October 28, 2009: Morning Call

October 28, 2009: Morning Call

Fair Value: SP500 – 1060.13; NDX: 1720.87; DOW: 9833.78

Technical Levels:

SPX: 875-880, 910, 953, 986, 1003, 1041 support/ 1110 resistance

Events:
Pre-market EPS: COP (.93/37.63B); GD (1.40/7.74B); GT (.40/4.26B); HES (.50/7.1B); IP (.24/5.92B); NYB (.26/244.4M)
07:00: MBA Mortgage Applications
08:30: Durable Goods Orders (Sep): 1.0%; Ex-Transportation: 0.7%
10:00: New Home Sales (Sep): 440,000; 2.6% MoM
10:30: DOE Crude Oil and Gasoline Inventories
11:00: MEE earnings call
16:30: FSLR Earnings Call
Post-market EPS: AFL (1.20/4.75B); ASIA (.21/62.4M): AKAM (.34/199.2M); AVB (1.08/216.0M); CBG (.10/1.04B); CERN (.59/420.4M); DNB (1.10/394.8M); FLS (2.02/1.11B); FSLR(1.69/525.3M); LNC (.80/2.42B); ORLY (.56/1.22B); RYL (-.95/351.7M); VALE(.32/6.12B)

Foreign Market Summary/Key Macro News/Commentary:

The S&P and NASDAQ futures are both 6 below fair value. The USD is stronger for the 3rd day in a row, weighing on commodities (down 1% across the board; Gold down 8 to 1032). Market sentiment also appears to be shifting toward risk aversion - VIX up to 25 from 20 a few days ago, AIG is down nearly 30% in the last 10 days, and Treasury bond auctions continue to see remarkable demand considering the yields. SAP is down 7.7% on weaker guidance. GMAC is in talks with the Treasury regarding another 3-6 billion dollar bailout. Irish banks are down 15% on concerns about potential requirements the EU may impose in return for government aid (ING ripple effect). European markets are down 1.5% with financials, technology, and basic material sectors among the weakest. Asian markets closed broadly lower for the 2nd session in a row. Keep an eye on AAPL and AMZN as they are important "risk proxies". AAPL and AMZN are clearly best of breed and both have scarcity value considering that virtually no other companies are exhibiting the same kind of secular growth. But, both stocks will be subject to increased risk aversion given that momentum investors are quick to sell. That said, I expect both stocks will continue to outperform the S&P 500 and other technology stocks given the scarcity value.

Research Calls/Market Moving News:

MEE (31.31): Massey Energy reports Q3 EPS $0.19 vs Reuters $0.18: Company reports revenues of $641.6M vs Reuters $686.4M. Q3 EBITDA $112.1M vs. Reuters $110.7M. produced coal shipments to be between 37.5 and 38.5M tons, down from prior 38.5-40.5 tons. MEE is trading down 4% in the pre-market.

GMAC in talks with the Treasury about additional financial support – WSJ: The Journal cites people familiar with the matter who say that GMAC and the Treasury are in advanced talks regarding additional financial support. These sources say that the government is likely to inject $2.8B to $5.6B into GMAC, on top of the $12.5B that the lender has already received since December of 2008. The new funds are expected to come in the form of preferred stock. Recall that the government currently owns a 34% stake in the company. The article also notes that the FDIC told GMAC on Tuesday that it will guarantee an additional $2.9B in debt in an effort to make it easier for the company to sell debt to investors. The agency backed $4.5B in GMAC-issued debt earlier this year.

