December 18, 2008: Morning Call

December 18, 2008: Morning Call

Fair Value: SP500 – 900.82; NDX: 1228.30; DOW – 8779.90


Technical Levels:

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


Events:

Pre-market EPS: CCL (.40/3.31B); FDX (1.58/9.75B); LEN (-1.16/1.06B); WOR(.16/802.1M); DFS (.18/1.09B)
05:00: Euro-zone Trade Balance
05:00: Euro-zone Construction Output
08:30: Initial Jobless Claims
08:30: FDX Earnings Call
08:30: AG Analyst Meeting
10:00: Philly Fed (December): -40.0
10:00: Leading Indicators (November): -0.5%
10:35: EIA Natural Gas Storage Change
11:00: LEN Earnings Call
11:00: DFS Earnings Call
12:00: WFC Q4 2008 Guidance Call
13:30: Fed’s Fisher speaks on current economic crisis
17:00: RIMM Earnings Call
17:00: ORCL Earnings Call
Post-market EPS: DRI (.30/1.66B); ORCL (.34/5.87B); RIMM (.79/2.77B)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 3 points above fair value while the NASDAQ futures are trading flat with fair value at 7:30am ET. Asian markets closed modestly higher (Hong Kong up 0.24%, Nikkei up 0.64%, Australia up 0.30%) with Indian markets the best performing region with a gain of 3.7% (Sensex closed above 10,000 for the first time since November 10). In China, banks rallied on speculation the government would cut their 5% business tax. A strong yen pushed exporters down again in Japan, but banking and property shares gained on speculation the Bank of Japan will lower borrowing costs tomorrow. Automakers and component manufacturers declined in the wake of Honda (7267.JP)’s forecast cuts yesterday. European markets are unchanged and in a tight intra-day range. Commodity shares are amongst the leading fallers. Advancers on the FTSE 100 lead decliners 7-3. BNP Paribas extended yesterday declines after saying its planned acquisition of assets from Fortis (FORB.BB) can't go ahead following the recent court ruling and it has cancelled its shareholder meeting. Carrefour (CA.FP) fell following a trading statement after yesterdays close.

Impact Research Calls/Market Moving News:

RIMM (40.67): Deutsche Bank previews RIMM earnings. RIM still under pressure We are currently modeling RIM to report Q3 revenue of $2.8 b and EPS of $0.81, versus consensus of $2.8 b and $0.83. We are modeling 6.7m units with 2.6m net adds. We are modeling them to deliver Q4 revenue of $2.8 b and $0.79 (FC $3.0 b and $0.83). However, we think RIM will have a difficult time meeting these numbers. In particular, we think Street expectations for a sequential increase need to come down in light of the current economy. Long-term concerns beyond the consumer: Beyond macro concerns, we think RIM faces significant challenges. Their entry into mass consumer devices has revealed cracks in their model. In particular, the poor showing of the Blackberry Storm indicate to us that launching four new products in a year is more than they are capable of. The company is now dependent on producing hit products; not only is the Storm not a hit, but there is nothing in their pipeline for the foreseeable future. Reiterate Sell rating and $30 target: We believe RIM will continue to see pressure on its revenue growth rate as channel fill for the new products ebbs and the consumer shies away from purchases this holiday season. We also think the gross margin is at risk due to industry-wide pricing pressure and quality concerns/return rates for new products. Finally, advertising expenses likely remain high given the holiday media campaign. (My take: Although I am currently neutral on RIMM shares given that the risk/reward appears balanced, there appears to be downside related to gross margins. The bears on RIMM stock believe that the recent gross margin weakness will continue in coming quarters. Given the headwinds facing the consumer, I think it is reasonable to conclude that ASP’s will be under pressure particularly if AAPL and/or NOK start a full-blown price war. Most analysts seem to expect RIMM to maintain 45% gross margins and this appears far too aggressive.)

X (42.12): U.S. Steel downgraded to neutral from buy at Goldman Sachs: The firm recommends taking profits. The Goldman Sachs analyst has changed his rating on X shares 4 times since September 4 and 2 times in the last month.

AAPL (89.16): Apple has a deep bench - WSJ: Citing people familiar with the company's internal workings, the Journal notes that based on the evolution of the team that develops Apple's hardware, software and services, the company is now strong enough (barring an exodus of top talent) to continue producing innovative products even without current CEO Steve Jobs. The paper adds that Jobs does not design products such as the iMac, iPod and iPhone himself, but instead acts an "editor in chief" by helping to refine and improve ideas for the company's gadgets. According to the article, the day-to-day work of driving Apple's innovations is far more dependent on the likes of Jonathan Ive, an Apple senior vice president who oversees the company's industrial design team, as well as Scott Forstall, another senior vice president, who heads the team responsible for the iPhone's operating system and other software. The Journal goes on to highlight some of the other internal talent at Apple, while also pointing out some instances in which Jobs probably made things more difficult than needed.

C (7.84): Citi price target lowered to $14 from $17 at Ladenburg Thalmann: Analyst Dick Bove also increases his Q4 loss estimate to $1.00 a share from $0.61 a share. Bove cites the likelihood that the significant writedowns in capital markets operations seen at Morgan Stanley and Goldman Sachs will also weigh on Citi. Stock remains buy-rated.

AAPL (89.16); NOK (16.51); PALM (2.20): Apple (AAPL), NOKIA (NOK), and Palm (PALM) initiated at Canaccord: AAPL ($80 PT) initiated hold. NOK ($12 PT initiated sell. PALM ($0 PT) initiated sell

WFR (16.66): MEMC Electronic Materials guides Q4 revenue to $400-425M vs prior $475-525M and Reuters $490.1M: The company now anticipates Q4 gross margin of approximately 46%, plus or minus one percentage point. This compares to the company’s previously announced target gross margin of 48% plus or minus two percentage points. Expectations for operating expenses remain unchanged at approximately $27M. “The revised outlook is primarily a result of a continued deterioration in end demand for semiconductor products amid the weak macroeconomic environment. MEMC Electronic Materials (WFR) downgraded to underperform from buy at Merrill Lynch

MA (148.68): MasterCard maintained buy at UBS following checks: Following checks, firm believes the company will be implementing a fairly meaningful price increase to acquirers in Q2'09, which UBS sees as being favorably received. Target is $240.

TTWO (12.07): Take-Two (TTWO) reports Q4 EPS $0.02 ex-items vs Reuters $0.04, guides Q1 EPS to ($0.70)-($0.85), ex-items vs Reuters $0.22, guides f09 EPS to $0.00-0.20, ex-items vs Reuters $1.21. TTWO shares are trading down nearly 20%.

MT (26.26): ArcelorMittal downgraded to equal-weight from overweight at Barclays Capital

BUCY (22.57); JOYG (25.51): Bucyrus (BUCY), Joy Global (JOYG) downgraded to underweight from neutral at JPMorgan

CPT (31.91); EQR (33.29); BRE (32.69): Camden Property (CPT) upgraded, Equity Residential (EQR) and BRE Properties (BRE) downgraded at Merrill Lynch: CPT is upgraded to neutral from underperform. EQR and BRE are downgraded to underperform from neutral