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Trader Talk with Bob Pisani

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  Tuesday, 30 Sep 2008 | 11:50 AM ET

Traders Expect Sell-Off Into Rally

Posted By: Bob Pisani

Stocks started strong, on renewed expectations that a bill will be passed in the House later this week.

We moved a bit higher at 10 am ET as consumer sentiment came in stronger than expected (higher than in many months, in fact), the moved up again a few minutes later as Senate Minority Leader Mitch McConnell said the Senate expected to pass rescue legislation this week.

Financials are particularly strong; the Bank Index (BKX), a basket of large bank stocks, down 21 percent yesterday, has already gained back nearly 50 percent of its losses.

Still, volume is very light due to the Jewish holidays, and most traders still expect some attempt to sell into the rally.

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  Tuesday, 30 Sep 2008 | 9:08 AM ET

Why Rally Is "Bad" For Bailout Backers

Posted By: Bob Pisani

We have really fallen down the rabbit hole today. For proponents of a bill, a notable rally pre-open is not welcome news.

Traders are surprisingly optimistic that some kind of bill can be passed by the House this week. They base this belief on the idea that the bill was only 11 votes short and the Mother of All Arm Twistings will be applied to a couple dozen Congress people in the next few days.

Proponents of a bill want a DOWN open, and they want the markets closing DOWN today, to emphasize the magnitude of the crisis. A positive close would only make many feel there is less sense of urgency.

The rise in futures is welcome by those hostile to the bill, who argue that the market should go it alone. To purists, the collapse of bank prices simply means that more and more of the bad news is factored into the market.

The odd thing is that both camps agree that two events need to occur: 1) mass purchases of bad debts, and 2) large-scale capital injections into individual banks.

Elsewhere:

1) A number of beaten-up regional banks, like Regions Financial(up 21 percent), BB&T (up 11 percent) trading up this morning, as are a few larger financials like CIT, JP Morgan, and Morgan Stanley.

2) Genworth Financial said they are examing strategic alternatives regarding their mortgage insurance division, including a possible spinoff. That division has been at the heart of the company's share selloff. Up 26 percent pre-open.

3) The Dow dropped over 200 points in the closing minutes, and it could have been a lot uglier. There was very little buying interest as a wave of sell orders came in, so specialist firms on the floor were active buyers, as they were supposed to be. I heard one specialist firm committed $175 million in capital.

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  Monday, 29 Sep 2008 | 7:19 PM ET

Where Should Buyers Come Back In?

Posted By: Bob Pisani

Wall Street despair. Where should buyers come into the market?

If you're a stock trader, this previously simple question has now become hideously complex, almost unknowable. That is the source of the despair on Wall Street tonight.

The TARP plan that was rejected by the House of Representatives today was important for a simple reason: it would help put a floor under the credit market.

More From CNBC.com

  • The Failed Bailout: Panic and Blood, at Last!
  • Slideshow: Credit Crunch Battle Play-by-Play
  • Spreads in the credit market are now again widening on virtually everything except Treasuries and gold.

    To be a buyer of stocks, but particularly a valuation buyer, you use earnings and interest rates to value stocks.

    The problem: both earnings and interest rates have become moving targets. Right now, the ranges for earnings and interest rates are so wide no real valuation methodology is possible.

    Think about it: you can't predict what Altria is going to earn if you have no idea what it will cost them to borrow money.

    Even the Procter and Gamble's of the world need to borrow money.

    And some players—energy trading companies, investment banks—depend on short-term financing that is virtually inaccessible right now.

    Some small and midcap companies could be wiped out unless the credit markets unfreeze.

    So what do stock traders do? Normally, with the CBOE Volatility Index (VIX) near 50, it's a screaming buy. These were levels that were last seen at the 2002 lows.

    Some bold traders, noting that overseas markets look to be opening down big, say a big down open (another 500 + points on the Dow), could be a tradeable bottom, because at the point you would have a 12 percent correction in two days.

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    The markets don't go down like that in two days. But even that is now called into question.

    Lowry, the oldest technical analysis service in the United States, said in a note to clients after the bell that while nearly 98 percent of the volume at the NYSE today went to stocks on the downside, ""90% Down Days are frequently followed by 2-7 days of rally, the lack of signs of a major market low suggests any rally, if it occurs, should be used for building additional defensive positions."


