June 17, 2009: Morning Call

Fair Value: SP500 – 907.95; NDX: 1442.97; DOW: 8451.06

Technical Levels:

SPX: 765, 788, 832, 875-880 support/ 935-943 resistance

Events:

Pre-market EPS: FDX (.54/8.44B); SMTS (.13/13.4M)

04:30: Bank of England releases minutes from interest rate decision
05:00: Euro-zone Trade Balance (April)
05:00: Euro-zone Construction Output (April)
05:00: MT Annual Meeting
07:00: MBA Mortgage Applications
08:00: HPQ Analyst Day
08:30: FDX earnings call
08:30: US Consumer Price Index (May): 0.3% MoM; Ex-Food/Energy: 0.1% MoM
08:30: US Consumer Price Index (May): -0.9% YoY; Ex-Food/Energy: 1.8% YoY
08:30: US Current Account Balance (Q1): -85.0B
10:30: DOE Crude Oil and Gasoline Inventories: -2000k Crude Draw; 500k Gas Build
12:00: Fed’s Bernanke speaks at Financial Literacy conference
12:50: President Obama unveils financial regulation legislation

Foreign Market Summary/Key Macro News/Commentary:

The S&P futures are trading flat with fair value while the NASDAQ futures are
trading 6 points above fair value at 7:45 am ET. The S&P futures have dropped 4
points in the last few minutes after FDX guided Q1 estimates below current consensus.
Weakness in US markets yesterday afternoon spilled over to Asian and European trading.
European markets are down 0.75% to 1.2% near the lows of the session. Mining shares
are amongst the leading fallers. Decliners on the FTSE 100 lead advancers 4-1. Sainsbury
(SBRY.LN) Q1 trading statement reported like-for-like sales up 7.8% excluding fuel and
VAT, however the shares traded lower as the company announced a capital raising of
approx £445M. Profit warnings from SSAB Svenskt Stal (SSABB.SS), Sandvik
(SAND.SS) and Aeroport de Paris (ADP.FP) saw their shares fall. Iberdrola (IBE.SM)
announced a €1.325B capital raise. Asian markets closed mostly lower (Hong Kong
down 0.45%, Australia down 1.47%, Shanghai up 1.67%, Japan up 0.90%, India down
2.9%). Commodity stocks fell and financials were down across the region. China
reversed initial losses after the government reiterated it would not tighten lending
conditions, and a report said real estate investment trusts might be allowed. The market
was unaffected by a report that IPOs would be allowed to resume by 25-Jun. Japan also
closed up. Auto stocks rose after the US House passed the cash-for-clunkers measure.
Research Calls/Market Moving News:

Fed Weighs Using FOMC Statement to Damp Rate-Rise Speculation-Bloomberg:

Federal Reserve officials are considering whether to use next week’s policy statement to
suppress any speculation they’re prepared to raise interest rates as soon as this year.
While policy makers have signaled they accept an increase in longer-term Treasury yields
as the economy improves, some are concerned at any premature anticipation of rate rises.
Fed staff have examined the Bank of Canada’s public intention of foregoing an increase
until 2010, according to a person familiar with the matter, without concluding the
statement has proven effective. One option would be to emphasize in the June 24
statement that increasing slack in the job market and U.S. manufacturing will keep
inflation low and a recovery muted, said Michael Feroli, an economist at JPMorgan
Chase & Co. in New York and former member of the Fed Board staff. At stake: keeping
borrowing costs low enough to foster a sustained recovery, without binding the central
bank to a single course of action.

BAC (12.73): Carlyle, Blackstone, and TPG are leading a group that is in talks to
buy Bank of America's First Republic – Bloomberg: The Bloomberg report cites three
people familiar with the matter; one says that the group may partner with First Republic
chairman James Herbert. The report cites an analyst who valued first Republic at $700M
on 8-Jun. A Bank of America spokesman declined to comment for the report.

FDX (51.42): FedEx reports Q4 EPS $0.64 ex-items vs Reuters $0.51: First Call is
$0.52. Company reports revenues of $7.85B vs Reuters $8.38B. Guides Q1 EPS to
$0.30-$0.45 vs Reuters $0.70. Guidance assumes current fuel prices and a stable
economic environment. FDX shares are down 2.5%.

GOOG (416.00): Piper Jaffray comments on US May Search data: Bottom line is
we view last nights comScore data as essentially neutral to the quarter, (we continue to
expect Google to report Q2 revenue slightly below Q2 consensus of down 1% q/q), but
remain positive on shares given it is likely to be one of the first beneficiaries of an
economic recovery.• Google controlled 65% U.S. search market share in May, up from
64.2% in April. • Google's total U.S. queries were down 2% m/m and up 40% y/y in May.
• Real focus should be on impact of Microsoft Bing in June. • Expect paid click data next
week. Conclusion: Google Gained In May, But Focus On Bing. The bottom line is that
we continue to expect Google to report Q2 revenue slightly below Q2 consensus of down
1% q/q. Based on comScore numbers released last night, Google controlled 65% U.S.
search market share in May. Additionally, Google's total U.S. queries were down 2% m/m
and up 40% y/y in May. While we view the data as essentially neutral to the quarter, we
believe the real investor focus on future comScore data is likely to be on the impact of
Microsoft Bing.

