February 17, 2009: Morning Call
Fair Value: SP500 – 825.40; NDX: 1237.46; DOW: 7829.27
Technical Levels:
SPX: 752-755, 800 support/ 848-852, 874, 899-908 resistance
Events:
Pre-market EPS: GPC (.56/2.55B); HSP (.76/989.1M); MDT (.70/3.53B); STO (.61/25.9B); RIG (3.70/3.29B); RAIL (.34/195.7M); TCK (.38/1.72B); VCI (.26/615M); WMT (.97/106.95B); ZBRA (.30/220.7M
08:30: Empire Manufacturing (Feb): -24.00
09:00: Net Long-Term TIC Flows (Dec): 20.0B
10:00: RIG earnings call
11:00: INTC Shareholders Meeting
13:00: NAHB Housing Market Index (Feb): 8
13:00: Fed’s Bullard speaks on the economy
17:00: ABC Consumer Confidence (Feb 15): -53
Post-market EPS: A (.28/1.26B); CHK (.75/2.45B); WYNN (.42/701.0M-date not confirmed); UPL (.48/244.8M)
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are trading 23 points below fair value while the NASDAQ futures are trading 37 points below fair value following sharp declines in European markets. European markets are down 4% in the last two sessions (US markets were closed Monday for President’s Day). Financial stocks are among the hardest hit after Moody’s put banks with units in eastern Europe on review for possible downgrade. Mining, steel, and technology names are also underperforming with 9 issues declining for every advancing issue in London. Asian stocks closed sharply lower last night (Hong Kong down 3.8%, Japan down 1.3%, Australia down 1.5%, Shanghai down 3.1%, South Korea down 3.9%, India down 2.9%). In Japan, Finance Minister Shoichi Nakagawa announced he would resign amid widespread accusations that he was drunk at a G7 press conference. Banks led Hong Kong lower, though Bank of East Asia (23.HK) went against the trend. Oil-related stocks fell on lower crude-oil futures. A slumping won hurt shares in South Korea.
Impact Research Calls/Market Moving News:
WMT (46.53): Wal-Mart reports Q4 EPS $0.96 vs guidance of $0.91-$0.94: Excluding items, WMT reports EPS from cont. ops of $1.03 vs. Reuters $0.99. Company reports revenues of $108.0B vs Reuters $106.95B. Guides Q1 EPS to $0.72-$0.77 vs Reuters $0.77. Guides full year EPS to $3.45-$3.60 vs Reuters $3.57; First Call $3.59
GOOG (357.68): Google downgraded to source of funds from accumulate at ThinkEquity: Target reduced to $300 from $350. “GOOG shares are up 27% in the past three weeks (versus S&P up 3%) and are currently reflecting a 2H09 recovery that we believe is unlikely to materialize. Our research suggests that paid clicks and CPCs have continued to deteriorate in the first half of Q1. We are now expecting 3.8% Y/Y growth in net revenue (0.6% for gross) versus the Street consensus at 10.3%. Our PF EPS estimate is now $19.85 versus consensus at $21.20. As investors come around to our point of view, we expect to see multiples contract and the stock to fall into the $300 range.”
Wall Street to lobby for reconsideration of rescue plan – FT: People close to the situation say banks wanted detailed talks before the $2T financial rescue plan was announced. They hope to throw off the yoke of stringent financial health reviews and aren't crazy about the capital injections that could make the government a large shareholder, either. They would like the government to make clear that its "stress test" is not a pass-fail exercise
BIDU (128.20): RBC reduces f09 Baidu estimates below consensus: The firm notes the economic backdrop and limited visibility and reduces f09 EPS and revenue estimates to $596M and $5.69 vs. Reuters $629.73M and $6.12. Target for the shares is reduced to $182 from $242. Shares remain outperform rated. You may recall that Pali Capital took numbers below consensus on Thursday of last week.
GE (11.44): UBS remains cautious on General Electric: Firm believes expectations for finance remain too high and expects some combination of a dividend cut, credit rating downgrade and/or capital raise over the next several months. UBS maintains short-term sell rating.
NY Times columnist argues in favor of nationalizing the banking system: Columnist Joe Nocera says some industry observers have begun arguing that the government should just go ahead and nationalize bad banks already. He argues that government can successfully manage banks, as it supposedly did during the S&L crisis by finding qualified bankers to run them. Quotes a former member of the IMF as saying government taking over failing banks is best practices. He concludes with, "As we run out of possibilities, nationalization is looking more and more like the right thing."
NY Times says new car council to be led by Geithner and Summers: The panel, The Presidential Task Force on Autos, will replace the idea of a car czar and will also be composed of restructuring expert Ron Bloom, an advisor to the industry's labor unions. The paper says a task force instead of a czar will retain for President Obama the final word on the viability of GM and Chrysler
GM (2.50): General Motors bondholders propose debt-swap deal – Reuters: A person with knowledge of the talks says representatives have outlined specific proposals on how to carry out the plan to swap debt for equity in a restructured company. The source says the idea encourages high participation among bondholders and addresses a key concern about fairness in the parallel debt-reduction deal that GM has been negotiating with the UAW. GM has not yet accepted the proposals, specific terms of which were not disclosed.
RIG (60.15): Transocean reports Q4 EPS $3.69 ex-items vs Reuters $3.69: Revenues of 3.27 billion versus 3.29 billion. Average total drilling fleet dayrate $251.5K vs year-ago $224.0K.
DE (36.11): Deere & Company downgraded to sell from neutral at Goldman Sachs: The firm reduces target to $32 from $39 and expects the weakness in agriculture equipment to persists through 2010.
DO (63.41): Diamond Offshore Drilling Inc. (DO) will replace Weatherford International Ltd. (WFT) in the S&P 500 on a date TBA
SIRI (.10): Liberty Media to invest 530 million dollars in Sirius/XM radio via preferred stock. John Malone and Greg Maffei are going to join the SIRI board.
Barron's summary
Cover: Most Respected Companies: Top Ten are: JNJ, BRK.A, PG, AAPL, WMT, XOM, MCD, TM, KO and CSCO. Interview: Robert Albertson, principal and chief strategist of Sandler O'Neill & Partners, sees the financial crisis lasting for another 2-3 years. Lead Articles: Editorial suggests using $200B in TARP funds to reduce the balances of subprime mortgages by about 25%; Abbott Labs (ABT) could do even better over the next few years; Considers the 20 best dividend plays for 2009 and 10 that look iffy; A look at companies vulnerable to goodwill impairments; Activist investors are likely to find more support in this tough market environment; A discussion of the pros and cons of mark to market accounting, maybe a solution is to re-evaluate what banks are allowed to hold and how to calculate reserves; Cemig (CIG) may be the hottest play on a Brazilian recovery, stock could go to $18; Editorial says economics is not a hard science and that Keynesians won the election and now have to prove their theory works. Columns: The Trader is cautiously positive on tech, cautious on Hershey's (HSY) and American Italian Pasta (AIPC); Euro Trader is positive on Munich Re, cautious on Swiss Re; Asia Trader discusses Hyundai's (005380.KS) coming recapitalization of its auto-financing unit, notes some positive sentiment towards China Yuchai (CYD) though there are still plenty of concerns; The Striking Price discussions option strategies for General Electric (GE); Current Yield notes the reactions of Treasuries to recent events and sale efforts; Commodities Corner says the normal moves in heating oil futures compared to gasoline may not occur again this year, last year the lack of the trade was called the widow maker; Follow Up says a recovery could start in Q3, cautious on Abercrombie & Fitch (ANF); Up and Down Wall Street discusses the bailout and stimulus efforts in Washington; Streetwise says HSBC has a new international list of Nifty Fifty names including WMT, DIS, KO, JNJ, SLB, NTDOY, NSRGY, RR.LN and CAJ; D.C. Current wonders if Treasury Secretary Geithner will remain in his post for very long; Technology Trader is positive on IAC (IACI) on the potential to return cash to shareholders sometime this year, cautious outlook for solar names due to falling demand and polysilicon prices; Plugged In says Dell and Acer will have a tough time in the smartphone market and notes that NetApp (NTAP) missed revenue targets but still looks positive long term
Tuesday, February 17, 2009
Thursday, February 12, 2009
February 12, 2009: Morning Call
February 12, 2009: Morning Call
Fair Value: SP500 – 832.10; NDX: 1227.09; DOW: 7979.92
Technical Levels:
SPX: 752-755, 800, 816 support/848-852, 874, 899-908 resistance
Events:
Pre-market EPS: AET (.95/8.01B); ECA (.81/5.87B); FCL (.48/448.3M); GLG(.07/90.0M); KO (.62/7.58B); MAR (.41/3.67B); MAS (-.05/2.11B); MLM(.83/423.8M); NXY (.39/1.51B)VIA (.79/4.23B); WMI (.49/3.16B)
05:00: Euro-zone Industrial Production (Dec): -2.5% MoM; -9.5% YoY
08:00: UNP presents at BB&T Transport Conference
08:30: US Retail Sales (Jan): -0.8%; Less Autos: -0.4%
08:30: Initial Jobless Claims (Feb 7): 610,000; Cont. Claims: 4.8 million
09:30: NSC presents at BB&T Transport Conference
10:00: Business Inventories (Dec.): -0.9%
10:15: CSX presents at BB&T Transport Conference
10:30: EIA Natural Gas Storage Change
Post-market EPS: CEPH (1.37/525.9M); COG (.42/242.6M); EQ (1.23/1.49B); MFE(.52/420.9M); PNRA (.84/351.9M);
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are trading 8 points below fair value while the NASDAQ futures are trading 10 points below fair value at 7:45 am ET. Asian markets closed lower (Japan down 3.03%, Hong Kong down 2.3%, Australia up 1.1%, India down 1.6%) and European markets are currently down 1.7% on weak economic data (Indian and Euro-zone Industrial Production came in weaker than expectations), disappointing earnings in Europe (EDF and DEO), and concerns that US retail sales are going to be weaker than expectations. Companies trading lower in Europe after earnings include BT Group (BT.A.LN) Cap Gemini (CAP.FP), EdF (EDF.FP), Smith & Nephew (SN.LN), and Diageo (DGE.LN). after EPS and Swiss Re (RUKN.VX) advanced after announcing its CEO resigned
Impact Research Calls/Market Moving News:
BIDU (133.86): Baidu consensus estimates may be aggressive, says Pali: Firm says Q1 and Q2 consensus estimates may be overly aggressive, as state owned businesses will be the first to benefit from Chinese gov't stimulus, and the trickle down effect will take time to make an impact on entities such as BIDU. Shares rated sell, target price, $90.
