January 5, 2009: Morning Call

January 5, 2009: Morning Call

Fair Value: SP500 – 928.80; NDX: 1265.16; DOW – 8990.47

Technical Levels:

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


Events:

04:30: Euro-zone Sentix Investor Confidence
10:00: Construction Spending (November): -1.3%
13:15: Fed’s Yellen leads panel discussion on sub-prime loan crisis.
14:00: GM US Auto Sales
14:00: SEC and SIPC officials testify on Madoff scam before House
15:30: Chrysler US Auto Sales
Post-Market EPS: MOS (1.52/2.74B)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 5 points below fair value while the NASDAQ futures are trading 10 points below fair value. European markets are up 0.50% but off the highs of the session. Volume is still on the light side in Europe. Telecom, Utilities, Technology and Financial stocks are outperforming while Auto’s, Gold, and Energy sectors are underperforming. Gold is down 20 bucks an ounce on strength in the dollar (dollar is up 2.5% against the Euro to 1.358). Asian markets closed higher (Hong Kong up 3.4%, Japan up 2.0%, Shanghai up 3.6%, India up 3.1%) excluding Australia, which fell 0.72%. The strong close in Friday’s session coupled with optimism about the Obama economic recovery package have contributed to the stronger tone in foreign markets.

Impact Research Calls/Market Moving News:


TLT (116.35); TBT (39.00): Barron's Cover says to get out of Treasuries now, other bonds beckon: Treasuries are offering some of the lowest yields since the 1940s. But prices of longer-term Treasuries could fall sharply if yields rise. Yields on 30-year Treasuries could easily top 4% by the end of the year. One sign of trouble is the resilient price of gold and the dollar has weakened recently. One way to go bearish on the Treasury market is through TBT or PST as well as shorting the TLT. Elsewhere in the bond market, however, things look enticing including municipals, corporate bonds, convertible securities, some mortgage securities and preferred stock. The yield differential between munis and Treasuries is unprecedented. The average junk bond issue trades for less than 60 cents on the dollar. Ways to play the junk market include HYG, FAGIX and many closed-end funds that are trading at double-digit discounts to NAV. Convertible securities from companies like C, CHK, VNO, F and RIG offer a nice combination of yield and equity kickers. For mortgage securities, it is probably better to stick with a mutual fund like TGMNX. If you need the safety of Treasuries, the best bet is probably TIPS through funds like VIPSX or the ETF TIP.

Obama Economic Recovery package will include hundred of billions of dollars worth of tax breaks—Bloomberg: “Obama is asking that tax cuts make up 40 percent of a stimulus package, the people say. The measure may be worth as much as $775 billion, a Democratic aide says, meaning tax cuts may constitute more than $300 billion of the legislation. The plan would attempt to boost consumer demand by spending $140 billion on tax breaks worth $500 for individuals and $1,000 for couples, according to a House Democratic aide. The change would come by altering tax-withholding rules, rather than through a rebate check as with the previous stimulus plan enacted last year, so that workers would see an immediate increase in their take-home pay. For businesses, the aide said, lawmakers will use similar measures they’ve employed in past stimulus bills, such as allowing companies to get refunds for taxes paid in any or all of the past five years by deducting losses they’ve incurred now; those losses can currently only be carried back two years. Congress is also likely to include incentives such as accelerated depreciation to encourage companies to buy equipment now rather than defer such investments. The plan also attempts to combat joblessness by offering companies tax breaks for hiring more workers, the aide said.”

C (7.14): Deutsche Bank analyst Mike Mayo cuts his 2009 and 2010 numbers on Citibank. 2009 estimate is cut to a loss of 1 dollar and the 2010 profit estimate is cut to 75 cents. Citibank 2009 consensus is for a loss of .08 cents and 2010 consensus is a profit of .98 cents.

AAPL ((90.75): Thomas Weisel reiterates their overweight rating and $160 price target. “Macworld will take place in San Francisco from Monday January 5, 2009 to Friday January 9, 2009. Phil Schiller, Sr VP of WW Product Marketing, will deliver the keynote presentation on Tuesday January 6, 2009 at 9AM PT (noon ET). While we do not expect AAPL to introduce a significant new product at Macworld, we do expect insight into the next generation desktop product (iMac). We expect Schiller’s keynote to highlight ongoing successes in each of AAPL’s key product areas (Macs, iPhones and iPods) with a particular focus on the successful ramp of App Store, iTunes and MobileMe as sustainable drivers of AAPL product sales. Importantly, we expect investors to come away from Macworld with increased confidence in AAPL’s long term growth story and specifically in AAPL’s ability to continue to gain market share despite (1) a likely diminished role for Steve Jobs as de-facto Promoter-in-Chief of APPL products and (2)The abolition of Macworld following this year’s event. Based on evidence of strong online sales in the Dec Q (unique traffic up 19% y/y during Dec 1-24, according to comScore) we do not expect AAPL to pre-announce negatively. We expect AAPL to provide evidence of strong, broad-based market share gains during the Dec Q when the company reports F1Q09 results in late January. We are reiterating our Overweight rating and our 12-month price target of $160 which is based on a on a 24x multiple on our FY10 EPS estimate of $6.57 and compares to a 25% EPS CAGR we expect AAPL to deliver from FY08 to FY12.

