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Trader Talk with Bob Pisani

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  Tuesday, 16 Sep 2008 | 5:18 PM ET

Morgan Stanley Thrills as Market Rallies

Posted By: Bob Pisani

Morgan Stanley trading up 3 percent after the close, as it pre-announced earnings above expectations. (See MS earnings report .)

CEO John Mack said, "We have continued to actively reduce our legacy postions and carefully manage our risk, capital and liquidity."

Several factors worked in favor of today's modest but important rally:

1) hope for some kind of short-term government loan for AIG;

2) covering of heavy short positions, particularly on tech and financials;

3) some applauding Fed for standing pat on interest rates. Even though stock traders booed the Fed decision when it came out, and most traders wanted a rate cut, most bond traders applauded the move, noting that lower Fed funds rates will not accomplish notably lower consumer rates, particularly mortgage rates.

Don't get too excited about the rally: there were still more DECLINING stocks at the NYSE than ADVANCING.

Still, the mood was much less somber today. Example: tech traders blew off a downbeat report from Dell, which said that weakness in North America was spreading overseas. Dell shares hit a 10 YEAR LOW today, but other techs rallied as traders claimed it was a Dell-specific problem.

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More Names in the News:

- Lehman Bros.

- Goldman Sachs

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Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 16 Sep 2008 | 3:17 PM ET

Wall St. Split on Fed Rate Decision. Why?

Posted By: Bob Pisani

There was booing on the floor as the Federal Reserve announced it would leave rates unchanged . (Read The Fed Statement .)

Stock traders believe that the Fed's equal concern with inflation and slow growth are misplaced -- and that with dramatically lower commodity prices, lower employment, and a general global slowdown, the concern is with DEFLATION.

But others applauded, noting that lower Fed funds rates will not accomplish notably lower consumer rates, particularly mortgage rates.

The Dow initially dropped 150 points, then recovered and is now essentially unchanged since just before the announcement.

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CNBC's Names in the News:

- AIG

- Lehman Bros.

- Goldman Sachs

- WaMu

- JP Morgan

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Questions? Comments? tradertalk@cnbc.com

»Read more
  Tuesday, 16 Sep 2008 | 1:55 PM ET

Why Is Market up?

Posted By: Bob Pisani

Why is there no fear in the market? A few points:

1) The market is not in great shape today: there are TWO stocks declining for each ONE stock advancing. Dow is up because big cap financials staged a modest rally midday.

2) the S&P 500 closed at a 2-year low on record volume yesterday, down 18 percent on the year! That is the worst showing since 2002! Other than a two-month rally that began in March, the major indices have gone almost straight down since October 2007!

3) stock trading is now dominated by short-term, technically oriented traders that look for short-term oversold/overbought trading opportunities. These short-term, daily trends have nothing to do with the longer-term trend. Stocks were dramatically oversold yesterday at the close.

4) there are some attempts to distinguish winning from losing financials that has been going on for the past couple weeks.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 16 Sep 2008 | 1:30 PM ET

AIG: Handicapping How It Will Play Out

Posted By: Bob Pisani

Traders are passing around a note out in the last hour by Friedman Billings Ramsey that handicaps how the AIG saga will play out. Here's a summary:

The key takeaway is ONLY A 10 PERCENT CHANCE THAT AIG GOES UNDER. Higher odds are as follows:

20 percent chance: bridge loan from private sources materializes--the Fed is pressuring Goldman Sachsand JP Morgan to structure a $70-$75 billion loan.

If no private equity bridge loan: 20 percent chance that a sov. wealth fund or private equity would offer a high interest rate loan with an option to buy the entire company at a price above the present market value.

If no private equity involvement materializes: a 20 percent chance that the feds make a loan, likely charging a high interest rate, over 12%, and ask for two-to-one collateral.

If no deal from the fed materializes: 20 percent chance AIG will likely be taken over whole by a sovereign wealth fund (Abu Dhabi, Dubai, Saudi Arabia, or Singapore), a foreign insurance company (AXA, Swiss Re, Munich Re, or a domestic player (Berkshire Hathaway or GE). The transaction would be similar to Merrill's takeover by Bank of America.

What about the chances they could sell assets quickly enough to come up with short-term liquidity needs? Only 10 percent.

