September 30, 2008: Morning Call

September 30, 2008: Morning Call


Fair Value: SP500 – 1110.06; NDX: 1507.73; DOW – 10384


Technical Levels:


SPX: 1063, 1090 support/ 1142, 1250, 1298-1300, 1337 resistance.

Note: SPX 1063 is the August 2004 monthly and 1090 is the October 2004 monthly low)

NASDAQ: 1890, 1921 support /2020, 2210, 2264 resistance:

(Note: NASDAQ 1890 is the April 29, 2005 weekly low while 1921 is the April 29, 2005 weekly close).

Events:

Last Trading Day in Q3
09:00: S&P/CaseShiller Home Price Index (July): -16.0%
09:45: SLB Investor Day
09:45: Chicago Purchasing Manager (Sep): 54.0
10:00: Consumer Confidence (Sep): 55.0
13:00: Fed’s Lockhart speaks on the economy
17:00: ABC Consumer Confidence
21:00: Chinese PMI Manufacturing

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 34 points above fair value while the NASDAQ futures are trading 20 points above fair value in an attempt to recover from one of the most severe market plunges since World War 2; over 1.2 trillion in market capitalization was lost in Monday’s session. Although the 777 point drop in the Dow Industrial Average is getting all the attention in the press, the carnage in technology, mining, and energy sectors was far worse with many securities dropping 15-20%. The 10.3% drop in the NDX-100 was the 3rd worst percentage loss in history and a new 3-½ year low. The S&P 500 dropped to a new 4-year low. Right now, the strong futures can be attributed to less severe declines in Asian markets, benign news flow in the banking sector, and speculation that the Senate is going to bring the TARP legislation to a vote either Wednesday or Thursday. Also, the S&P dropped 28 points in the last 10 minutes of trading so the market is snapping back from the aggressive closing sell-programs. Do not read too much into this early morning advance. Asian markets closed lower but the declines were not as severe as US equity market participants were discounting at 4pm on Monday. Regulators in South Korea and Taiwan temporarily banned short selling in an effort to stem declines. Regulators in Hong Kong said they would take “more aggressive” measures against the practice. Property stocks continued to drop in Hong Kong as more banks raised mortgage rates. Regulators sought to calm investors by promising injections of liquidity into the banking system if necessary. China is closed all week for National Day holidays. Japan closed down 4.1%, Australia down 4.3%, Hong Kong up 0.75%, India closed up 2.1%. European markets are trading down 1.0% but have bounced 2% off the early morning lows. The bounce off the session lows in Europe can be partially attributed to rumors of a coordinated central bank interest rate cut. President Bush is scheduled to speak at 8:45 ET on the bailout. Atlanta Fed President Lockhart speaks on the economic outlook in New Orleans at 13:00 ET. Sep Chicago Purchasing Manager's and Consumer Confidence data will be released at 10:00 ET. Nov WTI crude is trading +$2.54 to $98.91 despite strength in the US dollar. The dollar is up 0.60% against the Euro to 1.4343.


Impact Research Calls/Market Moving News:

C (17.75): Mike Mayo issues cautious comments on Citibank’s purchase of Wachovia’s: “Citigroup gets good financial deal but with integration risks Citigroup’s purchase of most of Wachovia should give its leading deposit market share, increased core funding, and earnings accretion (before merger charges). Yet, the transaction comes with unusually high execution risk given a decade-long short-fall in Citi's retail banking combined with a myriad of management changes. We lowered our target to $18 reflecting heightened integration risks and lower FY09 est. (down 70 cents to $1.80) due slower global growth and higher credit costs. Maintain Hold as we believe merger benefits are offset by near-term risks. Protection on credit risk but need to watch revenues: The transaction is targeted to be accretive to earnings (before merger-related charges) by year 2 given expected cost savings of $3B (3% combined base). On a present value basis, this savings equals $16B of value created, or about equal to deal costs for the purchase price ($2B to Wachovia), preferred and warrant issuance to FDIC ($12B), and merger charges (present value cost of est. $2B). We see NO additional credit risk on the firm's riskiest assets ($312B of $800B in acquired assets) because any additional loan losses beyond this level is covered by the FDIC - i.e., Citi is getting mostly a clean bank. Yet, a swing factor could still be revenue loss, which is a real possibility that could make the transaction value destructive if it were to occur meaningfully. Our price target of $18 applies a 10x multiple on our '09 est. of $1.80: We believe a multiple equal to the 5-yr. avg. is warranted given integration risks and uncertain global economic conditions and the impact on Citi's credit quality, mitigated by a more stable franchise with better funding sources than in the past. Macro risks incl. A significant slowdown in the economy and adverse changes in gov't. laws and regulations. Company risks include credit risk (esp. U.S. mortgage and global cards), market & interest-rate risks (exposures to CDOs and other structured products), and operational risks (including those associated with the Wachovia integration). Upside risks include a better than expected rebound in U.S. housing values and the global economy in general.”

