Thursday, October 30, 2008

Goldman very weak again

GS is trading down almost 8% today to 90 a share. The stock is dramatically underperforming the S&P 500 over the last 5 trading days. I am hearing nothing specific to account for GS weakness. But, November quarter end numbers look way too high - consensus is 2.50 down 41 cents in the last 4 weeks from 2.91. I have a pretty strong suspicion that GS could have lost money in September and October. I am skeptical they can make current consensus estimates even if there is a remarkable recovery in the markets and FICC trading flows pick up dramatically in November. The biggest risk in the near-term is that estimates come down more sharply. I don't have a position in GS shares because it is difficult to determine if below consensus earnings are already discounted in the stock. That said, I don't think GS shareholders are prepared for a loss.

October 30, 2008: Morning Call

October 30, 2008: Morning Call

Fair Value: SP500 – 929.83; NDX: 1306.29; DOW – 8977


Technical Levels:

SPX: 848-850 support/ 998, 1098-1100 resistance

NASDAQ: 1423 support /1640-1650, 1890 resistance


Events:

Pre-market EPS: BJS (.56/1.46B); CAM (.71/1.48B); CL (.98/4.0B); D (.91/3.63B); EK(.22/2.53B); EXPE (.42/838.1M); IFF (.77/629.2M); IP (.78/6.89B); MOT (.02/7.81B); MRO (2.36/24.52B); RDS (2.61/123.8B); XOM (2.36/131.38B); DB (1.25/5.3B)
04:00: DB earnings call
04:55: German Unemployment Rate (October): 7.6%
06:00: Euro-zone Consumer Confidence (October): -20
08:30: Q3 US GDP: -0.5%; Personal Consumption: -2.4%
08:30: GDP Price Index: 4.0%; Core PCE QoQ: 2.5%
08:30: Initial Jobless Claims (Oct 25): 475,000; Cont. Claims: 3.7m
08:30: Fed’s Kroszner speaks on risk management
10:35: EIA Natural Gas Storage Change
15:15: Fed’s Yellen speaks on the economy
Post-market EPS: AKAM (.40/196.0M); BMC (.51/467.1M); CHK (.89/2.8B); MEE (.74/782.8M); SWN (.41/426.3M0; WYNN (.62/756.9M);


Foreign Market Summary/Key Macro News/Commentary:

The S&P and NASDAQ futures are trading 23 points above fair value at 7:41am ET primarily due to strength in Asian markets. Asian markets surged higher on news that the Federal Reserve was establishing a 120 billion dollar swap facility with South Korea, Singapore, Brazil, and Mexico. Money-market rates have also fallen and three-month dollar LIBOR is pegged at 3.19% versus 3.42% yesterday. Asian markets ripped higher with Japan gaining 9.9%, Hong Kong 12.8%, and South Korea 12.17%. Basic material and resource sectors were among the sharpest gainers. European markets are up 2.5% at the highs for the session. Advancers on the FTSE 100 lead decliners 4-1. Deutsche Bank (DBK.GR), Alcatel-Lucent (ALU.FP), Royal Dutch Shell (RDSA.LN), Novo Nordisk (NOVOB.DC) and Unilever (ULVR.LN) all traded higher following quarterly earnings or trading updates. Volkswagen (VOW.GR) extended gains after reporting 9 month results and reaffirming forecasts. German Oct Unemployment and France Sept PPI were both better than expected. EuroZone Industrial and Consumer confidence data were weaker than forecast. Q3 GDP and weekly jobless claims will be reported at 8:30 ET. Fed Governor Kroszner speaks at 8:30 ET, followed by SF Fed President Yellen at 15:15 ET.

Traders should begin scaling out of longs above the 950 level on the S&P 500 because the easy money has been made off the lows. The 998-1002 area on the SPX should be an area of formidable resistance given the headwinds facing the global economy and consumer. Also, the Baltic Dry Index (BDIY Index GO on Bloomberg) is a red flag right now because the index is still at a 52 week low despite the bounce in commodity prices and global stock indexes. The index closed at 925 on Wednesday (at a 52-week low and 92% below the May 20, 2008 record) signaling that many shippers are still unable to obtain trade financing from the banks. Obviously, the Fed swap lines are partially targeting the frozen shipping markets with the goal of trying to rekindle trade financing in many emerging markets (in many emerging markets, ships have been idled in port). So, keep your eye on the Baltic Dry Index. The broader indexes will face additional headwinds if the Baltic Dry Index does not see a sharp recovery in the next few days. This market continues to favor traders with a short-term time horizon and a disciplined strategy. Avoid taking substantial intermediate and long-term risk.



Impact Research Calls/Market Moving News:


RIMM (47.82): Barron's Weekday Trader is cautious on Research In Motion: The article notes that despite the fact that the stock is down roughly 70% from its all-time high in June, the bullish case has dissipated given the outlook for consumer retrenchment and heightened competition. Barron's adds that the company is on the verge of rolling out its new phone, Storm, next month, which is more costly to produce, but will compete with smart phones costing less, including the company's Pearl. According to the article, if Storm is a bust, the shares could fall further, while if it is successful, the company will have to contend with the uncertainties of being in a hit-driven business. Barron's also highlights concerns surrounding the deterioration in gross margins as fickle consumers represent an increasingly larger portion of BlackBerry subscriber additions.

CLF (27.19): Cleveland Natural Resources reports Q3 EPS $2.13 ex-items: Q3 North American Iron Ore pellet sales volume was 8.0M tons, up 31% from the 6.1M tons sold in the prior-year Q3. Cost per ton increased 25% in Q3 to $60.47, compared with $48.34 in 2007's comparable quarter. Asia-Pacific Iron Ore sales volume was virtually flat during the 2008 Q3 at 2.1M tonnes when compared with Q3 in 2007. Per-tonne cost in Asia-Pacific Iron Ore for Q3 increased 44% to $63.76, versus the comparable period in 2007.

WYNN (41.05): Steve Wynn spends money as others cut back – WSJ: The article, for which Wynn was interviewed, says WYNN's low level of debt helps it tremendously as it splurges. While both Wynn and WYNN have lost money of late, Wynn sees the economic downturn as a chance to build market share and win customer loyalty, and sees not spending money now as a very bad idea.

FSLR (116.00): First Solar upgraded to buy from neutral at Merriman Curhan Ford

BJS (13.46): BJ Services reports Q4 EPS $0.57 vs 14-Oct guidance of $0.55-0.57: Company reports revenues of $1.53B vs 14-Oct guidance of $1.53B. Guides Q1 Lower: EPS to $0.48-0.51 vs Reuters $0.57.

CSCO (17.87): Cisco Systems' mentioned cautiously at Morgan Stanley: The shares are rated overweight with a $24 target. The firm believes Street estimates are too high and would view a reduction in consensus estimates as an opportunity to accumulate shares. Morgan Stanley says their checks suggest FQ109 results should be in line at 8% y/y growth, however weaker demand drives a (3%) reduction to their FQ209 sales estimate, which the firm now expects to come in flat Q/Q.

RIG (73.00): Transocean contract is a record for multi year deepwater rig, says Citi: Firm says yesterday's contract announcement from the company at a day rate of $640K/day is the highest rate ever for a multi year drilling contract, and is a positive for those in the deepwater drilling services space. Firm says selloff in shares of RIG is overdone. Shares rated buy, tp $159.

Wednesday, October 29, 2008

October 29, 2008: Morning Call

October 29, 2008: Morning Call


Fair Value: SP500 – 940.28; NDX: 1301.93; DOW – 9052


Technical Levels:

SPX: 848-850 support/ 998, 1098-1100 resistance

NASDAQ: 1423 support /1640-1650, 1890 resistance


Events:

Pre-market EPS: ANR (1.01/702.0M); CMCSA (.21/8.6B); GRMN (.83/857.9M); GLW (.44/1.58B); HES (2.49/12.99B); JNY (.33/975.0M); K (.81/3.29B); LM (.86/1.01B); MCO (.41/426.5M); NEM (.47/1.55B); NYB (.24/209.8M); PG (1.02/21.92B); SEE(.39/1.26B)
07:00: MBA Mortgage Applications
08:30: Durable Goods Orders (Sep): -1.0%; Ex-Transportation: -1.5%
10:35: DOE/API Crude Oil and Gasoline Inventories: 2.0M Crude Build; 1.5M Gasoline Build
11:00: ANR earnings call
11:55: Former Fed Chairman Volcker will speak on financial stability
14:15: FOMC Rate Decision
17:00: V earnings call
17:00: CME earnings call
Post-market EPS: AW (.26/1.59B); CME (3.97/623.4M); EQR (.63/533.4M); FSLR(1.02/338.6M); HAR (.39/1.01B); HIG (-1.45/2.62B); HRS (.88/1.35B); MET(.92/13.56B); MUR (2.65/5.77B); MXIM (.24/501.4M); PRU (.84/6.71B); V(.56/1.6B)


Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 5 points above fair value while the NASDAQ futures are trading 13 points above fair value at 7:45 am ET. The SP futures are currently trading at 945 well off the overnight session lows at 914.50. Asian and European markets moved sharply higher following the sharp gains in US trading on Tuesday. European markets are currently higher by almost 4.0% with mining, manufacturing, technology, and chemical sectors gaining the most. Financials are trading up 6.8% and insurers are up nearly 10%. Deutsche Bourse lowered the index weighing on VOW to 10% from 27%; VOW shares are down 36%. US hedge funds have seen staggering losses on the Long Porsche/Short VOW arbitrage. This trade alone has destroyed some hedge funds and the losses are being sustained by an industry that has experienced terrible returns for the last two months. Asian markets closed higher lead by a 7.8% gain in Japan. MTU rallied 7.8% after the Nikkei reported that the BOJ may lower interest rates. TM rallied 10% and CEO gained 10%. Hong Kong rose slightly on the strength of energy stocks. The Standard says Hong Kong officials are divided on whether to ban short selling. South Korea fell led by banks on rumors (denied by authorities) that the country might apply to the IMF for bailout funds weighed on investors. Crude Oil is up nearly 6% after a weak performance in Tuesday’s session. There is no fundamental news but given the increase in equity markets it was a little surprising that the reaction in oil prices was very muted on Tuesday.

Traders should raise the stop-loss for tactical long positions from the SPX 848-price level that I highlighted yesterday to 928 given the huge gains. I would not be in a rush to initiate new long or short positions at current levels.

Impact Research Calls/Market Moving News:

Peoples Bank of China reduces China's lending rates – wires: The Chinese central bank reduced its benchmark lending and deposit rates by 27 bp, eff 30-Oct. One-year loan rates are 6.66%, eff 30-Oct vs prior 6.93%; one-year deposit rates are 3.60%, eff 30-Oct vs prior 3.87%.

New York Times Article: Worth a read. David Leonhardt has been writing some very good thought provoking articles for the past year. This article is a counter argument to the bull case that stocks are extremely cheap based on historical valuation measures.
http://www.nytimes.com/2008/10/29/business/economy/29leonhardt.html?_r=1&hp&oref=slogin

AAPL (99.91): Bernstein comments on Apple, sees a share repurchase as the best use of cash: In the firm's view, a share repurchase would be more favorable than either a major acquisition or dividend. A $20B repurchase program in f09 could raise EPS 9%-15% higher than current estimates with non-GAAP accretion even higher. (My comment: Extremely long odds for this to happen. Would be a huge surprise because Jobs said the “cash was not burning a hole in Apple’s pocket” on the recent earnings call and suggested the a share re-purchase is not in the cards).

