December 3, 2008: Morning Call

December 3, 2008: Morning Call

Fair Value: SP500 – 848.53; NDX: 1130.72; DOW – 8420.26


Technical Levels:

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


Events:

04:00: Euro-Zone PMI Services (Nov. Final): 45.3 (weaker: 42.5) ; Composite: 39.7 (weaker 38.9)
05:00: Euro-zone Retail Sales (October): -0.4% MoM (weaker: -0.8%) ; -1.5% YoY (weaker: -2.1%)
08:15: ADP Employment Change (November): -200,000
08:15: AGU presents at the Citibank Chemical Conference
08:30: Non-Farm Productivity (Q3 Final): 0.9%; Unit Labor Costs: 3.6%
08:50: CF presents at the Citibank Chemical Conference
10:00: ISM Non-Manufacturing (November): 42
10:00: FCX presents at the FBR Capital Markets Conference
10:35: DOE/API Crude Oil and Gasoline Inventories
11:00: MSFT presents at Credit Suisse Tech Conference
11:10: MOS presents at the Citibank Chemical Conference
12:30: Fed’s Lacker, BofA’s Lewis, and WB’s Steel speak on the economy
14:00: Fed’s Beige Book
14:20: BTU presents at the FBR Capital Markets Conference
17:00: Select Retailers release November Same Store Sales
Post-market EPS: SNPS (.38/351.1M)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 12 points below fair value while the NASDAQ futures are trading 22 points below fair value at 8am ET. Weak economic data in Europe and an earnings warning from RIMM are the primary reasons for the lower futures. Asian markets: Most markets rose though gains were muted with an exception being China. The financial sector advanced for the first time this week as the Fed extended an emergency loan program and the BOJ eased lending terms. China advanced on a newspaper report the government spent CNY10B buying shares to support the market last month. European markets opened down 2.0% on weak economic data but have bounced modestly off the early session lows and are currently trading down 1.3%. Market participants await the BOE and ECB interest rate decisions tomorrow. Decliners on the FTSE 100 lead advancers 3-2.


Impact Research Calls/Market Moving News:

RIMM (37.32): RIMM guides Q3 2009 EPS to between .81-.83 cents versus street consensus of .90 cents. GAAP EPS, which will reflect a higher tax rate, is projected to be $0.67-0.71. The company guides Q3 revenue to $2.75-2.78B vs prior $2.95-3.10B and Reuters $2.95B. Gross margin for the quarter is expected to be 45-46%. Company now expects new subscriber accounts to be 2.6M vs prior 2.9M. Company cites currency issues and lower shipments as reason for reducing forecast. (My take: I have been bearish on RIMM shares since the company reported Q1 results in June because it was clear that gross margins had peaked. During the June quarter conference call, the CEO also quickly discounted the competitive threat posed by the iPhone which I considered absurd. But, I am now moving to a neutral position and would cover shorts and bearish option positions. I find it impressive that RIMM is going to earn around .80 cents given that the economy has fallen off the proverbial cliff during their fiscal third quarter (I thought the EPS miss could be more significant). That said, I would not be long for anything other than a quick trade because I am worried that demand will continue to weaken and the new product release catalyst is pretty much in the rear-view mirror. RIMM earned 2.26 in 2008, 1.10 in 2007, 82 cents in 2006, and .70 cents in 2005. RIMM is a much different company now than in 2005 and has a very impressive enterprise and consumer product portfolio. I doubt earnings will recede to 2005 levels or worse unless there is a borderline Depression. But, I could see earnings easily falling to 2007 levels and the stock is not cheap based on EPS of 1.10).

GS (65.00): Fox-Pitt Kelton lowers numbers again on GS to a loss of 3.65 vs. prior estimate of a loss of 1.55 (Fox-Pitt cut their numbers on November 10 to a loss of –1.55). Fox-Pitt says the reason for the second downward revision is the “meaningful deterioration in global equity and credit prices.”

TOT (50.26); NXY (18.85): FT Total (TOT) board meeting to approve offer for up to C$19.7B for Nexen (NXY)

RIMM (37.32): Research In Motion maintained outperform at Oppenheimer despite pre-announcement: Target reduced to $50 from $55. The firm says RIMM is still well positioned in the industry due to a strong product portfolio and an increased focus by carriers on smart phone.

RIMM (37.32): Research In Motion removed from Conviction Buy List at Goldman Sachs: Shares remain buy rated. Target reduced to $62

WYNN (37.58): Wynn Resorts initiated sell at Citi: Target price, $29

GS (65.00): Goldman Sachs thinks about establishing internet bank to widen funding sources – WSJ: People familiar with the situation say if the venture goes ahead, it will probably offer a range of savings products. Sources say GS has not ruled out the possibility of buying a bank with substantial retail operations, even though it has sought and received a state-banking license for New York. Turning away from retail, the company is also thinking about using its wealth-management operation and large corporate clients to attract deposits.

GOOG (275.11): Google cutting ancillary projects, sharpening its focus as revenue growth slows – WSJ: The Journal cites comments from Google CEO Eric Schmidt, who says that given the uncertainty surrounding the economic slowdown, the search giant will curtail the "dark matter", or projects that have yet to catch on and are not really that exciting. Schmidt says that the company's investment priorities include display ads, advertising on mobile phones and online business software. The article goes on to highlight the culture shift taking place inside the firm.


GS (65.00): MS (12.04): "Heard on the Street" reminds investors that Goldman Sachs (GS), Morgan Stanley (MS) face greater regulation – WSJ: The column notes that the companies' recent use of the government guarantee on new debt issues to borrow cheaply is attractive and could boost profits. But regulation by the Federal Reserve means leverage will probably need to be lowered further. The column estimates MS's leverage ratio stands at around 15 times, with Goldman's around 17 times. But both remain above JPMorgan Chase (JPM)'s estimated 13 times. Though GS CEO Lloyd Blankfein disagrees, Bernstein Research recently argued GS's leverage and returns are closely correlated. (My take: Sanford Bernstein is correct. Goldman’s ROE performance is directly tied to their gross leverage. Normalized earnings will be significantly lower because Goldman’s earnings power is derived from putting their own capital to work on a principle basis).