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.

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