Friday, January 16, 2009

January 16, 2009: Morning Call

January 16, 2009: Morning Call

Fair Value: SP500 – 840.60; NDX: 1183.57; DOW: 8171.54

Technical Levels:

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


Pre-market EPS: FHN (-.30/471.6M); PPG (.40/3.29B); SNE (.43/30.05B)
08:30: US Consumer Price Index (Dec): -0.9% MoM; Ex-Food/Energy: 0.1%
08:30: US Consumer Price Index (Dec): -0.1% YoY; Ex-Food/Energy: 1.9% YoY
09:00: Net Long-term Foreign Purchase of US Assets
09:15: Industrial Production (December): -0.8%; Capacity Utilization: 74.7%
12:15: Fed’s Lacker speaks on the economic outlook

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are 15 points above fair value while the NASDAQ futures are 13 points above fair value at 7:30am ET. Futures moved up overnight after the Senate voted to release the second half of the TARP assets (350 billion) and strength in foreign markets. The US Treasury agreed to invest 20 billion more in BAC and to guarantee 118 billion of assets to help Bank of America absorb the Merrill Lynch deal. Citibank confirmed that the company is going to spin off its “non-core” businesses (CitiFinancial, Premerica, brokerage, retail assets management, and a “special asset pool” consisting of the assets the US government agreed in November to guarantee). Effectively, Citibank is being split into a good bank (branch banking, corporate lending, securities underwriting, transaction processing and private banking) and a bad bank. Asian markets closed higher on news that the Democrats are circulating an 825 billion dollar stimulus package and the Senate vote to release the second half of the TARP funds (Japan up 2.5%, Shanghai up 1.8%, Hong Kong flat, India up 3.0%). European markets are up between 2.5%-3.0% helped by the late turnaround in Thursday’s US trading and short covering on the bailout news. Mining and Energy shares were amongst the leading groups though energy shares trimmed gains as the oil price reacted negatively to the IEA's cut in its outlook for oil demand. Mining and Energy shares were amongst the leading groups though energy shares trimmed gains as the oil price reacted negatively to the IEA's cut in its outlook for oil demand.

Impact Research Calls/Market Moving News:

C (3.83): Citi confirms it will realign into two businesses: Citicorp and Citi Holdings: The moves confirm numerous media reports of such a split. Citi CEO Vikram Pandit said, “Given the economic and market environment, we have decided to accelerate the implementation of our strategy to focus on our core businesses. This will help in our ongoing efforts to reduce our balance sheet and simplify our organization, which will enable us to better serve our clients and customers in both businesses without disruption. In light of the opportunities we see in the market today, we believe this new structure will provide a wide range of options going forward to continue strengthening our core franchise.

BAC (8.32): US to invest $20B in Bank of America from TARP: The government will backstop a $118B asset pool for the bank, excluding foreign assets, assets originated on or after 14-Mar-2008, and equity securities. The pool has cash assets with a current book value of $37B and a derivatives portfolio with maximum potential future losses of $81B. The guarantee is in place for 10 years for residential assets and 5 years for non-residential ones. The bank can terminate the guarantee at any time, but would then need to prepay any outstanding Federal Reserve loan in full. Bank of America will absorb the first $10B of eligible losses; the government will cover 90% of the losses beyond that. BAC will issue the government $4B of preferred stock with an 8% dividend and warrants with an aggregate exercise value of 10% of the total amount of preferred issued. BAC is prohibited from paying common stock dividends of more than $0.01 per share per quarter for three years. BAC had to submit an executive compensation plan, including bonuses, "with appropriate limitations" to be approved by the government by yesterday.

C (3.83): BAC (8.32): Unintentional nationalization may be pending for US banks. New York Times article hints at a “shadow nationalization” of banks- NYT: Losses, particularly for Citi (C), have become so large that it will be almost mathematically impossible for the government to inject enough capital to save large banks without taking a majority stake or at least squeezing out existing shareholders. Recall that Fed Chairman Ben Bernanke warned earlier this week the government has no choice but to put more money into banks. Analysts say TARP gives too many ways for real problems at banks to be concealed from shareholders and taxpayers. (article link here:

