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Trader Talk with Bob Pisani

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  Tuesday, 9 Sep 2008 | 9:17 AM ET

Commercial Real Estate: The Next Big Credit Problem?

Posted By: Bob Pisani

At a hedge fund idea dinner I attended last night, many of the participants seem focused on what they feel is the next leg of the credit problem that will manifest itself: commercial real estate.

After the close yesterday, RBC Capital put out a note essentially echoing that concern: "Next Credit Shoe to Drop on Banking Industry: We believe commercial and industrial loans (C&I), commercial real estate and non-resi construction loans will be the next credit problems for the banking industry brought on by the weakening in the US and Global economies."

Oil is at a fresh 5-month low, and airlines are trading up in the mid-single digits on light volume. OPEC is meeting in Vienna. European banks like UBS, Deutsche Bank, and HSBC are also trading up.

Elsewhere:

1) As expected several banks announced impairment charges related to investments in Fannie Mae and Freddie Mac preferred securities.

a) Wells Fargo said its charge relates to $480 million of securities it holds for sale. Wells said the preferreds now trade at 5 to 10 percent of face value. Oppenheimer's Meredith Whitney lowered her third quarter estimates by 9 cents to 17 cents.

b) Sovereign Bank, the second-largest savings and loan, said it held $622.6 m of Fannie and Freddie preferred stock.

2) BHP Billiton said the slowing world economy would likely cause commodities to continue to decline in price, but the decline would not their proposed buyout of Rio Tinto.

3) Proctor & Gamble downgraded at Merrill Lynch, saying they can't just the premium the stock trades at relative to its peers.

4) CapitalSource,a REIT that specializes in commercial finance and residential mortgages, down 9 percent pre-open as they cut their dividend 92 percent.

5) Forrester Research says that 43 percent of large businesses cut their overall tech budget this year.

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CNBC's Names in the News:

Freddie Mac

Fannie Mae

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  Monday, 8 Sep 2008 | 4:18 PM ET

Bears, Bulls And The Dilemmas They Each Face

Posted By: Bob Pisani

This was a day of many emotional ups and downs for bulls:

--up on a strong open;

--down as techs, materials, energy and some financials were sold into the rally;

--up as techs, financials and consumer discretionary rallied modestly in the last 45 minutes.

The central dilemma for bulls is how to entice those sitting on cash back into the market; yesterday's rescue of Fannie and Freddie does help deal with a major systemic risk, but it does not repeal the economic or housing cycle.

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  Monday, 8 Sep 2008 | 3:05 PM ET

Bulls: Why They Are Having A Problem

Posted By: Bob Pisani

Bulls have a major problem today: the action so far is unlikely to convince fence-sitters to jump back into the market in a big way.

This is not an academic question. Both bulls and bears agree that many funds have accumulated cash as a result of deleveraging and the reversal of the long commodities/short dollar/short financials trade.

Those sitting on that cash may be the crucial players determining whether we move up or down from here.

Unfortunately, the internal evidence is not compelling. At the open, there was hope: the highest level of Advancing Stocks since June, along with strong volume. But that quickly dissipated, as we saw waves of selling in financials, materials, energy, and tech stocks; at 3 pm ET, there are only 3 stocks advancing for every 2 declining. Volume will be higher than it has been in a month, but that is not saying much.

In other words, "sell into any rally" is still an effective mantra.

This is why technicians are not impressed. The oldest of technical services, Lowry, reviewed the evidence thus far, looking at weakening demand for stocks in the past month, along with higher supply, and concluded there was "no tangible evidence that a major market bottom is close at hand."

Bears note that since December of last year we have had:

--several rate cuts by the Fed, including a 75-basis point Inter-meeting cut on January 8th;

--the creation, on March 16th, of the creation of special liquidity-enhancing facilities for banks and investment banks;

--the bailout of Bear Stearns; and now

--the bailout of Fannie and Freddie.

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  Monday, 8 Sep 2008 | 11:34 AM ET

Why It's A Bull--And Bear Day--On The Street

Posted By: Bob Pisani

Both the bulls and the bears can claim to be happy so far today. We have had a rally, and no less than TWO attempts to sell into it. Stocks are holding modest gains so far.

