Monday, November 17, 2008

November 17, 2008: Morning Call

November 17, 2008: Morning Call

Fair Value: SP500 – 872.48; NDX: 1180.91; DOW – 8484.19

Technical Levels:

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

NASDAQ: 1423 support / 1650, 1890 resistance


Pre-market EPS: LOW (.28/11.60B); TGT (.48/15.19B)
08:25: LNC Investor Meeting
08:30: Empire Manufacturing (Nov): -26.1
09:00: Fed’s Hoenig speaks on regulation
09:00: LOW earnings call
09:15: Industrial Production (Oct): 0.2%; Capacity Utilization (Oct): 76.4%
10:30: TGT earnings call
13:00: WYNN presents at Deutsche Bank Gaming Conference
13:30: MGM presents at Deutsche Bank Gaming Conference
15:00: ADBE Investor Meeting
16:30: LVS presents at Deutsche Bank Gaming Conference
18:30: Treasury’s Paulson speaks on the economy and markets

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 20 points below fair value while the NASDAQ futures are trading 36 points below fair value at 7:36am ET. Global stocks continue to reel from risk aversion and increased fears that the global economy is rapidly decelerating. Asian stocks closed lower on the session but rallied into the close (Australia down 2.5%, South Korea down 1.3%, India down 1.01%). Japan bucked the trend lower with a gain of 0.71%; the Nikkei traded in a 550 point range after the GDP report came in weaker than expected at –0.40% vs. consensus of +0.1% growth. European markets are down 2.7% moving in tandem with US Index futures over the last two hours. Autos (-5.6%) and financials (-3.5%) were amongst the leading decliners. The major indices are trading close to session lows. Decliners on the FTSE 100 lead advancers 4-1.

Impact Research Calls/Market Moving News:

FCX (24.34): Freeport-McMoRan downgraded to neutral from overweight at JPMorgan

LOW (18.23): Lowe's reports Q3 EPS $0.33 vs Reuters $0.28: Company reports revenues of $11.73B vs Reuters $11.61B. Q3 comps (5.9%) vs StreetAccount consensus (6.9%). Guides Q4 EPS to $0.08-0.16 vs Reuters $0.18. The company expects to open 33 to 38 new stores reflecting square footage growth of 7 to 8% in Q4. Total sales are expected to range from (3%) to +2%, with comps (5%)-(10%). The company said that while falling energy prices and initial signs of stabilization in housing turnover should aid the consumer, it saw a decline in sales trends in the last week of October that continued into November.

GS (66.73): Top Goldman Sachs executives to forgo bonuses reports the WSJ: The 7 top executives at the firm asked the compensation committee to grant them no bonuses for '08. The board approved the request this Sunday. The move may be followed across Wall Street as this may make it difficult for any other firm to pay its top people anything over their base pay. The executives are only eligible for their base salaries, $600K each. One senior executive said that if CEO Blankfein did not take a bonus, no top people on the Street would. Sources say distinctions are being made between the top people and lower level employees who performed well during '08.

C (9.52): Citi to announce job cuts at town hall meeting this morning at company town hall meeting, says CNBC's Gasparino: Gasparino said that the job cuts will be appx 50K.

JPM (34.47): JPMorgan Chase's target reduced at Ladenburg Thalmann: Following comments from CEO, Jaime Dimon, Ladenburg decreases the company's target to $37 from $45 (shares rated neutral). Ladenburg says Dimon's message was unremittingly negative. The firm notes that JPM's investment bank is expected to produce more losses and lower earnings and there should be pressure on retail financial services, credit cards, and commercial banking from bad credit results. Ladenburg also says asset values may fall harming the asset management division; there could be less volume in the Treasury management sector; and higher losses may emerge in the private equity sector.

C (9.52): WSJ says doubts still linger about Citi: A Heard on the Street column says that one reason for the drop in Citi shares since the Lehman bankruptcy may be that investors may believe they deserve a lower valuation. It trades about in line with Bank of America. But Citi's issues seem greater at this point as it has higher leverage and more at-risk assets. One measure of confidence is a bank's ability to refinance borrowings. Citi's last big bond offering was in August and the bank's CDS spread is higher than before the Lehman collapse. The market is not yet convinced that Citi can be rebuilt.