On a separate note, hope you have noticed the big moves up today in other insurance companies: Aceup 7 percent, Travelers up 9 percent, Chubbup 12 percent. Other insurers will benefit significantly from a serious decrease in competition if AIG fails, FBR notes.

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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

Goldman Sachs

JP Morgan

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Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 16 Sep 2008 | 12:03 PM ET

AIG Aside, Market Struggles Over Earnings

Posted By: Bob Pisani

While AIG is dominating trader talk today, there is also a broader debate going on regarding earnings. In general, the markets are having a tough time moving forward (ex-financials) because earnings for the major sectors keep getting hit, for various reasons. Consider:

1) financials: event risk has taken down ests. on all the big names

2) autos, housing, retail: estimates coming down due to poor fundamentals (jobs, wage growth)

3) energy: was a big contributor to Q3 and Q4 estimates, but are now getting cut because energy prices are dropping

4) tech, industrials, materials: estimates getting cut due to slower global growth.

What's left? Consumer staples and healthcare--the classic defensive names. That's why stocks like Procter and Gamblehave been outperforming recently.

Bears are even more aggressive when arguing about the overall estimates, arguing they are not coming down far enough into the first half of 2009.

For example, right now the S&P 500 trades at a P/E multiple of 15.2; that is about the historic average. Average earnings when earnings risk is above average, they argue, is not a good formula.

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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

AIG

Goldman Sachs

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Questions? Comments? tradertalk@cnbc.com

»Read more
  Tuesday, 16 Sep 2008 | 9:04 AM ET

AIG: What It Needs To Do

Posted By: Bob Pisani

There is a certain air of disbelief on the Street today concerning AIG. Bank of America's analyst epitomized this: "AIG is facing a near-term liquidity issues, as opposed to solvency issues," a report this morning said. All insisted they have plenty of assets to sell.

But that is besides the point: liquidity IS solvency right now. AIG needs to secure short-term funding and quickly execute sales of several of its subsidiaries. JP Morganand Goldman Sachs have been asked to find a way to get them short-term loans.

How much do they need? We don't know; Morgan Stanley estimated this morning that their near-term capital and liquidity needs was in the range of $45-$50 billion. "Thus far AIG has failed to articulate a strategy as to how it plans to fund these needs, leading us to recommend that investors presently stay on the sidelines," Morgan concluded. And this does not even include the additional cost of rolling over debt that is coming due in the coming months.

Elsewhere:

1) Goldman Sachs reported earnings of $1.81, beat by 10 cents, though revenues were below expectations. Not bad, but remember they made over $6.00 in the same period last year. Investment banking was down 40 percent, Fixed Income, Currency and Commodities down 67 percent, Equities down 50 percent. Down 6 percent pre-open.

The Journal reports today that additional regulation of investment banks, already considered a given, would expand to take into account derivates and how much debt a company could amass. Bottom line: more regulation--and new competition in the form of Bank of America/Merrill Lynch--is definitely coming to investment banks. Little wonder that there is intense speculation that Morgan Stanley and Goldman Sachs may have to do a merger deal with a commercial bank to survive.

2) UBSis the other major topic of discussion. They have significant exposure to mortgage-backed securities in the U.S., and with higher interbank lending rates have also been jumping, affecting all the big European and U.S. banks. Down 14 percent pre-open.

Other major financials trading down: Morgan Stanleydown 14 percent, Wachoviadown 10 percent.

3) As the Fed meets today, considerable debate about cutting rates. The majority want it, but a persistent minority--perhaps 25 percent--believe that with the Fed accepting all sorts of new collateral to provide liquidity, it's not necessary. In fact, hawks on this issue point out that it was the negative interest rate policy that got us into this mess.

4) finally, nobody is even talking about oil--at $91 and change, with airlines up about 5 percent pre-open.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

»Read more
  Monday, 15 Sep 2008 | 4:08 PM ET

Worst Day For Markets Since 9/11

Posted By: Bob Pisani

Technically, the day was horrible:

1) the S&P 500 broke through its July 15 closing lows of 1,214.91, and the intraday low of 1,200.44.

2) it was the worst day for the S&P since September 17, 2001;

3) new lows expanded to the highest level since the July lows;

4) this was almost certainly a 90% downside day, with 90% of the volume going to stocks on the downside.

