Wednesday, October 29, 2008

October 29, 2008: Morning Call

October 29, 2008: Morning Call

Fair Value: SP500 – 940.28; NDX: 1301.93; DOW – 9052

Technical Levels:

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

NASDAQ: 1423 support /1640-1650, 1890 resistance


Pre-market EPS: ANR (1.01/702.0M); CMCSA (.21/8.6B); GRMN (.83/857.9M); GLW (.44/1.58B); HES (2.49/12.99B); JNY (.33/975.0M); K (.81/3.29B); LM (.86/1.01B); MCO (.41/426.5M); NEM (.47/1.55B); NYB (.24/209.8M); PG (1.02/21.92B); SEE(.39/1.26B)
07:00: MBA Mortgage Applications
08:30: Durable Goods Orders (Sep): -1.0%; Ex-Transportation: -1.5%
10:35: DOE/API Crude Oil and Gasoline Inventories: 2.0M Crude Build; 1.5M Gasoline Build
11:00: ANR earnings call
11:55: Former Fed Chairman Volcker will speak on financial stability
14:15: FOMC Rate Decision
17:00: V earnings call
17:00: CME earnings call
Post-market EPS: AW (.26/1.59B); CME (3.97/623.4M); EQR (.63/533.4M); FSLR(1.02/338.6M); HAR (.39/1.01B); HIG (-1.45/2.62B); HRS (.88/1.35B); MET(.92/13.56B); MUR (2.65/5.77B); MXIM (.24/501.4M); PRU (.84/6.71B); V(.56/1.6B)

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 5 points above fair value while the NASDAQ futures are trading 13 points above fair value at 7:45 am ET. The SP futures are currently trading at 945 well off the overnight session lows at 914.50. Asian and European markets moved sharply higher following the sharp gains in US trading on Tuesday. European markets are currently higher by almost 4.0% with mining, manufacturing, technology, and chemical sectors gaining the most. Financials are trading up 6.8% and insurers are up nearly 10%. Deutsche Bourse lowered the index weighing on VOW to 10% from 27%; VOW shares are down 36%. US hedge funds have seen staggering losses on the Long Porsche/Short VOW arbitrage. This trade alone has destroyed some hedge funds and the losses are being sustained by an industry that has experienced terrible returns for the last two months. Asian markets closed higher lead by a 7.8% gain in Japan. MTU rallied 7.8% after the Nikkei reported that the BOJ may lower interest rates. TM rallied 10% and CEO gained 10%. Hong Kong rose slightly on the strength of energy stocks. The Standard says Hong Kong officials are divided on whether to ban short selling. South Korea fell led by banks on rumors (denied by authorities) that the country might apply to the IMF for bailout funds weighed on investors. Crude Oil is up nearly 6% after a weak performance in Tuesday’s session. There is no fundamental news but given the increase in equity markets it was a little surprising that the reaction in oil prices was very muted on Tuesday.

Traders should raise the stop-loss for tactical long positions from the SPX 848-price level that I highlighted yesterday to 928 given the huge gains. I would not be in a rush to initiate new long or short positions at current levels.

Impact Research Calls/Market Moving News:

Peoples Bank of China reduces China's lending rates – wires: The Chinese central bank reduced its benchmark lending and deposit rates by 27 bp, eff 30-Oct. One-year loan rates are 6.66%, eff 30-Oct vs prior 6.93%; one-year deposit rates are 3.60%, eff 30-Oct vs prior 3.87%.

New York Times Article: Worth a read. David Leonhardt has been writing some very good thought provoking articles for the past year. This article is a counter argument to the bull case that stocks are extremely cheap based on historical valuation measures.

AAPL (99.91): Bernstein comments on Apple, sees a share repurchase as the best use of cash: In the firm's view, a share repurchase would be more favorable than either a major acquisition or dividend. A $20B repurchase program in f09 could raise EPS 9%-15% higher than current estimates with non-GAAP accretion even higher. (My comment: Extremely long odds for this to happen. Would be a huge surprise because Jobs said the “cash was not burning a hole in Apple’s pocket” on the recent earnings call and suggested the a share re-purchase is not in the cards).