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      Monday, 29 Sep 2008 | 4:06 PM ET

    No Bailout Today--Okay, What's Next?

    Posted By: Bob Pisani

    For the markets, it's a 95 percent down day, with 95 percent of the volume going to declining stocks.

    We are weak across the board, but financials and commodity stocks are all down notably, as we see too separate plays: 1) attack the weakest financials, and 2) play the "global slowdown trade" by selling energy and material stocks.

    What's next? There's several possibilities now that the House has voted down the TARP bill:

    1) A revote;

    2) New, broader legislation. But if you are against a bailout on ideological grounds, because you believe in total free enterprise, what bill could be crafted that you would vote for? There is none.

    3) Do nothing. The problem with doing nothing, and the reason the Street is so unhappy today, is that the lack of a systemic solution means "one bankruptcy at a time" or "one shotgun marriage at a time" (as the FDIC has arranged with WaMu/JP Morgan and Citi/Wachovia).

    But if we have learned anything, we have learned that this ad hoc method of dealing with one company at a time hasn't worked.

    • Pros: The Disease Is Spreading
    • Cramer: Dow Could Drop to 8000
    • Fast Money: How Grim is the Future for Financials?
    • Trading the Bailout: Buy Best in Banks
    • Financials to Buy Now: ETFs and Exchanges
    • Wait Until Short-Sale Ban Ends
    • Money Market Freeze Needs to Be Fixed

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      Monday, 29 Sep 2008 | 1:15 PM ET

    The Great Credit Meltdown "Book": The Chapters To Come

    Posted By: Bob Pisani

    The TARP plan is Chapter One of Part Two of the Great Credit Meltdown book. Part One was the Ad Hoc Solution Phase, which was a failure: the attempts to deal with the problem case-by-case, starting with Bear Stearns.

    Part Two is the global solution part, and we still do not know the outcome.

    But the next chapters are clear:

    CHAPTER ONE is passing the TARP plan, which is close.

    CHAPTER TWO: participation in the TARP plan. Who is going to take the government up on their deal?

    There are two problems with the TARP plan in Congress:

    1) executive compensation limits. This may prevent many potential participants from selling assets into the plan.

    2) the government taking warrants in companies. The inability to quantify the dilution is an issue. If the level of warrants is tied to how many transactions the institution has with the TARP, then every interaction dilutes existing shareholders, so the more often a firm "goes to the well" by selling to the TARP, the more difficult the position of shareholders become.

    Little-discussed is the clause that gives the SEC the ability to eliminate mark-to-market accounting. There is good news and bad news here: good news because it will slow down the rush to devalue, bad news in that if people want to really know where the balance sheet is, they will have no idea. This INCREASES OPACITY.

    CHAPTER THREE: raising capital outside of the TARP. The problem is pretty clear: how do you raise capital after you see what has happened to the shareholders of Fannie Mae, Freddie Mac, Lehman, Washington Mutual, and now Wachovia Bank?

    Who is going to give any but the strongest banks money?

    The good news is that we are in the process of separating the strong banks (those who can raise capital) from the weak (those who will have trouble doing it, or will pay ruinous prices).

    The FDIC has been proactive and has arranged two "shotgun marriages": WaMu-JP Morgan and now Citi -Wachovia.

    There will be more. This may be a full-time job for the FDIC for the next few months. Now that the largest players have been taken out, the market is turning to the next phase: weeding out the weaker regional banks.

    CHAPTER FOUR: the "European bailout" chapter. You think it's tough here, try Europe. It took THREE COUNTRIES to bail out Fortis today. Think they will keep doing this on an ad-hoc basis? Already there is talk for a broader solution. French President Sarkozy has called for a global summit before the end of the year.

      • House Nears Bailout Vote; Outcome Remains Unclear

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      Monday, 29 Sep 2008 | 9:24 AM ET

    Weeding Out The Weak Banks

    Posted By: Bob Pisani

    In a mood reminiscent of WaMu-JP Morgan, the FDIC says Citi is buying Wachovia's banking operations, and assume the senior and subordinated debt.

    Wachovia is trading below $1.00, down 90 percent. Wachovia's preferred stock is also down heavily.

