February 10, 2009: Morning Call

February 10, 2009: Morning Call

Fair Value: SP500 – 867.88; NDX: 1281.72; DOW: 8242.44

Technical Levels:


SPX: 752-755, 800, 816, 848 support/ 874, 899-908 resistance

Events:

Pre-market EPS: DTV (.34/5.34B); HCP (.55/291.3M); ICE (.83/209.9M); MDC(-1.40/370.9M); Q (.10/3.31B); UBS (-.64/2.87B); TRA (1.09/544.0M)
08:30: ICE earnings call
09:00: Fed’s Dudley speaks about inflation
09:20: MOS presents at the Goldman Sachs Ag Forum
10:00: Wholesale Inventories (Dec): -0.7%
10:00: IBD/TIPP Economic Optimism (Feb): 44.0
10:00: Treasury Secretary Geithner testifies on TARP to Senate Banking Panel
11:00: Treasury Secretary Geithner speaks on Financial Rescue Package
10:30: GE presents at Barclays Industrial Select Conference
10:50: POT presents at Goldman Sachs Ag Forum
11:30: INTC Business Update Call
12:00: Geithner interview on CNBC
12:30: V presents at CLSA Asia Investors Forum
13:00: Fed Chairman Bernanke testifies on Fed programs at House panel
13:30: MA presents at CLSA Asia Investors Forum
13:55: MTW presents at Barclay’s Industrial Select Conference
14:30: MON presents at the Goldman Sachs Ag Forum
15:00: TRA earnings call
16:30: TXN presents at Thomas Weisel Tech Partners
16:30: AMAT earnings call
16:30: API Crude Oil and Gasoline Inventories
17:00: ABC Consumer Confidence
Post-market EPS: AMAT (.00/1.36B); CBG (.27/1.40B); CF (2.34/892.4M); CSC(1.02/4.14B); CHH (.37/143.6M); NVDA (-.11/489.1M); XL (.52/1.16B)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 6 points below fair value while the NASDAQ futures are trading 8 points below fair value as investors await the details of the financial rescue plan. Last night, equity futures moved 13 points lower right before President Obama’s 8pm press conference. Futures are recovering off the lows on several news leaks about the rescue plan. But, I would expect that the Geithner speech at 11am will be short on details and will focus more on the “big picture.” I would not expect any details on how the rescue plan will be specifically implemented. Clearly, the goal is to create incentives for private capital to come off the sidelines through attractive financing and government stop-loss protection. The key question that will remain going forward is how the price discovery mechanism is going to work? Will the highly distressed banks be forced to liquidate if they fail the government “uniform stress test? If the answer is yes, then the rescue package could work because a “liquidation event” would likely be a catalyst for establishing a floor on the toxic assets. Of course, a government-sponsored liquidation of banks that fail the stress test would likely trigger serious short-term selling pressure because the stakeholders (equity and debt holders) would be wiped out. In this scenario, the S&P could break the November 20 lows. But, I would expect private institutional investors and sovereign wealth funds to come off the sidelines in a liquidation event. Private capital is extremely fearful of a zombie financial sector because it will be more difficult to establish a floor on the toxic assets if institutions that should be liquidated are kept alive on the taxpayer’s dime. Establishing price discovery without inflicting pain on the stakeholders of the deeply troubled institutions will be impossible. The key question investors should ask themselves is which institutions are likely to fail the “uniform stress test?”

Impact Research Calls/Market Moving News:

Banks will have to undergo "stress test" if they want additional capital from government – WSJ: Citing people familiar with the matter, the Journal reports that many US banks will be subject to rigorous stress tests to determine if they are healthy enough to lend before receiving additional federal bailout funds. The stress tests will be part of the revised banking rescue plan to be announced on Tuesday. The Journal also points out that the Obama administration plans to invest between $100B and $200B more into banks. According to the article, federal regulators are expected to require large banks to undergo a stress test to determine what they would look like under the "worst case scenario" in two years. Smaller institutions will be able to voluntarily go through the test. The paper also points out that in addition to the capital injections, the rescue fund will spend $100B to help the Fed expand the TALF and $50B to help homeowners. The Treasury is also expected to commit a small portion of the bailout funds to facilitate a public/private partnership to purchase toxic assets.

