Lorillard (NYSE:LO): Rep. Waxman bill likely to leave open the possibility of a ban on menthol - Citigroup

Citigroup is out with a cautious call on Lorillard (NYSE:LO) noting Rep. Waxman has said he will, in a few weeks, reintroduce a Bill to ensure the domestic tobacco industry is regulated by the Food and Drug Administration. Citi expects this Bill to be similar to the Bill he sponsored in the House last year. Given the Democratic control of Congress and White House, they expect the Bill to pass.

Most significant for LO — The Bill is likely to leave open the possibility of a ban on menthol. Bearing in mind Lorillard (LO) makes more than 97% of its EBIT from menthol-flavored Newport, this is potentially a big issue and is certainly likely to create volatility. However, they don’t believe that it is practical to ban menthol, which currently makes up about 29% of the US cigarette market.

Other likely measures — The Bill is likely to give the FDA much leeway on what to impose. It is likely to make it slower and more expensive to launch new brands, helping cement MO’s dominance , in firm's view. It’s also likely to have many proposals that are already in place in Europe that, in firm's view, have little impact on shareholders, eg banning the term “Lights”.

Unhelpful for sentiment — Clearly this development is unhelpful for sentiment, and supports those who believe that federal and state governments are starting to attack the tobacco industry viciously. Furthermore the timing is an (unwelcome) surprise because they expected the new Congress/ administration to have higher priorities at the moment.

Notablecalls: This is a pretty sharp call, in my opinion and will generate selling interest in LO in the n-t. The menthol ban issue has been overlooked in my opinion and Citi's call will bring it back into attention.

I have to note they do keep a Buy rating on the name here but that's something that can change.

Anyway, I see LO trading lower today on this. Have no idea by how much, though.

United States: Banks: The Big Bad Bank- the devil will be in the details - Goldman Sachs

Wanted to take a chance to highlight Goldman's thoughts on the "Bad Bank":

Industry context

The prospect of a government sponsored aggregator bank has sparked a major rally in bank stocks. Three questions need answers before we can assess the impact on equity holders:

1) At what price will assets be acquired? Market derived prices would destroy bank capital while buying assets at par puts losses to taxpayers. The distribution of losses between banks and taxpayers is critical in assessing the impact for common shareholders.

2) Who/what assets are eligible? Politically, it seems difficult to allow banks to sell assets to the government at a gain. Thus, brokers who mark to market would probably only benefit indirectly to the extent that fixed income markets rally. Asset purchases are likely to focus on whole loans given that restarting the flow of credit is key.

3) What strings are attached? TARP preferreds seemed attractive initially, but the perception changed as TARP was linked to new lending. Further linkage of federal assistance with policy measures (i.e., cramdowns) will be important.

Stock implications
Goldman's base case: banks do not bottom until non-performing asset growth decelerates. They view government intervention rallies as short term. That said, short term rallies can turn into real pain – i.e. last summer, banks rallied for two months.

As a result, they would recommend the following trades for those looking to

1) be less underweight, or 2) be hedged on a Cautious view:

1) JPM vs. USB: For large banks they would buy JPM or pair JPM vs USB. JPM has tangible common plus reserves of 5.0% which provide loss protection with or without a government bad bank, while valuation at 1.2X tangible book still preserves upside as the cycle turns. Conversely, USB trades at 3.2X tangible book and is actually slightly thinner on capital than JPM.

2) KEY vs. BBT: For regional banks they would buy KEY vs. BBT as KEY has tangible common plus reserves of 7.7% vs. 5.8% for BBT, while KEY trades at 0.6X tangible book vs. 1.5X for BBT. While BBT has more earnings power, credit issues are still ahead given a big construction book.

Notablecalls: FYI - While I agree with Goldman in part, I continue to stand by my thesis that the "Bad Bank" has put a stop to the slide. That's good enough for the time being.

There is not going to be any V-shaped recovery for the financials (or the whole global economy for that matter) but things are getting better. Blood will flow on the main street in 2009 but that's something we all have to deal with psychologically.

Aflac (NYSE:AFL): Upgraded to Buy at Merrill Lynch

Merrill Lynch/Bac is upgrading Aflac (NYSE:AFL) to Buy from Neutral with a price tgt of $48 (down from $71).

Aflac has historically generated substantial excess capital and they expect that this trend will continue. In addition to estimated on balance sheet excess capital of $500 million to $1.0 billion, the firm forecast free capital generation (after common dividends and assuming no debt issuance to replace maturing debt) of $1.5 billion during the next two years. The statutory operating return on capital is 35% to 40%, which provides the flexibility to add a substantial amount to the regulatory capital base or, in today’s environment, offset material investment losses.

Hybrid risk is real, but ability to absorb losses over time
The stock has sold off dramatically during the past week on fears of exposure to hybrid securities issued by financial institutions. Merrill thinks elevated losses and ratings downgrades associated with these securities could cause the risk-based capital ratio to fall in the near term, but capital should build at a fairly rapid pace. They estimate that the risk-based capital ratio was 450% at year-end 2008. Under a bad case scenario, we could see the RBC ratio dropping to 320%, but then build to 380% in one year and 450% in two years.

Firm is raising their operating EPS estimates from $4.60 to $4.80 for 2009 and from $5.15 to $5.25 for 2010.

Notablecalls: Given the huge decline in AFL shares I think MLCO's blessing will drive the shares higher today. Would not be surprised to see 10% upside in AFL today.

The market seems hungry for some upside in the fins following yesterday's Bad Bank speculation on CNBC. People feel it will stop the slide in the space. Think they are right about this one.