    Citi will take $42 b in losses on a $312 b pool of loans, the FDC will absorb losses beyond that. Wachovia will continue to own AG Edwards and Evergreen.

    Citi is trading down about 7 percent, no doubt on concern it will have to raise capital.

    As painful as all this is, this activity is good: we are weeding out the weak banks.

    Elsewhere:

    1) Now it's Europe's turn: Fortis is getting help with a big capital injection from the Netherlands, Belgium, and Luxembourg. U.K. mortgage company Bradford and Bingley is being nationalized but Banco Santander will buy its deposits and branches.

    European banks like Lloyds,UBS,Barclays,Deutsche Bankand Credit Suisseare down 11 to 15 percent pre-open in the U.S.

      • Citigroup to Buy Wachovia's Banking Operations
      • Benelux Governments Rescue Fortis to Halt US Contagion

    2) While the TARP plan appears to be going through the House and the Senate, the warrants that the government will get are a major issue for the Street and may limit participation. How much dilution will this mean?

    Fortunately, the Treasury Secretary has sole discretion here, including the exercise price and when they will be exercised.

    Regardless, the inability to quantify the dilution is an issue. If the level of warrants is tied to how many transactions the institution has with the TARP, then every interaction dilutes existing shareholders, so the more often a firm "goes to the well" by selling to the TARP, the more difficult the position of shareholders become.

    Important to clarify this quickly.

    Also, the SEC now has the option to suspend mark-to-market

    3) Lost in the TARP debate is big news for the auto industry: the Senate has passed loan guarantees for auto industry; GM up 4 percent -pre-open.

    We are ending the quarter with the Dow down 1.8 percent for the last three months. The Dow and the S&P 500 are now down four consecutive quarters. For the Dow, this is the first time this has happened since 1977-78.

      • US Bailout Vote Nears as Crisis Hits Europe Banks

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      Monday, 29 Sep 2008 | 8:49 AM ET

    Headlines You Will See Soon

    Posted By: Bob Pisani

    Regardless of when a bill in Congress is passed, traders are already talking about the next round of big headlines. Here are the three I am hearing are most likely:

    1) earnings cuts in retailers, autos, energy. Analyst estimates have been coming down notably in recent weeks for the third AND fourth quarter. Many companies will pre-announce within the next two weeks.

    2) new "circuit breakers" for individual stocks. There is a good chance that the ban on short selling in financials will be extended, but there's also work on a "broader" way to address short selling in general. This includes bringing back the uptick rule, but also under consideration is some kind of "circuit breaker" for individual stocks, where, for example, a stock down 10 percent might hit certain "circuit breakers" like closing for a few minutes.

      • Citigroup to Buy Wachovia's Banking Operations
      • Hedge Funds Prepare to Reveal Short Positions

    3) hedge funds closing. Lots of talk, getting louder, that a number of big hedge funds will close this year. Speculation that much of the money going into money market funds recently is due to hedge funds essentially going to cash in preparation to close. It means lower trading volumes, less liquidity, at least until they reopen under a new name.

    • Check Futures and Other Pre-Market Data
    • Get Credit-Spreads Data
    • Track the Dow 30 Stocks

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    _______________________________________
    CNBC's Names in the News:

    Wachovia

    Nokia

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      Friday, 26 Sep 2008 | 4:26 PM ET

    It's Down To This: Liquidity, Global Economy, Earnings

    Posted By: Bob Pisani

    The major indices rose in the last half hour as financials rallied in anticipation that some kind of relief plan would be passed this weekend in Congress. Regardless, the markets are facing three serious problems right now.

    NUMBER ONE WORRY is LIQUIDITY: it is drying up in stocks (no one is trading) and more importantly in the credit markets. We have spoken about credit issues in meat companies, restaurants, and even lower demand for fertilizers based on concerns about credit for farmers.

    The SECOND WORRY is the GLOBAL ECONOMIC SLOWDOWN. We are again today seeing selling in commodities and commodity stocks, as well as industrials, with new lows in bellwethers like Caterpillar, Deere, U.S. Steel, Eaton, and Ingersoll Rand.

    FINALLY, earnings continue coming down in financials, retail, autos, and energy.

    Who cares about earnings? Ha! Earnings will become a major issue as soon as the Congress passes a bill. Consider that every sector has had its estimates reduced since the third quarter began on July 1. Same with the fourth quarter: estimates coming down in financials, autos, retailers, energy, and even techs.

