August 13, 2009: Morning Call

August 13, 2009: Morning Call

Fair Value: SP500 – 1003.96; NDX: 1618.98; DOW: 9334.10

Technical Levels:

SPX: 875-880, 910, 953, 986 support/ 1044 resistance

Events:
Pre-market EPS: ABV (1.04/2.8B); GIL (.31/339.5M); KSS (.67/3.7B); URBN (.25/457M); WMT (.86/103.1B); WW (.69/390.6M)
08:00: WMT earnings call
08:30: US Import Price Index (July): -0.5% MoM; -19.1% YoY
08:30: US Retail Sales (July): 0.8%; Less Autos: 0.1%
08:30: Initial Jobless Claims: 545,000; Continuing Claims: 6.3 million
08:30: FASB Board Meeting discusses potential expansion of fair value rules to loans
10:00: Business Inventories (June): -0.9%
10:30: EIA Natural Gas Storage Change
13:00: Treasury auctions 15 billion in 30-year bonds
Post-market EPS: A (.11/1.1B); ADSK (.19/413.1M); DV (.51/376.9M); JWN (.43/2.1B);

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 9 points above fair value and the NASDAQ futures are trading 17 points above fair value at 8am ET. Futures rallied overnight following better than expected GDP news from Germany, France, and the Euro-zone. European markets are up 1.2% to 1.5% with basic resource and financial sectors leading the advance after copper rallied on the LME. Food & beverage space underperforms again, with AB Inbev dropping 3.8% after saying H2 earnings won’t rise at same pace as H1, dragging peer Heineken lower. Nestle drop another 1.5% after y’days disappointing figs. Asian markets closed higher with India leading the region with a gain of 3.3%. India rose when the government promised to cut corporate taxes from 30% to 25% and eliminate a levy on equities trading. Concerns about China’s bank lending tempered optimism in Hong Kong. Fushan International Energy (639.HK) and Hopson Development (754.HK) rose on being included in the MSCI Emerging Markets Index.

Research Calls/Market Moving News:

BAC (15.93): BAC trades 5% higher following reports that Paulson and Company acquired 168 million shares in the second quarter. The shares traded between 6.82 and 14.17 during Q2 so his average price is materially below the current price. Paulson does not need to update his position until 45 days after Q3 given that it represents about 2% of the BAC shares outstanding. He could have easily sold or pared back his stake substantially given the run in the shares. But, perception is reality and right now traders perceive that the “smart money” is long BAC. I am bearish on BAC shares at the 16-17 dollar level. Paulson also disclosed stakes in GS, FITB, and RF.

WMT (50.51): Wal-Mart reports Q2 EPS $0.88 vs Reuters $0.85: Company reports net sales of $100.08B vs Reuters $100.13B. Guides Q3 EPS to $0.78-0.82 vs Reuters $0.80. Guides full year EPS to $3.50-3.60 vs Reuters $3.53, tightened from previous $3.45-3.60. Wal-Mart reports US comps ex-fuel (1.2%) vs StreetAccount consensus +1.0%. Guidance was for flat to +3%. Total net sales for the quarter were down 1.4% and increased 2.7% ex-currency. Gross margin (% of total revenue) reported 25.5% vs SA 24.3%. Inventories ended the quarter at $33.86B compared to $34.39B in Q1 and $34.51B in Q4. Q3 guidance assumes comps flat to +2% at Walmart and flat plus/minus 1% at Sam's.

NTES (46.65): Netease.com reports Q2 EPADS $0.53 vs Reuters $0.45: Company reports revenues of $126.4M vs Reuters $120.4M. Pali Capital is saying that “organic results” missed and that one-time gains led to the bottom line beat. “2Q09 results beat on paper but organic growth is negative in game business – NTES reported 2Q09 revenue of $126.4M, $6M above the Street and our estimate however, the top line beat was driven by the recognition of $12.2M in game revenue from dormant accounts as a result of a change in the user agreement (outstanding points in accounts that are dormant for 540 days or more will be removed after 30 days). It is a one time non-recurring event. Excluding this recognition, game revenue would have been $102.0M, below our $111.0M estimate while total revenue would have been $114.2M, below consensus of $120.3M. The decline was largely due to the weakness in its main game FWWJ, as the ACU number dropped 8% Y/Y and 10% Q/Q from 1.92M in 1Q09 to 1.72M in 2Q09.”

AVB (66.61): AvalonBay (AVB) files to sell up to $400M in common stock through BNY Mellon, BoA Merrill and Deutsche Bank.

LDK (11.21): LDK is trading down 15% following weak Q3 guidance. Think Equity maintains their “source of funds” rating and 8 dollar target. “We believe that LDK's aggressive growth and financing strategy is coming to a critical turning point in its business. If the company can restructure its debt and reduce its near-term cash obligations, we see potential for the company to clean up its balance sheet and gain market share as the low-cost provider of crystalline wafers as a vertically integrated supplier. However, in the meantime, we believe that the company has an uphill climb facing firm polysilicon prices, difficult negotiations on restructuring debt, ongoing price pressure, and significant challenges in ramping its polysilicon manufacturing facility.”

Solar Energy sector downgraded to neutral at Barclays Capital: Investors should wait for better entry points. Sees downside risk from a lack of near term potential catalysts and relatively rich valuation as well as weak seasonality.

JASO (4.47): JA Solar downgraded to equal-weight from overweight at Barclays Capital: Cites concerns that limit upside to the name even though the $4 book value provides potential downside support.