VMware (NYSE:VMW): Downgraded to Underperform, $15 tgt at Merrill/BAC

Merrill is lowering their target on VMW from $31 to $15 based on 15x new CY09 EPS of $1.00 (vs. old $1.12), -5% y/y. The target equates to ~7x EV/ 4Q08 maintenance revenue run rate, in-line with ORCL. The new EPS of $1.00 is based on 10% decline in license revs and +70bps OM. The 15x multiple is a 25% premium to large cap software (ORCL and SAP) that have comparable license decline and modest EPS growth.

Q4:08 results in line but implied C09 guidance negative surprise

License revs of $314.8mn (+11% y/y) were in-line. However, ex-EA (enterprise agreements) and license backlog, license growth of an estimated 5% is muted for a seasonally strong Q. Implied license growth in upcoming seasonally slow Q109 is -11%, leading to -11% for the year under normal seasonality vs. +15% previously. Economic headwinds could make it tougher to win EAs (peaked at 23% of Q408 bookings, key license driver) which has been winding up growth recently. Unwinding to reasonable level could dampen near term growth.

Notablecalls: Would not be surprised to see VMW trade below $21 level today, possibly closer to $20 level. What this market hates the most is companies not giving guidance. Thats what VMW did.

PS: After looking at the market and the pre-market action I'm not entirely sure this one will collapse they way I initially thought. I would scratch the trade here.

Biogen-Idec (NASDAQ:BIIB): Upgraded to Buy at Goldman Sachs

Goldman Sachs is upgrading Biogen-Idec (NASDAQ:BIIB) to Buy from Neutral and adding the stock to their Conviction Buy list with a $61 tgt (up from $57).

According to the firm this is based on potential upside revision to earnings and attractive valuation. They believe the threat of generics and competition should be manageable, leading to their 2009/2010 EPS (incl. ESO) of $4.14 & $4.55 vs. consensus of $3.97 and $4.23, resp. BIIB’s pipeline is underestimated and should gain visibility in 2009/2010. The product profile and manufacturing capacity might be attractive for potential pharma acquirers. The intrinsic value of $46 implies a pipeline value of $3 which the firm views as attractive.

Catalyst

1) Safety data from over 10,000 patients on Tysabri therapy by yearend.

2) In 2009, MLCO expects Phase 3 data on Rituxan in lupus nephritis (1Q, $1bn potential), Phase 2 data on CDP323 for multiple sclerosis (MS), BIIB14 for Parkinson’s disease, and HSP90 inhibitor for cancer, as well as Phase 1/2 results on long acting Avonex for MS and long acting Factor IX for hemophilia B. Combined potential of the Phase 1&2 programs exceeds $3 bn.

3) Detailed data on two competing agents in MS in 4/09.

Notablecalls: Could do 3-4% to the upside.

Lincoln Electric (NASDAQ:LECO): Downgraded to Sell, $35 tgt at Piper Jaffray

Piper Jaffray is out downgrading Lincoln Electric (NASDAQ:LECO) to Sell from Neutral, while lowering tgt to $35 from $44 as they believe that negative earnings revisions over the next year and sustained low visibility around a recovery will push the stock back to the lows ($35 per share) set in late-November 2008.

LECO shares have rallied along with other 'infrastructure plays'. It is becoming increasingly clear that benefits from the federal stimulus package will be minimal at best in FY09 and more likely to come in FY10/FY11.

In the meantime, Piper's channel checks with key customers and end markets are pointing to deteriorating unit volume demand and price concessions.

Firm is sharply lowering their FY09 sales and EPS estimates and initiating FY10 estimates that fall well shy of Street consensus. A return to past recession trough margins would equate to earnings of $2.35/share.

Notablecalls: This one will work big, I suspect. With Caterpillar (NYSE:CAT) out with dismal results and guidance I think LECO can do 3-4 pts of downside on this downgrade.

Apollo Group (NASAQ:APOL): Actionable Short Alert!

CSFB is out with new (negative) info on Apollo Group (NASAQ:APOL) noting the shares rallied yesterday in reaction, they believe, to news of the dismissal of the lawsuit filed December in Arkansas alleging that Apollo wrongfully returned Title IV funds to the Department of Education to manage down cohort default rates; they think some investors had believed that the dismissal meant that the issue had been put to bed.

Industry sources lead CSFB to think that the lawsuit is likely to be refiled in the coming days in Phoenix.

Although they expect news of a refiling to weigh on APOL shares short term and potentially increase volatility in coming weeks, they continue to like APOL shares and would view significant weakness as a buying opportunity. Sector history makes the firm think that, even if some wrongdoing were found by the Department of Education, resulting financial penalties would not likely be large enough to materially hurt Apollo's enterprise value as long as Apollo worked with the Department to ensure compliance going forward.

Further, they are optimistic that 09 enrollment and earnings upside (vs CS and consensus ests) may result from the combination of the weak economy and continued expense management initiatives.

Notablecalls: This is new info. Kudos to CSFB people. In light of this I'm calling APOL an ACTIONABLE SHORT. I'm surprised they didn't downgrade the stock.

I think the stock can go below $84 level this.

CME Group (NYSE:CME): Downgraded at JP Morgan and Sanford Bernstein

Two firms are out cautious/negative on CME Group (NYSE:CME):

- Sanford Bernstein downgrades CME to Market Perform saying they will re-evaluate 2009-12 future volume growth rate estimates based on revised outlook for the macroeconomic and financial markets and our reduced reliance on their regression-based future volume forecasts, which have broken down over the past 2 quarters. New price tgt is $200 for CME (and $80 for ICE which is also discussed in the note).

