March 4, 2009: Morning Call

March 4, 2009: Morning Call

Fair Value: SP500 – 695.86; NDX: 1081.04; DOW: 6720.04

Technical Levels:


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

Events:

Pre-market EPS: BIG (.93/1.36B); COST (.60/16.84B); JOYG (.75/782.2M); TOL(-.44/426.1M)
04:00: Euro-zone PMI Services (Feb): 38.9; Composite: 36.2
07:00: MBA Mortgage Applications.
08:15: ADP employment Change (Feb): -620,000
10:00: ISM Non-Manufacturing (Feb): 41.0
10:00: Treasury Secretary Geithner speaks on the budget to Senate Finance committee
10:30: DOE Crude Oil and Gasoline Inventories
11:00: COST earnings call
12:00: Fed’s Lockhart speaks on the US economy
14:00: Fed’s Beige Book
14:00: TOL earnings call
16:00: Select Retail Companies report February Comps.
Post-market EPS: AUY (.04/222.7M); PETM (.59/1.36B); WTW (.53/360.1M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P and NASDAQ futures are both trading 6 points above fair value at 7:30am ET. The S&P futures have recovered 20 points from the post-session lows last night (682). Foreign markets are higher on speculation that China is going to expand their fiscal stimulus programs. Asian markets rose with the exception of Australia (Japan up 0.85%, Hong Kong up 2.47%, Shanghai up 6.68%, South Korea up 3.17%, Australia down 1.64%, India up 0.23%). European markets are up 2.0% with mining and industrial shares leading the advance and health care and consumer staples lagging.


Impact Research Calls/Market Moving News:

Chinese Premier Wen Jiabao to announce new stimulus package tomorrow (5-Mar in China) – Bloomberg: Speaking outside a meeting of the economic group of the Chinese People’s Political Consultative Conference, former statistics bureau head Li Deshui does not indicate if the new package will be more than the CNY4B ($585B) package announced in November.

GOOG (325.48): At Morgan Stanley’s technology conference, GOOG CEO Eric Schmidt said the economy is “pretty dire” and that the next two quarters will be very tough. Schmidt also indicated that travel, automobile, and financial services segments have taken a hit. Schmidt said GOOG is not immune to the economic situation but is better positioned than most and that people are using the internet more during the recession. The S&P futures were trading 13 below fair value and GOOG shares traded as low as 311.50 following these comments(down 14 dollars). The statement by Schmidt should not have come as such a great surprise to market participants given the recent news flow on the economy and sharp declines in financial markets over the last 2 weeks. The post-market weakness was an over-reaction.

COST (40.69): Costco reports Q2 EPS $0.55 vs Reuters $0.60: Company reports revenues of $16.84B vs Reuters $16.84B. Q2 comps were (1%) in the US, (11%) internationally, (3%) overall. US comps (excluding the impact from gasoline deflation) were +4%; international (excluding the effects of foreign exchange) +8%. Results were hurt by weakness in non-foods sales, increased pre-holiday markdowns, lower gasoline profits, and the strengthening of the US dollar.

BIG (14.54): BIG reports Q4 EPS $0.96 vs Reuters $0.93, guides Q1 EPS $0.34-0.40 con't ops vs Reuters $0.35, guides f09 EPS $1.75-1.90 con't ops vs Reuters $1.70.

PALM (7.38): Palm guides Q3 revenue to $85-90M vs Reuters $155.2M: The company says that the revenue decline is the result of reduced demand for its maturing legacy smartphone products, the challenging economic environment and later-than-expected shipments of the Treo Pro in the US. Palm upgraded to buy from neutral at Piper Jaffray: Firm says new 'Pre' model will resonate with consumers

Washington Post discusses Treasury's toxic asset plans: Many of the specifics in the Post's report were covered by the WSJ last night. Like the WSJ, the Post reports that the Treasury is considering setting up several funds to purchase toxic assets, attracting private investors to manage and put their own money into these funds by offering to cap their losses and share in the risk of buying the assets. The Post was more specific regarding timing, saying that the Obama Administration is hoping to unveil the plan in the "next few weeks". The Post also noted many potential similarities between the plan and the now established TALF. The key difference between the two programs is that the TALF focuses on highly rated, new issues, while the toxic asset plan will focus on legacy assets - previously issued, lower rated securities. Yet in both cases, the government is looking to private investors to price the assets, giving them incentive to participate by providing financing and capping losses via non-recourse loans. The article notes that Blackstone (BX) CEO Stephen Schwartzman said that his firm has decided to look into buying assets offered in the TALF, though the firm has never bought such securities before. BX shares rose 19.3% on Tuesday

Mortgage relief bill to be tempered; bankruptcy judges to get less leeway - Washington Post: A compromise version of the bill limits homeowners' ability to ask a bankruptcy judge for help if they have already received or been offered a loan modification that lowered their payments to 31% of their income. They will also need to share any profit from the eventual sale of the home with lenders if a bankruptcy judge lowers the principal balance, and lowering the loan's interest rate will be preferred to cutting the balance.

HPQ (28.17): Hewlett-Packard upgraded to buy from hold at Argus Research: Target is $35.00.. Firm notes valuation and EDS potential

TOL (14.39): Toll Brothers reports Q1 EPS ($0.55): The net loss included pre-tax writedowns of $156.6M. Reuters is ($0.52). Company reports revenues of $409.0M vs Reuters $432.5M. Backlog, net signed contracts, and cash levels at end Q1 were reported on 11-Feb. Chairman, CEO Robert Toll says they are beginning to see some properties come to market at reasonable prices. TOL has not bought any yet, but are getting closer. Toll believes there are buyers on the fence, but that weak buyer confidence still impedes the market. TOL says it will not provide earnings guidance at this time, expects to deliver betweeen 2K-3K homes in f09 at an average delivered price of between $600-$625K per home, and expects lower f09 projected revenues