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Trader Talk with Bob Pisani

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  Thursday, 11 Sep 2008 | 3:10 PM ET

Market Leaders: You Won't Believe Them

Posted By: Bob Pisani

So we have come to this: forget financials, forget materials, forget energy. Our market leaders are retailers and home builders.

Since the July bottom, the Philadelphia Stock Exchange Housing Sector Index is up 43 percent, while the S&P Retail Index is up 31 percent. All this, while the S&P 500 is up 3.3 percent.

Huh? Aren't consumers hurting? Isn't housing the root of all our problems? Yes and yes.

But, today Goldman added DR Hortonto its Conviction Buy List, saying "New and existing home sales data reported at the end of the month as well as the Case-Shiller home price index have been providing more encouraging signs as of late."

This is, to say the least, a somewhat optimistic reading of the home numbers. Signs of a bottom are still murk, and most traders feel the way JP Morgan's analyst feels: "we believe this depressed sales pace will keep inventory levels elevated through at least the next 2-3 quarters, and should result in further pressure on home prices, driving further large impairment charges for the builders."

As for retailers, they are historically early cycle plays. It works like this: historically, when EPS moves to new lows, P/E multiples start moving up in anticipation of a recovery. It's that simple. Oh, one other fact: short interest in retailers are at historic highs, so there is plenty of room for short covering.

The problem here: both of these groups are trading like there will be some kind of clear bottom in the next quarter or so. Big assumption.

A note on Lehman. While Lehman'scommon stock remains weak today, down 40 percent to $4.35, the preferred shares are not down nearly as much. The Lehman J Shares (7.95 percent, par $25), for example, traded as low as $5.12 earlier this morning (down about 40 percent), but is now at $7.85, down 10 percent.

Why is the preferred holding and the common is not? Speculation that Lehman may be taken out: traders note that the common might sell at distressed levels in a takeover, but buyers of the preffered may be made whole in the event of a takeover.

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  Thursday, 11 Sep 2008 | 2:35 PM ET

Analysts: I Quit! I Have No Idea What's Happening!

Posted By: Bob Pisani

Analysts, shell-shocked by the events in financials this week, are simply giving up today:

1) Merrill Lynch analyst Guy Moszkowski has changed his rating on Lehman from "neutral" to "no opinion."

2) Morgan Stanley said that while they were maintaining their research coverage on Lehman, they are removing their ratings and price targets "due to heightened market uncertainty."

3) Landeburg Thalman's Dick Bove is suspending his price target and Neutral rating on Washington Mutual "until there is some clarification as to what was in the MOU [Memorandum of Understanding]."

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  Thursday, 11 Sep 2008 | 11:33 AM ET

For Lehman, Disorder Is The Rule

Posted By: Bob Pisani

Want to see how fast things are moving? Why Dick Fuld probably has the feeling that events are spinning out of his control? Mike Mayo is one of the senior bank analysts on Wall Street. Sunday night the Deutsche Bank analyst had a Buy on Lehmanwith a $32 price target.

Monday, he reiterated the Buy, noting the Fannie/Freddietakeover could be good for Lehman, but lowered the price target to $28.

Wednesday, with the stock cut in half, he maintained a Buy.

Today, he threw in the towel, lowering the price target to $11 from $28 and cutting the rating to Hold.

He wasn't the only one, other analysts have dramatically dropped their numbers in the last day. A big issue was Moody's, which late yesterday warned the bank that actions they were taking might be insufficient to avoid a ratings downgrade of their debt.

A downgrade would force Lehman to post additional collateral and limit transactions with partners that require a certain credit rating to be maintained. In other words, it could be the death knell for them.

So this is where we stand : Lehman wants and needs an orderly sale of assets, and an orderly capital raise. They are getting neither. Instead, disorder is the rule, which creates speculation that a fire sale of Neuberger may occur at levels far below what they consider fair value, or what they need.

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CNBC's Names in the News:

Fannie Mae

Freddie Mac

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  Thursday, 11 Sep 2008 | 9:12 AM ET

Strong Dollar, Weak Commodities Now A "Problem"

Posted By: Bob Pisani

The combination of a strong dollar and weak commodities, which was greeted with relief in August, is now causing some concerns.