The biggest concern they have with regards to the CME is the weakening volumes the firm has seen in its interest rate futures complex. The credit markets have undergone a structural shift during the past 6-12 months in which securitization volumes have virtually dried up and corporate debt issuance (save for bank issuance guaranteed by the FDIC) has remained moribund since the failure of Lehman Brothers in September. Given these fundamental changes in the credit market, it will likely take some time before volumes in the CME's interest rate complex begin to recover to pre-LEH bankruptcy level.

Based on their updated macroeconomic forecast in which they do not expect to see an improving fixed income/credit environment until at least H2 '09, a domestic economic recovery until 2010, and sustained improvement in the domestic equity markets until 2010, they have adjusted their volume growth forecasts for all of the futures products. For the most part, their more negative macro-economic outlook has resulted in a reduction of our volume forecast for most futures products. This does not bode well for the profit potential of either CME or ICE.

- JP Morgan is out resuming their coverage on CME with an Underweight rating (prev. Overweight) and $145 price tgt.

With CME volumes falling due to the worst financial crisis in memory and estimates in need of downward revisions, they believe CME’s stock will slip lower near-term. Longer-term, they believe CME will be a leading beneficiary of the secular migration of OTC trading on-exchange driven by its industry-leading trading technology and product innovation, led by a strong management team.

Estimates too high and falling. JPM sees CME’s stock price under pressure as estimates continue to fall and trading volumes slow. Their ’09 estimate is well below consensus and they are concerned that weak volumes could persist into ’10. CME looks inexpensive at 12x ’09 estimate, given the quality of management and the long-term growth outlook. However, with a leveraged B/S and investments under water, they think valuation will drift lower, even if only temporarily.

Notablecalls: Since JPM was restricted on CME until the Nymex deal closed in 8/08, this is actually a downgrade.

Would say JPM's call is stronger than Sanford's downgrade to Market Perform.

Nonetheless, I think CME will see $160 level (or lower) today.

Apple (NASDAQ:AAPL): Cracks appear in resiliency?

Want to highlight some analyst chatter following Apple's (NASDAQ:AAPL) Q4 results:

- CSFB says not to shoot the messenger, but they not feeling any better on macro pressures. They don’t believe upside in a seasonally optimal quarter should relieve concerns over weaker demand trends for the entire hardware sector in early 2009. Our conservatism on demand, more limited opex leverage, and the iPhone shortfall lead to an outlook that is likely to be seen as conservative.

Upside not flowing through estimates. For fiscal 2009, they are looking for revenues of $33.16 billion and EPS of $4.89, versus previous estimates of $33.36 billion and $4.88. Firm's non-GAAP estimate for calendar 2009 stands at $5.67 versus $6.02 previously.

Apple remains CSFB's top PC pick, but near-term remains tough. On an excash basis, the stock is trading at 10.7 times earnings. They believe longerterm investors should continue to build positions in Apple on weakness. Near-term, particularly in the March quarter, they expect the entire IT hardware sector to come under pressure.

- RBC reits their Underperform rating and $70 tgt noting cracks appear in Apple's resiliency - Apple shipped 2.5M Macs (RBC 2.5M), down 3% Q/Q in Apple's strongest qtr, despite refreshed Macbooks. More scary is the 22% Q/Q decline in Desktops, revealing sharply slowing consumer demand. US growth dropped from 26% Y/Y F08 to 5%. iPhones at 4.4M decelerated 37% Q/Q, below 5M street (RBC 4.5M). iPod US growth was 3% Y/Y.

Growth and Margin Downshift. Headline Q1 results were less worse than investors feared, however with F09 Macs growth at est 4% vs 38% F08, iPhones slowing, iPods saturated, we see a growth 'downshift' for Apple, positioned as premium-priced amidst a worsening global recession (Proprietary RBC/Changewave data points to more deterioration ahead). iPhones are coming off a 3G product cycle without similar catalysts F09, and intensifying competition. Margins may also decline.

Extra' Cautious Outlook below Street. Guidance for $7.6-8B rev. and $0.90-1.00 EPS was below already-lowered street ests at $8.2B, $1.13 on 'extra' conservatism, with Apple acknowledging reduced visibility. Apple reaffirmed 2H/F09 30% GM guidance. Apple's traditional low guidance/high beat may be at risk, given nominal product catalysts, deteriorating demand, lower margins.

Notablecalls: Is good execution in a tough environment enough for AAPL stock to hang on to it's 10+ pt gap-up? I sure have my doubts.

Fastenal (NASDAQ:FAST): Downgraded to Sell with a $22 tgt at FTn Midwest

FTN Midwest is out with a very neg call on Fastenal (NASDAQ:FAST), downgrading the shares to Sell from Neutral and lowering tgt to $22 from $40.

Firm's 2009 and 2010 EPS estimates assume -6.9% and -1.0% revenue growth, 3.2% and 5.0% store growth and 51.0% and 51.5% GM, respectively, down from 52.8% in 2008. FAST expects to temper store growth and headcount in 2009 which is factored into our OM estimates of
15.9% and 16.2%, respectively, vs. 19.7% for 2008.

FAST reported more negative leverage in the last cycle than FTN is modeling, but with a different cost structure. Also, many companies are better equipped and more experienced to handle cycles than in the past.

