July 13, 2009: Morning Call

July 13, 2009: Morning Call

Fair Value: SP500 – 875.91; NDX: 1418.98; DOW: 8098.42

Technical Levels:

SPX: 765, 788, 832, 875-880 support/ 935-943 resistance

Events:

Pre-market EPS: FAST (.33/485.7M)
*Treasury Secretary Geithner travels to UK, France, Saudi Arabia this week
08:00: Meredith Whitney interviewed on CNBC
14:00: US Monthly Budget Statement (June): -70B
14:30: White House Council of Economic Advisors releases labor market report
18:30: NVLS earnings call
Post-market EPS: NVLS (-.38/117.2M); CSX (.62/2.22B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P and NASDAQ futures are both trading flat with fair value at 8am, rallying 10 points off the overnight session lows on light volume. Asian markets closed sharply lower on political concerns in Japan, growing doubts about the pace of the recovery, and concerns about relative valuations in emerging markets (Japan down 2.5%, Hong Kong down 2.56%, Australia down 1.49%, Shanghai down 1.1%, Taiwan down 3.5%, South Korea down 3.4%, India down 0.77%). Stocks in Japan fell for a 9th straight session after Prime Minister Aso’s plan to dissolve parliament sparked concern that political turmoil will hurt the economy. Fears about the fallout from a potential failure at CIT also weighed on sentiment. China Eastern Airlines (600115.CH) and Shanghai Airlines (600591.CH) both rallied as they resumed trading after announcing terms of their proposed merger. Fortescue Metals (FMG.AU) gained when it reported higher Q4 production, but Rio Tinto (RIO.AU) fell on lower metals prices. European markets have reversed opening declines of 1.0% and are currently trading up between 0.25%-0.50%. Mining and banking stocks are leading the gains. Philips Electronics (PHIA.NA) gained on Q2 net €44M topping estimates. Getinge (GETIB.SS) also traded higher after reports Q2. Friends Provident (FP.LN) traded higher after Resolution (RSL.LN) confirmed its made an initial offer for the company.

Research Calls/Market Moving News:

Goldman Sachs upgraded to buy from neutral at Meredith Whitney Advisory Group LLC: The price target is $186. Whitney will be appearing on CNBC at 8am ET.

Bank of America trying to avoid paying government billions for guarantees against losses at Merrill Lynch – Bloomberg: People familiar with the matter say regulators want BAC to pay at least part of a $4B fee it agreed to in January, because the company subsequently enjoyed implied US backing of $118B of Merrill assets. But the bank argues that since the rescue agreement was never signed and the funding never used, it shouldn't have to pay. One source says the government is probably asking for less than the $4B in the unsigned agreement. Another source says an update may be provided with Q2 results.

GS (141.87): Front-page NYT story profiles Goldman Sachs’s “Swift Return to Lofty Profits.” “Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday. Analysts predict the bank earned a profit of more than $2 billion in the March-June period, because of its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations. The obsessive speculation has already begun, along with banter about how Goldman’s rapid return to minting money will be perceived by lawmakers and taxpayers who aided Goldman with a multibillion-dollar cushion last fall. “They exist, and others don’t, and taxpayers made it possible,” said one industry consultant, who, like many people interviewed for this article, declined to be named for fear of jeopardizing business relationships. Startling, too, is how much of its revenue Goldman is expected to share with its employees. Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee. Top producers stand to earn millions.”

POT (85.07): Potash downgraded to neutral from buy at Sterne, Agee

GE (10.78): General Electric may have upside to Q2 EPS, says Goldman Sachs: The firm believes that GE may post upside Q2 EPS to First Call consensus of $0.23 (Reuters is $0.24) based on results from Industrial and GE Capital. Goldman Sachs maintains its neutral rating, noting that a potential for short covering around earnings is offset by the potential uncertainty regarding US financial regulatory reform. The target remains $16.

AAPL (138.52): Apple to release netbook in October, says Commercial Times – Bloomberg: Without citing sources, the paper says Wintek (2384.TT) will supply the touch panel and Hon Hai Precision (2317.TT) will assemble it.

