November 25, 2008: Morning Call

November 25, 2008: Morning Call

Fair Value: SP500 – 850.94; NDX: 1155.21; DOW – 8433.80


Technical Levels:

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


Events:

Pre-market EPS: DLTR (.44/1.1B); DHI (-1.88/1.7B); TECD (.63/6.1B)
04:45: BOE’s King testifies to House of Commons Treasury Committee
08:00: JEC Analyst Meeting
08:30: US Q3 GDP (1st Revision): -0.5%; Personal Consumption: -3.2%
08:30: GDP Price Index (Q3): 4.2%; Core PCE QoQ: 2.9%
09:00: S&P/Case Schiller Home Price Index (Sep): -16.9%
10:00: Consumer Confidence (November): 38.1
10:00: Richmond Fed Manufacturing Index (November): -27
10:00: House Price Index (Sep): -0.8%
10:00: DHI earnings call
17:00: ABC Consumer Confidence
Post-market EPS: BCSI (.17/115.8M); JCG (.27/352.7M)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 3 points below fair value while the NASDAQ futures are trading 13 points below fair value at 7:45 am ET. The S&P futures have pared earlier declines following a rebound in European markets. Asian markets surged higher excluding India (down 2.3%) and Shanghai (down 0.18%). Australia and Japan paced the gains with rallies of 5.8% and 5.2% respectively. The Citibank bailout and rally in US markets were the primary catalysts for the overnight advance in Asia. Financial and commodity leveraged sectors were the biggest percentage gainers in Asia. European markets are unchanged but have rallied 2.5% off the early session lows. Better than expected UK Q3 total business investment helped the market reverse the early losses at 4:30am ET. Advancers on the FTSE 100 lead decliners 7-3. Rio Tinto (RIO.LN) fell after BHP (BLT.LN) dropped its bid. BHP rose. Axa (CS.FP) fell after reducing FY underlying earnings guidance and Volkswagen (VOW.GR) is trading lower on reports its planning a three week shut down at its largest plant.

Impact Research Calls/Market Moving News:

C (5.95): Deutsche Bank analyst Mike Mayo comments on the government bailout of Citibank. “ With the new govt. plan, Citi gets a $40B capital benefit, a cap for some losses, less extreme tail risk, and likely more confidence w/depositors and debt holders that should protect against a downward spiral. Yet, it does so with more gov't. involvement (comp plan), remaining loan risk (cards, int'l. consumer), no changes in corporate governance, and dilution on est. normalized EPS. We lower our '09 est. by 40 cents to -70 cents and our '10 est. by 25 cents to $1.15. We have a downward bias to our ests. Maintain Hold. Government protection helps Citi avoid extreme loss scenarios but otherwise does not seem to change our cum loss estimates much (est. $80B - $60B on loans, $20B capital markets - detail below), esp. since only 15% of total assets are covered. For instance, cards and int'l consumer are not covered, both which are likely to get stressed as economies slow. Nevertheless, it helps increase the Tier 1 capital ratio by reducing risk weighting on the covered assets (frees up $16B of capital), reflecting more cushion for possible losses.

WSJ article highlights the Goldman Sachs 2 billion FDIC backed bond issue – there is chatter demand is so strong that the issue has been raised to 5 billion: (My take: This program has certainly alleviated concerns in the market about funding pressure but obviously this program has potential unintended consequences. For example, there are initial indications that these GS bonds could have tighter spreads to treasuries than GSE debt. Will the flood of financial companies rushing to issue FDIC backed bonds reduce demand for FNM and FRE mortgage debt? Also, further erosion in the economy and credit quality could expose the taxpayer to substantial losses). WSJ reports banks, brokers and other financial companies are poised to issue tens and possibly hundreds of billions of dollars in debt backed by the U.S. government, following the lead of Goldman Sachs, which received strong interest from investors Monday for $2 billion to $3 billion in bonds it is issuing under a government program. The Goldman bond offering is expected to be completed Tuesday and is the first major sale in the plan, which was designed to bolster financial cos by letting them borrow easily and cheaply by giving their debt a U.S. guarantee. Citigroup (C), General Electric (GE), and other companies have signed up to sell bonds under the plan, which could help them resume lending to consumers and businesses and allow them to rebuild capital. For investors, the bonds offer a free lunch -- they are backed by the government, just like Treasuries, but pay higher interest rates. The Goldman bonds, which mature in three years, are likely to yield about two-percentage points more than three-year Treasury bonds, or around 3.5%. Goldman's outstanding debt trades at yields of 7% or higher.

RTP (145.99); BHP (33.42): BHP Billiton (BLT.LN) withdraws offer for Rio Tinto: RTP is trading down 50 points. BHP is trading up 4.50. The BHP board has decided the offer is no longer in the best interests of BHP shareholders. The company says that in normal economic conditions, it would have been prepared to offer acceptable, manageable remedies to satisfy what it expects to be the European Commission’s objections to the takeover. But in the current climate, it thinks the remedies would add to the cost and risk of the transaction, so it will not offer them, and it therefore expects the EC to deny clearance.

C (5.95): Regulators considered buying Citi stock on the open market - FT The FT cites people involved in the talks who say that US regulators considered a proposal to buy Citi shares on the secondary market before deciding to provide another $20B in capital and ring-fence $306B in distressed assets. The article notes that the government considered investing as much as $30B, equally split between preferred and common stock. The paper also points out that regulators talked about replacing the bank's senior management, but ultimately decided against the move due to a lack of obvious successors.

DHI (5.00): DR Horton reports Q4 EPS ($2.53) vs Reuters ($2.73): Company reports revenues of $1.54B vs Reuters $1.78B. Homes closed 6,961 vs year-ago 11,733; company owned approximately 99,000 lots at 30-Sep; backlog 5,297 homes ($1.2B) vs year-ago 10,442 ($2.7B); net sales orders 3,977 homes ($852.3M) vs year-ago 6,374 ($1.3B); cancellation rate 47%.

C (5.95): Citi issuer default rating downgraded to 'A+' from 'AA-' by Fitch: The rating outlook is stable. The downgrade recognizes future pressures from an expected U.S. recession and continued economic difficulties globally.

C (5.95): Citi needs to get smaller – WSJ: The article really does not cover a whole lot of new ground, noting that despite the reprieve from the government, the bank is expected to reduce its appetite for risk and explore strategic alternatives such as a breakup of the company. The Journal also discusses the role of CEO Vikram Pandit, noting that government officials decided to keep him around in an effort to avoid sending a bad signal to the markets and potentially destabilizing the company. Of interest, the paper also notes speculation that American Express CEO Kenneth Chenault could replace Pandit

Some lawmakers want to rescind tax break on bank mergers - NY Times DealBook: Recall that in late-September, the IRS and Treasury tweaked tax rules to allow firms to use up the tax losses of banks they acquire. The Times now reports that several members of Congress are working to reverse the move, a dynamic that could lead to an unraveling of some deals that have already been reached, while others under consideration could be scrapped all together. According to the article, the opposition is largely a function of concern that TARP money is being used to fund banking sector consolidation, rather than to spur lending

X (27.85): U.S. Steel target lowered to $25 from $30 at UBS: Firm believes that mills have lost leverage in contract price negotiations with auto and appliance makers. '09/'10 EPS estimates are lowered and the firm sees a loss in Q1. Rating is sell.