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Trader Talk with Bob Pisani

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  Tuesday, 15 Jul 2008 | 11:31 AM ET

Bernanke's Important Points On Solving Problems

Posted By: Bob Pisani

We are seeing a modest rally, led by financials. Lehman, for example, has gone from $12 at its bottom shortly after 10 am ET to just about $14, up 11 percent, though most other financials remain in negative territory. Fannieand Freddie remain down over 20 percent, but off the lows of the day.

The recent weakness in oil is causing energy stocks to drop; GM however has rallied as oil has declined.

Mr. Bernanke is making important points on how to find a way out of the current problems. He made it clear that stabilizaiton of new home construction in late 2008 or 2009 is the critical issue, though he made it clear that house prices may continue to fall because of the large inventory of unsold homes. He also made it clear that strengthening the GSEs is of vital importance.

When questioned on the global economy, Mr. Bernanke said he expects "some moderation, but still healthy growth." This might weaken the contribution of exports, but it might also reduce commodity prices, which would be a positive.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 15 Jul 2008 | 10:16 AM ET

Bernanke Speak Sending Stocks Lower

Posted By: Bob Pisani

Mr. Bernanke's somewhat downbeat commentary on the economy is sending stocks to their lows for the day. In particular, the most vulnerable group--financials, are again under attack. Fannie Mae and Freddie Mac both down more than 20 percent, but other large financials like Citigroup and AIG are down 9 and 11 percent, respectively.

Large industrials like Cummins, Honeywell, and CSX are also weak.

The NASDAQ has also hit a new two year low.

If this continues, we are heading toward a 90 percent downside day, where 90 percent of the volume is on the downside, one of several that have occurred in the past few months.

As a result of the battering in financials, healthcare stocks this morning have passed financial stocks in terms of their weighting in the S&P 500. Here's the weighting of the four largest sectors:

Techs 16.6%
Energy 15.9%
Healthcare 12.9%
Financials 12.8%


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 15 Jul 2008 | 9:10 AM ET

Bernanke Has Tough Job Today

Posted By: Bob Pisani

Humphrey-Hawkins testimony will be the key story today. Mr. Bernanke's job is to walk the fine line between acknowledging--and defending--the Fed's expanding role in the regulation of investment banking, and not appearing to be coddling excessive risk-takers.

The dollar is at a new low against the euro this morning, even though the German confidence index fell to the lowest level since the survey began in 1991. Oil and gold have both advanced this morning, gold stocks up 2-4 percent.

Producer Price Index hotter than expected, though core (ex-food and energy) was lighter than expected; retail sales were disappointing.

GM suspending dividend, cutting salaried employment costs 20 percent, and will sell up to $4 billion in assets. No surprise on suspending the dividend of $1 per share. Laying off some white collar workers, and suspending bonuses.

US Bancorpreported earnings that includes increased provisions for credit losses and securities losses. CEO Richard Davis said the additional net charge-offs and credit losses was "prudent." Down 7 percent pre-open.

Kimberly Clark is pre-announcing earnings below expectations, due largely to a "significant" increase in cost inflation; they are assuming that raw material and energy costs will remain at elevated levels and will continue to pressure their margins.

JNJbeat estimates ($1.18 vs. $1.12 consensus estimate), and raised guidance by a nickel: to $4.45-$4.50, from $4.40-$4.45. Consumer produce sales up 13 percent, medical device sales up 12 percent, pharmaceuticals up 3 percent. International sales up 17 percent, beat domestic sales up 8.5 percent.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 14 Jul 2008 | 4:09 PM ET

Financial Worries Now Include Credit Cards, Auto Loans

Posted By: Bob Pisani

We will start earnings in earnest tomorrow as banks like US Bancorp report, along with Inteland Johnson & Johnson. Banks are oversold and cheap by historical standards, and while a few that report decent numbers will definitely bounce, it is unlikely to eliminate worries over more capital raising.

There's additional worries, as now many are concerned with deterioration in other parts of the banks' portfolios, like credit cards, auto loans and commercial real estate.

The reason these banks are continuing to see selling is that the Street is now taking down estimates for the second half of the year AND 2009.

The failure of IndyMac, as well as the continued willingness to sell into any rally in financials, put pressure on regional banks, many of which were down double digits today.

President Bush's lifting of the Executive Order banning offshore drilling, as well as the usual trend toward staying long energy stocks, lifted E&P and oil exploration stocks today.

The stocks moving today are the ones that make sense: National Oilwell(makes components for oil rigs) and U.S. drillers like Transocean, Diamond Offshore, and Noble. Large oil service companies like Schlumbergerare also strong.

Here's two problems:

1) Fadel Gheit at Oppenheimer, as well as others, have pointed out that the cycle time for any discoveries is at least 3-5 years. In other words, in the best case scenario we will not see oil for at least 3 years.

