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Trader Talk with Bob Pisani

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  Monday, 25 Aug 2008 | 2:49 PM ET

Financials Overshadow Rest of Market

Posted By: Bob Pisani

Mary Thompson is filling in for Bob Pisani Monday.

Ask a trader why the market is down today and you'll get a whole host of different answers. Among the ones I have been told: concerns about the financials, the lack of resolution about Lehman's future, the lack of volume which makes the market more vulnerable to sudden swings, and the tensions between Russia and the U.S. over Russia's support of breakaway regions in Georgia.

The most common answer, though, is the concern about the financials.

Take a look at today's news: My colleague and co-host of Power Lunch, Bill Griffeth, maintains that on any other day, the good demand for Freddie Mac's sale of three and six month bills (even though it had to pay a higher rate to attract buyers) and the 3.1 percent increase in July existing home sales would be enough to drive the Dow up 200 points -- not down 200 points where it stands as I write.

I disagree. The report on existing home sales shows that median price of a home here in the U.S declined from last July. Until home prices stabilize, the declines in housing prices are going to have a negative effect on the value of the residential mortgage related securities held by the banks. This is likely to lead to more writedowns at these firms.

Then, a lot of regional banks, insurance companies and big banks own common and preferred shares of Fannie Mae and Freddie Mac. And while shares of these government sponsored entities are up today, they are down more than 90 percent over the last year.

In fact, in a filing with the SEC, JPMorgan said today its holdings in both firms have fallen by $600 million in the third quarter, a decline the banking giant said could affect its earnings. Keep in mind just a couple of weeks ago, it was JPMorgan which said the value of its mortgage-backed securities and loans declined by $1.5 billion earlier in the quarter, because of wider credit spreads and a lack of liquidity in the markets.

The problems in the financials cannot be solved by a single economic report or one strong debt sale by a GSE. So while we might see some one-day relief rallies in these stocks, the problems they face are still a long way from being solved. Until they are, being concerned about the financials is valid.

There are few bright spots today. Bonds are benefitting from the general aversion to stocks. Along with the financials, cyclicals and transports are big percentage losers. The transports are pressured by a downgrade of the trucking group by Wachovia, and that is offsetting the modest losses we are seeing in oil today.

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CNBC's Financials in the News:

- Video: Should Lehman CEO Fuld Be Fired?

- KKR Shows 'High' Interest In Lehman's Neuberger Unit

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Questions? Comments? tradertalk@cnbc.com

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  Monday, 25 Aug 2008 | 1:12 PM ET

Forget Politics -- Oil & Credit Still Main Stories

Posted By: Bob Pisani

Mary Thompson is filling in for Bob Pisani at the NYSE and wrote this blog post.

The markets have kicked off what is supposed to be a quiet week of trading on a down note. The decline is broad, volume is light, and financials and transports are the leading losers.

There is no shortage of news this week with plenty of data on tap and the Democratic National Convention kicking off tonight.

But Fred Dickson, chief market strategist at D.A. Davidson, says the main story for the stock market remains the same: What will push stocks around is either the movement in oil or the smouldering credit pressures that are keeping the financials down.

Dickson says with that backdrop, the markets are still keeping an ear open for a ratcheting up of Russian rhetoric concerning Poland and Georgia, will be listening for any gaffes or policy changes that might be unveiled at the DNC, and remains focused on what the future of Fannie Mae and Freddie Mac might hold.

Speaking of Freddie Mac and Fannie Mae, they received a vote of confidence from Citigroup today. In a note to clients, analyst Bradley Ball writes that while the recent decline in shares of the providers of mortgage funding could limit their financial flexibility, and prompt management and policymakers to take extraordinary action, he thinks shareholders' interests will be preserved. Translation: Ball doesn't think they'll be nationalized. Both stocks are trading higher midday Monday.

AIG is under pressure as well. The ratings agency Fitch says the insurer could face a downgrade, given uncertainty about CEO Bob Willumstad's plan to revive the company, and fears that AIG's mortgage related holdings will lead to further writedowns.

Willumstad is expected to unveil his strategy for AIG at the end of September.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 22 Aug 2008 | 5:22 PM ET

The Week: Stocks End Up; Oil Slides; Financials Level

Posted By: Bob Pisani

A big drop in oil provided nice support for stocks. Oil went from $114 to $121, then all the way back to $114, in two days!

