August 17, 2009: Morning Call

August 17, 2009: Morning Call

Fair Value: SP500 – 1002.43; NDX: 1610.95; DOW: 9298.71

Technical Levels:

SPX: 875-880, 910, 953, 986 support/1010, 1044 resistance

Events:

Pre-market EPS: CIT (-1.83/412.2M); LOW (.54/14.3B)
08:30: Empire Manufacturing (August): 2.0
09:00: Net-Long Term TIC Flows (June)
09:00: LOW earnings call
13:00: NAHB Housing Market Index (August): 18
18:00: TSL earnings call
Post-market EPS: A (.11/1.0B); TSL (.31/149.4M)


Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading 20 points below fair value and the NASDAQ futures are trading almost 30 points below fair value. The financial press is citing the slight miss in Japanese GDP (up 0.9% QoQ vs. up 1.0%) as the primary cause of the weakness. But, the more important catalyst is the big technical break in Shanghai markets, which fell 6.1% overnight on concerns about tighter monetary policy and a bigger than expected drop in foreign direct investment (down 20.3% vs. down 16.8%). Hong Kong fell 3.6% and Japan declined 3.1%. India dropped 4.07%. Banks and basic material stocks fell as much as 8.5% across the region. Weakness in Chinese markets is weighing on commodity prices, which are down about 2.5%-4.0%. European markets are down 2.0% to 2.5% with basic material stocks leading the drop with losses of 4.0% to 5.0%. There is limited corporate news in Europe and the losses are broad-based with every group in the Bloomberg European 500 index currently trading lower. Autos pared declines as Volkswagen (VOW.GR) recovered slightly after releasing Jul vehicle sales. Decliners on the FTSE 100 lead advancers 19-1.


Research Calls/Market Moving News:

FSLR (141.78): Barron's is cautious on the earnings at First Solar, might be from aggressive accounting: The rise in operating income masked the falling cash flow. Receivables grew $166M but revenue only grew $108M and the company lent $25M to a customer outside those receivables. The recent quarter earnings beat estimates because of bookkeeping; the company recognized $84M in revenue as a "result of reclassifying its investment in a project as 'debt' rather than 'equity'." The company gave up the right to convert an investment in a solar farm in Germany into an equity stake. Additionally, the company booked $104M of its purchase of OptiSolar as an asset it will expense only if and when it sells the project even though regulators have required companies to book similar deals as an intangible asset that will be steadily amortized and expensed. FSLR is trading down 6%.

FSLR (141.78): Jefferies comments on Barron's article on First Solar: The firm takes issue with 3 points made in the article. With respect to working capital, Jefferies notes that the company had rising sales and made a change in customer payment terms to bring more in line with industry standards, and says the changes in payment terms have most impact to cash flow at the time they are put in place. In response to Barron's claim about bookkeeping in 2Q08, and the treatment of intangible assets with respect to the Optisolar acquisition, Jefferies believes both were accounted for appropriately. The rating remains buy; target $200.

COF (35.08): Capital One reports Jul managed trust charge-off and delinquency data: All comparisons are month/month: US Card: net principal charge-offs $524.9M vs $527.8M; annualized net charge-off rate 9.83% vs 9.73%. 30 days + delinquencies $3.07B vs $3.09B for a rate of 4.83% vs 4.77%. COF shares are trading down 4.5%.

Oppenheimer downgrades REITs: AVB, BMR, BXP: Biomed Realty Trust (BMR) downgraded to perform from outperform. Boston Properties (BXP) downgraded to perform from outperform. HCP (HCP) downgraded to perform from outperform. AvalonBay (AVB) downgraded to underperform from perform; target is $55. UDR Inc (UDR) downgraded to underperform from perform; target is $10. Washington REIT (WRE) downgraded to underperform from perform; target is $22.

LOW (22.83): Lowe's reports Q2 EPS $0.51, including charge: The figure includes a pre-tax charge of $48M related to a re-evaluation of future store sites. Reuters $0.54. Company reports revenues of $13.84B vs Reuters $14.35B. Guides Q3 EPS to $0.21-$0.25 vs Reuters $0.27. For 2010, expansion in North America will be below previously anticipated levels, and new store openings will likely be in the range of 35 to 45. LOW is trading down 11.5%.

Barron's Technology Trader Fall Preview considers Apple, smartphones and the solar industry: The column considers what may happen during autumn. Apple (AAPL) seems to be clearly up to something and the general consensus is that a tablet computer is coming in early September. In smartphones, there is the coming launch of Motorola's (MOT) new phones based on the Google (GOOG) Android operating system in a bet the company move. Notes some doubts emerging about the success of the Palm Pre (PALM). The Nokia (NOK) deal with Microsoft (MSFT) underscores the weakness of Nokia's smartphone lineup and Research in Motion (RIMM) is probably not worried too much over their position in the enterprise market. Barclays became cautious on the solar industry after poor results from 3 Chinese makers and questions over whether the German subsidy program is sustainable.

Barron's says many retail stocks may correct sharply in coming months: The rally in retail may be sending a false signal about the sector's prospects. Results, particularly for specialty stores and department stores, are likely to disappoint over the next few years, especially as consumer struggle to pay down debt loads. One investor says the consumer is going to be in a secular downturn for years. It has usually been dangerous to bet against the U.S. consumer but much of the recent improvement in earnings came from beating depressed estimates even as revenue fell. A combination of higher taxes, lower wages and high debt levels may keep many consumers home and away from the shops.

CAT (46.00): WSJ is cautious on industrial stocks: A 'Heard on the Street' column says that Caterpillar (CAT) exemplifies the sector perfectly in that the company beat estimates largely due to cost cuts, a lower tax rate, currency gains and accounting gains on shrinking inventory. Revenue fell 41%. Disappearing demand is what investors should be focused on. Morgan Stanley estimates revenue dropped 20% in Q2 industry-wide while order books dropped 30%.

WSJ suggests unloading home improvement stocks: The may be positive news on the housing front this week but there is already a lot of good news priced into the stocks of Lowe's (LOW) and Home Depot (HD), both trading for 18x estimates compared to 15x for the S&P 500. They are vulnerable to any disappointing housing news, something likely given the unemployment situation and continuing foreclosures. There will be better opportunities to buy the names.