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Trader Talk with Bob Pisani


  Thursday, 9 Oct 2008 | 4:50 PM ET

Uncertainly In Credit Markets Just One Of Key Issues

Posted By: Bob Pisani

The issues are:

1) forced selling & redemptions in the last hour

2) continuing uncertainty in credit markets

3) inability to determine earnings with credit uncertainty

4) financials: concerns about wider losses (credit card losses, commercial real estate) and capital raises

GM down 31 percent to the lowest level since 1950 on worries that global auto sales will slow dramatically in 2009.

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  • Insurers like Prudentialand Protective Life were down 23 and 44 percent respectively as traders believe insurers will have to raise more capital soon. Earlier in the week Allianz invested $2.5 billion in Hartford Financial.

    Teen and specialty retailers reported September same store sales today, and as with department stores yesterday they are generally below expectations. Abercrombie,TJX, Pier One and Men's Wearhouselowered guidance; Chicos withdrew the earnings guidance for the rest of the year.

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      Thursday, 9 Oct 2008 | 3:02 PM ET

    Street Despair: No Visibility of Earnings

    Posted By: Bob Pisani

    The markets are extremely oversold, but it can't muster a rally. Why not? The Fed is doing everything it can; it will undoubtedly soon start taking direction positions in financial companies, and may even guarantee loans between banks.

    While many are expecting a rally, and some are in fact buying modestly right now, there are other problems.

    1) Financials have been hurt by concerns about wider losses (credit card, commercial real estate), and capital raising issues.

    Look what happened to BofAand Morgan Stanley after they announced capital raises; look what is happening to Wells Fargoand Prudential and Protective Life now that many believe they will have to raise capital.

    2) But there's a bigger problem: there is no "E" in the P/E. In English, there is no Earnings in the Price/Earnings Ratio.

    Look at the estimates now: S&P 500 price is 975; many estimates of earnings for the S&P 500 for 2009 are around $75 for the index.

    Do the math: 975/$75 = 13 x earnings. Now, this is modestly cheap. The historic average is 15 x earnings, so 13 x is a little cheap, but not much.

    Here's the problem: that $75 estimate is baloney. No one has a CLUE what earnings will be. All we know is they keep dropping.

    So the Street is re-jiggering the numbers. Instead of $75 earnings, let's assume, say, $60 earnings. In order to get to a level where the S&P is cheap (13 x earnings), we have to go to 800 on the S&P: 800/$60 = 13.3 x earnings. 800 on the S&P??? Gads, it's at 975 or so now, that's a drop of...another 175 points....1,700 points on the Dow! Sobs and wails.

    See why the Street is in despair? With no visibility on earnings, we can't play the game.

    That's why the banks have to start lending, in order to get a clear indication of what it costs to borrow money. Getting a grip on a company's lending costs are key.

    Cheaper lending costs mean higher margins, which means higher earnings!

  • Global Markets Fall Again As Credit Remains Frozen
  • GM Shares Near 60-Year Low as European Sales Drop US Decides to Restore Credit ConfidenceIBM's Forecast Is Positive for Tech Sector
  • _____________________________
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      Thursday, 9 Oct 2008 | 1:04 PM ET

    Traders Find Their New "Nirvana"?

    Posted By: Bob Pisani

    Like junkies eager for the next fix, traders are applauding a short headline from the White House that Treasury Secretary Henry Paulson is "actively considering" capital injections into troubled U.S. banks.

    Never mind that many traders consider such dilution anathema; the idea that the Feds will, every single day, have a new "fix" for the markets is now firmly entrenched in the traders' imagination.

    There are more. Because banks are afraid of counterparty risk, traders now want the Federal Reserve to guarantee all interbank lending.

    This is the new Nirvana, this is the one that will solve the problems. So they say.

      • US to Start Buying Stakes In Banks by Month's End
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  • _____________________________
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      Thursday, 9 Oct 2008 | 9:09 AM ET

    Short Sale Ban On Financials Is Over: Make A Difference?

    Posted By: Bob Pisani

    S&P futures are up 19 points, and while many think this is because Treasury is actively shopping the idea they will take an ownership stake in U.S. banks, bear in mind that the market now routinely swings in 20 plus point ranges in a day, and often overnight, so futures up 15 is not even unusual any more.

