Tuesday, November 11, 2008

November 11, 2008: Morning Call

November 11, 2008: Morning Call

Fair Value: SP500 – 918.05; NDX: 1252.55; DOW – 8850

Technical Levels:

SPX: 848-850, 908 support/ 998, 1098-1100 resistance

NASDAQ: 1423, 1650 support / 1890 resistance


Pre-market EPS: LIZ (.37/1.01B); TYC (.74/5.3B)
05:00: ZEW Economic Sentiment Survey (Nov): -60.5 (better than expected at –50.4; German ZEW Survey also better at –53.5 vs. consensus of –63).
08:30: MER presents at the Merrill Banking and Financial Services Conference
09:40: BX presents at the Merrill Banking and Financial Services Conference
10:30: BK presents at the Merrill Banking and Financial Services Conference
11:40: JOYG presents at Robert Baird Industrials Conference
12:50: BLK presents at the Merrill Banking and Financial Services Conference
14:00: TOL Q4 2008 Guidance Call
14:00: CTX presents at UBS Building Products CEO Conference
16:15: GS presents at the Merrill Banking and Financial Services Conference
16:40: CAT presents at Robert Baird Industrials Conference
21:00: Chinese Retail Sales (October): 22.0%
Post-market EPS: HOLX (.30/438.7M); SPC (.15/685.9M); PBR (1.50/36.8B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 13 points below fair value while the NASDAQ futures are trading 15 points below fair value. The stunning quarterly losses that FNM and AIG reported yesterday morning coupled with a restructuring of the AIG bailout have rekindled fears that the credit crisis is deepening. The S&P futures are currently testing the 908-support level after bouncing 4 times off this level in the last hour of trading on Monday. Traders should not aggressively buy at this level given that the fundamental backdrop has significantly eroded in the last few sessions. The risk of a hard test of the October 27 lows (848) has increased so traders should adjust their risk profiles accordingly. Asian markets finished the day lower, though some came off early lows as investors continued to buy steelmakers and commodity stocks after the 9-Nov announcement of China’s CNY4T economic stimulus package (Nikkei down 3.0%, Hong Kong down 4.7%, India down 6.6%). Lenders tumbled in Australia (down 3.5%) after National Australia Bank (NAB.AU) sold A$3B worth of shares at a discount. European markets are down 3.1% on fears that the global economy and earnings outlook is rapidly deteriorating. Basic material, energy, and financial stocks are leading the decline.

Impact Research Calls/Market Moving News:

CHK (23.67): StatoilHydro (STL.NO) buys 32.5% of Chesapeake Energy's Marcellus shale assets for initial $1.25B, plus a further $2.13B between 2009-12.

WYNN (46.82): S&P announces changes to S&P 500: Wynn Resorts Ltd. (WYNN) will replace Ashland Inc. (ASH) in the S&P 500.

GOOG (318.78): Goldman Sachs cuts their Q4 estimate on GOOG: “We are trimming our 4Q2008 revenue growth forecast for Google from 4% qoq to 1% qoq (2% constant currency) given: (1) Poor macroeconomic and consumer data in October; paid search is typically a real time media sale, so revenue should react rapidly to macro deterioration. (2) Declining average order values, noted by eBay, Amazon, and Blue Nile et al., which likely reduce theoretical threshold bids per keyword. (3) Negative commentary on search trends in Sep / Oct from Ask and AOL, who cited declining consumer propensity to click on paid links and declining advertiser willingness to bid up paid links. Consensus estimates call for ~7% qoq revenue growth. Google grew revenue 14% qoq in 4Q2007, but its latest 10-Q notes that the malaise may adversely “affect the increase in commercial queries that we typically experience in the fourth quarter. Our 6-month target price is $475 (down from $520 as we trim earnings estimates) is based on P/E to normalized growth and DCF analysis.”

PRU (30.95); LNC (19.25): Goldman Sachs rates domestic life insurance sector as cautious as part of a transfer of coverage; downgrades PRU, LNC: The sector is rated cautious vs. prior neutral view. Prudential Financial (PRU) and Lincoln National (LNC) downgraded to sell from neutral. Hartford Financial (HIG) reinstated with sell. Principal (PFG) is rated sell and MetLife (MET) is rated neutral.