    Finally, here's a bizarre note: getting rid of financial stocks helps the earnings of the S&P 500!

    Consider that just before Lehman came out of the S&P 500, third quarter earnings for the entire index were down 1 percent from the same period a year ago. When Lehman was removed, earnings for the entire index immediately became plus 0.3 percent!

    The lesson is clear: if we can just get rid of enough financials, the S&P earnings prospects would improve.

    Let's see: there's 85 financials left in the S&P 500, if we get rid of 2 a week...no, make it 3...we could have massively positive earnings in 6 months!

    For the week: Dow down 2.2 percent, S&P down 3.3 percent, NASDAQ down 4.0 percent, Russell 2000 down 6.5 percent.

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    CNBC's Names in the News:

    Wachovia

    Citigroup

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      Friday, 26 Sep 2008 | 2:04 PM ET

    Lending Coming To A Halt?

    Posted By: Bob Pisani

    Credit is the lifeblood of the economy, and there are signs that credit activity is pulling back.

    Consider these two data points:

    1) Agricultural stocks are down on word that fertilizer demand has been down--why? Agricultural stocks are getting hit hard today: CF Industries down 18 percent, Agrium down 12 percent, Terra Industries down 20 percent, Mosaic down 11 percent.

    Citigroup downgraded the group on word that urea (a nitrogen product used in fertilizers) prices were down substantially on what appears to be weak demand.

    Why is demand down? Traders have been speculating that the farm harvest now requires its largest seasonal financing requirements, and that farmers are having trouble getting funding.

    2) credit appears to be tightening for restaurant franchisees as well. Last week Bank of America declined to increase lending on existing loans to McDonald'sfranchisees.

    Now the CFO of Sonic Corp., a drive-in restaurant chain, told Dow Jones that franchisees have been notified by GE Capital that it will temporarily stop financing new loans, although GE Capital will continue to honor pre-existing financing agreements.

    These are two small data points, but in two important industries: fertilizers and restaurants.

    We need to improve the balance sheets of the banks and increase the liquidity in the system. Otherwise lending is coming to a halt.

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      Friday, 26 Sep 2008 | 9:04 AM ET

    Street Wants To Be Re-Liquefied--And JP Morgan's Coup

    Posted By: Bob Pisani

    The Street is in unanimous agreement about one thing: the system needs to be re-liquefied. Soon. HOW you get to that point may not be as important as just GETTING there.

    The consensus is that if nothing gets done, the market will crash. A minority note that with the consensus overwhelmingly believing that, it is unlikely to happen. Few are willing to make that bet now.

    Elsewhere:

    1) Last night, JP Morgan announced that it acquired ONLY the banking operations of Washington Mutual for $1.9 billion in cash to the FDIC. They will mark down the loan portfolio by $31 billion.

    They DID NOT buy the holding company's assets and liabilities, the senior unsecured or subordinated debt, and preferred stock.

    JP Morgan also will be raising $8 billion in a common stock offering.

    This is a coup for JP Morgan: they get the branches in the west and Florida that they coveted (and did not have), the deal is accretive in 2009, and they now become the largest depository institution in the U.S.

    This leaves almost no value for WaMu common and preferred shareholders, and, it seems, most of the debtholders.

    2) Financials: Wachovia down 23 percent pre-open; European banks like UBS and Lloyds down 8 percent.

    Morgan Stanleydown 13 percent. Remember, Mitsubishi has not yet put up a dime to buy into Morgan Stanley, despite the proposal to buy up to 20 percent of Morgan.

    3) KB Homedown 7 percent on a terrible report (loss of $6.19 excluding gains from discontinued operations, vs. estimates of a loss of $1.25). "Market fundamentals appear unlikely to improve significantly in the near term," CEO Jeffrey Mezger said.

    Other builders like Lennar and Hovnaniandown 8 to 9 percent pre-open.

  • WaMu Folds, JPMorgan Buys Assets
  • Poll: When Will Deal Happen?
  • Should Buffett Negotiate Deal?
  • Who's Afraid of Salary Cap?
  • Americans Split on Bailout
  • How Exactly Will Bailout Work?
  • How to Trade Bailout
  • S&L Rescue Now Looks Easy
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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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