November 18, 2008: Morning Call

November 18, 2008: Morning Call

Fair Value: SP500 – 849.99; NDX: 1153.56; DOW – 8261.31


Technical Levels:

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

NASDAQ: 1423 support / 1650, 1890 resistance

Events:

Pre-market EPS: HD (.39/17.82B); MDT (.71/3.72B); SKS (-.03/710.1M)
08:00: CF Investor Day
08:00: WMT presents at Morgan Stanley Consumer Conference
08:30: US Producer Price Index (Oct): -1.8% MoM; Ex-Food/Energy: 0.1% MoM
08:30: US Producer Price Index (Oct): 6.2% YoY; Ex-Food/Energy: 4.0% YoY
08:30: UNP presents at the Citibank Transportation Conference
09:00: Net Long-term TIC Flows
09:30: CSX presents at the Citibank Transportation Conference
09:30: Bernanke and Paulson testify to House hearing on TARP implementation.
11:15: BNI presents at the Citibank Transportation Conference
11:30: WFR presents at UBS Tech Conference
13:00: NAHB Housing Market Index (Nov): 14
17:00: ABC Consumer Confidence (Nov 16): -49
Post-market EPS: JBX (.45/687.5M); LZB (.02/333.6M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 15 points below fair value while the NASDAQ futures are trading 17 points below fair value at 7:50am. Asian markets closed lower with Chinese stocks pacing the decline (Hong Kong down 4.5%, Shanghai down 7.4%). Semiconductor stocks in Asia were weak after an industry group lowered growth to –2.2% from a prior estimate of +5.8%. European markets are down 1.8% after opening modestly higher. European banks are at new 12 year lows with BNP down 9% on speculation the company needs to raise additional capital; BCS is down 6% despite amending a recent capital raise to placate existing shareholders.


Impact Research Calls/Market Moving News:

HPQ (29.34): HPQ guides Q4 above consensus and reiterates forward guidance: SP Futures cut the pre-market losses in half (now 8 points below from fair value vs. 16 below prior to the HPQ news) on positive preannouncement from HPQ: HPQ reports preliminary non-GAAP Q4 EPS of $1.03 vs. Reuters $0.99; First Call $1.00: Q4 revenues $33.6B vs. Reuters $33.11B. HPQ guides Q1 non-GAAP diluted EPS $0.93-$0.95 vs. Reuters $0.94; guides Q1 revenues $32.0-$32.5B vs. Reuters $33.77B; First Call $33.93B. F09 non-GAAP diluted EPS guided to $3.88-$4.03 vs. Reuters $3.88; First Call $3.92. F09 revenues guided to $127.5-$130.0B vs. Reuters $135.65B. HPQ shares are trading 10% higher in the pre-market.

C (8.89): Deutsche Bank’s Mike Mayo takes numbers down sharply and lowers the price target to 9 a share: “We lowered our '09 estimate from $1.50 to negative 30 cents to reflect Citi's view that it may have $1-$2B higher consumer credit losses per quarter (vs. 3Q08) in 1H09 and our assumption that revenues will decline by 20% from core 3Q08 levels, mitigated by new aggressive expense targets of $50-52B in '09. Our '09 estimate, which still has a downward bias, does not yet reflect additional corporate credit losses, reserve builds, or capital market write-downs. Noteworthy, Citi is moving $80B of assets (some which may include CDOs) away from mark-to-market, which can reduce write-downs after the assets are transferred (but reduces transparency, in our view).” Mayo also notes that the stock “could almost get cut in half” if “trends toward half of tangible book value where some financials have traded recently” or close to 20 “based on 8x normalized EPS of 2.70”. Mayo maintains a negative bias and notes “that risks are skewed near-term whereas any recovery earnings scenario is back-ended.”

FCX (23.14): Freeport-McMoRan estimates reduced at Morgan Stanley: New production guidance and continued deterioration in molybdenum prices is cited. Shares, however, remain overweight rated with a $48 target.

RIMM (42.24): Research In Motion estimates reduced further below consensus at BMO Capital: The firm sees sub adds as light this quarter vs. mgmt guidance and reduces f2010 revenue and EPS estimates further below Street consensus. BMO says estimates for the company are still too high and though Storm will be well received, it will not match current estimates. Shares are market perform rated. Target lowered to $53 from $55.

FSLR (115.55): First Solar initiated overweight at JPMorgan

YHOO (10.63): Jerry Yang to step down as CEO of Yahoo! – Shares are indicated higher on speculation that this Yang’s departure may open the door to a new MSFT proposal.

BAC (15.03): Bank of America facing resistance in mortgage modification effort – WSJ (this is a big problem because reducing foreclosures is a key aspect to stabilizing house prices): The Journal reports that under the terms of a settlement with attorneys general from 15 states earlier this year related to its acquisition of Countrywide, BofA agreed to modify the mortgages of as many as 400K borrowers by refinancing loans, lowering interest rates and reducing principal amounts. BofA said that it owns about 12% of the roughly 400K loans at issue and can modify another 75% based on the "delegated authority" provided in its contracts with investors. However, the paper adds that some investors believe that they should have been contacted first. In addition, others have argued that the bank is shifting the cost of the settlement to investors when it should be footing the bill itself. These investors say that while they do not oppose modifying loans if the process can increase returns and keep borrowers in their homes, they believe that BofA should repurchase the loans before modifying them, as many of the modifications have violated representations and warranties made when the mortgages were packaged into securities. The article goes on to discuss the entanglements surrounding the securitization process.

C (8.89): Citi still needs to focus on reducing leverage - WSJ (nothing particularly new here): In a "Heard on the Street" column, the Journal discusses Citi's recent announcement that it plans to cut 50K employees. According to the article, while the layoffs are a step in the right direction given that they will reduce the bank's cost base and eventually filter down to earnings, investors remain concerned about the firm's leverage. The paper points out that tangible assets are still 55x tangible equity, versus multiples of 31.4x at JPMorgan (JPM) and 31.3x at Bank of America (BAC). In addition, the Journal notes that in the wake of proposed accounting rule changes that could be adopted in 2010, Citi's leverage would jump to 59x if it is forced to bring roughly $120B in credit card assets back onto its books. Even more concerning is the fact that leverage would surge to 63x if the bank also has to consolidate 20% of the some $670B in mortgage assets currently held by off -balance-sheet vehicles.

WFR (13.39): MEMC Electronic Materials sees Q4 gross margin of 46-50% vs prior guidance of 50%. WFR guides Q4 revenue to $475-525M vs prior $540-600M and Reuters $569.7M.