Friday, March 27, 2009

March 27, 2009: Morning Call

March 27, 2009: Morning Call

Fair Value: SP500 – 830.15; NDX: 1282.55; DOW: 7881.44

Technical Levels:

SPX: 676, 719, 765, 792 support/ 823, 898 resistance


Pre-market EPS: FINL (.34/361.4M); KBH (-.81/356.0M)
06:00: Euro-zone Industrial New Orders (Jan): -5.6% MoM; -28.4% YoY
08:30: Personal Income (Feb): -0.1%; Personal Spending: 0.2%
08:30: PCE Core (Feb): 0.2% MoM; 1.6% YoY
10:00: University of Michigan Confidence (March Final): 56.6
11:30: KBH earnings call

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 14 points below fair value while the NASDAQ futures are trading 23 points below fair value at 8am ET. Foreign markets are weaker despite the strong gains in US markets during Thursday’s session. Asian markets closed mixed (Japan down 0.11%, Hong Kong up 0.07%, Shanghai up 0.77%, South Korea down 0.25%, Australia up 0.70%, India up 0.45%). Rio Tinto (RIO.AU) jumped in Australia after CFO Guy Elliott said the company had a backup plan if Chinalco’s $19.5B investment is turned down. In Japan, real estate share and trusts gained on a report the government is considering establishing a fund to support REITs. European markets are down 0.80% snapping a 7-day winning streak for the Euro-stoxx 50. The major indexes moved to session lows following a weaker than expected UK GDP report. Decliners on the FTSE 100 lead decliners 3-2. Air France-KLM (AF.FP) fell 6% after saying it'll report a FY09 operating loss and that traffic in the initial weeks of March has shown a further decline.

Research Calls/Market Moving News:

FDIC's Bair says she would be open to banks profiting from disposal of problem loans – WSJ: The Journal reports that Bair's comments came in a conference call with bankers on Thursday. According to the article, Bair said that banks might be able to take equity stakes in funds set up to buy problem loans from banks, which would give them a payoff if the loans ultimately increased in value, as well as an additional incentive to get the assets off of their balance sheets. The article goes on to discuss the wide range of haircuts that have been applied to recent deals involving toxic assets

ACN (31.96): Accenture reports Q2 EPS $0.63 vs Reuters $0.62: Company reports revenues of $5.27B vs Reuters $5.54B. Guides Q3 revenues to $5.10-$5.30B vs Reuters $5.78B. Fiscal year revenue growth guided to 0-4% below prior 6-10%. Q3 revenue guidance assumes (12)% impact from forex vs.y/y. Fiscal year guidance assumes forex impact of (9%) vs. prior (10%)-(8%). IBM is trading down 2.50 points in reaction.

INTC (15.82): INTC files 1 billion dollar equity shelf registration for acquisition purposes.

FSLR (150.39): First Solar downgraded to hold from buy at Collins Stewart: “Despite the indication yesterday that China will allocate funds for solar installations, it remains a challenging environment for the solar industry. ASPs are declining, financing is difficult to obtain in many markets and businesses are reluctant to tie up funds in a solar project in the midst of a weak economy. With regard to China, we do not believe the program in China will meaningfully alter the demand for FSLR product or correct the polysilicon oversupply situation we forecast for CY09 and CY10. Based on polysilicon prices ($100/kg spot), we believe the price of polysilicon-based modules will fall to $2.00/watt by YE09, a price level vendors such as TSL and YGE can achieve with a 22% gross margin (assuming $100/kg polysilicon). As standard module prices trend below $2.20/watt, they start to impact FSLR's pricing. FSLR modules require a $0.25/watt discount to maintain an installation cost parity, and an additional discount to provide an incentive for buyers to use its modules.”