AAPL (197.37): Apple says they intend to defend the Nokia patent case vigorously in 10-K filing: “Plaintiff Nokia Corporation filed this action against the Company on October 22, 2009 in the United States District Court for the District of Delaware, alleging infringement of U.S. Patent No. 5,802,465, U.S. Patent No. 5,862,178, U.S. Patent No. 5,946,651, U.S. Patent No. 6,359,904, U.S. Patent No. 6,694,135, U.S. Patent No. 6,755,548, U.S. Patent No. 6,882,727, U.S. Patent No. 7,009,940, U.S. Patent No. 7,092,672, and U.S. Patent No. 7,403,621. The complaint alleges that these patents are essential to one or more of the GSM, UMTS and 802.11 wireless communications standards, and that the Company has the right to license these patents from plaintiff on fair, reasonable, and non-discriminatory (“FRAND”) terms and conditions. Plaintiff seeks unspecified FRAND compensation and other relief. The Company’s response to the complaint is not yet due. The Company intends to defend the case vigorously.”

MT (35.56): ArcelorMittal reports Q3 EPS $0.60 vs Bloomberg $0.00 and year-ago $2.78: Company reports revenues of $16.17B vs Bloomberg $18.85B and year-ago $35.20B; reports EBITDA of $1.59B vs Bloomberg $1.96B and year-ago $8.58B. Shipments totaled 18.2M tons vs year-ago 25.6M. Guides Q4 EBITDA to $2.0-2.4B vs Bloomberg $2.62B. ArcelorMittal's CFO says 2009 not expected to be a break-even year, net loss likely.

Visa (V) reports Q4 EPS $0.74 ex-items vs Reuters $0.72, authorizes $1B share repurchase plan.

AKS (17.18); X (37.41): KeyBanc downgrades AKS, X: AK Steel (AKS) downgraded to hold from buy. U.S. Steel (X) downgraded to hold from buy. Firm notes concern that the rate of real economic recovery in NA is occurring too slowly relative to current market expectations.

City minister pressuring investment banks to reduce underwriting fees for Lloyds Banking Group's rights issue – Guardian: The article says that six unnamed investment banks have reduced their fees by £100M after lobbying by the Treasury, but says that Lord Myners is pressuring them to lower their charges even more.

ING (12.96): ING Group upgraded to buy at Bank of America Merrill Lynch -- Bloomberg

WSJ discusses latest developments surrounding "too big to fail" legislation: Citing people familiar with the matter, the Journal reports that under a deal hashed out between the Treasury and House Financial Services Committee Chairman Barney Frank (D., Mass.), financial firms with more than $10B of assets would have to pay for the rescue or unwinding of a collapsed competitor. The paper adds that while the agreement fits with efforts on the part of Democrats to shift the burden of future financial crises away from taxpayers and toward the financial industry, it would not prohibit government funds from being injected into failing firms. The Journal goes on to note that roughly 120 banks currently have more than $10B of assets.

BAC (15.45): Bank of America CEO search hits a snag – WSJ: Citing people familiar with the process, the Journal reports that the BofA's search for a new CEO has slowed as directors have been frustrated by what they view as a shortage of high-profile financial executives who are right for the job. The paper adds that while the company had hoped to choose a successor to retiring CEO Ken Lewis in time for the full board to vote on the matter at its regularly scheduled meeting on Wednesday, committee members have indicated that they need additional time. According to the article, Chief Risk Officer Gregory Curl, and Brian Moynihan, the bank's consumer and small-business banking chief, remain the leading internal candidates for the job. However, some large shareholders are pushing hard for the board to seriously consider outside CEO candidates. Of interest, BlackRock (BLK) Chairman and CEO Larry Fink, who is being backed by some executives inside of BofA, has had no conversations with the board and has reportedly told people close to him that he is not interested in the job.

WYNN (56.13): Wynn Resorts upgraded to outperform from perform at Oppenheimer: Target is $73.. Recent weakness offers an attractive entry point.

BX (14.39): Blackstone Group is talks to reduce Hilton's debt load reports the WSJ: Sources say Blackstone has begun talks with lenders to cut up to $5B from the $20B debt load of Hilton Worldwide, the single biggest investment of Blackstone. The firm is considering contributing another $800M in equity to buy back debt at a discount as well as seeking to extend some debt maturities. Talks are in the preliminary stages. One complication is that about $4B in debt is held by the Federal Reserve from the Bear Stearns deal.