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:

Events:

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.