Pisani's Trader Talk: Bernanke Brings Calm to the Markets

CNBC's Bob Pisani reports on what traders are telling him:

Something important happened in the stock market today--nothing.

For the first time in almost a month, stocks were not buffeted by anxieties about credit issues, or by volatility in the bond market, or by extremes in volatility, or even by attempts to sell off financial stocks on any rally.

What happened? Certainly there is still anxiety, particularly in the credit markets, but since Friday--when Mr. Bernanke blew up the short sellers by raising the discount rate an hour before an options expiration--traders have come to believe that Mr. Bernanke will do everything he can to prevent a market meltdown, and that belief has calmed a lot of nerves.

This helps explain the otherwise strange spectacle of a Presidential candidate (Sen. Chris Dodd) calling a press conference to announce that he was NOT trying to influence Mr. Bernanke at a just-completed meeting, and then proceeding to paraphrase Mr. Bernanke that he would use all tools at his disposal to deal with the credit crisis.

We are in a hall of mirrors here, with reporters parsing Senators parsing Fedheads. Still, traders loved it; it was all somewhat, well, reassuring.

Two points to remember: these are the two biggest vacation weeks of the year, and despite what you hear traders are on vacation (albeit with Blackberries), and 2) the question is whether it lasts. We won't know until after Labor Day.

Just released: NYSE just came out with its short-interest statement, which tracks short interest at the NYSE on August 10. That was a while ago, but it shows short interest was down 3.5%, so even then short interest was down a bit. That is far from total capitulation, given that short interest was high to begin with.

Pisani's Report at Midday.

Beyond Senator Dodd's interpretation of Mr. Bernanke's commentary, traders are looking to September as the make-or-break month to determine the extent of the damage from the credit crunch.

Goldman Sachs, in a note this morning, echoed that sentiment. The markets, of course, will attempt to guess the outcome before then, but here's why Goldman and others believe September is the make-or-break month:

• Sept. 4th: First Data will start marketing $22 billion in loans and bonds as part of its pending leveraged buyout. This is a big one: we need an LBO deal to close.
• 3rd week of September: Earnings results from brokerage firms, whose quarter ends in August, start coming in. Many are sitting on subprime debt and LBO bridge loans.
• Sept. 18th: FOMC meeting, where traders expect the Fed to lower interest rates.
• Sept. 19th: CPI, housing starts data released.

Pisani's report from the morning.

You're wondering why Sen. Chris Dodd is meeting with Bernanke today to discuss the mortgage problem? Because it's a political hot potato.

Just look at the stats. According to Realtytrac, U.S. foreclosures in July rose 9% sequentially, up 93% year-over-year. More importantly, more than half the foreclosure activity comes from California, Florida, Michigan, Ohio, and Georgia. Those are all states with big electoral colleges, and this story could impact how people vote in the presidential election.

Pisani's report before the market open.

A few encouraging signs this morning. Three-month Treasury bill yields continue to drop, but stock futures are up.

Is there a Bernanke put? This is the psychological belief that Bernanke is looking out for the markets; many traders became believers in the Bernanke put on Friday when he blew the shorts out on an options expiration morning.

Traders believe that the rally in the credit markets is telling us something--markets believe the Fed is going to act--either cutting the discount rate again by 50 basis points, bringing it in line with the Fed Funds rate, or cutting the Fed Funds rate, or both.

And look at the action. Traders seem to be far more cautious shorting financials aggressively. Of course, much of the easy money has been made. Still, traders note that the fundamentals for these companies won't matter much until October. There's plenty of room to short if traders think there is a deeper bottom, but they seem to be doubtful.

Another good sign: Capital One finally dumps GreenPoint Mortgage, a deal nobody liked. Yes, they are taking a huge writedown, but stock is UP pre-open. This highlights the current trend: take the losses now, and move on. Good heavens, even Countrywideis up this morning.

Senator Chris Dodd, head of the Senate Banking Committee, meets with Bernanke and Paulson today. Traders note that the Jackson Hole conference is next week. Lots of high-profile opportunities to jawbone. Traders love this. Cajoling and grandstanding works to their advantage. It puts pressure on participants to do something, which calms the markets and may (strange, I know) reduce the need to do something.

OK, everyone knows that. What would be REALLY good news? What we need is to have one of the big deals close. That would really tell everyone that things are getting back to normal. Tribune would be one; but certainly TXU andFirst Datawould be the bellweathers. TXU supposed to close some time in the second half; First Data end of the third quarter.

Finally, will somebody tell China that there's a crisis going on? The Shanghai composite hit an historic high today. Since the S&P 500 hit its historic high July 19th, China is up 25%. Maybe they didn't get the memo. Maybe investors who buy the local shares don't read the Asian Wall Street Journal. Maybe WE are the idiots.