Monday, November 24, 2008

November 24, 2008: Morning Call

November 24, 2008: Morning Call

Fair Value: SP500 – 799.09; NDX: 1086.52; DOW – 8037.52

Technical Levels:

SPX: 685 support/ 848, 908, 998, 1098-1100 resistance


Pre-market EPS: CPB (.76/2.3B)
05:00: BCS Extraordinary General Meeting
05:00: Euro-zone Industrial New Orders (Sep): -2.8% MoM; -1.5% YoY
10:00: New Home Sales (October): 5.0 million; -3.5% MoM
11:00: President-elect Obama announces his economic team
14:00: PBR analyst meeting
17:00: HPQ earnings call
Post-market EPS: ATW (1.13/156.7M); HPQ (1.01/33.3B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 13 points above fair value while the NASDAQ futures are trading 22 points above fair value at 8:00 am ET.
The US Government has provided Citibank with 300 billion in guarantees for troubled mortgages and other toxic assets. Citibank is also getting an additional 20 billion in capital in addition to the 25 billion that the company just received under the TARP. In exchange, the government will receive 27 billion of preferred shares paying an 8% dividend with a warrant to purchase 254 million common shares at 10.61. In addition, President-elect Obama signaled that the stimulus package could approach 500 to 700 billion. Asian markets declined despite the strength in US markets on Friday and the Citibank news (Hong Kong down 1.6%, Shanghai down 4.3%, South Korea down 3.7%, India down 0.14%). European markets are up 3.5% on light volumes. Basic Resources (up 6.8%), Financials (up 4.3%), and Industrials (up 4%) are the leading sectors in Europe. The only sector in the red is the Auto’s (down 2.9%). Dollar weakness (Euro up 1.5%) is contributing to some early strength in commodities this morning (Crude up 2.2%, Gold up 2%, Silver up 5.3%).

Impact Research Calls/Market Moving News:

C (3.77): Citibank announces that it has reached an agreement with the U.S. Treasury, the Federal Reserve Board, and the FDIC on a series of steps to strengthen capital ratios, reduce risk, and increase liquidity. The U.S. Treasury will invest $20 bln in Citi preferred stock under the TARP. Citi will issue an incremental $7 bln in preferred stock to the U.S. Treasury and the FDIC as payment for a government guarantee on $306 bln of securities, loans, and commitments backed by residential and commercial real estate and other assets. As a result of the asset guarantee, the $306 bln portfolio will have a new risk weighting of 20%, thus freeing up an additional $16 bln of capital to the co. Citi will issue warrants to the U.S. Treasury and the FDIC for approx 254 mln shares of the common stock at a strike price of $10.61. Citi also has agreed not to pay a quarterly common stock dividend exceeding $0.01/share for three years effective on the next quarterly common stock dividend payment. Citi's Tier 1 capital ratio for the third quarter ended September 30, 2008, on a pro forma basis, for the October TARP capital injection and the new capital generated by today's announcement, subject to Federal Reserve Board approval, is expected to be approx 14.8% and its TCE/RWMA ratio would be approx 9.3%.

The Wall Street Journal reports President-elect Barack Obama will introduce Monday his National Economic Council director, Lawrence Summers, and his Treasury secretary nominee, Timothy Geithner, two men from the same ideological wing of the Democratic Party but with different roles in the new administration. Mr. Geithner will take over a Treasury Dept. already shouldering big, new responsibilities. It will administer the Bush administration's $700 bln financial-sector rescue fund. As Mr. Geithner assembles his team, Mr. Summers is likely to make the administration's early decisions on budget and tax policy, according to Democrats familiar with the team's thinking. Treasury will still be an important entity, but will likely have less clout than it did during the Bush administration when the White House seemed to defer to Treasury Secretary Henry Paulson on economic policy, according to a person familiar with the incoming administration's plans.

BRK (90,000): Barron's reports now may be a good time to buy shares in Berkshire Hathaway (BRK.A). Looking out to 2009, Berkshire's earnings could get a lift from improving conditions in the insurance market, and from some new high-yielding investments, including $8 bln of 10% preferred stock of Goldman Sachs (GS) and General Electric (GE). If the market rallies in 2009, Berkshire probably will see record profits. Its operating profits this year could be about $5,400 per Class A share, excluding losses on equity and junk-bond derivatives that may cause a fourth-quarter loss. One big investor says earnings could hit $7,000 a share by 2010, a modest 13x the current stock price. Berkshire now trades below 1.4x estimated book value, vs an average of around 1.5 in the past decade -- and current book is depressed. If the stock market rallies 25% in the next year, the stock could hit $110,000, or 1.4x potential year-end '09 book value of $80,000 a share.

AAPL (82.58): Oppenheimer trims their iPhone estimates to reflect the global slowdown in consumer spending. For Q109, they target 4.8 mln iPhones vs their prior 7.5 mln. FY09 unit estimate drops to 21.3 mln from 27.0 mln. Firm also cuts their Q109 iPhone ASP estimate to reflect the impact of the stronger dollar on international sales. They believe the new MacBook portfolio is seeing strong demand, despite focusing squarely on the high end of the notebook market. As a result, firm raises their Q109 unit estimate to 1.61 mln from 1.54 mln. Finally, they believe Apple could materially outperform its gross margin target for the quarter (30%-31%) as well as for they year as LCD panel and many other components have seen unprecedented price declines.

DB (24.58): reports Deutsche Bank Chief Executive Officer Josef Ackermann said Germany's largest bank will scale back unprofitable businesses, bolster capital and cut debt following a plunge in its stock. "In the last few days, confidence has eroded significantly across financial markets, and consequently our operating environment has significantly deteriorated,'' Ackermann said. "We have agreed a number of immediate initiatives which address the near- term challenges of our current market.'' Deutsche Bank's stock fell last week to the lowest level in at least 16 years in Frankfurt trading as confidence in financial markets worsened. Ackermann said "nothing'' justifies Deutsche Bank's low share price, while acknowledging that investors are concerned about the bank's capital base, the size of its balance sheet, the potential for further writedowns and the outlook for operating performance

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