July 8, 2009: Morning Call

July 8, 2009: Morning Call

Fair Value: SP500 – 877.79; NDX: 1403.89; DOW: 8116.12

Technical Levels:

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

Events:

G-8 Meeting Starts today
Pre-market EPS: FDO (.59/1.8B)
05:00: Euro-zone GDP (Q1): -2.5% QoQ; -4.9% YoY
05:00: Euro-zone Household Consumption (Q1): -0.5%
07:00: MBA Mortgage Applications
09:00: NYX presents at Virtual Investor Forum
10:00: FMC presents at Morgan Stanley Energy Conference
10:00: FDO earnings call
10:30: DOE Crude Oil and Gasoline Inventories: -2.8m Crude draw; +900k Gas Build
12:55: Fed’s Evans speaks on a subject TBA
13:00: Treasury auctions 19 billion in 10 year notes
13:00: APC presents at Morgan Stanley Energy Conference
15:00: Consumer Credit (May): -7.8B
17:00: AA earnings call
17:00: Select US Retailers release June Same-Store Sales
Post-market EPS: AA (-.34/3.9B); RT (.19/303.9M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 3 points above fair value and the NASDAQ futures are trading 7 points above fair value at 8am ET. The MSCI World index fell for a fifth straight day, commodities are down 1%, the USD is modestly higher against the Euro, and Treasury bonds are up a few ticks ahead of the 10-year note auction. Asian markets closed lower (Japan down 2.3%, Hong Kong down 0.79%, Taiwan down 0.70%, Shanghai up 0.35%, India down 2.3%). Financials dropped as the cost of protecting regional corporate and sovereign bonds from default jumped. Australia reversed declines as miners jumped on a report China agreed to a 33% iron-ore price cut. Doubts about the pace of economic recovery sent Hong Kong and Indian markets lower. European markets are flat to down 0.50% in a listless trading session. The final revision to Euro-zone Q1 GDP was in-line with expectations (-4.9% YoY vs. –4.8% consensus).

In the May 20th morning call, I noted that the S&P 500 would settle into a trading range between 875-950 for the next few months and that opportunistic traders should trade around these broad market levels. On June 23rd, the S&P had the first real test of the bottom end of the range and I noted that, “opportunistic traders should buy the bottom end of the range.” I am no longer advocating this "trade the range" strategy because the underlying bid is appreciably weaker than I expected. On balance, economic data has been disappointing over the last few weeks and market participants are clearly beginning to question the long-term sustainability of any economic recovery. Thus far, the massive monetary and fiscal of stimulus (and trillions in additional financial backstops/guarantees) have only appeared to trigger a modest improvement in the data. As TCW’s Jeffrey Gundlach noted in a letter to investors on June 15: “Well, given the government’s massive intervention in our economy, a few blips in the econ stats would be the least we should expect! If we’re to indulge in horticultural metaphors, I suspect these green shoots owe more to Miracle-Gro than properly fertilized soil and the natural change in the seasons. Like perennials overdosed with Miracle-Gro, the economy may manage a year or two of real growth under the goad of Treasury-issued debt and Fed-engineered inflation—before burning out.” In terms of strategy, traders should be focused on short-term trading strategies rather than aggressively buying the bottom end of this range (875-880). I would look to buy more aggressively on a technical break below the trading range – say around 855-860.

Research Calls/Market Moving News:

GOOG (396.63): Google introduces Google Chrome operating system on website: The open-source OS will initially be targeted at netbooks; the company will open-source the code later this year. Google is working with multiple OEMs to make netbooks running Google Chrome OS available for purchase in H2/10. While there are areas where Google Chrome OS and Android overlap, the projects are different.

AAPL (135.40): Apple disclosures about Steve Jobs's health remain under SEC scrutiny – Bloomberg: A person familiar with the matter says investigators want to make sure investors weren't misled by January statements that moved Jobs's condition from "relatively simple" to "more complex" in nine days. The source says the review does not mean Jobs or Apple will be accused of wrongdoing. Regulators are particularly interested in exactly what the company's board knew when it made the 5-Jan and 14-Jan statements. Another source says Apple's lead directors were being briefed by Jobs's doctors about his condition at the time.

