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Pisani's Trader Talk: Mortgage Woes Hit Markets Again

CNBC'S Bob Pisani reports on what traders were telling him at the close.

Mortgage issues returned to the markets this afternoon. July ending on the lows. Markets weakened right at 1:30 PM ET as indications flashed at the NYSE that American Home Mortgage would reopen after a day and a half, going from roughly $10 to $-1-$2. It closed at $1.04

Very clear pattern now: 1) bears will attempt to sell into every rally, as they did today. First attempt at 10 ET was unsuccessful, second right after AHM news was; 2) on days when there is no news concerning mortgages/credit issues, markets hold up fairly well.

For the month: Dow Industrials down 1.5%, S&P down 3.2% (worst since July 04), NASDAQ down 2.2% (worst since July 06), Russell 2000 down 6.9% (worst since Sept. 02), Midcap Index 4.4%, Bank Index down 6.9%, Brokerage Index down 9.1%, Home building Index down 12.4%, REIT Index down 8.3%

Earlier, Pisani talked about the reminders that mortgage problems won't simply disappear.

The market has seen another dip (the second today) after mortgage lender American Home Mortgage reopened after being closed for a day and a half. It reopened down 86%. They have been hit with margins calls from lenders. That has impaired their ability to issue new loans and fund existing commitments. They had taken major writedowns on the values of the loans they hold. The company also said it was delaying payment on its dividend.

Other mortgage REITs are weak as well.

A similar problem with Radian and MGIC. They have a joint investment in a company, C-Bass, which securitizes home loans--there have been margin calls from investors, which has impaired their ability to issue new loans. It's not clear if the entire investment is lost. Both companies have contributed a little more than $400 million each. Radian down 16%, MGIC down 13%.

These are reminders that mortgage problems are not going away. Good news is that market has taken two attempts to sell off and is still up. Advancing stocks outnumber declining stocks two to one.

At midday, Pisani was saying:

Reasons to be optimistic - Part Two

1) As anticipated, there was a concerted attempt to sell into the morning rally. Volume rose on the selloff, but it was largely unsuccessful. Bears attacked on the weakest link: brokerage stocks, which came down fast, but recovered more than half the losses within a half hour.

2) A quieter corporate bond/credit market. For the second day in a row, the corporate bond market is quieter. The LCDX index, an index of corporate credit default swaps, is up for a second day in a row. That has not happened in a long time.

3) The core PCE deflator rose by 0.1%, and the employment cost index rose by an as-expected 0.9%. Both of these pieces of data do not suggest any significant near-term risk to the inflation outlook.

4) UBS talks bullish. Nick Nelson, their London-based strategist, said, "The majority of our indicators suggest that we are close to the trough of the correction." He went on to say that "The market is now trading on a sub-12-times price/earnings multiple for 2008, towards the bottom of its four-year range and the pressure on earnings is on the upside."

What he was hearing before the market opened.

The corporate bond market calmed down yesterday, and that was why the market rallied. The LCDX index, an index of corporate credit default swaps, actually rose yesterday for the first time in a while. Futures up here as European and Asian bourses are up 1%-2%.

General Motorsis the key story today. Earnings were far better than expected--TWICE as better--note that sales overseas were a big part of GM's earnings beat, again enforcing the idea that international is where the growth is. GM's restructuring also helping the bottom line (cost cutting).

Technically, yesterday was very important. Breadth was good, volume a very respectable 2 billion shares, though shy of the records last week. All ten S&P sectors were up, with the most oversold--particularly materials--experiencing the biggest move up. Many indicators are still oversold. This will make fence sitters more reluctant to take defensive action.

Expect more attempts to sell into strength, though a few more days like yesterday will make shorts very cautious once again.

Not that everything is rosy. The Russell 2000 sustained some real damage and it is possible that the long awaited move out of small caps and into big caps is (after 7 years) finally occurring. Still too early to tell.

They still don't care. Investment Company Institute out with its monthly mutual fund flows, and again fairly paltry inflows of $5.4 billion in June into U.S. mutual funds.

This included world equity funds that invest primarily overseas: they had inflows of $8.5 billion in June, while funds that invest in the U.S. had outflows of $3.0 billion in June. This continues a trend that has gone on for more than a year.

U.S. investors just not that interested in U.S. stocks. We'll see if that changes with the July drop.

Year to date: $89.4 billion into mutual funds, at this time last year there was $112.6 billion in inflows.

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