net acres of this leasehold and Chesapeake will own approximately 405,000 net acres. BP will pay $1.1B in cash at closing and will pay a further $800M during the remainder of '08 and in '09 by funding 100% of Chesapeake's 75% share of drilling and completion expenditures until the $800M obligation has been funded. Chesapeake plans to continue acquiring leasehold in the Fayetteville Shale play and BP will have the right to a 25% participation in any such additional leasehold. The transaction is subject to the execution of mutually acceptable definitive documentation that the companies anticipate executing within the next week and closing is anticipated to occur later this month.

Barron's summary
Cover: There is trouble coming from debt heavy purchases for the private equity houses with Apollo seeming to be in the worst shape. Interview: Bertie Thompson likes BMW.GR, NVS, ROG.VX, BNP.FP, NDA.SS, DPW.GR, MEO.GR, EOAN.GR, GSZ.FP, LIN.GR, TKA.GR, TOT, OMV.AV, E, DMGT.LN, WIN.GR, PSN.LN, BKG.LN and MTC.LN but not SYT and YAR.NO. Lead Articles: Wall Street strategists have become more cautious about Q4 though most see limited further downside; It looks like a time to own Prudential (PRU), shares could go to $108; Smaller U.S. E&P companies do not reflect the value of their shale holdings; Profile of the questionable associates of Bidz.com (BIDZ) CEO Zinberg; D.C. Current looks at the government loans to car makers and taxes under a new president; Other Voices argues for a change in trade laws; Editorial notes the fiscal problems being faced in both California and New York and says that the rest of the country is likely to follow soon. Columns: The Trader is cautious on airlines, mentions nat gas plays and is mixed on Ruby Tuesday (RT); Asia Trader considers the Asian issues facing the presidential candidates; The Striking Price suggests using puts or put spreads to hedge the rise in P&G (PG); Current Yield notes the recent events at Fannie and Freddie and suggests looking at the debt; Euro Trader says that the rescue of Alitalia (AZA.IM) may have negative implications for the trends in the Italian economy, Swiss Life (SLHN.VX) may be vulnerable to a takeover; Commodities Corner says that falling demand for cars could shift platinum from shortage to oversupply; Follow Up is still cautious on commodities and positive on Tetra Tech (TTEK); Up and Down Wall Street considers the choice of Sarah Palin as McCain's VP and the impact of the deflator on GDP numbers; Streetwise notes the increase in summer market activity; Technology Trader is cautious on Dell (DELL) and still prefers his blackberry (RIMM) to an iPhone (AAPL); Plugged In is positive on Lawson Software (LWSN).