October 9, 2008: Morning Call

October 9, 2008: Morning Call


Fair Value: SP500 – 988.78; NDX: 1340.95; DOW – 9281


Technical Levels:

SPX: 980 support/1007, 1090, 1142, 1250 resistance

NASDAQ: 1640, 1750 support /1890 resistance:

Events:

08:30: Initial Jobless Claims (w/e Oct 4): 475,000; Cont. Claims: 3.58 million
10:00: Wholesale Inventories (Aug): 0.4%
10:35: EIA Natural Gas Storage Change
13:30: Fed’s Stern speaks on financial shock
14:00: ICSC Chain Store Sales
16:00: Fed’s Rosengren speaks on the economy

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 11 points above fair value while the NASDAQ futures are trading 10 points above fair value at 7:30 am ET. The overnight range in the S&P futures was 971-1009. IBM is trading higher after announcing preliminary Q3 EPS of $2.05 vs. Reuter’s consensus is $2.01, and reaffirmed f08 EPS guidance. European markets are trading up 1% but off the session highs. Dexia shares are up 24% on the back of a liquidity guarantee while BCS is down 5% on a downgrade. Cash volumes in specific stocks are on the light side as traders focus on index futures and ETFs. Russia's Micex and RTS exchanges have had periods of trading suspension following steep rises when the markets reopened this morning. Advancers on the FTSE 100 lead decliners 7-3. Financial (HBOS up 29%, RBS up 13%, LLOY up 9%) and Mining (XTA up 6%, RIO up 5%) shares are outperforming in the European session. Asian markets: Except for the Nikkei, larger markets in Asia rose as investors gained confidence from coordinated central bank rate cuts. Hong Kong, Taiwan, China, and South Korea have cut rates in the past 24 hours, and Japan and Australia pumped more than $22B into money markets. But gains were pared when the reductions failed to prevent money market rates from rising. Gold miners followed the gold price higher. Australia fell, with Commonwealth Bank of Australia (CBA.AU) tumbling after selling stock at a 16% discount to its market price. India was closed for Dasera, and Indonesia remained closed after trading was halted yesterday.




Impact Research Calls/Market Moving News:

IBM (90.55): IBM announces preliminary Q3 EPS of $2.05; Reuters consensus is $2.01; First Call $2.02: IBM reports Q3 revenues of $25.3B, up 5%, which includes 3 points of currency benefit. Reuters consensus is $26.48B; First Call $26.57B. IBM continues to see f08 EPS of at least $8.75. Reuters is $8.78; First Call $8.80. Q3 gross margins 43.3% vs. 41.3% y/y. At the end of Q3, YTD FCF was appx $6.4B and IBM's cash balance was $9.8B. The company also said it continues to expect full year EPS of at least $8.75; Reuters is $8.78 and First Call is $8.80.

LEHMQ (0.11): Lehman CDS Auction Tomorrow – Reuters has a detailed timeline for the auction - Here is the link:

Http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008

Treasury Department considering taking ownership stakes in US banks - NYT: The Times reports that the preliminary plan, which resembles the one announced today in the UK, has emerged as one of the most favored new options among policymakers as it directly address the worries that banks have about lending to one another and to customers. The article notes that the new bailout law gives the Treasury the right to take ownership positions in banks, including healthy ones. The possibility of the government's buying in to banks has come up before; other ideas include the Fed's guaranteeing all lending between banks, and the Treasury's essentially providing seller financing for investors in troubled bank assets

X (53.37); STLD (9.51); AKS (14.17): Goldman cuts ratings and estimates on several steel stocks: STLD, AKS, X; upgrades CMC: US Steel (X) and Steel Dynamics (STLD) downgraded to neutral from buy. AK Steel (AKS) downgraded to sell from neutral. The firm also recommends a long NUE/short AKS pair trade, which it adds to its Conviction List. Gibraltar (ROCK) and Worthington (WOR) remain rated sell. Commercial Metals (CMC) is upgraded to buy from neutral. (Note: Goldman Sachs is essentially throwing in the towel on the steel stocks – the Goldman analyst was very bullish on X at 180-190 a share so I would not consider this a high impact stock call).

