Wednesday, May 6, 2009

May 6, 2009: Morning Call

May 6, 2009: Morning Call

Fair Value: SP500 – 901.73; NDX: 1421.86; DOW: 8381.29

Technical Levels:

SPX: 676, 719, 765, 788 support/ 898, 943 resistance

Pre-market EPS: ANR (.70/513.1M); DVN (.30/1.85B); GRMN (.41/530.7M); HK(.02/241.5M); MMC (.51/2.95B); PCG (.71/3.46B); RRD (.37/2.47B); VNO (1.58/605.1M); XTO(.77/2.11B); RIG (3.47/3.09B)
04:00: Euro-zone PMI Services (April): 42.1; Composite: 40.5 (actual better: Services-43.8; Composite-41.1)
05:00: Euro-zone Retail sales (March): 0.1% MoM; -2.6% YoY (actual weaker: -0.6% MoM; -4.2% YoY)
07:00: MBA Mortgage Applications
08:15: ADP Employment Change (April): -645,000
08:30: PHM earnings call
09:30: Fed’s Stern speaks to Senate on “Too Big To Fail.”
10:00: CSX Annual Meeting
10:30: DOE Crude Oil and Gasoline Inventories
16:30: CSCO earnings call
17:00: Select US Retailers release April Same-Store Sales
17:30: Fed’s Yellen speaks on a topic to be announced
Post-market EPS: APC (-.59/1.61B); ATW (.83/138.1M); CECO (.36/445.8M); CSCO(.24/8.07B); MUR (.26/469.0M); PRU (.96/6.48B); SUN (.40/10.3B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 9 points above fair value at 8:45am ET following a better than expected ADP Employment Change number. A WSJ report that the US will require Bank of America to raise an additional 34 billion in common equity had weighed on the futures earlier in the session. The Bank of America news is not a big surprise given that BAC shares were pricing in a large preferred equity conversion. Most sell-side analysts that have a “buy rating” on BAC shares were expecting a preferred conversion of between 25-45 billion. That said, BAC investor expectations regarding future dilution improved in recent days due to rumors that the company would not be required to convert anywhere near the 25-45 billion. The CNBC spin this morning that this news is “better than expected” because analysts “were expecting 65-70 billion in capital” is non-sense. The bear case on BAC expects 65-70 billion in capital needs by the end of 2010. I would not be surprised to see some near-term profit taking to the 875-880 level on the S&P 500 despite the better than expected ADP Employment change number.

European markets are up 0.25% but have pared stronger gains earlier in the session. Advancers on the FTSE 100 lead decliners 13-7. Trading lower after results are Total (FP.FP) and BAE Systems (BA.LN). BNP Paribas, Deutsche Post (DPW.GR) and BMW Group all traded higher after results. Asian markets closed mixed but Chinese markets continued higher (Hong Kong up 2.4%, Shanghai up 1.4%, Australia down 0.60%, South Korea down 0.50%, India down 1.4%). Financial stocks were strong due to two strong earnings reports from 2 banks based in Singapore (United Overseas and Overseas Chinese Banking Corp). Resource stocks fell.

Research Calls/Market Moving News:

Bank of America May Need About $34 Billion of Capital-Bloomberg: “Regulators have determined that Bank of America Corp. requires about $34 billion in new capital, the largest need among the 19 biggest U.S. banks subjected to stress tests, according to a person with knowledge of the matter. Citigroup Inc.’s shortfall is more limited because the company already plans to convert government preferred shares to common stock, people familiar with the results said. JPMorgan Chase & Co. doesn’t need a deeper reserve against losses, according to people familiar with that company’s result. The banks may outline their strategies to add capital, or in other cases buy out government stakes, after the Federal Reserve publishes the stress tests results tomorrow. Companies requiring more capital could raise all the funds through conversions of preferred shares if they choose, the people said.”

Citi pushing to speed up brokerage venture with Morgan Stanley (MS) – Bloomberg: People familiar with the matter say Citi wants to close the deal by 1-Jun, rather than in Q3. The sooner the deal is closed, the sooner Citi can book a $5.8B gain, which would reduce its perceived need for additional capital

RIG (72.97): Transocean reports Q1 EPS $3.75 ex-items vs Reuters $3.50: Company reports revenues of $3.12B vs Reuters $3.09B. Average total drilling fleet dayrate $256.5K vs year-ago $228.4K; Utilization 91% vs year-ago 91%

RIMM (75.40): Research In Motion's target increased at Oppenheimer after channel checks: The shares are rated outperform and the target is increased to $85 from $70. The firm cites greater confidence in near-term demand and the possibility of some inventory restocking. Oppenheimer feels trends have stabilized with upside potential as volume ramps and product mix improves.

