Wednesday, December 10, 2008

December 10, 2008: Morning Call

December 10, 2008: Morning Call

Fair Value: SP500 – 888.36; NDX: 1213.04; DOW – 8689.12

Technical Levels:

SPX: 685, 752-755, 848-852 support/ 899-908, 998-1002 resistance


07:00: MBA Mortgage Applications (w/e Dec. 5)
08:00: WFC presents at the Goldman Sachs Financial Services Conference
08:45: NTRS presents at the Goldman Sachs Financial Services Conf.
09:00: YUM Analyst Conference
10:00: Wholesale Inventories (October): -0.2%
10:35: DOE/API Crude Oil and Gasoline Inventories
14:00: Monthly Budget Statement (November): -189.0B
15:45: MSFT presents at Barclays Tech Conference
21:00: Chinese Consumer Price Index (November): 3.0% YoY

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 13 points above fair value while the NASDAQ futures are trading 20 points above fair value at 7:30am ET.
Asian markets closed sharply higher (Nikkei up 3.1%, Hong Kong up 5.6%, India up 5.3%) on strength in automakers, commodities, and Chinese banks. Automakers surged on speculation that Congress will pass the auto bailout agreement: Mahindra & Mahindra (MM.IN) +11%, Honda (7267.JP) +10%, Hyundai (005380.KS) +9%, Kia Motors (000270.KS) +9%, Daihatsu (7262.JP) +8%, Toyota (7203.JP) +7%, Nissan (7201.JP) +5%, Mitsubishi (7211.JP) +5%, Tata Motors (TTMT.IN) +4%. European markets are currently trading up 0.42% in choppy trading. Rio Tinto (RIO.LN) is a notable gainer pushing the Metals and Mining sector higher after announcing it will eliminate 14,000 jobs by cutting 5,500 employees and 8,500 contractor positions due to "the unprecedented rapidity and severity of the global economic downturn". Rio Tinto will also reduce 2009 capital expenditure from $9B to $4B and review capex for 2010.

Impact Research Calls/Market Moving News:

AIG (1.93); GS (72.77): AIG facing $10B in losses on trades that have gone bad – WSJ: The Journal cites people familiar with the matter who say that AIG owes Wall Street's biggest firm roughly $10B for speculative trades that have gone bad. The paper adds that the losses are particularly concerning given that the they are not covered under the government's $150B rescue package for the insurer. According to the article, the IOUs stem from market bets on the performance of bundles of derivatives linked to subprime residential mortgages, commercial real estate bonds and other types of debt. The Journal points out that there are no actual securities backing these speculative trades. The article implies that Goldman Sachs has significant exposure to the 10 billion in question: “Some of AIG's speculative bets were tied to a group of collateralized debt obligations named "Abacus," created by Goldman Sachs. The Abacus deals were investment portfolios designed to track the values of derivatives linked to billions of dollars in residential mortgage debt. In what amounted to a side bet on the value of these holdings, AIG agreed to pay Goldman if the mortgage debt declined in value and would receive money if it rose." Goldman has said their exposure to AIG s “immaterial.”

AAPL (100.06): Apple target reduced to $95 from $105 at Morgan Stanley, estimates reduced further below consensus: F09 and f10 EPS estimates are further reduced below Reuter’s consensus of $5.27 and $6.43. C09 iPhone unit forecasts are reduced. Shares remain equal weight rated with Morgan Stanley saying AAPL should meet the guidance range provided in Oct.

PX (56.95): Praxair guides Q4 EPS to $0.95-1.00 ex-items vs prior $$1.03-1.08 and Reuters $1.04; to cut 1600 jobs. The company has seen a fall-off in demand in November and is expecting additional customer plant closings in December, which will further reduce volumes for the quarter.

WFC (30.50): Wells Fargo downgraded to neutral from buy at Merrill Lynch. Price target decreased to 32 from 35.

GE (17.78): General Electric downgraded to neutral from buy at UBS: The downgrade comes as part of a transfer of coverage. Price target decreased to $18 from $27. The firm sees risk that GE will reduce 2009 EPS guidance at meeting on 16-Dec.

WFC (30.50): Proposed legislation aims to end "Wells Fargo ruling" tax break – WSJ: Wells Fargo (WFC)'s purchase of Wachovia (WB) and PNC Financial (PNC)'s acquisition of National City (NCC) were encouraged by a break allowing a buyer to use a larger portion of a target's built-in losses to reduce taxable income. HR 7300, proposed by Rep. Lloyd Doggett, is intended to eliminate the break, which amounted to billions in the two aforementioned cases. HR 7300 would not revoke the break for Wells Fargo or PNC.

ERTS (19.35): Electronic Arts says Q3 (Dec) revenue and EPS will be significantly below expectations and cuts f09 outlook: While not providing specific targets for the quarter, management says revenue and earnings will be significantly below their plan for the quarter. ERTS says f09 net revenue and EPS will be below guidance given on 30-Oct and cites primarily lower than expected sales across North America and Europe. ERTS does not expect to provide updated financial guidance for fiscal 2009 prior to reporting its third quarter results in early February. ERTS says it continues to pursue cost savings initiatives, including a reduction of its product portfolio for fiscal year 2010 with additional associated headcount reductions and facility consolidations. ERTS says its holiday slate is not meeting its sales expectations. ERTS says it will be launching several new titles and online games in fiscal 2010. At least 4 brokerage firms have downgrades ERTS shares.

EK (7.20): Eastman Kodak withdraws 2H08 guidance due to economic weakness and currency: EK has withdrawn H2 guidance for revenue growth, digital revenue growth, earnings from continuing operations, and cash generation because of the deepening global recession and changes in the value of the dollar

GM (4.70): F (3.23): Details on Big Three bailout – WSJ: The bill, which was still being written late last night, although the basics had been decided, will provide about $15B in short-term funds and will kick off discussions about longer-term public financing. A car czar is to oversee the program. Companies could qualify for a 30-day extension beyond their 31-Mar deadline to provide restructuring plans, but after that, the President would have to call the loans. Deals of $100M or more would be subject to government review. The legislation could be voted on today. Passage appears likely in the House but problematic in the Senate, where 60 votes will be required.

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