November 12, 2008: Morning Call

November 12, 2008: Morning Call

Fair Value: SP500 – 897.95; NDX: 1226.98; DOW – 8677


Technical Levels:

SPX: 848-850 support/ 953, 998, 1098-1100 resistance

NASDAQ: 1423 support /1650, 1890 resistance

Events:

Pre-market EPS: M (-.19/5.49B); JASO (.23/305.1M)

05:30: Bank of England inflation report: (BOE’s King signals that he will continue to cut interest rates as inflationary threats have receded).

08:00: CMI Analyst Day
10:15: GOOG presents at Piper Jaffray Internet Summit
10:30: M earnings call
10:50: TOL presents at UBS Building Products CEO Conference
11:00: Fed’s Kohn speaks on financial services
11:20: NYB presents at the Merrill Banking and Financial Services Conference
11:40: TEX presents at Robert Baird Industrials Conference
12:50: JPM presents at the Merrill Banking and Financial Services Conference
13:00: Fed’s Stern speaks on the economy
13:45: USB presents at the Merrill Banking and Financial Services Conference
14:00: MSFT Analyst Meeting
14:20: MTW presents at Robert Baird Industrials Conference
14:55: BUCY presents at Robert Baird Industrials Conference
17:00: ABC Consumer Confidence
21:00: Chinese Industrial Production (October): 11.2%

Post-market EPS: AMAT (.14/1.94B); CSC (.75/4.28B); SINA (.42/103.3M); LVS (.11/1.16B)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 5 points below fair value at 892 while the NASDAQ futures are trading 10 points below fair value at 7:45 am ET. The futures have weakened 10 points in the last hour following European markets lower. European markets are still up 0.50% but have weakened 1.5%-2.0% off the opening highs. Basic material and mining stocks are among the weakest sectors in Europe. Advancers on the FTSE 100 lead decliners 3-2. Swiss Life (SLHN.VX) fell after it lowered 2008 guidance and cut it's dividend payout and Natixis (KN.FP) is also lower after press reports that it had suffered large trading losses in Oct, the extent of which were denied by the company. Natixis reports Q3 tomorrow. ING Group (INGA.NA) reversed early gains and UniCredit (UCG.IM) pared gains after Q3 results. UK Septmeber ILO 3-month Unemployment rate 5.8% vs consensus 5.8% EuroZone Sep industrial production fell a larger than expected (2.4%) y/y. Asian markets declined in cautious trading (Japan down 1.29%, Hong Kong down 0.75%, India down 3.08%, Australia down 0.85%). Developers and real estate companies dropped on concerns that property prices will continue to decline in Hong Kong. Markets in Shanghai bucked the trend lower with a gain of 1.0% on continued optimism caused by the large stimulus plan announced earlier this week. Chinese October retail sales also came in-line with expectations at 22.0%. Commodities are trading lower by 2.0% on increasing worries that the global economy is getting appreciably worse.

Impact Research Calls/Market Moving News:

GS (74.68): Deutsche Bank’s Mike Mayo comments on the Goldman presentation at the Merrill Conference in NYC: “Mgmt at a NYC conf said that it has not changed its business model, 20% target ROE (tangible) through a cycle, or intention to expand outside the U.S., in asset management or in private wealth management. It does, however, look to increase deposits and the firm plans to transfer $130-150B of assets to its bank. The CEO said he is open to all possibilities in terms of strategic moves but that decisions should not be based on short-term considerations for long-term value. In any event, the door seems left open for mergers with banks. To us, the jury is out in terms of the need to change the model. Also, Goldman did not comment on the quarter except that the market is down in terms of stocks (down 30 percent), leveraged loans (20%), and CRE (20-30%). Some of the historical data and perspective gave additional comfort, as well as lack of consumer exposure, but lack of details given the current environment leads to ongoing uncertainty, in our view. GS is transitioning from a broker to a bank in a very short period of time, raising questions about its future earnings power (will the Fed require some scaling back of activities in trading = 2/3rd of revenues) and risk. The result is that we accord a lower than historical price-to-book ratio of 1.0x on est. year-end 2009 book. Value to get a price target of $108 (was $113). Risks include a worse/better than expected economy, a rebound in the housing market, a steeper yield curve, increases in unemployment and bankruptcies (in the U.S. and abroad), and, as a regulated bank holding company, changes in U.S. and foreign laws and regulations. There is upside potential to our price target given volatility in GS shares (shares have traded btwn $71 and $170 FQTD).”