MAR (15.15): Marriott (MAR) reports Q4 EPS $0.34 ex-items vs Reuters $0.40, guides f09 EPS to $0.86-$1.04 vs Reuters $1.14. MAR says it cannot forecast results with any certainty. For Q1 of 2009, the company expects North American comparable company-operated REVPAR to decline roughly 17%, including the benefit of the shifting fiscal calendar, and comparable company-operated REVPAR outside North America to decline roughly 15%.
TEX (13.62): Terex says it may likely be in violation of a covenant in its credit agreement by the end of 1Q09: Due to deteriorating business conditions in certain of its operating segments and the impact of historical fixed charges incurred on a trailing twelve months basis, TEX may likely be in violation of the consolidated fixed charge coverage ratio covenant under its credit agreement as early as the end of Q1 of 2009. As a result, TEX has initiated discussions with its lead banks seeking to obtain a consent and/or amendment to its credit agreement and will attempt to get the consent and/or amendment during Q1
CMG (47.42): Chipotle Mexican Grill reports Q4 EPS $0.52 vs Reuters $0.48: Company reports revenues of $345.3M vs Reuters $340.9M. Comps for the quarter were +3.5% vs. StreetAccount +1.4%. CMG sees full year f09 comps in the low single digits.
RTP (110.94): Rio Tinto confirms partnership with Chinalco; Rio to receive $19.5B cash: The Boards of Rio Tinto plc and Rio Tinto Limited announce that they are unanimously recommending to shareholders a transaction with Aluminium Corporation of China ("Chinalco"). Investment by Chinalco in certain aluminium, copper and iron ore joint ventures totalling $12.3B. The issue of subordinated convertible bonds in two tranches with conversion prices of $45 and $60 in each of Rio Tinto plc and Rio Tinto Limited for a total consideration of $7.2B. If converted, the subordinated convertible bonds would increase Chinalco's current shareholding to 19.0% in Rio Tinto plc and 14.9% in Rio Tinto Limited, equivalent to an 18.0% interest in the Rio Tinto Group.
BHP (42.44): BHP Billiton (BHP) may look to trump Chinalco for some of Rio Tinto's assets - London Times: The Times reports that BHP is expected to approach the Rio Tinto board with a counter-offer for some of the mine stakes that are expected to be acquired by the Chinese. According to the article, BHP is understood to be particularly interested in Escondida, the Chilean copper mine that is the world's largest.
X (30.75): X will temporarily stop production at its East Texas plant, idling as many as 1200 workers.
ECA (43.10): EnCana reports Q4 operating EPS $0.60 vs Reuters $0.77: Company reports revenues of $6.36B vs Reuters $5.87B. Natural gas production increased 4% to 3.9 Bcf/d; Oil and natural gas liquids production in the quarter was flat at 136,000 bbls/d. Total production increased 3% to 4.7 Bcfe/d. Cash flow per share decreased 32% to $1.73.
PBR (29.22): Petrobras downgraded to hold from buy at Citi: Price target is $34. The firm cites valuation.
NYX (20.60): NYSE Euronext downgraded to hold from buy at Citi: Price target decreased to $21 from $24. The firm cites the current state of capital markets, lack of catalysts, and concern about expenses, among the rationale.
KSS (37.93): Kohl's downgraded to Conviction Sell from neutral at Goldman Sachs: Price target is $32. The firm cites valuation and believes 2009 EPS consensus is too high
LVS (3.98): Las Vegas Sands reports Q4 EPS ($0.04) ex items vs Reuters $0.03: Company reports revenues of $1.09B vs Reuters $1.18B.
JASO (3.01): JA Solar guides f09 revenue to $830-$952M vs Reuters $956.5M: F09 target for total production output is now 500 MW to 550 MW, below prior 800 MW, given on 12-Nov, though note the company cut Q4 guidance on 10-Dec without updating f09. The nameplate production capacity by year-end 2009 is now expected to be 875 MW. JASO says worldwide macro economic conditions; tight credit markets and resulting issues with project financing are negatively impacting the solar industry
Fair Value: SP500 – 832.10; NDX: 1227.09; DOW: 7979.92
Technical Levels:
SPX: 752-755, 800, 816 support/848-852, 874, 899-908 resistance
Events:
Pre-market EPS: AET (.95/8.01B); ECA (.81/5.87B); FCL (.48/448.3M); GLG(.07/90.0M); KO (.62/7.58B); MAR (.41/3.67B); MAS (-.05/2.11B); MLM(.83/423.8M); NXY (.39/1.51B)VIA (.79/4.23B); WMI (.49/3.16B)
05:00: Euro-zone Industrial Production (Dec): -2.5% MoM; -9.5% YoY
08:00: UNP presents at BB&T Transport Conference
08:30: US Retail Sales (Jan): -0.8%; Less Autos: -0.4%
08:30: Initial Jobless Claims (Feb 7): 610,000; Cont. Claims: 4.8 million
09:30: NSC presents at BB&T Transport Conference
10:00: Business Inventories (Dec.): -0.9%
10:15: CSX presents at BB&T Transport Conference
10:30: EIA Natural Gas Storage Change
Post-market EPS: CEPH (1.37/525.9M); COG (.42/242.6M); EQ (1.23/1.49B); MFE(.52/420.9M); PNRA (.84/351.9M);
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are trading 8 points below fair value while the NASDAQ futures are trading 10 points below fair value at 7:45 am ET. Asian markets closed lower (Japan down 3.03%, Hong Kong down 2.3%, Australia up 1.1%, India down 1.6%) and European markets are currently down 1.7% on weak economic data (Indian and Euro-zone Industrial Production came in weaker than expectations), disappointing earnings in Europe (EDF and DEO), and concerns that US retail sales are going to be weaker than expectations. Companies trading lower in Europe after earnings include BT Group (BT.A.LN) Cap Gemini (CAP.FP), EdF (EDF.FP), Smith & Nephew (SN.LN), and Diageo (DGE.LN). after EPS and Swiss Re (RUKN.VX) advanced after announcing its CEO resigned
Impact Research Calls/Market Moving News:
BIDU (133.86): Baidu consensus estimates may be aggressive, says Pali: Firm says Q1 and Q2 consensus estimates may be overly aggressive, as state owned businesses will be the first to benefit from Chinese gov't stimulus, and the trickle down effect will take time to make an impact on entities such as BIDU. Shares rated sell, target price, $90.
MAR (15.15): Marriott (MAR) reports Q4 EPS $0.34 ex-items vs Reuters $0.40, guides f09 EPS to $0.86-$1.04 vs Reuters $1.14. MAR says it cannot forecast results with any certainty. For Q1 of 2009, the company expects North American comparable company-operated REVPAR to decline roughly 17%, including the benefit of the shifting fiscal calendar, and comparable company-operated REVPAR outside North America to decline roughly 15%.
TEX (13.62): Terex says it may likely be in violation of a covenant in its credit agreement by the end of 1Q09: Due to deteriorating business conditions in certain of its operating segments and the impact of historical fixed charges incurred on a trailing twelve months basis, TEX may likely be in violation of the consolidated fixed charge coverage ratio covenant under its credit agreement as early as the end of Q1 of 2009. As a result, TEX has initiated discussions with its lead banks seeking to obtain a consent and/or amendment to its credit agreement and will attempt to get the consent and/or amendment during Q1
CMG (47.42): Chipotle Mexican Grill reports Q4 EPS $0.52 vs Reuters $0.48: Company reports revenues of $345.3M vs Reuters $340.9M. Comps for the quarter were +3.5% vs. StreetAccount +1.4%. CMG sees full year f09 comps in the low single digits.
RTP (110.94): Rio Tinto confirms partnership with Chinalco; Rio to receive $19.5B cash: The Boards of Rio Tinto plc and Rio Tinto Limited announce that they are unanimously recommending to shareholders a transaction with Aluminium Corporation of China ("Chinalco"). Investment by Chinalco in certain aluminium, copper and iron ore joint ventures totalling $12.3B. The issue of subordinated convertible bonds in two tranches with conversion prices of $45 and $60 in each of Rio Tinto plc and Rio Tinto Limited for a total consideration of $7.2B. If converted, the subordinated convertible bonds would increase Chinalco's current shareholding to 19.0% in Rio Tinto plc and 14.9% in Rio Tinto Limited, equivalent to an 18.0% interest in the Rio Tinto Group.
BHP (42.44): BHP Billiton (BHP) may look to trump Chinalco for some of Rio Tinto's assets - London Times: The Times reports that BHP is expected to approach the Rio Tinto board with a counter-offer for some of the mine stakes that are expected to be acquired by the Chinese. According to the article, BHP is understood to be particularly interested in Escondida, the Chilean copper mine that is the world's largest.
X (30.75): X will temporarily stop production at its East Texas plant, idling as many as 1200 workers.
