April 3, 2009: Morning Call

April 3, 2009: Morning Call

Fair Value: SP500 – 831.61; NDX: 1295.08; DOW: 7933.80

Technical Levels:

SPX: 676, 719, 765 support/ 845, 898 resistance

Events:

04:00: Euro-zone PMI Services (Mar. Final): 40.1; Composite: 37.6 (actual: Services – 40.9; Composite: 38.3)
08:30: US Change in Payrolls (March): -660,000; Unemployment Rate: 8.5%
08:30: Change in Manufacturing Payrolls (March): -162,000
08:30: Average Hourly Earnings (March): 0.2% MoM; 3.5% YoY
09:10: Fed’s Kohn speaks on the economic crisis
10:00: ISM Non-Manufacturing Index (March): 42.0
12:00: Fed Chief Bernanke speaks at Credit markets conference

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 6 points above fair value while the NASDAQ futures are trading 13 points above fair value at 8am ET. Technology stocks continue to outperform following a substantial upside earnings surprise from RIMM. Technology stocks have been benefitting all year due to their simple business models, high levels of cash, and low levels of debt. Performance anxiety appears to be playing a critical role in the recent gains as market participants that have missed the rally off the lows are likely chasing higher-beta technology stocks in an attempt to “catch up” with their benchmarks. European markets are flat to modestly higher ahead of the US labor report. Autos, chemicals, and basic materials are outperforming in Europe. Asian markets closed higher (Japan up 0.35%, Hong Kong up 0.16%, Australia up 1.5%, India closed). Banking shares gained on the US decision to allow more flexibility in valuing toxic assets. Australia advanced on (non-gold) miners and financial shares. Japanese exporters were boosted when the US dollar eclipsed the 100-yen mark. Toyota Motor (7203.JP) jumped 7% after it got loans to finance US car sales.

Research Calls/Market Moving News:

RIMM (49.09): Research In Motion reports Q4 EPS $0.90 vs Reuters $0.84: Company reports revenues of $3.46B vs Reuters $3.40B. Research In Motion guides Q1 EPS to $0.88-$0.97 vs. Reuters $0.81. Guides Q1 revenues to range $3.30-$3.50B vs. Reuters $3.35B. Net sub adds totaled 3.90M vs consensus of 3.48M and 11-Feb guidance for 20% higher than 2.9M (or 3.48M). Gross margin reported 40.0% vs SA 40.2% and 11-Feb guidance for the low end of 40-41%. Q1 guidance assumes: Net sub adds 3.7-3.9M vs SA 3.02M. Gross margin 43-44% vs SA 40.4%. RIMM shares are surging 25% and have been upgraded by at least 5 brokerage firms.

RIMM (49.09): Thomas Weisel Reiterates their buy rating and raises the price target to 74. The note out provides good insight into the bull case on RIMM: “We reiterate our Overweight rating on RIMM shares following strong results and guidance this evening. Going into the report, we were admittedly concerned with RIMM's ability to improve gross margin - something we have heard for a few quarters now - and to sustain a solid growth rate amid increased competition and weak enterprise and consumer spending. On the growth front, the guidance of 3.7mn-3.9mn net subscriber adds in the May quarter is a sign that RIMM continues to gain traction with consumers while defending its dominance in the enterprise space. More important, the GM guidance (43%-44%, up from 40% last quarter) demonstrates RIMM's ability to bring down supply costs as its platforms mature - despite a declining ASP due to mix. Looking ahead, GM will still be key metric, and we are conservatively modeling a modest decline in F2H10 as RIMM launches new products. But we also believe the company will have a steady flow of new products and carrier partnerships over the next few quarters to continue driving top and bottom line growth (the expected launch of the "Niagara" with Verizon being a prime example). We are increasing our estimates and raising our 12-month price target to $74 from $52.”