Foreign companies would pick up the slack if U.S. car makers go into bankruptcy says the NY Times: Many industry experts and economists say that if one of the Big Three car makers were to declare bankruptcy, in time foreign car makers, many with plants in the U.S., would pick up the slack and market share. The paper says whether Washington should let this play out is the big question this week for politicians. The companies and the UAW claim there would be a tremendous disruption but industry experts say the big foreign companies are established enough to take up the slack at suppliers much more quickly than believed. One analyst says the reorganization of the industry after a GM bankruptcy would take about a year.

Warren Buffett 13F filing: Berkshire Hathaway discloses new positions in Eaton (ETN), Conoco (COP): Other changes: BAC reduced to 5.0M from 9.1M; KMX reduced to 18.44M from 21.3M; HD reduced to 3.7M from 4.18M; LOW reduced to 6.5M from 7.0M; NRG increased to 5.0M from 3.24M; USB increased to 72.9M from 68.6M.

MER (13.20); BAC (16.42): Bank of America may have overpaid for Merrill Lynch says the WSJ: A 'Heard on the Street' column says that BAC CEO Ken Lewis has to make money from the Merrill deal and he probably has mixed feelings over it these days. B of A was paying to acquire Merrill for 1.8x tangible book value. Morgan and Goldman are now trading for 0.4x and 0.8x tangible book value. The dollar value of the deal has fallen with B of A's stock price but B of A shareholders will be diluted about 23%. Writedowns at the investment bank could still be large, making it hard to gauge the unit's future profitability. The wealth management unit is the most dependable source of earnings but even that could disappoint.

Barron's suggests 8 steps for President-Elect Obama to restore confidence and bolster the markets: The Cover story is an open letter to President-Elect Obama. In order of importance, the steps he should take now to address the financial crisis are: 1. Back a bold stimulus plan, a $100B plan plan and be ready to back another of similar size after inauguration; 2. Support aid for GM and Ford, $25B in special preferred stock for each that pays a dividend, encourage Chrysler to merger or sell its valuable units; 3. Help Homeowners, the government put up $100B to reduce the principal on mortgages and get the participating banks to add another $50B, the government would get a portion of any price appreciation from the reduced principal level; 4. Delay tax increases, for at least a year; 5. Don't impede free trade; 6. Improve financial regulation, deal with credit default swaps and force greater disclosure when shorting stocks; 7. Change fuel efficiency rules, repeal the two-fleet rule and allow the importation of smaller Big Three cars; 8. Keep union ballots secret, the President is elected by secret ballot, unions should face the same type of elections.

DELL (10.89): Dell downgraded to neutral from buy at Merrill Lynch

Barron's summary

Cover: Barron's suggests 8 steps for President-Elect Obama to restore confidence and bolster the markets. Interview: Howard Marks, chairman of Oaktree Capital Management sees some opportunities in financials, debt of buyouts and convertible bonds. Lead Articles: Colgate-Palmolive (CL) is being unfairly punished for its international exposure; Honda Motor (HMC) is the best positioned of any car maker for a recovery; Charles Schwab (SCHW) is healthier than many competitors and could gain share; American Express (AXP) is misunderstood and has plenty of cash; The mess of credit default swaps may be defusing itself and probably was never all that large to begin with; Editorial argues that even Google came to realize the promise of capitalism. Columns: The Trader notes the large market swings and is positive on Oil-Dri Corp. of America (ODC); Current Yield says that the yield curve may be indicating that the prodigious borrowing by the U.S. government may finally be catching up with it; The Striking Price notes the fear trading in Citigroup (C) options, the puts are exceedingly expensive which reflects a real concern about its future; Asia Trader notes the selloff of Asian currencies as investors look to preserve capital, the winners have been the Japanese Yen and the U.S. dollar, many suggest staying away from emerging Asia until at least 3Q09; Euro Trader is positive on FirstGroup (FGP.LN); Commodities Corner says any food bargains this Thanksgiving will be in Turkey, not red-meat; Preview suggests that factors could move corn prices higher in the near term; Follow Up is still positive on food stocks and Starbucks (SBUX); Up and Down Wall Street considers the market action, doubts that stocks are 'cheap' and is positive on the prospects for Gold and Oil; Streetwise says that some smart investors are preparing for a bottom, though not yet willing to say one is here; Technology Trader recounts the slowdown in tech, cautious on Microsoft (MSFT); Plugged In says tech stocks are not cheap enough yet, positive on VMware (VMW) and EMC (EMC).

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