ECA (43.10): EnCana reports Q4 operating EPS $0.60 vs Reuters $0.77: Company reports revenues of $6.36B vs Reuters $5.87B. Natural gas production increased 4% to 3.9 Bcf/d; Oil and natural gas liquids production in the quarter was flat at 136,000 bbls/d. Total production increased 3% to 4.7 Bcfe/d. Cash flow per share decreased 32% to $1.73.
PBR (29.22): Petrobras downgraded to hold from buy at Citi: Price target is $34. The firm cites valuation.
NYX (20.60): NYSE Euronext downgraded to hold from buy at Citi: Price target decreased to $21 from $24. The firm cites the current state of capital markets, lack of catalysts, and concern about expenses, among the rationale.
KSS (37.93): Kohl's downgraded to Conviction Sell from neutral at Goldman Sachs: Price target is $32. The firm cites valuation and believes 2009 EPS consensus is too high
LVS (3.98): Las Vegas Sands reports Q4 EPS ($0.04) ex items vs Reuters $0.03: Company reports revenues of $1.09B vs Reuters $1.18B.
JASO (3.01): JA Solar guides f09 revenue to $830-$952M vs Reuters $956.5M: F09 target for total production output is now 500 MW to 550 MW, below prior 800 MW, given on 12-Nov, though note the company cut Q4 guidance on 10-Dec without updating f09. The nameplate production capacity by year-end 2009 is now expected to be 875 MW. JASO says worldwide macro economic conditions; tight credit markets and resulting issues with project financing are negatively impacting the solar industry
Wednesday, February 11, 2009
February 11, 2009: Morning Call
February 11, 2009: Morning Call
Fair Value: SP500 – 825.35; NDX: 1229.36; DOW: 7862.27
Technical Levels:
SPX: 752-755, 800, 816, 848 support/ 874, 899-908 resistance
Events:
Pre-market EPS: AYE (.52/1.13B); BCE (.50/4.52B); DF (.39/3.22B); GENZ (1.03/1.19B); IR (.26/3.69B); JNY (-.05/820.6M); MICC (1.18/942.5M); MMC(.33/2.98B); SF (.56/214.0M); MT (.46/20.4B)
05:30: Bank of England releases Quarterly Inflation report
07:00: MBA Mortgage Applications
07:00: Bloomberg Global Confidence
08:00: BBT Analyst Day
08:30: Trade Balance (Dec): -36.0B
08:30: NYX Investor Day
09:30: MT earnings call
09:30: BNI presents at BB&T Transport Conference
09:50: Fed’s Duke speaks on stabilizing the Housing Market
10:00: Treasury’s Geithner testifies on TARP at Senate Budget Panel
10:00: Bank Executives testify on their use of funds from TARP: CEO’s from BAC, C, JPM, STT, BK, WFC, MS, and GS are expected to testify)
10:30: DOE Crude Oil and Gasoline Inventories
11:00: YRCW presents at BB&T Transport Conference
11:00: BRCM presents at Thomas Weisel Tech Conference
12:45: MSFT presents at Thomas Weisel Tech Conference
13:00: Fed’s Evans speaks on the US economic outlook
14:00: US Monthly Budget Statement (Jan): -78.0B
14:00: INTC provides 4G WiMax Mobile Broadband Update
14:00: TOL Q1 2009 Guidance Call
15:15: INTC presents at Thomas Weisel Tech. Conference
Post-market EPS: ATVI (.29/2.15B); CMG (.48/340.9M); GIL (.04/216.8M); PAA(.74/8.56B); TEX (.60/2.23B)
Foreign Market Summary/Key Macro News/Commentary:
The S&P and NASDAQ futures are both trading flat with fair value. Equity futures have been closely tracking the intra-day pattern in Europe, which is down 0.50% this morning. European markets are being lead lower by the financial sector. Advancers just edge decliners on the FTSE 100. Trading lower post results were Credit Suisse (CSGN.VX), Peugeot Citroen (UG.FP) and Groupe Danone (BN.FP). Trading higher were Sanofi-Aventis (SAN.FP), ArcelorMittal (MT.NA). Asian markets mostly declined due to weakness in financial and industrial stocks (Japan down 0.29%, Hong Kong down 2.4%, Australia down 0.40%, India down 0.30%).
Impact Research Calls/Market Moving News:
RIMM (57.03): Research In Motion guides fQ4 gross margin and EPS to be at the low end of prior ranges: Recall RIMM had guided Q4 EPS to $0.83-$0.91 and Q4 gross margins to 40-41% on 18-Dec vs. the 45.6% in fQ3. Reuters consensus for EPS is $0.86; First Call $0.85. RIMM guides Q4 revenues to be at or near the midpoint of the previously guided range of $3.30-$3.50B. Reuters is $3.40B; First Call $3.41B. RIMM cites a variety of factors, including product mix, lowered channel inventory levels and an increased ratio of new subscriber sales to upgrade and replacement sales, for the outperformance in subscriber growth relative to revenue and earnings performance in Q4 (My take: As I have pointed out several times in this blog over the last year, gross margin compression continues to hurt RIMM’s growth. The pace of commoditization in the smartphone market appears to be accelerating rapidly and a $99 dollar iPhone would be a negative catalyst for RIMM. Although AAPL could potentially grow iPhone unit shipments fast enough to offset the margin pressure, the shares will be weak in the short-term on gross margin concerns. AAPL is down 1 dollar to 96.80. RIMM Is down 4 to 53).
AMAT (9.69): Applied Materials (AMAT) reports Q1 EPS ($0.02) ex-items vs Reuters $0.00, says Q2 (Apr) revenue will be down more than 30%
CF (53.60): CF Industries Holdings reports Q4 EPS $3.59 including items, EPS excluding items was $3.87
MS (20.79): GS (90.40): Bernstein believes Morgan Stanley (MS) and Goldman Sachs (GS) are less likely to need additional capital relative to the others: The firm believes that GS and MS have less pressure from the government to lend than do other banks such as JPM, C and BAC. Bernstein believes more clarity is needed into the bank rescue plan before investing in the banking sector.
TOL (18.58): Toll Brothers reports preliminary Q1 home building revenues of ~$409.3M vs. Reuters $446.7M: First Call is $442.6M
WSJ discusses criticism of the Public-Private Investment Fund: The Journal points out that some investors fear that program will be too small to stimulate purchases of toxic assets, while other investors complain that the plan is far too vague to get them to come off the sidelines. Citing people familiar with the matter, the paper adds that one possibility being considered involves the government and private investors putting up equal amounts of capital, with the Fed lending money to the fund, allowing it to significantly increase is purchasing power. Any profits would be divided between taxpayers and investors.
Technology companies to benefit from stimulus package – NYT: Without naming which ones, the article says President Obama recently had a dozen CEOs, seven from technology and energy companies, to the Oval Office to discuss the plan. Tech and clean energy companies have been helping shape the bill since as early as September. The Senate version of the bill provides $7B to expand high-speed Internet access, $20B to build a smart-grid power network, and $20B to digitize health records
European banks may need to file weekly reports on portfolio values – NYT: European finance ministers have agreed to produce guidelines within the next two weeks that will allow governments to use different means of dealing with banks' bad debt. The European Commission is suggesting weekly reporting and a six-month deadline to accept help. The commission is also suggesting that governments be allowed to choose from a bad bank, asset-management programs, an insurance plan, or a combination. Mandatory participation or at least mandatory disclosure is under consideration.
Fair Value: SP500 – 825.35; NDX: 1229.36; DOW: 7862.27
Technical Levels:
SPX: 752-755, 800, 816, 848 support/ 874, 899-908 resistance
Events:
Pre-market EPS: AYE (.52/1.13B); BCE (.50/4.52B); DF (.39/3.22B); GENZ (1.03/1.19B); IR (.26/3.69B); JNY (-.05/820.6M); MICC (1.18/942.5M); MMC(.33/2.98B); SF (.56/214.0M); MT (.46/20.4B)
05:30: Bank of England releases Quarterly Inflation report
07:00: MBA Mortgage Applications
07:00: Bloomberg Global Confidence
08:00: BBT Analyst Day
08:30: Trade Balance (Dec): -36.0B
08:30: NYX Investor Day
09:30: MT earnings call
09:30: BNI presents at BB&T Transport Conference
09:50: Fed’s Duke speaks on stabilizing the Housing Market
10:00: Treasury’s Geithner testifies on TARP at Senate Budget Panel
10:00: Bank Executives testify on their use of funds from TARP: CEO’s from BAC, C, JPM, STT, BK, WFC, MS, and GS are expected to testify)
10:30: DOE Crude Oil and Gasoline Inventories
11:00: YRCW presents at BB&T Transport Conference
11:00: BRCM presents at Thomas Weisel Tech Conference
12:45: MSFT presents at Thomas Weisel Tech Conference
13:00: Fed’s Evans speaks on the US economic outlook
14:00: US Monthly Budget Statement (Jan): -78.0B
14:00: INTC provides 4G WiMax Mobile Broadband Update
14:00: TOL Q1 2009 Guidance Call
15:15: INTC presents at Thomas Weisel Tech. Conference
Post-market EPS: ATVI (.29/2.15B); CMG (.48/340.9M); GIL (.04/216.8M); PAA(.74/8.56B); TEX (.60/2.23B)
Foreign Market Summary/Key Macro News/Commentary:
The S&P and NASDAQ futures are both trading flat with fair value. Equity futures have been closely tracking the intra-day pattern in Europe, which is down 0.50% this morning. European markets are being lead lower by the financial sector. Advancers just edge decliners on the FTSE 100. Trading lower post results were Credit Suisse (CSGN.VX), Peugeot Citroen (UG.FP) and Groupe Danone (BN.FP). Trading higher were Sanofi-Aventis (SAN.FP), ArcelorMittal (MT.NA). Asian markets mostly declined due to weakness in financial and industrial stocks (Japan down 0.29%, Hong Kong down 2.4%, Australia down 0.40%, India down 0.30%).
