Thursday, September 4, 2008

September 4, 2008: Morning Call

September 4, 2008: Morning Call

Fair Value: SP500 – 1275.05; NDX: 1834.93; DOW – 11538

Technical Levels:
SPX: 1205, 1235, 1250, 1262 support/1298-1300, 1337, 365 resistance

NASDAQ: 2210, 2264, 2303 support/2341, 2386, 2428 resistance:


Pre-market EPS: CIEN (.37/253.7M); TOL (-.31/772.6M)
07:00: Bank of England Interest Rate Decision - unchanged
07:00: Retailers will release August Same-Store-Sales Comps before to the open
07:45: ECB Rate Decision- unchanged
08:00: JWN presents at Goldman Sachs Retail Conference
08:15: ADP Employment Change (August): -20,000
08:30: Non-Farm Productivity (Q2 Final): 2.8%; Unit Labor Costs: 0.7%
08:30: Initial Jobless Claims
08:30: SPWR presents at Raymond James London Conference
09:00: TEX analyst meeting
09:50: JNPR presents at Citibank Tech Conference
10:00: ISM Non-Manufacturing (August): 49.3
10:35: Natural Gas Storage Change
11:00: DOE/API Crude Oil and Gasoline Inventories
11:00: HOV earnings call
12:30: WMT presents at Goldman Sachs Retail Conference
13:40: Fed’s Fisher speaks on economic challenges
13:45: QCOM presents at Citibank Tech Conference
13:45: ACI presents at Lehman CEO Energy Conference
14:00: TOL earnings call
14:30: Fed’s Yellen speaks on US economy
16:10: MSFT presents at Citibank Tech Conference
Post-market EPS: ADCT (.26/387.4M); ATVI (.13/513.8M); COO (.66/285M)

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 3 points below fair value while the NASDAQ futures are trading 6 points below fair value. European markets are trading down 0.27% with energy stocks among the best performing sectors (+1.8%). Weakest sectors include Autos (-1.6%), Construction (-1.48%), and Banks (-1.06%). Volume is on the light side in Europe. As expected, the BOE and ECB left rates unchanged. Asian markets: The majority of Asian markets declined led by technology and energy stocks. Shipping stocks declined after the Baltic Dry Index slumped. Samsung Electronics (005930.KS) fell after the Korea Economic Daily reported it wouldn’t buy back its own shares for the first time since 2001. China’s Shanghai Composite reached its lowest level since 2006 on concerns about a slowing economy in the morning, but metal and agriculture shares helped the market recover what it lost in the afternoon, finishing barely above where it started. Hong Kong fell to a one-year low on worries about the global economy

Impact Research Calls/Market Moving News:

Steel Sector Downgrade: Goldman Sachs downgrades American steel sector to neutral from attractive: “We are transferring coverage of the steel sector to Sal Tharani from Aldo Mazzaferro. We are also downgrading our coverage view for the sector to Neutral from Attractive due to the re-emergence of various risks—both perceived and real, such as rising dollar, “China fear”, weak economic data out of the developed and emerging markets, and softness in steel and scrap prices. We believe that negative news flow in the near term would keep multiples compressed, and wait for a better opportunity to get more constructive on the sector. Neutral view does not mean we are completely on the sideline. A sharp correction in steel equities, primarily driven by the macro concerns and decline in oil prices, has created selective investment opportunities. Valuations of some of these stocks reflect a doomsday scenario, which we believe are not what longer-term fundamentals suggest. Lowering steel prices, estimates, multiples and target prices We have lowered our steel price estimates by an average of 6% for 2H-2008 and 2009. Our earnings estimates are now 1% and 7% lower than earlier estimates for 2008 and 2009, respectively. The biggest change we have made is in our multiples, which we are lowering to reflect near-term risk aversion by investors. Our target prices have been cut by an average of 18% across our coverage universe. Firm removed US Steel (X) from its Conviction Buy List, but maintained its buy rating. Firm also upgraded Steel Dynamics (STLD) to buy from neutral, and downgraded Commercial Metals (CMC) to neutral from buy. Firm also reduced its estimates and target prices on names in the sector, including: Buy rated: Nucor (NUE) $73 vs prior $98 Steel Dynamics (STLD) $34 vs prior $44 US Steel (X) $182 vs prior $244 Neutral rated: AK Steel (AKS) $53 vs prior $61 Allegheny Technologies (ATI) $56 vs prior $68. Gerdau Ameristeel (GNA) $14 vs prior $18.Commercial Metals (CMC) $36 vs prior $46. Olympic Steel (ZEUS) $51 vs prior $69. Reliance Steel (RS) $59 vs prior $74. Schnitzer Steel (SCHN) $72 vs prior $87. Sell rated: Gibraltar Steel (ROCK) $14 no change. Worthington (WOR) $15 no change.

