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


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.

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