October 23, 2008: Morning Call

October 23, 2008: Morning Call


Fair Value: SP500 – 896.85; NDX: 1241.88; DOW – 8509.39


Technical Levels:


SPX: 848-850, 899 support/ 1098-1100, 1142, 1250 resistance

NASDAQ: 1640 support /1890 resistance

Events:

Pre-market EPS: POT (3.54/3.0B); BG (2.89/14.7B); BDK (1.30/1.55B); CBE (.95/1.7B); CNX (.40/1.1B); HOT (.53/1.51B); JCI (.73/9.46B); NOV (1.30/3.60B); RSH (.36/993.0M); STI (.61/2.14B); UNP (1.30/4.73B); UPS (.88/13.03B); TRA (1.74/820.0M)
05:00: BHP Annual Meeting
08:00: STI earnings call
08:30: Initial Jobless Claims
08:30: PHM earnings call
09:00: APA analyst meeting
10:00: FDIC’s Bair and Treasury’s Kashkari testify to Senate on turmoil in credit markets
10:00: House Price Index (August): -0.5%
10:00: BG earnings call
10:35: EIA Natural Gas Storage Change
13:00: POT earnings call
15:00: TRA earnings call
17:30: MSFT earnings call
Post-market EPS: AFL (1.00/4.31B); BNI (1.69/4.79B); CB (1.23/2.92B); DST (.93/430.3M); EMN (1.32/1.83B); FII (.55/308.4M); JNPR (.30/927.2M); MSFT (.47/14.83B); PKI (.36/510.4M); WFR (.89/529.8M); YRCW (-.09/2.33B)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading flat with fair value while the NASDAQ futures are trading 5 points below fair value at 7am ET. S&P futures had been 25 points above fair value at 4am because European markets were flat at that time. Since 4am, European markets have moved down 3.5% weighing on the S&P futures. Asian markets closed lower with South Korea dropping 7.0% and Australia and India dropping 4%. The Nikkei fell 2% but rallied nearly 500 points into the close. Indian markets also briefly turned positive in the middle of the session before selling off into the close of trading. Forced selling and fears of a deepening global recession continue to weigh on markets around the world. Australia, BHP Billiton (BHP.AU) and Rio Tinto Group (RIO.AU) both fell after European regulators indicated they might block a merger and commodities dropped. European markets are trading down 3.5% near session lows. Commodity and basic material sectors are among the hardest hit with MT down another 8% in London. MT has dropped nearly 32% in the last 3 trading sessions.

Impact Research Calls/Market Moving News:


POT (67.10): Potash reports Q3 EPS $3.92 vs Reuters $3.52: Company reports revenues of $3.06B vs Reuters $3.03B. Sees f08 EPS at the low end of prior guidance of $12-13/sh. Sees f08 capex of $1.2B vs prior $1.4B. Management now expects 2008 nitrogen gross margin to be lower than previously forecast but still exceed 2007 by appx 60% percent.

BG (35.25): Bunge Ltd reports Q3 EPS $2.00 ex-items vs Reuters $2.81 : Company reports revenues of $14.80B vs Reuters $13.86B. The company reported volumes of 35.2M tons vs 37.7M tons y/y. Guides full year EPS to $11.60-11.90 vs Reuters $11.49.

BIDU (249.09): Baidu.com reports Q3 EPS $1.54 ex-items vs Reuters $1.34: Company reports revenues of $135.4M. TAC as a component of cost of revenues was $16.0M. Reuters consensus is $135.2M. Guides Q4 revenues to $151-$155M vs Reuters $151.3M.

AMZN (49.99): Amazon.com reports Q3 EPS $0.27 vs Reuters $0.25: Company reports revenues of $4.26B vs Reuters $4.28B. Guides Q4 revenue $6.0-7.0B vs Reuters $7.04B.

PHM (9.95): PHM reports a Q3 loss of 1.11 vs. consensus of a loss of .58 cents. Company reports revenues of $1.56B vs Reuters $1.54B. (13%) decrease in average selling price to $281,000. Company also says that due to the high degree of uncertainty and volatility, as well as a lack of visibility surrounding the housing industry and the overall economy, the company is not providing earnings guidance for Q4," though it is targeting a cash position by the end of 2008 of $1.6B to $1.8B.

WSJ article highlights credit card losses: “This financial crisis has shown that history is an unreliable guide for gauging future losses. Banks relying on historical models were fooled when it came to potential mortgage hits. They similarly miscalculated with structured-debt products. Now, the same may hold true for credit cards. Banks and big card issuers have seen card losses climb and are projecting that things will worsen in 2009. But their expectations, largely grounded in the experience of past downturns, mightn't be dour enough. Losses could easily overtake historic peaks, possibly spelling additional woe for the likes of C, JPM, BAC, AXP, and COF. Credit-card usage has changed so drastically, even since the last downturn. A broader range of consumers now carry cards and many run consistent credit balances to fund their lifestyles. This has led to successively higher peaks over the years in credit-card charge-off rates. The danger is that the current financial downturn results in a new, far-higher peak charge-off rate that leads to unexpectedly large losses at banks and other card issuers. Each tick higher in the unemployment rate makes that more likely. Already, both delinquencies and the likelihood they turn into real losses are rising. During the 1980s, charge-off rates averaged about 2.6%, according to Federal Deposit Insurance Corp. data. In the early 1990s recession, those rates peaked at 4.98%. Charge-offs rose to 5.39% in the late 1990s and then hit their most recent peak of 7.69% in the first quarter of 2002. At the end of June, net charge-offs had risen to 5.52%, FDIC data show. Third-quarter data have yet to be released, but will undoubtedly be worse based on numbers already being reported by banks and card firms.”

GS (115.06): Goldman Sachs to cut 10% of workforce - WSJ

DO (64.39): Diamond Offshore reports Q3 EPS $2.23 vs Reuters $2.23: Company reports revenues of $900.0M vs Reuters $874.6M.

PBR (23.15): Petrobras Brasileiro's target reduced at Morgan Stanley: The shares are rated overweight and target is reduced to $46 from $65. The firm says they are more guarded on PBR in the near term due to concerns that demand destruction could be more severe than initially thought, and that oil prices may be pressured in the short term.

$40B proposal to aid borrowers under consideration – WSJ: A person familiar with her testimony says FDIC chairman Shiela Blair will tell the Senate Banking Committee today that the government should give banks a financial incentive to turn troubled loans into more-affordable mortgages. The government would then share any future losses on the new loans with the lenders. And other sources say Treasury is discussing the option. Blair's idea calls for new mortgages to meet certain unknown conditions to qualify for partial government backing. Treasury is also considering buying unsecuritized bad loans from banks.

Counterintuitively, falling oil prices bring benefits to oil majors - WSJ: Pressure for windfall-profit taxes and difficulty landing long-term deals with countries that have untapped reserves of oil ill fall as the price of oil does. And the majors have lots of cash and little debt. Lower income from oil production will be partially offset by higher returns from refining and marketing. And since gas prices are falling slower than crude prices, profit margins are increasing.