Bulls remain hopeful that:

--one more systemic risk has been reduced

--markets can focus more on earnings

--dollar rally continues

Bears say that if Fannie/Freddie was the only variable going, it would be 100 percent positive, unfortunately for the bulls, its not that simple.

Bears say that this event:

-- does not change the economy/ biz cycle

--does not eliminate the need for home prices and inventories to come down

--is unlikely to be a bottom (bulls said that about Bear Stearns!)

The bears note the following about trading patterns today:

1) regional banks, while up, are not up much: many have significant exposure to Fannie/Freddie preferred stock, and may have additional losses;

2) Lehmanis again under significant pressure (down 13 percent) as they try to raise additional capital;

3) commodity stocks are for the most part again down today;

4) big momentum tech stocks like Google, Rimm, Appleand Oracle are all down today.

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CNBC's Names in the News:

Freddie Mac

Fannie Mae

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Questions? Comments? tradertalk@cnbc.com

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  Monday, 8 Sep 2008 | 9:15 AM ET

Fannie, Freddie: The Good And Bad Of Takeover

Posted By: Bob Pisani

While Fannie and Freddie are not trading pre-open (prevented by NYSE), the government rescue of Fannie and Freddie is having a very notable effect on financial and homebuilding stocks. Financials which hold significant amounts of Fannie and Freddie debt are also up, including AIG, up 11 percent. Money center banks like Citigroupand Bank of Americaare also up in the high single digits.

Builders like Beazer, DR Horton, Pulteare up double digits pre-open.

One question is how much, if any, losses might be incurred from the many small and medium sized banks that own Fannie and Freddie preferred securities. While not worthless, the dividends are suspended and they will certainly trade down.

Terms of the agreement include a:

1) Stock purchase agreement. There will be a cash infusion now, with the government receiving $1 billion of senior preferred stock with a 10 percent coupon, and warrants representing 79.9 percent of the respective companies.

2) MBS purchase program. Treasury will also be purchasing agency mortgage-backed securities (MBS) in the open market.

3) Credit facility. A GSE Credit Facility will provide secured funding on an as-needed basis to Fannie and Freddie.

One of the main goals is to reduce the size of both organizations. In 15 months, each company must reduce their retained portfolios (the mortgages they actually hold) by 10 percent, until they hit $250 billion. That's a long way off: right now Fannie Mae has $737 billion in its retained portfolio, Freddie has $792 billion.

After that, they will still have the guarantee business, but they will be much smaller entities.

What happens after that? No one knows, not even Mr. Paulson. Their long-term fate is in the hands of the next President and Congress. They could split them up and sell them, as Mr. Greenspan has argued, or they could fully nationalize them.

What about the stock of Fannie and Freddie? The dividends for both common and preferred have been suspended. Stockholders will still be kept alive, but as Mike O'Rourke noted, they will be "in a long-dated coma." Officially, the powers of the stockholders are suspended until the conservatorship is terminated, though the stockholders will retain all rights in the stock's financial worth, whatever that is.

The good news:

1) lower mortgage rates. This should notably tighten spreads between Treasury bonds and mortgage backed securities. How much lower? I noted three weeks ago that the spread between 30 year fixed rate mortgages and Treasury yields was about 270 basis points; historically it is about 170 basis points. So theoretically, mortgage rates could fall by 100 basis points, though that is unlikely. But even a half-point cut would bring rates down to about 6 percent.

This morning, the 30-year FNMA mortgage rate current coupon is down 17 basis points to 5.456%, the lowest since late May.

2) boosts confidence in financials markets.

The bad news:

1) this will not solve the housing crises. This does not address the increase in delinquencies and other issues, but even cynics would note it is an important component in addressing the crisis. FHFA Director James Lockhart said on our air that "we may be in the start of a bottoming phase" and these actions should help.

2) it may not solve the stock market's problem. A global slowdown will not be reversed by these actions.

Cynics, who have grown accustomed to selling rallies, expect to see the highs of the day early; but bulls are arguing that this is the second leg of the bottom that began in July.

The Street is abuzz about the large amounts of cash on the sidelines, but to lure that in we will need higher volume and a consistent uptrend to lure in all those sitting on that cash. Bulls argue that this is a very important step to restore confidence and start luring those people in.

