February 18, 2009: Morning Call

February 18, 2009: Morning Call

Fair Value: SP500 – 787.76; NDX: 1187.56; DOW: 7537.48

Technical Levels:


SPX: 745-755 support/800, 848-852, 874, 899-908 resistance

Events:

Pre-market EPS: ACGY (.36/785.6M); ALD (.22/110.6M); CEG (1.21/4.29B); CMCSA (.22/8.63B); DE (.63/4.62B); GT (-.93/4.94B); HST (.47/1.6B); IMA (.59/451.0M); JACK (.52/767.4M); PDC (.40/159.6M)
07:00: MBA Mortgage Applications
08:30: Import Price Index (Jan): -1.5% MoM; -11.8% YoY
08:30: Housing Starts (Jan): 530,000; Building Permits: 525,000
08:30: CMCSA earnings call
09:00: Fed’s Pianalto speaks in Ohio - Topic to be determined
09:00: AMAT analyst day
09:15: Industrial Production (Jan): -1.4%; Capacity Utilization: 72.5%
10:00: DE earnings call
10:30: AGU presents at the Morgan Stanley Basic Materials Conference
12:15: MON presents at Morgan Stanley Basic Materials Conference
12:15: President Obama unveils mortgage foreclosure/housing plan
12:30: Fed’s Bernanke speaks on Fed programs and balance sheet
13:20: Fed’s Evans speaks on the economic outlook
14:00: FOMC Minutes from the January 28 meeting
14:20: MOS presents at the Morgan Stanley Basic Materials Conference
15:10: CF presents at the Morgan Stanley Basic Materials Conference
16:30: API Crude Oil and Gasoline Inventories
17:00: HPQ earnings call
20:00: BIDU earnings call
Post-market EPS: ADI (.16/475.0M); CBS (.26/3.59B); HPQ (.93/31.94B); DBRN (.01/341.5M); KGC (.10/505.8M); PCLN (1.03/377.5M); WFMI (.17/2.48B); BIDU (1.44/130.5M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 2 points above fair value while the NASDAQ futures are 2 points below fair value at 8am ET. European markets have pared their losses to 0.50% from a 1.5% decline at 5am. The modest bounce in Euro-zone markets helped the S&P futures bounce 5 points off the overnight session low (784). Energy and mining shares are amongst the leading decliners in Europe. Decliners on the FTSE 100 lead advancers 3-2. Asian markets closed mixed (Japan down 1.5%; Hong Kong up 0.55%, Australia down 1.48%, Shanghai down 4.6%, India down 0.22%). Hong Kong reversed initial declines after the city’s Chief Executive said the government will do more to address the economy if it sees “major stress” in banking, business, or unemployment. Taiwan edged up led by tech exporters. The continued fall of the won against the dollar hurt shares in South Korea, which dropped 1.8%. Real estate and insurance stocks went down in Japan.

Impact Research Calls/Market Moving News:

WSJ discusses latest details surrounding mortgage relief plan: The Journal reports that the focal point of the plan, which will be unveiled on Wednesday, is making loans more affordable by providing a government subsidy to help mortgage companies modify certain troubled loans. The paper adds that the administration is expected to detail a program that will allow homeowners in a position of negative equity to refinance their mortgages, something that is not currently possible. The GSEs, Fannie and Freddie, are expected to assist borrowers who are still current on their payments but at risk of default. Citing people familiar with the plans, the Journal also notes that in an effort to make loans more affordable, the administration is expected to support a variety of approaches, including lowering interest rates or lengthening the terms of such loans. To determine who qualifies for a more-affordable mortgage, the administration is expected to focus on homeowners' debt-to-income ratio. The plan may also require homeowners to eventually pay back the difference between the original payment and reduced rate. Of particular interest, the article notes that the administration's plan doesn't appear to include reducing the size of homeowners' loans.

Former Fed Chief Alan Greenspan and other Republicans are increasingly focusing on nationalization to help banking crisis – FT: Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism. The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.” The article notes that Lindsay Graham, the Republican senator for South Carolina, said that many of his colleagues, including John McCain, agreed with his view that the nationalization of some banks should "be on the table." In an interview with the paper, Graham said that many Americans have already accepted his argument that the government should stop throwing money into institutions such as Citi and BofA, both of which have market caps below the amount of public funds they have received. According to Graham, “In limited circumstances the Swedish model makes sense for the US." The article notes that even President Obama has recently begun to move towards the Swedish model.

