January 21, 2009: Morning Call

January 21, 2009: Morning Call

Fair Value: SP500 – 802.21; NDX: 1136.28; DOW: 7909.48

Technical Levels:


SPX: 752-755, 800 support/816-820, 852, 899-908 resistance

Events:
Pre-market EPS: APD (.97/2.2B); ATI (.89/1.1B); BLK (1.20/1.1B); CNI (1.77/4.4B); COH(.67/958.8M); FCX (-.92/3.0B); UAUA (-3.99/4.5B); UTX (1.22/14.8B); PGR(.35/3.1B); USB (.22/3.7B); NTRS (.94/977.04M)
04:30: Bank of England releases Minutes from Interest Rate Decision
04:45: BOE’s Tucker to testify to UK Treasury Committee
07:00: MBA Mortgage Applications
09:00: GM Q4 2008 Vehicle Sales Conference Call
09:00: USB earnings call
09:00: BLK earnings call
10:00: Treasury nominee Geithner’s Senate Confirmation Hearing
12:00: NTRS earnings call
13:00: NAHB Housing Market Index (January): 9
17:00: AAPL earnings call
Post-market EPS: AAPL (1.39/9.7B); BNI (1.75/4.4B); DOX (.55/792.9M); CNH (.69/4.7B); EBAY (.40/2.1B); FFIV(.40/166.3M); NE (1.48/917.8M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 9 points above fair value while the NASDAQ futures are trading 13 points above fair value at 7:30am ET. Futures are seeing a modest bounce back following the worst inauguration day performance in the Dow Industrials history. Asian markets closed lower (Japan down 2.04%, Hong Kong down 2.9%, India down 3.5%) following the sharp declines on Wall Street. BHP Billiton (BHP.AU) and Rio Tinto (RIO.AU) fell in Australia after saying they would close operations and cut production and David Jones (DJS.AU) dropped after cutting guidance. Hanjin Heavy Industries & Construction (097230.KS) plunged on profit worries. Hong Kong shares fell on profit warnings from China Life Insurance (2628.HK) and Angang Steel (347.HK) whilst HSBC Holdings (5.HK) continued to decline on worries it will need to raise capital. European markets are down 1.5% due to weakness in financial (down 2.5%) and energy stocks (down 2.9%). Societe Generale (GLE.FP) is trading up after saying it'll accept the second tranche of French government aid and sees 2008 net profit approx. €2B. Hypo Real Estate (HRX.GR) got an additional €12B in German Financial Markets Stabilization Fund guarantees. Most major global markets are now down approximately 10% YTD.

Impact Research Calls/Market Moving News:

WSJ Page One article examines the plunge in financial stocks: “Shares of the biggest names in American banking plunged Tuesday as some investors feared that the government would need to nationalize the most deeply wounded financial institutions, wiping out stockholders. The hours-old administration of President Barack Obama is expected to move swiftly to try to stabilize the financial system by pumping more capital into weakened banks and buying bad assets. Nationalization appears to be a last resort, but other options on the table move the U.S. in that direction. In one idea under consideration, the government could buy convertible securities from financial institutions, an approach that could ultimately leave the government owning large chunks of many firms' common shares. Obama administration officials are sorting through a menu of options as they prepare efforts to clean up bank balance sheets and put them in a better position to lend. Discussions have also advanced on creating a government-backed institution that would buy and hold banks' bad assets, as well as a plan to provide government guarantees on bank holdings. Analysts say that until the Obama plan is unveiled, investors appear to be bracing for the worst-case scenario. Among other plans under consideration, government officials are weighing the option of buying securities that pay interest like bonds but can be converted into common stock. Such "convertible" securities, typically issued by companies struggling to raise capital, often leave the buyer owning a big chunk of the company. When the securities are converted to common shares, other common stockholders' shares are diluted, cutting the value of the banks' shares. Current share prices appear to reflect that low value. Federal Reserve officials have proposed that the U.S. consider tying together public equity injections with private investments. That would ensure that the government doesn't take the dominant stake in the financial institutions it supports. It would also provide a way to sort out healthy banks from unhealthy ones, because only healthy banks would be able to raise private capital.”

