October 7, 2009: Morning Call

October 7, 2009: Morning Call

Fair Value: SP500 – 1051.09; NDX: 1703.76; DOW: 9678.20

Technical Levels:

SPX: 875-880, 910, 953, 986, 1003 support/ 1048, 1110 resistance

Events:

Pre-market EPS: COST (.76/22.26B); FDO (.41/1.84B); HELE (.39/160.7M); MON(.01/1.9B)
05:00: Euro-zone GDP (Q2 Final): -0.1% QoQ; -4.7% YoY
05:00: Euro-zone Household Consumption (Q2 Final): 0.2% QoQ
06:00: German Factory Orders (August): 1.1% MoM; -20.0% YoY
08:30: MON earnings call
10:30: DOE Crude Oil and Gasoline Inventories
11:00: COST earnings call
11:30: ADBE Analyst Meeting
13:00: ORCL Annual Meeting
13:00: Treasury auctions 20 billion of 10-year notes
15:00: US Consumer Credit (August): -10.0B
16:00: Select Retailers release September Same-Store Sales
Post-market EPS: AA (-.12/4.58B); RT (.09/295.0M)

Foreign Market Summary/Key Macro News/Commentary:

Equity futures are trading flat with fair value at 7:30am ET. Asian markets surged overnight excluding India in response to the strong gains in Europe and the United States on Tuesday (Japan up 1.1%, Hong Kong up 2.07%, Australia up 2.27%, South Korea down 0.02%, India down 0.90%). Energy shares rose on oil’s gains, gold miners were higher on record high prices, and banks benefited from broker upgrades. In Australia Brambles (BXB.AU) fell on recent management changes and increased costs coming from a strategy makeover. Steel shares, metal stocks, and trading houses all made gains in Japan. South Korea ended flat after volatile trade. Banks and technology stocks gained but automakers fell on concerns about the won’s strength. India and New Zealand reversed gains as respectively IT and telecom stocks came under selling pressure and as investors took profits in Telecom (TEL.NZ) and Fletcher Building (FBU.NZ). China remained closed for National Day. European markets are down 0.25%, fluctuating between modest gains and losses in the early morning session. Euro-zone GDP came in 1 tick below consensus (down 4.8% YoY vs. street at –4.7%). German Factory Orders for August came in better than expected (1.4% vs. 1.1% MoM) but July was revised lower to 3.1% vs. prior estimate of 3.5%. Sainsbury (SBRY.LN) announced in its Q2 trading statement that like-for-like sales up 5.4% excluding fuel and VAT. Q-Cells (QCE.GR) traded higher on renewed market talk of interest from Siemens (SIE.GR). Lloyds Banking Group (LLOY.LN) downgraded to underperform at Fox-Pitt.


Research Calls/Market Moving News:

AAPL (190.01): Piper Jaffray’s bi-annual Teen Survey results were released last night after the market closed and showed Apple’s lead widening. “Apple's dominance in the CE and online music markets is going seemingly unchecked, capped by market saturation for iPod and iTunes usage. Also, interest in the iPhone remains high. In our most recent survey, those who plan on purchasing an iPhone in the next six months was up to 22%. We believe that the teen demographic is a critical component of long-term growth in the digital music and mobile markets, and Apple is taking its leading position in music and mobile markets. iPhone Interest Solid, $99 iPhone Appears Meaningful For Share Gains. In our spring-09 survey (before the $99 iPhone 3G was available), 8% of students surveyed owned iPhones and an additional 16% expected to buy an iPhone in the next 6 months. In our most recent survey, the iPhone's share amongst teens rose to 15%, and interest was up to 22% planning on purchasing an iPhone in the next six months. We believe the $99 iPhone 3G has been a meaningful part of share gains in the last six months. Previously, teens were indicating that the plan pricing and handset pricing were too high for them (and their parents) to buy iPhones. The lower pricing appears to have been a catalyst for share gains. Also, the popularity of the App Store and the quality of games available for the iPhone have likely led to the gains among the teen demographic in recent months.” Reiterate Overweight and 235 target.

COST (57.93): Costco reports Q4 EPS $0.85 vs Reuters $0.77: Company reports revenues of $22.38B vs Reuters $22.27B. US comps were (6%); international comps (3%); total comps (5%). US comps (excluding the impact from gasoline deflation) were (1%); international (excluding the effects of foreign exchange) +7%; total comps (excluding aforementioned effects) +1%. Q4 results benefited from a $0.02/share LIFO credit, and were adversely impacted by previously reported factors including on-going softness in US sales, higher employee benefit costs, and lower US dollar amounts of international profits as a result of weaker foreign currencies.

BAC (17.00): Bank of America upgraded to outperform from market perform at Wells Fargo: Valuation range increased to $24-$27 from $14-$16. Firm believes BAC’s potential share price appreciation compared to “normalized” EPS is the strongest of their coverage universe.

GOOG (498.74): Google's target increased at Oppenheimer: Shares are rated outperform and the target is increased to $565 from $490. Following conversations with a leading PPC vendor and recently released paid click data, the firm expects GOOG to report better than expected 3Q results on 15-Oct after the close. Oppenheimer believes paid clicks and pricing have improved vs. 2Q, and that advertisers are less focused on ROI, instead looking to drive higher sales and market share.

CSCO (23.35): Cisco Systems upgraded to outperform from market perform at William Blair

VALE (23.87): Companhia Vale do Rio Doce (CVRD) upgraded to buy from neutral at Goldman Sachs -- Bloomberg ($23.87)

YUM (34.86): YUM! Brands reports Q3 EPS $0.70 ex-items vs Reuters $0.58, raises f09 EPS guidance to $2.14 vs prior guidance $2.10, Reuters $2.12, FC $2.13.

Fed is concerned about banks' sluggishness in taking losses on commercial real-estate loans – WSJ: A 29-Sep presentation suggests the Fed fears a repeat of the housing-related losses that have recently hit banks. WSJ analysis shows banks with heavy exposure to commercial real-estate loans have only set aside $0.38 in reserves for every $1 in bad loans, vs $1.58 in reserves for every $1 of bad loans at the beginning of 2007. Recall CNBC reported 16-Sep that the Fed had undertaken a broad review of commercial-real-estate exposure at the largest regional banks.

Cable/Satellite sector upgraded to overweight at Wells Fargo: Firm sees the most upside for Time Warner Cable (TWC), followed by Comcast (CMCSA) and then Cablevision (CVC). TWC upgraded to outperform from market perform. Valuation range increased to $50-54 from $30-33.