RIMM (49.09): Deutsche Bank upgrades the shares to hold from sell. Deutsche Bank raises the price target to 56 from 30. Even though Deutsche Bank upgraded the stock, the note provides insight into the bear case on RIMM. “We upgrade to Hold due to better near-term GM guidance. Sustainability of execution and increasing competition remain our concerns. Raising PT from $30 to $56.Post-holiday demand momentum and margin stabilization mark the quarter: Among the quarter's highlights were better than anticipated demand momentum for their smartphones, on the back of new phone launches and aggressive carrier promotions, worldwide, and improvements in cost-controls. Near-term, due to COGS reductions and mix, management expects RIM's GM's to improve 3-4% sequentially. We note that the entirety of our upward revision in earnings is due to the increase in our GM assumption from 40% to 43% for FY10. Competitive and execution concerns remain; basis for Hold rating : While RIM seems to be benefiting from the initial inventory builds for their new devices, we do not think they are well-positioned strategically. The company remains increasingly exposed to consumer demand, and also over-weight to North America (+70% of sales). Further, it will become increasingly hard for them to stand out from the competition with multiple new competing smart phones launching this year, including models targeting mid-range price points. To keep consumers upgrading they have to stay on the treadmill indefinitely, and that may prove beyond RIM's abilities. We see these issues creating margin pressure over time. We see these issues creating margin pressure over time. For now, we go to the sidelines and upgrade to Hold.”

RIMM (49.09): Piper Jaffray reiterates their neutral rating and raises the price target to 62 from 48. “Gross Margin Recovery Surprise: We believe the fall in gross margin during the February quarter was primarily driven by the quicker than anticipated adoption of newly launched lower margin products such as the Bold and Storm, as we believe Storm gross margins are in the high 20s. However, RIM has improved the yields and cost structure of these devices faster than we anticipated, and we also expect a more favorable mix shift during the May quarter. With the 2 for 1 promotion coming to an end at Verizon, this should lead in a lower mix of the lower margin Storm products. • Longer-Term Concerns: Longer term, we believe RIM's increasing mix of consumer products due in part to slowing enterprise sales will result in longer-term margin pressure. Further, we believe RIM will face increased competition from compelling products such as the Palm Pre (June launch), Nokia's E71 ($99 at AT&T), a potentially lower priced iPhone, and other devices in 2H09. Based on the resulting price competition combined with RIM's ongoing investment and increasing operating expense structure, we anticipate RIM's operating margins will likely decline longer term.”

DVN (48.40): Devon Energy upgraded to outperform from market perform at Friedman Billings Ramsey: Target is $60.

AMZN (76.34): Amazon.com estimates and target raised at JPMorgan: The firm sees room for additional market share gains internationally and has raised their Q1 international revenue estimate to $2.35B from $2.29B. Trends domestically remain positive with modest margin improvement. JPM raises Q1 revenue to $4.8B from $4.7B vs. Reuters $4.75B. F09 revenue and EPS estimates are raised to $22.7B and $1.37 from $22.5B and $1.32 vs. Reuters $21.97B and $1.47.

MON (81.41): Monsanto downgraded to neutral from overweight at JPMorgan: The firm sees shares as reasonably valued at current levels.

HPQ (33.69): Hewlett-Packard mentioned positively at UBS: Firm's checks confirm a report that the Navy plans to award an IT services deal to EDS, which would be for a transition period that could last several years. UBS sees the deal as incrementally positive for shares. Firm maintains buy rating. Target is $40.

AXP (14.98); MS (23.11): Goldman Sachs removes AXP from Conviction Sell List; removes MS from Conviction Buy List: American Express (AXP) rating remains sell; target remains $7.50. Morgan Stanley (MS) rating remains buy; target remains $27. The firm also reduces estimates for MS for Q1 and 2009 to $0.22 and $1.60, respectively, from $0.40 and $1.80. Reuters is $0.04 and $2.05, respectively. First Call is $0.21 and $1.95.

DIS (20.21): Walt Disney downgraded to neutral from overweight at JPMorgan: The firm sees limited upside from current levels. F09 estimates are reduced. Target is $21

Banks considering buying toxic assets to be sold by rivals – FT: The FT reports that US institutions that have received government aid, including Citi, Goldman, Morgan Stanley and JPMorgan, are considering buying toxic assets to be sold by rivals under the Treasury's financial rescue plan. The article notes that such moves could draw considerable scrutiny given that the goal of the PPIP is to help banks sell, rather than acquire, distressed assets. However, Wall Street executives argue that banks' asset purchases would help achieve the second goal of the plan, which is to establish prices and reinvigorate the market for illiquid assets. Recall that FDIC chairman Sheila Bair said late last month that she would be open to banks profiting from the disposal of problem loans.