GLW (11.42): Reports Q3 EPS of .46 cents versus consensus of .43 cents. Guides Q4 lower to between .20-.22 cents vs. consensus of .42 cents. Shares are trading down a buck in the pre-market.

China is delaying plans to allow margin lending and short selling – according to reports. SCMP.com reports the central government is set to delay the launch of margin lending and short selling amid mounting worries the potentially risky trading methods will exacerbate market turbulence. Sources said the State Council had put on hold plans for the much-anticipated launch next month because of fears the introduction of the practices could send the market into another tailspin. One source close to the China Securities Regulatory Commission said senior officials believed margin lending and short selling could expose more investors to heavy losses. One regulatory official said that the new trading mechanism was "temporarily on hold" and still awaiting official approval. But other sources said the so-called temporary suspension could become a long delay.

X (35.20): U.S. Steel target lowered to $27 from $42 at Bank of America: Estimates for '08/'09 are lowered with '09 estimates lowered below consensus. Firm notes higher pension expenses in '09, lower profit assumptions in Europe, and somewhat lower valuation multiples. Rating is sell.

X (35.20): U.S. Steel estimates reduced below consensus at Morgan Stanley: Despite impressive Q3 results, the firm reduces estimates for f09 and f10 below consensus given the company's high fixed costs and continuing global slowdown. Shares remain equal weight rated.

ANR (29.63): Alpha Natural Resources reports Q3 EPS $0.97 vs Reuters $1.01: Company reports revenues of $715.0M vs Reuters $692.5M. Coal revenue per ton was $85.70 with per ton margin of $21.43. ANR sold 7.3M tons of coal.

SEE (21.01): Sealed Air reports Q3 EPS $0.28 ex-items vs Reuters $0.38: Company reports revenues of $1.22B vs Reuters $1.26B. Sees full year EPS to $0.97-1.07, incl charges vs prior $1.41-1.51 and vs Reuters $1.56.

GRMN (21.43): Garmin reports Q3 EPS $0.82 vs Reuters $0.83: Company reports revenues of $870.4M vs Reuters $857.9M. GRMN notes that excluding foreign exchange, EPS was $0.87 compared to $0.89 in the same quarter in 2007. Gross margin was 44.3% compared to 45.8% in Q2 2008 and 46.9% in Q3 2007. Q3 had 3.9M units sold, up 43% from the same quarter in 2007. Guides full year EPS to $3.78 ex-foreign currency translation vs Reuters $3.94; guides revenues to $3.6B vs Reuters $3.81B. Development of the nĂ¼vifone is on target for a H1 of 2009 launch.

POT (69.68): Barron's Weekday Trader is positive on Potash: The article notes that the company's business model is supported by powerful and sustainable fundamentals, as rising middle classes in emerging markets such as China and India are demanding more nutritious diets. Barron's also points out that the stock is trading at less than 4x its 2009 and 2010 earnings estimates.

WSJ Heard on the Street article highlights the drastic changes facing Goldman Sachs and Morgan Stanley: “When Fidel Castro took over Cuba, he closed the casinos. It won't get that bad for Wall Street's casinos, now that the U.S. government is intervening heavily in the financial system. But there isn't any doubt that they face drastic changes. That may be one reason why shares in Goldman Sachs Group and Morgan Stanley have fallen 28% and 44% respectively since they became Federal Reserve-regulated bank holding companies in mid-September. The declines have occurred even though both firms have received $10 billion preferred equity investments and a guarantee on their debt issuances. Morgan Stanley is trading at around half its tangible book value, a measure of net worth that strips out intangible assets. Goldman trades at about one time. These distressed multiples suggest investors think everything has changed for the pair, making profitability very hard to gauge. Those fears make sense. In the new financial system that is likely to emerge from the credit bust, it is hard to see a place for firms that have huge balance sheets -- Goldman and Morgan Stanley had just over $2 trillion of assets between them at the end of August -- and a heavy capital-markets bias.”

Tuesday, October 28, 2008

Terrible Consumer Confidence Equals Good Stock Performance??

The 32 print on the Consumer Confidence number is getting a lot of attention because it was a record low. But, SentimentTrader.com has an interesting comment on the price action in the S&P 500 after "trough" prints on Consumer Confidence. "The previous troughs in Confidence were in December 1974 (43.2), May 1980 (50.1), October 1982 (54.3), and February 1992 (47.3). By six months later the SPX was higher every time by an average of 21.1%. On the other hand, Confidence reached an all-time high in May 2000 (144.7), and October 1968 (142.3) prior to that. You wouldn't have exactly been happy holding stocks after those instances, after a year, the S&P was down both times by an average of 8.8%."

The only point I would make is that it is very difficult to have a time horizon of six months in this market. One hour is an eternity let alone six months. That said, October 28 is turning into a pivotal trading day as the headlines have been awful and a number of key stocks have acted terrible this morning(GS, MS, JPM, DB, OIH, ect). Volume has been light and the broader averages are far more resilient than you would think given the fundamental and technical backdrop. The market needs to hold current levels because an additional decline of 10 to 15% in the S&P 500 will cement terrible economic outcomes. Traders should be long with a stop-loss at around 848 on the S&P 500.

October 28, 2008: Morning Call

October 28, 2008: Morning Call

Fair Value: SP500 – 848.41; NDX: 1173.80; DOW – 8161


Technical Levels
:

SPX: 848-850 support/ 998, 1098-1100 resistance

NASDAQ: 1423 support /1640-1650, 1890 resistance:

Events:

Pre-market EPS: ASH (.09/2.24B); BP (2.38/107.6B); BYD (.19/443.9M); CHKP(.43/200.0M); ETR (2.49/4.31B); MAS (.18/2.58B); MHP (1.23/2.15B); MLM(1.64/546.4M); OXY (2.73/6.66B); PCX (-.17/471.4M); SII (.98/2.74B); RCL(1.66/2.05B); SAP (.60/3.98B); X (7.21/7.19B); WHR (1.69/4.96B); VLO(1.50/37.56B)
08:00: Former Fed Chairman Volcker speaks on the economy
09:00: S&P/Case Shiller Home Price Index (August): -16.6% YoY
10:00: Consumer Confidence (October): 52.0
10:00: Richmond Fed Manufacturing Index (October): -23
10:00: Treasury’s Paulson speaks on financial markets
13:30: BOE’s Besley speaks on monetary policy
14:00: X earnings call
17:00: ABC Consumer Confidence
Post-market EPS: BXP (1.19/351.3M); CTX (-1.11/1.3B); CEPH (1.22/494.0M); FISV(.83/1.07B); FLS (1.76/1.11B); LNC (1.16/2.65B); MCK (1.04/26.27B);MTW(.80/1.25B)


Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 24 points above fair value while the NASDAQ futures are trading 37 points above fair value at 7:30am, as global indexes rebound from yesterday’s sharp declines. The FOMC begins a regularly scheduled 2-day meeting today, with the decision on interest rates due at 14:15 ET tomorrow. Oct Consumer Confidence will be released at 10 ET. Former Fed Chairman Volcker speaks at 8 ET. Asian markets closed sharply higher with the Nikkei gaining 6.4% and Hong Kong surging 14.3%. Hong Kong’s Financial Secretary said the government would act to support the stock market if needed. The yen has moved lower on speculation that the Japanese central bank will start selling the currency. European markets are up 3.5% near the session highs on strength in commodity and energy related shares following BP’s earnings. Volkswagen (VOW.GR) rose strongly for a second day up over 100% at one point, briefly surpassing Exxon (XOM) as the worlds largest company by value. Shares pared initial gains before moving higher and remain close to the highs for the session. 83 members of the FTSE 100 are higher. BP (BP.LN), Publicis Groupe (PUB.FP) and TeliaSonera (TLSN.SS) all gained after Q3 results. TomTom (TOM2.NA) has given back initial gains after lowering guidance with Q3 results.

Impact Research Calls/Market Moving News:

CSCO (16.09): Cisco Systems (CSCO) added to Conviction Buy List.

SPRWA (60.75); ESLR (2.39); ENER (28.38); UBS downgrades solar shares: SPRWA, ESLR, ENER, SOLR: Firm checks indicate lower solar than previously anticipated for '08/'09. Firm also lowers its '09 solar module price estimate. SPRWA downgraded to sell from neutral. ESLR, ENER, SOLR downgraded to neutral from buy. Estimates are lowered for FSLR, WCH.GR, SWV.GR, STP, LDK, and YGE. Most preferred picks are FSLR, WCH.GR, LDK.

EBAY (14.53); YHOO (11.58); AMZN (49.58); eBay (EBAY), Yahoo! (YHOO), Amazon (AMZN), Google (GOOG) initiated at Credit Suisse: AMZN tp $60, EBAY tp $19 and YHOO tp $14 initiated neutral. GOOG initiated outperform, tp $400.

SII (26.49): Smith International reports Q3 EPS $1.01 ex-items vs Reuters $0.98: Company reports revenues of $2.85B vs Reuters $2.72B.

MA (126.35); V (56.59); DFS (9.68): Discover Financial confirms $2.75B antitrust settlement agreement with Visa (V) and MasterCard (MA): Under the terms of the settlement agreement, Discover is expected to receive up to $2.75B in the settlement of its lawsuit against Visa and MasterCard. Discover will receive approximately $862M of the settlement in the current fiscal quarter and up to approximately $472M per quarter in 2009. Conference call on 28-Oct at 8:30 a.m. ET. 866.362.4820 or 617.597.5345. pw: 13604805.

Big oil outperforming amid carnage in energy prices: In a "Heard on the Street" column, the Journal notes that big oil is not as dependent on liquid capital markets and lofty energy prices. The article points out that companies such as ExxonMobil (XOM) also benefit from their more diversified and lower cost portfolios. The column also discusses the ability of well-capitalized companies to take advantage of the dislocations in the market via M&A.

Monday, October 27, 2008

October 27, 2008: Morning Call

October 27, 2008: Morning Call


Fair Value: SP500 – 876.56; NDX: 1206.60; DOW – 8366


Technical Levels:

SPX: 848-850 support/ 998, 1098-1100, 1142, 1250 resistance

NASDAQ: 1423 support /1640-1650, 1890 resistance


Events:

Pre-market EPS: ACI (.60/764.1M); FPL (1.35/4.73B); VZ (.65/24.52B); SOHU(.98/115.0M)

10:00: New Home Sales (Sep): 450,000; -2.2% MoM
13:30: WMT Analyst Meeting

Post-market EPS: CF (3.54/1.04B); PCL (.39/424.4M)


Foreign Market Summary/Key Macro News/Commentary:

Market participants are facing another rough morning with the S&P futures trading 30 points below fair value and the NASDAQ futures trading 36 points below fair value. The S&P futures were down 51 at the overnight session lows (4:00am ET). One of the more remarkable aspects of this brutal October decline is that trading has remained very orderly. But, global markets seem to be at a tipping point in this regard. If global markets do not start stabilizing in the next few trading sessions, trading conditions will become far more chaotic and global equity markets could even seize up. The primary risk confronting governments and market participants around the world is that sustained turmoil in the markets will cement terrible economic outcomes. This is why the next few sessions are so critical.

