November 13, 2008: Morning Call

November 13, 2008: Morning Call

Fair Value: SP500 – 851.28; NDX: 1166.62; DOW – 8265.13


Technical Levels:

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

NASDAQ: 1423, 1650 support / 1890 resistance

Events:

Pre-market EPS: WMT (.76/97.78B); FIG (.09/168.5M)
04:00: ECB Publishes November Monthly Report
07:30: Indian Wholesale Price Index (November): 10.50%
08:00: FIG earnings call
08:30: US Trade Balance (Sep): -57.0B
08:30: Initial Jobless Claims
09:00: MSFT presents at BMO Capital Interactive Entertainment Conference
09:20: EOG presents at the Bank of America energy conference
10:00: BHI presents at the Bank of America energy conference
10:00: House oversight committee hearing on hedge funds
11:00: DOE/API Crude Oil and Gasoline Inventories
11:00: RIMM presents at RBC Capital Markets Conference
12:00: Fed’s Plosser speaks on the economy
12:30: QCOM Analyst Meeting
14:00: Monthly Budget Statement (October): -89.0B
14:00: Fed’s Stern speaks on the economy
Post-market EPS: CRM (.17/273.6M); JWN (.32/1.83B); KSS (.51/3.87B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading flat with fair value while the NASDAQ futures are trading 18 points below fair value at 7:45am ET, despite reduced guidance from INTC. The resilient tone is a little surprising because the market has acted terrible following bad news all year. A sustained rally despite the INTC news and the terrible jobless claims (516,000 vs. 480,000) would mark a positive shift in the character of the market. Each recovery rally this year (Jan 22-Feb 1; March 17-May 19; July 15-Aug 11; Sep 18-Sep 22; Oct 10-Oct 14; Oct 27-Nov 4) was triggered by government intervention, technical factors and the absence of bad company specific news. Weaker guidance from a major S&P 500 company has not been the primary catalyst for any of the recovery rallies this year. Bear market rallies are primarily triggered after market participants recognize that weaker guidance has already been discounted so a higher close would be a very constructive sign.

That said, traders should not utilize leverage and maintain a modest risk profile simply because the range of potential outcomes remains unprecedented. The consensus appears to have ruled out the possibility that the market could drop an additional 20-30%. This is a big mistake. Portfolios should be stress tested factoring in additional declines of 20-30% given the collapse in confidence, terrible macroeconomic and company specific news, and the erratic response from the government and regulatory agencies. Truly hedged participants and nimble short-term traders with a disciplined risk management system will survive this financial hurricane. Leveraged participants and traders reckless enough to “hang on” will continue to go out of business. I have been repeating this for over a year because it remains true.

Asian markets: The majority of markets closed lower by 5%, led by commodity companies, banking shares and tech stocks. China was the sole index to advance despite a deceleration in industrial production. Chinese stocks in Hong Kong dropped and China’s rise was attributed to speculation the government would add more measures to boost growth. Mizuho Financial Group (8411.JP) dropped after reports the bank is considering issuing preferred securities in an effort to raise new capital. European markets are flat ahead of the US open. UK markets are weaker (down 1.4%) than other major Continental European markets. The OECD's downward revision to growth expectations and erratic trading in US futures has contributed to the volatility. Russian exchanges have again been temporarily halted as shares continued to decline. Decliners on the FTSE 100 lead advancers 4-1. Zurich Financial (ZURN.VX) and London Stock Exchange (LSE.LN) fell after reporting results. Germany 3Q preliminary GDP (0.5%) q/q vs consensus (0.2)%.

Impact Research Calls/Market Moving News:

INTC (13.52): Intel guides Q4 revenues to $9B, +/- $300M vs. Reuters $10.34B; First Call $10.42B: Prior guidance was $10.1-$10.9B. Other Q4 guidance: Q4 gross margins guided to 55% +/- a couple of points, below prior 59%, +/- a couple of points.

WMT (52.62): Wal-Mart reports Q3 EPS $0.77 cont. ops. vs Reuters $0.76: Company previously reported revenues of $97.63B. Guides Q4 EPS to $1.03-$1.07 vs Reuters $1.11. WMT guides Q4 comps. in the US to between +1 to +3%.

UBS downgrades '09 global mobile phone volume forecasts to a 9% decline from 3% growth: Firm notes a lengthening European replacement cycle, weakening economic outlook, and weakness in some emerging markets due to the currency movements. Firm removes Nokia (NOK) from global top picks list in devices.

INTC (13.52): Piper Jaffray expects inventory replenishment in 1H09 at INTC: “In our view, inventory was already in reasonable shape and the drop in Intel's gross margin guidance speaks to the company reducing wafer starts in order to keep internal inventories in check. As has historically been the case, the PC supply chain periodically builds too much inventory or gets caught short on inventory. We think this revision to estimates is likely an over reaction driven by the supply chain trying to conserve cash, difficulty obtaining credit, significant drops in currency exchange rates in emerging markets and fear of demand destruction. Moreover, we estimate that it takes Intel 12 – 14 weeks to produce a chip and given the diminished output by Intel, lead times are likely to stretch and double ordering is likely to occur sometime in the first half of 2009. We believe that this sets up the likelihood of, at a minimum, a relatively strong sequential comparison in Q1 as well as a potentially violent inventory snap back as the channel will need to replenish inventory in the first half of 2009.”

INTC (13.52): Oppenheimer comments on semiconductors following preannouncement: Following yesterday's negative preannouncement from INTC, the firm says that checks indicate the lack of visibility and orders is endemic across the semi landscape. Oppenheimer anticipates negative announcements in abundance this quarter due to the combination of anemic demand and increasingly difficult collections. In the current environment, the firm sees few Semi safe-havens and recommends avoiding the group near term.

DELL (10.50): Dell downgraded to market perform from outperform at BMO Capital: Price target decreased to $11 from $14. The firm reduces PC unit and revenue forecasts for c09 and cites limited upside for DELL over the next 12 months. HPQ remains top pick, followed by IBM and AAPL.

LVS (5.10): Las Vegas Sands upgraded to neutral from sell at Bank of America: Though the stock is upgraded, the target is reduced to $5 from $12.

HK (14.55): Petrohawk Energy guides f09 capex to $1.0B, reduced from prior $1.5B -- slide presentation: HK guides f09 production growth of 25-35% over full year 2008

ENER (25.92): Energy Conversion price target decreased to $25 from $40 at Barclays Capital: Firm says credit market weakness and solar industry fundamentals may impact the company's earnings power. Shares rated equal weight. Firm also reduced its target on First Solar (FSLR), overweight rated, to $140 from $180.