Tuesday, November 4, 2008

November 4, 2008: Morning Call

November 4, 2008: Morning Call

Fair Value: SP500 – 965.02; NDX: 1337.51; DOW – 9296.18

Technical Levels:

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

NASDAQ: 1423, 1650 support / 1890 resistance


Pre-market EPS: ADM (.69/15.47B); EMR (.86/6.7B); EXPD (.37/1.54B); FE (1.43/4.53B); JEC (.92/3.08B); PPL (.59/1.71B); THC (-.04/2.21B); VNO (1.23/647.0M)
09:00: EOG earnings call
10:00: Factory Orders (Sep): -1.0%
11:45: Fed’s Fisher speaks on US economy
17:00: ABC Consumer Confidence
Post-market EPS: PXD (1.22/658.3M); AUY (.11/317.4M)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 30 points above fair value while the NASDAQ futures are trading 39 points above fair value at 7:45am ET. European and Asian markets have moved sharply higher on decent earnings and reduced stress in short-term credit markets. European indexes are up 3.0% due to a 9% rally in the largest UK clothing retailer, Marks and Spencer (MKS.LN). MKS reported earnings that were modestly ahead of expectations and the report set a bullish tone in consumer discretionary and financial shares. Euro-zone PPI was slightly better than expected at 7.9% y/y vs. consensus of 8.5% y/y. 3M LIBOR was also fixed 15 basis points lower at 2.71%, the lowest level since June 9; the decline in interbank rates over the last few weeks has improved confidence. Asian markets closed higher, led higher by Japanese stocks (Nikkei rallied 6.27%). Exporters broadly advanced on a weaker yen. Large banks advanced after Credit Suisse raised its rating and lending costs tumbled, rallying the market further. Hong Kong reversed early declines, led by gains in Chinese lenders and property developers. Australia finished lower despite a larger than expected 75bps rate cut.

The 998-1002 level on the S&P 500 should be an area of formidable resistance. Traders should reduce long exposure and consider adding short-term tactical short exposure around those levels.

Impact Research Calls/Market Moving News:

MA (143.89): MasterCard reports Q3 EPS $2.47 ex-item vs Reuters $2.22:Reports gross dollar volume up 12.3%; purchase volume up 13.3%; 13.0% increase in the number of transactions processed, to 5.4B. MA guided down revenue growth to below its long-term goal of 12-15%, although it still expects to meet its goal of 20-30% earnings growth. The story changes from an organic growth to expense containment and gross margin improvement.

MA (143.89): MasterCard maintained hold at Citi: Firm says shares may respond positively to the company's commitment to keep costs flat in 2009. Citi also noted that transaction volume growth is slowing, though high margin cross border transaction volume increased in October. Target price, $184.

MA (143.89): Deutsche Bank maintains a hold rating on MA: Aggressive approach to costs is good response to slowing growth. We maintain our Hold and trim our price target to $180 after MA's 3Q08 print. Quarterly results continue to demonstrate the qualities we like most about this model (pricing, op leverage) and we agree with MA's decision to be more assertive on the cost side given prospects for slower global growth and FX headwinds over the next several Qs, but Visa continues to look more attractive to us for the time being, given similar levels of cost discipline, but with less top-line volatility, less exposure to Europe, and less market share risk. MasterCard's 3Q08 results: the calm before the storm: MA shares were up in after-market trading on the heels of another solid quarterly beat, with revs topping us by $92mm on upside from operations fees, and EPS ex charges $0.27 above our model on better cost leveraging coupled with the robust top line. Cross-border volumes (+18%) remain a key component to this growth, and pricing provided another solid (+5%) boost to revs this Q. But macro challenges are clearly weighing on the global model, evidenced by purchase volume growth decelerating everywhere except Asia-Pac and Canada. And MA's commentary pertaining to cross-border travel trends was distinctly bearish, particularly as it has tracked since mid-September. At this point, MA believes high-single digit revs growth next year is achievable, and that this pace would allow MA to meet its long-term margin (+300-500bps) and net income (+20-30%) goals for next year, ex headwinds from FX. While we think there could be greater downside risk to these numbers, MA could help mitigate this risk through more aggressive pricing actions and/or rapid success in eliminating costs. We recently cut our 2009 forecast for slowing global growth,
unfavorable FX, and negative market share shifts caused by banking sector restructuring.”

AAPL (106.96): Bernstein comments on Apple, sees shares as significantly undervalued: Though the firm believes non-GAAP earnings growth could be slower than corresponding GAAP, revenue growth should remain strong. Bernstein says that while the look of flat non-GAAP EPS could be discouraging shares are significantly undervalued given true earnings of $7+ and FCF of around $9 per share. Target is $135.

Fertilizer Sector: Agrium (AGU), CF Industries Holdings (CF), and Terra Industries (TRA) upgraded to buy from hold at Citi. Firm cites valuations. AGU tp $60 vs prior $86. CF tp $113 vs prior $128. TRA tp $30 vs prior $44. Also mentioned this morning in the space by Citi were buy rated Mosaic (MOS) and Potash (POT); Citi said that it continues to favor its top pick POT in the space. MOS tp $105 vs prior $112. POT tp $191 vs prior $207.

EOG (75.78): EOG Resources reports Q3 adjusted EPS $2.34 vs Reuters $2.23: Total volume was 189.1 Bcfe vs year-ago 161.9. EOG is targeting 2009 total company production growth ranging from 10 to 14%, depending upon North American natural gas prices. Production growth in 2009 is expected to be driven by high reinvestment rate of return opportunities in the United States, particularly the Fort Worth Basin Barnett Shale and the North Dakota Bakken. Natural gas production from Canada, Trinidad and other international areas in 2009 is projected to remain relatively flat with 2008 production levels.

BDIY Index (Baltic Dry Index): FT discusses concerns about derivatives losses tied to the October collapse in charter dry bulk rates: The article notes that traders in forward freight agreements, which are derivatives based on short-term charter rates, could owe significant amounts of money if they were betting on a rise in charter rates. The paper points out that the Baltic Dry Index of charter rates started the month at 3,025 points and closed on Friday at 851. According to the paper, the 80% of trades made through clearing houses were being settled on Monday, while traders who purchased cash-settled products in over-the-counter transactions, have until Friday to settle. Recall that Britannia Bulk (DWT) was recently forced to put its British operating subsidy into administration after having been hit by its exposure to speculative FFA trading (My comment: the continued erosion in the Baltic Dry Index is a red flag and should be watched. The freight index fell another 1.5% this morning to 814.60. The BDIY index was at 3000 on October 3 and has fallen 22 days in a row and a stunning 74% from the beginning of October.)

VLO (20.29)Valero Energy (VLO), Holly (HOC) downgraded to neutral from buy at Goldman Sachs

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