GM (2.92): Democrats make plans to rescue carmakers – WSJ: Aides to Barack Obama and Nancy Pelosi say separately that federal aid, likely from the $700B TARP fund, will have significant conditions, involving equity stakes or warrants for the government, and rules on executive compensation. Carmakers will also have to accept strict rules aimed at building environmentally friendly cars. Senator Barbara Mikulski will unveil a proposal to make interest on car loans tax deductible today

Treasury considering requiring companies seeking TARP aid to raise private capital – WSJ: People familiar with the matter say the condition would not apply to the current $250 bailout program, but rather to future capital investments. They say Treasury has no plans to purchase bad loans or troubled assets, choosing instead to continue injecting capital directly into the financial sector. Treasury Secretary Hank Paulson may outline some of these changes today. Requiring companies to raise capital was an early idea that was discarded partially because of the belief the market would make doing so hard. But Treasury officials now think conditions have improved enough that such a condition would not be overbearing.

Buying Binge Slams to a halt for the US Consumer – New York Times: Another good read by David Leonhardt even though there is nothing particularly new in the article. He has been worth a read for the last year as he has consistently adopted a cautious and correct view on the downside risks to the economy (copy and paste link): http://www.nytimes.com/2008/11/12/business/economy/12leonhardt.html?_r=1&hp&oref=slogin

GS (74.68): Goldman Sachs target price reduced to $70 from $80 at Ladenburg Thalmann: Shares maintained sell. Firm's analyst Dick Bove noted that the company might produce a 'tiny' profit in the quarter; as a result of it’s changing its reporting dates from a November fiscal year to a December year now, as the company is now a bank holding company.

AIG (2.26): Revised AIG bailout will benefit banks – WSJ: The Journal reports that many banks that purchased protection from AIG on securities backed by risky mortgage assets (i.e. CDOs) are likely to recoup a large chunk of their investments under the revised rescue plan, which will see the New York Fed acquire roughly $70B of the securities via a new investment vehicle. The article notes that such banks include Goldman Sachs (GS), Merrill Lynch (MER), UBS (UBS), Deutsche Bank (DB) and others. Under the terms of the plan, the banks will keep the collateral they received from AIG, and will also sell the CDOs to the new facility at market prices averaging around 50 cents on the dollar. The banks that participate will be compensated for the securities at par in exchange for allowing AIG to unwind the credit-default swaps its wrote. The contract cancellations will free AIG from additional collateral calls on the swaps.

LVS (5.34): Las Vegas Sands target reduced to $13 from $25 at Thomas Weisel; rating remains overweight: Valuation: Our 12-month price target is $13. We get to a fair value range for LVS of $17-20 based on several assumptions: 1) 2012 EBITDAR of $2.4-2.8bn, 2) Multiples of 9-10x, 3) Net debt of $8bn, 4) Discount rate of 10%. Breaking that down, we assess existing operations at $8-10, with projects adding $9-10. Using LVS' own projections would yield a present value of $24-28. Our price target of $13 represents a discount of 24% to the low end of the fair value range on the view that market is not yet ready to pay full value for projects. Risks include: (1) ability to obtain funding for projects; (2) ability to deliver projects on time and budget; (3) sustainability of same-store EBITDA against significant industry capacity growth; ($) political
and legislative risk in Macau.

Macau will not help Las Vegas Sands - South China Morning Post (5.34): Macau Chief Executive Edmund Ho tells a press briefing the SAR has no plan to help Sands with financing. He says if the company collapses, the government will take over running its casinos until a buyer is found. He predicts casino revenues in Macau will average MOP7B a month next year, (25%) down from this year, and says there is no plan to cut the gaming tax rate.

INTC (13.93): Intel estimates reduced, target at Goldman Sachs: The firm estimates Q4 revenues (5%) seq compared to company guidance of (1%) to +7%. Goldman sees Q4 margins at ~56% vs. co. guidance of 59% +/- a couple of points. The firm reduces c09 EPS to further below Reuters consensus of $1.27; First Call $1.29, and reduces f10 estimates. Rating remains neutral; 6-month target reduced to $17 from $18.

Citibank downgrades European steelmakers to hold from buy: SSAB Svenskt Stal (SSABA.SS), Voestalpine (VOE.AV), Salzgitter (SZG.GR) (pre European Open).

Streamline Modification Program fraught with moral hazard – WSJ: A "Heard on the Street" column says the mass loan modification plan could result in borrowers who are now able to stay current on their mortgages deciding to fall behind to get a cut of the bailout. The government has shown no inclination to stop adding to its list of companies it is willing to bail out, and if the SMP is effective, individuals may test Capitol Hill. Removing pressure from housing prices will help borrowers and mortgage-backed securities investors. But consequences of actions taken to solve this crisis have proven hard to predict thus far.

AXP (22.40): American Express seeks $3.5B in TARP aid – WSJ

PRU (27.61):Prudential cuts annual dividend by 49.6% to $0.58 from $1.15