Asian markets plummeted overnight as risk aversion, forced selling, and fears of a global recession continue to weigh on global equity indexes. Hong Kong closed 12.7% lower, Thailand and the Philippines dropped 10-12%, Japan and Shanghai dropped 7%, and India recovered into the close down 2.2%. South Korea was the one bright spot with a 2.8% rally after a surprise 75 basis point interest rate cut. European markets are down 4.3% but off the worst levels of the session (Euro-zone markets were down 6.6% at the session lows). The German October IFO business climate index came in weaker than expected at 90.2 versus consensus of 91. Crude Oil and other commodities are lower by 2%-4%.


Impact Research Calls/Market Moving News:

G7 warns about excessive yen gains – comments signal potential intervention: Guardian Unlimited reports Japan is poised to intervene in its currency market for the first time in more than four years after the G7 issued a warning over recent excessive gains by the yen that have pummelled exporters' profit forecasts. In an emergency statement issued in Tokyo, the G7 stopped short of calling for concerted action to rein in the yen, which last Friday rose to a 13-year high of 90.87 yen to the dollar, but said cooperation remained an option to bring stability to global markets. The G7 said it was concerned about "excessive gains" by the yen that have forced major Japanese exporters to drastically reduce profit forecasts as the weak dollar eats into exports to the US. "We reaffirm our shared interest in a strong and stable international financial system," the statement said. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. "We continue to monitor the markets closely, and cooperate as appropriate."

Barron's Cover suggests that valuations look pretty reasonable, even assuming marked earnings declines: The Cover Story discusses the market's fall of the past week and notes that valuations of stocks look pretty reasonable, even assuming marked earnings declines. THe S&P 500 is trading for only 10x '07 operating earnings. Even assuming earnings fall to $70, the index is trading for less than 13x earnings. The dividend yield is 3% and the price/book ratio is 1.8x. In Europe stocks are even cheaper. Equity yields have not been this attractive to European bonds in 50 years. Cash rich companies like Microsoft (MSFT), ExxonMobil (XOM), Loews (L) and Motorola (MOT) look attractive in the current environment while Volkswagen (VOW.GR) is still perhaps the most overvalued big company on the planet. There may be a near-term bounce after the steep drops. There are opportunities from the forced selling by hedge funds that are unwinding trades. Among these are in convertibles, leveraged loans and interest-rate swaps. There are also takeover arbitrage opportunities in situations like the takeover of Anheuser-Busch (BUD). For patient investors who follow Warren Buffett's advise to buy now, the payoff should be rather nice.

X (34.68): U.S. Steel downgraded to sell from buy at UBS: Firm cites elevated fixed costs in an environment where steel prices are falling as its rationale for the downgrade. Target price, $30 vs prior $60.

CAT (33.30): Caterpillar downgraded to neutral from buy at Merrill Lynch

GS (100.40); C (12.14): Goldman Sachs talked to Citi about merger discussions, was rebuffed, reports the FT: GS' CEO Blankfein called Citi CEO Pandit about a possible merger at the tentative suggestion of regulatory authorities, or at least their blessing, according to several sources. The call was made shortly after Goldman converted itself into a commercial bank. Mr. Pandit rejected the proposal at once. Any serious discussions about a deal became a non-issue once Treasury announced its capital injection into the banking industry.

Japanese government considers boosting funds for injection into banks to Y10T – Nikkei: Citing comments made by government officials, the Nikkei reports that the government is considering boosting the amount of public funds set aside for injection into banks' capital bases to Y10T ($106B) from the currently planned Y2T. The government is likely to announce the increase in the scale of the bank recapitalization program, together with other emergency market-support measures, even before Monday's opening of the TSE. Among other expected market-support measures is a plan to have Banks' Shareholdings Purchase Corp purchase shares held by banks to minimize damage to their capital bases. In a separate report, Nikkei reported that Mitsubishi UFJ (MTU) plans to raise up to Y1T ($10.6B) in new capital before the end of the fiscal year in March. Mitsubishi has reportedly contacted three investment banks about a potential offering, which could include Y600B in ordinary shares and Y100-300B in preferred shares.

BX (7.89): China Investment Corp defends investment in Blackstone Group – Reuters: Reuters reports that Chairman Lou Jiweu of China's sovereign wealth fund CIC said its investment in Blackstone will pay off in the long run. A source familiar with the situation told Reuters earlier this month that CIC would boost its stake to 12.5% from 9.9%, and Lou confirmed the position is already over 10%. Lou also said that CIC holds over 90% of its assets in cash and is watching the markets closely everyday.

COF (35.30): Capital One plans to sell $3.55B in preferred stock and warrants to buy common stock in conjunction with participation in TARP

EQ (29.74): CTL offers to buy EQ in a deal valued at 5.8 billion. EQ shareholders will receive 1.37 CTL shares for each share of EQ that they own.

Friday, October 24, 2008

October 24, 2008: Morning Call

October 24, 2008: Morning Call

Fair Value: SP500 – 908.15; NDX: 1243.81; DOW – 8681.31


Technical Levels:

SPX: 848-850, 899 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance


Events:

Pre-market EPS:ERIC (.13/7.21B); TROW (.56/551.0M)

10:00: Existing Home Sales (Sep): 4.97M; 1.2% MoM


Foreign Market Summary/Key Macro News/Commentary:


The S&P futures are trading limit-down 60 points. NASDAQ futures are trading limit-down 85 points and the Dow is limit-down 550 points as the global collapse in confidence deepens. The massive risk aversion is causing panic selling in many emerging markets while the USD and Yen are seeing stunning gains against most other currencies (the USD trading at 92.1 yen, down a remarkable 5.2%- yen rallying on risk aversion as market participants have borrowed yen cheaply to invest in other assets outside Japan; there is a total collapse in the yen carry trade this morning). The British pound is down more than 5% against the USD, the biggest drop in at least 37 years and down a stunning 11.5% on the week, more than the 9.8% drop when George Soros broke the peg that linked the pound to the deutschmark. The Indian rupee fell through 50 against the dollar to a record low. Asian markets closed down 8%-12%. South Korean trading was halted for 30 minutes after the Kosdaq fell (10%). South Korea fell on news Q3 economic grew was only 0.6% q/q, and disappointing earnings from Samsung Electronics (005930.KS) and Lotte Shopping (023530.KS). Japan dropped in the wake of Sony (6758.JP)’s cutting its full-year profit forecast yesterday dragging other tech firms lower. Hong Kong was led down by HSBC (5.HK) and Standard Chartered (2888.HK) after Morgan Stanley slashed target prices and lowered 2008 earnings estimates. European marketsmoved sharply lower following weaker Asian markets and continued earning concerns highlighted by poor Q3 results and outlooks from some European industrial heavyweights. The major indices declined between (5%) - (7%), attempted to rally before disappointing economic data and weakening US futures extended the declines. The major indices are currently down between (7%) - (8.5%). The Danish Central Bank raised its key interest rate 50bps to 5.5%. There are no advancers on the FTSE 100. UK Q3 advance GDP (0.5%) q/q vs consensus (0.2%), the first q/q contraction since Q2 1992. All Eurozone, Germany and France Oct PMI releases were weaker than expected except for Germany Oct Advanced Services PMI 49.7 vs consensus 48.8.

Cash remains king and traders should still focus exclusively on a disciplined short-term tactical trading strategy. Taking substantial overnight risk is a recipe for going out of business.

Thursday, October 23, 2008

October 23, 2008: Morning Call

October 23, 2008: Morning Call


Fair Value: SP500 – 896.85; NDX: 1241.88; DOW – 8509.39


Technical Levels:


SPX: 848-850, 899 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance

Events:

Pre-market EPS: POT (3.54/3.0B); BG (2.89/14.7B); BDK (1.30/1.55B); CBE (.95/1.7B); CNX (.40/1.1B); HOT (.53/1.51B); JCI (.73/9.46B); NOV (1.30/3.60B); RSH (.36/993.0M); STI (.61/2.14B); UNP (1.30/4.73B); UPS (.88/13.03B); TRA (1.74/820.0M)
05:00: BHP Annual Meeting
08:00: STI earnings call
08:30: Initial Jobless Claims
08:30: PHM earnings call
09:00: APA analyst meeting
10:00: FDIC’s Bair and Treasury’s Kashkari testify to Senate on turmoil in credit markets
10:00: House Price Index (August): -0.5%
10:00: BG earnings call
10:35: EIA Natural Gas Storage Change
13:00: POT earnings call
15:00: TRA earnings call
17:30: MSFT earnings call
Post-market EPS: AFL (1.00/4.31B); BNI (1.69/4.79B); CB (1.23/2.92B); DST (.93/430.3M); EMN (1.32/1.83B); FII (.55/308.4M); JNPR (.30/927.2M); MSFT (.47/14.83B); PKI (.36/510.4M); WFR (.89/529.8M); YRCW (-.09/2.33B)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading flat with fair value while the NASDAQ futures are trading 5 points below fair value at 7am ET. S&P futures had been 25 points above fair value at 4am because European markets were flat at that time. Since 4am, European markets have moved down 3.5% weighing on the S&P futures. Asian markets closed lower with South Korea dropping 7.0% and Australia and India dropping 4%. The Nikkei fell 2% but rallied nearly 500 points into the close. Indian markets also briefly turned positive in the middle of the session before selling off into the close of trading. Forced selling and fears of a deepening global recession continue to weigh on markets around the world. Australia, BHP Billiton (BHP.AU) and Rio Tinto Group (RIO.AU) both fell after European regulators indicated they might block a merger and commodities dropped. European markets are trading down 3.5% near session lows. Commodity and basic material sectors are among the hardest hit with MT down another 8% in London. MT has dropped nearly 32% in the last 3 trading sessions.

Impact Research Calls/Market Moving News:


POT (67.10): Potash reports Q3 EPS $3.92 vs Reuters $3.52: Company reports revenues of $3.06B vs Reuters $3.03B. Sees f08 EPS at the low end of prior guidance of $12-13/sh. Sees f08 capex of $1.2B vs prior $1.4B. Management now expects 2008 nitrogen gross margin to be lower than previously forecast but still exceed 2007 by appx 60% percent.

BG (35.25): Bunge Ltd reports Q3 EPS $2.00 ex-items vs Reuters $2.81 : Company reports revenues of $14.80B vs Reuters $13.86B. The company reported volumes of 35.2M tons vs 37.7M tons y/y. Guides full year EPS to $11.60-11.90 vs Reuters $11.49.

BIDU (249.09): Baidu.com reports Q3 EPS $1.54 ex-items vs Reuters $1.34: Company reports revenues of $135.4M. TAC as a component of cost of revenues was $16.0M. Reuters consensus is $135.2M. Guides Q4 revenues to $151-$155M vs Reuters $151.3M.

AMZN (49.99): Amazon.com reports Q3 EPS $0.27 vs Reuters $0.25: Company reports revenues of $4.26B vs Reuters $4.28B. Guides Q4 revenue $6.0-7.0B vs Reuters $7.04B.

PHM (9.95): PHM reports a Q3 loss of 1.11 vs. consensus of a loss of .58 cents. Company reports revenues of $1.56B vs Reuters $1.54B. (13%) decrease in average selling price to $281,000. Company also says that due to the high degree of uncertainty and volatility, as well as a lack of visibility surrounding the housing industry and the overall economy, the company is not providing earnings guidance for Q4," though it is targeting a cash position by the end of 2008 of $1.6B to $1.8B.

