September 29, 2008: Morning Call

September 29, 2008: Morning Call

Fair Value: SP500 – 1217.34; NDX: 1684.78; DOW – 11166


Technical Levels:

SPX: 1136-1142 support/1250, 1298-1300, 1337, 1365 resistance

NASDAQ: 2020 support /2210, 2264, 2303 resistance:


Events:

Pre-market EPS: WAG (.45/14.67B); CC (-1.04/2.5B)
05:00: Euro-zone Consumer Confidence (Sep): -19 (in-line at –19)
05:00: Euro-zone Economic Confidence (Sep): 87.3 (slightly better at 87.7)
08:00: FDX Shareholders Meeting
08:30: Personal Income (August): 0.2% MoM; Personal Spending: 0.2% MoM
08:30: PCE Core (August): 0.2% MoM; 2.4% YoY
08:30: WAG Earnings call
10:00: CC Earnings call
20:45: Fed’s Hoenig speaks on the economy and policy

Foreign Market Summary/Key Macro News/Commentary:

SP futures are trading 24 points below fair value while the NASDAQ futures are trading 38 points below fair value at 7:45am ET. European markets are down 3.0% on multiple bank failures. 4 financial institutions in Europe were rescued over the weekend with HRX (Hypo Real Estate) getting EU35 billion emergency funding, Icelandic Government buying 75% stake in Glitnir for EU 600 million, Fortis receiving EU11.2 billion investment from Belgium, the Netherlands, and Luxemborg. The UK Treasury also seized Bradford and Bingley, which is the biggest rental property lender in Great Britain. In addition, the NYT and WSJ are both reporting that WFC and C are in emergency takeover talks with WB. WB shares are down over 60% this morning to 4 dollars. The USD is sharply higher against the Euro and Pound on the Euro-zone bank failures. The dollar strength is weighing on commodity prices with Crude Oil declining 4 dollars to 103. Treasury bills and bonds along with Gold are stronger as investors continue to look for safe-havens amid the turmoil. Technology stocks are also very weak on increasing fears that weakening demand is squeezing gross margins. Two analysts downgrade AAPL shares this morning on concerns about gross margins. AAPL shares are trading down 8 to 120 in the pre-market trading session. Asian markets closed lower with Hong Kong (down 4.2%) and India (down 3.8%) pacing the decline.



Impact Research Calls/Market Moving News:

WB (10.00): WB shares are down 60% to 4 dollars on speculation that the Treasury/Fed is orchestrating an emergency takeover with Citigroup or Wells Fargo mentioned as the primary suitors. NY Times article says, “Both banks are unlikely to bid more than a few dollars a share.” The Treasury and Fed are presumably resisting efforts to guarantee part of the assets. The WSJ is reporting that Wells Fargo “appears to be the preferred bidder.”

AAPL (128.24): Apple downgraded at Morgan Stanley: Target for the shares is reduced to $115 from $178 with the firm also reducing their f09 EPS growth target.

AAPL (128.24): Apple downgraded to sector perform from outperform at RBC Capital: Price target decreased to $140 from $200. The firm cites concern about consumer spending and the impact from reduced visibility on growth and margins.

NTRS (79.90): Northern Trust takes actions to support certain investment funds
Northern Trust expects to incur pre-tax charges of approximately $525M ($328M after-tax or $1.46 per share) in Q3 in connection with these actions. Northern Trust will increase the support provided for certain cash investment funds previously covered through capital support agreements (as announced February 22, 2008, and amended July 15, 2008) and will add one additional fund to this coverage. The capital support levels provided by Northern Trust will increase in aggregate by $321M, to a maximum capital contribution of $550M. These measures will enable the funds to continue to maintain a stable net asset value of $1.00. Northern Trust expects to incur a pre-tax charge of approximately $290M ($181M after-tax or $0.80 per share) in Q3 in connection with this action. Northern Trust also will take certain actions to provide support for securities lending clients whose cash collateral is invested in five constant dollar, commingled investment pools negatively impacted by recent market events. Northern Trust expects to incur a pre-tax charge of approximately $150M ($94M after-tax or $0.42 per share) in Q3 in connection with this action. Northern Trust also announced that it will put in place a program offering to purchase certain illiquid auction rate securities that were purchased through Northern Trust for Personal Financial Services (PFS) clients under investment discretion or that were acquired by PFS clients from Northern Trust's affiliated broker/dealer. The terms of the offer will be communicated to those clients who qualify for the program. Northern Trust expects to incur a pre-tax charge of approximately $85M ($53M after-tax or $0.24 per share) in Q3 in connection with this action.

