Monday, October 27, 2008

October 27, 2008: Morning Call

October 27, 2008: Morning Call

Fair Value: SP500 – 876.56; NDX: 1206.60; DOW – 8366

Technical Levels:

SPX: 848-850 support/ 998, 1098-1100, 1142, 1250 resistance

NASDAQ: 1423 support /1640-1650, 1890 resistance


Pre-market EPS: ACI (.60/764.1M); FPL (1.35/4.73B); VZ (.65/24.52B); SOHU(.98/115.0M)

10:00: New Home Sales (Sep): 450,000; -2.2% MoM
13:30: WMT Analyst Meeting

Post-market EPS: CF (3.54/1.04B); PCL (.39/424.4M)

Foreign Market Summary/Key Macro News/Commentary:

Market participants are facing another rough morning with the S&P futures trading 30 points below fair value and the NASDAQ futures trading 36 points below fair value. The S&P futures were down 51 at the overnight session lows (4:00am ET). One of the more remarkable aspects of this brutal October decline is that trading has remained very orderly. But, global markets seem to be at a tipping point in this regard. If global markets do not start stabilizing in the next few trading sessions, trading conditions will become far more chaotic and global equity markets could even seize up. The primary risk confronting governments and market participants around the world is that sustained turmoil in the markets will cement terrible economic outcomes. This is why the next few sessions are so critical.

Asian markets plummeted overnight as risk aversion, forced selling, and fears of a global recession continue to weigh on global equity indexes. Hong Kong closed 12.7% lower, Thailand and the Philippines dropped 10-12%, Japan and Shanghai dropped 7%, and India recovered into the close down 2.2%. South Korea was the one bright spot with a 2.8% rally after a surprise 75 basis point interest rate cut. European markets are down 4.3% but off the worst levels of the session (Euro-zone markets were down 6.6% at the session lows). The German October IFO business climate index came in weaker than expected at 90.2 versus consensus of 91. Crude Oil and other commodities are lower by 2%-4%.

Impact Research Calls/Market Moving News:

G7 warns about excessive yen gains – comments signal potential intervention: Guardian Unlimited reports Japan is poised to intervene in its currency market for the first time in more than four years after the G7 issued a warning over recent excessive gains by the yen that have pummelled exporters' profit forecasts. In an emergency statement issued in Tokyo, the G7 stopped short of calling for concerted action to rein in the yen, which last Friday rose to a 13-year high of 90.87 yen to the dollar, but said cooperation remained an option to bring stability to global markets. The G7 said it was concerned about "excessive gains" by the yen that have forced major Japanese exporters to drastically reduce profit forecasts as the weak dollar eats into exports to the US. "We reaffirm our shared interest in a strong and stable international financial system," the statement said. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability. "We continue to monitor the markets closely, and cooperate as appropriate."

Barron's Cover suggests that valuations look pretty reasonable, even assuming marked earnings declines: The Cover Story discusses the market's fall of the past week and notes that valuations of stocks look pretty reasonable, even assuming marked earnings declines. THe S&P 500 is trading for only 10x '07 operating earnings. Even assuming earnings fall to $70, the index is trading for less than 13x earnings. The dividend yield is 3% and the price/book ratio is 1.8x. In Europe stocks are even cheaper. Equity yields have not been this attractive to European bonds in 50 years. Cash rich companies like Microsoft (MSFT), ExxonMobil (XOM), Loews (L) and Motorola (MOT) look attractive in the current environment while Volkswagen (VOW.GR) is still perhaps the most overvalued big company on the planet. There may be a near-term bounce after the steep drops. There are opportunities from the forced selling by hedge funds that are unwinding trades. Among these are in convertibles, leveraged loans and interest-rate swaps. There are also takeover arbitrage opportunities in situations like the takeover of Anheuser-Busch (BUD). For patient investors who follow Warren Buffett's advise to buy now, the payoff should be rather nice.

X (34.68): U.S. Steel downgraded to sell from buy at UBS: Firm cites elevated fixed costs in an environment where steel prices are falling as its rationale for the downgrade. Target price, $30 vs prior $60.

CAT (33.30): Caterpillar downgraded to neutral from buy at Merrill Lynch

GS (100.40); C (12.14): Goldman Sachs talked to Citi about merger discussions, was rebuffed, reports the FT: GS' CEO Blankfein called Citi CEO Pandit about a possible merger at the tentative suggestion of regulatory authorities, or at least their blessing, according to several sources. The call was made shortly after Goldman converted itself into a commercial bank. Mr. Pandit rejected the proposal at once. Any serious discussions about a deal became a non-issue once Treasury announced its capital injection into the banking industry.

Japanese government considers boosting funds for injection into banks to Y10T – Nikkei: Citing comments made by government officials, the Nikkei reports that the government is considering boosting the amount of public funds set aside for injection into banks' capital bases to Y10T ($106B) from the currently planned Y2T. The government is likely to announce the increase in the scale of the bank recapitalization program, together with other emergency market-support measures, even before Monday's opening of the TSE. Among other expected market-support measures is a plan to have Banks' Shareholdings Purchase Corp purchase shares held by banks to minimize damage to their capital bases. In a separate report, Nikkei reported that Mitsubishi UFJ (MTU) plans to raise up to Y1T ($10.6B) in new capital before the end of the fiscal year in March. Mitsubishi has reportedly contacted three investment banks about a potential offering, which could include Y600B in ordinary shares and Y100-300B in preferred shares.

BX (7.89): China Investment Corp defends investment in Blackstone Group – Reuters: Reuters reports that Chairman Lou Jiweu of China's sovereign wealth fund CIC said its investment in Blackstone will pay off in the long run. A source familiar with the situation told Reuters earlier this month that CIC would boost its stake to 12.5% from 9.9%, and Lou confirmed the position is already over 10%. Lou also said that CIC holds over 90% of its assets in cash and is watching the markets closely everyday.

COF (35.30): Capital One plans to sell $3.55B in preferred stock and warrants to buy common stock in conjunction with participation in TARP

EQ (29.74): CTL offers to buy EQ in a deal valued at 5.8 billion. EQ shareholders will receive 1.37 CTL shares for each share of EQ that they own.

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