»Read more
  Monday, 15 Sep 2008 | 1:11 PM ET

Traders See More Bank M&A's As REITS Hit Hard

Posted By: Bob Pisani

There are two trends that traders see happening in banks:

1) most are expecting more M&A in banking;

2) a split between the "have nots" and the "haves": a split between banks with strong capital positions/less exposure to residential & commercial real estate/construction, and those with weaker capital positions and significant exposure to real estate.

The Street has been making this distinction for months, and it is now accelerating. For example, look at some of the smaller regional banks that have less exposure to construction/real estate than others, and how they have performed in the last year:

Hudson City up 29 percent

People's United up 10 percent

SVB Financial up 15 percent

PNC up 5 percent

Notice they are UP, despite the debacle in financials. Now look at some of the other names that have much larger exposure to real estate (also in the last year)

Washington Mutual down 93 percent

»Read more
  Monday, 15 Sep 2008 | 9:57 AM ET

Lehman, Merrill: What We Are Likely To See On Street

Posted By: Bob Pisani

Wall Street has fretted that it does not know how to value many derivative assets because they trade so rarely. We are now about to find out, assuming Lehman begins a liquidation of assets.

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CNBC Toolkit:

- The Dow 30 at a Glance
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That liquidation will likely result in wider credit spreads, as well as a mark down in assets at other brokers, which will further pressure capital ratios.

So we will now likely see:

--tighter credit

--more rate cuts

--more banking consolidation--some financial institutions like JP Morgan and Bank of America will get stronger, other mid-size banks with exposure to real estate and weaker balance sheets will get weaker;

--more "boutique" banks that de-emphasize risks.

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CNBC Special Report:

- How to Invest After Lehman Fall

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Despite all the gloom, there are several pieces of good news:

--the Fed has finally drawn a line on the "moral hazard" issue by refusing to backstop Lehman;

--interest rates are likely to come down;

--the dollar is still strengthening, despite the likelihood of lower rates;

--commodity prices are still dropping;

--there is still cash on the sidelines.

Most importantly, there are efforts being made to address the most crucial issue, the lack of capital and liquidity:

--the Fed has already announced an expansion of its emergency lending program for commercial and investment banks;

--the ECB has said they will also offer additional funds;

--a consortium of banks are offering a $70 billion borrowing facility to improve liquidity.

On the two big topics this morning: AIG and Bank of America/Merrill, there is some good news, and considerable risk.

AIG: The good news here is that AIG is not a brokerage firm: they have many assets they can sell to accomplish their capital needs. There are two serious problems:

1) they can't accomplish a sale immediately, that's why they need a bridge loan. It's not clear that the Fed would be willing to make a loan on the scale they need ($40 billion or so);

2) the lowered assets values associated with Lehman's liquidation will negatively impact securities similar to those held by AIG.

These two problems are why AIG is down almost 50 percent pre-open.

Bear in mind that losses from Hurricane Ike will also affect AIG, with estimates of total losses there of $8-$18 billion (those are total losses, not just AIG exposure).

Bank of America/Merrill Lynch. Bank of America buying Merrill Lynch for .8595 shares for each Merrill Lynch share, roughly $25 at this morning's prices. No one is quite sure how this price was derived.

There are many positives:

--significant costs savings (about $7 billion, 30 percent of Merrill's expense base);

--B of A's size increases by about one-fourth, and in the process they become a top-tier investment banker with a world-class brokerage firm, along with control of 49 percent of BlackRock;

»Read more
  Friday, 12 Sep 2008 | 4:25 PM ET

Financials: Get Past The Headline Names

Posted By: Bob Pisani

On the surface, the action in financials seemed horrific this week:

  • Lehman down 77 percent
  • AIG down 46 percent
  • Merrill down 36 percent
  • Wachovia down 15 percent

But get past these "headline" names and the rest of the financials were relatively calm. Money center banks like BofA and JP Morgan were up 4 and 3 percent respectively, most regional banks were up as well.

Two other noteworthy trends:

1) commodity stocks finally found a bottom, rallying for the last three days.

2) some good news on housing: Karl Case of the real estate advisory firm Case Shiller gave a paper where he postulated that housing may be near a bottom, noting that 9 of 20 markets in his index show signs of price improvement. Also, many have noted the considerable drop in mortgage rates this week. This will not only help consumers, it will help banks, because it will reduce their consumer credit losses.

For the week, Dow Industrials up 1.9 percent, S&P 500 up 0.8 percent, NASDAQ flat.

»Read more

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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