    The short sale ban on financials is over; financials are among the most actively traded pre-open. Lots of debate on how much of a difference this will make in trading. It appears to have made little difference in how the stocks trade. More on this later.


    1) Teen and specialty retailers reported September same store sales today, and as with department stores yesterday they are generally below expectations. Abercrombie, TJX, Pier Oneand Men's Wearhouse lowered guidance.

    2) Chemical giant Huntsmanup 40 percent pre-open after Apollo said it will contribute $540 m to its Hexion unit to close the acquisition of the company.

    3) We get greater clarity about who has exposure to the Lehman credit default swaps tomorrow. The Lehman bonds are practically worthless, trading at 12 to 13 cents on the dollar, according to some accounts. So the sellers of protection are facing massive losses. There will be an auction tomorrow on the bonds, which will determine how much the sellers of protection will have to shell out.

    4) IBMpre-announced third quarter earnings ABOVE expectations: $2.05, above First Call estimates of $2.02. Note this is one of the few stocks above last year's third quarter of $1.68. Up 3 percent after the close to $93.75.

    5) MetLifepriced its 75 million share secondary at $26.50, closed at $27. The good news is they got the deal done; the bad news is that it was done at a price HALF what the stock was trading at a few days ago.

    6) Iceland halted trading on their stock market until Monday and seized control of another bank, the third one it has seized this week.

    7) Today is the anniversary of the all-time closing high for the S&P 500: 1565.15 on October 9th. Intraday high was 1576.09 on October 11th.

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      Wednesday, 8 Oct 2008 | 4:54 PM ET

    Paulson To Blame For Late Sell-Off? Read This First

    Posted By: Bob Pisani

    We were doing so well, what happened in the last 20 minutes? Before everyone blames Mr. Paulson, examine the facts.

    Late in the day Treasury Secretary Paulson did disappoint traders by saying it would take several weeks before Treasury would buy assets, but he also mentioned the powers to inject capital into financial institutions that the Treasury now has.

    These are subtle reminders that the Treasury has powers it has not used yet.

    The markets did not drop while he was talking. They began drifting lower after he was finished.

    What sold off? Two groups stand out: financials (the ban on shorting financials ends tonight), and consumer staples like Kraft, Coke, Kellogg, Colgate, and Heinz.

    Why consumer staples? They have been battered, despite being defensive names, because traders are selling what they can due to margin calls and redemptions.

    There was a midday rally as Mr. Trichet made what appeared to traders as dovish comments, in favor of global coordination.

    Retailers were down slightly as some big names--Nordstrom , Kohls,JC Penney , and Target, lowered earnings estimates. But they weren't down much--the Street has long since taken the stocks down in anticipation of lower earnings for both the third and fourth quarter.

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      Wednesday, 8 Oct 2008 | 2:46 PM ET

    Why Stock Traders Are Fixed On Bond Market

    Posted By: Bob Pisani

    What an interesting trading day. Four observations:

    1) Markets rallied midday on comments from Mr. Trichetin Europe-he said they would "take appropriate decisions at any time." Traders interpret this to mean that Mr. Trichet is now clearly in the rate cut camp, and to providing "unlimited" liquidity. This is a big turnaround: Trichet turns dovish.

    2) Stock traders are fixed on the bond market, as traders want to believe that today's huge selloff in bonds means that the flight to quality trade is ending.

    This would be a big psychological boost, because stock traders want to believe this is a sign the credit markets might be in the process of unfreezing.

    3) We are so oversold, and there has been so much money lost, that a small but significant minority of professional traders are now LONG the market--they are standing in the bleachers cheering like crazy, because for them it is ALL IN time.

    There is a larger group--half of all traders--sitting on the sidelines waiting for some sign of a tradeable bottom. They do not have it yet, but that minority that is long is trying desperately to get the uncommitted group in.

    4) The most important development is the coordinated global action. First U.S. federal agencies began coordinating activities, then other countries began active intervention, now there is GLOBAL COORDINATION. Consider that we have had, in less than a week:

    --a UK bailout,

    --Fed buying commercial paper,

    --a Spanish TARP,

    --coordinated rate cuts,

    --deposit guarantees in Europe,

    --a banking sector support plan in Russia.