WSJ article highlights credit card losses: “This financial crisis has shown that history is an unreliable guide for gauging future losses. Banks relying on historical models were fooled when it came to potential mortgage hits. They similarly miscalculated with structured-debt products. Now, the same may hold true for credit cards. Banks and big card issuers have seen card losses climb and are projecting that things will worsen in 2009. But their expectations, largely grounded in the experience of past downturns, mightn't be dour enough. Losses could easily overtake historic peaks, possibly spelling additional woe for the likes of C, JPM, BAC, AXP, and COF. Credit-card usage has changed so drastically, even since the last downturn. A broader range of consumers now carry cards and many run consistent credit balances to fund their lifestyles. This has led to successively higher peaks over the years in credit-card charge-off rates. The danger is that the current financial downturn results in a new, far-higher peak charge-off rate that leads to unexpectedly large losses at banks and other card issuers. Each tick higher in the unemployment rate makes that more likely. Already, both delinquencies and the likelihood they turn into real losses are rising. During the 1980s, charge-off rates averaged about 2.6%, according to Federal Deposit Insurance Corp. data. In the early 1990s recession, those rates peaked at 4.98%. Charge-offs rose to 5.39% in the late 1990s and then hit their most recent peak of 7.69% in the first quarter of 2002. At the end of June, net charge-offs had risen to 5.52%, FDIC data show. Third-quarter data have yet to be released, but will undoubtedly be worse based on numbers already being reported by banks and card firms.”

GS (115.06): Goldman Sachs to cut 10% of workforce - WSJ

DO (64.39): Diamond Offshore reports Q3 EPS $2.23 vs Reuters $2.23: Company reports revenues of $900.0M vs Reuters $874.6M.

PBR (23.15): Petrobras Brasileiro's target reduced at Morgan Stanley: The shares are rated overweight and target is reduced to $46 from $65. The firm says they are more guarded on PBR in the near term due to concerns that demand destruction could be more severe than initially thought, and that oil prices may be pressured in the short term.

$40B proposal to aid borrowers under consideration – WSJ: A person familiar with her testimony says FDIC chairman Shiela Blair will tell the Senate Banking Committee today that the government should give banks a financial incentive to turn troubled loans into more-affordable mortgages. The government would then share any future losses on the new loans with the lenders. And other sources say Treasury is discussing the option. Blair's idea calls for new mortgages to meet certain unknown conditions to qualify for partial government backing. Treasury is also considering buying unsecuritized bad loans from banks.

Counterintuitively, falling oil prices bring benefits to oil majors - WSJ: Pressure for windfall-profit taxes and difficulty landing long-term deals with countries that have untapped reserves of oil ill fall as the price of oil does. And the majors have lots of cash and little debt. Lower income from oil production will be partially offset by higher returns from refining and marketing. And since gas prices are falling slower than crude prices, profit margins are increasing.

Wednesday, October 22, 2008

October 22, 2008: Morning Call

October 22, 2008: Morning Call

Fair Value: SP500 – 955.51; NDX: 1288.62; DOW – 9027.82


Technical Levels:

SPX: 848-850, 899-905 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance:

Events:

Pre-market EPS: BA (1.10/15.45B); BHI (1.38/3.08B); COP (3.24/111.9B); NTRS (.82/945.2M); PM (.89/6.63B); WB (-.15/9.33B); WLP (1.49/15.52B)
04:30: Bank of England Minutes on Interest rate decision
07:00: MBA Mortgage Applications
10:00 WB earnings call
10:35: DOE/API Crude Oil and Gasoline Inventories
11:00: COP earnings call
12:00: NTRS earnings call
17:00: AMZN earnings call
22:00: BIDU earnings call
Post-market EPS: AMGN (1.08/3.71B); AMZN (.26/4.28B); BIDU(1.30/135.2M); CMG (.59/339.4M); CNW (.65/1.28B); NE (1.38/870.0M); SLM(.36/849.0M); TEX (1.32/2.42B); PHM (-.56/1.5B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 22 points below fair value while the NASDAQ futures are trading 8 points below fair value. The weakness is due to sharp declines in Asian and European markets, which are down on fears that the credit crisis and global economy will worsen. The Nikkei plunged 6.8% while India, Hong Kong, and South Korea closed down approximately 5%. Weaker earnings at NEC Electronics (6723.JP), Singapore Petroleum (SPC.SP) and Jiangxi Copper (358.HK) weighed on sentiment. Resource stocks fell on lower oil and metals prices. Mitsubishi UFJ Financial Group (8306.JP) Mizuho Financial Group (8411.JP) and Sumitomo Mitsui Financial Group (8316.JP) fell after the Nikkei reported they might miss earnings estimates. China Overseas Land & Investment (688.HK) dropped when China’s property prices rose at the slowest pace in three years. Bank of England governor Mervyn King said in a speech last night the U.K. economy has likely entered a recession and faces a "long march" back to stability. The major indices are near the lows of the session. Decliners on the FTSE 100 lead advancers 9-1. Euro-dollars are trading at 1.28, down 1.7% to a 20-month low on speculation that the ECB is going to cut interest rates. Credit default swaps on corporate bonds are rising sharply this morning on fears that corporate CDO’s will be downgraded forcing another round of writedowns at many financial institutions.

Impact Research Calls/Market Moving News:

AAPL (91.49): Apple reports Q4 EPS $1.26 vs Bloomberg consensus of 1.12. Company reports revenues of $7.90B vs Reuters $8.04B. Product shipments: Macs 2.611M vs consensus 2.79M, iPods 11.052M vs 10.8M and iPhones 6.892M vs 5.1M. Guides Q1 EPS to $1.06-1.35 vs Bloomberg consensus of 1.66; guides revenues to $9.0-10.0B vs Bloomberg $10.70B. AAPL guides Q1 GM’s to 30-31% vs. street 32.5%.

AAPL (91.49): Piper Jaffray’s Gene Munster is positive on AAPL following the earnings report. Here is the note: “KEY POINTS: • Apple reported strong earnings on solid unit sales, particularly iPhone units of 6.9m 38% above Street expectations. • Non-GAAP results $2.69 on $11.7b; vs. our estimates of $1.60 and $10.1b. • We are now modeling for CY09 Non-GAAP EPS of $12.25; previously $9.14. • Despite very conservative guidance, company suggested economy having only minimal impact on business. • We remain buyers of Apple given our belief the guidance is overly prudent. Bottom Line. We remain buyers of AAPL. Based on comments from the conference call, we think the economy has only had a minimal impact on Apple's business, and believe Apple will exceed guidance for the December quarter. 2009 remains a wild card, but should get a boost from a family of iPhones not yet reflected in Street models. Conclusion: Apple Well-Positioned To Weather The Storm. During the Sept. quarter, iPhone sales of 6.9m were significantly ahead of the Street at 5.0m, iPod sales were in-line, and Mac sales of 2.6m were slightly below expectations of 2.8m ahead of new portables in Oct. While the product cycles make it difficult to determine, we believe that Apple is weathering the economic storm better than expected. With new Macs at lower entry prices ($999), new iPods, and strong iPhone growth, we believe Apple is positioned to exceed Dec. quarter guidance. • New Macs Should Drive Rebound In Dec. Qtr. While Sept. Mac units of 2.6m were below the Street (2.8m), we expect the new MacBooks announced on 10/14 to drive a significant replacement cycle. Implicit in Apple's guidance is continued headwinds for Macs, but we believe the new MacBooks will drive upside to
guidance in the Dec. quarter. • Strong iPhone Growth Likely To Continue. The iPhone 3G launch quarter was well above expectations. We believe this strong start will continue in FY09 with launches in new countries (including China). Moreover, we believe Apple will continue to enter new price points with several SKUs in the iPhone family in CY09. • iPod Less Significant As A Growth Driver. iPod units of 11.1m were up 8% y/y in Sept.; however, management indicated that the growth slowed in the last few weeks of the quarter. We are modeling for y/y iPod unit contraction of -16% in the holiday quarter, but we note that the iPod business is not an overall growth driver for the company.”

AAPL (91.49): Apple downgraded to neutral from buy at UBS: Target lowered to $115 from $125. Firm notes potential macro-economic issues impacting Mac sales. Estimates are lowered.

AAPL (91.49): Morgan Stanley comments on Apple, says adjusted EPS growth is not sustainable: The firm says the September quarter had the benefit of channel fill and pent up demand from the 3G product launch. Shares remain equal weight rated with a $105 target.

AMZN (50.23): Amazon.com estimates and target reduced at Piper: The firm expects results for Q3 to be in-line but sees slowing growth in Q4. Target reduced to $53 from $65. Shares are reiterated neutral

C (14.18): Citi maintained underperform at Oppenheimer after meeting with management: Oppenheimer notes that C is optimistic that the steps taken by the Treasury and government will restart the term-funding market. However, C is less optimistic regarding the consumer, and sees continued deterioration. The firm continues to believe that consumer liquidity will continue to be squeezed, and are no more encouraged after yesterday's meeting. Oppenheimer says C views its best growth prospects as outside the U.S., but would be opportunistic in the U.S., given contained risk in a prospective transaction

X (42.35); STLD (10.74): Steel Dynamics (STLD) added to Conviction Buy List, US Steel (X) added to Conviction Sell List at Goldman Sachs: STLD upgraded to buy vs neutral X downgraded to sell from neutral.

COP (53.96): ConocoPhillips reports Q3 EPS $3.39 vs Reuters $3.08: Company reports revenues of $70.00B vs a single estimate of $73.17B.

CF (55.93): CF Industries Holdings downgraded to neutral from overweight at JPMorgan

WFC (32.64): Wells Fargo may need to reduce deposits to comply with 10% cap rate in Wachovia (WB) deal: In its statement regarding the company's application to acquire Wachovia, the Fed Board of Governors states consummation of the proposal would be consistent with Board precedent and within the thresholds in the DOJ Guidelines in 37 of the banking markets in which Wells Fargo’s and Wachovia’s subsidiary depository institutions directly compete. Regarding competition, the board notes that seven banking markets warrant special scrutiny, which include: Cottonwood, Arizona; Hanford, Hemet, Oroville, Placerville, and Santa Cruz, all in California; and Grand Junction, Colorado. In each of these markets, including one with proposed divestitures and six without proposed divestitures, the concentration levels on consummation of the proposal would exceed the threshold levels in the DOJ Guidelines or the resulting market share of Wells Fargo would exceed 35%.

Tuesday, October 21, 2008

Apple Volatility Too Cheap

Apple Computer at-the-money (ATM) straddles have dropped approximately 20% in the last few sessions to 18 dollars despite the earnings risk tonight. But, I would not be a seller of AAPL premium given the pullback in implied volatilities. The AAPL November 95 straddle is currently trading at 18 bucks suggesting that option traders are discounting a 19% move in AAPL shares between now and expiration (31 days left until expiration). On the surface, the premiums look attractive to sell when you compare the price to the historical AAPL straddle price ahead of earnings. But, this is not the case when you compare the AAPL ATM price to the ATM straddle on the S&P 500. For example, the SPY November 96 straddle is discounting an 11% move in the index by expiration based on the price of the SPY ATM straddle (November 96 straddle). Clearly, AAPL premium sellers are not being compensated for the risk. I doubt that AAPL straddles will trade at a steep discount to the SPY Novemer 96 straddle price even if the stock trades unchanged after the earnings report. So, best case, a straddle seller will be looking at a 7-8 dollar gain despite taking a lot of gamma risk. Apple option premiums should be higher given the fundamental backdrop. I would consider being long out of the money calls and puts (skewed to the put side as I think the downside is greater near-term) as a "cheap" way to speculate on a significant move in the shares following the earnings (some traders will say I am crazy to call the premiums cheap but that is what makes a market; relative to SPY options, AAPL premium is too cheap). Defined risk/long premium strategies are the only way to speculate on AAPL shares given the uncertain consumer discretionary environment and impact consumer weakness could have on forward guidance.