China solar-power rollout to smash target - South China Morning Post
Speaking at a solar energy conference, a researcher at the National Development and Reform Commission says the country may have 10,000 MW of installed solar energy capacity by 2020, vs the target of 1,800 MW. The researcher stresses that the forecast is his personal opinion, and adds that the idea of meeting the international goal of getting 1% of electricity from solar power by 2020 is an unrealistically high target (40,000 MW) for China. The country had less than 100 MW of solar power capacity attached to the grid at the end of 2008

MOS (46.27): Globe and Mail Mosaic (MOS) is latest rumored target of BHP Billiton

Capital Raises: Dow Chemical (DOW) to offer approximately $1.65B in common stock with $625M from selling shareholders. DR Horton (DHI) announces $400M convertible note offering through Citi. Delta Petroleum (DPTR) announces 70M share secondary through JPMorgan, BMO and Deutsche Bank

Private equity tries to buy banks – NYT: The Federal Reserve, however, limits private equity firms to a minority interest. The firms are lobbying regulators to change their position, because they could then purchase what they think will be money-printers once the recession is over. Laws prohibit mixing banking and commerce, and the government also wants to be able to use a parent company's funds to stabilize a bank that needs it. The structure of private equity firms would make such funding problematic. Private equity firms have, as in the case of IndyMac, squeaked around the rules by arranging to buy banks in a way that no one of them has a majority interest. JC Flowers has purchased a bank using his own money -- which is perfectly legal, though he still can't use his firm's billions -- and is now hoping for the rules to change

WYNN (49.98): Wynn Resorts downgraded to market perform from outperform at Bernstein: Target increased however to $40 from $30. Firm cites valuation.

DVN (54.48): Devon Energy reports Q1 EPS $0.48 vs Reuters $0.29: EPS excludes a $4.2B non-cash, after-tax reduction in the carrying value of oil and gas properties. Company reports revenues of $2.03B vs Reuters $1.84B. Combined oil, gas and natural gas liquids production averaged 685K oil- equivalent barrels (Boe) per day in Q. This was a seven percent increase in production compared with Q1 of 2008. The production growth was concentrated in onshore fields within the United States and Canada.

Some REITs buying back their bonds at steep discounts – WSJ: The Journal reports that in an effort to deleverage, in the past six months, 16 large REITs have repurchased an aggregate $3.9B in face value of bonds at discounted price of $2.5B

FWLT (24.04): Foster Wheeler reports Q1 EPS $0.59 ex-items vs Reuters $0.69: Company reports revenues of $1.26B vs Reuters $1.47B. Consolidated backlog in future revenues $4.91B vs year-ago $8.95B New orders booked in future revenues $906M vs year-ago $1.24B

CHK (20.40): Chesapeake Energy removed from Conviction Buy List at Goldman Sachs: The shares are maintained buy with a $25 target.

Study says nearly 30% of US homeowners underwater – WSJ: The Journal reports that Web site said that overall, the number of borrowers who are underwater climbed to 26.9M at the end of Q1 from 16.3M at the end of Q4. The latest figure represents 28.9% of all homeowners, up from 17.6% in Q4 and 14.3% in Q2. According to the Journal, there is some dispute over just how many borrowers are underwater, as the answer depends on several assumptions, including home values and mortgage debt outstanding. In addition, underwater estimates can be overstated if they use price data that includes large numbers of foreclosures. Moody's estimates that of 78.2M owner-occupied single-family homes, 14.8M borrowers, or 19%, owed more than their homes were worth at the end of Q1, up from 13.6M at the end of last year. The article notes that given that with the surge in underwater borrowers, fewer homeowners will qualify to take advantage of a critical component of the Obama administration's plan to stabilize the housing market. Under that plan, as many as 5M homeowners whose loans are owned or guaranteed by Fannie and Freddie, can refinance their mortgage if it is a maximum of 105% of the loan's value. FHFA director James Lockhart says that the government may increase that limit.

Banks will have to show ability to sell debt without FDIC guarantee as a condition of exiting TARP – WSJ: The Journal cites senior government officials who say that banks that want to return TARP funds will have to demonstrate their ability to raise debt without an FDIC guarantee. Banks have issued more than $322.5B under the TLGP since the program began last fall. According to the article, regulators could detail the complete set of guidelines outlining how banks can repay TARP funds as early as Wednesday. Note that JPMorgan (JPM), Goldman Sachs (GS), BB&T (BBT) and BNY Mellon (BK) are some of the banks that have recently been able to issue debt without the FDIC wrap.

Freddie Mac receives favorable accounting ruling – WSJ: In an interview with the Journal, acting CEO John Koskinen says that Freddie Mac has received a favorable ruling from the SEC that will allow it to avoid what the company had feared might be a $30B charge against earnings. The article notes that the company sought guidance from the SEC earlier this year after the Obama administration announced a plan in February under which the GSEs will lower mortgage payments for millions of Americans in an attempt to prevent foreclosures. The plan will require the companies to give up income and reduce the value of many mortgage securities they hold. Koskinen also says that the company hopes to announce the hiring of a new CFO this month, and a new CEO by mid-July.

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