New Zealand cut rates 50 bp last night to 7.5 percent, twice what was expected. The dollar is again rallying to new highs against the Euro. Traders in Europe are awaiting a report on industrial production tomorrow; it's expected to show a decline, and there is considerable speculation the ECB could cut rates.

Commodities continue to drop, as they have for 7 of the last 8 trading sessions.

With futures weak again here, we are very close to breaking the recent closing low of July 15 of 1,214.

Elsewhere:

1) Lehman trading at $4.10, last night closed at $7.25, has already traded 23 million shares pre-open. There is considerable speculation about what, if any, price they will be able to negotiate for all or part of Neuberger.

2) Merrill Lynch (down 13 percent) and Wachovia (down 6 percent) are also heavily traded; other financials traded include AIG(down 5 percent), Morgan Stanley (down 7 percent), UBS(down 6 percent), Bank of America(down 6 percent).

3) CSXup 4 percent, raised full-year guidance on strong performance and continuing demand for coal shipments.

4) Wellpoint said it would take a third-quarter charge due to its holdings of Fannie Mae and Freddie Mac stock. Originally worth about $243 million, it's now worth about $39 million. However, guidance is within expectations.

5) European retail stocks are weak as several large players reported disappointing results. Strangely, one of the few bright lights in the U.S. are retail stocks like Home Depot, Lowe's, and Gap, which have outperformed the overall market for over a month. These are early cycle plays, so they are a good barometer for the bull position.

    • Oil Prices Still Under Pressure Despite Ike

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  Wednesday, 10 Sep 2008 | 5:02 PM ET

Meager Rally No Snapback

Posted By: Bob Pisani

Anyone who thought today's meager rally was some kind of significant snapback is not paying attention.

After a huge drop yesterday, we got almost no bounce, advancing stocks were just barely ahead of declining stocks. Modest advances in energy and materials after being mugged for the past 6 trading sessions.

After the close, Lehmanis again dropping, trading at $6.91 down from the $7.25 close; Merrill at $22.97, down from $23.30, and the dollar is rallying to new highs against the euro.

The only good news was the FedExannouncement,that lower jet fuel prices will help the bottom line this quarter. This will resonate with food companies, intensive energy users like aluminum companies, and other transportation stocks.

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  Wednesday, 10 Sep 2008 | 3:04 PM ET

What’s Up With Washington Mutual and AIG?

Posted By: Bob Pisani

Forget Lehman, the biggest debates on the Street involve the continuing fate of other financials, but particularly today Washington Mutualand AIG.

Washington Mutual. Down 38 percent this week, but this one is not hard to figure out. On Monday before the open, the company announced they were ousting their CEO and entering into a Memorandum of Understanding (MOU) with their regulator, the Office of Thrift Supervision (OTS). There are few details here, but it's obvious their regulator is requiring them to report to them about risk management and compliance issues.

In this hyper-charged environment, the shorts are using this as an excuse to continuing shorting: the implication is that OTS has placed them on some kind of probation, and there is SOMETHING that is worrying them, most likely the loan portfolio. The stock has been under pressure since the announcement.

AIG. Down 17 percent this week to a 13-year low. This is much more complicated.

Issues that come up include:

1) concern that another capital raise might be necessary. They already raised $20 b in May--another capital raise is certainly a possibility, particularly if there are notable losses this quarter. Of course, it would be dilutive and would not be met warmly by investors;

2) concern about possible ratings downgrades. Moody's on August 7th, a day after AIG earnings came out, bluntly warned AIG that their affirmation of their debt ratings was based on an understanding that AIG "will actively address potential liquidity and capital needs at various operating units...failure to address these concerns in the near term could lead to rating downgrades..." Morgan Stanley also raised this issue in an investor note;

3) the extent of ownership of Fannie and Freddiepreferred shares.

At any rate, we will not have to wait long for more news. A strategic review announcement is expected by September 25.