FSLR (144.70): First Solar upgraded to buy from accumulate at ThinkEquity (144.70): “Conclusion: Given the recent sell-off of solar stocks and FSLR's 29% move lower from its May high, we believe investors can begin to get constructive on the stock in anticipation that the company meets 2Q09 estimates, reiterates 2009 guidance, and the potential for consensus 2010 estimates to increase on higher systems sales. We believe FSLR has the only unquestionably sustainable business model in the solar industry and is actively taking market share despite the weak business environment. We believe shares are oversold at current levels and are upgrading the stock to Buy (from Accumulate) based on valuation and raising our price target, which offers 24% upside from current prices. Additional Key Points Include: • We expect FSLR to meet consensus estimates and reiterate guidance based on our most recent round of channel checks. • We believe that the 2Q09 sell-through is still a concern and modest inventory build is a possibility, but we have not found significant volumes of inventory in the channel. • Euro-denominated pricing appears to be moving lower, but USD/Euro exchange rate is offsetting declines, in our view. We expect module ASPs at approximately $1.97/W for the quarter. 2Q09 sell-through is a concern, but we have not found significant volumes of inventory in the channel. While reports of large volumes of FSLR modules have been widely disseminated for the past two quarters, we have not found
confirmation of those volumes. However, our checks indicate that inventory of FSLR modules has increased modestly at the installer level and that the secondary market for FSLR product has seen some volume that has taken several weeks to clear. While we view slower moving inventory as a concern and would not be surprised to see a small inventory build at the OEM level, we believe the company is focusing on removing barriers to sell-through and will likely not see a large inventory build anywhere in the channel despite increasing production volume. We also believe the company is using its North American systems business, which we believe has a much larger backlog than the company has indicated, as a safety valve for volumes allocated to Europe, which the company is not able to sell. Given our channel checks and management's history of guiding very conservatively, we believe FSLR is likely to at least meet consensus estimates of $460M in revenue and $1.61 in EPS and has a significant chance to meet our expectation of $484M in revenue and $1.69 in EPS.”

RIMM (66.46): Piper Jaffray is cautious on RIMM citing increased smartphone competition and “slightly weaker” June sales: “Slightly Weak June Sales: Our checks indicated BlackBerry sales declined in June at AT&T and Sprint due to increasing smartphone competition, as BlackBerry sales appeared to lose share to the Palm Pre at Sprint and the new 3GS iPhone and older $99 iPhone at AT&T. BlackBerry sales at T-Mobile remained solid, but Verizon sales were slightly weaker following the termination of the BOGO promotion. Maintain Neutral: Due to our longer term concern of increasing smartphone competition and RIM's increasing mix of sales to consumers combined with RIM's ongoing investments to grow its global brand and market share, we anticipate declining margin trends. As such, we maintain our Neutral rating. • Pre Launch Impacts Blackberry Sales At Sprint: Our checks indicated Curve sales slightly declined in June at Sprint due to solid sales of the Palm Pre. Despite initial stock-out issues of the Pre, our June checks indicate adequate Pre stock at most Sprint channels, and we anticipate solid sell-through of the Pre over the next several months could potentially lead to softer Curve sales. • iPhone Launch Impacts Blackberry Sales At AT&T: Our checks indicated the new 3GS iPhone and older 3G iPhone's new $99 price impacted BlackBerry and other competitor sales. At AT&T, our checks indicate the Bold remains the top selling BlackBerry device with the 8900 a distant second and limited sales for the older Curve and Pearl products. Overall, our checks indicated the new iPhone impacted BlackBerry sales, as June sales appeared lower than May levels.”

FCX (45.00): Citibank upgrades FCX to buy from hold. Price target is 58 a share.

FDO (27.75): Family Dollar reports Q3 EPS $0.62 vs guidance $0.54-0.58 and Reuters $0.59: Company previously reported revenues of $1.84B. Guides Q4 EPS to $0.39-0.43 vs Reuters $0.39. Guides full year EPS to $2.03-2.07 vs Reuters $2.00. FDO noted the quarter is off to a good start, with sales in comparable stores increasing an estimated 2% in June. For Q4, the company expects that net sales will increase between 4%-6% and expects comparable store sales will increase 2%-4%.

Federal regulators consider restrictions on speculative traders in oil, natural gas, and other energy products – NYT: The Commodity Futures Trading Commission says it will consider using its existing powers to impose volume limits on such trading by purely financial investors. Trading by businesses such as airlines or oil companies would not be restricted. The CTFC also intends to reveal more about exactly who the traders are. The article notes the ideas, borne of recent chaotic movements in the price of oil, could be fiercely opposed by big banks, which are large traders in commodities. The government already limits speculative trading in agricultural commodities. Bloomberg had a high profile article on this topic yesterday and concerns about the trading limits caused sharp sell-offs in CME and ICE shares.

AMGN (52.23): Amgen's Denosumab demonstrates superiority over Zometa in head-to-head phase 3 trial – shares are trading up 7 in the pre-market: AMGN announced that a pivotal, Phase 3, head-to-head trial evaluating denosumab versus NVS's Zometa (zoledronic acid) in the treatment of bone metastases in 2,049 patients with advanced breast cancer met its primary and secondary endpoints and demonstrated superior efficacy compared to Zometa.

AMGN (52.23): Amgen target raised to $60 from $54 at Deutsche Bank following Denosumab data: The firm sees the results as the best possible scenario for AMGN after the company announced Dmab showed superiority vs. Zometa in breast cancer with both primary and secondary endpoints being met. Superiority in breast cancer is seen increasingly the likelihood of superiority in other indications.

FDIC chief Sheila Bair not anxious to have private-equity firms buy banks - NY Post: A participant in a five-hour 6-Jul meeting between Bair, banking figures, and private-equity figures provides the assessment of her attitude. The source, which says the meeting was friendly, suggests Bair may feel there are too many banks, making consolidation preferable to new ownership. Wilbur Ross says, "I left the meeting feeling the FDIC was nervous about private equity, but not that they did not want to work with us."