Thursday, January 15, 2009

January 15, 2009: Morning Call

January 15, 2009: Morning Call

Fair Value: SP500 – 839.36; NDX: 1263.36; DOW: 8158.04

Technical Levels:

SPX: 752-755, 800, 816 support/852, 899-908 resistance


Pre-market EPS: BLK (1.49/1.15B); APH (.50/728.3M); MI (.12/629.5M); JPM (0.01/18.0B)
00:00: Fed’s Yellen speaks on the economy in San Francisco
05:00: Euro-zone CPI (December): -0.1% MoM; 1.6% YoY; 1.8% Core
07:45: ECB Interest Rate Decision: 50 basis point cut to 2.00% expected
07:45: JPM Earnings Call
08:30: US Producer Price Index (Dec): -2.0% MoM; Ex-Food/Energy: 0.1% MoM
08:30: Initial Jobless Claims; Continuing Claims
08:30: Empire Manufacturing (Jan): -25.00
09:00: ATW, RIG, and DO present at Goldman Energy Conference
10:00: US Philly Fed (Jan): -35.0
10:00: CHK, EOG, XTO present at Goldman Energy Conference
11:00: MRO, SUN, TSO, HOC present at Goldman Energy Conference
13:30: NE presents at Goldman Sachs Energy Conference
13:40: Fed’s Evans speaks on the economy
13:40: Fed’s Lockhart speaks on the economy
16:45: DNA earnings call
17:30: INTC earnings call
Post-market EPS: INTC (.14/8.2B); DNA (.95/3.62B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are flat with fair value at 8:45 am ET. Continued concerns about widening losses in the banking sector, weakness in foreign markets, and news that Apple CEO Steve Jobs is taking a medical leave is weighing on sentiment. The futures have recovered following the producer price data, which may have temporarily eased fears of deflation. JPM shares have also rallied 3% during the earnings call. Keep your eye on BAC shares given the fears in the market that Bank of America is going to be the next Citibank following news reports that the US government is considering a loss sharing agreement for BAC’s toxic assets. Typically, these agreements are only put in place for deeply troubled institutions. In short, C has been quasi-nationalized and BAC does not appear far behind. Asian markets closed sharply lower led by resource and financial sectors (Japan down 4.92%, Hong Kong down 3.3%, Australia down 4.2%, South Korea down 6.1%, India down 3.4%). Disappointing economic news weighted on Japan. Banks in South Korea fell as the won weakened and the government said the country’s growth would be less than expected. Carmakers fell after Fitch Ratings cut their debt ratings to junk. HSBC Holdings (5.HK) continued to fall, on worries it will cut its dividend and raise capital. European markets are down 1% and barely reacted to the 50 basis point rate cut by the ECB. Financial stocks are leading the decline in Europe.

Impact Research Calls/Market Moving News:

JPM (25.91): JPM reports EPS of 7 cents vs. consensus of 1 cent. Write-downs were 2.9 billion vs. street expectations of 2.5B. Investment banking was much weaker than expected due to bigger leveraged loan losses (1.8B – street looking at 1.0B). The investment bank’s mortgage exposure at the end of Q4 was 14.7 billion vs. 18.6B at Q3. Equity revenues were negative 94 million. JPM also increased credit card service loss expectations to 7% in Q109 and 8% +/- at year-end 2009. Street was looking at 6% at Q1 and 7% at year-end. The provision for credit card losses is 4 billion up 122% and the delinquency rate rose 106 basis points to 4.97% vs. 2.91% in the prior quarter. On the positive side, actual charge offs in Q4 were not as bad as some had expected: Home Equity (770m vs. street at 725m-850m), Subprime (319m vs. street at 375-425m), and Prime (195M vs. street at 300m). But, JPM said they expect home equity losses to approach 1 billion over the next several quarters vs. Q4 losses of 770 million. Prime mortgage losses are expected to approach 400 million over the next several quarters vs. 195 million in Q4. Subprime is expected to be in-line with prior estimates. Also, total deposits are 339.8 billion (126.3B attributed to WaMu) with a deposit margin of 2.94% up from 2.67% a year ago. All in all, the report is a mixed bag versus expectations. Tough to call how the stock will react to this news given that the both the bulls and bears have some ammunition to support their view.