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CNBC's Names in the News:

Imclone

Lehman

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  Wednesday, 10 Sep 2008 | 11:38 AM ET

Trading Lessons 2008 And the Great Commodity Drop

Posted By: Bob Pisani

Trading Lessons 2008
Forget about Lehman--suppose its problems were magically solved by a buyout, or someone offered them oodles of money for Neuberger. What would happen next? The shorts would cover and simply find another target.

What have we learned about trading this year?

1) that (long-term) the most bearish position has been the one that made the most money;

2) that shorts have consistently cycled through names perceived to be weak--mortgage insurers first, then Bear Stearns, then Fannie Mae and Freddie Mac, now Lehman. Notice each time the “issue” is “addressed” the market rally gets shorter and shorter. When does it end? When taking short positions in select names doesn't work any more.

The Commodity Drop
The drop in oil and distillates, natural gas, and other commodities is finally starting to filter through. Federal Express raised estimates for their fiscal first quarter due to lower fuel costs, though they did not raise full year guidance.

Here's why it's such a big deal: In late June, FedExwas paying $3.85/gallon. By the end of August, it was paying $3.27/gallon. That's a $0.60 difference. Is that a lot? Yes! FedEx uses 300 MILLION gallons of fuel per quarter--300 m x $0.60 = $180 million in savings--PER QUARTER.

This good news is going to play out with all the commodity users--from aluminum companies to food companies to transports.

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_______________________________________
CNBC's Names in the News:

Imclone

RIMM

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  Wednesday, 10 Sep 2008 | 9:11 AM ET

Lehman's Problem: No Deal To Raise Capital

Posted By: Bob Pisani

Not enough: that's the general verdict of the Street on the Lehman announcement. They pre-announced a loss of $5.92. They're selling a majority stake in its investment management division and spinning off commercial real estate assets into a separate public company. The good news: raising capital and selling investments is what the Street wants.

The problem: no actual deal to raise capital was announced, in fact Korea Development Bank made a point of noting that there was "a disagreement over conditions of a transaction;" in other words, they were far apart on price. Even if a deal was announced, it's not clear that enough capital can be raised.

    • Lehman In Talks To Sell Key Unit; Stock Rebounds

Financials are generally trading down, with Merrill, Citi, BofA down 2-3 percent. Europe down about 1 percent, but some of the European financials like AXA and UBS are trading up.

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  Tuesday, 9 Sep 2008 | 3:03 PM ET

Lehman: A Case Of Waiting Not Working

Posted By: Bob Pisani

Lehmanremains near the lows for the day, and we have now come full circle as the S&P 500 has given back all of the gains it made yesterday. Two observations:

1) this year, those who have been the most bearish have been the most correct;

2) waiting in the hope things will get better is not an effective strategy.

This is something Secretary Paulson learned regarding Fannieand Freddie; he had his "bazooka" to take them over a while ago, and doing nothing hoping things would get better just...made things worse.

So it is with Lehman today. We have heard of endless permutations about capital raising, but...no capital raise. We have heard of discussions to sell assets like Neuberger but...no sales.

Waiting is not working.

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  Tuesday, 9 Sep 2008 | 2:41 PM ET

Commodity Sell-Off? Where Does It End?

Posted By: Bob Pisani

In the last 7 trading sessions, commodity stocks have been in a free-fall. Look at what has happened to these big names, most of which hit historic highs in June or July:

Nucor: 52-week low on heavy volume (55% off high)

Potash: 6 month low on heavy volume (41% from historic high)

Freeport-McMoran: 52-week low on heavy volume (47% from historic high)

Valero: 3 year low on heavy volume, (59% from historic high)

Massey Energy: 5 month low on heavy volume (56% from historic high)

This is more than just normal trading, there is clearly margin calls of some sort going on that is leading to liquidation of positions. Aside from the uncertainties in financials, answering the question, "When does the commodity stock selloff end?" is the most important question on the Street.

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About Trader Talk with Bob Pisani

  • Direct from the floor of the NYSE, Trader Talk with Bob Pisani provides a dynamic look at the reasons for the day’s actions on Wall Street. If you want to go beyond the latest numbers— Bob will tell you why the market does what it does and what it means for the next day’s trading.

 

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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