September 5, 2008: Morning Call

September 5, 2008: Morning Call

Fair Value: SP500 – 1236.83; NDX: 1776.41; DOW – 11192

Technical Levels:

SPX: 1205, 1235 support/1250& 1262 support broke Sep-4, 1298-1300 resistance

NASDAQ: 2210 support /2264 & 2303 support broke Sep-4, 2361 resistance

Events:

Pre-market EPS: NSM (.34/468.7M).
08:30: US August Payrolls: -70,000; Unemployment Rate: 5.7%
08:30: Average Hourly Earnings: 0.3% MoM; Weekly Hours: 33.6
15:55: Fed’s Yellen speaks on the US Economy


Foreign Market Summary/Key Macro News/Commentary:

S&P futures are trading 5 points below fair value while the NASDAQ futures are trading flat with fair value following Thursday’s 3.0% decline in US markets. European markets are down 1.3% this morning and heading for their worst weekly performance since 2002. Look out below if the job's number is weaker than expected; A strong number will likely be sold into. Once again, macro-related factors continue to provide formidable headwinds for global equities. Fears of a global economic recession, the perception that earnings estimates for the second half are too high, and the de-leveraging among institutional market participants suggest that the path of least resistance remains skewed to the downside. During Thursday’s session, rumors were rampant that multiple large hedge funds were encountering serious problems. These rumors circled during the November 2007 and January 2008 pullbacks and were completely exaggerated. But, these same rumors seem to have more credibility during the July/August 2008 decline because the sector rotations into and out of the energy and financial sectors have been extremely vicious and suggest serious stress among the holders of these assets (the Long Commodity/Short Financial trade has seen multiple trading days with moves of + and – 10% or more in just the last few weeks). Rest assured, Ospraie Capital is not the only major hedge fund blowing up, encountering serious stress, or seeing massive client redemptions. The first phase of the current credit crisis infected global investment and commercial banks; the second phase is clearly spreading to the hedge fund asset class and this appears more ominous because it occurs in the shadows. Nobody knows the extent of the damage and there is no mechanism like the various Fed lending facilities to gauge the quality of the assets and investment firm’s underlying health. Risk remains extremely high and discipline is critical. The odds of a hard test or substantial break of the July 15 lows is increasing with each session. It is clear the market is entering a new paradigm when one of the largest bond investors (Pimco’s Bill Gross) comes on TV and tells the Treasury to basically shit or get off the pot on FNM and FRE (In his September Investment Outlook and the CNBC interview, Gross specifically states he is no longer buying bank or agency debt until the Treasury makes their plans clear). Bold action is required to stabilize the housing market but the executive branch seems determined to push this problem to the next administration. Clearly, President Bush does not want FNM and FRE nationalized on his watch. The market is in the process of forcing the Treasury’s hand.

Impact Research Calls/Market Moving News:

NOK (22.31): Nokia lowers 3Q08 mobile device market share outlook
Nokia now sees Q3 mobile device share below Q2, below prior guidance of flat seq, citing multiple factors for the reduction, including it's decision to not meet "aggressive pricing" of some competitors. NOK continues to see an increase in its market share in mobile devices for the full year 2008. NOK says the market will be impacted by weaker consumer confidence, though continues to expect industry mobile device volumes in 2008 to grow 10% or more from the approximately 1.14B units Nokia estimated for 2007. Nokia also continues to expect industry mobile device volumes in Q3 2008 to be up sequentially. NOK says launches and start of shipments "on track" in Q3. NOK will report Q3 results on 16-Oct. Conference call at 8:30 ET. Dial-in: 706.634.5012

MER (26.21): Merrill Lynch downgraded to sell from neutral at Goldman Sachs:
Price target is $22. The firm also adds MER to the Conviction Sell List. Goldman reduces Q3 EPS to ($5.75) from ($4.75) due to higher writedowns and expects Merrill will take a loss in Q4 on securities it repurchases from clients. Reuters for Q3 is ($3.73); First Call ($3.75).

Fertilizer Sector: Morgan Stanley defends fertilizer names
Firm notes that the roughly 35% in fertilizer stocks implies an implosion in the companies' business models that seems unfounded. Adds that peak earnings are likely to come in 2011, rather than 2008, as has been suggested by the equity market. Goes on to argue that a global economic slowdown is unlikely to impact fertilizer demand, while noting that capacity increases should meet underlying demand rather than flooding the market and forcing lower prices. Top picks include Potash (POT), Mosaic (MOS) and Agrium (AGU). Monsanto (MON) also mentioned positively. Recall that there has been multiple firms (RBC yesterday) defending this sector based on the arbitrage between the high fertilizer prices and discount that is embedded in the EPS models. This mentality has crushed the dip buyers in Ag and Energy complex. Simply defending the group based on the relative discount in the equities is not going to work. A new catalyst is required.

Nabors Industries downgraded to neutral from buy; targets lowered on Helmerich & Payne (HP) and Patterson-UTI (PTEN) at Goldman Sachs (31.95)
Price target decreased to $41 from $56. Firm also lowers targets on Helmerich & Payne (HP, buy, to $72 from $85) and Patterson-UTI (PTEN, neutral, to $29 from $39).

EOG (93.45): EOG Resources upgraded to buy from neutral at UBS
Price target $136 unchanged. Firm cites recent pullback in share price.

CIEN (13.09): Ciena downgraded to neutral from buy at Merrill Lynch
Price target decreased to $14 from $25.

MON (103.70): Monsanto upgraded to outperform from neutral at Credit Suisse:
The firm notes the recent share price weakness and believes the risk/reward is highly attractive. Target is $145.

Goldman Sachs reduces its Henry Hub natgas price forecast for 2009 to $9.00 vs prior $11.25. Firm also reduced its 2010 Henry Hub natgas price forecast to $8.25 vs prior $9.50.

DVN (93.80): Devon Energy (DVN), Chevron (CVX), and Transocean (RIG) added to Top 10 Energy Favorites List at Goldman Sacks: In conjunction with these additions, COG, COP, and DO are removed from the list.

Chinese steel mills prepare to resist Companhia Vale do Rio Doce (CVRD) price increase - Reuters :Four steel industry sources confirm the 3-Sep report saying RIO emailed Chinese customers to say it would extend the 65-71% price increase from earlier this year by an additional 20 percentage points from 1-Sep. One source says the customers are "not likely" to accept the demand.

Heard on the Street says retail-stock rally not all it appears to be - WSJ
Retail shares are up 11% since 15-Jul, vs 2% for the S&P 500. But the column questions the assumption that huge retail profits will materialize if/when the slowdown ends next year. Lending is likely to remain tight, gas prices are high, unemployment is rising, and the economy slowing. Recent buying of shares in the sector is attributed not to optimistic investors, but rather to hedge funds closing out commodity trades. There appears to be a real possibility that retail stocks could crumble rather than sparkle.