Elsewhere:

1) Washington Mutual ousted its CEO,Kerry Killinger, and entered an agreement with its regulator, the Office of Thrift Supervision, that effectively puts it on probation. Washington Mutual is essentially now reporting to OTS, provided them with updates on its business plans. Stock is trading up, partly on the statement that it will not be required to raise capital.

2) two stories on Lehman:

a) Times of London reports Lehman is exploring splitting itself into 2 companies - creating a "good bank" and a "bad bank." The new "bad bank" company would hold $32 billion in commercial mortgages. An announcement could come at the end of the month when the company reports its Q3 results.

b) Merrill Lynch upgrades Lehman to neutral from underperform. It believes the FNM/FRE bailout will help LEH to "attract the equity capital it needs at a price around the current market" ("despite the likelihood of another big loss as the company seeks to sell illiquid real estate-related assets").

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  Friday, 5 Sep 2008 | 4:55 PM ET

Market Needs Turnaround To Bring In Hedge Fund Cash

Posted By: Bob Pisani

If you're looking for something to blame today's early weakness on, you don't have to get very imaginative: 1) the unemployment rate spiking to over 6 percent will be the lead headline in many papers tomorrow, and 2) U.S. homes in foreclosure reaching 2.75 percent, up from 2.47 percent in the first three months of 2008. Delinquencies (30 days or more past due) stood at 6.41 percent, the highest since 1979.

The foreclosure number wasn't all bad: there were improvements in Texas, Massachusetts, and Maryland. But it was overshadowed by California and Florida, which accounted for 39 percent of all the foreclosures and a good part of the delinquencies as well.

Elsewhere, the big debate is what is going on with hedge funds, and what they may do in the fourth quarter. Everyone agrees that many funds have deleveraged and are sitting on large piles of cash. What will they do with it?

Bulls are hopeful that they will put it to work in the market--the argument here is that the U.S. represents a relative value play--that as the rest of the world slows down, we will come out of the slowdown first, making the U.S. the logical choice of investors right now. They point to recent action in the U.S. dollar to support their thesis.

This is an interesting argument--the problem is many traders I talk to aren't convinced. I've noted several times this week how sour the mood is on the Street. Here's why:

1) with such large losses in some funds, many traders are defensive and are not inclined to make big bets unless there is a much clearer turnaround in the market;

2) funds need a cushion to meet redemption requests, as well as margin calls.

Bottom line: the markets are going to have to move notably higher to suck in a lot of those funds sitting on all that cash.

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_______________________________________
CNBC's Names in the News:

Palm

Rimm

_______________________________________


Questions? Comments? tradertalk@cnbc.com

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  Friday, 5 Sep 2008 | 9:20 AM ET

Rally After Down Day Or Continued Weakness?

Posted By: Bob Pisani

Futures dropped 10 points as the unemployment rate rose .4 percent to 6.1 percent , the highest since September 2003. The S&P will likely open in the mid 1,225 range; the key number here is 1,200, which was the July 15th intraday low.

We have seen a weak rally from the July lows that is now deteriorating; Demand for stocks has been weak and supply has been more than adequate.

Yesterday was a 90 percent downside day on both the NYSE and the NASDAQ, according to Lowry; in the past these sharp down days typically are followed by rallies of 2-7 days before a renewed decline. However, there were important breaks of support yesterday, which Lowry says, suggests potential for further weakness.

Elsewhere:

1) Nokiadown 11 percent, lowering its third quarter 2008 mobile device market share on weaker consumer confidence; they now expect it to be lower than in the second quarter. Motorola and Texas Instruments weak in sympathy

2) Goldman downgrades Merrill Lynch to sell: "With these markets still under pressure, we believe additional write-downs...and book value deterioration will continue to plague the stock." Merrill down 5 percent.

3) Elan looking for second-round bids for its drug delivery unit, Elan Drug Technologies. It could fetch between $1.3 and $1.4 billion. A few private equity firm are in the bidding.

4) M&A chatter floating around:

a) Tobacco firm Altria in advanced talks to acquire smokeless tobacco maker UST, according to the New York Times; UST up 23 percent.

b) Samsung may make a bid for SanDisk,according to online news provider eDaily. That would create a flash memory powerhouse. A SanDisk spokesperson said that they periodically have conversations with multiple parties, including Samsung. One issue: SanDisk already has a venture with Toshiba.

