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


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): 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.

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