January 20, 2009: Morning Call

January 20, 2009: Morning Call

Fair Value: SP500 – 846.94; NDX: 1198.14; DOW: 8239.86

Technical Levels:


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

Events:

Pre-market EPS: FAST (.41/552.8M); JEF (-2.27/199.1M); JNJ (.92/15.9B); PH(.84/2.6B); STT (1.14/2.4B); SU (.32/7.04B); AMTD (.31/618.8M); RF(-.08/1.6B); PCP(1.70/1.7B)
05:00: Euro-zone ZEW Economic Survey
08:00: President Obama Inauguration
08:30: JNJ earnings call
09:30: STT earnings call
12:00: President Obama sworn into office/Inaugural Speech
15:20: BOE’s King to Make speech in the UK
16:30: IBM earnings call
17:00: ABC Consumer Confidence
Post-market EPS: CSX (.89/2.6B); IBM (3.03/28.2B)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are 8.50 points below fair value while the NASDAQ futures are 12 points below fair value at 8:00am ET. European markets fell 1.0 to 1.5% during the Martin Luther King holiday after RBS reported a staggering quarterly loss and the UK government announced that it will spend an additional 142 billion to support financial institutions. The new 142 billion dollar UK bailout is the latest attempt to stabilize the UK financial sector following October’s 50-billion bank recapitalization program. Institutions that want to participate in the second UK bailout must agree to “have specific and quantified lending commitments that will be binding and externally audited.” The Euro and British Pound are sharply lower against the dollar and yen on concerns that the recession is deepening. Asian markets fell, led by banking stocks hit by renewed concerns about the financial sector. Techs dropped in South Korea, Taiwan, and Japan (Japan down 2.3%, Australia down 3.1%, Hong Kong down 2.8%, Shanghai up 0.60%, India down 2.4%).


Impact Research Calls/Market Moving News:

RBS (10.85): RBS shares are down almost 70% after the company reported a full year loss of nearly 12 billion dollars with an additional charge of between 15 to 20 billion pounds in goodwill linked to previous acquisitions. In exchange for government guarantees, RBS will sign a binding agreement with the UK Treasury on how much it will lend and on what terms. Auditors will examine the bank to make sure it is following government directive.

STT (36.35): STT shares are down 30% after reporting earnings of 15 cents versus consensus of 1.14 (unclear if this is comparable as the press release is confusing). STT also sees 2009 operating earnings and revenue below long-term targets.

Losses from the credit crisis may reach 3.6 trillion – Bloomberg, citing Nouriel Roubini. Roubini was quoted in Dubai overnight, “I’ve found that credit losses could peak at a level of 3.6 trillion for US institutions, half of them by banks and broker dealers. If that’s true, it means the US banking system is effectively insolvent because it starts with a capital of 1.4 trillion. This is a systemic banking crisis.”

US prepares next steps to address banking crisis – WSJ: Some headlines regarding US plans were reported Friday night. The WSJ reports that officials from the Treasury, Fed, FDIC, and incoming Obama Administration have been considering two options: a "bad bank" established by the government to acquire troubled bank assets or an extension of the loss-insuring plan used recently with Citi and BofA. The bad bank approach has the advantage of being capable of addressing the problem on a universal rather than ad hoc basis, with the disadvantage of having to price the assets acquired by the bad bank (too high and the government overpays, too low and banks must write down more assets). The loss-insurance approach avoids the pricing issue, but could be more of an ad hoc approach. . As noted previously, the UK is reportedly favoring the loss-insurance approach. The WSJ also reports that policymakers are considering an expansion of an existing Fed program by encouraging investors to buy newly issued, high-rated securities backed by consumer loans, and could also expand it by agreeing to guarantee other kinds of securities, including CMBS, or by purchasing lower-rated or previously issued securities.

C (3.50): Citi maintained underperform at Oppenheimer: Analyst, Meredith Whitney says that C's core problem is that it doesn't make money in any of its businesses except Smith Barney, which it is in the process of selling. Whitney notes that she fails to appreciate how the strategy of splitting the company into"core" and "non-core" will alter C's fundamental funding needs or that the bank will continue to lose money into 2010. Oppenheimer reduces estimates due to deteriorating credit and worsening economic outlook. with FY09E moving to ($4.00) (vs. consensus ($0.33)). Oppenheimer's FY2010E goes to a loss of ($2.15) (vs. consensus of +$1.14).