NYT looks at who housing bailout will probably help: The article notes that there are about 3M households that cannot afford their mortgages, and 10M others who are "underwater," meaning they can afford their mortgage payments, but their homes are worth less than they owe. The article says the plan will evidently focus on the first group, which is enormously cheaper than helping the second. But if a large proportion of the second group starts to leave their homes (which they don't really need to; remember, these are the people that can afford their payments), the housing bust and financial crisis will be aggravated. A Federal Reserve economist predicts the nationwide foreclosure rate over the next few years will be not radically higher than 1-2%; other economists predict the rate will be much higher.

GOOG (342.66): Piper Jaffray reiterates his buy rating and 419 price target on GOOG shares following the comScore data. “Conclusion: Google's total U.S. queries ended up 6% m/m and 38% y/y in January. The year on year growth is the second highest rate since October 2007. We are expecting a 2% q/q U.S. revenue decline in Q1. The bottom line is that the comScore query data makes us incrementally more positive that there will be growth in paid clicks; however, we continue to believe sequential CPC rates could suffer given a tough comp of the December holiday quarter in addition to adjustments made to account for the consumer spending slow down (falling conversion rates). We continue to like Google on our belief that search is the most defensible form of online advertising in a difficult ad environment. Next Data Points, What To Expect. The next data points for Google will be comScore Worldwide query data followed by paid click data. We believe it's likely the m/m growth in Worldwide queries is more muted than that of the U.S. given the Presidential Inauguration in January. Regarding paid clicks, for Q1 we are modeling for 3% q/q growth in U.S. paid clicks and 2% q/q paid click growth overall. However, we are modeling for a 5% sequential decline in CPC rates in Q1.

DE (33.49): Deere & Company reports Q1 EPS $0.48 vs Reuters $0.62: Company reports revenues of $4.56B vs Reuters $4.54B. Guides full year equipment sales to be down about 8%; guides Q2 equipment sales to be down about 9%. The company is suspending its practice of providing a quarterly net income forecast in light of highly uncertain conditions in the global economy, including volatility in foreign exchange rates.

GM (2.18): General Motors releases highlights of its progress update: GM is increasing its loan request by $4.5B; needing an additional $16.5B if conditions stay the same, for a total of $30B in financial assistance from the government. GM says it will run out of money by next month without more aid. Will cut 47K hourly, salaried jobs by the end of the year. GM will cut 10K salaried and 37K hourly workers and plans to close 5 additional US factories to 33 in 2012 from 47 in 2008. GM has considered and rejected 3 bankruptcy scenarios as part of the plan. GM says bankruptcy would cost more than a larger bailout.

GS (85.71): Goldman Sachs confirms in press release the retirement of President and co-COO Jon Winkelreid

Gold (970.25): Canaccord Adams raises gold price forecast to $1,100/oz from $950/oz: Firm believes the safe haven flight to gold will continue and notes the continued weakness in the financial markets, high credit risk, and the eventual devaluation of paper currencies from monetary and fiscal policies to reflate the global economy

NYX (18.01): NYSE Euronext upgraded to neutral from sell at Goldman Sachs: Target remains $19. The firm cites valuation.

Wilbur Ross says interested in govt's troubled asset fund if low-cost leverage is provided – Reuters: Reuters reports that Ross also said that a "loss-sharing formula" with the government is needed to entice private investors, but that private equity in various countries is flush with capital and would be huge buyers.

Bullish sentiment declines 31.1% from 32.3% in the latest Investor's Intelligence poll

Private equity firm Lone Star Fund seen raising additional $20B for troubled assets - Reuters, citing sources: Reuters, citing sources, reports roughly half will be spent for commercial real estate, including commercial mortgage-backed securities, and the other half will go towards other distressed debt, including residential mortgages and corporate debt

Steel stocks crushed on Tuesday – WSJ: The Journal recaps Tuesday's rout in the steel space, noting that the stocks were hit by worries about the global nature of the economic slowdown and fears about pricing. The article also points out that several sell-side notes appeared to contribute to the selloff. UBS noted that while companies are nearing the end of their destocking, demand could still be down 25% to 30% from the year-earlier period, and possibly worse. In addition, analysts at Dahlman Rose said US Steel (X) was facing a slowdown in tubular goods and has idled a plant in Texas to curb production. In addition, Longbow Research analyst Bob Richard slashed his earnings estimate on Schnitzer Steel (SCHN) by 85%, as channel checks have revealed weakness in scrap-metal fundamentals.