TSL (12.19:FBR Capital downgrades shares to undderperform. “Following the recent rally in the shares of Trina Solar Limited, especially the 40% from yesterday compared to a 2% strengthening of the S&P 500, combined with what we believe to be the fact that solar incentives in China will not be more than 180M watts (versus our expectations of a total installation of 100M watts in CY09) and that Europe has remained relatively weak, in our opinion, when compared to company management commentary from only a month ago, we are downgrading the shares of TSL from Market Perform to Underperform. Our estimates remain unchanged, though there remains downside risk. Our price target of $8.00 has also remained unchanged. We believe that the fundamentals for the solar industry remain relatively weak, with continued excess capacity (and, thus, more finished-goods inventory write-downs). Although there is an increased level of skepticism among investors regarding a significant acceleration in growth before mid 2010 (when the U.S. market could potentially take off), we believe that the company's management (and management throughout the industry) has remained too hopeful.”

Solar Power: Deutsche Bank cautious on solar stocks: “The China Ministry of Finance announced a new incentive program to stimulate the solar PV industry. The main point of this preliminary plan is to provide up to a 20 Yuan (US$2.93)/Wp subsidy for projects 50kW and larger. This new stimulus package is clearly a positive, but we believe stocks have over-reacted to the news. Our near-term outlook for the broader solar PV industry remains negatively biased as credit issues drive prices down and inventories up. The China Ministry of Finance press release (detailed in the body of this report) could be characterized as a general direction with some details, but is clearly not detailed enough for an accurate assessment of the potential impact to the solar PV industry. We believe the program is likely designed to lend support to local Chinese solar PV industry players, and not meant to serve as a blueprint for a solar PV industry recovery plan in China. The press release did not detail the budget, the applicable period, or installation goals, making it difficult to quantify the impact of the program. While the program is clearly an incremental positive for the Chinese market and global demand, we caution against euphoria when considering solar PV company stocks.

GS (111.99): FBR Capital initiates coverage of The Goldman Sachs Group, Inc. (GS) with an Outperform rating and a 12-month price target of $130.00 per share. We believe that the company will benefit from the inward focus of many of its once formidable competitors, significant progress toward de-leveraging the balance sheet, and recovering returns on equity. For these reasons, we view the shares as attractively valued. Despite the need to reduce leverage and the concern that doing so could harm returns on equity, we believe that the market is largely ignoring higher risk premiums across a variety of asset classes and their positive implications for returns. We argue that leverage did have a positive impact on ROE but that the conditions that necessitated the higher use of leverage (namely extremely low risk premiums fueled by years of historically low funding costs) have reversed, allowing for attractive returns on lower leverage. We believe that GS’s current valuation appropriately reflects expectations for a difficult capital markets environment in 2009 but offers attractive upside potential in more stable capital markets.”

MGM (3.09): MGM Mirage and investment partner Dubai World unlikely to make $220M debt payment due Friday on City Center – WSJ: The Journal cites people familiar with the matter. The paper adds that MGM has hired law firm Weil, Gotshal & Manges LLP to help prepare a possible Chapter 11 court filing for City Center, as well as to explore other options. A filing could come as early as this weekend, though the paper notes that it is not clear what kind of impact such a move would have on MGM Mirage's other finances.

CF (74.00): Agrium raises cash component of its offer for CF Industries Holdings to $35 from $31.7

AMZN (73.69): removed from Conviction Buy List at Goldman Sachs: Shares remain buy rated. Despite the move, the 6-month target is increased to $81 from $70.

AMZN (73.69): Amazon initiated hold at Kaufman Brothers:Target is $69. The firm cites uncertainty relative to consumer spending, declining gross margins and sales tax overhang, among the rationale.

COP (40.310): ConocoPhillips upgraded to buy from neutral at Goldman Sachs: Target decreased however to $47 from $50.

BBY (37.67): Best Buy removed from the Conviction Buy List at Goldman Sachs: Shares remain buy rated.

Goldman Sachs changes ratings in the E&P sector: upgrades APC, CHK, PXD; downgrades TLM, XTO: Upgrade: Chesapeake Energy (CHK) upgraded to Conviction Buy from buy. Pioneer Natural (PXD) upgraded to buy from sell. Downgrade: XTO Energy (XTO) downgraded to neutral from Conviction Buy. Talisman Energy (TLM) downgraded to sell from neutral.

BJS (10.94): BJ Services added to Conviction Sell List at Goldman Sachs: 6-month price target is $8.

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