While they do not use historic or peer P/E multiples for valuation, FAST has ranged from 18x-41x over the past 10 years. FAST is currently trading at 18.3x current 2009 consensus vs. its distribution peers at 11.1x.

Conclusion:

While they neither believe history will simply repeat nor are modeling their coverage to mirror their respective fundamentals of the past recession, the firm attempts to account for macro change and fundamental impact. Their downgrade of FAST reflects their belief that the market has not yet priced potential negative trends similar to what is estimated and priced into other distributors.

Notablecalls: FAST should get killed on this.

General Electic (NYSE:GE): ’09 Expectations Still Too High; Placing Short-Term Sell Rating on the shares - UBS

UBS is out negative on General Electic (NYSE:GE) saying ’09 Expectations Still Too High; Placing Short-Term Sell Rating on the shares; lowering tgt to $12 from $18.

Believe reserves are too low and ’09 credit losses will exceed guidance
USB is reducing their ‘09 estimates for Capital Finance to break-even vs. GE’s guidance of roughly $5B (prior UBSe ~$3.2B). They believe GECS reserves are too low, and expect credit losses to far exceed GE’s forecast. Firm views GE’s guidance of $5B in Capital Finance earnings as a nearly “best case” scenario.

Credit rating and dividend at risk, and could drive stock lower
If their estimates are correct, UBS believes that GE’s ‘AAA’ rating is at risk, and that GE might have to consider either cutting its dividend or raising additional capital. They also believe that GE’s commitment to its dividend could result in underinvestment in its industrial businesses. Despite a sharp drop in the stock’s price over the last week, they expect declining consensus estimates, coupled with an intensification of the discussion about the dividend and credit rating, to drive the stock lower over the next few months.

Reducing earnings estimates, primarily to reflect weaker GECS outlook
New EPS estimate for 2009 is $1.05 (was $1.40) and for 2010 is $1.40 (was $1.50)

Notablecalls: It looks like UBS' 09 EPS of $1.05 is the new Street low (prev. $1.20). Also, their $12 tgt is the Street low.

The call reads ugly, but one must admit the stuff discussed here is not new in nature. There has already been ample discussion regarding GE's credit rating and dividend.

I would not be surprised to see the stock trade down on this, though.

Ralph Lauren (NYSE:RL): Downgraded to Sell at Goldman Sachs

Goldman Sachs is downgrading Ralph Lauren (NYSE:RL) to Sell from Neutral with a reduced price target of $37 (vs $51 previously), reflecting 10% potential downside, as they see the following unfold:

1) likely next aspirational laggard to join this peer group (TIF, COH, JWN and EL) which have all negatively preannounced,

2) fundamental EPS risk on the horizon and a likely cautious outlook well below consensus, and

3) multiple contraction much like in past periods of slowing EPS and returns. 2008/2009/2010 estimates are moving to $3.79/$3.09/$3.35 from $3.88/$3.34/$3.68 to reflect a tougher outlook for RL’s retail division.

Goldman sees an on-gong shift in consumer spend from aspirational to desperational. RL has bucked this trend with impressive inventory and expense management; however, they believe the shift worsened over the past few months and will prove more challenging for RL to withstand. As such, when RL reports Q3 EPS on Feb 4th, they expect signs of weakened fundamentals across wholesale, retail, outlet and its European business as deep discounts were likely needed to drive sales. Given downside risk versus consensus expectations, shares are likely to be pressured. If EPS growth slows and returns see pressure, investors could even push valuation back to recent 8x lows which would compound the stress on the shares and potentially drive 20- 40% downside - well beyond $37 target. Firm notes RL saw similar valuation over 2001-2003 when returns and growth last slowed.

Notablecalls: This Goldman Sachs call makes RL a short. My only question is - will RL fall below $39 level today or will it take 2 days. I suspect it's going to happen today. Going sub-$38 is a real possibility.

Research in Motion (NASDAQ:RIMM): Upgraded to Outperform at RBC Capital

RBC Capital is out with a big call on Research in Motion (NASDAQ:RIMM) upgrading the shares to Outperform from Sector perform while raising tgt to $75 from $45.

Firm notes their prior Sector Perform rating was based on 1) reduced margin visibility; 2) execution issues; 3) recession-related growth headwinds. RIM has corrected 28% since Q2 results; they now forecast new upside, based on: 1) improving margin visibility; 2) recovering execution; 3) performance exceeding lowered expectations.

Improving Margin Visibility. In Sept/08, RIM's sharp downward GM outlook (down 670bps F10) surprised investors, on a consumer-related margin downshift and early Storm/Bold costs. On improved mix and cost structure, the firm sees hardware margins stabilizing (32-34% hardware, 41% reported) F10/F11, improving sentiment regarding LT margin trends. They also see RIM benefiting from Op Leverage F10/F11.

Recovering Execution. Execution challenges (delays, quality, shortages) and unfavourable reaction to the Storm also pressured RIM's valuation multiple. Carrier and other feedback suggests RIM's execution may improve F10 as they move up manufacturing and supply experience curves. Firm believes future consumer launches will avoid repeating Storm's stumbles, advancing RIM's consumer momentum and share gains.

Revised Estimates. RBC's F09 estimates remain unchanged; F10 estimates become $15.8B and $3.90 EPS (15% Y/Y) (prior $15.8B, $3.84). They are introducing F11 estimates for $19.2B rev (21% Y/Y) and $5.00 EPS, with 28% Y/Y EPS growth.