Impact Research Calls/Market Moving News:
RIMM (57.03): Research In Motion guides fQ4 gross margin and EPS to be at the low end of prior ranges: Recall RIMM had guided Q4 EPS to $0.83-$0.91 and Q4 gross margins to 40-41% on 18-Dec vs. the 45.6% in fQ3. Reuters consensus for EPS is $0.86; First Call $0.85. RIMM guides Q4 revenues to be at or near the midpoint of the previously guided range of $3.30-$3.50B. Reuters is $3.40B; First Call $3.41B. RIMM cites a variety of factors, including product mix, lowered channel inventory levels and an increased ratio of new subscriber sales to upgrade and replacement sales, for the outperformance in subscriber growth relative to revenue and earnings performance in Q4 (My take: As I have pointed out several times in this blog over the last year, gross margin compression continues to hurt RIMM’s growth. The pace of commoditization in the smartphone market appears to be accelerating rapidly and a $99 dollar iPhone would be a negative catalyst for RIMM. Although AAPL could potentially grow iPhone unit shipments fast enough to offset the margin pressure, the shares will be weak in the short-term on gross margin concerns. AAPL is down 1 dollar to 96.80. RIMM Is down 4 to 53).
AMAT (9.69): Applied Materials (AMAT) reports Q1 EPS ($0.02) ex-items vs Reuters $0.00, says Q2 (Apr) revenue will be down more than 30%
CF (53.60): CF Industries Holdings reports Q4 EPS $3.59 including items, EPS excluding items was $3.87
MS (20.79): GS (90.40): Bernstein believes Morgan Stanley (MS) and Goldman Sachs (GS) are less likely to need additional capital relative to the others: The firm believes that GS and MS have less pressure from the government to lend than do other banks such as JPM, C and BAC. Bernstein believes more clarity is needed into the bank rescue plan before investing in the banking sector.
TOL (18.58): Toll Brothers reports preliminary Q1 home building revenues of ~$409.3M vs. Reuters $446.7M: First Call is $442.6M
WSJ discusses criticism of the Public-Private Investment Fund: The Journal points out that some investors fear that program will be too small to stimulate purchases of toxic assets, while other investors complain that the plan is far too vague to get them to come off the sidelines. Citing people familiar with the matter, the paper adds that one possibility being considered involves the government and private investors putting up equal amounts of capital, with the Fed lending money to the fund, allowing it to significantly increase is purchasing power. Any profits would be divided between taxpayers and investors.
Technology companies to benefit from stimulus package – NYT: Without naming which ones, the article says President Obama recently had a dozen CEOs, seven from technology and energy companies, to the Oval Office to discuss the plan. Tech and clean energy companies have been helping shape the bill since as early as September. The Senate version of the bill provides $7B to expand high-speed Internet access, $20B to build a smart-grid power network, and $20B to digitize health records
European banks may need to file weekly reports on portfolio values – NYT: European finance ministers have agreed to produce guidelines within the next two weeks that will allow governments to use different means of dealing with banks' bad debt. The European Commission is suggesting weekly reporting and a six-month deadline to accept help. The commission is also suggesting that governments be allowed to choose from a bad bank, asset-management programs, an insurance plan, or a combination. Mandatory participation or at least mandatory disclosure is under consideration.
Tuesday, February 10, 2009
It's the "Uniform Stress Test" Stupid!!!
The morons on CNBC are in a full tilt panic to explain why the market sold off following the Geithner speech at 11am ET. CNBC is reporting that the "lack of details" in the package has caused the selling pressure. Wrong! Larry Kudlow, who has been permanently wrong for the last 10 years, even suggested that the speech was a "total disaster" and that the only way to turn the market around is to do nothing but cut taxes more. Wrong!
The financial stocks were weak ahead of the of speech on concerns that the "uniform stress test" could end up triggering a government seizure and liquidation of several large banks. Remember, the heart of the problem in the banking sector is not simply that a lot of the banks are technically insolvent. The problem is that most bank executives and shareholders have not been willing to admit it and government regulators are not forcing the point. The uniform stress test may be a way for the Obama Administration to force the point and provide political cover from the morons on the rightwing that claim the end of the world will arrive if Shittybank is nationalized and liquidated.
Private capital is extremely fearful of a zombie financial sector because it will be more difficult to establish a floor on the toxic assets if institutions that need to be liquidated are kept alive on the taxpayer’s dime. Establishing price discovery without inflicting pain on the stakeholders of the deeply troubled institutions will be impossible. The key question investors are currently asking is which institutions are likely to fail the “uniform stress test?”
The financial stocks were weak ahead of the of speech on concerns that the "uniform stress test" could end up triggering a government seizure and liquidation of several large banks. Remember, the heart of the problem in the banking sector is not simply that a lot of the banks are technically insolvent. The problem is that most bank executives and shareholders have not been willing to admit it and government regulators are not forcing the point. The uniform stress test may be a way for the Obama Administration to force the point and provide political cover from the morons on the rightwing that claim the end of the world will arrive if Shittybank is nationalized and liquidated.
Private capital is extremely fearful of a zombie financial sector because it will be more difficult to establish a floor on the toxic assets if institutions that need to be liquidated are kept alive on the taxpayer’s dime. Establishing price discovery without inflicting pain on the stakeholders of the deeply troubled institutions will be impossible. The key question investors are currently asking is which institutions are likely to fail the “uniform stress test?”
February 10, 2009: Morning Call
February 10, 2009: Morning Call
Fair Value: SP500 – 867.88; NDX: 1281.72; DOW: 8242.44
Technical Levels:
SPX: 752-755, 800, 816, 848 support/ 874, 899-908 resistance
Events:
Pre-market EPS: DTV (.34/5.34B); HCP (.55/291.3M); ICE (.83/209.9M); MDC(-1.40/370.9M); Q (.10/3.31B); UBS (-.64/2.87B); TRA (1.09/544.0M)
08:30: ICE earnings call
09:00: Fed’s Dudley speaks about inflation
09:20: MOS presents at the Goldman Sachs Ag Forum
10:00: Wholesale Inventories (Dec): -0.7%
10:00: IBD/TIPP Economic Optimism (Feb): 44.0
10:00: Treasury Secretary Geithner testifies on TARP to Senate Banking Panel
11:00: Treasury Secretary Geithner speaks on Financial Rescue Package
10:30: GE presents at Barclays Industrial Select Conference
10:50: POT presents at Goldman Sachs Ag Forum
11:30: INTC Business Update Call
12:00: Geithner interview on CNBC
12:30: V presents at CLSA Asia Investors Forum
13:00: Fed Chairman Bernanke testifies on Fed programs at House panel
13:30: MA presents at CLSA Asia Investors Forum
13:55: MTW presents at Barclay’s Industrial Select Conference
14:30: MON presents at the Goldman Sachs Ag Forum
15:00: TRA earnings call
16:30: TXN presents at Thomas Weisel Tech Partners
16:30: AMAT earnings call
16:30: API Crude Oil and Gasoline Inventories
17:00: ABC Consumer Confidence
Post-market EPS: AMAT (.00/1.36B); CBG (.27/1.40B); CF (2.34/892.4M); CSC(1.02/4.14B); CHH (.37/143.6M); NVDA (-.11/489.1M); XL (.52/1.16B)
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are trading 6 points below fair value while the NASDAQ futures are trading 8 points below fair value as investors await the details of the financial rescue plan. Last night, equity futures moved 13 points lower right before President Obama’s 8pm press conference. Futures are recovering off the lows on several news leaks about the rescue plan. But, I would expect that the Geithner speech at 11am will be short on details and will focus more on the “big picture.” I would not expect any details on how the rescue plan will be specifically implemented. Clearly, the goal is to create incentives for private capital to come off the sidelines through attractive financing and government stop-loss protection. The key question that will remain going forward is how the price discovery mechanism is going to work? Will the highly distressed banks be forced to liquidate if they fail the government “uniform stress test? If the answer is yes, then the rescue package could work because a “liquidation event” would likely be a catalyst for establishing a floor on the toxic assets. Of course, a government-sponsored liquidation of banks that fail the stress test would likely trigger serious short-term selling pressure because the stakeholders (equity and debt holders) would be wiped out. In this scenario, the S&P could break the November 20 lows. But, I would expect private institutional investors and sovereign wealth funds to come off the sidelines in a liquidation event. Private capital is extremely fearful of a zombie financial sector because it will be more difficult to establish a floor on the toxic assets if institutions that should be liquidated are kept alive on the taxpayer’s dime. Establishing price discovery without inflicting pain on the stakeholders of the deeply troubled institutions will be impossible. The key question investors should ask themselves is which institutions are likely to fail the “uniform stress test?”
Impact Research Calls/Market Moving News:
Banks will have to undergo "stress test" if they want additional capital from government – WSJ: Citing people familiar with the matter, the Journal reports that many US banks will be subject to rigorous stress tests to determine if they are healthy enough to lend before receiving additional federal bailout funds. The stress tests will be part of the revised banking rescue plan to be announced on Tuesday. The Journal also points out that the Obama administration plans to invest between $100B and $200B more into banks. According to the article, federal regulators are expected to require large banks to undergo a stress test to determine what they would look like under the "worst case scenario" in two years. Smaller institutions will be able to voluntarily go through the test. The paper also points out that in addition to the capital injections, the rescue fund will spend $100B to help the Fed expand the TALF and $50B to help homeowners. The Treasury is also expected to commit a small portion of the bailout funds to facilitate a public/private partnership to purchase toxic assets.