October 21, 2008: Morning Call

October 21, 2008: Morning Call


Fair Value: SP500 – 986.63; NDX: 1359.42; DOW – 9265.30


Technical Levels:


SPX: 848-850, 899-905 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance


Events:

Pre-market EPS: AKS (1.45/2.17B); ARB (.54/102.6M); AVY (.74/1.66B); FCX(1.54/4.98B); CAT(1.41/12.43B); COH (.44/765.0M); DD (.51/7.1B); FITB (.20/1.65B); LMT(1.89/10.72B); MMM (1.39/6.64B); NCC (-.31/1.74B); PCAR (.87/3.88B); SWK (.97/1.14B); WAT (.75/391.1M); UAUA (-2.42/5.55B); USB (.48/3.8B)
07:30: USB earnings call
10:00: FCX earnings call
11:00: AKS earnings call
11:00: CAT earnings call
11:15: RIMM Blackberry Developer Conference
15:10: BOE King speaks on the UK economy
17:00: ABC Consumer Confidence
17:00: AAPL earnings call
19:45: Fed’s Stern speaks on the economy
Post-market EPS: AAPL (1.12/8.07B); BRCM (.45/1.27B); NSC (1.22/2.74B); YHOO (.08/1.37B)


Foreign Market Summary/Key Macro News/Commentary:


The S&P futures are trading 13 points below fair value while the NASDAQ futures are trading 25 points below fair value at 8:15am ET. Weak forward guidance from TXN and general concerns about earnings is offsetting additional improvement in the inter-bank lending markets. Energy, technology, and basic material sectors are among the weakest in the pre-market. 3M LIBOR fell another 22 basis points to 3.83, the lowest level since September 26. The decline in interbank lending rates has been the primary catalyst for the 8.5% rally in the last 3 trading sessions. Additional declines in LIBOR and the TED spread will continue to improve sentiment but it will no longer be a key driver of the broader markets because credit remains extremely tight for many consumers and businesses. The improvement in the interbank lending markets has not “trickled down” to many consumer and corporate loan indicators, which remain stressed. For example, the rate on 30-year fixed jumbo loan has increased to 7.51% from 7.06% last month. 30-year conforming loan rates increased to 6.16% from 5.87% last month. A key ingredient to halting the decline in house prices will be a decline in mortgage interest rates and increased availability of mortgage credit. Mortgage loans are more costly and are increasingly difficult to obtain. Keep your eye on 30-year fixed mortgage rates as this will indicator will quickly become far more important to market participants than the decline in LIBOR.

Asian markets: Asian markets closed higher paced by gains in Japan (up 3.3%), India (up 4.5%), and Australia (up 3.9%). Banks, insurers, and basic materials lead the gains in Asia. Oil stocks followed crude-oil prices higher. Markets were also encouraged by Fed chair Ben Bernanke’s saying he would support a stimulus package. Hong Kong fell 1.8% after Citic Pacific (267.HK) warned of almost $2B in potential foreign-exchange-contract losses and China Mobile (941.HK) missed earnings estimates. India gained 4.5% on yesterday’s surprise 100-basis-point rate cut by the country's central bank. European markets are currently unchanged after being up nearly 2% earlier in the session. Overnight results from tech companies Logitech (LOGN.VX) and Texas Instruments weighed on the sector. French banks were higher after the French government said it'd invest €10.5B in the country's top six banks by buying subordinated debt. Breadth has turned mixed as the Euro-zone markets have pulled back on the weakness in US futures.



Impact Research Calls/Market Moving News:

CAT (40.90): CAT reports Q3 EPS of 1.39 vs. street consensus of 1.41. Revenues were a little light at 12.15 billion vs. street consensus at 12.43 billion. CAT reaffirms forecast and says 2009 sales and revenues are looking “flat.” CAT also said they see slow world economic growth over the next 3 to 4 quarters. CAT is targeting 2008 world economic growth of 2.8% and 2009 world economic growth less than 2.5%. CAT does not see global economic collapse like the early 1980’s but that much of the developed world is in a recession. CAT shares are unchanged in the pre-market.

TXN (17.98): Guides lower. Texas Instruments reports Q3 EPS $0.43 vs Reuters $0.44: Company reports revenues of $3.39B vs Reuters $3.40B. Company guidance was $0.42-$0.46 on revenues of $3.33-$3.47B. Guides Q4 EPS to $0.30-$0.36 vs Reuters $0.43; guides revenues to $2.83-$3.07B vs Reuters $3.34B. Texas Instruments reports Q3 gross margin 48.5% vs Street consensus 51.7%. Texas Instruments CFO says orders got progressively worse in Q3. CFO Kevin March says orders in Q4-to-date are below orders for Q3. Book/bill was 0.95 in Q3 compared to 1.03 in Q2. TXN guided Q4 lower on a sequential basis in its press release and says on the call that it expects revenue to decline in both Q4 and Q1. Deutsche Bank is downgraded to hold from buy. TXN shares are down 7.2% in the pre-market to 16.50.

FCX (36.72): Freeport-McMoRan reports Q3 EPS $1.42 ex items vs Reuters $1.44
Company reports revenues of $4.62B vs Reuters $4.76B
. Copper sales for Q3 were 1B pounds with 307K ounces of gold. Copper production for the quarter was 1.02B pounds with gold production of 300K ounces. FCX are currently trading down 4.6% in the pre-market to 35 dollars a share.

MMM (57.51): 3M reports Q3 EPS $1.42 ex-items vs Reuters $1.38: Company reports revenues of $6.56B vs Reuters $6.67B. Guides full year EPS to $5.40-5.48 vs Reuters $5.45.

RIMM (53.91): Research In Motion coming 30-45 days critical, says Citibank: Firm says the coming weeks are important as details emerge on the company's new products and their progress into carrier sales channels in time for holiday sales. Citi says that incremental information on rollout will provide catalysts up or down as launch targets are met or missed. Shares rated hold, tp $64 vs prior $90.

WYNN (52.41); MGM (13.83); LVS (12.26): WYNN, MGM, and LVS estimates and targets lowered at UBS: Firm sees '09 Las Vegas revenue growth rate declining (5%), and expects Macua '09 gaming revenues to be down (10%) vs prior estimate of +20%. WYNN target lowered to $61 from $93. MGM target lowered to $15 from $39. LVS target lowered to $14 from $55.

UTX (52.23): United Technologies downgraded to equal-weight from overweight at Morgan Stanley

BJS (13.52): BJ Services upgraded to buy from neutral at UBS: Though upgraded, the price target is decreased to $20 from $23. Firm cites valuation.

Monday, October 20, 2008

October 20, 2008: Morning Call

October 20, 2008: Morning Call


Fair Value: SP500 – 941.96; NDX: 1318.77; DOW – 8953.82


Technical Levels:

SPX: 848-850, 899-905 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance


Events:

Pre-market EPS: HAL (.74/4.61B); EDU (1.12/108.5M); WFT (.54/2.47B)
09:00: HAL earnings call
10:00: Leading Indicators (Sep): -0.2%
12:45: Fed’s Lockhart to speak on the economy
Post-market EPS: AXP (.60/7.41B); NBR (.76/1.4B); NFLX (.33/342.3M); TXN(.44/3.40B)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 8 points above fair value while the NASDAQ futures are trading 12 points above fair value at 7:45am ET. LIBOR fell another 38 basis points to 4.06% this morning as money market rates continue to decline from highly stressed levels. South Korea guaranteed $100 billion in lender’s foreign currency debt, ING received EU10 billion from the Dutch government, and the Reserve Bank of India unexpectedly cut its overnight lending rate by 100 basis points to 8% from 9%. The rate cut was seen as a sign that downside risks to the Indian economy are now a bigger threat than inflation. Asian markets closed sharply higher with the Nikkei rallying 3.6%, Hong Kong gaining 5.2%, and India moving up 2.4%. Resource and mining shares were among the biggest gainers on stronger commodity prices. European markets are up 1.8% and have been in a tight trading range all morning. Breadth is not as strong as the broader European indexes suggest as advancers are only leading decliners 3-2. Ericsson (ERICB.SS) rose after reporting Q3 whilst Novartis (NOVN.VX) reversed early gains to trade lower after reporting Q3. ING Group (INGA.NA) traded higher following the Dutch government injection of €10B whilst Societe Generale (GLE.FP) is trading lower on renewed rumors of a capital increase.



Impact Research Calls/Market Moving News:


AAPL (97.40): Piper Jaffray’s Gene Munster previews AAPL’s earnings: KEY POINTS: • We believe upside to Mac, iPhone and iPod units will drive upside to Apple's Sept. quarter results. • Mac number will be the key; could reach 2.8m (vs. the Street at ~2.7m). • We now expect iPhone units of 5m (vs. the Street at ~4.5m). • Historically, Apple guides conservatively and we believe the company will guide below Dec. quarter consensus of $1.66 on $10.63b. Sep-08 Preview. We expect upside to all three major product categories, Mac, iPhone and iPod, will drive upside to Sept. quarter results.• Mac: The Key To The Quarter. We believe Apple will announce June Mac units of around 2.8m. Through the first two months of the Sept. qrtr (July and Aug.), Mac NPD data is up 32% y/y. In the month of July, NPD data was up 43% y/y and in Aug. units were up 23% y/y. However, we note that Aug. was a tough comp, as a redesigned iMac was released in Aug-07. But even if we assume continued y/y growth of 23% in the month of Sept. (which we believe is conservative), the overall y/y growth rate for the full quarter would come in at 29%, implying 2.8m Macs in the Sept. qrtr. We note that NPD data for the month of Sept. comes out later today (10/20). Moreover, our confidence in the Mac number is based on Apple's aggressive back to school promo which ran from 6/3 to 9/15. For the first time, Apple offered a full rebate for an iPod touch if purchased with a Mac, driving both Mac and iPod sales for most of the Sept. qrtr. • iPhone: Strong iPhone 3G Launch. We believe the iPhone 3G launch early in the Sept. qrtr (7/11) exceeded expectations. Since then, demand has remained strong and Street iPhone numbers have come up; we continue to expect Apple will announce sales of 5m iPhones in Sept (vs. the Street at 4.5m). • iPod: Expect ~11m Units. Our analysis of iPod unit data from NPD for the first 2 months of the Sept. qrtr leads us to an iPod approximation of 11m (we believe Street consensus for iPod units is ~10.8m). iPod NPD implies a y/y increase of 8% vs. the Street at 6% y/y. We note that iPod upside may be driven by the aggressive back to school promo, which included a the iPod touch for the first time this year. The Big Picture. Despite the expectation for an extended consumer slowdown hitting the consumer electronics space, we believe Apple is well-positioned to weather the storm. The company has recently leveraged its unit volumes in the iPod, Mac, and iPhone businesses to lower prices moderately while generally maintaining margins. INVESTMENT RECOMMENDATION: Our $250 price target is based on 27.4x CY09 booked EPS of $9.14. We maintain our Buy on AAPL and the stock's inclusion on the PJC Alpha List.”

HAL (18.26): Halliburton reports Q3 EPS $0.76 ex-items vs Reuters $0.74: Company reports revenues of $4.85B vs Reuters $4.62B. HAL repurchased 3.5M shares for $122M in Q3, and has appx $1.8B remaining under its existing authorization.