Multiple Recovery Expected. Valuation declined 69% since June/08, faster than peers (down 28%) and Nasdaq (down 38%), and trades at 14x, below peers (19x). Firm sees RIM's valuation multiple converging to peers, on alleviation of execution and LT margin concerns. They have been prudent regarding their target multiple in consideration of near-term valuation volatility risks and ongoing recessionary headwinds.

Notablecalls: I like this call as RBC is the Axe in the space. Also:

1) RIMM has a nice upward sloping chart hinting further upside to come.

2) The call itself is a game-changing one. RBC sees improving margin visibility and recovering execution.

I think the stock can do $53+ in the near term.

State Street (NYSE:STT): 8-K filed: Very Large Increase in Unrealized Losses, Proforma TCE Ratio with Conduits Under 1%? - JPM

JP Morgan is out with some negative comments on State Street (NYSE:STT) that filed an 8-K after market close on Friday to disclose very large increase in unrealized losses in its securities portfolio and in its conduits.

By firm's estimates, proforma tangible common equity ratio with the conduits would likely fall from an already thin level of 3% at 9/30 to below 1% at 12/31/08. TCE ratio for its on balance sheet assets would be about 3.5% including deferred tax benefit, down from 4.8% at 9/30.

STT also disclosed a $78 mil securities impairment charge in 4Q08. 4Q results will include previously announced $450 mil charge for managed accounts. There was also a charge of $160 mil in 1Q08 for these managed accounts.

Unrealized losses in its $78 bil securities portfolio rose to about $9 bil pretax from $5.3 bil at 9/30, and unrealized losses in its ABCP conduits rose to about $6 bil pretax from $3.5 bil at 9/30.

Analyst notes they are very surprised by the timing of the filing, as STT is scheduled to report earnings Tuesday morning before market opens, and this filing will raise concerns about capital adequacy.

Notablecalls: It looks like State Street (NYSE:STT) is going to get clobbered tomorrow morning regardless what the headline numbers are going to look like.

I don't have many previews handy but a quick glance shows Barclays expected unrealized losses on STT's $78B securities to exceed $4.5B ($3.3B AT in 3Q), while losses on its $25.5B ABCP conduit to exceed $3B ($2.1B in 3Q). They also expected consolidated TCE ratio fall below 3% (reported should be over 4%).

Judging from this it looks like the unrealized losses are 2x larger than expected. Were it Citigroup, it wouldn't be a surprise but in State Street's case I suspect the market will react in a rather painful manner.

Waterpistol to the head, I think $32 level could be breached in the very n-t.

PS: Congrats to those few who managed to short STT stock around $36 level Friday after market close. Just 10,000 shares, but hey you are in the money!

Apple (NASDAQ:AAPL): Downgraded to Underperform at RBC

RBC throwing in the towel in Apple (NASDAQ:AAPL) downgrading the stock to Underperform from Sector Perform and lowering their tgt to $70 from $125.

They see a revaluation in Apple shares towards the market multiple, on reduced earnings growth expectations and near-term uncertainty re leadership.

Leadership Void. CEO Jobs' unexpected leave of absence raises near-term uncertainty re leadership. Jobs is widely viewed as Apple's chief innovator, dealmaker, leader, deeply involved in minute decisions, inextricably tied to Apple's brand. Jobs' being sidelined for 6 months or more and unavailable day-to-day -- with no clear successor -- in RBC's view raises risks to Apple's sustaining its stellar record of innovation going forward.

Declining Visibility to Growth. Proprietary data indicates further deterioration next 90 days in consumer electronics and Apple-related spending; January RBC IQ / Changewave survey data (3,500) shows only 28% of respondents planning to purchase a Mac laptop next 90 days, down from 33% Nov. Separately, 30% plan on buying iPhone 3G in Dec, down from 34% in Sept.

Lowering Financial Estimates, Q1 Preview. On deteriorating demand, F09 estimates become $36.2B rev and $5.00 EPS (prior $38.1B, $5.07). For Q1 (reporting Jan 21), they expect $9.8B rev (up 2% Y/Y) vs $9.9B street on 4.5M iPhones, 2.5M Macs, 20.4M iPods. GAAP EPS is expected at $1.48, vs. $1.39 street.

Notablecalls: Just wanted to let you know it's out there. No trade here, in my opinion (Even if there was one I probably wouldn't take it).

Also, note that RBC is the most negative firm out there this morning with other Tier-1 firms defending AAPL.

Catepillar (NYSE:CAT): Risk/reward has tilted more negative - Morgan Stanley

Morgan Stanley is out uber negative on Catepillar (NYSE:CAT) this morning saying risk/reward has tilted more negative for CAT shares.

Recent comments by the CEO of competitor Hitachi Construction—who has “never before experienced seeing sudden, simultaneous drops in worldwide demand” and is seeing global demand down 25-30%—support their bearish view on the shares. MSCO's 2010 EPS estimate of $2.57 is 40% below consensus ex-MS. CAT has held that emerging markets revenues would grow in 2009; they’ve argued for a steep fall but allowed for the possibility of upside. Upside now seems very unlikely.

Differentiation from consensus:
First, they doubt stimulus will have much of an impact on equipment sales, especially in 2009.
Current talk in DC still supports around $85bn in infrastructure, with half contracted within the year, and a likely multi-year spending curve. The resulting math does not mean much in a trillion dollar construction market. And China loader sales continue to decline through December despite the announced stimulus there. Second, they believe 2010 will be weaker than 2009. Construction and project planning timelines are just too long, and a recovery in 2010 is highly unlikely. Finally, they are concerned that mining, oil and gas revenues could turn substantially negative in 2009. Rig counts are falling sharply, with room to the downside, and mining capex constraints may outweigh the effect from fleet renewal.

