Wednesday, March 11, 2009

March 11, 2009: Morning Call

March 11, 2009: Morning Call

Fair Value: SP500 – 719.56; NDX: 1112.81; DOW: 6926.73

Technical Levels:

SPX: 639, 676 support/741, 752, 778, 800 resistance


Pre-market EPS: AEO (.20/917.0M); BONT (2.12/1.02B); NSM(-.04/296.7M; SPLS (.43/6.82B)
07:00: MBA Mortgage Applications
07:00: Bloomberg Global Confidence
08:25: M presents at Bank of America Consumer Conf.
08:30: COP Annual General Meeting
09:00: CSX presents at JP Morgan Aviation and Transportation Conf.
10:30: DOE Crude Oil and Gasoline Inventories
11:00: HOV earnings call
11:15: UNP presents at JP Morgan Aviation and Transportation Conf
11:00: EBAY analyst day
13:00: NSC presents at JP Morgan Aviation and Transportation Conf
13:05: NVDA presents at Raymond James Institutional Investor Conf.
13:50: JWN presents at Bank of America Consumer Conf.
14:00: US Monthly Budget Statement (Feb): -205.3B
22:00: Chinese Retail Sales (Feb): 17.0%
22:00: Chinese Industrial Production (Feb): 6.0%
Post-market EPS: HOTT (.32/234.0M); PLL (.45/583.0M)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 7 points above fair value while the NASDAQ futures are trading 10 points above fair value at 8:30am ET. The futures reversed early losses (S&P futures were 7 below fair value at 4:30am ET) in response to a rebound in European markets. Most European markets are up around 1.0% with London lagging (down 0.40%) due to weakness in HBC. Advancing issues lead decliners in London by 3 to 2. Other financial stocks in the Euro-zone are up around 4.0% despite the sloppy action in HBC. Asian markets closed sharply higher following strong gains in US trading (Japan up 4.5%, Hong Kong up 2.02%, Australia up 1.88%, South Korea up 3.44%, Shanghai down 0.91%). Asian bank stocks paced the advance. HSBC Holdings (5.HK) opened higher but pared gains as its rights issue approaches. Financials and steel companies, on expectations of an export tax rebate, initially led China higher but news of a record slump in exports sent the market lower. India is closed for Holi.

Research Calls/Market Moving News:

Chinese Fixed Asset Investment surges 26.5% versus a year ago ahead of expectations of an increase of 21.5% increase. China has poured approximately 150 billion dollars into building new roads, railways, and power grids to counter a 25% plunge in Chinese exports. Railway investment tripled, agriculture spending doubled, and coal mining expenditures jumped nearly 60%.

TALF facing more problems – WSJ: “The government's $1 trillion program to spark consumer lending hit another roadblock when investors balked at signing an agreement required to participate in the program, arguing that it gave Wall Street dealers and the Federal Reserve too much power to look at their books and reject them from the program. Through the Term Asset-Backed Loan Facility, or TALF, program, an investor can put down $5 to $14 for every $100 it will put up, borrowing the remaining $95 to $86 cheaply from the Fed. They agree to buy eligible, highly rated securities issued by lenders making loans to businesses and consumers to buy cars, pay for their educations or use credit cards. The amount of money an investor must initially fork over varies depending upon the types of loans backing the security. The Fed-and-Treasury-backed program is set to begin next week, but it faces the tough task of getting potentially hundreds of financial firms to agree on the wording of the contracts…. Investors, particularly hedge funds, are bristling over language about how the Fed or dealers may decline their application, and that the Fed or any agency it deems appropriate may decide to comb through an investors' books or query any documents if and when it chooses…. TALF has been bogged down with delays for months, as investors and issuers negotiated with the Fed and the Treasury to adjust the terms of the loans. Now, with next Tuesday's deadline looming for investors to request their first loans, bankers and investors say they feel the initiative may be moving too fast.” (My comment: Obviously, the market will not view a delay in TALF launch favorably so this issue should be closely watched as a potential negative catalyst).

HBC (27.03): HBC shares are down 13% in extremely volatile trading ahead of the pricing of the rights offering. Hong Kong regulators are examining trading irregularities following a 13% price drop in Hong Kong markets on Monday.