QCOM (43.45): Qualcomm upgraded to Conviction Buy from neutral at Goldman

Sachs: Target increased to $53 from $43.
GOOG (416.00): US May Search Data: FBR comments on the comScore US search
data which was released on Tuesday afternoon: “comScore released U.S. search data
for May on Tuesday night (see Exhibit 1). Total U.S. Internet core search queries grew
32.9% year over year, down from 39.4% in April, with notable strength at Google
(+39.7% year over year) and Yahoo (29.5% year over year). May's year-over-year growth
rate decelerated for the first time in five months, but still represented the third largest
growth rate since July 2007. While any survey panel-based data has to be taken in
context, we believe this strength should continue to offset the weakness in keyword
pricing that is being driven by the current economic environment. Total U.S. Internet
core search queries declined 2.9% month over month and grew 32.9% year over
year in May 2009, a deceleration from the +39.4% year-over-year growth reported
in April by comScore. The year-over-year growth in May queries was driven by strength
at Google (+39.7%) and Yahoo (29.5%). Total U.S. unique visitors decreased 1.0% month
over month and grew 4.8% year over year, down from 6.8% year-over-year growth in
April. • Google's U.S. market share increased 73 bps to 65.0% as a percentage of all
U.S. core searches. Yahoo!'s U.S. share fell 31 bps to 20.1%. Among other search
engines, MSN's total share decreased by 17 bps, AOL decreased 31 bps, and Ask was up
6 bps in the month. Those three currently have U.S. shares of 8.0%, 3.1%, and 3.9%,
respectively. • We believe that the strength in query volume will continue to more
than offset the decline in pricing as consumers increasingly rely on search. May's
year-over-year growth rate decelerated for the first time in five months, but still
represented the third largest growth rate since July 2007. • We continue to believe that
the Internet sector as a whole, and ad-driven companies in particular, offer strong
fundamental growth, reasonable valuation, and considerable potential
outperformance. With increasing Internet penetration, the proliferation of smartphones
driving additional search volume, and ad dollars shifting online, we continue to believe
that companies offering the visible return on advertising investments that Google does
will gain share. While advertising and consumer spending are under pressure across the
board, we believe that search, similar to yellow pages and direct mail, will ultimately
prove to be among the most defensive forms of advertising.

Mortgage modification push facing significant headwinds - WSJ

The Journal reports that getting a mortgage modified can take months, with the process
hampered by thin staffing levels and mountains of paperwork. The paper adds that the
process is further complicated by the fact that so many loans were bundled and sold to
investors, a dynamic that often makes it difficult to figure out who actually owns them.
Citing data from the Mortgage Bankers Association, the article points out that roughly
4M loans were delinquent in Q1, the highest level since the group started tracking such
data in 1972. However, as of the end of April, just 518,155 home loans had been
modified, according to Hope Now.
ADBE (28.17): Adobe Systems reports Q2 EPS $0.35 ex-items vs Reuters $0.35:
Company reports revenues of $704.7M vs Reuters $694.9M. Guides Q3 EPS to $0.30-
$0.37, ex-items, vs Reuters $0.33; guides revenues to $665.0-$715.0M vs Reuters
$676.5M. Adobe Systems reports Q2 non-GAAP operating margin 33.7% vs
StreetAccount consensus 34.1%. Q3 guidance assumes non-GAAP operating
margin of 31-35%.

George Soros says originators should have more "skin in the game" than the 5%
proposed by the Obama administration – FT: In an op-ed piece in the FT, Soros
outlines three steps to financial reform. First, regulators must accept responsibility for
preventing asset bubbles from growing too big. Second, given that monetary policy alone
cannot control the availability of credit (to help prevent bubbles), credit controls such as
margin requirements and minimum capital requirements should be adjusted to reflect
market conditions. Third, the meaning of market risk needs to be re-conceptualized given
that the efficient market hypothesis is unrealistic and markets are subject to imbalances
that individual participants may ignore amid the belief that they will be able to liquidate
their positions. Soros also argues that the Obama administration's proposal that
originators retain at least 5% of the credit risk of the loans they package and sell to
investors is "more symbolic than substantive," adding that he would consider 10% as the
minimum requirement. Soros goes on to note that credit default swaps should be
outlawed.

GS (144.16): Goldman Sachs CEO Lloyd Blankfein says bank to repay $10B in
TARP funds 17-Jun - Bloomberg

ETFC (1.65): E*TRADE files $400M secondary offering through JPMorgan and
Sandler O'Neill: ETFC says Citadel Equity Fund Limited, an affiliate of Citadel
Investment Group, will purchase either $50M or $100M of the common stock in this
offering, depending on the price.

CMI (33.56): Cummins downgraded to neutral from buy at UBS: Valuation cited,
target reduced to $36 from $38. Firm maintains its neutral rating on NAV and AURD, and
its sell ratings on PCAR and ETN. Goldman Sachs initiated a buy rating yesterday on
CMI.