Reiterates Underweight and $31 tgt noting their Bear Case is $16 as synchronous fall in virtually all markets leads to earnings troughing at $1.05 in 2010, well below CAT’s internal goals but in line with last downcycle. Cancellations of oil and gas rigs through 2011 depress earnings in an extended downcycle, accentuated by dealer inventory swings and a slow curve to cutting expenses.

Notablecalls: I think CAT stock will see selling pressure on this. Imagine being long the name and seeing this comment from Mother Morgan - would you sell? I think I would.

CAT's a short this morning.

The most interesting tid-bit from the call is that MSCO now thinks 2010 will be worse than 2009. That's certainly out of consensus.

Southern Copper (NYSE:PCU): Downgraded to Sell at UBS

UBS is downgrading Southern Copper (NYSE:PCU) to Sell from Neutral while moving their tgt to $12 from $18.

As we move into 2009, Cananea remains shut down and they believe Southern Copper will disappoint on both volume and costs. The dramatic fall in copper and moly prices will take its toll on early 2009 results, but also on Q4. Firm is cutting their 2009 and 2010 earnings estimates by 56% and 62%. In their view, 4Q08 results should be very weak, as they forecast provisional pricing sales will drive Q4 EBITDA to $4m and to a loss of $67m. The stock has outperformed copper and some of its peers (GMEX, FCX) and they are cutting PT from $18 to $12 and downgrading the stock to Sell. They prefer exposure through Grupo Mexico.

Copper and moly prices under pressure
While they remain bullish on copper’s long-term outlook, due to supply issues, they are more bearish on the commodity in the short-term. Prices have declined significantly and they expect copper to average $1.30/lb in 2009. We see a modest recovery in 2010. Firm also believes moly prices will remain low. They now forecast moly to average $8/lb in 2009. Weak commodity prices will contribute to the significant cash flow declines they are forecasting for PCU in 2009 and 2010.

Notablecalls: PCU has had its bounce - now its time to come back towards the $13-$14 level. UBS' call will make that happen. Will not break $14 today but will come close.

Palm (NASDAQ:PALM): Goldman Sachs reits Sell and $0.40 tgt - now

Goldman Sachs reits Sell rating and $0.40 tgt... based on a 0.25X EV/S multiple applied to our
CY2009 sales estimate of $756mn... fundamentally challenged to successfully compete in the fast, growing smartphone market.

Notablecall: Wanted to let you know its out there. Could take PALM to $5 today.

Energizer (NYSE:ENR): Downgraded to Underperform at Merrill/Bac

Merrill Lynch/Bank of America is out with a downgrade on Energizer (NYSE:ENR) to Underperform from Buy, lowering tgt to $59 from $74.

Firm notes the downgrade is consistent with a shift toward more defensive companies with less leverage for ’09, and is based on the following: 1) further macro deterioration and related risk of retailer inventory de-stocking, 2) the 75% run the shares have seen, and 3) the fact that ENR no longer trades at a deep discount to the bottom of the household products / personal care (HPC) group.

Lowering EPS ests to $5.29 for ’09, $5.82 for ‘10
Firm is lowering their FY09 EPS est to $5.29 (-13% y/y) from $6.01, based on a 40bp cut to sales growth, a 70bp cut to operating margin, and higher interest and other expense. They are now assuming that ENR fails to hold EPS flat y/y in FY09, which the company noted would be “a challenge” in its Q4 press release. So despite a slight pullback in the US$ and easing commodity costs since ENR last report, the worsening macro setting drives them to advocate taking some profits for those who bought at the bottom. FY10 est is now $5.82 (+10% y/y), down from $6.53, based on a lower base year and a higher y/y growth assumption.

Notablecalls: ENR is a big mover and I suspect the stock will take a fairly sizable hit on this MLCO downgrade. I'm guessing the stock will trade pretty close to $50 level in the n-t.

Amazon.com (NASDAQ:AMZN): Downgraded at Amtech to sell, $35 tgt

FYI: Wanted to let you know Amtech is out with this major call right now.

Sigma Designs (NASDAQ:SIGM): Sigma to retain 100% of Microsoft IPTV service platform (Actionable Call Alert) - BWS Financial

BWS Financial is out with an Actionable Call on Sigma Designs (NASDAQ:SIGM) saying the co would retain 100 percent market share position in Microsoft (MSFT) platform IPTV service since the firm learned Motorola (MOT) could delay field trials of second generation set-top boxes until the fourth quarter 2009, and for commercialization not to occur until first quarter 2010.

The comments were made to BWS analysts by a MOT representative during the Consumer Electronics Show (“CES”) in Las Vegas. While MSFT seemed more excited of the service being available via Xbox 360, and Broadcom (BRCM) only commenting that the program “remained on track”.

The threat of BRCM being a competitor has created a cloud of uncertainty for SIGM shares. The delay in the rollout would be welcomed news not currently priced into SIGM shares and earnings forecasts.

Firm believes the new timeline would present an opportunity for SIGM to outperform the current consensus estimates and for the Street to revalue the shares based upon the delay in competition.

SIGM shares should start to move higher.

Reiterates Buy and $15.50 tgt on SIGM.

Notablecalls: This is what I call research - going out there and getting new info. I suspect we will see SIGM shares trade up 5-7% today if the general market plays ball.

Calling it Actionable.

BWS is a small firm and I suspect the majors will catch up with their comments later on.

