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Trader Talk with Bob Pisani

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  Tuesday, 11 Nov 2008 | 9:24 AM ET

AmEx: Why They Became A Bank Holding Company

Posted By: Bob Pisani

Futures are down as Asia and then Europe opened down. Get ready to hear a lot more economic stimulus plans from many governments. The dollar is up, commodities are down roughly 2 percent, and the bond market is closed.

Elsewhere:

1) Sign of the times: American Express' application to become a bank holding company was approved by the Federal Reserve.

What does this mean? Several analysts noted that it means AmExis assuming that the funding difficulties everyone is experiencing will be longer and more protracted than many expected.

By becoming a bank holding company, they are trying to broaden their funding sources, and will gain greater access to capital under the current and any future government-sponsored programs. And they do need capital. In the next six months, AmEx will need $4 billion in net commercial paper and $7 billiion of long-term debt.

Now they can turn to the real issue: stemming the losses coming from their consumer credit card division.

2) Las Vegas Sandsreported earnings below expectations, more importantly several projects are being delayed to preserve capital, and they are about to announce a $2.1 b capital raise. MGM and Las Vegas Sands down 7 percent pre-open.

3) Here is is the type of news we WANT to be seeing. Citigroup is joining JP Morganby offering mortgage refinancings. Reducing consumer debt burdens is a key part of getting the economy going; expect to see more of this in the very near future.

This will have long-term positive effects for a variety of reasons (reduced foreclosures, increased confidence, reworked mortgage terms could be favorable) and while it may not be moving the needle this morning, as time goes on this news has a greater effect that its being given credit for this morning.

4) REITS. Lots of discussion on the Street yesterday about the fallout from the Circuit City bankruptcy, believed to be the latest of several bankruptcies coming. Impact on the REITs was profound, with many mall REITs down ten percent or more.

  • Credit Spreads
  • Pros Say: Currency Trends in Reverse
  • Credit Crunch Timeline
  • It's not just poor fundamentals killing REITs: they are experiencing higher capital costs as well. Interest rates are higher, the underwriting criteria has become much stricter, and loan-to-value ratios are dropping. It means that a lot of companies are going to de-leverage.

    Speaking of funding difficulties: the Yellowstone Club, an exclusive mountain retreat in Montana which boasts former VP Dan Quayle and Bill Gates among its members, filed for bankruptcy Monday because they could not secure new financing.

    _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance


    Questions? Comments? tradertalk@cnbc.com

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      Monday, 10 Nov 2008 | 2:53 PM ET

    A "Listless" Market: Here's Why

    Posted By: Bob Pisani

    Despite the positive news of a massive stimulus program from China, which initially buoyed commodity stocks, the market is trading in a listless manner.

    We are now in the midst of what one trader called "The Great Boredom," that period where we know the economy is going to slow dramatically, but it is too early to aggressively buy a rebound.

    Positive news on China stimulus, but market listless. This is "The Great Boredom":

    --know the economy slowing

    --but too early to buy a rebound

    Consider:

    1) GMtraded as low as $3.02, the lowest level since the 1940s, as Deutsche Bank slaps a price target of $0 on it;

    2) Goldman Sachs down another 11 percent today to a 5-year low. The thinking on the Street is that the assets on their books are declining in value, and with IPOs, secondaries, and the like practically nonexistent, it is simply extraordinarily difficult for them to make any money in the near future.

    3) Fannie Mae's numbers were awful (loss of $29 b!); they are losing money so fast that they will have to access the TARP program early next year;

    4) Wall Street professionals continue to get stuffed. Two examples:

    a) Investor Carl Icahn reported an 8.9 percent stake in containerboard maker Temple Inlandon October 17th. Not clear when he accumulated the shares, but the stock has gone from the $15-$20 range in the last few months to $5.26 today;

    b) On September 23rd, Warren Buffett invested $5 billion in Goldman preferreds, along with an additional $5 b in warrants at $115. On September 24th, Goldman issued $5 b in common stocks at $123. The stock is $69 today.

    The one positive: the Fed is directly buying assets from AIG, meaning they are starting to segregate the assets rather than let some other manager deal with it. That's a positive.