Deutsche Bank reduced its f09 crude oil target price to $60/bbl, downgrades several names: Firm also reduced 2010 oil price estimate to $57.50/bbl. Downgraded to sell from hold: ConocoPhillips (COP). Suncor (SU). Murphy Oil Corp (MUR) Downgraded to hold from buy: Hess Corp. (HES). Marathon Oil Corp. (MRO).

Oppenheimer upgrades oil and gas names, Anadarko Petroleum (APC), Apache (APA), others: The firm is upgrading shares of APC ($40 PT), APA ($95 PT), BP ($55 PT), COG ($32 PT), CVX ($76 PT), CRK ($42), COP ($62 PT), DVN ($90 PT), EOG ($88 PT), HES ($65 PT), MUR ($60 PT), XOM ($83 PT), NBL ($55 PT), PXD ($40 PT), RDSA ($58 PT), XTO ($40 PT), FTO ($16 PT), SUN ($35 PT), TSO ($14 PT), and VLO ($25 PT) to outperform. Oppenheimer believes the upside potential of the shares in the next 12 months could significantly exceed the downside risk from a further decline in oil and gas prices.

INTC (15.50); AMAT (11.99): Applied Materials (AMAT) added to Conviction Buy List, Intel (INTC) downgraded to neutral from buy at Goldman Sachs: Firm also upgraded its view on the semicap equipment group to attractive.

WSJ article on thawing in the credit markets: “Credit markets may have their first significant thawing in months this week, building on a boost in bank lending on Friday and government moves to restore trust between lenders and borrowers. But if these markets stay frozen, it would be a sign that a return to normalcy in the financial markets could take longer than investors and policy makers hope. On Friday, three big banks led by J.P. Morgan Chase & Co. made multibillion-dollar offers of three-month funds to European counterparts, causing an immediate stir in the shriveled markets for unsecured lending. That raised expectations that lenders would finally open their doors and businesses would be able to borrow again, removing one of the biggest stresses on the global economy. In response, futures markets are predicting sharp declines in the rates banks charge one another to borrow, with the benchmark three-month Libor, or London interbank offered rate, expected to drop by around half a percentage point from 4.41875% Friday. That would be a multiweek low, but still some way above the 2.8% seen before the collapse of Lehman Brothers in mid-September. Libor is the benchmark for pricing of all kinds of debt, including corporate borrowing and mortgages. A lasting drop would be a powerful signal of recovery in the banking sector. If banks are prepared to lower their lending rates, it means they are regaining sufficient confidence to resume their normal relationships as creditors, instead of plunging their cash into government bonds and considering central banks the only trustworthy counterparties. As soon as the J.P. Morgan sighting was reported Friday, Treasury bills, whose short maturities make them the safest paper on the market, lost ground. Selling out of the three-month bill sent the yield Friday shooting up to 0.803%, some 0.36 percentage points higher on the day. It remains too early to tell whether the return to unsecured lending will continue. Until now, investors had anticipated a gradual loosening in lending constraints, assisted by international central banks' new strategy of auctioning unlimited supplies of dollars but hampered by the usual clampdown in the leadup to the quarter-end accounting period.

AMZN (50.65): Amazon.com remains outperform rated at Bernstein: The company sees revenue for the quarter of $4.34B vs. Reuters $4.28B and says they are less concerned about the general slowdown in e-commerce given the company's ability to consistently take share. Estimates are reduced for Q4 and beyond with the target reduced to $83.

RIG (70.26): Transocean upgraded to Overweight from Underweight at Morgan Stanley

WFT (14.69): WFT reports in-line EPS. Reports Q3 (Sep) earnings of $0.53 per share, in-line with the First Call consensus of $0.53; revenues rose 28.9% year/year to $2.54 bln vs the $2.48 bln consensus.

Private equity is conserving cash says the WSJ: A 'Heard on the Street' column says that the days of financial engineering by private equity firms is over, according to a statement by Henry Kravis at a conference in Dubai. The firms are no longer able to make money by quick flips and dividend recapitalizations. Dividend withdrawals from private equity owned firms totaled $51B over '06-'07 while only $1.2B in '08 so far. The firms are now concentrating on keeping cash in their portfolio companies in order to keep them alive. Some firms are drawing down lines of credit while others are buying back their debt at a discount or paying in-kind bond interest payments with additional debt rather than cash. The belt tightening is hitting everyone.

Friday, October 17, 2008

October 17, 2008: Morning Call

October 17, 2008: Morning Call

Fair Value: SP500 – 948.58; NDX: 1321.01; DOW – 8988.68


Technical Levels:

SPX: 848-850, 899-905 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance


Events:

Pre-market EPS: CMA (.46/669.2M); HON (.96/9.6B); FHN (-.14/542.3M);SLB(1.26/7.0B)
08:30: Housing Starts (Sep): 880,000; Building Permits: 840,000
08:40: Bush speaks on the Economy
10:00: University of Michigan Confidence (Oct): 67.0
12:45: Fed’s Bullard to moderate panel on economic policy
14:00: Fed’s Evans speaks on the economy


Foreign Market Summary/Key Macro News/Commentary:

SP and NASDAQ futures are both trading 14 points below fair value at 8am ET. Futures have moved lower after the open in Europe. Europe opened 5% higher but has cut the gains to 2% at 7:30am ET. European markets briefly trading in negative territory at 6am ET and, at that point, the SP futures were trading 42 points below fair value. News flow is on the light side this morning but there is some anxiety ahead of the Housing Starts and Confidence data. Options expiration is also exacerbating the gyrations in the index futures. This expiration cycle is also unique given the huge swings this week. Typically, front-month option holders roll positions earlier in the week but premiums and October open interest is still extremely high suggesting that many market participants have deferred rolling or closing October option positions. Market participants have made substantial put purchases during this expiration cycle and there should be a better underlying bid in the futures today as those contracts are sold or rolled to further out months. Asian markets closed mixed overnight with the Nikkei gaining 2.8% while Hong Kong fell 4.4% and India dropped 5.73%. India’s Sensex closed at the lows of the session, below 10,000 for the first time this year. Recall that India doubled the margin required for equity derivatives 2 days ago. Australia declined led by oil and metals shares. Korea gave up early gains despite media reports the government could announce measures to revive confidence in the economy.


Impact Research Calls/Market Moving News:

GOOG (353.02): Google reports Q3 EPS $4.92 ex-items vs Reuters $4.75: Company reports revenues of $5.54B, including TAC, vs Reuters $5.57B. Ex-TAC revenues $4.04B vs. First Call consensus $4.05B, which does not include TAC. Key operating metrics: Google Sites gross revenue was $3.67B vs StreetAccount consensus of $3.67B, while Networks revenues were $1.68B vs SA $1.71B. Geographies: International revenues totaled $2.85B vs SA $2.78B, including the UK at $776M, and accounted for 51% of total revenues compared to 52% in Q2; company notes that international revenues would have been $59M higher at constant currency rates from Q2. US revenue came in at $2.69B vs SA $2.68B. TAC was $1.50B during the quarter compared to $1.47B in Q2; TAC as a percentage of ad revenues was 28% compared to 28% in Q2. Cash flow: operating cash flow was $2.18B and capex was $452M, resulting in free cash flow of $1.73B vs SA $1.38B. Headcount: total employees were 20.123K at quarter end versus 19.604K at the end of Q2; implies a net employee gain of 519 versus 448 in Q2. Google says will be responsible in managing the cost but did not provide specific details on the conference call. Management has consistently referenced the uncertain economic environment and provided a pledge of sorts that they will keep a close watch on spending in response to the turmoil. Management said, “"We are going to keep a close eye on costs. And that is even more true this quarter. We are very realistic about the macroeconomic environment but very optimistic about the business."

GOOG: Deutsche Bank maintains buy rating and 480 price target. Here are their comments on the earnings: “Tough times call for tough measures (costs) -Moderating growth + cost controls = 15% profit growth in 2009. We maintain our BUY investment rating on shares of Google as well as our 12-month price target of $480. While the company's positioning in the Internet media sector remains quite sound, clearly the downward pressures of a consumer spending cycle appear to be weighing on growth prospects at the company. We like the stock and the company's execution amidst an uncertain economic environment, but it is also difficult to lose sight of conference call commentary and buzzwords such as "operational efficiency" and "cost containment" and "disciplined hiring, which (in our years of watching business models develop, transition and mature) truly represent the hallmarks of slowing growth (especially in tech investing). Said another way, we believe that the Google business model is beginning to slow down, further exacerbated by massive forex headwinds that impact growth (although most of profits may remain in tact from very large-scale and sophisticated hedging programs). However, with a substantial focus on cost controls in place, we remain quite optimistic on Google's ability to deploy levers to stoke growth (if necessary) and achieve bottom-line targets in such a difficult industry environment. As for the quarter, Google posted 3Q results in-line/slightly better than our and consensus estimates on revenues and profits. Specifically, sequential net revenue growth of 4% was better than the reduced (consensus), expectations of 3% and our street-low 1.5% Q/Q growth forecast. Meanwhile, another quarter of sound operating expense controls led to higher-than-expected operating profits. Pro-forma EPS of $4.92 was better than street estimates of $4.76 and DB at $4.62. Volume of paid clicks was in-line, up 18% (vs. our 19% estimate). While not much new information (should we expect much anyway?) came from the earnings call, it once again was quite apparent that costs appear to be the focus at Google, a trend that would likely continue going into 2009. Additionally, the company's hefty forex hedging programs kicked in 3Q, contributing ~$0.10 in EPS in the quarter, with sizable contributions (of up to $0.50-$0.75 in EPS) likely in 2009.”

NYT Times Editorial: Warren Buffett says to buy equities in an editorial in the NY Times. “I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities. Why? A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”


FCX (33.39): Freeport-McMoRan downgraded to sector perform from outperform at RBC Capital: The firm has significantly reduced their 2009-2012 forecasts for copper and sees limited upside for the shares. Target reduced to $35 from $120.

BK (31.08): Bank of New York Mellon upgraded to buy from neutral at Janney Montgomery Scott

BWA (21.22); ARM (8.07); JCI (19.84): Borg Warner (BWA) upgraded; ArvinMeritor (ARM), Johnson Controls (JCI) downgraded at Goldman Sachs: BWA upgraded to buy from neutral. ARM and JCI downgraded to neutral from buy.

SLB (53.20): Schlumberger reports Q3 EPS $1.25 vs Reuters $1.25: Company says that the recent rapid deterioration in credit markets will undoubtedly have an effect on its activity, but anticipates this will largely be limited to NA and in some emerging exploration markets overseas. The strengthening production of North American natural gas has also led a number of customers to reduce spending early. SLB anticipates a slowing in the rate of increase of customer spending.

Credit crunch threatening companies that sell big-ticket items - WSJ: Harley-Davidson (HOG)'s in-house financing unit finances more than half of all new bikes the company sells, but operating income fell 28% in Q3, and the unit made no gains from selling loans to third parties. But even companies without in-house financing arms are facing trouble: Without wholesale financing, dealers can't afford to stock inventory for consumers to be tempted to buy. The article looks at the problems that Winnebago Industries (WGO) and Brunswick Corp (BC), which has a JV with General Electric (GE) to finance qualified dealers' inventories, are facing.

