April 28, 2009: Morning Call

April 28, 2009: Morning Call

Fair Value: SP500 – 855.02; NDX: 1369.89; DOW: 7987.52

Technical Levels:

SPX: 676, 719, 765, 788 support/869, 898 resistance

Events:

Pre-market EPS: AG (.24/1.56B); AVY (.22/1.42B); BDX (1.16/1.76B); BEN(.62/905.1M); FPL (.77/3.56B); MHP (.18/1.15B); PCAR (.05/1.89B); VLO(.51/15.91B); X (-1.62/3.19B); DB (na/na)
03:00: Deutsche Bank earnings call
05:40: BOE’s Haldane to speak on financial stability
09:00: S&P/Case Shiller Home Price Index (Feb): -18.80%
10:00: Consumer Confidence (April): 28.8
10:00: Richmond Fed Manufacturing Index
10:30: MET Annual Meeting
16:30: API Crude Oil and Gasoline Inventories
Post-market EPS: ACE (1.97/3.43B); BEC (.59/705.6M); CERN (.48/417.7M); MEE (.61/716.8M); DWA (.46/219.3M); PNRA (.56/318.1M); SRCL (.46/277.7M); TSS (.30/476.4M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P and NASDAQ futures are trading 14 points below fair value due primarily to a report that the US Government is going to require BAC and C to raise additional capital after the stress test results are released. Concerns about the spread of swine flu continues to have an impact as well after the WHO raised the pandemic flu alert to 4 from 3. European markets fell from the open on the aforementioned swine flu concerns and the WSJ article on BAC and C. Major indices fell between (2.4%) and (3.0%) before paring declines. Daimler's (DAI.GR) Q1 results that missed estimates, highlighted earning worries, capping the modest improvement and indices which have remained range bound close to session lows. There are 6 advancers on the FTSE 100. Asian markets closed lower (Japan down 2.6%, Hong Kong down 1.9%, Australia down 0.62%, South Korea down 2.8%, India down 3.25%). Travel and tourism sectors remain under pressure on fears about swine flu. Exporters fell in Japan on a stronger yen. Shippers were hurt by weak earnings forecasts and South Korea bulk carriers fell on a falling Baltic Dry Index.

The only reason the WSJ story is a “surprise” is most market participants have concluded that the stress tests results would endorse the banks current capital levels. Just yesterday, FDIC chairwoman Shelia Bair indicated that the results would be disseminated in such a way as to “instill confidence” in the banking sector. Financial stocks are indicated down 3% so the reaction to the WSJ story is not particularly significant given the magnitude of the upside move off the lows and resilient trading in bank and REIT stocks over the last two weeks. Skeptical traders have attributed the strength in the “toxic sectors” to mechanical rather than fundamental factors. The REIT sector, in particular, has certainly benefitted from dislocations at hedge funds focused on quantitative strategies and hyperbolic trading in ultra-ETF products. Since April 8, the most shorted sectors have been more resilient (up 5-10%) than the broader S&P, which has been in a tight trading range (835-865). On the surface, the market appears to have entered a more tranquil trading phase. But, substantial gyrations continue underneath the surface as the REIT and financial sectors have averaged daily moves of 6.9% while the S&P has averaged a daily move of 1.6% since April 8.

In terms of strategy, traders should maintain a large cash position or stay completely on the sidelines. The path of least resistance is lower but it is extremely easy to get whipsawed and chewed up in this market particularly when shorting the toxic sectors. Emerging markets look particularly susceptible to a pullback given the outperformance versus developed markets – many are up 40-50% off the lows. I would not be chasing longs here because I believe S&P 500 fair value is around 750-775. When the S&P 500 was below 700, market participants were not expecting positive GDP until 2010. Currently, market participants expect a modest economic recovery in the 2H: Q3 median growth forecast is 0.3%; Q4 median growth forecast is 1.5%. I remain skeptical that growth can rebound in 2H given the ongoing deleveraging of both consumer and corporate balance sheets.

Research Calls/Market Moving News:

BAC (8.92); C (3.07): Bank of America (BAC), Citi (C) told they have capital shortfalls – WSJ: People familiar with the situation say regulators have warned the banks they may need more capital based on early results from their stress tests. People familiar with BAC say its shortfall is billions of dollars; Citi's deficit is unclear. Both banks are objecting to the preliminary findings. Sources say Citi wants credit for trying to shrink its balance sheet recently by selling Smith Barney and its Japanese brokerage arm.

UK banks may need billions of pounds of extra capital – FT: Alistair Darling is expected to announce next month that the country's banks considered too big to fail will need to hold more capital than the sector average. The higher capital ratio is seen as the penalty the institutions have to pay for relying on taxpayer bailouts if they find themselves in trouble

X (27.71): U.S. Steel (X) announces 18M share secondary offering and $300M convertible note offering through JPMorgan, Morgan Stanley and Merrill, reports Q1 EPS ($3.60) ex-items vs Reuters ($1.62), reduces dividend to $0.05 from $0.30. X shares are trading down 9% in the pre-market.

BIDU (224.86): Baidu target increased at Goldman Sachs: Following earnings, the 6-month target is increased to $273 from $212. The firm believes BIDU could see y/y revenue growth pick up in Q3 or 4Q09. Rating remains Conviction Buy.

JEC (45.55): Jacobs Engineering (JEC) reports Q2 EPS $0.88 vs Reuters $0.88, cuts full year guidance to between 3.10 and 3.50 versus street consensus at 3.59.

NTRS (55.01): Northern Trust (NTRS) files for secondary offering of common stock and notes through Goldman, Morgan Stanley. Company is going to offer 750 million in stock and 500 million in senior notes in order to repay TARP.

SPWRA (24.04): SunPower (SPWRA) announces intent to offer 9M common shares in secondary offering, $175M in senior convertible notes through Credit Suisse and Deutsche Bank.

PCL (34.90): Plum Creek reports Q1 EPS $0.95 ex-items vs Reuters $0.94: Note earnings includes impairment and severance charges that amounted to $0.05 as well as a tax benefit of $0.05. Company reports revenues of $470.0M vs Reuters $506.4M. Guides Q2 EPS breakeven vs Reuters $0.14; guides full year EPS $1.20-1.45 vs prior $1.38-1.63 and Reuters $1.46, First Call $1.45.