Percentage of problem loans nearly tripled in Q2 – FT: Citing the annual federal “shared national credits” survey, the FT reports that $373.4B of syndicated credits faced actual or potential difficulties at the end of Q2, up from $259.3B in the year earlier period. The latest figure represented 13.4% of the total syndicated credit held by lenders, up from 5% in the previous year. The paper adds that classified credits, or those rated as substandard, doubtful, or loss-making by regulators, rose 128% to $163.1B, or 5.8% of the total, up from 3.1% in 2007.

GOOG (338.11): Piper Jaffray’s Gene Munster defends GOOG shares: “Conclusion. We continue to be positive on shares of GOOG as we believe the quarter will be in-line with Street expectations (excluding impact from FX) and longer term as we believe Google will remain a must buy on the internet. Separately, we believe the valuation continues to discount future growth despite lowering 2009 estimates. An essentially inline Q3 should be a positive for the shares and illustrate our thesis that search is better insulated from an economic slowdown that other forms of online advertising given its direct response nature. Search Survey Confirms Q3. The results from our SMX East search survey regarding Q3 showed 89% of respondents suggesting budgets were flat to increased from Q2. We believe the data continues to support our thesis that Google's U.S. business is intact and that the company will report essentially inline with Street for Q3. The results of our survey regarding Q3 correlate with our positive prior published checks with four keyword buyers and third party data from Tuesday. Third Party Data Suggests Paid Clicks Strong In Q3 - Recap. Third party data released Tuesday suggests an indicator of US paid clicks for Google are tracking up 9% sequentially through August; the Street is modeling for a 5% sequential overall revenue increase. In three of the last four quarters, this data has been accurate within 1% in predicting Google's total sequential revenue growth and we read it as an incremental positive to our checks. Reducing 2009 Estimates. Our survey also revealed that our expectation of 21% growth in U.S. revenue is likely too aggressive (respondents suggested an average of 15%). We are therefore reducing 2009 pro-forma earnings estimates to $23.11 from $24.23 on $19.9B from $20.6B. Additionally, we think it would be unrealistic to expect Google to be unscathed by the economic environment, but we do continue to believe Google is better insulated that others in the space. An inline Q3 would reiterate our thesis of strength in search despite a slowing economy.”

AXP (27.12); MA (163.54); V (52.63): American Express (AXP), MasterCard (MA), and Visa (V) estimates, target prices reduced at Keefe Bruyette & Woods: AXP (mp) tp $36 vs prior $42; f09 EPS reduced below consensus. MA (op) tp $279 vs prior $363; f09 EPS reduced further below consensus. V (op) tp $83 vs prior $92; f09 EPS reduced below consensus.

STT (43.60): BK (24.45): State Street Corp (STT), Bank of New York Mellon (BK) bid to handle record-keeping, custody services for the Treasury - Bloomberg: People familiar with the matter say Pacific Investment Management Co. and BlackRock (BLK) submitted proposals to manage troubled mortgage-backed securities in the Treasury's $700B financial-rescue program.

LDG (71.68): Walgreen (WAG) withdraws proposal to acquire Longs Drug: Management provides the following statement: "While we believe we made a compelling proposal for Longs, we do not believe it would be in the best interests of Walgreens shareholders, customers or employees to allow this situation to remain unresolved for an extended period of time."

Fed summons CDS market participants to another meeting on Friday - WSJ: The Journal notes that the meeting would be the second this week, as regulators look for solutions to boost the transparency of the market and mitigate counterparty risk. Citing people familiar with the situation, the paper adds that he regulators want to see large dealers come together and decide which trading platform and clearinghouse they plan to support. Recall that both CME Group (CME) and IntercontinentalExchange (ICE) have planned forays into this business.

MS (16.80): Morgan Stanley expected to discuss a number of joint initiatives with Mitsubishi UFJ (MTU) – WSJ: The Journal cites sources familiar with the matter. The paper adds that such initiatives include cross-selling financial products and combining Morgan Stanley's Japan office with the securities operation of MUFG. According to the article, Morgan Stanley may also receive a new credit facility from MUFG, while also helping the Japanese firm build deposit assets in the US.