PH (39.77): PH guides full year EPS to between 3.85-4.25 vs. consensus of 4.45.

AAPL (82.33): Barron's Plugged In says Apple and Steve Jobs have a credibility problem: The company and its directors have a very poor record when it comes to transparency. They allowed questionable stock-option practices. They also kept Jobs' cancer diagnosis secret for about 9 months. One analyst says that the board either did not ask the questions it should have asked or they did ask those questions but kept the answers to themselves. Even now there is the suspicion that shareholders are not getting the complete story. It is time for the board to articulate a succession program and for full disclosure from the company because Steve Jobs is still an iconic manager. It is time to end the many layers of speculation surrounding the company.

AAPL (82.33): WSJ says that Apple is on sale: A 'Heard on the Street' column says that Apple had already lost its Steve Jobs premium before the announcement of his medical leave. On some measures the company is valued below HPQ and DELL. Even assuming that Mr. Jobs does not come back, the company should still trade at a premium given its unbeatable brand and diversified product lineup. Right now, Apple looks like a bargain.

INTC (13.74): Intel cuts prices of some processors up to 48% - Bloomberg: The company keeps the prices of its three most expensive desktop chips the same. Intel says the price cuts are not a reaction to AMD (AMD)'s new chips that retail for half the price of comparable Intel products.

WFR (14.76): MEMC Electronic Materials downgraded to neutral from buy at UBS: The firm also adds a short-term sell rating. Price target decreased to $14.50 from $20. UBS sees 2009 wafer sales to be much worse than expected.

Treasury asking biggest TARP recipients to show how they are using the money – Bloomberg: Documents the newswire obtained show that Neel Kashkari, who administers the Troubled Asset Relief Program, wrote to Citi (C), Bank of America (BAC), and 18 others 16-Jan seeking figures on business and consumer loans, as well as details on purchases of mortgage- and asset-backed securities. The article does not say how exactly the data will be used, other than to give a basis for a quarterly comparison between banks that got aided and banks that didn't.

Barron’s: Cover: Barron's argues for a smaller stimulus program primarily focused on an elimination of the payroll tax on the first $8K of earnings. Roundtable Part II: Thoughts and ideas from Bill Gross, Felix Zulauf, Archie MacAllaster and Abby Cohen. Lead Articles: Barron's considers carbon cap-and-trade possibilities under an Obama administration; Barron's admits the poor performance of its picks last year; KeyCorp (KEY) looks like a survivor long term and the stock could double or possibly triple; Barron's questions if electric grid upgrades will boost stocks, suggests waiting another budget cycle to see if the federal government keeps spending to upgrade equipment; Corporate earnings are likely to remain poor through the first half of the year and only improve in the second half on a relative basis; Cautious on Martin Marietta Materials (MLM) and Vulcan Materials (VMC); Editorial looks back at the successes and failures of the Bush presidency. Columns: The Trader is cautious on financials and truckers, positive on Nuance Communications (NUAN); Euro Trader is cautiously positive on car makers Peugeot-Citroën (12150.FP), Fiat (F.IM) and Porsche Automobil Holding (PAH3.GR) but cautious on Volkswagen (VOW.GR); Asia Trader is cautious on Australia given the practice of fully underwritten dividends at names like ANZ.AU, BBG.AU and WBC.AU, notes the caution of one investor on Geodesic Information Systems (GEOD.IN); Current Yield notes the progress and steps-backward in the credit markets; Commodities Corner says platinum could face a pullback but end the year gaining once more; The Striking Price says volatility is expected to remain high throughout the first half of the year; Follow Up is mixed on Citi (C) and negative on LDK Solar (LDK) and says the TARP program should no longer even pretend to try to make money; Up and Down Wall Street notes the end of the Bush presidency and the pounding the banking sector has taken and that the caution by investors will likely continue for some time to come; Streetwise notes that, contrary to the oft-repeated mantra, banks have actually been increasing lending, market reactions to recent news suggest that we may be past the worst of the crisis and into a more familiar trading pattern based on fundamentals and valuation, speculative names for a loosening of credit terms includes FIG, MCO, MHP and ASH; Technology Trader notes that investors have started to ignore bad news in tech though they may not have much good luck doing so; Plugged In says Apple (AAPL) and Steve Jobs have a credibility problem; Gadget of the Week: Solio Magnesium device battery recharger (solar-capable).