AXP (23.98): American Express confirms that it has been granted bank holding company status: Recall that the Fed issued a press release earlier this evening highlighting the move (see comments). Company notes that qualifying as a bank holding company will provide American Express maximum flexibility and stability in this challenging economic environment. Adds that the decision to become a bank holding company does not fundamentally change American Express' core focus on the payments industry, nor will it require any significant divestitures.

GOOG (318.78): Citi reduces US advertising forecast for 2008, 2009: Sees total ad expenditure for 2008 (1.8%) vs prior +0.2%, and for 2009, Citi sees (3.6%) vs prior forecast of (0.3%). Citi said that ad recovery is likely to lag the broader economy, and that Internet advertising is also materially exposed to a recession.

LVS (8.00): Las Vegas Sands reports Q3 EPS ($0.09); company is reporting that ex-items adjusted EPS is .02 cents vs. consensus of $0.11 cents. But, the company is excluding losses on disposal of assets, pre-opening expense, development expenses, and loss on early retirement of debt. Company reports revenues of $1.21B vs Reuters $1.16B. LVS announces suspension of construction of a portion of Sands Bethlehem due to difficulties in the capital markets and the overall decline in general economic conditions. LVS is in the process of raising appx $2B in capital.

HPQ (34.17); DELL (11.86); INTC (14.35): Barclays reduces estimates for PC and related vendor: The firm reduces its global PC forecast and revenue estimates for both HPQ and DELL. 2009 PC market revenue estimates reduced to (4%) from +2%. Barclays believes Intel (INTC) will reduce guidance at its mid-quarter update on 4-Dec.

GE (18.45): WSJ Heard on the Street article looks at problems confronting GE Capital: “Right now, one of the big reasons GE's shares trade around 11-year lows is that investors need convincing that GE Capital's borrowings can be recast so that the unit can fund itself smoothly amid rocky credit markets. GE Capital's heavy use of a type of short-term debt called commercial paper seemed to make sense when times were good, because it was cheaper. But it left the unit exposed when investors' demand for corporate debt recently dried up. Seeing investors step back, the Federal Reserve last month set up a special vehicle to buy commercial paper. GE has registered to sell as much as $98 billion of CP to the government. Also, GE Capital may soon be able to gain access to the government guarantee on new debt issuance that banks now enjoy. With $66 billion of debt maturing next year, according to Barclays Capital, that could give GE Capital breathing room to sort out its balance sheet. But any restructuring by the company needs to be big -- and to happen soon. Even with the debt guarantees in place, the market is showing little tolerance for financials that try to hang on to outdated business models…. Acknowledging the realities of the crunch, GE is planning to cut CP and increase deposits. But if it doesn't go far enough, GE risks getting brusque treatment from the markets. And as things stand, GE's plans probably don't go far enough. By the end of this year, the company aims to reduce CP to $80 billion from $88 billion at Sept. 30 and wants it to be between 10% and 15% of total borrowings "going forward." Given that it is now just more than 16% of its $536 billion in total borrowings, GE Capital would have to slash CP as much as $34 billion to get it to the lower end of that range. That is a lot of debt to find elsewhere now. GE Capital can pay some of it down with cash it generates from allowing loans to roll off. And it does have backup credit lines, as well as assets it can borrow against, but those moves could be expensive and weigh on GE's credit rating.”

Barack Obama asks George W. Bush to provide immediate emergency aid for automakers – NYT: People familiar with the discussion say Bush indicates he might support some aid and a broader overall stimulus package if Democrats will support a free-trade agreement with Colombia.

More government help for troubled homeowners on the way - Reuters: Reuters cites sources familiar with the matter who say that leading US housing agencies will on Tuesday announce new efforts to loosen terms for troubled borrowers. According to the article, HUD will make it easier for borrowers to qualify for a loan guarantee under the "Hope for Homeowners" program, which is designed to refinance as much as $300B in troubled loans. Reuters goes on to note that Fannie and Freddie are also expected to unveil new measures that will make home loans more for affordable for borrowers struggling to make monthly payments.

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