October 8, 2008: Morning Call

October 8, 2008: Morning Call

Fair Value: SP500 – 999.84; NDX: 1339.89; DOW – 9469

Technical Levels:

SPX: 998 -1005 support/1090, 1142, 1250, 1298-1300, 1337 resistance

NASDAQ: 1783, 1838 support /1890, 2020 resistance


Events:

Pre-market EPS: COST (.93/22.9B); MON (-.13/1.9B); ACGY (.42/820.0M); PGR(.33/3.48B)
07:00: MBA Mortgage Applications
07:45: Philly Fed’s Plosser speaks on Fed policies
08:30: JCP September 2008 Sales and Revenue Guidance
08:30: TGT September Sales
10:00: Pending Home Sales (August): -1.1%
10:35: DOE/API Crude Oil and Gasoline Inventories
11:00: COST earnings call
16:00: Select Retailers Report September Comps


Foreign Market Summary/Key Macro News/Commentary:


Global central banks announced a coordinated 50 basis point reduction in interest rates at 7am ET. The ECB, BOE, BOC, Sweden, Switzerland, and China all cut interest rates citing the recent intensification of the financial crisis and downside risks to growth. SP futures are currently trading 32 points above fair value while the NASDAQ futures are 27 points above fair value. There was full-blown panic in the overnight session in the S&P futures and the trading range is remarkable with a low of 962 and a high of 1043. Asian markets plunged overnight with the Nikkei falling 9.3%. Financial, resource and shipping stocks were amongst the leading fallers around the region. Alumina (AWC.AU) and Aluminum Corp of China (2600.HK) slumped after Alcoa (AA) missed earnings. Toyota Motor (7203.JP) fell on reports it would miss its profit estimates, combined with a strengthening yen and led other Japanese vehicle makers lower. The Indonesia Stock Exchange halted trading indefinitely after the index fell (10.4%). The yen is trading at ¥99.87 to the US dollar. European markets have reversed steep losses on the coordinated rate cut and are currently unchanged. European markets were down 8.5% at session lows despite the UK government announcing a 50 billion pound direct injection into troubled banks as well as a 200 billion pound emergency line of credit from the BOE.

Although sentiment remains shattered and every government/central bank intervention has been met with increasing skepticism, market participants that have substantial cash positions need to begin getting net-long US equities. Nobody knows if we are near the bottom and trying to pick one is a fool’s game but scaling in long exposure currently makes sense, as the risk/reward looks very compelling. I have repeatedly stated in this morning call that downside risk was substantial and a break of a 1000 on the S&P was likely. Now that we convincingly broke below my target last night, I think it is time to buy and I would target a net-long position of 25-50% of capital. I would scale in additional long exposure on a break of the over-night lows. I would avoid financial and individual stocks and focus on index ETF’s (SPY, QLD, SSO). Broader market plays add a modest layer of safety and liquidity amid the turmoil while individual equities carry substantial EPS risk ahead of Q4 earnings guidance.


Impact Research Calls/Market Moving News:

Fed cuts federal funds target rate by 50bp to 1.5%; part of coordinated global rate cut: Statement from the Fed: "Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability." Joining the Fed in the coordinated action: Bank of Canada, Bank of England, ECB, Bank of Sweden and the Swiss Nat'l Bank, which each cut the benchmark interest rate by 50bp. Though not cutting rates, the BoJ says it welcomes the policy decision made by the central banks and hopes that these actions will contribute to securing the stability of both the financial systems and economies of these countries. China cuts benchmark-lending rate by 0.27 percentage point.

COST (57.80): Costco reports Q4 EPS $0.92 ex-items, unclear if comparable to Reuters $0.93: Company reports revenues of $23.10B vs. Reuters $22.90B. Results exclude a non-cash pre-tax LIFO charge of $32.3M, or $0.05/share and a $15.9M pre-tax charge or $0.02/share recorded in connection with a litigation settlement. Costco reports September comps +7% vs. StreetAccount consensus of +7.2% (57.80)Includes US +8% and International +2%; ex-gasoline US comps would have been +6% and local currency international comps were +8%.

