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Trader Talk with Bob Pisani

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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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Questions? Comments? tradertalk@cnbc.com

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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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  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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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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