President Obama has no quick fix for banking system – NYT: Timothy Geithner is not expected to have a detailed plan ready to present at his confirmation hearing tomorrow. Advisors say they are studiously going through a range of solutions and analyzing their respective risks and benefits. The various options have varying degrees of transparency about costs to taxpayers and whether banks will be required to reveal the size of their likely losses. (The article outlines three options being considered.) Help for banks are expected to be tied in with Obama's goal to provide up to $100B to reduce home foreclosures. Officials have made a primary goal of not repeating Hank Paulson's course of selling Congress on one strategy and shifting to a different one before the first was even tried.

AAPL (78.20): SEC reviewing Apple's disclosures about Steve Jobs's health – Bloomberg: A person familiar with the matter says the review does not mean investigators think investors were misled.

IBM (81.98): IBM reports Q4 EPS $3.28 vs Reuters $3.03: Company reports revenues of $27.01B vs Reuters $28.11B. Guides f09 EPS to at least $9.20 vs Reuters $8.77; First Call $8.75. IBM reports Q4 signed services contracts $15.6B, adjusted for currency: StreetAccount consensus is $13.1B. Signings were $17.2B at actual rates. Backlog at quarter end was $117B compared to $114B in Q3. Revenue and gross margin by business segment: Technology Services: revenue $9.623B vs SA $10.14B and gross margin 34.9% vs year-ago 30.1%. Business Services: revenue $4.709B vs SA $4.98B and gross margin 28.7% vs year-ago 23.1%. Systems and Technology: revenue $5.425B vs SA $5.80B and gross margin 39.9% vs year-ago 45.7%. Software: revenue $6.420B vs SA $6.44B and gross margin 87.7% vs year-ago 87.1%. Finance: revenue $660M vs SA $654M and gross margin 50.0% vs year-ago 45.5%.

BK (19.00): Bank of New York Mellon reports Q4 EPS $0.05; Reuters consensus $0.70: Company reports revenues of $2.90B, which includes pre-tax writedown charge of $1.24B. Unclear if comparable to Reuters estimate of $3.81B. Assets under management were $928B at quarter end, (17%) y/y Net asset inflows in Q4 totaled $5B but were more than offset by lower market values and the impact of a stronger U.S. dollar. Assets under custody and administration amounted to $20.2T, (13%) y/y

INTC (12.86): Intel CEO says in internal memo that Q1 may be a loss, "too close to call" – Bloomberg: CEO Paul Otellini reportedly said in the memo that the company is only filling selective vacant job positions, and says things are not going to be rosy for six months.

GE (12.93): UBS places Short-Term Sell rating on General Electric: Target lowered to $12 from $18. Firm believes GECS reserves are too low and sees credit losses exceeding guidance. UBS thinks the company's AAA rating is risk and that it might have to cut its dividend or raise additional capital. Estimates are lowered. Firm maintains 12-month neutral rating.

STT (14.89): Ladenburg Thalmann analyst Dick Bove says State Street has become a compelling takeover target: Bove lowers his F09 EPS estimate to $3.30 from $4.46, while taking his F10 estimate to $2.94 from $5.08 and cutting his price target to $25 from $50. However, he argues that the stock is a compelling acquisition target as the arguments concerning its earnings are not related to its cash flows, while its market capitalization is 1/3 less than its projected revenue for 2009 and only about 10% of the company's liquidity. Bove contends that Bank of New York Mellon (BK) should by State Street immediately in a deal that would see significant synergies.

Housing downturn expected to worsen – WSJ: Citing a consensus of building-industry economists, the Journal notes that the US housing downturn is expected to deepen further this year, with no broad recovery seen until at least 2010. The paper adds that according to the economic outlook of the National Association of Home Builders released Tuesday, single family housing starts, which fell 40% to 617K in 2007, are expected to drop to roughly 441K this year, the lowest since records have been maintained. The article notes particular concerns about the huge overhang of unsold homes, which now stands at 11.5 months, as well as tighter lending standards, which are likely to prevent many consumers from taking advantage of declining housing prices and mortgage rates.

WFR (13.43): MEMC Electronic Materials downgraded to hold from buy at Citi: Price target decreased to $15 from $30. The firm sees risk to pricing for WFR's largest solar contracts and believes it is less certain that WFR can make f09 consensus EPS estimates.