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Trader Talk with Bob Pisani

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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.)

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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

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  Wednesday, 20 Aug 2008 | 9:37 AM ET

Lehman Following Fannie? Goldman Lowers Sector View

Posted By: Bob Pisani

Renewed inflation fears, as well as concerns about financials, continue to weigh on markets. Many investors who attempted to buy financials just after the bottom in mid-July are coming to the realization that the news flow in the financials has the potential to be negative for some time, and as a result they are primarily trading stocks and not long-term holds.

Goldman epitomized this realization with its note last night on the brokers, entitled, "Tides are not changing; more write-downs and asset sales to come."

Goldman is lowering estimates for Q3 and the full year across their entire universe of brokerage. It believes that Q3 will be the fourth consecutive quarter of overall losses for the industry, an unprecedented negative streak.

Fannie Mae and Freddie Mac were the first stocks to break through their July 14 low; now Lehman Bros. is close.

The July 14 closing low for Lehman was $12.40; it is trading this morning at $12.81.

This has important implications for the S&P 500: much of the second half turnaround in overall earnings is based on the idea that financials will begin reporting positive results in the second half. This is not going to happen, for the most part, and as a result strategists are now frantically readjusting their earnings expectations.

Elsewhere:

1) Electronic payment equipment maker VeriFone up 25 percent as it provided second-half estimates well above analyst expectations; the strength is in international.

2) Hewlett-Packard up 3 percent; like IBM H-P reported a solid quarter. Remember, the EDS deal should close soon; H-P will hold an analyst day September 15th to discuss that.

3) US Air completed its public stock offering, which included issuance of 19 m shares at $8.50 per share, as well as 2.85 m shares as a greenshoe (the overallotment granted to the underwriter, Merrill Lynch). Down 6 percent pre-open.

4) Thanks for the cynical analysis: UBS raising price targets (but not earnings estimates) on food companies: Kellogg, General Mills, Heinz and Campbell Soup. Partly it's due to the positive effects of lower commodities, because these companies have already announced price increases. But the slower economy is the real reason for the modest optimism: "Our analysis shows that consumers' eating at home increases as job losses pick up."


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 19 Aug 2008 | 11:37 AM ET

Bove's Financials Note: How Bad Will It Get?

Posted By: Bob Pisani

On a day when financials are again weak, Richard Bove at Ladenburg Thalman provided his clients with a long (70 pages!) note outlining the problem with the banking industry.

The positives:

- Banks have more capital, more liquidity, more deposits, more loans, better margins, higher net interest income, improving non-interest income, and the likelihood of improving expense control.

The overwhelming problem, Bove notes, is bad loans: "They are explosive and they show no sign of subsiding."

He notes that non-performing assets are increasing: of 34 banks surveyed in the second quarter, non-performing assets were up by $54 billion, or 189 percent, year-over-year.

The problems are primarily in the real estate sector but the bad credits are now extending out to both the consumer (autos, credit cards) and the commercial sectors.

How bad will it get? His hope is that job loss is relatively moderate in this downturn, and home prices stabilize.

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Financials in the news:

- Citigroup

- JPMorgan

- Merrill Lynch

- Wachovia Bank

- Bank of America

__________________________________


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 19 Aug 2008 | 10:06 AM ET

Discounters Rule Retail; Stocks' Uptrend Problem

Posted By: Bob Pisani

The trend in retail continues, with discounters continuing to outperform department stores: Home Depot and Target beating, Saks on the light side.

Biggest problem for stocks is that we are once again on the verge of breaking the uptrend from the July lows.

Housing starts at 965,000 annual units was the slowest since 1991; building permits were well below expectations at 937,000. Remember, at the height of the market a couple of years ago, there were 2.2 MILLION permits issued. While this sounds like bad news, the truth is we need to see a string of really poor numbers like these if we have any hope of working off the high inventory levels.

It's tough to make excuses for the shockingly high PPI number: up 1.2 percent, twice the expectations, and up 0.7 percent on core (ex-food and energy), three times the expectation of a gain of 0.2 percent.

  • CNBC Video: Oil Heading to $160?!

Year over year, headline is now up 9.8 percent, the largest gain since June 1981.

Bears are trying the same trick they used with CPI: saying that with commodities down, this is a backward-looking number. Unfortunately, prices seem to be increasing right across the board, and corporations are clearly indicating that they plan to keep raising prices.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 18 Aug 2008 | 4:54 PM ET

Tricky Market: Weak Financials, Wobbly Tech & Housing

Posted By: Bob Pisani

Weakness in financials -- particularly over concern that the equity in Fannie Mae and Freddie Mac could go to zero -- was the primary driver of today's activity.

Traders in tech stocks -- the market leader -- took advantage of the market weakness to lighten up on their positions.

Finally, even energy stocks saw a late-day selloff. The Amex Oil Index closed at a new low.

The housing news from southern California is illustrative of the elusive nature of this housing crisis: a little good news, but still mostly bad.

The good news, according to AP, is that bargain hunters are out: sales hit a 16-month high.

