Monday, December 29, 2008

December 29, 2008: Morning Call

December 29, 2008: Morning Call

Fair Value: SP500 – 869.51; NDX: 1186.94; DOW – 8469.84

Technical Levels:

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


No Events

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 2 points above fair value while the NASDAQ futures are trading 10 points above fair value at 7:10 am ET. Crude Oil is up 7% to 40.50 due to escalating violence in the Gaza strip between Israel and Hamas. The dollar is down 2.0% against the Euro to 1.43 due to the rally in crude. Asian markets closed higher (Japan up 0.09%, Hong Kong up 1.02%, Australia up 1.09%, Indi up 2.19%). Energy and commodity leveraged sectors rose on a strong rebound in commodity prices, bolstered by the unsettled situation in the Gaza Strip. Hong Kong rose as declines in banks and property stocks failed to outweigh gains in China Mobile (941.HK) and oil companies. CITIC Pacific (267.HK) added 7% on news that its parent secured a majority stake. European markets are higher in thin trading led by energy and commodity stocks. London is up 2.4%. Shares have remained range bound following the initial gains, slightly below the highs of the session. Advancers on the FTSE 100 lead decliners 4-1.

Impact Research Calls/Market Moving News:

ROH (63.56): Kuwait ends deal with Dow Chemical-Kuwait Petroleum Corporation (KPC) and Petrochemicals Industries Company (PIC) have informed Dow Chemical that the Kuwait Supreme Petroleum Council (SPC) has decided to reverse its approval of the agreement over joint venture K-Dow Petrochemicals. Dow is in the process of evaluating its options. The WSJ reports that the agreement would have provided Dow with $9B that it was going to use to complete its purchase of Rohm & Haas (ROH).

CSCO (16.27): Cisco Systems is making a push into digital entertainment reports the NY Times: At the Consumer Electronics Show, the company will introduce a new line of products, including a wireless digital stereo system. The company aims to take on Apple, Sony and other consumer electronics giants. It is working on a means of getting Internet video onto TV screens more easily and has a big bet on consumers using a version of its Telepresence for high-definition video chat through TV screens. The company says consumer electronics are only now beginning to take advantage of broadband connections and home networks. The company says it is trying to get media companies to take a more expansive view of digital rights and relax some of the restrictions tying content to a device. If services such as consumer video conferencing takes off, Cisco would stand to profit not just from the technology but also because video is a bandwidth hog and the internet access providers would need to buy more Cisco equipment to meet the increased bandwidth demand.

China official says 2008 GDP growth will exceed 9% - Dow Jones: In a speech 27-Dec, National Bureau of Statistics chief economist Yao Jingyuan said despite downward pressure in Q4 and declining growth rates in the year's first three quarters, the annual growth rate will remain above 9%. He said the country will maintain "stable economic growth" for next year, and he expects the CNY4T economic stimulus plan to start having an effect in H2/09. Recall there is worry that China will be unable to keep 2009 growth above 8%, which some experts consider to be the minimum necessary to avoid social unrest in the country

HPQ (34.97): Barron's Cover is positive on Hewlett-Packard and CEO Mark Hurd: CEO Hurd can't offer any predictions as to when the current financial mess will end but does predict that HP will have modest earnings growth through next year. He says he is even more focused on profitability now. Under Hurd, the company has diversified its revenue and profits. He is known for cost-cutting but also for gaining market share. Barclays Ben Reitzes thinks the shares could climb to $47 once the broader market settles down. Recurring revenue accounts for about a third of revenue and about half of estimated '09 earnings. About 60% of sales are overseas. HP trades for 8.18x estimated '10 earnings while Dell (DELL) trades for 8.32x estimated '10 numbers and IBM (IBM) trades for 9x expected '09 numbers. Chuck Jones of Atlantic Trust thinks the shares could go into the low $50s when the market returns to normalcy. Bernstein's Toni Sacconaghi thinks the concerns over consumer exposure are overblown since inkjet supplies account for about 98% of the consumer profits. He sees the shares going to $40. The biggest help for margins and profits should come from the EDS acquisition where the long-term contracts and high operating margins should take some of the pressure off printing supply sales. HP says no material customer has exited after the acquisition.

AAPL (85.81): Barron's Technology Trader notes the risks to Palm and RIMM with the iPhone now selling at Wal-Mart: The move by Wal-Mart (WMT) to start selling the Apple (AAPL) iPhone seems to be a bet that all types of consumers will buy relatively complex pieces of computing. The move could drive a wedge between Apple and competitors RIMM, Nokia and Palm.

Barron's summary:
Cover: Positive on Hewlett-Packard (HPQ) and CEO Mark Hurd, shares could climb into the $40s. Interview: Mark Roberts, founder of Off Wall Street Consulting Group, likes BRS, PHH and ASML and would short HRC, SYK and PSYS. Lead Articles: Conditions are worse for credit card issuers than investors realize, COF is the best positioned of the pure plays for funding; The concerns over Linn Energy LLC (LINE) seem misplaced, stock could go into the $20s; Streetwise notes that reversion to mean plays are no longer sure things, suggests going long RIG and shorting NE; the selloff in Millicom (MICC) seems overdone, stock could rise by more than 25%; positive on preferred stocks, especially adjustable rate preferreds from financials; Other Voices says it is time that Americans stopped lying about correctly timing the market and admit that they were caught just like everyone else; Editorial suggests ways to exit the current financial mess including ending tax subsidies or specialized treatment, except for an energy tax to make the U.S. frugal energy consumers, and opening up all markets to true competition. Columns: The Trader is positive on Saks Fifth Avenue (SKS), cautious on '09; Asia Trader looks at the current state of Asia and recounts the past year; Euro Trader recounts the many issues that seemed important in '08 but weren't; Current Yield sees a further contraction in corporate bond spreads, suggests LQD, FSICX, LSBRX and RPSIX as a way to play it; The Striking Price considers the merits of covered call writing; Commodities Corner notes the speculative frenzy that gripped many markets in '08; Preview notes the selling of oil and gas leases by Pennsylvania to companies like COG and XTO; Follow Up notes the systemic risks in China; Up and Down Wall Street considers the past year and notes the Dogs of the Dow for 2009 are BAC, GE, PFE, AA, DD, T, VZ, MRK, JPM and KFT with yields ranging from 4.32%-9.31%; Economic Beat suggests spending the Obama economic stimulus on infrastructure repair and helping out state and local budgets and not adding in an economic stimulus element; D.C. Current suggests that President Bush can restore some dignity to the Oval Office by not crassly profiteering once he leaves office; Speaking of Dividends is positive on REITs because of an IRS ruling to let them pay a significant portion of their dividends in stock, thereby conserving cash; Technology Trader notes the risks to Palm and RIMM with the iPhone now selling at Wal-Mart.

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