Stocks were drifting lower midday Friday, on very light volume and a lack of energy, but when oil prices started moving down aggressively about 1pm ET, the market stabilized, and a few sectors like airlines and retailers had modest rallies.

Financials also stabilized today, though they are down for the week. The two weakest points -- Fannie/Freddie and Lehman Bros. -- were split, with Fannie Mae up 2 percent but Freddie Mac down 5 percent. Both were up again.

Fannie, which traded as low as $3.53 yesterday, traded over $5.00 today; most of the action is from short-term momentum traders. Lehman was as low as $12.54 yeterday, but almost broke $16 early in the day, until cautious comments from Korea Development Bank -- implying that they are considering other options in addition to buying Lehman -- and a selloff at the close dropped the stock down to $14.40.

One thing to watch out for: the CBOE Volatility Index (the VIX) , a measure of fear in the market, is sitting near the lowest levels since early June. However, futures in the VIX are trading much higher, implying that volatility traders expect are expecting higher volatility in September (i.e., selloff).

This week: Dow down 0.3 percent, S&P down 0.5 percent.

This was a Week of Reversals: techs have underperformed for the first time in a while, with the Nasdaq down 1.6 percent. Small-cap stocks, which had outperformed as the dollar strengthened, also underperformed with the Russell 2000 down 2.0 percent; oil stocks rebounded strongly, with Amex Oil Index up 3.7 percent.

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CNBC's Financials in the News:

-American Express , Wells Fargo
(Story: Buffett Says He's Buying AmEx -- OR Wells )

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 22 Aug 2008 | 3:17 PM ET

Three Big Questions: FNM, China, S&P 1,300

Posted By: Bob Pisani

There are three big questions floating around on the Street today:

1) Does the debt of Fannie/Freddie take a haircut? Most traders would say no prior to today, but Ben Bernanke's comments that debt haircuts might be in order for some (he did not specifically say for Fannie Mae or Freddie Mac ) has given many pause.

That debt--and much of the preferreds--are owned by many regional banks that hold them as part of their capital base; traders tell me many are afraid to do damage to that level of the capital structure.

2) How much will China stimulate its economy?

The government there is rumored to be looking at a stimulus plan of their own; many traders believe they are expecting a slowdown. How much stimulus some think they will provide -- and how much effect that will have on commodities like oil -- determines whether some are bullish or bearish on China.

3) What will it take to get S&P 500 over 1,300? 1,297 was the August high just a few short weeks ago. Most think the answer is to get oil prices below the nice round number of $110 -- we got as close as $111 last Friday.

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CNBC's Financials in the News:

-Lehman Bros.
(Story: Hostile Takeover Coming? )

-American Express , Wells Fargo
(Buffett Says He's Buying AmEx -- OR Wells )

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 22 Aug 2008 | 1:55 PM ET

Lehman Woes: Sorry, White Knight Is No Answer

Posted By: Bob Pisani

The bottom line on Lehman Bros.:

All the talk about a possible investment in Lehman from Korea Development Bank -- or anyone else -- is really beside the point.

Lehman is down about 75 percent for the year, while the Brokerage Index is down 30 percent. The reason Lehman has dramatically underperformed even its poorly performing peers this year is the large exposure they have to the worst performing parts of the market--residential mortgages, commercial mortgages, and leveraged loans.

  • Exclusive Video: Richard Bove's Take on Lehman

They need to reduce their problem portfolio substantially before anyone is going to dive in on a fundamental basis. Since the asset quality is not improving, they need to sell, even if at a loss.

How to do that? They have already raised capital, so they have some capacity to absorb losses from asset sales. The New York Times noted that they are said to be shopping their commercial mortgage-backed business, and perhaps $40 billion in commercial real estate. The crown jewel, their investment management division including Newberger Berman, may also be on the block.

The bottom line: Lehman can't wait for some white knight. They need to improve the balance sheet, now.

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CNBC's Financials in the News:

-American Express , Wells Fargo
(Story: Warren Buffett Buying Financials )

-Bank of America , JPMorgan

(Story: Analyst Praises BofA, JPMorgan )

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 22 Aug 2008 | 10:11 AM ET

Street Bullish on Buffett & Fannie 'Bailout'

Posted By: Bob Pisani

Stocks are up as the dollar is rallying modestly; oil prices are down. Warren Buffett told CNBC that he has no bets against the dollar and stocks are more attractive now than a year ago.