GLW (11.42): Reports Q3 EPS of .46 cents versus consensus of .43 cents. Guides Q4 lower to between .20-.22 cents vs. consensus of .42 cents. Shares are trading down a buck in the pre-market.

China is delaying plans to allow margin lending and short selling – according to reports. reports the central government is set to delay the launch of margin lending and short selling amid mounting worries the potentially risky trading methods will exacerbate market turbulence. Sources said the State Council had put on hold plans for the much-anticipated launch next month because of fears the introduction of the practices could send the market into another tailspin. One source close to the China Securities Regulatory Commission said senior officials believed margin lending and short selling could expose more investors to heavy losses. One regulatory official said that the new trading mechanism was "temporarily on hold" and still awaiting official approval. But other sources said the so-called temporary suspension could become a long delay.

X (35.20): U.S. Steel target lowered to $27 from $42 at Bank of America: Estimates for '08/'09 are lowered with '09 estimates lowered below consensus. Firm notes higher pension expenses in '09, lower profit assumptions in Europe, and somewhat lower valuation multiples. Rating is sell.

X (35.20): U.S. Steel estimates reduced below consensus at Morgan Stanley: Despite impressive Q3 results, the firm reduces estimates for f09 and f10 below consensus given the company's high fixed costs and continuing global slowdown. Shares remain equal weight rated.

ANR (29.63): Alpha Natural Resources reports Q3 EPS $0.97 vs Reuters $1.01: Company reports revenues of $715.0M vs Reuters $692.5M. Coal revenue per ton was $85.70 with per ton margin of $21.43. ANR sold 7.3M tons of coal.

SEE (21.01): Sealed Air reports Q3 EPS $0.28 ex-items vs Reuters $0.38: Company reports revenues of $1.22B vs Reuters $1.26B. Sees full year EPS to $0.97-1.07, incl charges vs prior $1.41-1.51 and vs Reuters $1.56.

GRMN (21.43): Garmin reports Q3 EPS $0.82 vs Reuters $0.83: Company reports revenues of $870.4M vs Reuters $857.9M. GRMN notes that excluding foreign exchange, EPS was $0.87 compared to $0.89 in the same quarter in 2007. Gross margin was 44.3% compared to 45.8% in Q2 2008 and 46.9% in Q3 2007. Q3 had 3.9M units sold, up 43% from the same quarter in 2007. Guides full year EPS to $3.78 ex-foreign currency translation vs Reuters $3.94; guides revenues to $3.6B vs Reuters $3.81B. Development of the nüvifone is on target for a H1 of 2009 launch.

POT (69.68): Barron's Weekday Trader is positive on Potash: The article notes that the company's business model is supported by powerful and sustainable fundamentals, as rising middle classes in emerging markets such as China and India are demanding more nutritious diets. Barron's also points out that the stock is trading at less than 4x its 2009 and 2010 earnings estimates.

WSJ Heard on the Street article highlights the drastic changes facing Goldman Sachs and Morgan Stanley: “When Fidel Castro took over Cuba, he closed the casinos. It won't get that bad for Wall Street's casinos, now that the U.S. government is intervening heavily in the financial system. But there isn't any doubt that they face drastic changes. That may be one reason why shares in Goldman Sachs Group and Morgan Stanley have fallen 28% and 44% respectively since they became Federal Reserve-regulated bank holding companies in mid-September. The declines have occurred even though both firms have received $10 billion preferred equity investments and a guarantee on their debt issuances. Morgan Stanley is trading at around half its tangible book value, a measure of net worth that strips out intangible assets. Goldman trades at about one time. These distressed multiples suggest investors think everything has changed for the pair, making profitability very hard to gauge. Those fears make sense. In the new financial system that is likely to emerge from the credit bust, it is hard to see a place for firms that have huge balance sheets -- Goldman and Morgan Stanley had just over $2 trillion of assets between them at the end of August -- and a heavy capital-markets bias.”

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