November 5, 2008: Morning Call

November 5, 2008: Morning Call

Fair Value: SP500 – 1004.73; NDX: 1380.99; DOW – 9606.3


Technical Levels:

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

NASDAQ: 1423, 1650 support / 1890 resistance


Events:

Pre-market EPS: BDX (1.12/1.81B); AGU (1.95/2.22B); CNP (.26/2.27B); DUK (.44/3.95B); DVN (3.08/3.97B); GM (-3.66/39.78B); FWLT (.88/1.79B); MMC (.32/2.88B); MT (4.30/39.19B); PKD (.43/160.1M); RIG (3.54/3.15B); SLE (.22/3.34B); TWX (.27/11.82B); XTO (1.00/2.07B); TOT (2.47/59.31B)
07:00: MBA Mortgage Applications
08:00: RIG earnings call
08:15: ADP Employment Change (October): -90,000
08:30: DO Investor Meeting
10:00: ISM Non-Manufacturing (October): 48.0
10:35: DOE/API Crude Oil and Gasoline Inventories
13:30: UNP, NSC, GE present at Goldman Sachs Industrials Conference
16:00: Select Retailers release October Same Store Sales
Post-market EPS: AVB (1.27/214.0M); CDNS (-.11/239.1M); CSCO (.39/10.3B); EXM(1.17/137.9M); GXP (.71/712.3M); MDR (.71/1.86B); NWS (.23/7.66B); PAA (.66/8.05B); SUN (2.27/12.78B); VMC (.85/1.05B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 15 points below fair value while the NASDAQ futures are trading down 17 points at 7:45am ET. European stocks are down 1.6% and have pared the losses after being down as much as 3.0%. Steel, mining and energy are among the weakest sectors on the poor earnings from MT. Banks are a bit better than the broader Euro-zone markets with a decline of 0.70% in Europe. Market participants await interest rate decisions from BOE and ECB tomorrow. Decliners on the FTSE 100 lead advancers 4-1. Lower oil prices outweighed better than expected results as Total's (FP.FP) shares fell. France, Germany, UK and EuroZone trumped Oct Services PMI's were all either lower than estimate, in the case of the UK or revised down from the preliminary results. UK Sep Manufacturing Production fell more than expected whilst EuroZone Sep Retail sales were better than forecast (1.6%) y/y. Asian markets closed sharply higher following the strength in European and US markets on Tuesday.



Impact Research Calls/Market Moving News:

MT (31.70): MT shares are down 17% on accelerated steel production cuts and weaker earnings/guidance. ArcelorMittal reports Q3 EPS $2.78 vs Bloomberg consensus $4.06: Company reports revenues of $35.20B vs Bloomberg consensus $39.13B and year-ago $25.52B. Q3 EBITDA $8.58B vs pre-announced in excess of $8.5B on 9-Oct and Bloomberg consensus $8.16B. Guides Q4 EBITDA in the range $2.5-3B vs Bloomberg consensus $6.8B; Full year EBITDA $24.2-24.7B vs Bloomberg consensus $28.17B and year ago $19.4B. Shipments 25.6MMT vs year ago 26.0MMT. The company plans to adapt existing growth plans to reflect market conditions; now sees $5B in SG&A savings over the next 5 years vs previous forecast of $4B and increases temporary production cuts to accelerate inventory reduction. The Board recommends maintaining the 2009 base dividend at $1.50/share. Targets to return 30% of net income to shareholders through base dividend and share repurchase. The buybacks would be implemented once the $10B net debt reduction is achieved by the end 2009.

AAPL (110.99): UBS says checks at Apple indicate iPhone production softness: Firm's checks indicate various iPhone supply chain cuts, and the firm believes recent data points may suggest unit volumes are weaker than its current estimate. Estimates are maintained. Rating is neutral with a target of $115.

RIG (84.52): Transocean reports Q3 EPS $3.44 vs Reuters $3.54: The average dayrate for the fleet increased 2% from $238,600 in Q2 to $242,200 in Q3, primarily as a result of rigs commencing new contracts at higher dayrates in Q3. Total utilization for Q3 was 89% vs 87% in Q2 and 89% y/y. RIG is trading down 4 points in the pre-market to 80.50 a share.

DVN (83.00): Devon Energy reports Q3 EPS $3.09 ex-items vs Reuters $3.06: Company reports revenues of $5.98B vs Reuters $4.15B. Q3 combined oil, natural gas and natural gas liquids production from cont ops was +3% to 58.6M (Boe). Q3 production was 637K Boed vs 618K Boed y/y.

GS (95.00); BAC (24.53): WSJ “Heard on the Street” column explores Goldman’s and Bank of America’s exposure to China. Nothing particularly new here and the time to be concerned about the exposure was 6 to 12 months ago; there are much greater threats to Goldman’s core business that is the primary headwind facing the common shares. That said, here is the key points of the article: “Goldman and affiliates held a $7.14 billion stake in Industrial & Commercial Bank of China at the end of August, while Bank of America's investment in China Construction Bank was valued at $14.5 billion at the end of September. ICBC's shares are down 30% since the end of August, the close of Goldman's fiscal third quarter. The bank's investment doesn't track exactly with the stock price. But at these levels, the slide in ICBC shares could translate into a mark-to-market loss in excess of $1.5 billion so far this quarter. CCB's shares are down 21% since the end of September. Applying that decline to Bank of America's position suggests a paper loss of around $3 billion. Such losses need to be seen in context. Taking stakes in Chinese banks made sense for lots of reasons -- even with the restrictions that have prevented the banks from selling or hedging the investments for agreed periods. Both investments are still up substantially and will no doubt turn a solid profit in the long run, especially when dividend income is counted. The banks also might argue that these stakes are worth having, despite their volatility, since they provide invaluable business relationships and insight into China. But the size of the investments is what makes them a headache right now. Using the last public values, the stakes are equivalent to roughly 10% of Goldman's shareholder equity and around 7% of Bank of America's, after recent capital raisings for both banks. Given those numbers, Goldman and Bank of America must dread a sharp slowdown in China.”

FWLT (31.60): Foster Wheeler reports Q3 EPS $0.88 vs Reuters $0.88: Company reports revenues of $1.72B vs Reuters $1.78B. New orders booked in Foster Wheeler Scope were $664.3M in Q308, 24% above the average quarter of 2007. Backlog in Foster Wheeler Scope was $1.8B at the end of Q308, up modestly y/y. FWLT also announced that Raymond J. Milchovich, Chairman and CEO of Foster Wheeler Ltd., has signed a new three-year agreement, effective November 4, 2008, to continue to lead the company.

RIMM (55.56); Research In Motion added to Focus List at Morgan Keegan

VMW (30.56): VMware downgraded to neutral from buy at Merrill Lynch

TWX (10.83): Time Warner reports Q3 EPS $0.31 ex-items vs Reuters $0.27: Company reports revenues of $11.71B vs Reuters $11.86B. Guides full year EPS to $1.04-$1.07, reduced by $0.04 in items, compared to prior $1.07-$1.11 vs Reuters $1.07. TWX reduces f08 adjusted OIBDA to about 5% off a base of $12.9B y/y, implying about $13.55B. Prior guidance was for growth of 7-9%.

VZ (32.61); T (29.28): Verizon (VZ), AT&T (T) targets lowered at UBS: VZ target is lowered to $34 from $37. T target is lowered to $31 from $34. Firm lowers net add forecasts for both companies in '09. '09 EPS estimates are lowered.