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Trader Talk with Bob Pisani

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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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  Wednesday, 9 Jul 2008 | 5:04 PM ET

GE Is Next Data Point To Watch

Posted By: Bob Pisani

Now that Alcoa is out of the way, the next important data point is our parent network, General Electric, which reports earnings on Friday. Since I'm often asked about the different divisions, here's a breakdown, with 2008 estimated revenues:

General Electric
(% of 2008 est. revs)
Infrastructure 37%
Commercial Finance 19%
Consumer Finance 14%
GE Industrial 10%
NBC Universal 9%
Healthcare 9%

If you're wondering what all these divisions do, here's a primer:

Infrastructure: sells equipment for air transportation, energy generation, rail transports, water treatment.

Commercial Finance: loans and leases on vehicles, corporate aircraft, construction equipment.

Consumer Finance: services to consumers, retailers, auto dealers, and private label credit cards.

Industrials: sells consumer appliances (which is on the block), and industrial equipment.

NBC Universal: theme parks and TV networks.

Healthcare: healthcare equipment, medical diagnostic equipment.

What might the earnings look like? Infrastructure will almost certainly be the highlight—it’s a core competency of the company, and where much of the recent growth has been.

Commercial Finance still looks OK. If there is a weak spot, it is likely Consumer Finance, where the trend is worsening.

But GE’s stock reflects this concern: down 13% in June and is down 25% year-to-date; the S&P is down 14 percent.

What we want to clear up: will 2009 EPS growth be much flatter than the 10% embedded within guidance?

Plusses for GE:
--Dividend yield: 4.5%
--Low multiple: 12x forward earnings


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 9 Jul 2008 | 4:45 PM ET

Bears Get "Wish": Selling Into Rallies Continues

Posted By: Bob Pisani

Financials give up all of Tuesday's gains; on top of that home builders, REITs, techs and retailers were also weak.

The issues were again around the Government Sponsored Enterprises--Freddie Mac down 23 percent, Fannie Mae down 11 percent; as I noted before, the most likely concern is short sellers continuing to press the stocks on concerns over their exposure to mortgages vs. their capital base.

On top of that an, article posted on the Fortune website just before 2 pm ET may also be a contributor to the weakness. In it, the author basically goes over the recent Lehman Brothers analyst report, and is titled: "The Fannie and Freddie doomsday scenario: It's time to wonder what would happen if Fannie Mae and Freddie Mac failed."

There have been a series of 90 percent downside days (days where the down volume/up volume and points gained/points lost exceed 90 percent) in recent months; for a bottoming process to form, traders are expecting some sign of buying enthusiasm. This would typically take the form of a series of 90 percent UPSIDE days.

But it isn't happening. We are continuing to see selling into any rallies. It is unfolding as bears have hoped: it's not over until all hopes are dashed, and even the leaders are taken out and shot.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 9 Jul 2008 | 3:38 PM ET

Washington Mutual: Watch It At Today's Close

Posted By: Bob Pisani

Aside from financials in general, the stock to watch at the close is Washington Mutual. After the close, Washington Mutual'ssharecount in the S&P 500 Index will be increased by 647 million shares to account for the conversion of preferred securities.

As a result of this announcement, analysts estimate the S&P 500 index holders will have to purchase about 51 million shares of Washington Mutual; that is about an entire days worth of average trading.

I am being asked why Freddie Macand Fannie Maeare trading down so much again (19 percent and 10 percent, respectively); as in all these matters, the most likely concern is short sellers continue to press the stocks on concerns over their exposure vs. their capital base.

On top of that, an article posted on the Fortune web site just before 2 pm ET may also be a contributor to the weakness. In it, the author basically goes over the recent Lehman Brothers analyst report, and is titled: "The Fannie and Freddie doomsday scenario: It's time to wonder what would happen if Fannie Mae and Freddie Mac failed."