GS (137.99): Goldman Sachs had up to $20B at risk if AIG collapsed – NYT: Gretchen Morgensen article looks at the fallout from an AIG collapse. A Goldman spokesman says the company was never imperiled by AIG's troubles. But six people close to the insurer say Goldman was its largest trading partner, and several of them report the potential 11-digit damage that could have come to pass. Recall GS CFO David Viniar said 16-Sep the company saw the impact from AIG as immaterial

GS (137.99): Goldman Sachs calls NYT report of company's exposure to AIG "seriously misleading" – Reuters: A GS spokesman reiterates that the company's exposure to AIG was and is not material. Recall the NYT reported GS stood to lose up to $20B if AIG had failed.

GS (137.99): NY Times looks at the changes hitting Wall Street and especially Goldman Sachs: Article says that the former world of Wall Street is largely coming to an end as the days of easy money and supersize bonuses fade into the past. The credit boom behind the explosive growth is over and regulators have woken up and started to pay attention once more. Even Goldman Sachs, the leading firm on the Street, has been forced to change. Goldman had been successfully navigating the troubled waters of the credit crisis but once the market turned against investment banks, it changed course immediately and become a regular bank. One major difference will be in the amount of leverage the bank is allowed to use; even at today's reduced level Goldman's leverage is about twice that of regulated banks. Some analysts see Goldman's return on equity falling to about 13% from 33% in '07. Goldman says it expects a 20% return on equity in the future. One analyst speculated that Goldman might consider merging with a bank like Northern Trust (NTRS) or State Street (STT).

COP (76.24); MRO (40.83): Marathon (MRO) upgraded; ConocoPhillips (COP) downgraded at Goldman Sachs: MRO upgraded to buy from neutral; target raised to $59 from $46. COP downgraded to neutral from buy, though says it still believes the stock is inexpensive; prefers MRO.

OIH (157.62): Morgan Stanley reduces estimates for the Oil Services, Drilling & Equipment group: The firm notes the impact from the severe hurricane season and says the impact to Q3 earnings could be similar to that of Q3/05

Starwood Hotels (HOT), Host Hotels & Resorts (HST), Sunstone Hotel Investors (SHO), Strategic Hotels (BEE) downgraded at Citi: HOT, HST, SHO downgraded to hold from buy. BEE downgraded to sell from hold.

WM (0.16): Washington Mutual likely to drive private equity to sidelines in financial services – WSJ: A "Heard on the Street" column says now that TPG has lost $1.35B in WaMu, private equity will be more likely to cautiously wait for a turnaround than before. Attractive acquisitions like Goldman Sachs (GS) are few and far between in the financial services sector, and holding periods on investments there will need to expand. Though private equity likes to think it is smart enough to make winning bets in bad times, the real smart players may be the ones who wait for a collapse to go through, so they can score unequivocal bargains afterward.

Barron's summary

Cover: The bailout plan could very likely make money for the government and taxpayers. Interview: Richard Bernstein, chief investment strategist at Merrill Lynch, is cautious on equities, favoring bonds, especially Treasuries, and cash. Lead Articles: Wall Street has not credited Tyco Electronics (TEL) for its smart moves, stock could rise 50% over 12-18 months; Past experience suggests that if Congress tries to punish bankers, the bailout plan will not work; Plenty of reasons to like W.R. Berkley (WRB), stock could go to the mid-$30s when the cycle turns; Several analysts are positive on the emerging markets, positive on EEM, CHL, RIO, PBR, UBB, HDB others that might see attention include AMX, TEVA, PTR, TS, TSM, MBT, OGZPY and CX; Barron's suggests buying companies that invest heavily in R&D; There may be more upside than downside to Starbucks (SBUX), stock could rise 20-30%; JPMorgan Chase (JPM) acquisition of a big piece of WaMu was a smart move; D.C. Current notes that there are no patent cases on the current U.S. Supreme Court docket, there is a significant cigarette case involving MO; Other Voices points to the large amount of help Wall Street had from Washington in creating the current financial crisis; Editorial discusses who is really funding the bailout and who is actually getting bailed out. Columns: The Trader suggests buying gold and is cautious on Urban Outfitters (URBN); Euro Trader says it is not time to buy European autos yet and that DAI.GR and BMW.GR will suffer as the funding for car purchases dries up; Asia Trader notes the possibility of an Asian bounce in the immediate aftermath of a U.S. bailout; Current Yield notes the actions the Fed is taking to ease the crisis; The Striking Price discusses the growing concern of counter-party risk and says the OCC is very strong; Commodities Corner notes the impact high grain prices may have on meat producers like TSN, SFD and PPC; Follow Up is positive on General Electric (GE), Microsoft (MSFT) and Nike (NKE); Up and Down Wall Street calls the bailout the ultimate blind pool; Streetwise considers the notion of a 'good bank' for a bailout and wonders about the value of banning short selling; Economic Beat points to one economist who believes that GDP will remain positive; Technology Trader is cautiously positive on the GHL Acquisition (GHQ) deal for Iridium Holdings but would wait for the dust to settle before considering buying in; Plugged In notes that Google's (GOOG) target with the Android phones may not be Apple (AAPL) but Microsoft (MSFT).