Hedge fund liquidation trade likely to continue – WSJ: The Journal reports that Monday's carnage in stocks could force hedge fund managers to dump more assets, a move that would spur further market declines. The paper adds that some industry insiders predict that as many as 20% of the 10K hedge funds that were operating at the start of 2008 will soon be out of business. The article also highlights the outsized losses in several stocks favored by hedge funds, including Apple (AAPL), US Steel (X) and Conoco-Phillips.

EU to propose regulatory overhaul to deal with bank failures – WSJ: Tomorrow, EU commissioner for internal markets Charlie McCreevy will propose changes that include creating groups of national regulators to supervise banks doing business across national borders. People familiar with the matter say he will also seek to force banks to set aside more capital when they sell some of the securitized credit products that were at the heart of the current crisis. Despite a European central bank, banking regulation on the continent is largely down to national regulators, leading to questions about who will react exactly how if a pan-European institution meets trouble. Bankers say the proposals will increase the price of raising debt and kill off a market already hit by the credit crunch, but critics of the current system say the weekend rescues of Fortis (FORB.BB), Bradford & Bingley, and Hypo Real Estate Holding (HRX.GR) offer little comfort. The article was written before Dexia (DEXB.BB)'s capital infusion was announced this morning.

FITB (9.11); WFC (33.25): Fifth Third (FITB) downgraded, Wells Fargo (WFC) upgraded at RW Baird. FITB downgraded to neutral from outperform. WFC upgraded to neutral from underperform

WB (1.84): UBS estimates Wachovia's fair value at $2 per share
Firm notes that it is unclear if the company will remain independent, but estimates that earnings from the retail brokerage and asset management, plus WB's preferreds and annual dividends, suggest shares are worth $2/share. Target is lowered to $2 from $16. Rating is neutral

DEXB BB (7.07): Shares are trading up 9% in Belgium on news of the EU 6.4 billion government backed capital injection. Dexia long-term counterparty rating downgraded to AA- from AA; outlook negative at S&P: Standard & Poor's Ratings Services announced that it has lowered its long-term counterparty credit ratings to 'AA-' from 'AA' on the core entities of Belgium-based banking group Dexia S.A.: Dexia Credit Local, Dexia Bank S.A., and Dexia Banque Internationale a Luxembourg. Affirmed the short-term counterparty credit ratings on the three entities at 'A-1+'. The outlook on these entities remains negative. In addition, S&P affirmed the 'AA-/A-1+' ratings on Dexia Crediop SpA and revised the outlook to negative from stable.

Irish government to guarantee all bank deposits, banks senior debt, bonds: The Irish government announced its decided to put in place with immediate effect a guarantee arrangement to safeguard all deposits (retail, commercial, institutional and interbank), covered bonds, senior debt and dated subordinated debt (lower tier II), with the following banks: Allied Irish Bank (ALBK.ID), Bank of Ireland (BKIR.ID), Anglo Irish Bank (ANGL.ID), Irish Life and Permanent (IPM.ID), Irish Nationwide Building Society and the Educational Building Society and such specific subsidiaries as may be approved by Government following consultation with the Central Bank and the Financial Regulator.

WYNN (77.93); LVS (33.10): Gaming employment vacancies in Macau plunge 85% in Q2 as casinos rein in spending - South China Morning Post: Data released by the Statistics and Census Service show job vacancies in the sector fell to 764, the lowest total since record keeping began in 2004, even though the number of licensed casinos rose from 26 to 30. Average earnings in the industry rose 7% to MOP15,565/month, but earnings for card dealers went up only 0.3% as casinos removed underutilized tables to control costs. An analysis of government data shows total payroll as a percentage of casino revenues fell to 7.4% in Q2, vs 10.0% a year ago. Recall it has been widely reported that casino operators in Macau are struggling to maintain EBITDA margins in the face of junket commissions.