RIMM (59.24): Parts, materials to make BlackBerry Bold found to cost $158.16 – Engadget: The total comes from research firm iSuppli. The article notes that if Research in Motion can get carriers to pay about $350 for the Bold, it will achieve a gross margin of 45%, after allowing $11.25 for assembly and testing costs

SPWRA (50.99): Merrill Lynch and Citibank downgrade SPWRA. Cit downgrades to sell and Merrill downgrades to neutral.

ZION: Zions Bancorp reports Q3 EPS $0.47 ex-items vs Reuters $0.65. Company reports revenues of $581.6M vs Reuters $622.2M. The return on average common equity was 2.59% compared to 10.50% y/y. Provision for loan losses was $156.6M vs. $55.4M y/y. Net loan and lease charge-offs were $95.3M or 0.91% annualized of average loans, vs. $18.1M or 0.19% y/y. Nonperforming assets were $924.4M vs. $196.6M y/y. JP Morgan and FBR downgraded ZION shares this morning.

Thursday, October 16, 2008

October 16, 2008: Morning Call

October 16, 2008: Morning Call

Fair Value: SP500 – 909.95; NDX: 1252.07; DOW – 8586.50


Technical Levels:

SPX: 848-850 support/1007, 1056, 1098-1100 resistance

NASDAQ: 1640 support /1890 resistance


Events:

Pre-market EPS: C (-.50/21.3B); BK (.72/3.7B); BBT (.66/1.86B); HOG (.79/1.4B); MER (-4.92/1.4B); HBAN (.26/637.0M); NOK (.49/18.6B); NUE (2.16/7.5B); PH(1.39/3.0B); PNC (1.09/1.9B); ITW (.94/4.4B); RS (1.98/2.39B); SPWRA(.76/416.0M); UTX (1.33/15.1B)
08:00: BK earnings call
08:00: MER earnings call
08:00: NOK earnings call
08:30: Consumer Price Index (Sep): 0.1% MoM; 5.1% YoY
08:30: Consumer Price Index Ex-Food/Energy: 0.2% MoM; 2.5% YoY
08:30: Initial Jobless Claims (w/e October 11); Continuing Claims
09:00: Total Long-term TIC Flows (August)
09:15: Industrial Production (Sep): -0.9%; Capacity Utilization (Sep): 78.0%
09:30: Fed’s Bullard speaks on US Growth potential
10:00: Philly Fed (Oct): -9.4
10:00: C earnings call
10:35: EIA Natural Gas Storage Change
11:00: DOE/API Crude Oil/Gasoline Inventories
13:00: NAHB Housing Market Index (Oct): 17
16:30: GOOG earnings call
17:00: COF earnings call
20:00: Fed’s Rosengren speaks about foreclosures
Post-market EPS: AMD (-.40/1.4B); COF (1.01/4.25B); GOOG (4.81/4.0B); IBM (2.05/26.5B); GILD (.49/1.3B); SYK (.67/1.6B); ZION (.64/622.4M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures have been extremely volatile in the overnight session and are currently trading 5 points above fair value. SP futures had been 30 points below fair value at 2am ET due to weakness in European index futures. European markets are currently trading down 3% but opened down 6-7%. Worst sectors in Europe include Transports, Ag/Chemicals, Basic Materials, Leisure, and Energy. The best groups include Telecommunication and Industrials. Asian markets got hit hard overnight with the Nikkei plunging 11.4%, the most since October of 1987. The Kospi in South Korea fell 9.5% after the won dropped over 10%. Exporters were hit as the yen refused to weaken, and trading houses fell as oil continued to fall. Rio Tinto (RIO.AU) plummeted 16% after saying yesterday that it will probably delay the sale of $10B of assets. In other news, hedge fund Citadel is refuting rumors in the marketplace yesterday that they were forced sellers in order to meet margin calls. As I have repeatedly pointed out, the hedge fund compensation model is broken and the perception that hedge funds are seeing massive redemptions is a key factor currently weighing on stock prices. The rumor mill is taking dead aim at hedge funds now and I would expect an acceleration of negative chatter about hedge fund performance.

As I noted in my note on Tuesday morning, I thought it made sense to sell long exposure and move to a neutral/cash position due to the stunning gains off the lows. I continue to believe that cash is king. A long-term holding period in this eviornment is not weeks, months, or years but rather hours. The time horizon for tactical short-term trades is literally 15 to 30 minutes. It has been comical listening to the pundits on CNBC universally state that stocks are a good value but only for people with a five to ten year time horizon (this is the kind of conventional wisdom that has absolutely buried the general public in huge losses). Market participants that remain extremely flexible and disciplined will survive in this environment. Risk management trumps conviction so the idea that you should buy and hold stocks for five years is silly given the volatility. This environment continues to favor market participants that focus on short-term trading strategies that utilize little or no leverage.



Impact Research Calls/Market Moving News:

C (16.23): Citi reports Q3 EPS continuing ops ($0.71) vs Reuters ($0.70). Net interest margin was 3.13%, down 1 BP vs. Q2. Write-downs during the quarter totaled $4.4B. Net credit losses increased $2.5B, primarily driven by Consumer Banking and Cards in North America. Revenues and net income by segment (changes on a y/y basis): Global Cards: revenue (40%) to $3.79B and income ($902M); global cards managed revenues were (1%) to $7.37B. Consumer Banking: revenue $7.43B vs. year-ago $7.30B and income ($1.10B) vs. year-ago $156M. Institutional Clients: revenue (48%) to $2.39B and income ($2.02B) vs. year-ago $267M. Global Wealth Management: revenue (10%) to $3.16B and income $363M vs. year-ago $490M. Corporate: revenue ($95M) vs. year-ago ($140M) and income $232M vs. year-ago ($246M). Tier 1 capital ratio ended the quarter at 8.2% compared to 8.7% in Q2.


MER (`18.24): Merrill Lynch reports Q3 EPS ($5.56) ex-items (18.24)Reuters is ($5.18). Company reports revenues of $16.0M. The revenue figure includes net writedowns of $5.7B, net pre-tax gain of $4.3B from the sale of 20% in Bloomberg; net writedowns of $3.8B, mainly from market dislocations in Sep., net gains of $2.8B from widening of credit spreads, and net losses of $2.6B from asset sales in residential and commercial. Reuter’s consensus is $355.3M; First Call $759.9M. Results by business segment, with changes on a y/y basis: Global Markets and Investment Banking: Net revenues ($3.2B) and pre-tax loss of $6.0B; the revenue total includes - FICC ($9.9B), Equity Markets (%19) to $6.0B and Investment Banking (25%) to $750M. Global Wealth Management: Net revenues (9%) to $3.2B and pre-tax earnings to $774M for a pre-tax margin of 23.9% compared to 22.0% in Q2 and 26.9% in prior year; net revenues by business line - Global Private Client (8%) to $3.0B and GIM (11%) to $241M. Net inflows of client assets were $2B and total net new money was ($3B); total client assets ended the quarter at $1.5T versus $1.6T in Q2.


BK (29.25): Bank of New York Mellon reports Q3 EPS $0.72 ex-items vs. Reuters $0.66: Company reports revenues of $3.63B vs. Reuters $3.71B. Total revenue was comprised of $2.923B of fee and other revenue including the write-down of certain investment securities ($162M) and $703M of net interest revenue including a pre-tax charge for the SILO/LILO tax settlement ($112M). Assets under management, excluding securities lending assets, totaled $1.067 trillion at quarter end. This represents a decrease of 4% y/y. Net asset inflows in Q308 totaled $8B. Assets under custody and administration totaled $22.4 trillion, a decrease of 1% y/y.

WFC (33.35): Wells Fargo needs to do more to protect against loan losses – WSJ: A "Heard on the Street" column notes that WFC allowed its Q3 loan-loss reserve of $7.87B to slip to 1.57 times its past-due loans, from 1.81 times in Q2. Had the bank maintained the ratio, EPS would have been $0.25 rather than the $0.49 it reported. Noting that WFC still wants to raise $20B in capital to support its planned purchase of Wachovia (WB), the column advises a rapid increase in bad loans could make that capital necessary.

GOOG (339.17): WSJ’s Walter Mossberg reviews T-Mobile and GOOG’s G1 phone. Mossberg says, “I have been testing the G1 extensively, in multiple cities and in multiple scenarios. In general, I like it and consider it a worthy competitor to the iPhone. Both devices run on fast 3G phone networks and include Wi-Fi. Both have smart-touch interfaces and robust Web browsers. Both have the ability to easily download third-party apps, or programs. By far, the G1's biggest differentiator is that it has a physical keyboard, which is revealed by sliding open the screen. The keyboard proved only fair in my tests, with keys that are too flat and that can be hard to see in bright light, and with a bulge in the body on the right side that you have to reach over to type. But, for the many people who can't stomach typing on glass, the G1 keyboard will be a welcome sight. It's complemented by a BlackBerry-like trackball for navigation. Overall, the G1 is a very good first effort, and a godsend for people who prefer physical keyboards or T-Mobile but want to be part of the new world of powerful pocket computers. ”

PH (39.20): Parker-Hannifin reports Q1 EPS $1.50 vs. Reuters $1.39
Company reports revenues of $3.06B vs. Reuters $3.03B. The company reported an increase of 1% in total orders for the quarter ending 30-Sep, 2008 compared with the same quarter a year ago. Guides full year EPS to $5.37-5.75 vs. prior $5.65-6.05 and Reuters $5.56.

Flight-to-quality for bank deposits – WSJ: The Journal notes that bank deposits are increasingly flowing to the institutions have best weathered the credit crisis. The article points out that Wells Fargo (WFC) attracted $14.45B in additional deposits in Q3, while at the other end of the spectrum, Sovereign (SOV) saw an exodus of $4.17B, or 8.8% of its deposit base. Also on the winning end has been Hudson City Bancorp (HCBK), which added $570M in Q3 and $200M thus far this month.

FDIC chief concerned that government is not doing more to prevent foreclosures – WSJ: The Journal cites an interview with FDIC Chairman Sheila Bair. According to Ms. Bair, the government plan will help stabilize financial markets, but does not address foreclosures, the focal point of the crisis. Ms. Bair tells the paper that she has been frustrated by the government's unwillingness to help borrowers. Citing people familiar with the matter, the paper notes that there has been growing tension between Ms. Bair and the key figures trying to resolve the financial crisis, notably Treasury Secretary Paulson and Fed Chairman Bernanke.

X (38.82): U.S. Steel target lowered to $60 from $110 at UBS: Firm lowers '08/'09 estimates, with '09 estimates cut nearly in half due to a worsening tubular outlook. Firm notes the company's exposure to onshore gas drilling and sees a potentially severe US drilling downturn ahead. Rating is buy.

EBAY (15.33): EBAY guides Q4 below consensus. eBay reports Q3 EPS $0.46 vs. Reuters $0.41: Company reports revenues of $2.12B vs. Reuters $2.12B. Guides Q4 EPS to $0.39-0.41 vs. Reuters $0.47; guides revenues to $2.02-2.17B vs. Reuters $2.44B. Piper Jaffray and JPM downgrade EBAY to neutral from overweight.

HPQ (38.61): Hewlett-Packard developing touch-screen laptop - WSJ
People familiar with the matter say it will debut before the end of the year. They say the company is also planning to introduce a new notebook with a 10-inch screen this year. Pricing details remain unclear.