2) Most stocks already trading at high multiples; for example E&P companies like EOG are trading at 12.8 times forward earnings; Chesapeake at 16 times forward earnings.

A company like Exxon? Only 8 times forward earnings, in fact Exxon is down 10 percent this year, while the E&P and oil service stocks are killing. Why? Because energy stock traders only go to Exxon when oil drops, as a safe investment.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 14 Jul 2008 | 1:42 PM ET

Weird Day When My Mother Asks About Tattoo Removals

Posted By: Bob Pisani

Three signs that things are a little weird with the stock market:

1) National Cityhalts trading in its stock midday to announce that...nothing is happening. Really. They are not seeing any unusual depositor activity. That was it.

2) Wachovia Banknow has a market cap of $21.4 billion. That is well below the $25 billion price they paid for Golden West in 2006. And remember, they also paid $6.8 billion for AG Edwards, in 2007. So Wachovia has paid nearly $32 billion in the last two years for two big purchases, and the combined company is now worth $21.4 billion.

3) My mother writes the following note to me:

"Dear Robert,
Just received my quarterly statement, and was that sad... Found the name of a stock I was interested in called Palomar Chemicals, supposed to help removed tattoos.
Love, Mom"


Questions? Comments? tradertalk@cnbc.com

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  Monday, 14 Jul 2008 | 11:23 AM ET

Traders Keep Shorting Financials

Posted By: Bob Pisani

What happened? Futures were up pre-open, we started strong...and then faded away. It is not a good sign that financials--the very group that was supposed to be helped by the Fannie/Freddie news--are flat to down.

Let's go back to First Principles:

1) The only thing that has consistently worked in the past couple months is to have AGGRESSIVELY, RECKLESSLY shorted financials, and that is what traders are doing today. Yes, some traders did cover their shorts at the open, but they put them right back on again.

2) The actions taken by the Fed do not change the underlying fundamentals. The most important question right now is, when will the housing market bottom? Specifically, what is the maximum loan loss ratio that we will see in this cycle? If we know that, we can make reasonable estimates on losses at Fannie, Freddie, and everywhere else. We do not have this number, nor do we have the confidence to make a projection right now.

3) Absent this confidence, traders lack the buying enthusiasm that is necessary to move stocks off their bottom. Yes, they are oversold, yes under certain valuation metrics they are cheap, but cheap alone is not enough. Not in this market.

Given this misery, Is there any hope short term? Yes. The other major issue besides housing is earnings, and earnings news may be better than expected. There's been lots of selling outside financials on concerns the earnings outlook for the second half of the year will be poor, but the IBM's of the world may not be as bad as everyone thinks.

Yes, financials may be rough with Lehman and Citi and Merrill,but we also have J&J, Intel, and Microsoftthis week.

Meantime, the other minor trade--stay long energy--continues to work, although there was some doubt a week ago. They have since stabilized and are up again today.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 14 Jul 2008 | 9:24 AM ET

Traders: Fannie And Freddie Too Big To Let Fail

Posted By: Bob Pisani

Traders getting their early morning coffee at the commissary of the New York Stock Exchange were more animated than usual this morning, discussing the pros and cons of the government's intervention in Fannie and Freddie. "The government has unlimited checks so they can keep writing them," one trader said. "So much for all the tough talk, so much for letting firms fail."

But that trader was in the minority. Most felt that the feds had no other choice, that these two firms really were too big too fail.

So now Fannie and Freddie can borrow from the Federal Reserve's discount window. Treasury will pursue increasing the credit lines the companies currently have, and will consider an equity investment.

Congress is about to go on recess for August, and we are in an election year, so it's not clear how fast they will pass a bill that will allow Treasury to buy debt and make a capital infusion into both these institutions.

One side issue is what this does to the housing bill--after all, we are asking Fannie and Freddie to take on a significant amount of new business by helping homeowners refinance; will that $300 billion for refinancing stay in the bill? Reform legislation will clearly be strengthened; the Federal Reserve will now have a consultative role by in setting capital requirements.

Fannie and Freddie both trading up nearly 30 percent on heavy volume. Other financials like AIG,Citi and Wachovia Bank are also trading up.

Will any of this matter to the stock market? We will certainly get a modest boost at the open; what we are lacking is any conviction we are near a bottom. Lacking a strong base of buyer enthusiasm, most traders I have spoken with have not become notably more bullish this morning.

Elsewhere:

1) Positive comments on Lehman. The strengthening of its funding base and its support from the Federal Reserve should enable it to survive any crises of confidence, says Sanford C. Bernstein & Co analyst Brad Hintz. His commentary may carry a little more weight, since he is the former CFO of Lehman. Lehman up 16 percent pre-open, also on heavy trading.

