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:

Events:

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.