  • AIG Gets Revised Bailout Of $150 Billion From US
  • Federal Reserve Statement on AIG
  • Lehman, Bear Stearns Survivors May Get Best Bonuses
  • Goldman Sachs Plans to Stay Public, Seek Deposits
  • Treasury Prices Fall Ahead of $55 Billion Auction
  • _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________

    _______________________________________
    CNBC's Names in the News:

    Apple

    General Motors

    _______________________________________


    Questions? Comments? tradertalk@cnbc.com

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      Monday, 10 Nov 2008 | 9:12 AM ET

    GM Rating Target Price: $0

    Posted By: Bob Pisani

    China up 7 percent on the nearly $600 billion stimulus package, Europe has also opened 3 to 4 percent. That is stimulating commodity stocks like BHP Billiton, Rio Tinto,ArcelorMittal, and ABB, all of who are up about 10 percent.

    Elsewhere:

    1) GMdown 10 percent as Deutsche Bank lowered its rating on GM to a Sell, but more interesting is the price target: $0. That's because, like most analysts, Rod Lache has concluded that a government bailout is not likely to help the shares, that even with a bailout GM's future, if it is not in bankruptcy, is likely to be "bankruptcy-like." That means that secured creditors may be made whole, while unsecured creditors will get a very low recovery. Equity shareholders will likely get nothing.

    2) McDonalds up 3 percent pre-open; comp store sales were again stellar. U.S. comparable store sales were up 5.3 percent, 11.5 percent gains in Asia/Pacific, 9.8 percent in Europe.

    3) Circuit Cityhas filed for bankruptcy under Chapter 11 , which will allow it to hold off creditors and operate as normal while it develops a financial reorganization plan. Stock is $0.10 now, it was $0.25 at the close Friday.

    4) AIG is now getting all sorts of loans, including 1) an additional $40 billion purchase of newly issued preferred shares under the TARP program, 2) a modification of the loan the government initially gave to AIG, and 3) two additional lending facilities that will allow the Fed to lend money to AIG. The first lending facility will be secured with mortgage-backed securities as collateral; the second will buy collateralized debt obligations (CDOs) on which AIG has written credit default swaps (CDS).

    _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________


    Questions? Comments? tradertalk@cnbc.com

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      Friday, 7 Nov 2008 | 4:50 PM ET

    Market Plays Defense

    Posted By: Bob Pisani

    How to trade: sell bad news rumors, then buy, but buy good news rumors, then sell. Traders sold stocks going into the nonfarm payrolls number, then when it was not as bad as the worst case scenarios (240,00 reported, but 300,000 was feared) bought stocks, but not enthusiastically.

    Then they bought the perceived good news ahead of the Obama presser, but sold as soon as it was over...though again on light volume.

    Obama presser: President-elect Obama, in his first press conference since his election, said that he would support a second stimulus package, that he wanted more help for the automotive industry, but offered few specifics.

    GM: reckoning has arrived. General Motors reported a loss twice what was expected, and made it clear it was burning through cash ($2.3 b a month) at a rate twice that of just a few months ago. With $16.2 b in cash left, and with their prior statements that they need $11 to $14 billion to keep operating, GM is out of time.

    GM Continues to Fold

    Standard and Poor's reflected this concern when they lowered GM's debt rating this afternoon: "Our concern is that the company may not have the liqudity to endure the economic downturn..."

    As for government assistance, S&P does expect it to come, but even here "we would likely view such assistance as buying more time for GM rather than solving its fundamental business risks." GM down 25 percent this week.

    Next week. We get retail sales for October, which will be down, and earnings from big retailers, like Wal-Mart, JC Penney, Kohls, Macy's, Abercrombie, and Nordstrom.

    »Read more
      Friday, 7 Nov 2008 | 4:03 PM ET

    Obama Does What Traders Expected: Avoids Specifics

    Posted By: Bob Pisani

    President-elect Obama, in his prepared remarks, has done what most traders expected: he has stuck to broad generalities.

    He did talk about an extension of unemployment benefits, and that a fiscal stimulus plan that will jumpstart economic growth "is long overdue."

    Barack Obama: Stimulus Package

    • Obama: US Economy Needs Another Stimulus Package

    But he did not go farther. He said we will need a stimulus package "either before or after the inauguration" and that he wanted it "sooner rather than later," but there were no specifics on what he wanted to see in it.

    On the auto industry, the president-elect said that in addition to accelerating the retooling assistance Congress has already enacted, his team would work on "additional policy options." Again, support without specifics.

    As for cabinet appointments: "when we have an announcement, we will make it." The S&P rallied, then dipped a bit as some were expecting a bit more on the specifics front.

    _____________________________
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    - The Dow 30 at a Glance

    _____________________________


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      Friday, 7 Nov 2008 | 3:12 PM ET

    GM and Chrysler: The Endgame Approaching

    Posted By: Bob Pisani

    Under normal circumstances, companies try to put the best face on bad news. But we are not in normal circumstances.

