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:


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): 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%.

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