AAPL (90.75): Barron's The Trader notes all the dry powder, cautiously positive on Apple (AAPL): Column notes the tremendous amount of money parked in money market mutual funds, enough to absorb 42% of the S&P 500's market value. The typical trade of shorting Apple (AAPL) into the January MacWorld conference may not be the move this year given the anxiety over a poor Christmas season and modest expectations for show revelations. More than 30% of the market value is cash and the stock trades for a relatively low 17.7x '09 earnings

AAPL (90.75): Several technology blogs are publishing rumors that Steve Jobs will make an appearance at Mac World in order to quell rumors surrounding his health. There is no official news from AAPL nor do the technology blogs provide any factual information to support the rumor.

AMZN (54.26): Amazon.com upgraded to overweight from neutral at JPMorgan.

HMC (21.81); TM (66.37): December Japan vehicle sales fall for Honda (HMC), Toyota Motor (TM), Nissan (NSANY) – Bloomberg: The Japan Auto Dealers Association reports that Toyota's sales declined (17.8%) y/y to 77,157 vehicles, Honda's dropped (25.3%) y/y to 27,505 vehicles, and Nissan's fell (21.8%) y/y to 26,934 vehicles.

NY Times says commercial real estate may be the next source of trouble for banks:Vacancies in commercial real estate exceed 10% in virtually every major city and the Urban Land Institute sees '09 as the worst for the sector in almost 20 years. Borrowers may have trouble paying mortgages or refinancing as rental income drops. The industry's lobbying group is already at work in Washington seeking help from the government. Many big banks hold billions in securities tied to commercial real estate or invested directly in properties. There may be an even bigger problem among regional banks. The vacancy rate in Chicago could reach 17% in '09.

T (29.42); VZ (34.64): Telecom names, Verizon (VZ) and AT&T (T) downgraded at Bernstein: VZ downgraded to underperform from market perform and target reduced t0 $27 from $32. T downgraded to market perform from outperform and target reduced to $27 from $35. The firm cites strong Q4 outperformance and says the primary risk is to wireless.

Barron's summary
Cover: Get out of Treasuries now, other bonds beckon. Interview: Laszlo Birinyi, founder and president of Birinyi Associates, likes GE, AMZN and HES. Lead Articles: Hedge funds that survive the coming shakeout in the industry will need to be more transparent, use less leverage and show investors that they are properly investigating investment choices; Questar (STR) is a compelling mid-cap play on a natural gas recovery, stock could go into the 50s or higher; Political and other factors will delay any recovery in India for about 15 months or so, if you still need exposure try INFY or IBN; interview with Dilbert creator Scott Adams; Other Voices says new metrics are needed to understand and read the new knowledge economy; Editorial says that policy makers should respond as aggressively to rapidly rising markets as they do to declining markets. Columns: The Trader notes all the dry powder, cautiously positive on Apple (AAPL); Asia Trader is positive on the Chinese independent power producers including HNP, 0991.HK, 1071.HK, 0836.HK and 2380.HK; Euro Trader is positive on European defense names including FNC.IM, BAESY and HO.FP because of attractive valuations and continued high Pentagon spending; Current Yield notes some potential investments in the junk bond sector including issues from electric generation companies and health care including Hospital Corp and CYH as well as select telecoms like CBB and Q and would avoid chemical companies and media companies; Commodities Corner notes the efforts to offer Sharia compliant investment products; The Striking Price notes the potential for volatility in retails shares including SHLD, JWN, RSH and BBY; Follow Up is cautiously positive on DryShips (DRYS) and cautious on Dow Chemical (DOW); Up and Down Wall Street considers the success of Street forecasters; Streetwise notes some variations on Dogs of the Dow that include AA, AIG, BAC, C and GM or DOW, GE, X, COP and NSC; Economic Beat argues that we need to get to the bottom of boom and bust cycles; Technology Trader questions when a recovery will actually come to tech and suggests those companies trading close to their cash levels including AAPL, CSCO and MSFT.