Thursday, October 2, 2008

October 2, 2008: Morning Call

October 2, 2008: Morning Call

Fair Value: SP500 – 1165.48; NDX: 1575.83; DOW – 10857

Technical Levels:

SPX: 1063, 1090, 1136-1142 support/ 1250, 1298-1300, 1337 resistance

NASDAQ: 1890, 1921, 2020 support / 2210, 2264 resistance


Pre-market EPS: MAR (.32/2.94B)
04:30: Bank of England Quarterly Credit Conditions
05:00: Euro-zone PPI (Aug): -0.5%; 8.4% YoY
07:45: ECB Decision on interest rates: 4.25%
08:00: ENER Investor Day
08:30: Initial Jobless Claims (w/e Sep 27): 468,000; Continuing Claims
09:20: Greenspan speaks on the financial markets at Georgetown University
10:00: Factory Orders (August): -2.0%
10:00: MAR Earnings call
10:35: EIA Natural Gas Storage Change
11:00: MOS Earnings call
11:00: HON presents at Oppenheimer Industrials Conference
15:25: AGU presents at Citi Ag Conference
16:00: Fed to release value of Bear-Stearns mortgage portfolio
20:00: Fed’s Bullard speaks on the economy
21:45: Fed’s Hoenig speaks on the economy

Foreign Market Summary/Key Macro News/Commentary:

SP and NASDAQ futures are both trading 8 points below fair value after the Senate approved the Troubled Asset Relief Program (TARP) legislation by a wide margin. The overnight session in the S&P futures continued to be remarkably volatile with a 24-point range (1150-1174) despite very thin trading volumes. The ECB just left interest rates unchanged causing the futures to pull back a few points. The Euro is currently testing the September 11 lows against the dollar despite rates holding steady (Euro at 1.3895) The dollar strength is weighing on commodity prices with Crude Oil pulling back 1.2% to 97.30. In other news, the short selling ban is going to be extended to either 3 days following the passage of the TARP legislation or no later than October 17. European markets were up 1.5% prior to the ECB decision but pared the gains to 0.50% on the ECB decision to leave rates unchanged. Best sectors in Europe are banks, real estate and media. Beverages, Auto’s, Fertilizer/Chemicals, and Farm equipment are among the weakest. Asian markets closed mostly lower with Japanese stocks dropping 1.8% to a new 3-year low. Automakers were down sharply after Toyota (7203.JP) showed sluggish September sales in the US. The Hang Seng rallied into the close lifted by Ping An Insurance (23187.HK) sharp rise, after it cancelled the acquisition of half of Fortis's (FORB.BB) Asset Management unit. Korean Banks traded lower after Moody's changed the outlook to negative on the financial strength of the countries' big four banks. Hang Seng Bank (11.HK) fell to a six-month low after a newspaper reported the lender may record losses on debt issued by Washington Mutual.

Impact Research Calls/Market Moving News:

MOS (67.51): MOS shares are trading down 20% in early trading following a disappointing earnings report. Q1 results ex-items were 2.83 versus street consensus of 2.93. Headline EPS was 2.65 due to an 18 cent mark to market derivative losses. More importantly, MOS intends to reduce phosphate production by 500,000 to 1 million tons over the next several months due to high inventory levels. MOS shares are down a stunning 68% since the June 18 peak.

MOS (67.51); POT (128.04); AGU (54.90); TRA (28.40); IPI (29.65): Merrill Lynch downgrades the Fertilizer sector to underperform from buy.

MAR (25.08): MAR Q3 EPS of .34 cents vs. consensus of .32 cents. Guides Q4 EPS to $0.44-0.50 vs. Reuters $0.63. Guides Q4 worldwide REVPAR to decline (1-3%), N.A. REVPAR (3-5%). MA guides FY09 EPS to 1.48-1.60 vs. street consensus of 1.86. Room growth is expected to total 30,000 to 35,000 rooms in 2009 and most hotels expected to open are 30,000-35,000 rooms in 2009. Timeshare contract sales could remain flat to 2008 levels. In 2009, investment spending is expected to total $700M to $800M. The company does not anticipate meaningful share repurchase activity in the balance of 2008 and 2009.

NBR (24.00): Nabors Industries guides Q3 adjusted EPS to $0.82-$0.85, ex-items, vs. Reuters $0.81. But, when you include significant charges in its investment income and other special items, Q3 EPS will be in a range of .65-.68 cents. In this environment, I think it is silly to include investment losses as a “special item.”

Federal Reserve: Bloomberg is reporting that the Federal Reserve may report an unrealized loss of 6 billion on the portfolio of mortgage-backed assets it took over from BSC, according to Bank of America. The Fed will announce its quarterly estimate of the fair value of the 30 billion “Maiden Lane” portfolio. Bank of America is estimating a mark to market loss range of 2 billion to 6 billion depending on how they apply the fair value accounting principles. Bank of America said valuing the assets “puts the Fed squarely in the very position of the banks it regulated in dealing with mark-to-market accounting.”

Page One WSJ article says the Fed is considering additional rate cuts due to more anchored inflation expectations and increasing signs that the economy is in a recession: The Fed's willingness to consider additional cuts marks a turnaround from the past few months, when soaring food and energy prices turned its attention to inflation risks. A reduction in rates is still far from certain, in part because of inflation worries. But in just the past few weeks, as the credit crisis pummeled the financial system; economic data have become steadily worse, raising fears of a recession.

Goldman Cuts 2009 Crude Oil Price target: GS cuts 2009 price target to $90 from $107. Goldman’s Branch says US oil demand has “dropped like a rock.” But, also says the super cycle is not over. Merrill Lynch cut its 2009 oil price estimate to 90.

GE (24.50): General Electric's move to tap Buffett should help break the vicious circle – WSJ: In a "Heard on the Street" column, the Journal argues that GE's move to raise capital was all about protecting its credit rating and staving off any funding problems. According to the article, if GE had run into trouble rolling over its commercial paper and was forced to tap its $62B in bank credit lines, its stock would have been decimated, something that could have spooked the credit ratings firms, particularly when considering the signs of stress evident in the company's credit-default swaps. The article goes on to note that while the turning to Buffett was expensive, it was the best way to break the vicious circle.

LVS (31.32); WYNN ( 80.19): Morgan Stanley downgraded to equal weight from overweight. The firm believes that visa restrictions will adversely impact market growth rates as long as they are in place, and also expects the Vegas market to be weaker in 2009 than current expectations due to a further weakening US consumer as well as lower group bookings

IBM (116.96): IBM revenue estimates reduced at Barclays Capital: The firm continues to see IBM as a defensive way to leverage outperformance in the hardware sector, though cites near-term economic risk and forex exposure for changing revenue estimates through f09.

TOT (60.45), BP (50.12), STO (23.06), MUR (61.23) - pre-European open: TOT, BP upgraded to neutral from underperform at Merrill Lynch. STO, MUR downgraded to underperform from neutral. The firm also reduced its 2009 oil price estimate by 16% to $90/barrel.

AA (21.27); FCX (52.96); AU (23.23): Alcoa (AA) downgraded, Freeport McMoran (FCX) removed from Conviction Buy List; AngloGold (AU) upgraded at Goldman Sachs: AA downgraded to neutral from buy. FCX removed from Conviction Buy List; rating remains buy. AU upgraded to buy from neutral. The firm reduces base and precious metal price assumptions for 2008-10.

EBAY (20.85): eBay downgraded to equal-weight from overweight at Morgan Stanley: The firm says trends deteriorated more than it anticipated during Q3. Estimates for f08 and f09 are reduced.

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