Geithner Said to Have Prevailed on the Bailout- NYT: The New York Times article mostly addresses the debate inside the Obama administration as they crafted the financial rescue plan. The most important part of the article is at the end when they discuss how the plan is going to attract private institutional investors: “For private institutional investors, the question of whether to invest alongside the government will depend on what kinds of carrots and sticks Treasury officials offer. Managers of hedge funds and private equity funds are closely watching to see how much the government pushes banks to write down the value of troubled mortgages and mortgage-backed securities they want to sell. There is no market value for most of those troubled assets because they are not trading. Investors want to buy them at the lowest price possible, but banks want to avoid selling them at rock-bottom prices and realizing huge losses. The impasse is particularly serious for whole mortgages, which are loans that banks have kept on their own books instead of selling them to Wall Street firms, which bundle them into pools and resell them as mortgage-backed securities. Under current accounting rules, financial institutions have already been required to write down the value of mortgage-backed securities to reflect their current market value. But banks do not have to write down the value of whole mortgages if the borrowers are still current, and many regional banks collectively hold vast numbers of those loans. Under the category of sticks, private investment managers are closely watching how the Treasury rolls out its “uniform stress test” for grading the health of banks. If the government takes a tougher line with more banks, it could force them to sell off more of their loans and take their lumps sooner rather than later.”
TALF could be increased from original $200B to between $500B and $1T - Dow Jones: Dow Jones cites comments from two congressional staff members following briefings by the Treasury. According to the article, Treasury employees did not suggest the administration would have to ask Congress for funds beyond the second $350B they already have available (CNBC had a similar report earlier this evening). As has also been hinted at in earlier reports, Dow Jones says that the plan to deal with illiquid assets on the balance sheets of banks would likely combine low-interest financing provided by the Fed with some form of guarantee on assets provided by the FDIC. The program will initially be between $250B and $500B, but could expand to as much as $1T. As was the case with the TALF expansion, Dow Jones says that the Treasury did not explain how much of the TARP funds would be used for the program.
WSJ discusses constraints surrounding public/private partnership for purchases of toxic assets: In a "Heard on the Street" column, the Journal notes that public/private partnerships in banking do not have a great history. The paper adds that a lot depends on how such partnerships are structured going forward. According to the article, investors may balk at participating in an aggregator bank that only allows them to take minority equity stakes in an entity they can't control. The paper also points out that private sector participation does not guarantee improved transparency given that pricing will likely be determined by the amount of loss-sharing offered by the government, as well as the cost of funding. The article goes on to discuss some of the additional complications surrounding the way different assets are valued on bank balance sheets.
Corporate debt market thawing for highest-rated issuers – WSJ: Citing research from Dealogic, the Journal notes that since the beginning of the year, US companies have sold $78.3B of investment-grade corporate bonds that are not guaranteed through a government program, up significantly from Q4 when companies sold on average $21B of non-government-backed debt a month. The article largely focuses on Cisco's $4B, 10-year note offering, which was sold on Monday at two percentage points above comparable Treasuries for a yield of 4.979%, while a 30-year tranche sold for 5.916%. The Journal notes that back on 2-Dec, H-P (HPQ) had to pay roughly 4.6 percentage points over Treasuries to borrow $2B for five years.
TRA (23.23): Terra Industries reports Q4 EPS $1.65 vs Reuters $1.09: Company reports revenues of $683.5M vs a single estimate of $544.0M.
ICE (62.26): IntercontinentalExchange reports Q4 adjusted EPS $0.82 vs Reuters $0.83: Company reports revenues of $207.3M vs Reuters $209.9M.
FT discusses record bullion sales: The FT reports that the US mint sold 92K ounces of its popular American Eagle coin last month, nearly 4x the amount sold a year ago, and more than it shipped during the entire first half of 2007. The paper also notes that inflows into gold-backed ETFs surged in January, boosting their holdings to a record high of 1,317 tons. According to Barclays Capital, last month's inflows of 105 tons were above September's previous high of 104 tons, and absorbed roughly half the world's gold mine output for January.
Fair Value: SP500 – 867.88; NDX: 1281.72; DOW: 8242.44
Technical Levels:
SPX: 752-755, 800, 816, 848 support/ 874, 899-908 resistance
Events:
Pre-market EPS: DTV (.34/5.34B); HCP (.55/291.3M); ICE (.83/209.9M); MDC(-1.40/370.9M); Q (.10/3.31B); UBS (-.64/2.87B); TRA (1.09/544.0M)
08:30: ICE earnings call
09:00: Fed’s Dudley speaks about inflation
09:20: MOS presents at the Goldman Sachs Ag Forum
10:00: Wholesale Inventories (Dec): -0.7%
10:00: IBD/TIPP Economic Optimism (Feb): 44.0
10:00: Treasury Secretary Geithner testifies on TARP to Senate Banking Panel
11:00: Treasury Secretary Geithner speaks on Financial Rescue Package
10:30: GE presents at Barclays Industrial Select Conference
10:50: POT presents at Goldman Sachs Ag Forum
11:30: INTC Business Update Call
12:00: Geithner interview on CNBC
12:30: V presents at CLSA Asia Investors Forum
13:00: Fed Chairman Bernanke testifies on Fed programs at House panel
13:30: MA presents at CLSA Asia Investors Forum
13:55: MTW presents at Barclay’s Industrial Select Conference
14:30: MON presents at the Goldman Sachs Ag Forum
15:00: TRA earnings call
16:30: TXN presents at Thomas Weisel Tech Partners
16:30: AMAT earnings call
16:30: API Crude Oil and Gasoline Inventories
17:00: ABC Consumer Confidence
Post-market EPS: AMAT (.00/1.36B); CBG (.27/1.40B); CF (2.34/892.4M); CSC(1.02/4.14B); CHH (.37/143.6M); NVDA (-.11/489.1M); XL (.52/1.16B)
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are trading 6 points below fair value while the NASDAQ futures are trading 8 points below fair value as investors await the details of the financial rescue plan. Last night, equity futures moved 13 points lower right before President Obama’s 8pm press conference. Futures are recovering off the lows on several news leaks about the rescue plan. But, I would expect that the Geithner speech at 11am will be short on details and will focus more on the “big picture.” I would not expect any details on how the rescue plan will be specifically implemented. Clearly, the goal is to create incentives for private capital to come off the sidelines through attractive financing and government stop-loss protection. The key question that will remain going forward is how the price discovery mechanism is going to work? Will the highly distressed banks be forced to liquidate if they fail the government “uniform stress test? If the answer is yes, then the rescue package could work because a “liquidation event” would likely be a catalyst for establishing a floor on the toxic assets. Of course, a government-sponsored liquidation of banks that fail the stress test would likely trigger serious short-term selling pressure because the stakeholders (equity and debt holders) would be wiped out. In this scenario, the S&P could break the November 20 lows. But, I would expect private institutional investors and sovereign wealth funds to come off the sidelines in a liquidation event. Private capital is extremely fearful of a zombie financial sector because it will be more difficult to establish a floor on the toxic assets if institutions that should be liquidated are kept alive on the taxpayer’s dime. Establishing price discovery without inflicting pain on the stakeholders of the deeply troubled institutions will be impossible. The key question investors should ask themselves is which institutions are likely to fail the “uniform stress test?”
Impact Research Calls/Market Moving News:
Banks will have to undergo "stress test" if they want additional capital from government – WSJ: Citing people familiar with the matter, the Journal reports that many US banks will be subject to rigorous stress tests to determine if they are healthy enough to lend before receiving additional federal bailout funds. The stress tests will be part of the revised banking rescue plan to be announced on Tuesday. The Journal also points out that the Obama administration plans to invest between $100B and $200B more into banks. According to the article, federal regulators are expected to require large banks to undergo a stress test to determine what they would look like under the "worst case scenario" in two years. Smaller institutions will be able to voluntarily go through the test. The paper also points out that in addition to the capital injections, the rescue fund will spend $100B to help the Fed expand the TALF and $50B to help homeowners. The Treasury is also expected to commit a small portion of the bailout funds to facilitate a public/private partnership to purchase toxic assets.
Geithner Said to Have Prevailed on the Bailout- NYT: The New York Times article mostly addresses the debate inside the Obama administration as they crafted the financial rescue plan. The most important part of the article is at the end when they discuss how the plan is going to attract private institutional investors: “For private institutional investors, the question of whether to invest alongside the government will depend on what kinds of carrots and sticks Treasury officials offer. Managers of hedge funds and private equity funds are closely watching to see how much the government pushes banks to write down the value of troubled mortgages and mortgage-backed securities they want to sell. There is no market value for most of those troubled assets because they are not trading. Investors want to buy them at the lowest price possible, but banks want to avoid selling them at rock-bottom prices and realizing huge losses. The impasse is particularly serious for whole mortgages, which are loans that banks have kept on their own books instead of selling them to Wall Street firms, which bundle them into pools and resell them as mortgage-backed securities. Under current accounting rules, financial institutions have already been required to write down the value of mortgage-backed securities to reflect their current market value. But banks do not have to write down the value of whole mortgages if the borrowers are still current, and many regional banks collectively hold vast numbers of those loans. Under the category of sticks, private investment managers are closely watching how the Treasury rolls out its “uniform stress test” for grading the health of banks. If the government takes a tougher line with more banks, it could force them to sell off more of their loans and take their lumps sooner rather than later.”
TALF could be increased from original $200B to between $500B and $1T - Dow Jones: Dow Jones cites comments from two congressional staff members following briefings by the Treasury. According to the article, Treasury employees did not suggest the administration would have to ask Congress for funds beyond the second $350B they already have available (CNBC had a similar report earlier this evening). As has also been hinted at in earlier reports, Dow Jones says that the plan to deal with illiquid assets on the balance sheets of banks would likely combine low-interest financing provided by the Fed with some form of guarantee on assets provided by the FDIC. The program will initially be between $250B and $500B, but could expand to as much as $1T. As was the case with the TALF expansion, Dow Jones says that the Treasury did not explain how much of the TARP funds would be used for the program.