The bad news:

1) Prices keep dropping: to a median of $348,000, down from $355,000 in June and a peak of $505,000 in July 2007 (down 30 percent from peak);

2) Foreclosures were still huge, at 43.6 percent of all sales, up from 41.8 percent in June, and 7.9 percent in July 2007. Most of these distressed sales were in newer neighborhoods.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 18 Aug 2008 | 1:37 PM ET

Why Fannie, Freddie Are Spooking Markets

Posted By: Bob Pisani

New lows in Fannie Mae and Freddie Mac are what's spooking the markets today.

Here's the problem: many believe equity holders in these stocks are in a no-win situation. Consider:

1) Over the weekend, Barrons said it was increasingly likely the U.S. Treasury might take over Fannie and Freddie; both stocks open weak.

2) Late in the morning, a spokesperson for the Treasury says it has no plans to use its authority to backstop Fannie or Freddie. Both stocks drop more, this time also bringing down the broader market -- but particularly other financials, as well as techs.
(Contd.)

_________________________________
Read about these banks in danger :

- Merrill Lynch

- Wachovia Bank

_________________________________

See what I mean? If the Treasury takes them over, it's likely one of the terms will be equity holders get wiped out; if the Treasury refuses to take them over and the situation continues to deteriorate, the equity will still go to zero.

In other words, bailout or not, equity can go to zero here.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 18 Aug 2008 | 9:30 AM ET

Dollar Down -- But Asia Weakness May Still Help

Posted By: Bob Pisani

The Shanghai Composite dropped another 5 percent today, to a new low, but they are not the only ones. Hong Kong, Singapore and Malaysia are also at new lows.

The dollar is down for the first time in 11 days.

The bottom line, though is that the dollar has been rallying on weakness in Europe and Asia, not on any obvious signs of a turnaround in the U.S. The argument from the bulls last week was that the U.S. will pull out of the global slowdown before anyone else.

Elsewhere:

1) Lowe's did what every retailer except WalMart has done: they beat for the quarter just ending, but guidance for the third quarter is below expectations.

However, full-year guidance was raised slightly, so they obviously feel the fourth quarter will not be a disappointment. Same store sale comps were only down 5.3 percent, better than most analysts expected. Lowe’s up 4 percent pre-open.

2) The Journal noting that Lehman may be in line for its second quarterly loss; the current quarter is ending in less than two weeks. The hope had been for a modest profit. Banks in Europe are generally weak this morning. Merrill noted in a note this morning, "We believe European banks are facing a period of further earnings downgrades as the economy slows."

3) UnionBanCal is selling the rest of itself to Mitsubishi UFJ Financial Group; Mitsubishi already owns only 65 percent of the company. The price is $3.5 billion, or $73.50 a share, a 12 percent premium to Friday's close. UB stock has held up well as it has avoided much of the subprime debacle.

4) Hersheys announced they raised prices after the close on Friday, in some cases 10 percent, all in an effort to offset higher costs. In January they raised prices an average of 13 percent.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 15 Aug 2008 | 4:22 PM ET

There Was A Change In The Markets This Week

Posted By: Bob Pisani

Don't let the relatively flat performance of the major indices (Dow down 0.6 percent, S&P up 0.1 percent) lull you into thinking nothing happened this week.

Remember what the Smart Money trade was up until a couple weeks ago:

--Long: oil stocks, fertilizers, iron ore

--Short: financials, retailers, small caps

--Short: dollar

What a difference a few weeks make. Once again this week the above trade is unwinding:

--Small cap Russell 2000 outperforms big cap S&P 500 (up 2.5 percent vs. up 0.1 percent, respectively)

--Oil stocks again underperform

--Retailers hold up despite poor guidance

--Financials mostly sideways

--Dollar at highs for year

On top of that, techs are outperforming on hopes for a seasonal rally and positive comments from key names like Cisco. Rightly or wrongly, there has definitely been a change.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 15 Aug 2008 | 3:14 PM ET

Why Traders Think There's A Bottom Of Sorts

Posted By: Bob Pisani

On a week that has seen light trading, there has nonetheless been a change in outlook. In the last two weeks, I have seen money moving AROUND and INTO the stock market, rather than money moving OUT of the stock market.

Specifically, many now believe that a bottom is in for financials, retail, and some big-cap energy stocks, and that techs have a reasonable run at a rally.

Why do some traders feel this way? For months, traders have adopted extremely short-term technical trading methodologies to deal with a market that could turn in either direction on a dime. But this week bulls argued that it may now be possible to envision a longer-term play:

--with the commodity markets clearly in decline, the inflation cycle has peaked;

--the news from the U.K., the Eurozone and Hong Kong indicate that a global slowdown is now underway, and that many countries would be lowering interest rates soon;

--that the United States was much further along in the economic cycle than the rest of the world;

--that this argued for strength in the dollar, which would help the balance of payments.

The implications:

--the U.S. stock market will be the preferred market in the coming months

--small caps will outperform large caps on the dollar strength

--play U.S. tech stocks on seasonal strength

Of course, bears put out that the global slowdown and the dollar's strength will create headwinds for big-cap U.S. multinationals. This is undoubtedly true, but for the moment the bulls are ignoring this fact, just as they ignored that their “de-coupling” theory was all wrong.


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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