GOOG (414.40): Think Equity previews GOOG’s Q2 earnings: “We expect GOOG to report an in-line Q2—revenue trends during the quarter were mixed, according to our SEM checks (April-May showed signs of improvement, but June slowed), but we believe GOOG could continue to produce upside to EPS/FCF forecasts, given cost controls and moderate CapEx. While we are expecting a better-than-L-shaped recovery, June jobs data suggested the path out of the recession could be bumpy. Considering MSFT is putting forward more competition in search and projected next-leg growth opportunities, such as display and mobile, still on the horizon, we remain cautious and reiterate our SoF (source of funds) rating and $325 price target. Consensus Revenue Expectations Have Declined But Still Too High, In Our View: As we noted above, we are expecting a better-than-L-shaped macroeconomic recovery, but questions remain as to the timing of the recovery and the ultimate strength of the recovery. Given disappointing June jobs data and our checks with large paid search buyers, which suggested potential consumer weakness in June, the path ahead could be a bumpy one. Consensus estimates for FY09 and FY10 have steadily decreased over the past several quarters, but we believe that they may still be too aggressive. For FY09, the consensus implies 6.3% net revenue growth (versus our estimate of 4.1%); for FY10, the consensus implies 14.4% net revenue growth (versus our estimate of 13.3%). While we find the consensus estimates to be more reasonable than in the recent past, we still believe downward estimate revisions are likely, and we expect those revisions to weigh on GOOG shares.”

INTC (16.04): Needham previews Intel’s Q2 earnings report. “We reiterate our Buy ahead of INTC's 2Q09 earnings on July 14. We expect 2Q09 results to beat consensus based on a strong Nehalem ramp and positive notebook orders at key ODMs. While the shares appear to already discount strong results and higher guidance, we believe upside to margins could still surprise the Street. Despite macro concerns, we believe improved visibility supports seasonal growth in 2H09. Looking into 2010, we believe Windows 7 will drive the much-needed corporate refresh, leading to further revenue growth and the return of normalized earnings. Upside to consensus revenue estimate largely expected; Intel may report a GAAP loss on EU fine. Most Asian OEM/ODMs reported MoM growth in June, suggesting the start of the typical seasonal build. We expect Intel's 1Q09 results to reflect strong order rates for server and mobile products. Intel may report a GAAP loss if it records the $1.45B EU antitrust fine, which is not factored in the Street's (or ours) estimates. 3Q09 revenue guidance should show seasonal growth. We expect guidance to reflect seasonal growth for 3Q09, or roughly inline with 15-yr average of 8.7% Q/Q. We believe the impact of component shortages in PC supply chain could be the biggest risks for 3Q09. The stock could rally on stronger margin guidance. We believe consensus underestimate margin leverage in Intel's model. The Street is modeling 3Q09 margin of 49.6% vs. our 51.8%. While the Bears are worried about mix shifting towards low-end netbooks, we believe Intel continues to limit price cuts to protect its margins. We believe margin outlook could beat expectation. Windows 7 to drive corporate refresh in 2010. As our IT Hardware Analyst, Rich Kugele, wrote on his July 7 piece, we believe Windows 7 will drive a corporate refresh cycle in 2010. The combination of a compelling OS offering, the aging corporate PCs, and weak IT spending this year, we believe there is pent-up demand for corporate PCs that could drive growth in 2010. Since corporate PCs typically use higher-end MPUs, we believe Intel will see further margin expansion.

GOOG (414.40): Barron's Technology Trader is skeptical of Google's plans to develop Chrome OS: While making many of the same observations made by others over the past week, Barron's says Google misunderstands the nature of netbooks in that people do use them to connect to the Web, but they use them for other things, including running standard software. Barron's also notes the overlapping markets for Chrome OS and Android.

BBY (32.77): Best Buy upgraded to outperform from perform at Oppenheimer: Target is increased to $42 from $40. Firm says recent concerns for the shares are largely overblown and the market has been too quick to dismiss the potential benefits for BBY from Circuit City's demise.

WSJ notes companies that may face problems if antitrust scrutiny increases
A "Heard on the Street" column surmises that industries that have not been looked at could be subject to scrutiny if exclusive agreements turn out to be the trigger for Justice Department concern. Best Buy (BBY) and Wal-Mart (WMT) sell a lot of things no one else does, and DirectTV (DTV) has exclusive rights to broadcast every Sunday NFL game. The behavior of companies that offer credit cards and are planning to raise fees before the new rate-limiting law comes into effect may be considered collusive. While not every antitrust case is lost by the company it is filed against, the column suggests avoiding any large targets the Justic Department may choose to make a statement.