WSJ discusses constraints surrounding public/private partnership for purchases of toxic assets: In a "Heard on the Street" column, the Journal notes that public/private partnerships in banking do not have a great history. The paper adds that a lot depends on how such partnerships are structured going forward. According to the article, investors may balk at participating in an aggregator bank that only allows them to take minority equity stakes in an entity they can't control. The paper also points out that private sector participation does not guarantee improved transparency given that pricing will likely be determined by the amount of loss-sharing offered by the government, as well as the cost of funding. The article goes on to discuss some of the additional complications surrounding the way different assets are valued on bank balance sheets.
Corporate debt market thawing for highest-rated issuers – WSJ: Citing research from Dealogic, the Journal notes that since the beginning of the year, US companies have sold $78.3B of investment-grade corporate bonds that are not guaranteed through a government program, up significantly from Q4 when companies sold on average $21B of non-government-backed debt a month. The article largely focuses on Cisco's $4B, 10-year note offering, which was sold on Monday at two percentage points above comparable Treasuries for a yield of 4.979%, while a 30-year tranche sold for 5.916%. The Journal notes that back on 2-Dec, H-P (HPQ) had to pay roughly 4.6 percentage points over Treasuries to borrow $2B for five years.
TRA (23.23): Terra Industries reports Q4 EPS $1.65 vs Reuters $1.09: Company reports revenues of $683.5M vs a single estimate of $544.0M.
ICE (62.26): IntercontinentalExchange reports Q4 adjusted EPS $0.82 vs Reuters $0.83: Company reports revenues of $207.3M vs Reuters $209.9M.
FT discusses record bullion sales: The FT reports that the US mint sold 92K ounces of its popular American Eagle coin last month, nearly 4x the amount sold a year ago, and more than it shipped during the entire first half of 2007. The paper also notes that inflows into gold-backed ETFs surged in January, boosting their holdings to a record high of 1,317 tons. According to Barclays Capital, last month's inflows of 105 tons were above September's previous high of 104 tons, and absorbed roughly half the world's gold mine output for January.
Tuesday, February 3, 2009
February 3, 2009: Morning Call
February 3, 2009: Morning Call
Fair Value: SP500 – 822.44; NDX: 1195.61; DOW: 7894.22
Technical Levels:
SPX: 752-755, 800, 816 support/848-852, 899-908 resistance
Events:
Pre-market EPS: ADM (.68/17.64B); ADP (.56/2.16B); AVP (.60/2.87B); CAM(.75/1.52B); CME (3.53/695.6M); CMI (.41/3.23B); DHI (-.56/893.9M); DOW(.04/13.07B); KSU (.39/436.3M); MOT (-.02/7.07B); MRO (.91/17.81B); NOC(.84/8.87B); PNC (.63/1.91B); UPS (.86/13.09B)
05:00: Euro-zone PPI (Dec): -1.2% MoM; 2.1% YoY
07:45: UPS earnings call
08:30: CME earnings call
09:00: PNC earnings call
10:00: DHI earnings call
10:00: Pending Home Sales (Dec): 0.0% MoM
16:30: API Crude Oil and Gasoline Inventories
17:00: ABC Consumer Confidence
18:15: BHP earnings call
20:00: Chinese PMI Manufacturing
Post-market EPS: ACE (1.88/3.22B); CTX (-4.25/887.0M); DIS (.52/10.13B); ERTS(.89/1.91B); FISV (.86/1.07B); MEE (.79/822.6M); MET (.14/12.23B); PXD(.20/475.8M); YUM (.45/3.4B)
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are trading 3 points below fair value while the NASDAQ futures are trading 6 points below fair value moving in lockstep with European markets, which reversed initial gains and are now down 0.25%. European trading is subdued ahead of the interest rate decisions on Thursday. Mixed earnings reports from Vodafone (better) and BP (worse) and mixed economic data have contributed to the lackluster trade. Advancers and decliners on the FTSE 100 are about even. Vodafone (VOD.LN) reaffirmed FY underlying ranges guidance though increased guidance to reflect FX environment. BP (BP.LN) reports its first quarterly loss in 7 years. Germany Dec Retails sales (0.3%) y/y vs con +0.5%. EuroZone Dec PPI +1.8% y/y vs con +2.1%. Banks (down 1.4%) and Insurance (down 0.70%) sectors are the weakest while Telecom and Tech are the strongest. Asian markets closed mixed (Japan down 0.62%, Hong Kong down 0.66%, Australia up 0.32%, India up 0.91%, Shanghai up 2.5%). Government stimulus plans in Japan and Australia buoyed sentiment, and technology stocks gained. Australia cut interest rates lowering its cash target rate 100bps to 3.25% and also planning an additional A$41.5B fiscal stimulus. Resource stocks rose as Chinalco confirmed it was discussing cooperating with Rio Tinto (RIO.AU). PetroChina (601857.CH) rose on reports the Chinese government may submit a stimulus plans for the energy industry.
Impact Research Calls/Market Moving News:
BP (41.57): BP reports Q4 EPS ($0.18) vs Bloomberg consensus $0.17 and year-ago $0.23: Company reports revenues of $60.94B vs Bloomberg consensus $61.45B and year-ago $81.22B . Reported production for Q4 was 3,945mboe/d vs year-ago 3,907mboe/d.
DOW (11.05): Dow Chemical reports Q4 EPS ($0.62), ex-items: DOW also says Q4 earnings were reduced by a much higher effective tax rate, which produced a negative impact of $0.32. Reuters is $0.00; First Call $0.07. Company reports revenues of $10.90B vs Reuters $13.01B. Volume declined 17%, and was down in all operating segments and in all geographic areas. Price was down 6% in the quarter, as a 4% increase in the Performance segments was more than offset by a 15% decline in the Basics segments.
AFL (23.03): AFLAC reports Q4 EPS $0.98 ex-items vs Reuters $1.00: Company reports revenues of $4.26B vs Reuters $4.64B. Reaffirms f09 EPS guidance of $4.51-$4.59 vs Reuters $4.70. AFL says the yen is currently stronger to the dollar than it was in 2008. If the stronger yen persists and averages 90 to 95 for the full year, it would expect reported earnings to be in the range of $4.73 to $4.96 per diluted share. (Note: Of AFL’s 68.9 billion in investments and cash in Q4, hybrid securities exposure is 8 billion. AFL did not take any writedowns on the hybrid investments because they use a debt impairment model following comments from the SEC. Capital concerns are a major issue for AFL because the investment portfolio is heavily weighted toward the financial sector – approx. 40% of assets.)
PNC (32.18): PNC Bank reports Q4 EPS $0.32 ex-items vs Reuters $0.78: PNC issued a press release on January 21, indicating that Q4 results would be below expectations. Company reports revenues of $1.68B vs Reuters $1.91B. The estimated tier 1 risk-based capital ratio was 9.7% at December 31, 2008 vs. 21-Jan guidance of 9.5-10%.
AMZN (61.15): Amazon.com maintained hold at Citi: Firm speculates that the company will rollout its Kindle 2.0 reader on 9-Feb, and says that data indicates that the company sold 500K Kindles in 2008, vs the firm's prior estimate of 380K, likening its sales ramp to that of the iPod. Target price, $65
QCOM (35.29): Qualcomm downgraded to neutral from buy at Goldman Sachs: Price target remains $35. The firm cites valuation.
CME (168.26): CME Group reports Q4 EPS $3.58 ex-items vs Reuters $3.46: Company reports revenues of $692.0M vs Reuters $687.6M.
CAM (21.98): Cameron International reports Q4 EPS $0.75 ex-items vs Reuters $0.74: EPS excludes a non-cash, after-tax charge of $0.08, associated with the previously announced termination of the company's U.S. pension plans. Company reports revenues of $1.52B vs Reuters $1.52B. Company guides Q1 EPS to $0.59-0.62 vs Reuters $0.60. Guides f09 EPS to $1.75-2.00 vs Reuters $2.47.
ADM (27.50): Archer-Daniels reports Q2 EPS $0.91 vs Reuters $0.68: Company reports revenues of $16.67B vs Reuters $17.09B.
MGM (8.13): MGM Mirage initiated with sell at Citi: Target is $2.50. The firm cites concern about the potential default rate at CityCenter and thinks MGM may have to sell at least one other property in 2009 to raise cash.
M (8.59): Moody's places Macy's on review for possible downgrade: The review was prompted by concern that Macy's significantly lower 2009 earnings guidance would result in the company maintaining credit metrics that are more appropriate for a Ba rating level over the medium term.