Alcoa (NYSE:AA) : Downgraded to Sell ahead of earnings release

Deutsche is out with a gutsy call on Alcoa (NYSE:AA) downgrading the stock to Sell from Hold while lowering tgt to $8 from $10.

Firm is revising their earnings model for DB’s revised commodity estimates and the recently announced production cuts (among other measures) to weather the economic downturn. They believe these factors will likely lead to significant net losses for Alcoa in the short term and note the downside from current prices, near-term negative FCF and large net debt position support their Sell rating.

As a result of DB’s lower aluminum price forecasts (USc63/lb for 2009, -26% vs. prior, and USc70/lb for 2010, -32%). and recently announced volume cuts, they have slashed Alcoa EPS estimates to a US$0.85 net loss for 2009 (vs. prior earnings of US$0.04) and US$0.27 loss for 2010 (vs. previous US$1.00 gain), below Bloomberg consensus of US$0.35 and US$1.05, respectively. On January 6, Alcoa announced additional curtailment in smelting output of 135,000 mtons and that it will cut its workforce by 13,500 (13%) by the end of 1Q09. Capex for 2009 should be reduced to US$1.8bn (50% lower YoY).

Diluted EPS loss of US$0.93 for 4Q08
Based on a sharp sequential drop in aluminum prices, the firm expects Alcoa to report 4Q08 diluted EPS loss of US$0.93, lower than Bloomberg consensus of US$0.08 loss, and vs 3Q08 earnings of US$0.33/share. After excluding the after-tax impact of ~US$900m (~US$1.15/share) due to one-off charges (restructuring, impairment and special charges), normalized diluted EPS stands at US$0.17.

Notablecalls: AA is set to release its quarterly tonight, making DB call a gutsy one. If they are right, Alcoa won't be able to sustain its current dividend.

Not saying short into $10.30 in pre mkt but one to keep on the short radar.

Robert Half International (NYSE: RHI): Added to Top Picks Live as a Sell - Citigroup

Citi is out with an interesting call on Robert Half International (NYSE: RHI) adding it to their Top Picks Live (TPL) as favorite Sell idea within their Business & Professional Services universe.

Why Now? — Over the past couple of months, evidence has mounted that deteriorating economic conditions are wreaking havoc on professional staffing and permanent recruiting firms such as RHI. Even then, we’ve witnessed an unjustified run up in the stock (creating a rich valuation). Citi believes economic data (incl Friday’s US employment report) could continue to disappoint and that the timing is right to highlight RHI as their top Sell idea on TPL.

Cutting Ests and PT — Given the host of negative data points of late and RHI's exposure to severe negative leverage in its Perm segment, they are cutting their forward estimates again. For 2009, the firm now projects $0.52 in EPS, down 35% from $0.80 and $0.09 (15%) below consensus. They are also cutting 2010 estimate by $0.28 to $0.62.

Price target goes down by a lesser 13% to $13 from $15 as they increase their targeted multiple range as we are now closer to trough earnings and they give RHI credit for its sizable cash balance.

Bottom Line — Many staffing firms have cut or suspended guidance of late due to weak results and poor visibility, and RHI should be no different. Off of their freshly cut estimates, the stock is trading for ~38x forward earnings, which is almost 3x the multiple of MAN (1H) and 2x the multiple of KELYA (3S).

The firm believes this premium is undeserved, particularly because RHI is the staffer most exposed to negative leverage effects as the recession drags on. They do not foresee a near-term recovery in these trends and expect RHI to suffer.

Notablecalls: I like this one for 3 reasons:

1) The chart - looks like this one wants to go down.

2) The valuation - 38x forward EPS? Any takers? Thought so.

3) The catalyst - tomrrow's employment report. Also, as Citi hints RHI may have to suspend guidance.

How much should it go down?

Would not be surprised to see the stock around $18 in the n-t.

Satyam (NYSE:SAY): The Short Story - First Global India

First Global India has a nice comment on SAY this morning:

Let’s say one thing upfront: we think Ramalinga Raju is an amateur. He is not the first promoter in the world to have cooked the books. Nor will he be the last.

But the weird mea culpa letter is something that is bizarre to say the least. This is not the way professional scamsters work. We doubt if there has ever been an instance of a promoter sending in a letter like this, right upfront. Jeff Skilling didn’t do it. Bernie Ebbers didn’t do it.

So, Mr.Raju was neither a good promoter nor a good scamster. And that is the final writing on his epitaph.

What happens to Satyam now?

It’s history.
The stock could go to zero or near-zero.

After all, no US IT major will go near it to sniff at Satyam’s books. They will need to hire one of the Big Four Accounting firms for a due diligence! Think about that…

No. Satyam is way too risky a deal. Clients will walk. Key employees will walk. There is no cash worth the name, on the balance sheet. And the so-called “genuine” is .loss making. As stated in Raju’s letter, Q2 FY09 had an OPM of only 3%...which means the overall business of Satyam is loss-making, at the net level. And is also cash negative, as is clear from Raju’s letter that he was pledging stock to raise money to keep Satyam’s operations going.

So all holders out there: get out while you still can. This stock has a bottom that you don’t want to see materialise.

Notablecalls: What can I say? High five to ABN Amro for upgrading SAY to Buy from Sell yesterday!