    Look at the GM report—they made no attempt—indeed, seemed to emphasize—the dire circumstances. The one-hour delay in the release—complete with scenes of a crowd of traders standing by idly while the stock was halted awaiting the news—only added to the sense of drama.

    GM , importantly, seems to have distanced itself from merger negotiations with Chrysler. This makes sense from GM's point of view.

    The moment of reckoning has arrived. GM made it clear that they will soon run out of cash unless the industry recovers quickly (unlikely), they sell assets (difficult), or receive a capital infusion from the government or private industry.

    Automobile Industry Failing

    This makes an infusion from the government increasingly likely. Most traders on the Street do not think the government will let GM go bankrupt.

    But a massive infusion into GM (debt or equity) means dilution (or worse) is now very likely for equity holders. As for Chrysler: it's difficult for GM to buy them when GM itself needs to SELL assets.

    Look at the stats: Chrysler is a company with 90 percent of its sales in the U.S., 70 percent of those sales are trucks. GM is a much more diversified company. Any merger with GM would still involve massive layoffs at Chrysler and occupy large amounts of time and money on a restructuring effort of doubtful value.

    As for the argument that Chrysler is too big too fail: they successfully made this argument in 1979, when Congress passed the Chrysler Corporation Loan Guarantee Act (remember Lee Iacocca? "If you can find a better car, buy it.").

    What happened? Several billion in loans, and the military bought Dodge pickup trucks by the thousands.

    As the economy improved in the 1980s, Chrysler, with the help of the K-car franchise, did improve its sales and pay off the loans. They bought AMC in 1987, but aside from the Jeep brand, few other brands survived from that line.

    Daimler-Benz bought Chrysler in 1998, but despite a strong economy the company's vehicles, for the most part, were a bust with the public.

    Hard to believe that it has only been a year and a half since Daimler sold an 80 percent stake in Chrysler to Cerberus for $7.4 billion. Every step along the way, Chrysler and the others have shed jobs, even in good times.

    _____________________________
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    - The Dow 30 at a Glance

    _____________________________


    Questions? Comments? tradertalk@cnbc.com

    »Read more
      Friday, 7 Nov 2008 | 9:19 AM ET

    Rally Today—Or Not—With Jobs Report?

    Posted By: Bob Pisani

    The October nonfarm payrolls report was bad, but not as bad as some expected. A decline of 240,000, versus expectations of 200,000, but some were expecting a much greater decline, to 300,000. And ultimately it may well be revised there: September was revised downward to 284,000, versus initial numbers of 159,000—a significant revision.

    When all was said and done, futures are relatively flat. The game plan for the past two days has been to short the market going into the jobs report, and if it was not dramatically worse to push a modest rally. We'll see. The Dow and the S&P 500 are down about 10 percent in the past two days.

    Elsewhere:

    1) Fordup 5 percent, after announcing a greater loss than expected. They are cutting 10 percent of its salaried staff, and cutting production as well. Ford burned through $7.7 b in cash this quarter, ending with $29.6 b in cash and credit on hand. Although they say they have enough cash to get through next year; the question is how much aid the government will provide.

    GM's numbers come out at 10:30 AM ET.

    2) A miracle: someone raised guidance! Construction and engineering giant Fluorbeat expectations and guided higher for the rest of the year, as well as next year. Remember, they get a large amount of their revenues from the oil and gas industry.

    3) Wells Fargo did get its capital raising done: $11 billion. That's 407.5 million shares for $27 each, 6 percent below the Nov. 6 price of $28.77. Wells down 7 percent p

    4) Insurance giant Genworthsuspended its common stock dividend.

    5) There is considerable talk that federal officials may change the terms of the $85 billion loan to American International Group. They are burning through cash at a lot faster rate than expected.

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  • US Economy 'Has Fallen off a Cliff': El-Erian
  • _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________

    _______________________________________
    CNBC's Names in the News:

    General Motors

    Ford

    _______________________________________


    Questions? Comments? tradertalk@cnbc.com

    »Read more
      Thursday, 6 Nov 2008 | 4:08 PM ET

    What We Need: No More Surprises

    Posted By: Bob Pisani

    So for the past two days the short-term trade has been: fade the market in anticipation of a nonfarm payrolls report below even the loss of 200,000 jobs expected, then go for a modest rally in the middle of the day Friday.

    It makes sense, but regardless the economic and earnings data has been below expectations across the board. With auto sales at a 25-year low, major auto execs in Washington are pleading for help, and with many retailers with double digit same store sales declines in October, there is little good news.

    For the second day, a broad swath of stocks have been down 4 to 10 percent. There is a slight defensive tone to the market, with less intense declines among healthcare and consumer stocks.