Fair Value: SP500 – 822.44; NDX: 1195.61; DOW: 7894.22
Technical Levels:
SPX: 752-755, 800, 816 support/848-852, 899-908 resistance
Events:
Pre-market EPS: ADM (.68/17.64B); ADP (.56/2.16B); AVP (.60/2.87B); CAM(.75/1.52B); CME (3.53/695.6M); CMI (.41/3.23B); DHI (-.56/893.9M); DOW(.04/13.07B); KSU (.39/436.3M); MOT (-.02/7.07B); MRO (.91/17.81B); NOC(.84/8.87B); PNC (.63/1.91B); UPS (.86/13.09B)
05:00: Euro-zone PPI (Dec): -1.2% MoM; 2.1% YoY
07:45: UPS earnings call
08:30: CME earnings call
09:00: PNC earnings call
10:00: DHI earnings call
10:00: Pending Home Sales (Dec): 0.0% MoM
16:30: API Crude Oil and Gasoline Inventories
17:00: ABC Consumer Confidence
18:15: BHP earnings call
20:00: Chinese PMI Manufacturing
Post-market EPS: ACE (1.88/3.22B); CTX (-4.25/887.0M); DIS (.52/10.13B); ERTS(.89/1.91B); FISV (.86/1.07B); MEE (.79/822.6M); MET (.14/12.23B); PXD(.20/475.8M); YUM (.45/3.4B)
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are trading 3 points below fair value while the NASDAQ futures are trading 6 points below fair value moving in lockstep with European markets, which reversed initial gains and are now down 0.25%. European trading is subdued ahead of the interest rate decisions on Thursday. Mixed earnings reports from Vodafone (better) and BP (worse) and mixed economic data have contributed to the lackluster trade. Advancers and decliners on the FTSE 100 are about even. Vodafone (VOD.LN) reaffirmed FY underlying ranges guidance though increased guidance to reflect FX environment. BP (BP.LN) reports its first quarterly loss in 7 years. Germany Dec Retails sales (0.3%) y/y vs con +0.5%. EuroZone Dec PPI +1.8% y/y vs con +2.1%. Banks (down 1.4%) and Insurance (down 0.70%) sectors are the weakest while Telecom and Tech are the strongest. Asian markets closed mixed (Japan down 0.62%, Hong Kong down 0.66%, Australia up 0.32%, India up 0.91%, Shanghai up 2.5%). Government stimulus plans in Japan and Australia buoyed sentiment, and technology stocks gained. Australia cut interest rates lowering its cash target rate 100bps to 3.25% and also planning an additional A$41.5B fiscal stimulus. Resource stocks rose as Chinalco confirmed it was discussing cooperating with Rio Tinto (RIO.AU). PetroChina (601857.CH) rose on reports the Chinese government may submit a stimulus plans for the energy industry.
Impact Research Calls/Market Moving News:
BP (41.57): BP reports Q4 EPS ($0.18) vs Bloomberg consensus $0.17 and year-ago $0.23: Company reports revenues of $60.94B vs Bloomberg consensus $61.45B and year-ago $81.22B . Reported production for Q4 was 3,945mboe/d vs year-ago 3,907mboe/d.
DOW (11.05): Dow Chemical reports Q4 EPS ($0.62), ex-items: DOW also says Q4 earnings were reduced by a much higher effective tax rate, which produced a negative impact of $0.32. Reuters is $0.00; First Call $0.07. Company reports revenues of $10.90B vs Reuters $13.01B. Volume declined 17%, and was down in all operating segments and in all geographic areas. Price was down 6% in the quarter, as a 4% increase in the Performance segments was more than offset by a 15% decline in the Basics segments.
AFL (23.03): AFLAC reports Q4 EPS $0.98 ex-items vs Reuters $1.00: Company reports revenues of $4.26B vs Reuters $4.64B. Reaffirms f09 EPS guidance of $4.51-$4.59 vs Reuters $4.70. AFL says the yen is currently stronger to the dollar than it was in 2008. If the stronger yen persists and averages 90 to 95 for the full year, it would expect reported earnings to be in the range of $4.73 to $4.96 per diluted share. (Note: Of AFL’s 68.9 billion in investments and cash in Q4, hybrid securities exposure is 8 billion. AFL did not take any writedowns on the hybrid investments because they use a debt impairment model following comments from the SEC. Capital concerns are a major issue for AFL because the investment portfolio is heavily weighted toward the financial sector – approx. 40% of assets.)
PNC (32.18): PNC Bank reports Q4 EPS $0.32 ex-items vs Reuters $0.78: PNC issued a press release on January 21, indicating that Q4 results would be below expectations. Company reports revenues of $1.68B vs Reuters $1.91B. The estimated tier 1 risk-based capital ratio was 9.7% at December 31, 2008 vs. 21-Jan guidance of 9.5-10%.
AMZN (61.15): Amazon.com maintained hold at Citi: Firm speculates that the company will rollout its Kindle 2.0 reader on 9-Feb, and says that data indicates that the company sold 500K Kindles in 2008, vs the firm's prior estimate of 380K, likening its sales ramp to that of the iPod. Target price, $65
QCOM (35.29): Qualcomm downgraded to neutral from buy at Goldman Sachs: Price target remains $35. The firm cites valuation.
CME (168.26): CME Group reports Q4 EPS $3.58 ex-items vs Reuters $3.46: Company reports revenues of $692.0M vs Reuters $687.6M.
CAM (21.98): Cameron International reports Q4 EPS $0.75 ex-items vs Reuters $0.74: EPS excludes a non-cash, after-tax charge of $0.08, associated with the previously announced termination of the company's U.S. pension plans. Company reports revenues of $1.52B vs Reuters $1.52B. Company guides Q1 EPS to $0.59-0.62 vs Reuters $0.60. Guides f09 EPS to $1.75-2.00 vs Reuters $2.47.
ADM (27.50): Archer-Daniels reports Q2 EPS $0.91 vs Reuters $0.68: Company reports revenues of $16.67B vs Reuters $17.09B.
MGM (8.13): MGM Mirage initiated with sell at Citi: Target is $2.50. The firm cites concern about the potential default rate at CityCenter and thinks MGM may have to sell at least one other property in 2009 to raise cash.
M (8.59): Moody's places Macy's on review for possible downgrade: The review was prompted by concern that Macy's significantly lower 2009 earnings guidance would result in the company maintaining credit metrics that are more appropriate for a Ba rating level over the medium term.
Monday, February 2, 2009
February 2, 2009: Morning Call
February 2, 2009: Morning Call
Fair Value: SP500 – 822.88; NDX: 1180.11; DOW: 7958.74
Technical Levels:
SPX: 752-755, 800, 816 support/848-852, 899-908 resistance
Events:
Pre-market EPS: HUM (1.07/7.34B); MAT (.72/2.2B); ROK (84/1.26B)
04:00: Euro-zone PMI Manufacturing (January Final): 34.5
08:30: Personal Income (Dec): -0.3%; Personal Spending: -0.9%
08:30: PCE Deflator (Dec): 1.1% YoY; PCE Core: 0.0% MoM; 1.7% YoY
09:00: PBR Analyst Meeting
10:00: ISM Manufacturing (Jan): 33.0; Prices Paid: 19.0
10:00: Construction Spending (Dec): -1.2%
Post-market EPS: AFL (1.00/4.6B); APC (.26/2.38B); PCL (.43/455.3M); PBI(.74/1.61B); SNDK (-.60/769.4M)
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are currently trading 11 below fair value to 812 (session low 806) while the NASDAQ futures are trading 20 points below fair value. The S&P has sold off 7% in the last three trading days. Financials are down 6% in Europe with BCS among the weakest financial stocks after Moody's cut their debt rating. BNP is down 12%, as the revised Fortis deal will not increase their capital ratios. The German government is also signaling that bank nationalization is a possibility with Hypo Real Estate currently in focus (down 8%). Asian markets closed lower due to profit warnings from HIT and Mitsubishi Electric. (Japan down 1.5%, Hong Kong down 3.1%, Australia down 1.2%, India down 3.8%, Shanghai up 1.2). European markets are down 2% extending the 3-day sell off to 6%. CNBC is reporting that Obama's "bad bank" plan will not be announced until next week and will instead address the issue of Wall Street compensation this week. Paul Krugman's editorial in the New York Times this morning reflects some of outrage that is starting build against a continuation of the blank check bank policy – copy/paste: http://www.nytimes.com/2009/02/02/opinion/02krugman.html?_r=1
Impact Research Calls/Market Moving News:
BCS (5.71): Moody’s cuts Barclay’s debt rating to AA3 citing potential credit writedowns.
Mitsubishi Electric (6503 JT): Shares closed down 9% after the company cut its full year profit forecast. The company expects profit will decline 94% to 10 billion yen (112 million). The company expected 120 billion yen profit in October. Analyst consensus was for a profit of 72 billion yen.
HIT (30.16): Hitachi falls 18% in Tokyo on the earnings warning from Friday. HIT announced an annual loss of 700 billion yen (7.8 billion dollars). Moody’s downgraded HIT debt to A2 and S&P put the company on watch negative.
SOX Index (208.26): SIA says Global Semiconductor sales were down 16.6% in December versus November sales. The sales were down 22% versus a year ago.
NYX (22.00); NDAQ (21.82): NYSE Euronext (NYX), Nasdaq OMX Group (NDAQ) downgraded at Goldman Sachs: NYX downgraded to sell from neutral; target is now $19. NDAQ downgraded to neutral from buy; target reduced to $23 from $25.
NYX (22.00): NYSE Euronext downgraded to market perform from outperform at Keefe, Bruyette & Woods: Price target is $25. Firm cites industry headwinds and unfavorable pricing trends and exchange rates in its downgrade
CNBC reports that Obama's "bad bank" plan is expected next week: Citing an industry source, CNBC reports that in the coming week the Obama administration will address the issue of Wall Street bonuses and executive compensation through the TARP plan. An industry aid package, including the introduction of the "bad bank" concept, will be announced next week. Though some reports last week indicated that the Administration's industry aid plans might be announced this week, the Administration itself had indicated that a "comprehensive" solution would be rolled out "systematically in the coming weeks".
NY Times discusses the trouble valuing troubled assets: Article notes the very large problem of trying to value some of the assets on banks' balance sheets. It mentions on mortgage-backed bond rated by S&P. The financial institution that owns the bond values it at 97 cents on the dollar, S&P estimates it at 87 cents based on current conditions and 53 cents under a worse scenario but it trades at 38 cents on the dollar. Valuing the bonds too low will force crushing losses onto the banks while inflated values bails out the banks, executives and shareholders at the expenses of taxpayers. Some experts think the government should only buy assets already marked down and then guarantee the rest.
WSJ looks at who might benefit or lose from a government bad bank
A 'Heard on the Street' column looks at the valuations banks have been carrying financial assets on their balance sheets to see who might be helped or harmed by the government buying up assets. Morgan Stanley (MS) and Goldman Sachs (GS) have big holdings that could benefit since they use mark-to-market for their financial assets. But the vast majority of regular bank loans are not marked-to-market but have reserves booked against them. And in many cases the reserves appear inadequate.