2) Allegheny Technologies up 11 percent, as they raised their Q2 guidance;

3) In light of all this, the abrupt conclusion of the Anheuser-Bush and InBev deal for $70 a share seems a little anticlimactic. The main point is that while global M&A may have slowed dramatically, it hasn't come to a halt. Remember last week's big deals in the chemical business: Dow Chemical-Rohm and Haas, and Ashland buying Hercules. All three of these deals were at substantial premiums.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Jul 2008 | 4:40 PM ET

Fed's Discount Window: No Long Term Fix For Freddie And Fannie

Posted By: Bob Pisani

To give you an idea of how much trading went on today, Freddie Mac traded nearly 400 million shares--nearly two-thirds of the entire 646 million share float.

Markets rose briefly in the middle of the day asReuters reported that Fed Chairman Bernanke would open the Fed's discount window to Fannieand Freddie, but Dow Jones later said that there were no discussions with the agencies on opening the discount window.

If it did happen, what would this do? The disount window allows eligible institutions to borrow money from the Fed on a short-term basis. This would allow the two agenices to put their own paper to the Fed as collateral and borrow money against it, for short-term needs.

Would this help? It might, short term. But it is not a long term solution.

Elsewhere, we saw another merger deal in the chemicals industry, after yesterday's Dow Chemical: Ashlandbuying Hercules for $2.6 billion, $18.60 in cash and 0.093 of a share of Ashland for each Hercules. That values the deal at about $23 for Hercules, it went out yesterday at $16.60. Both are specialty chemicals manufacturers.

For the week, the Dow down 1.7 percent, S&P down 1.8 percent, NASDAQ down 0.3 percent.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Jul 2008 | 1:05 PM ET

Traders On Freddie, Fannie: Should Be No Gov't Takeover

Posted By: Bob Pisani

I've spent the morning talking to traders about the Fannie/Freddie issue, specifically about whether the government should essentially take the companies over.

Most traders are emphatically against this idea. They point out that the U.S. government currently has roughly $9 trillion in debt (which includes the Social Security obligations). Taking on $5 trillion in Fannie/Freddiedebt (even with the understanding that there are underlying assets) would:

1) drop the dollar further;

2) cause mortgage rates to go up, perhaps significantly; and

3) almost certainly cause taxes to go up.

So what else could be done? OFHEO has publicly stated that both GSEs currently have adequate amounts of capital. Freddie has consistently said they plan to pursue their $5.5 billion commitment to raise new capital. Will that be enough? No one knows, but the Street clearly thinks it will not be enough, and that is the source of the current problem.

Remember, common equity holders are at the bottom; their equity will essentially be zero if this dilution continues.

The Street is coming to believe that an even more massive preferred offering convertible into common at an extraordinary rate (10 percent, perhaps) could be coming down the road. How big does it need to be? Nobody knows, but a lot of people think both will end up more than doubling the shares outstanding.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Jul 2008 | 9:36 AM ET

Freddie, Fannie And Oil "Pushing" Market Around

Posted By: Bob Pisani

Despite good news from our parent General Electric, we are again being pushed around by oil at a record price, and by Fannieand Freddie.

Both are down big (about 50 percent) this morning, largely on a New York Times story that the federal government was considering placing one or both of them in a conservatorship. What would that mean? It would mean the companies would be under the legal control of the federal government. Traders, or course, began believing a month ago that the equity in the company was nonexistent, and that's why the shares have been sold off every day since then. What about an explicit guarantee of the $5 trillion in mortgage debt? That, apparently, is a step no one is willing to take, at least not yet.

On this Fannie and Freddie decline, home builders are all trading down--Centex,Lennar,KB Homeall down 6-10 percent.

Elsewhere:

1) Our parent General Electric in line with expectations, ($0.54), with 4 of 6 divisions exceeding expectations. Q3 guidance of $0.50-$0.54 at the low end of $0.54 analyst consensus. They reaffirm full year earnings of $2.20-$2.30 ($2.22 analyst estimate). GE also announced an agreement to sell GE Money Japan for $5.4 b, which analysts agree is a very good price.

So why is the stock trading down? Goldman Sachs, responding to the earnings, is typical of the chatter: "we believe it is still too early to get more positive on the stock until investor expectations for 2009 are reset to expect another year of 0%-5% earnings growth, and importantly GE begins to demonstrate a path to return to 10% earnings growth in 2010."

2) Another merger deal in the chemicals industry: Ashland buying Hercules for $2.6 b, $18.60 in cash and 0.093 of a share of Ashland for each Hercules. That values the deal at about $23 for Hercules, it went out yesterday at $16.60. Both are specialty chemicals manufacturers.

3) InBev raised the price for Anehuser-Busch to $70 a share, from $65. Up 8 percent to $65 and change.

4) Aviation parts maker Rockwell Collins reported earnings above expectations, and raises full year guidance to $4.05-$4.10 is above analyst expectations of $4.04.

5) Wynn Resortssurprised with a stronger than expected earnings report, though earnings fell in Las Vegas, profit in Macau almost doubled. Up 8 percent pre-open. Las Vegas Sands also up.


Questions? Comments? tradertalk@cnbc.com

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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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