GOOG (308.17): Needham lowering estimates on intra-quarter channel checks but is maintaining a buy rating. “Yesterday we hosted the latest installment of our Search Marketing Quarterly Update conference call (see our note titled Search Marketing Quarterly Update Call and dated 3/11/09). Speakers consisted of three leading experts in the online search-marketing field, including two from the U.S. and one from the UK/Europe. Our guests were nearly unanimous in saying that search spending has deteriorated further YTD, and will certainly decline sequentially and decelerate meaningfully YoY. Unlike past calls, our U.S. guests had slightly different views of 1Q09 spending, with the larger U.S. SEM seeing flat-to-slightly down YoY spending on a same-customer basis through mid-Feb, while the smaller U.S. SEM is seeing YoY growth in the 8-10% range. (The larger SEM's previous quarterly forecasts have shown some correlation to Google's previous actual results, which we have taken into account.) In general, our guests' commentary suggests our estimates for Google may be too high, and that negative 3-4% sequential gross revenue and negative 5-6% net revenue for 1Q09 might be more reasonable than our and the consensus projections of negative 2%. As such, we are lowering our estimates based on these and other intra-quarter datapoints. Our price target also declines to $450 based on this new lower estimates as well as a lower assumed target P/E multiple. We continue to expect Google to out-perform most other Internet and media companies and view Google’s stock as a safe place to hide in an otherwise uncertainty environment for consumer discretionary stocks. We also see the valuation as reasonable at 8x EV/EBITDA and believe mgmt has considerable opportunity to cut costs and achieve our EPS/FCF estimates. As such, we are maintaining our Buy rating.”

DE (27.84): Deere & Company comments on February retail sales: Utility tractors: Deere sales were down more than the 29% decrease for the industry; January inventories were lower than the industry's level of 47% of ttm sales. Row crop tractors: sales were down more than the industry's 14% decrease; January inventories were lower than the industry's level of 26% of ttm sales. 4WD tractors: sales were up double digits, but less than the industry's 34% increase; January inventories were slightly lower than the industry's level of 17% of ttm sales. Combines: sales were up more than the industry's 46% increase; January inventories were slightly lower than the industry's level of 10% of ttm sales. In Western Europe, retail tractor sales were down a single digit while combine retail sales saw a double-digit increase. Construction and forestry equipment sales were down double digits on both a first in the dirt and settlement basis. Commercial and consumer equipment sales were down double digits.

AXP (12.17): American Express downgraded to sell from neutral at Goldman Sachs: Target cut to $7.50 from $19. Shares are added to Conviction Sell List.

MS (20.84): Morgan Stanley upgraded to buy from neutral at Goldman Sachs: Target increased to $27 from $21. Shares are added to Conviction Buy List as well.

USB (11.40): US Bancorp upgraded to neutral from sell at Goldman Sachs: Target is $12. Shares are removed from Conviction Sell List as well.

UBS comments on semiconductors: Firm's inventory analysis indicates aggressive channel inventory de-stocking, which supports the firm's view of near term stabilization for the sector and potential recovery in 2H'09. UBS also notes checks that indicate several semi vendors are now seeing stabilization in order books. Firm believes the recent outperformance of semi stocks should continue. Top global picks are ATLR, ASML, MRVL, TSM.

LVS (1.66): Las Vegas Sands probability of default and corporate family ratings downgraded to 'B3' from 'B2' by Moody's: Moody's also lowered various ratings of Las Vegas Sands' subsidiaries, including Venetian Casino Resort, LLC (and its co-issuer Las Vegas Sands, LLC) and Venetian Macao Limited. The rating outlook is negative.

C (1.45): Investor caution still warranted when it comes to Citi – WSJ: In a "Heard on the Street" column, the Journal pokes some holes in Citi CEO Vikram Pandit's comments that the bank was profitable over the first two months of the year. The paper notes that banks often do not know their true expenses until the end of the quarter, while it is also possible that Citi's two-month net income received a boost from a low quality source, such as marking up the value of its own debt. The article also expresses some skepticism about the timing of the internal memo, as it came the day after Sen. Richard Shelby of Alabama, the ranking Republican on the Senate banking committee, called Citi a "problem child."

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