This has been a week of reversals: remember that just a short while ago, the dollar rally was creating a decline in commodity stocks, and a modest rally in small caps and techs.

This week, that all changed: the S&P is down 1.5 percent, but the small-cap Russell 2000 is down twice as much (3.7 percent), the tech-heavy Nasdaq is down 2.9 percent, while the Amex Oil Index (a basket of large-cap oil stocks) is up 5.4 percent.

The Street continues to believe that some kind of federal intervention in Fannie Mae and Freddie Mac is inevitable, and continues to believe that the market will rally when this announcement is made.

Elsewhere:

1) Lehman Bros. trading up 9 percent after state-run Korea Development Bank said Lehman was a possible acquisition candidate for the bank. If so, this would make Ladenburg Thalmann's Richard Bove call yesterday particularly prescient; he said the company could be the target of a (hostile) takeover.

2) Three retail companies reported earnings and guidance that was surprising for its lack of surprises:

a) Aeropostale came in inline with expectations, as was guidance for the third quarter.

b) Gap was roughly in line, but more importantly they reaffirmed their full year guidance. Same store sales were down 10 percent from a year ago.

c) Foot Locker up 15 percent pre-open, as earnings beat and they raised the lower end of their guidance by five cents. Up 8 percent pre-open.

3) The CFTC gave NYSE Euronext the right to open a new futures exchange, NYSE Liffe, on September 8. NYSE futures trading. Some gold and futures contracts will begin trading at that time; the NYSE purchased the CBOT's precious metals business earlier this year from the CME.

This is something the NYSE has sought for some time, and it comes as competition is expanding. Electronic Communication Network BATS recently filed to become an Exchange and compete directly against the NYSE and the Nasdaq.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 21 Aug 2008 | 9:38 AM ET

FNM/FRE Guarantees; Lehman 'Buy' Rating?!

Posted By: Bob Pisani

Regarding Fannie Mae and Freddie Mac:

The most important issue is not the value of the equity holders' stake -- it is essentially zero -- but to ensure that Fannie and Freddie keep operating. Even slight glitches can have ripple effects.

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CNBC Special Report:

- Will Stocks Hit Bottom after Fannie, Freddie?

_______________________________________

That's why the Street had a tough time on Tuesday, when Freddie auctioned $3 billion in new debt on Tuesday, at yields 1.13 percentage points above comparable Treasuries, the highest spread ever for Freddie debt. This implies higher mortgage rates; even modest increases (a half point or so) could cause the U.S. housing market to slip into a further leg down.

Ladenburg Thalmann analyst Richard Bove believes the government must provide an explicit guarantee to provide more funds into the two companies; if not, the markets will not provide the requisite funds.

Another option is a restructuring, with the U.S. having to guarantee the debt of the two companies, but only until a longer term plan is put into place.

Elsewhere:

1) Citigroup joined several other firms in lowering third-quarter estimates for the major brokerages, including Lehman Bros. , Morgan Stanley and Goldman Sachs . "We're lowering our 3Q08 estimates to reflect the difficult operating environment, characterized by lower client-related trading volumes and losses on hard-to-sell assets (primarily mortgage securities)," said a Citigroup note.

But wait, read on -- Citi has a BUY on Lehman and Morgan Stanley:

"MS is extremely well-positioned to benefit when the environment improves and LEH is discounting more erosion in book value than we anticipate. While measures such as selling Neuberger and raising equity may be on the table, we view them as lower probability actions over the next couple of months."

2) While equity holders in Fannie and Freddie may have little left, even bondholders of the two companies are under a little pressure, according to Sandler O'Neill.

Several insurance companies own a significant amount of the two companies' bonds, including Ace and Travelers. Sandler notes that "their stocks have been under pressure as a result of their FNM and FRE bond ownership. As long it appears that the Fannie Mae and Freddie Mac bond holders will be made whole, we would use weakness in these BUY rated stocks as a buying opportunity."


