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Trader Talk with Bob Pisani

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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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CNBC's Names in the News:

AIG

Goldman Sachs

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  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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  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.

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  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

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  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:

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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;

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  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.

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  Friday, 12 Sep 2008 | 3:00 PM ET

AIG And Its Problems

Posted By: Bob Pisani

AIG, down 40 percent this week, is again the subject of intense debate. The main problem is their significant exposure to the credit default swap market, where no one can quite figure out what the exact level of exposure could be.

They are hosting an analyst meeting September 25th. There is some discussion that they may announce some kind of capital raising program and possibly a sale of assets. But a capital raise is problematic for several reasons:

1) they last raised capital ($20 b) in May, when the stock was near $40; today it is $13;

2) credit spreads have widened;

3) there are fewer U.S. investors available, and foreign investors have been badly burned by their U.S. investments in the first half of the year.

Still, they may have few other choices: ratings downgrades are a definite possibility. 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 captial needs at various operating units...failure to address these concerns in the near term could lead to rating downgrades..."

Another strong possibility is sale of assets, including their aircraft leasing division, which some feel could fetch $8 billion or more.

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CNBC's Names in the News:

WaMu

Lehman

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  Friday, 12 Sep 2008 | 12:18 PM ET

What Traders Want To Help Street

Posted By: Bob Pisani

What can the government do? Forget Lehman, the Street is debating what the government could do (that would not involve a bailout of a company) that might stop the relentless selling of financial names.

This debate is being given an additional impetus because today, shorts appear to have moved on to a new name with financial exposure: our parent company General Electric, which at one point was down 6 percent, approaching a five year low.

Actions many traders would like to see:

1) Bring back the uptick rule. This is Number One on many traders' wish list. Last July the rule that prevented traders from shorting on a downtick was eliminated. Traders say that eliminating this rule has had the effect of making it much easy to build--and cover--a short position, and they believe it bears a good part of the responsibility for the tremendous uptick in volatility we have seen in the last year. Those opposed to bringing back the rule says the uptick in volatility corresponds with the credit crunch and would have happened anyway.

    • Fed Shouldn't Rush to Lehman's Rescue: Sen. Shelby

2) Bring back the prohibition against naked short selling of financials--here again, traders believe that the brief prohibition this year (July to mid-August) made a difference in stabilizing financials.

3) Change regulatory capital rules to allow banks to stop mark-to-market from hurting Tier One capital. These rules were changed only recently, so reversing them would be difficult.

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CNBC's Names in the News:

Lehman

WaMu

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  Friday, 12 Sep 2008 | 9:09 AM ET

Bad Econ News And Mutual Funds Continue To Shrink

Posted By: Bob Pisani

Futures were dropping even before the disappointing economic news, despite the talk of a Lehmanbailout [facilitation, takeover]. It's not rallying because 1) the Street figured out that these events do not stop the drop in the markets; traders simply move on to another target, and 2) shorting any notable rally has been the most consistent way to make money this year. AIG down 11 percent pre-open, Merrilldown 6 percent. Wachoviadown 2 percent pre-open.

Producer Price Index, a measure of inflation at the wholesale level, was lower than expected (good news), while retail sales were below expectations. This will give the Fed a little wiggle room; certainly reduces short-term pressure to raise rates.

    • Retail Sales Plunge Despite Easing in Inflation Index
    • Home Foreclosures Rise to Record High in August

Washington Mutualreleased third quarter financial projections that should make some feel better: loan-loss provisions for this quarter would be less than the second quarter, and they claim they have enough liquidity and capital to ride out the current crisis. There will be a loss for the quarter, but it will be less than the second quarter, though a bit more than most estimates. No matter; stock is trading down about 6 percent. Any wonder that analysts like those at Fox-Pitt throw up their hands and say "Washington Mutual long ago stopped trading on fundamentals."

Elsewhere:

1) Today, Fox-Pitt joined Morgan Stanley in suspending its price target and ratings on Lehman, "since the stock has become disconnected from fundamentals." Yesterday Merrill Lynch analyst Guy Moszkowski changed his rating on Lehman from "neutral" to "no opinion."

1) Euro is rallying as Trichet talks tough on inflation. Commodities are lifting, with gasoline once again outperforming oil. commodity stocks like BHP Billiton, Massey, and gold stocks are trading up 2 to 4 percent.

2) Chipotle Mexican Grill cut third quarter earnings, saying "the impact of the weakened economy has been greater than anticipated." Down 14 percent pre-open.

3) Meanwhile, quietly and with little fanfare, investors continue to take money out of mutual funds. This week, there were outflows of $1.3 billion from equity funds (excluding ETFs), according to AMG Data. The represents 14 straight weeks of net redemptions. There have been some weeks where ETF flows were positive, but this category is still largely used by professionals. Bottom line: mutual fund industry continues to shrink.

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  Thursday, 11 Sep 2008 | 4:11 PM ET

Despite Lehman And Merrill, Financials Rally At End

Posted By: Bob Pisani

Both Lehmanand Merrilldropped notably in the last half hour. Lehman traded north of 450 m shares today, a record, down 41 percent.

Merrill traded around $20 most of the day, but then slid below $20 in the last half hour as well, down 17 percent on 145 m shares, 3 times normal.

However other financials rallied notably into the close, many that were negative on the day ended positive.

As oil has continued to drop, approaching $100, we have continued to see airlines rally...US Air,United,both up double digits today.

Gasoline refiners were up as gasoline futures have been up, trading in opposition to oil. Sunoco and Tesoro both up about 10 percent.

Other commodity stocks also have shown signs of stabilizing: for example coal and steel stocks were up for a second day in a row after 7 brutal days of selling.

Finally, railroads were up mid-single digits as CSX raised their full-year guidance.

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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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