AK Steel (NYSE:AKS): Upgraded to Buy, added to Conviction Buy list at Goldman Sachs

Goldman Sachs is upgrading AK Steel (NYSE:AKS) to Buy from Neutral and adding it to the
Americas Conviction Buy List. They recommend AKS for near-term to medium-term investors primarily due to its high sensitivity to steel prices. Its electrical steel segment should remain highly profitable and should get a boost from global stimulus packages, particularly in China. Firm's new 6- month P/E and EV/EBITDA based target price of $15 (increased from $9) implies the highest potential upside in their coverage of 34%. It should also benefit from lower iron ore prices next year.

Goldman notes they see steel prices at an inflection point
They remain positive on the steel sector in the near-term owing to impressive supply discipline exhibited by the industry around the world which has helped prices to bottom at a significantly higher level than other commodities. Firm estimates that HRC prices will bottom in January at $525 per ton, then increase to $625 by April before declining again. Scrap prices, which generally lead steel, are already on the rise.

Swapping Steel Dynamics for Nucor on Conviction Buy List
Given their expectations for a near-term increase in steel prices, the firm believes Steel Dynamics offers a higher potential reward than Nucor, which has historically been a defensive name that has not outperformed in steel market uptrends. They have therefore added Steel Dynamics to their Conviction Buy list in place of Nucor. However, they continue to rate Nucor as a Buy.

Notablecalls: AKS has a nice chart and with GSCO bumping it to a Conviction Buy the stock will fly. I see $12 in cards as soon as today.

Apple (NASDAQ:AAPL): Upgraded (again) at Oppenheimer

Oppenheimer is out with an upgrade on Apple (NASDAQ:AAPL) to Outperform ($135 tgt) from Sector Perform following yesterday's disclosures about Jobs' health. While the letters from Jobs and Apple's board raise more questions than they answer, they allay the central concern they raised two weeks ago: the risk of a hasty, unplanned leadership change.

Firm notes they don't know what ails Apple's CEO, and they're not ready to assume that a problem with a "relatively simple and straightforward" remedy is a problem that is itself "simple and straightforward." Still, it seems unlikely that Jobs, the board, and its counsel would disclose the prognosis of a six-month recovery if it were at odds with doctors' expectations. While that is no guarantee, they are satisfied that a sudden change of leadership is not imminent.

In short, while the leadership risk is not eliminated, it has become less acute and allows them, following this note, to refocus on the heart of the Apple story: the Mac share gains, the iPhone revolution, the cash in the bank and the cash that's still flowin.

Notablecalls: So you know it's out there. Remember how Opco downgraded the stock on Dec 17? Well, the stock is now higher when they downgraded it. I know it pays to be flexible and I really have respect for analysts that have the ability to quickly change their mind when proven wrong.

Still, leaves a bad taste in your mouth, doesn't it?

This upgrade is the one you need to fade.

Also note there's a story in LA Times saying Jobs' hormone imbalance could be caused by a tumor.

Yeah, fade anywhere above $96.70 (I see it trading there this AM)

PS: BMO making negative trading call on AAPL.....thinks company will guide March quarter revenues in the range of $7.1B-$7.5B and EPS to a range of $0.75-$0.85.....street at $8.4B/$1.15....."we believe the magnitude between March quarter guidance and current Street estimates is likely to pressure the shares near term"...they lower FY09 EPS estimate to $4.60 from $5.11

NC: My question now is - Will AAPL see red today?

Satyam Computer (NYSE:SAY): Two tier-1 firms out negative - expect stock to go down

We have two tier-1 firms out cautious or even negative on Satyam Computer (NYSE:SAY) this morning:

- UBS notes Satyam stock has rallied more than 25% over the past week on increased probability of a management change. While they think a smooth management change would be positive for the stock, the market has not factored in a potential disruption to business caused by uncertainty by the management/ownership change, in firm's view. New contract wins will be the first to be impacted; additionally Satyam faces competition from TCS/Infosys Technology (INFY) in its existing client base in an already challenging demand environment.

Among Satyam’s large accounts, TCS also has a meaningful relationship with General Electric, Citi, Merrill Lynch, Applied Materials, Kimberly Clark and Qantas, and INFY has meaningful relationships with Telstra, Reuters and Citi. UBS sees higher risk to Satyam where TCS is also a vendor, as Satyam and TCS pricing differential is lower then Satyam and INFY pricing differential. A prolonged period of uncertainty would be detrimental to Satyam.

UBS also notes Satyam underperformed TCS and Wipro by only about 6% in 2008, despite negative implications of the aborted Maytas transaction. They see higher risk to Satyam’s earnings in FY10/11, compared with INFY/TCS/Wipro. Reiterates Sell rating on Satyam.

- JP Morgan says that while they have not heard of any specific instance so far, they believe that Satyam could see some business pull-back from top global customers if the corporate governance issues continue over the next few weeks. Further, they believe that Satyam employees are uncertain over future leading to low employee morale and several people are looking for options to exit the company.

They are reducing FY10/FY11E revenue estimates by 10-11% and EBIT estimates by 17%/13% respectively.

Satyam’s stock has rebounded sharply over the last couple of weeks largely due to cheap valuations and possibility of new promoter emerging. However, fundamentals remain weak and the firm believes that confidence in management would be difficult to rebuild - they see a new management team with new promoter as the only quick way to restore investor confidence.

Reits Underweight.

Notablecalls: The shares are reportedly trading down 4% in India, mostly due to concerns over renewal of existing contracts by clients.

A local analyst is quoted saying, "Concerns over corporate governance issues at Satyam might make its existing sourcers and vendors jittery before renewing their contracts."

This spells trouble for Satyam in my opinion.

Must say I would not be surprised to see the stock retrace some of the recent bounce gains.