Barron's Cover questions the future of LBOs: Considering the deals made by the private equity houses at the height of the boom, it is unclear if any financing will be available for the firms once lending restarts or if corporate boards will be willing to deal with them anymore. And the firms have not had much success investing in distressed debt or equity. Many bonds issued by highly leveraged companies trade for less than 50 cents on the dollar. It may take time to come to fruition, but the firms face a wipeout of their investments in companies like Harrah's, Clear Channel, Hilton Hotels, Freescale Semiconductor, Realogy and Claire's Stores. Barron's believes that many of these companies only have an option value, about 15%-20% of the original value, based on the hope of an eventual recovery. The buyout companies argue that the debt is unfairly depressed and that their portfolio companies are worth more. Apollo and KKR are better on disclosure of valuations than Blackstone. Barron's remains bearish on Blackstone.
Verizon shares could rise by 30% over the next two years says Barron's (29.87)The company offers reliable, business as usual results, keeps its focus and offers the promise of market beating returns. Profits jumped 15% in Q4 due to demand for wireless services and taking share from cable companies. The company had its negatives but has shown that it can handle these tough times. And investors couldn't ask for a better chance to buy as it trades around 12x estimated '09 earnings and 11.5x '10 estimates. There is stable free cash flow and a 6% dividend yield.
NY Times says this is the last year that Wall Street bonuses will be out of line with reality: Columnist Joe Nocera says the reason that bonuses will come down is because the government will not allow them to be so big in the foreseeable future and the banks will realize the PR aspect of bonuses. He notes the criticism of Wall Street bonuses from President Obama where the bonuses were called the height of irresponsibility. Mr. Nocera admits that the amounts for the corporate jet or the renovation of an office are usually too small to make a difference in companies as large as Citigroup or Bank of America. This is about symbolism, the symbolism of spending $1.2M to renovate an office or millions on a jet as the banks are receiving billions in government assistance. Also, the business models will change and the profit levels will be smaller.
WSJ also discusses pay on Wall Street: Industry executives admit that Wall Street pay could shrink from its already much-lowered levels, especially as the industry wants to avoid government intervention. It is likely that expectations will be lowered, at least until the crisis has passed. Some of the banks and securities firms expressed no problem with the talk about lowering compensation levels because it would bring expenses in line with the lower risk and profit profile spreading on Wall Street. The problem is that the compensation system is woven into the fabric of the financial system. Plus, many employment contracts cannot be unwound and lower pay does not guarantee that problems will not occur in the future. Base salaries may increase and payouts may be based on longer term metrics.
Fair Value: SP500 – 822.88; NDX: 1180.11; DOW: 7958.74
Technical Levels:
SPX: 752-755, 800, 816 support/848-852, 899-908 resistance
Events:
Pre-market EPS: HUM (1.07/7.34B); MAT (.72/2.2B); ROK (84/1.26B)
04:00: Euro-zone PMI Manufacturing (January Final): 34.5
08:30: Personal Income (Dec): -0.3%; Personal Spending: -0.9%
08:30: PCE Deflator (Dec): 1.1% YoY; PCE Core: 0.0% MoM; 1.7% YoY
09:00: PBR Analyst Meeting
10:00: ISM Manufacturing (Jan): 33.0; Prices Paid: 19.0
10:00: Construction Spending (Dec): -1.2%
Post-market EPS: AFL (1.00/4.6B); APC (.26/2.38B); PCL (.43/455.3M); PBI(.74/1.61B); SNDK (-.60/769.4M)
Foreign Market Summary/Key Macro News/Commentary:
The S&P futures are currently trading 11 below fair value to 812 (session low 806) while the NASDAQ futures are trading 20 points below fair value. The S&P has sold off 7% in the last three trading days. Financials are down 6% in Europe with BCS among the weakest financial stocks after Moody's cut their debt rating. BNP is down 12%, as the revised Fortis deal will not increase their capital ratios. The German government is also signaling that bank nationalization is a possibility with Hypo Real Estate currently in focus (down 8%). Asian markets closed lower due to profit warnings from HIT and Mitsubishi Electric. (Japan down 1.5%, Hong Kong down 3.1%, Australia down 1.2%, India down 3.8%, Shanghai up 1.2). European markets are down 2% extending the 3-day sell off to 6%. CNBC is reporting that Obama's "bad bank" plan will not be announced until next week and will instead address the issue of Wall Street compensation this week. Paul Krugman's editorial in the New York Times this morning reflects some of outrage that is starting build against a continuation of the blank check bank policy – copy/paste: http://www.nytimes.com/2009/02/02/opinion/02krugman.html?_r=1
Impact Research Calls/Market Moving News:
BCS (5.71): Moody’s cuts Barclay’s debt rating to AA3 citing potential credit writedowns.
Mitsubishi Electric (6503 JT): Shares closed down 9% after the company cut its full year profit forecast. The company expects profit will decline 94% to 10 billion yen (112 million). The company expected 120 billion yen profit in October. Analyst consensus was for a profit of 72 billion yen.
HIT (30.16): Hitachi falls 18% in Tokyo on the earnings warning from Friday. HIT announced an annual loss of 700 billion yen (7.8 billion dollars). Moody’s downgraded HIT debt to A2 and S&P put the company on watch negative.
SOX Index (208.26): SIA says Global Semiconductor sales were down 16.6% in December versus November sales. The sales were down 22% versus a year ago.
NYX (22.00); NDAQ (21.82): NYSE Euronext (NYX), Nasdaq OMX Group (NDAQ) downgraded at Goldman Sachs: NYX downgraded to sell from neutral; target is now $19. NDAQ downgraded to neutral from buy; target reduced to $23 from $25.
NYX (22.00): NYSE Euronext downgraded to market perform from outperform at Keefe, Bruyette & Woods: Price target is $25. Firm cites industry headwinds and unfavorable pricing trends and exchange rates in its downgrade
CNBC reports that Obama's "bad bank" plan is expected next week: Citing an industry source, CNBC reports that in the coming week the Obama administration will address the issue of Wall Street bonuses and executive compensation through the TARP plan. An industry aid package, including the introduction of the "bad bank" concept, will be announced next week. Though some reports last week indicated that the Administration's industry aid plans might be announced this week, the Administration itself had indicated that a "comprehensive" solution would be rolled out "systematically in the coming weeks".
NY Times discusses the trouble valuing troubled assets: Article notes the very large problem of trying to value some of the assets on banks' balance sheets. It mentions on mortgage-backed bond rated by S&P. The financial institution that owns the bond values it at 97 cents on the dollar, S&P estimates it at 87 cents based on current conditions and 53 cents under a worse scenario but it trades at 38 cents on the dollar. Valuing the bonds too low will force crushing losses onto the banks while inflated values bails out the banks, executives and shareholders at the expenses of taxpayers. Some experts think the government should only buy assets already marked down and then guarantee the rest.
WSJ looks at who might benefit or lose from a government bad bank
A 'Heard on the Street' column looks at the valuations banks have been carrying financial assets on their balance sheets to see who might be helped or harmed by the government buying up assets. Morgan Stanley (MS) and Goldman Sachs (GS) have big holdings that could benefit since they use mark-to-market for their financial assets. But the vast majority of regular bank loans are not marked-to-market but have reserves booked against them. And in many cases the reserves appear inadequate.
Barron's Cover questions the future of LBOs: Considering the deals made by the private equity houses at the height of the boom, it is unclear if any financing will be available for the firms once lending restarts or if corporate boards will be willing to deal with them anymore. And the firms have not had much success investing in distressed debt or equity. Many bonds issued by highly leveraged companies trade for less than 50 cents on the dollar. It may take time to come to fruition, but the firms face a wipeout of their investments in companies like Harrah's, Clear Channel, Hilton Hotels, Freescale Semiconductor, Realogy and Claire's Stores. Barron's believes that many of these companies only have an option value, about 15%-20% of the original value, based on the hope of an eventual recovery. The buyout companies argue that the debt is unfairly depressed and that their portfolio companies are worth more. Apollo and KKR are better on disclosure of valuations than Blackstone. Barron's remains bearish on Blackstone.
Verizon shares could rise by 30% over the next two years says Barron's (29.87)The company offers reliable, business as usual results, keeps its focus and offers the promise of market beating returns. Profits jumped 15% in Q4 due to demand for wireless services and taking share from cable companies. The company had its negatives but has shown that it can handle these tough times. And investors couldn't ask for a better chance to buy as it trades around 12x estimated '09 earnings and 11.5x '10 estimates. There is stable free cash flow and a 6% dividend yield.
NY Times says this is the last year that Wall Street bonuses will be out of line with reality: Columnist Joe Nocera says the reason that bonuses will come down is because the government will not allow them to be so big in the foreseeable future and the banks will realize the PR aspect of bonuses. He notes the criticism of Wall Street bonuses from President Obama where the bonuses were called the height of irresponsibility. Mr. Nocera admits that the amounts for the corporate jet or the renovation of an office are usually too small to make a difference in companies as large as Citigroup or Bank of America. This is about symbolism, the symbolism of spending $1.2M to renovate an office or millions on a jet as the banks are receiving billions in government assistance. Also, the business models will change and the profit levels will be smaller.
WSJ also discusses pay on Wall Street: Industry executives admit that Wall Street pay could shrink from its already much-lowered levels, especially as the industry wants to avoid government intervention. It is likely that expectations will be lowered, at least until the crisis has passed. Some of the banks and securities firms expressed no problem with the talk about lowering compensation levels because it would bring expenses in line with the lower risk and profit profile spreading on Wall Street. The problem is that the compensation system is woven into the fabric of the financial system. Plus, many employment contracts cannot be unwound and lower pay does not guarantee that problems will not occur in the future. Base salaries may increase and payouts may be based on longer term metrics.
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