Wednesday, October 15, 2008

October 15, 2008: Morning Call

October 15, 2008: Morning Call

Fair Value: SP500 – 1001.02; NDX: 1373.69; DOW – 9324


Technical Levels:

SPX: 848-850, 949-952 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance:

Events:

Pre-market EPS: KO (.77/8.5B); DAL (.01/5.6B); JPM (-0.09/16.3B); STJ (.57/1.0B); WFC(.43/10.9B); NITE (.23/206.6M)
08:05: Fed’s Rosengren speaks on the economy
08:30: Producer Price Index (Sep): -0.4% MoM; 8.7% YoY
08:30: Producer Price Index Ex-Food/Energy (Sep): 0.2% MoM; 3.8% YoY
08:30: Retail Sales (Sep): -0.6%; Less Autos: -0.2%
08:30: Empire Manufacturing (Oct): -10.0
09:00: JPM earnings call
10:00: Business Inventories (August): 0.4%
12:15: Fed’s Bernanke speaks on the economy
14:00: Fed’s Beige Book
14:30: CHK Analyst Meeting
17:00: EBAY earnings call
Post-market EPS: EBAY (.41/2.1B); SOV (-1.28/-460.0M); STLD (1.12/2.6B)


Foreign Market Summary/Key Macro News/Commentary:

SP and NASDAQ futures are both trading 10 points below fair value at 7:40am ET. The overnight session range in the S&P 500 is a high of 1008.30 and a low of 978. Equity futures briefly moved to unchanged following a modest drop in LIBOR (3M Libor fixed at 4.55% vs. 4.63% yesterday). But, the move higher in the futures was brief, as market participants appear focused on weaker commodity prices and general concerns about a weaker earnings outlook. INTC and JPM both reported earnings that were in-line with consensus while KO and STT both beat expectations. Commodity and Financial stocks are indicated lower in the pre-market while Technology is showing relative strength. Asian markets declined overnight with shipping and commodity leveraged sectors weakening the most after the Baltic Dry tumbled 8.5%. Hong Kong dropped 5.0% and India fell nearly 6% (all 30 members of the Sensex declined with heavy construction and infrastructure companies pacing the decline). European markets are also trading sloppy this morning with declines of 2.5% to 3.0%. Metal & Mining shares led the declines following commodity prices down. European shares are trading close to the lows for the session. Decliners on the FTSE 100 lead advancers 9-1. Russian exchanges have been halted for periods due to stock declines (Russia is down 7.8%) and Iceland cut its key interest rate to 12% from 15.5.



Impact Research Calls/Market Moving News:

JPM (40.71): JPM’s quarter generally in-line but I continue to be alarmed by the rapid increases in NCO's and NPAs in both the mortgage business and credit card services. I would avoid all financial stocks at current levels. JPMorgan Chase reports Q3 results: The $0.29 cent headline figure excluded merger costs and included a $581M gain. Excluding the gain, JPM reports ($0.06). JPM also reported total net revenues of $14.74B on a GAAP basis. The company provided updated guidance for many of the divisions on 25-Sep along with the WaMu announcement; the update included charge-offs for the Retail and Card divisions and mardowns in the Investment Bank. Results by operating division, with all changes on a y/y basis: Investment Bank: net revenue 37% to $4.04B, provision for credit losses $234M vs year-ago $227M and net income $882M vs year-ago $296M. Markdowns during the quarter totaled $3.6B versus the $3.0-3.5B highlighted on 25-Sep. Retail Financial Services: net revenue 16% to $4.88B, provision for credit losses $1.68B vs year-ago $680M and net income $247M vs year-ago $639M. Card Services: net revenue 1% to $3.89B, provision for credit losses $2.23B vs year-ago $1.36B and net income $292M vs year-ago $786M. Commercial Banking: net revenue 11% to $1.13B, provision for credit losses $126M vs year-ago $112M and net income $312M vs year-ago $258M. Treasury & Securities Services: net revenue 12% to $1.95B and net income $406M vs year-ago $360M. Asset Management: net revenue (11%) to $1.96B and net income $351M vs year-ago ($44M). Corporate/Private Equity: net revenue ($1.75B) and net income ($1.96B) vs year-ago $513M. Tier 1 capital ratio 8.9% at 30-Sep vs. 9.2% at 30-Jun and 8.4% y/y

KO (43.73): Shares are up 3 points on the better earnings. Coca-Cola reports Q3 EPS $0.83 ex-items vs Reuters $0.77. Company reports revenues of $8.39B vs Reuters $8.58B/

STT (56.69): State Street reports Q3 EPS $1.24 vs Reuters $1.20: Company reports revenues of $2.54B vs Reuters $2.54B.

LLTC (25.89): LLTC issues a earnings warning. Linear Technology reports Q1 EPS $0.48 vs Reuters $0.45: Company reports revenues of $310.4M vs Reuters $310.5M. Guides Q2 revenues to down 10-20%, implying $248.3-279.4M vs Reuters $314.1M. The company believes it can maintain pretax profits above 40% of sales with the lower forecasted sales range

INTC (15.93): Intel reports Q3 EPS $0.35 vs Reuters $0.34: Company reports revenues of $10.22B vs Reuters $10.25B. Guides Q4 revenues to $10.1-10.9B vs Reuters $10.78B. Intel discusses the demand environment - conf. call: Management says that some corporate softness was seen in September, while the consumer was more seasonal; they expect corporate to continue to show softness due to an expected tightening in IT budgets for the remainder of the year. Inventories (company and channel) are believed to be reasonable at this time, with Taiwan and the channel noted to be cutting back while some OEMs are building. While consumer traffic is said to be muted, they continue to see healthy interest in notebook and net books. As a result of the high degree of uncertainty, Intel has decided to schedule a formal mid-quarter update for 4-Dec in order to provide an update on how the quarter is playing out.

AAPL (104.08); IBM (93.60); DELL (14.08): Apple (AAPL), IBM upgraded to overweight from neutral, DELL downgraded to neutral from overweight at JPMorgan.

Morgan Stanley upgrades the Software group to attractive :The firm is buyers of oversold stocks with SYMC, ORCL, MFE, and ADBE mentioned.

UTX (52.23): United Technologies estimates and target lowered at UBS: Firm lowers '09/'10 EPS estimates to reflect a reduced outlook for commercial construction and the aerospace aftermarket and the strengthening US dollar. Target is lowered to $73 from $77. Rating is buy.

C (18.62): Citi shares still look vulnerable - WSJ: In a "Heard on the Street" column, the Journal notes that shares of Citi still look vulnerable, even when considering the $25B in low-cost capital it is about to receive from Uncle Sam. According to the article, the stock is trading a significant premium to its estimated tangible book value of slightly more than $10 a share, particularly when considering that losses are are likely to remain higher for the next few quarters. The column goes on to highlight the strange divergence in the market as banks with hard-to-value assets and dampened earnings power such as Citi are outperforming, while nonfinancials with hard assets and earnings visibility are coming under pressure.

ELY (11.87): ELY warns. Callaway Golf guides Q3 EPS to ($0.08)-(0.10) ex- $0.04 charge vs Reuters ($0.00): The company guides Q3 revenue to $213M vs Reuters $229.5M. Guides full year EPS to $0.92-1.02 vs prior $1.08-1.18 and Reuters $1.08; guides revenue to $1.13-1.15B vs prior $1.15-1.17B and Reuters $1.16B.

Tuesday, October 14, 2008

October 14, 2008: Morning Call

October 14, 2008: Morning Call


Fair Value: SP500 – 1006.85; NDX: 1439.95; DOW – 9406


Technical Levels:

SPX: 848-850 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance


Events:

Pre-market EPS: JNJ (1.12/15.7B); PEP (1.08/11.2B); SVU (.69/10.1B); GWW(1.53/1.8B)
08:05: Bush speaks on Treasury plan
08:30: Paulson speaks on the Treasury plan
10:00: IBD/TIPP Economic Optimism (October): 45.0
14:00: Monthly Budget Statement (Sep): 62.0B
17:00: ABC Consumer Confidence (w/e Oct 12)
17:30: INTC earnings call
20:30: Fed’s Bullard speaks on the economy
22:00: Fed’s Yellen speaks on the economy
Post-market EPS: DNA (.89/3.3B); INTC (.34/10.2B); CSX (.94/2.9B)



Foreign Market Summary/Key Macro News/Commentary:

S&P futures are trading 40 points above fair value while the NASDAQ futures are trading 50 points above fair value on news that the US Treasury is going to inject 125 billion dollars of capital directly into 9 US banks through preferred shares. Bank stocks are indicated sharply higher while the Credit-default swaps are tumbling as solvency fears ease(GS CDS fall 151 BP to 236 BP; MS CDS fall 666 BP to 416 BP; C CDS fall 41 BP to 181 BP). Asian markets surged overnight with the Japanese market posting the biggest one-day percentage gain ever (up 14.1%). Financials and resource shares were the biggest sector gainers. China’s CSI and India’s Sensex were notably weak with Shanghai dropping 2.6% and India gaining 1.5%. European markets are up 5% on continued momentum after rallying 11.0% on Monday.

US and European markets are up a stunning 20-25% off the lows on Friday morning due to the aggressive and coordinated response to the global banking crisis by government’s around the world. I would be paring back long exposure and moving to a neutral posture today given the stunning gains off the lows and the potential for downside risk ahead of key earnings reports this week (INTC tonight, WFC and JPM tomorrow morning). That said, the path of maximum frustration remains to the upside given that most market participants are falling well short of their benchmarks; performance anxiety could lead to a stronger than expected underlying bid. The price action will remain bipolar so discipline remains critical. 1098-1100 is a key resistance area (March 3 close) and this is an area where I would consider moving to a net-short position.

Impact Research Calls/Market Moving News:

Treasury to buy preferred stock in nine top banks – WSJ: The Journal cites people familiar with the situation. The paper adds that it is unclear how much would be invested in each institution. Of interest, the article notes that not all of the banks involved are happy with the move, but agreed amid pressure from the government. Citigroup (C) and JPMorgan Chase (JPM) were told they would each get $25B; Bank of America (BAC) and Wells Fargo (WFC), $20B each; Goldman Sachs (GS) and Morgan Stanley (MS), $10B each, with Bank of New York Mellon (BK) and State Street (STT) each receiving $2-3B. In addition, Wells Fargo will get $5B for its acquisition of Wachovia (WB), and Bank of America the same for amount for its purchase of Merrill Lynch (MER). Hank Paulsen said the government is not planning to inject capital in foreign banks, and he did not discuss if it would do so for smaller regional banks like National City (NCC).

GOOG (381.02): Google target reduced to $480 from $635 at Deutsche Bank: The firm maintains their buy rating, however, and believes shares already reflect a weakened consumer outlook.

GOOG (381.02): Google target reduced to $485 from $570 at Oppenheimer: The firm expects Q3 results to be modestly below First Call consensus due to continued slowing of US paid clicks, with a firmer dollar impacting international. Oppenheimer continues to believe 2009 Street estimates are too high. Rating remains outperform.

RIMM (63.87): Research In Motion upgraded to hold from underperform at Needham

BX (9.67): Blackstone group CEO Schwarzman says the US plan is a “sea change in terms of liquidity” and will “break the back” of the credit crisis – Reuters

AG (37.61); BUCY (33.93); DOV (34.14): AGCO Corp (AG), Bucyrus (BUCY) downgraded at Goldman Sachs; Dover (DOV) upgraded: AG and BUCY downgraded to neutral from buy. DOV upgraded to buy from neutral.

MMM (59.62): 3M upgraded to neutral from sell at Goldman Sachs

PCLN (65.14): priceline.com upgraded to positive from neutral at Susquehanna