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Trader Talk with Bob Pisani

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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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  Thursday, 10 Jul 2008 | 4:10 PM ET

Why Fannie And Freddie Dropped Again

Posted By: Bob Pisani

Another day with plenty of cross-currents. The bottom line is that a $5 spike in oil right near the close of trading in oil (2:30 pm ET) dropped stocks, the Dow lost all of its 120-point rally, though it came back a bit toward the close.

As that happened, traders again took the opportunity to sell into rallies on financials.

Also, retailers were weak, even though Wal-Mart raised estimates, outside of discounters sales were not great, and there is no belief better times are coming.

Finally, Fannie/Freddie were weak again. Why did Fannie Maeand Freddie Macdrop again today, even though everyone talked about their importance and Senator Schumer said bond holders might get a "lifeline?" Because, as one trader noted, the explicit backing likely won't come from the government until both companies exhaust every source of private fund raising they can muster in the upcoming months. That means more dilution for equity holders and the possibility that shareholder equity could be wiped out completely. A broader philosophical question is what an explicit backing would mean: most traders think it means we will have officially nationalized most mortgage financing in this country.

Elsewhere, Wachoviagot a first class CEO, Robert Steel, but the stock was down 9 percent nonetheless: 1) they reported a Q2 loss of $1.23-1.33--worse than expected, 2) on the conference call, management acknowledged the Golden West deal was a "mistake;" and 3) continuing concern about capital raises or dividend cut--dividend yield is currently 11%.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 10 Jul 2008 | 9:12 AM ET

Retail Numbers Help, But Freddie And Fannie "May" Dominate Again

Posted By: Bob Pisani

Two pieces of positive news this morning: 1) Wal-Mart sales better than expected and raising guidance, and 2) Dow Chemicalbuying Rohm and Haas.Jobless claims lower than expected is also a help.

However, Freddie Macand Fannie Maemay again dominate the news. Comments overnight from former Fed President William Poole that both are insolvent are not helping; Freddie down 8 percent pre-open.

1) Dow Chemical paying a 73 percent premium for Rohm and Haas , $78 a share or $15.3 billion, which includes an equity investment from Berkshire Hathaway and the Kuwait Investment Authority.

This is a good fit for Dow and turns them into a broader company: Rohm and Haas (which has its HQ on Independence Square in Philadelphia, literally facing the Liberty Bell) is most famous for Morton Salt, but their biggest division makes paint and coating materials, as well as packaging and building materials. They also have a division that makes chemicals to make semiconductors and printed circuit boards. All this fits in well with Dow Chemical.

Of course, Rohm and Haas has the same problems with escalating raw material costs. They have raised prices to close the gap and it was anticipated they would keep raising prices. Remember, Dow Chemical raised prices 25 percent at the end of June.

They are also not immune to the economic slowdown, and you can be sure their paint division, as well as their packaging and materials division, is seeing slower demand.

2) June same store sales were not bad. Wal-Mart's sales were up 5.8 percent without fuel, better than their own estimates of a rise of 2 to 4 percent, and better than 3.8 percent expected from analysts. They raised Q2 EPS forecast to $0.82-$0.84 (from $0.78 to $0.81), expectations $0.82. Flat panel television sets continuing to run high double-digit comparable store increases.

Other discounters were also strong: BJ's Wholesale was up 16.5 percent, Costco was up 9 percent.

TJXalso raised their earnings guidance.

Nordstrom sales' were down 18.6 percent; believe it or not that is better than expected.

Also better than expected: Gap(down but not as bad as expected), Aeropostale.

Worse than expected: Limited,Abercrombie.

Men's Wearhouseone of the only retailers to cut their earnings guidance; one problem was slower tuxedo rentals.

3) Marriott reported earnings below expectations on slower business in the U.S., though they pointed out that business outside the U.S. was still strong. They also expect weakness in the U.S. to persist into 2009.

4) Ruby Tuesdayreported upbeat guidance.


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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