JPM (25.91): JPMorgan CEO Jamie Dimon says worst of economic crisis still to come – FT: In an interview with the paper, Dimon notes that consumer loans and credit card trends continue to worsen. While the bank is prepared for the expected deterioration in consumer-oriented businesses, Dimon concedes that it will be forced to cut costs again if conditions become worse than expected. Dimon goes on to note that it is clear that some of the markets for highly leveraged lending and securitization will never come back.

BAC (10.20): US negotiating extending more aid to Bank of America – WSJ: Any potential deal could protect Bank of America from additional losses on Merrill's bad assets, with a cap on the amount BAC would have to take and the government absorbing the remainder, according to a source close to the situation. It is not known exactly how much Merrill lost during Q4. The talks between BAC and the government were driven by Treasury Secretary Paulson, who was concerned that without help the deal wouldn't have been completed, and the deal did close on 1-Jan with the understanding that the bank and Treasury would complete a deal. The terms of the deal are still being finalized and details are expected to be provided when BAC reports Q4 on 20-Jan.

AAPL (85.33): Apple's Jobs to take medical leave of absence until the end of Jun: The entire text of the letter sent to employees: "I am sure all of you saw my letter last week sharing something very personal with the Apple community. Unfortunately, the curiosity over my personal health continues to be a distraction not only for me and my family, but everyone else at Apple as well. In addition, during the past week I have learned that my health-related issues are more complex than I originally thought. In order to take myself out of the limelight and focus on my health, and to allow everyone at Apple to focus on delivering extraordinary products, I have decided to take a medical leave of absence until the end of June. I have asked Tim Cook to be responsible for Apple's day to day operations, and I know he and the rest of the executive management team will do a great job. As CEO, I plan to remain involved in major strategic decisions while I am out. Our board fully supports this plan. I look forward to seeing all of you this summer."

AAPL (85.33): FTN Midwest and RBC Capital downgrade the shares following the news that Steve Jobs is taking a medical leave of absence.

AAPL (85.33): Apple maintained outperform at Oppenheimer after Jobs' announcement: The shares remain rated outperform, however the firm reduces the price target to $120 from $135. Oppenheimer cites AAPL's valuation, the fact that the news on Jobs is out, and significant new product introductions that are likely still on tap for 1H09. Oppenheimer doesn't expect Jobs' leave to have a significant impact on AAPL's performance in 2009, since products slated for release this year must already be substantially complete. However, the firm notes that an extended period of muddled executive leadership would almost surely impact product releases in 2010 and beyond.

AAPL (85.33): Chunghwa Telecom says iPhone sales are worse than expected - Dow Jones: A CHT executive says sales are off by double digits. He says the company's targets were based on year-ago figures that are now unrealistic, given the economy. The company sold more than 2.2M handsets last year and aims to at least maintain that number this year.

DB (28.98): Deutsche Bank needs to raise capital – WSJ: In a "Heard on the Street" column, the Journal notes that shares of Deutsche Bank have fallen by two-thirds since September, suggesting that investors are skeptical about the firm's reluctance to raise additional capital. According to the article, such skepticism may be a function of concerns that losses are being incurred beyond risky areas such as leveraged lending and commercial property. The Journal also discusses the fact that while Deutsche has less exposure than rivals to consumer and corporate loans, it does have a ballooning stock of assets that are no longer marked to market.

C (4.53): Government needs to choose a plan to save Citi without killing other bank stocks – WSJ: A "Heard on the Street" column notes that finding an idea that does so without having the politically damaging quality of looking like a taxpayer giveaway may be even harder with Bank of America (BAC) set to receive more billions. If the government injects the $35B of common stock Citi needs to bring its leverage down to JPMorgan Chase's level, it will end up controlling the bank, and the market will start to assume the same step will be taken for other big banks. The column says Citi should use tomorrow's results announcement to explain which assets are covered by the government loss-sharing agreement, because investors will be heartened if it applies to almost anything. BAC is expected to receive a similar agreement, which will need to find a balance between being overly generous and therefore politically dangerous and under-generous and therefore just another stopgap.

C (4.53): Investors wonder if Citi is looking to sell things to buyers with no means to pay – NYT: An analyst notes that not many institutions might want to buy Citi's $600B worth of unprofitable businesses and troublesome assets, and those that do are unlikely to want to pay a lot. Citi insiders say there are no plans to seek additional capital from the government, though the article notes that without buyers, such a move might be necessary.

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