    Elsewhere, the damage is pretty even, but two things should be noted:

    1) some large financials (Citi, BofA,Goldman) are again at or near new lows;

    2) commodity stocks are again underperforming the market: steel stocks like US Steel are down nearly 23 percent in two days (!!), Alcoa down 18 percent and Freeport down 18 percent,. Energy stocks have had similar declines, with Massey Coal down 22 percent, EOG down 8 percent.

    What we need to have happen is this: the end of surprises. At this point, analysts and economists are going to cut their numbers aggressively (again!) and at some point, hopefully in the first quarter, they will overshoot and the economic and earnings numbers will again be better than expected.

    By then, the stock market will have already sniffed out the recovery.

    _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________

    _______________________________________
    CNBC's Names in the News:

    GM

    Ford

    _______________________________________


    Questions? Comments? tradertalk@cnbc.com

    »Read more
      Thursday, 6 Nov 2008 | 3:07 PM ET

    U.S. Automakers: Their Moment Of Reckoning

    Posted By: Bob Pisani

    The Big Three auto makers are meeting with the House leadership today, and they are going to be presenting scary numbers. GM in particular is likely burning through their cash horde of $25 b at a much faster rate than the $1 billion a month projecting a short while ago.

    This is the moment of reckoning for these companies. I know no one on the Street who thinks GM and Chrysler, or their suppliers, will survive in the form and structure that they currently exist in.

    In addition to having GMAC become a bank holding company (hence getting a direct infusion into the TARP), GMis also likely to be seeking the ability to sell auto loan assets directly into the TARP, which would help support the financing mechanism that has essentially collapsed.

    Beyond this assistance, there are some very hard questions that need to be addressed. The big one is: does government "bailouts" of any of the Big Three auto makers really solve the problem?

    What the Big Three have is:

    1) cost structures that do not make sense, and

    2) a collapse in volume: vehicle sales are at 25-year lows.

    Most traders and analysts believe there is little if any equity value in GM.

    What is likely to emerge here, with or without government assistance, is a much smaller GM. Instead of 25 percent of the market, perhaps 15 percent. That would still cost jobs (they have been shedding jobs for 8 years, by the way) but it might be their best shot at survival.

    What about Chrysler? Remember 1979? Lee Iacocca? This would be the second bailout.

    While a merger between Chrysler and GM may sound like a good idea politically, what would it accomplish:

    1) there would still be enormous liquidity problems;

    2) they would still need to cut product lines and cut jobs;

    3) the government would likely throw huge amounts of money into the restructuring costs.

    How many jobs would be saved by an additional $30 billion or larger investment by the government into a "bailout merger"? How many jobs would the government save to force a merger? Chrysler has probably 90 percent of its sales in North America; the vast majority of that is trucks that no one is buying in the quantities they are manufacturing.

    There is no alternative to working down excess capacity.

    _____________________________
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    - The Dow 30 at a Glance

    _____________________________


    Questions? Comments? tradertalk@cnbc.com

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      Thursday, 6 Nov 2008 | 12:03 PM ET

    Feelling Lucky? Try These New ETFs

    Posted By: Bob Pisani

    You would think risk appetite would be declining right now, but fund company Direxion has just launched a new series of Exchange Traded Funds (ETFs) that allow you to bet three times the performance or three times the inverse of major sectors of the market.

    Here's the funds:

    Tied to Russell 1000 (large cap index)

    Large Cap Bull (BGU), 3x performance

    Large Cap Bear (BGZ), 3x inverse performance

    Tied to Russell 2000 (small cap index):

    Small Cap Bull (TNA), 3x performance

    Small Cap Bear (TZA), 3x inverse performance

    So if, for example, the Russell 1000 was up 2 percent, and you owned the Large Cap Bull, your profit would be 6 percent. Conversely, if the Russell 1000 was down 2 percent, and you owned the same fund, you lose 6 percent.

    It works the same for the Bears in reverse. If the Russell 1000 was down 2 percent, and you owned the Large Cap Bear, you make 6 percent. But if the Russell 1000 was up 2 percent and you owned the same fund, you would lose 6 percent.

    This is the first time a 3x performance ETF has been launched; there are already several 2x performance.

    They have also announced that they will be launching Energy and Financial Bull and Bear ETFs, that will also allow you to bet three times the performance or three times the inverse of the Russell 1000 Energy and Financial Services sectors.

    Feel like making a big bet?

    _____________________________
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    - The Dow 30 at a Glance


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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.

     

    • Bob Pisani

      A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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