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 9 Jul 2008 | 9:21 AM ET

Oversold Bounce Or Real Bottom: Market Debate

Posted By: Bob Pisani

Oversold bounce or bottoming process? That's what everyone's debating right now. Or maybe it's a longer-term trade. This morning Lowry's noted noted that the rally in March lasted two months, while the rally from the bottom in January lasted only a matter of days.

True, we did see a nice bounce yesterday in drugs, financials, industrials, and retailers--all the beaten up groups. Believe it or not, traders are suspicious of a rally that is led by financials, because they have been so burned before by these head fake financial rallies.

That's why sentiment remains so bearish. Some three weeks ago,I said I haven't seen the Street so bearish since just after 9/11 . This morning Investors Intelligence reported that their Bull/Bear survey of financial newsletter writers fell to 27.4 percent bullish, the lowest reading since July 1994. Bears rose to 47.3 percent, the highest since 1995.

Elsewhere:

1) Alcoatrading up on a solid earnings report. The good news was right up in the first paragraph: "Higher input costs impacting the entire aluminum industry were offset by higher volume and stronger pricing." As FBR Capital noted when they upgraded the stock this morning, since June 1 aluminum prices have increased 7 percent while Alcoa's stock has decreased 18 percent. Up 4 percent pre-open.

2) Morgan Stanley cut price targets for JC Penney,Coach, Nordstrom,Abercrombie,Staples and other retailers, as well as restaurants, while reiterating that Wal-Mart remains their favorite stock. They say it's still too early to move heavily into the more discretionary sectors of retail. My favorite line from the report: "Last year's clothes and TV may have to do."

3) When you come to the fork in the road, take it: A regional bank upgrade? Yes indeed. Wachoviaupgraded at Merrill Lynch, which titles their report, "WB is now at a fork in the road." The to through a long list of negatives, noting the possibility the company will not be sold, and that they still face considerable issues, but concludes that "credit headwinds appear priced in."


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 8 Jul 2008 | 4:08 PM ET

Oversold Market Helps Move Stocks Up (Alcoa Looks Good)

Posted By: Bob Pisani

Stocks moved up late in the day. Some of this is clearly due to the oversold nature of the market. For example, regional banks were particularly strong: Washington Mutual, Comerica, Huntington Bancshares,Fifth Third,Regions Financial, and Sovereign--the most beaten-up names--were up double-digits today.

Some traders are also turning bullish. John Mendelson of the Stanford Group issued a buy signal late in the day; traders tell me it was his 3rd buy signal in 5 years, and the prior two calls were very good. This report went out about 2:45 ET. Here is what he said: "I think the long correction in the stock market than began early last summer when the NYSE Advance/Decline Line topped out is ending and I look for a resumption of the advance that began in October 2002."

He lists 8 reasons supporting his hypothesis, including 1) reduction in the risk premium for banks, 2) the New Low list declining, 3) the Dow Transports holding well above its January low, 4) rising put/call ratios.

Drug stocks have moved up: Pfizer highest in a month, Abbotthighest since February, Wyeth highest for the year.

Transports up as commodities weakened. As for big cap financials, the best that can be said is that they have stopped going down. For the past few days. That's all I'm saying.

Update: Alcoalooking good here--$0.66, estimate was $0.64, compared with $0.37 last year for the same quarter. The key line: "Higher input costs impacting the entire aluminum industry were offset by higher volume and stronger pricing." Up 4 percent in after-hours trading.

UPDATE: The sentence about Alcoa should have said the company made $0.81 instead of $0.37 for the same quarter last year.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 8 Jul 2008 | 11:22 AM ET

Market Leaders--Energy, Materials--Being Sold

Posted By: Bob Pisani

We noted last week the mantra of the bears: in a real bear market, even the market leadership eventually gets taken out. And that prophecy appears to be coming true. Quietly, traders have been selling the energy and materials stocks, which were the market leaders.

Now look at how far some of the main stocks in these sectors have fallen from their recent highs:

Massey Energy -27 percent
Mosaic -25 percent
U.S. Steel -22 percent
Anadarko Petroleum -19 percent
Freeport-McMoRan -19 percent

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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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