Tuesday, April 7, 2009

April 7, 2009: Morning Call

April 7, 2009: Morning Call

Fair Value: SP500 – 833.15; NDX: 1313.91; DOW: 7937.02

Technical Levels:

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


05:00 Euro-zone GDP (Q4 Final): -1.5% QoQ; -1.3% YoY (actual weaker: -1.6% QoQ; -1.5% YoY)
15:00: Consumer Credit (February): -3.0B
16:30: API Crude Oil and Gasoline Inventories
Post-market EPS: AA (-.45/3.99B); BBBY (.44/1.92B); MOS (.55/1.56B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 15 points below fair value while the NASDAQ futures are trading 18 points below fair value at 7:30am ET. European markets are down 1.0% to 1.5% reversing early gains following weaker economic data and general concerns about Q1 earnings. Banks, basic materials, and technology stocks are the weakest sectors. Consumer staples and health care are the strongest. Bloomberg is reporting that Rio Tinto Alcan (RIO.LN; RTP US) is going to slow construction of Yarwun alumina refinery expansion and cut bauxite production at Weipa mine. There are also reports that Rio is offering a 20% price cut on iron ore price to Asian steelmakers as annual talks stall. Euro-zone GDP came in a little weaker than expected. Asian markets closed lower (Japan down 0.28%, Hong Kong down 0.46%, Australia down 1.34%, South Korea down 0.30%, Shanghai up 0.25%). Banks and property shares declined, the latter on news that residential property sales dropped (5%) w/w in Shanghai. Japan’s market was quiet as the market awaits details of the $100B stimulus package to be announced Friday.

Research Calls/Market Moving News:

IMF to warn toxic debts could reach as high as high as $4 trillion - London Times: The Times reports that new forecasts from the IMF suggest that toxic debts incurred by banks and insurers could reach as high as $4 trillion. Recall that the IMF said back in January that it expected writedowns to hit $2.2 trillion by the end of next year. However, the paper notes that the agency is understood to be considering raising that figure to $3.1 trillion in its next assessment of the global economy, which will be published on 21-Apr. In addition, it is likely to boost that total by $900B to account for toxic assets originated in Europe and Asia. Banks and insurers have recorded nearly $1.3 trillion in writedowns thus far.

Rally in investment banks may have run its course - WSJ: In a "Heard on the Street" column, the Journal notes that it remains unclear whether banks will be able to earn returns above their cost of equity, which is now about 13%, while book value may fall further. The paper adds that while margins are expanding, that impact is likely to be partially offset by deleveraging. The article also points out that banks face significant regulatory risk as new capital and liquidity requirements take effect.

WSJ discusses recent developments in the REIT space: In a "Heard on the Street" column, the Journal notes that some semblance of hope seems to have returned to the REIT space, as evidenced by the ability of companies such as Kimco (KIM), Simon Property Group (SPG) and AMB Property (AMB) to raise money via equity offerings. While the offerings were priced at significant discounts to NAV, the article points out that all three of the stocks have rallied in the wake of the deals. The Journal also reports that Cohen & Steers, an influential REIT investor that bought significant positions in all three of the recent offerings, is willing to provide additional equity to 10 to 20 other leading real-estate companies that will be able to ride out the downturn. The article goes on to note that the companies that do survive will likely make attractive takeover targets for both strategic and financial buyers.

GOOG (368.24): Google estimates reduced at RBC: The firm has reduced its Q1 net revenue growth estimate to (4.3%) with EPS reduced to $4.73 from $4.84 vs. Reuters $4.97. Full year growth is reduced to 5.3% vs. prior 6.5%. Shares of GOOG remain.

GM (2.27): GM speeding up bankruptcy plans – Bloomberg: Bloomberg cites people familiar with the matter who say that GM is speeding up preparations for a possible bankruptcy filing even as its directors seek deeper savings in an effort to avoid such an outcome. According to the article, the company's preparations include looking at a 363 sale, which relates to a section of the Chapter 11 bankruptcy code that would create a new car company from the best assets and brands of GM. Recall that new GM CEO Fritz Anderson has said that bankruptcy is more probable given the resistance for concessions from bondholders and the UAW.

ADBE (23.19); MSFT (18.76); CRM (36.48): RBC Capital upgrades ADBE, MSFT, and CRM to outperform. ADBE target to 30 from 23. CRM target to 45 from 37. MSFT target to 27 from 20.

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