March 2, 2009: Morning Call

March 2, 2009: Morning Call

Fair Value: SP500 – 734.48; NDX: 1117.47; DOW: 7055.01

Technical Levels:


SPX: 685 support/752, 778, 800, 848-852 resistance

Events:

Pre-market EPS: ACAS (.64/263.0M); DISH (.48/2.95B); HBC; AIG
04:00: Euro-zone PMI Manufacturing Index (Feb): 33.6
05:00: Euro-zone CPI Estimate (YoY-Feb): 1.0%
08:30: Personal Income (Jan): -0.2%; Personal Spending: 0.4%
08:30: PCE Core (MoM): 0.1%; (YoY): 1.6%
10:00: ISM Manufacturing (Feb): 33.9; Prices Paid: 33.0
10:00: Construction Spending (Jan): -1.5%
11:30: Fed’s Rosengren speaks to bankers in Washington DC
12:45: Fed’s Lacker speaks on monetary policy.
18:20: AMAT presents at Morgan Stanley Tech Conference
Post-market EPS: MDR (.17/1.64B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 16 points below fair value while the NASDAQ futures are trading 23 points below fair value at 8:15 am ET. Asian markets closed sharply lower (Japan down 3.8%, Hong Kong down 3.86%, Australia down 2.82%, South Korea down 4.0%, India down 3.2%). Financials and exporters led Asian lower, with the one exception being Shanghai (up 1.1%) as comments by Premier Wen helped the market buck the trend lower. Australian banks fell after a Moody's downgrade and Macquarie Group (MQG.AU) fell after saying it did not plan to increase its investment in its listed funds. Financials and carmakers paced Japan’s decline. European markets are down 3.5% with financial, mining and industrial stocks leading the decline. Financial stocks are making fresh 17-year lows on accelerating fears that the credit storm is intensifying.

Impact Research Calls/Market Moving News:

AIG (.42): AIG reports Q4 loss of 22.95 a share or 61.7 billion. The US has agreed to a new 30 billion equity capital facility. The structure of the deal is incredibly complicated. The Fed will exchange 40 billion in preferred shares into a new preferred issue but the main issue is the terms are far less punitive than the initial bailout.

BRK/A (78,600): Berkshire Hathaway reports worst year ever reports the WSJ: The company reported a small profit for Q4, down 96% y/y. Book value per share fell 9.6% in '08, the biggest decline since Warren Buffett took over in 1965. Buffett said the economy will be in “shambles and, for that matter, well beyond.”

HBC (34.80): HBC shares are down 20% after the company announced a rights offering at 254 pence each, with existing shareholders able to buy 5 shares for every 12 they already own. HBC reported a pretax loss of 15.5 billion from North American operations.

STT (25.27): State Street downgraded to neutral from buy at Goldman Sachs

Defense sector downgraded to neutral from attractive; Lockheed Martin (LMT) removed from Conviction Buy List at Goldman Sachs: LLL remains on the Conviction Buy List, and is top pick. Both stocks remain rated buy.

BX (4.87): Blackstone Group upgraded to outperform from market perform at Keefe, Bruyette & Woods: Target is $6.00. Upgrade follows 27-Feb earnings announcement

ADBE (16.70): Adobe Systems upgraded to neutral from sell at UBS. Target is $18.

GE (8.51): Dividend cut not a panacea for GE – WSJ: In a "Heard on the Street" column, the Journal notes that savings from the dividend cut will amount to just $4.2B this year, According to the paper, that is not enough to fully dampen fears of larger writedowns in the finance business or the macro pressures facing the industrial business. The article goes on to note that while the cut amounted to a defensive move that was long overdue, it is still likely to exacerbate fears about the outlook for GE's businesses.

NEM (41.63); KGC (15.78): Newmont Mining (NEM) downgraded to neutral from overweight, Kinross Gold (KGC) upgraded to overweight from neutral at JPMorgan.

ABX (30.20): Barrick Gold upgraded to overweight from neutral at JPMorgan

Barron's cover looks at the health of the banking system: The Citi deal has everyone now focused on tangible capital, which is tangible common equity divided by tangible assets. Many analysts believe that 4% tangible capital ratio will emerge as the targeted minimum by the government. Previously, regulators focus on Tier 1 capital had been criticized as overstating financial strength. The change in focus should not be a problem for many regional banks with tangible capital ratios that exceed 5%. Among the larger banks, JP Morgan (JPM) is close to 4% and the cut to the dividend should add enough tangible capital to bring the bank over 4% this year. However, Bank of America (BAC) has a ratio of 2.6% and Wells Fargo's (WFC) is 2.8%. Both could hit the 4% mark with a conversion of preferred holders to common stock but the moves would dilute existing shareholders. Both banks have stated they don't see a need to raise capital right now. These concerns may mean opportunity for investors as many banks, including BAC, COF, KEY, STI and CMA, look cheap when compared to tangible book value. Dividend cuts may be possible at WFC, USB and PNC. Bernstein's John McDonald likes JPM with a target of $38. Bernstein likes CMA and USB among the regionals. Barron's is mixed on Citi and says preferred holders should convert, especially if the deal is as favorable as the 45 cents on the dollar offered the government and the fact that Citi will stop paying the dividend to the preferred.


Barron's summary
Cover: Looking at the health of the banking system, positive on JPM, CMA, USB. Special Report - Going Green: 5 plays on alternative energy: ABB, WMI, FPL, JEC and ETN. A look at the potential cost of the Obama Administration's plans to force America to go green. Lead Articles: The Obama budget plan includes a large tax bill for the investor class; Baxter (BAX) may reward investors if it delivers on earnings projections; It is far too soon to count Dell (DELL) out; Stericycle (SRCL) is likely to outshine the market for the next 18 months; Taxing Subject looks at the federal help offered to first time home buyers last year and this; Other Voices argues in favor of carbon capture and sequestration as a means of fighting global warming; Editorial considers the Obama economic plan and the fact that the crisis seems a reason to do things Obama would want to do anyway. Columns: The Trader is cautious on health care, gun makers, Best Buy (BBY) and Amazon (AMZN); The Striking Price notes the end of the Amex exchange and the start of the NYSE-Amex; Commodities Corner says some traders expect the positive trend among gold miners compared to gold to continue; Asia Trader says the problems in Asia will continue for some time, longer term positive on global equities given the projected decline of youth bulges in many countries; Euro Trader is positive on British Airways (BAY.LN); Current Yield notes the negative yields from Treasuries recently; Up and Down Wall Street considers Obama's trickle up economics and the Not-So-Great Depression; Streetwise looks at natural gas plays including UNG, PXD and FCG, notes that pharma M&A activity might trend towards smaller deals, positive for CVD and KNDL, mixed on the gun makers on the potential of the change in administration pulling demand forward; Economic Beat considers the risks in and to the new budget proposal from President Obama; Technology Trader considers potential M&A deals once the markets thaw; Plugged In looks at the differences between IBM and HPQ.