October 13, 2008: Morning Call

October 13, 2008: Morning Call

Fair Value: SP500 – 902.09; NDX: 1279.24; DOW – 8464


Technical Levels:

SPX: 848-850 support/1007, 1090, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance


Events:

08:15: Fed’s Hoenig speaks on regulation
12:30: NDAQ Annual Meeting


Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 35 points above fair value while the NASDAQ futures are trading 60 points above fair value at 7:30am ET. Markets in Hong Kong and India rallied 10% and 7% respectively overnight due to news that governments around the world would aggressively seek to recapitalize the global financial system in a coordinated action. European markets are also trading 5.5% higher on the weekend developments. MS shares are trading 25% higher on several news reports that MUFJ has renegotiated the terms of the secondary offering. The WSJ is reporting that official terms will be released at 8am ET. Financials, energy, and mining sectors are the strongest in Europe. The S&P 500 bounced a dozen times off the 850 level during Friday’s trading session and I continue to lean on this level as a strong support area.


Impact Research Calls/Market Moving News:

Central banks take steps to improve liquidity: In order to provide broad access to liquidity and funding to financial institutions, the Bank of England (BoE), the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank (SNB) are jointly announcing further measures to improve liquidity in short-term US dollar funding markets. The BoE, ECB and SNB will conduct tenders of U.S. dollar funding at 7-day, 28-day and 84-day maturities at fixed interest rates for full allotment. Funds will be provided at a fixed rate, set in advance of each operation. Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short- term funding markets. Starting on 15-October the Eurosystem will, every Wednesday, conduct a liquidity providing US dollar operation with a term of 7 days. All future auctions with a term of 7 days, 28 days and 84 days will be conducted at a fixed rate with full allotment. The 28-day and 84-day US dollar operations will be conducted according to the schedule released on 7 October 2008. As of 16-October, daily US dollar overnight operations will be conducted only if necessary in view of market developments. These measures will be in place as long as needed, and at least until January 2009.

MS (9.68): Mitsubishi UFJ, Morgan Stanley renegotiating - NY Times – Wall Street Journal is also reporting that deal revisions will be announced at 8am ET. The NY Times says that under the proposed new terms being discussed on Sunday, Mitsubishi would still buy roughly 21% of Morgan Stanley, but all of the investment would be through preferred shares, with a 10% annual dividend and many shares being convertible into common at a price far lower than originally proposed. People close to both sides expressed confidence that a deal would be struck, and they were hoping to announce the terms and Mitsubishi's commitment to complete the deal by Monday morning. Mitsubishi and the Japanese government have sought assurances from the Treasury Department that if the U.S. were to decide to inject money into Morgan Stanley at a later time, such a move would not wipe out preferred shareholders. Paulson is reportedly pushing the companies to come up with a private-market solution, but is said to have privately hinted to members of both companies that the government would back Morgan Stanley if it came to that.

German rescue plan provides for fund to stabilize financial markets; provides guarantees up to €400B for banks -- Reuters draft bill: Per Reuters, the German Fund will provide capital for German banks, with guarantees running until 31-Dec 2009. The rescue plan gives Finance Ministry power to influence a bank's strategy. The rescue fund can take on positions before 13-Oct. The German rescue fund provides guarantees of up to €400B for banks.

RBS (1.45); HBOS (124.20); LLOY (189.40): UK Government statement regarding financial support for the banking industry; to make capital investments in RBS and HBOS, Lloyds TSB after merging: The UK government announced it would implement the comprehensive set of measures it announced on 8-Oct, to make commercial investments in UK banks and building societies to help stabilize their position and support the long term strength of the economy. The overall aim of these measures is to support stability in the financial system; to protect ordinary savers, depositors, businesses and borrowers; and to safeguard the interests of the taxpayer. The measures are intend to: provide sufficient liquidity in the short term; make available new tier 1 capital to UK banks and building societies; ensure that the banking system has the funds necessary to maintain lending in the medium term through the credit guarantee scheme. HBOS is trading down 22%; RBS and LLYO are down 6%.

AAPL (96.80): Apple upgraded to outperform from market perform at Bernstein: The firm sees longer term risk/reward as compelling though the target for the shares is reduced to $135 from $175.

OIH (87.65): Oil Services sector downgraded to neutral at Goldman Sachs; SLB downgraded, BHI upgraded: Oil Services sector downgraded to neutral. Schlumberger (SLB) is downgraded to neutral from buy. Baker Hughes (BHI) is upgraded.

US E&P sector downgraded to neutral from attractive at Goldman Sachs
The firm notes less potential upside if storage tightens and the potential for reduced nat'l gas demand

Stock exchanges consider new ways to limit short selling - Washington Post: Sources familiar with the proposal say the idea with the most traction is a five-day ban on short-selling in any stock that finishes a session down at least 20% from the previous day's close. The sources say SEC chairman Christopher Cox is receptive to the idea, but commissioners want to see alternative proposals.

FT discusses U.S. plans to provide implicit guarantee for bank deposits, debt: The FT reports that the US is likely to strengthen its implicit guarantee for all bank deposits and bank debt but stop short of a formal legal guarantee, as it fears that a formal guarantee would be damaging to the non-bank financial sector. The FT noted a comment from Paulson that it said had not been widely reported, in which the Treasury Secretary said that the FDIC would use emergency authorities “as appropriate” to reduce systemic risk by “protecting depositors, protecting unsecured claims, guaranteeing liabilities and adopting other measures to support the banking system”.

Russian banks could start receiving money from Govt rescue package on Thursday-Friday -- Reuters, citing Fed council committee head.

BCS (207.50): Barclays to raise £6.5B of tier 1 capital; will not pay final dividend: The company announced that taking into account the new higher capital targets which the FSA has set for all UK banks, the Board has determined that it will raise in excess of £ 6.5bn of Tier 1 Capital. This would result in a pro forma Tier 1 Capital ratio as at 30-Jun 2008 of over 11%. BCS declined a direct capital injection from the UK government.

RBS (1.45): RBS announces £20B capital raising: RBS announces an offer of ordinary shares to raise £15B of core tier 1 capital. HM Treasury will underwrite the offer at a fixed price of 65.5p/share. Existing RBS shareholders will be invited to subscribe for all or part of there pro rata entitlements. New institutional shareholders may also be permitted to subscribe for new shares under the offer. In addition, HM Treasury will subscribe for £5B of Preference Shares, further increasing RBS's Tier 1 capital ratio.

Lloyds (LLOY.LN) revises term of acquisition; says HBOS shareholders to get 0.605 Lloyds TSB shares, and raises £5.5B new capital