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 20 Aug 2008 | 4:57 PM ET

Wall St.'s Stunning FNM/FRE Revelation

Posted By: Bob Pisani

On Fannie and Freddie: Both closed down 25 percent to multidecade lows; preferred shares also got hit. The Street is coming to the following realization:

1) that the equity is essentially zero;

2) that a government bailout (intervention, whatever) is now the likely scenario;

3) that the critical issue is not equity in the company -- it is to keep Fannie Mae and Freddie Mac operating; that any further disruption in their ability to provide liquidity will increase mortgage rates and may create an additional down leg in housing.

That's exactly what the head of the Minneapolis Federal Reserve, Gary Stern, said this afternoon: that the critical issue was to keep Fannie and Freddie operating.

Elsewhere, despite all the hand-wringing from equity holders in the two stocks, note that the overall market reaction has been a bit of a yawn:

1) an even number of advancing versus declining stocks;

2) two financial stocks advancing for each one declining, with only a few down 3 percent or more (regional banks rallied into the close);

3) oil remaining in the middle of the $112-$117 channel it has been in for two weeks;

4) bond rally continuing.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 20 Aug 2008 | 2:26 PM ET

Housing: Wall Street's No. 1 Worry

Posted By: Bob Pisani

While financials appear to be the No. 1 worry, it all gets down to housing -- and that's why Fannie Mae and Freddie Mac's continuing soundness is critical. Wall Street's biggest fear right now: that housing might take another leg down.

The major factors influencing housing are still a mess:

1) No clear bottom! While sales are picking up in some hard-hit markets like California, much of those sales remain foreclosures, and prices are still generally dropping.
(See Jane Wells' blog, "Is This How to Solve the Crisis?!" )

Bears have noted that sales were above-trend for so many years that they need to be below-trend for some time to get to historic norms, which would imply even lower levels than we are now seeing.
(Contd.)

______________________________________
CNBC Special Feature:

- How to Play This Market: Sectors, Individual Stocks

______________________________________

Housing starts are at their lowest since 1991; while this is good news, the inventory level of unsold homes remains stubbornly high.

2) Rising mortgage rates has dramatically hurt refinancings, and applications for mortgages this week fell to their lowest levels since December 2000, according to the Mortgage Bankers Assn.

That's why Fannie and Freddie are so important: like it or not, they are the primary providers of liquidity in mortgages, and any pullback in this function while the rest of the mortgage market is still not functioning properly could create notably higher mortgage rates and more defaults.

In fact, this is already happening: the spread between the 10-year Treasury (at 3.79 percent) and 30-year mortgages (6.47 percent) remains unusually wide at about 270 basis points; the historical average is closer to 170 basis points, indicating that investors perceive much higher risks in holding mortgages versus Treasurys, and they are demanding higher mortgage rates to compensate for the additional risk.

The bottom line: Fannie Mae and Freddie Mac do not involve abstract intellectual discussions divorced from reality. Any seize-up in the liquidity they provide to the mortgage markets could be the major contributing factor in higher rates and another downturn in housing.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 20 Aug 2008 | 12:00 PM ET

Critics Left Cold by Fannie CEO Happy Talk

Posted By: Bob Pisani

The battle over Fannie Mae and Freddie Mac continues. Fannie Mae's CEO, Daniel Mudd, told NPR this morning that the company has more capital than it ever had in its history.

This may be true, but to critics it is beside the point. The critics are saying they have insufficient capital relative to:

--the size of their risk, and to

--the quality of their exposure.

Size of risk: According to Fox-Pitt, their credit exposure is about $2.6 trillion; their capital resources above minimum capital is $54 billion. Bears say that is inadequate.

Quality of exposure: Bears say that the companies have substantial exposure to Alt-A mortgages, which are going to create large losses.

Bulls counter that the losses would have to be catastrophic for many quarters to use up the reserve.

Who's right? The reason the bears have the rhetorical upper hand for the moment -- and the reason Fannie and Freddie are at multi-decade lows -- is that the worst case scenarios in financials have consistently proved to be the correct scenarios this year.

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More Financials in the News:

- Lehman Bros.
(Story: Lehman Likeliest to Fail )

- JP Morgan , Merrill Lynch
(Story: Goldman Cuts View on 5 Major US Investment Banks)

___________________________________


Questions? Comments? tradertalk@cnbc.com

»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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