BAC (8.32): Bank of America reports Q4 EPS ($0.48), unclear if comparable to Reuters $0.21: Company reports revenues of $15.68B vs Reuters $20.59B. Merrill Lynch preliminary results indicate a Q4 net loss of $15.31B, or ($9.62) per diluted share. Provision for credit losses was $8.54B from $6.45B in Q3. Net charge-offs were $5.54B, or 2.36% of total average loans and leases compared with $4.36B and 1.84% in Q3. Nonperforming assets totaled $18.23B, or 1.96% of total loans compared with $13.58B and 1.42% in Q3. Allowance for loan and lease losses was $23.07B, or 2.49% of loans and leases measured at historical cost compared with $20.35B and 2.17% in Q3. Bank of America provides preliminary Q4 results for Merrill Lynch: As noted previously, Merrill's Q4 loss of $15.31B was not included in BAC's results. The company says that included in the Merrill results were the following: Credit valuation adjustments related to monoline financial guarantor exposures of $3.22B Goodwill impairments of $2.31B. Leveraged loan writedowns of $1.92B. Writedowns of $1.16B in the U.S. Bank Investment Securities Portfolio. Commercial real estate writedowns of $1.13B

FDIC may extend the loan-guarantee program for banks to 10 years - BloombergThe current bank loan-guarantee program is up to 3 years

TRA (16.29); CF (47.23): CF Industries (CF) offers to acquire Terra Industries for $2.1B: Under the terms of the deal, each common share of Terra would be entitled to receive 0.4235 shares of CF Industries. The proposal represents a premium of 34% based on the 30-day volume weighted average prices for the shares of the two companies, and a 29% premium based on the 10-day volume weighted average. The proposal also represents a 23% premium over the closing price of Terra shares on 15-Jan. On a pro-forma basis, the combined company will be the largest nitrogen producer in the world among publicly traded companies as measured by production capacity. The transaction is expected to generate more than $100M in annual cost synergies from reducing SG&A by combining overlapping corporate functions and optimizing transportation and distribution systems to improve efficiencies and reduce costs, and through greater economies of scale in procurement and purchasing. CF Industries expects the combined entity to realize these synergies within two years after the closing of the transaction. The transaction is expected to be accretive to current CF Industries stockholders in the second year following the close. The proposed transaction is subject to the negotiation of a definitive merger agreement; stockholder approvals from both companies; and the approvals. However, the deal is not subject to any financing contingency. Of interest, CF Industries notes that it was first approached by Terra about a deal several years ago.

INTC (13.29): Intel says Q1 gross margin currently expected to be trough - conf. call: While noting that their visibility is extremely limited, management says that even without a snapback in demand, they believe that the low 40s target for Q1 could be a trough. They are planning to take internal inventories down materially during the quarter and believe that will be a benefit over the remainder of the year even without a substantial pick-up in sales; they go on to note that gross margin should be at a relatively healthy level in the 2H. Regarding channel inventories, they believe that supplies fell dramatically during the fourth quarter and are probably a little low even in this environment. They expect the worldwide supply chain to continue to be aggressive about inventories and are anticipating a decline similar to that seen in Q4; they believe this trend will begin to slow and improve in the second quarter. In response to analyst question on slowing notebook trends, management says that they believe there has been very little cannibalization from net books

INTC (13.29): Intel target reduce to $12 from $14 at Goldman Sachs: The firm continues to rate the stock neutral, noting it is expensive, and would prefer Analog (ADI) and SanDisk (SNDK) in semis and Applied (AMAT) and Lam Research (LRCX) in the semi-equipment sector.

DELL (10.54); HPQ (35.75): UBS sees downside risk to consensus at Dell (DELL) and Hewlett-Packard (HPQ): Firm sees downside risks to consensus estimates following Intel's (INTC) quarter results, and expects shares to remain largely range-bound until visibility starts to improve.

MSFT (19.24): Microsoft maintained outperform at Oppenheimer ahead of earnings: Target is $22. The firm says MSFT is their top large-cap pick. Oppenheimer says a PC market slowdown is priced into the shares and says the Server & Tools and Business Productivity businesses should hold up relatively well in coming quarters due to annuity agreements and new products. The firm also notes the likelihood of expense reductions

Paul Volcker unveils plan to aggressively rethink global financial system - Washington Post: A report by the Group of 30 recommends measures that include limiting the size of banks, monitoring executive pay, and regulating hedge funds. Noting that Volcker, the lead author of the report, is a top economic adviser to the administration, the article suggests Barack Obama is likely to push for similar change. Volcker says that by keeping banks small, the failure of any one will not have systematic importance.

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