WMT (59.79): Wal-Mart reports August ex-fuel comps +3.0% vs. consensus +1.5%:
Includes Walmart +2.8% and Sam's Club +4.2%. Total comps including fuel were up 3.5%, including Walmart US +2.8% and Sam's Club +7.5%. Total company sales of $30.67B includes: Walmart US +7.0% to $19.42B, Sam's Club +8.7% to $3.63B and International +13.3% to $7.61B. Guides September ex-fuel comps to increase 2-3%.

CIEN (17.43): CIEN reports Q3 EPS $0.37 vs Reuters $0.37 – shares are down 20% on reduced forward guidance and weak margins: Company reports revenues of $253.2M vs Reuters $253.6M. Guides Q4 revenues to $190-$210M vs Reuters $263.8M. CIEN has seen no project or order cancellations, though says sales cycles are lengthening and some deployments are slowing. Ciena reports Q3 non-GAAP gross margins 52%
Guidance was for the low 50s, though somewhat below the 54% realized in Q2

QCOM (49.26): Qualcomm removed from Conviction Buy List at Goldman Sachs:
Buy rating maintained. Price target $64 unchanged.

GOOG (464.41): Google CEO concedes that launch of Chrome browser partly represented a defensive move – FT. In an interview with the FT, Google CEO Eric Schmidt says that while the new Chrome browser had been designed to create a more secure and stable platform for Internet users, there was also a "defensive component" related to the company's attempt to thwart Microsoft's online domination.

TOL (24.80): Toll Brothers guides Q4 home deliveries in range 850-1,050
The average price of Q4 deliveries will be in a range of $640-$640K per home, which will result in lower Q4 revenues than the $797.7M reported in Q3. Cost of sales, before writedowns, will be higher as a percentage of revenues in Q4 vs. Q3 due to higher incentives and slower deliveries. TOL is not issuing earnings guidance at this time.

LEH (16.94): Mitsubishi UFJ Financial says firm has no plans to invest in Lehman Brothers – Reuters: The comments contradict an earlier report from the London Times that cited senior sources close to the bank as saying it was considering the possibility of acquiring a stake in Lehman.

MER (28.33): Merrill Lynch's talks to sell a "significant" amount of bad loans to Korea Asset Management are faltering – Bloomberg: According to Korea Asset's CEO, the talks are having difficulty to due differences in price of the value of the assets and says " a deal may be difficult at this rate." Lee declined to provide the size of the potential transaction.

LEH (16.94): Lehman Brothers asks for asset-management bids by 12-Sep - NY Post: Sources say this could be the final round of bids for part or all of the unit, but the outcome is unclear due to the possibility of a capital infusion from Korean Development Bank or an outright purchase by HSBC (HBC). Some bidders think a capital infusion or sale would result in the asset-management unit's being retained.

LM (47.37): Legg Mason downgraded to underperform from neutral at Credit Suisse: Price target is $42. The firm believes that over the next year, LM will miss EPS estimates and experience the highest level of net redemptions as a percentage of AuM among the public managers.

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