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  Thursday, 4 Sep 2008 | 3:09 PM ET

Sour Mood Invades The Street; Here's Why

Posted By: Bob Pisani

There is a sour mood on the Street today. This is the first time in a while all sectors are down despite a stronger dollar and lower oil...bears are now arguing that we will see more correlated moves going forward which, they say, is the way its supposed to be in a down market.

And what about oil? A cynical mood has taken over here, with traders arguing that while lower oil is a help to the economy, it is not the savior of the economy.

Wait, the cynicism gets deeper. The biggest complaint is the vicious moves in either direction. As one veteran trader told me this morning: "What I buy on Monday, goes down on Tuesday..what I short on Tuesday, goes up on Wednesday." This is the nature of bear markets, bears keep saying: all the bulls have their hearts broken. The difference here is that in THIS bear market even the bears get beaten up.

Internal indicators are terrible today:

1) several indices have broken to new lows: a) The NYSE Composite Index broke through its July low and is now at a 2-year low, b) the Dow Utilities broke to a 2-year low, and c) the Philadelphia Stock Exchange Semiconductor Index (SOX) broke to a 5-year low.

2) new lows on the NYSE are at their highest levels since just after the July lows.

Everywhere today there are reminders that investing has become a landmine:

1) Home builders Hovnanian and Toll Brothers have signaled that while there may be some signs of a bottom, there is no sign of a rebound in housing;

2) Retailers have reminded us that--outside of Wal-Mart--retail sales have been weak and the recent rally in retailers as an early cycle play may be overdone;

3) Machinery companies like Terexare reminding us that formerly strong demand for equipment is now slacking off;

4) Techs are weak, as companies like Cienaare saying that phone companies are delaying purchases of communication equipment due to a weaker economy; yesterday display companies like Corning and Lg Display are reminding us that even the formerly hot area of flat panel TVs are showing signs of slowing down.

Bulls argue that economic news has been better recently. That's true, but bears argue that the poor company commentary is a better leading indicator. The key point: the bearish position has consistently been the most accurate, and for the moment they retain the rhetorical upper hand.

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CNBC's Names in the News:

Boeing

_______________________________________


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 4 Sep 2008 | 9:28 AM ET

Retail Results Just Plain Soft

Posted By: Bob Pisani

Productivity numbers were stronger than expected, but initial jobless claims just keep rising, now at 444,000, the highest levels since 2002. The Bank of England left interest rates unchanged at 5 percent, the European Central Bank also left interest rates unchanged at 4.25 percent.

Elsewhere:

1) Yesterday, Kohl's and JC Penney reported August same store sales slightly better than expected. Today Wal-Mart, Target, Gap, American Eagle (reaffirms third quarter guidance), Pacific Sunwear all reported sales above expectations. However, department stores did not fare as well: Saks and Nordstrom were both below expectations, although not dramatically. Mid-priced stores like Dillards, and Bon-Ton Stores were also weaker than expected, as was Abercrombie. TJX was weaker as well, that is surprising--off-price discounters have been doing well.

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  Wednesday, 3 Sep 2008 | 4:50 PM ET

How Market Played Out Today

Posted By: Bob Pisani

Commodities were lower, but once again it was no help for stocks. Commodity stocks were again sold off.

Techs were weak as Marvell gave what was perceived to be negative comments at a tech conference, while display stocks were down notably after Corning cut its outlook and LG Display made cautious comments.

Home Depot'sCEO helped retailers by saying that we were "getting awfully close to the bottom" in housing, as did Kohls and JC Penney, who both reported August same store sales roughly in line with expectations. The rest of the retailers report sales tomorrow. JC Penney at a 3 month high, Kohls and Limitedat highs for the year. Why, if the consumer is weak? This trade is partly based on the oil trade, partly it's just on faith: investors are looking to buy some early cycle names (Home Depot, Lowe's). Also, there are still tons of shorts in retailers.

Lehman up for a sixth straight day on word that other suitors may be interested in acquiring a stake in the company.

Finally, the Beige Book was a bit blue , in general the Federal Reserve districts said that"

--economic growth was "Slow"

--there was upward price pressure and

--tighter lending standards.

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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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