WMT (54.84): Wal-Mart reports Sep comps +2.4%, without fuel, vs. SA consensus +2.3%; First Call +2.5%: With fuel, WMT comps. +2.8%. Total sales $36.229B vs. $34.231B y/y. The net impact of Hurricanes Gustav, Hanna and Ike on total U.S. comparable store and club sales was approximately negative 0.4 percentage points. Oct US comps. guided to growth of 1-2%. WMT reaffirms Q3 EPS cont. ops in range $0.73-$0.76. Reuters is $0.76.

GOOG (346.01): BMO Capital is cautious on GOOG following an analysis of US paid search data: “Event: We are reducing estimates moderately and assessing newly released US paid search data. The data, compiled by comScore, shed light on recent monthly paid click growth trends across nine consumer categories and offers new insight as to proportionate exposure to cyclical marketing sectors like auto, travel, and retail. The new comScore US paid click data is useful as a guidepost for cyclical exposure because it estimates that ~20%-23% of Google paid clicks in the US emerge from retail searches, for instance; however, the new data seem less useful as measures of paid click growth, and offer no insight into pricing or non-US territories. Impact Neutral to GOOG. Exposure: Google generated about 36%-41% of its US paid clicks from nine consumer categories over the period from October 2007 to April 2008 (when aggregate paid click data were last rendered by comScore), including ~22% from retail (spiking to 28% in December 2007) and merely ~2% from auto and ~3% from travel. Growth: Google US paid click growth from the nine consumer categories ebbed to 11% in August 2008 from a monthly trend-line of 14%-22% since April 2008 (if the comScore data are to be treated as gospel). Yet, as ever, we caution investors not to rely heavily on the comScore data. We remain MARKET PERFORM rated on GOOG, are reducing estimates moderately, and are revising our price target to $462. Why Not Upgrade GOOG Now? For one thing, a round of downward estimate revisions may loom ahead. In our opinion, paid search marketing will not be immune to US nor global ad cycle retrenchment-as word pricing comes under pressure, Google estimates for 2008/2009 would likely be pressured too. Search marketing, however, should gain ad spend share through the cycle, positioning Google more favorably once cycle(s) recover. For another, we cannot yet determine how long recalibration of the pricing of risk for Internet media assets (downward) might take as the credit contraction wends its way through Internet venture capital. This impacts Google in two ways: one, by potentially diminishing a source of funds bidding for ad words; and two, by ratcheting down deal valuations that would, until recently, have otherwise stimulated high comparable values for early-stage assets like Youtube, Chrome, and Audio.”

MS (17.65): UBS says Morgan Stanley's funding profile remains pretty solid following meeting with CFO: Firm thinks the company's liquidity profile is fine for now and that access to the Fed window should help solve any short-term funding concerns. UBS adds that given Mitsubishi UFJ's (MTU) strong financial profile, it can see some type of credit backing for MS or strategic initiatives around asset & wealth management and IB, which should improve MS's business and funding mix. Rating is neutral with a target of $31.

NUE (30.97); STLD (9.70); X (51.28): Nucor (NUE) upgraded, Steel Dynamics (STLD) and US Steel (X) downgraded at Morgan Stanley: NUE is upgraded to overweight from equal weight though the target is reduced to $57 from $84. STLD and X are downgraded to equal weight from overweight.

Select software stocks upgraded at JPMorgan: BMC, CTXS, CDNS, SYMC: SYMC, CTXS upgraded to overweight from neutral. CDNS upgraded to overweight from underweight. BMC upgraded to neutral from underweight.

X (51.28): U.S. Steel estimates, target reduced at BofA: The firm reduces f09 EPS to $10 from $20 and its price target to $42 from $105. Reuters consensus is $23.86; First Call $23.13. Rating remains sell. The firm remains concerned about the weaker environment and reduces its spot hot roll coil price accordingly.

TRAN Index (3898.15): Merrill Lynch downgrades FedEx (FDX), Burlington Northern (BNI), Forward Air (FWRD), and CSX Corp (CSX: BNI, FWRD, and CSX are downgraded to neutral from buy. FDX is downgraded to underperform from neutral.

GM (7.56); F (2.92): General Motors (GM), Ford (F) downgraded to sell from hold at Citi: The firm is concerned about weaker credit conditions globally and valuation. Target for GM reduced to $6 from $12; F target reduced to $2.50 from $5.50