Geithner Said to Have Prevailed on the Bailout- NYT: The New York Times article mostly addresses the debate inside the Obama administration as they crafted the financial rescue plan. The most important part of the article is at the end when they discuss how the plan is going to attract private institutional investors: “For private institutional investors, the question of whether to invest alongside the government will depend on what kinds of carrots and sticks Treasury officials offer. Managers of hedge funds and private equity funds are closely watching to see how much the government pushes banks to write down the value of troubled mortgages and mortgage-backed securities they want to sell. There is no market value for most of those troubled assets because they are not trading. Investors want to buy them at the lowest price possible, but banks want to avoid selling them at rock-bottom prices and realizing huge losses. The impasse is particularly serious for whole mortgages, which are loans that banks have kept on their own books instead of selling them to Wall Street firms, which bundle them into pools and resell them as mortgage-backed securities. Under current accounting rules, financial institutions have already been required to write down the value of mortgage-backed securities to reflect their current market value. But banks do not have to write down the value of whole mortgages if the borrowers are still current, and many regional banks collectively hold vast numbers of those loans. Under the category of sticks, private investment managers are closely watching how the Treasury rolls out its “uniform stress test” for grading the health of banks. If the government takes a tougher line with more banks, it could force them to sell off more of their loans and take their lumps sooner rather than later.”

TALF could be increased from original $200B to between $500B and $1T - Dow Jones: Dow Jones cites comments from two congressional staff members following briefings by the Treasury. According to the article, Treasury employees did not suggest the administration would have to ask Congress for funds beyond the second $350B they already have available (CNBC had a similar report earlier this evening). As has also been hinted at in earlier reports, Dow Jones says that the plan to deal with illiquid assets on the balance sheets of banks would likely combine low-interest financing provided by the Fed with some form of guarantee on assets provided by the FDIC. The program will initially be between $250B and $500B, but could expand to as much as $1T. As was the case with the TALF expansion, Dow Jones says that the Treasury did not explain how much of the TARP funds would be used for the program.

WSJ discusses constraints surrounding public/private partnership for purchases of toxic assets: In a "Heard on the Street" column, the Journal notes that public/private partnerships in banking do not have a great history. The paper adds that a lot depends on how such partnerships are structured going forward. According to the article, investors may balk at participating in an aggregator bank that only allows them to take minority equity stakes in an entity they can't control. The paper also points out that private sector participation does not guarantee improved transparency given that pricing will likely be determined by the amount of loss-sharing offered by the government, as well as the cost of funding. The article goes on to discuss some of the additional complications surrounding the way different assets are valued on bank balance sheets.

Corporate debt market thawing for highest-rated issuers – WSJ: Citing research from Dealogic, the Journal notes that since the beginning of the year, US companies have sold $78.3B of investment-grade corporate bonds that are not guaranteed through a government program, up significantly from Q4 when companies sold on average $21B of non-government-backed debt a month. The article largely focuses on Cisco's $4B, 10-year note offering, which was sold on Monday at two percentage points above comparable Treasuries for a yield of 4.979%, while a 30-year tranche sold for 5.916%. The Journal notes that back on 2-Dec, H-P (HPQ) had to pay roughly 4.6 percentage points over Treasuries to borrow $2B for five years.

TRA (23.23): Terra Industries reports Q4 EPS $1.65 vs Reuters $1.09: Company reports revenues of $683.5M vs a single estimate of $544.0M.

ICE (62.26): IntercontinentalExchange reports Q4 adjusted EPS $0.82 vs Reuters $0.83: Company reports revenues of $207.3M vs Reuters $209.9M.

FT discusses record bullion sales: The FT reports that the US mint sold 92K ounces of its popular American Eagle coin last month, nearly 4x the amount sold a year ago, and more than it shipped during the entire first half of 2007. The paper also notes that inflows into gold-backed ETFs surged in January, boosting their holdings to a record high of 1,317 tons. According to Barclays Capital, last month's inflows of 105 tons were above September's previous high of 104 tons, and absorbed roughly half the world's gold mine output for January.