    Merrill Lynch's economist, Alex Patelis, summed it up best: "Unless we are assuming that global policy makers are incompetent, they will sooner or later get it right."

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      Wednesday, 8 Oct 2008 | 10:49 AM ET

    Retail Numbers--A Closer Look

    Posted By: Bob Pisani

    Due to the Yom Kippur holiday tomorrow, a number of retailers are reporting September same store sales a day early.

    In general, discounters (ex-Target) outperformed, so Wal-Mart,Costco,BJs, and Fred'sall did fairly well.

    The high end stores like Nordstromand Saks posted same store sales well below expectations (down 9.6 and 10.9 percent, respectively).

    A number of stores guided below expectations: Nordstrom, Kohls, JC Penney, and Target.

    The stocks are trading down, but only slightly. That's because the Street has widely assumed that analysts have been behind the curve cutting retail estimates; the Street has been cutting stock prices in anticipation of this.

    Teen and specialty retailers will report tomorrow.

      • Retailers Post Weak Sales Despite Deep Discounts
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      Wednesday, 8 Oct 2008 | 9:09 AM ET

    Traders: Rate Cut Should Have Been Later In Day

    Posted By: Bob Pisani

    After closing at 1029, S&P Futures traded as low as 962 until the early morning, then rallied to as high as 1043 when the coordinated rate cut of half a point was announced, then moved all the way back down.

    Simply put, the S&P futures moved 8 percent in 4 hours. The hope is that burgeoning coffers, and a rare coordinated rate cut will finally get banks lending again.

    While most traders welcomed the cut, there were many who complained about the TIMING. This camp has been waiting--and waiting--for a huge down open on big volume. Never mind that the S&P 500 has dropped 100 points in the past three days--this apparently was not alarming enough for this crowd.

    Today, they thought, was the day it would have happened. If the Fed ONLY WOULD HAVE WAITED UNTIL NOON--after the market opened down big--we could have had a Clean Uncontested Reversal.

    The Fed, to this crowd, has thwarted this, so now we have Yet Another Muddled Short-Term Bottom. They are still waiting for the Big Washout.


    1) Earnings disappointments. In the past 36 hours, we have had three companies report earnings (two of them early releases); all three have been below expectations. We started with Bank of America Monday night.

    a) Alcoadown 6 percent, reported earnings that disappointed at $0.37 well below the expectations of $0.54. As expected, the company noted that aluminum prices had fallen, while costs remained high, the classic margin squeeze.

    They are stopping all non-critical capital projects and suspending their share repurchase program.

    The only good news is that the market had long since anticipated this type of report.

    b) MetLifedown 9 percent pre-open, reported operating earnings below expectations, withdrew guidance for the rest of the year, and announced a 75 m share secondary.

    2) Retailers:

    a) Wal-Mart September sales were basically in line with expectations (up 2.4 percent); they reiterated their third quarter guidance.

    b) JC Penney down 6 percent, said same store sales were down 12.4 percent, below expectations; earnings for the quarter reduced to $0.50-$0.60 from $0.70-$0.75.

    c) Target down 5 percent, said same store sales in September were below expectations, and that third quarter earnings may be slightly below consensus estimates. They specifically noted higher write-off rates in their credit card segment.

    d) Sakssame store sales were down 10.9 percent, below expectations of a drop of 4.2 percent

    2) Bank of Americadid price its secondary, $10 b at $22.

    3) Mitsubishi confirmed their investment in Morgan Stanley would occur on October 14th, the last day of the mandatory five day waiting period after the Fed approved the deal on Monday.

    4) oil traded as low as $86, the low for the year.

    • Retailers Post Weak Sales Despite Deep Discounts

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      Tuesday, 7 Oct 2008 | 4:08 PM ET

    Question Asked: Why Own Stocks Right Now? (Update)

    Posted By: Bob Pisani

    Stocks fell apart going into the close. For those watching technicals, we took out yesterday's lows.

    So what's the issue?

    Isn't the Fed doing everything they can to expand liquidity? Yes.

    Didn't Bernanke all but say a rate cut was coming? Yes.

    Isn't the Fed setting up a facility to buy commercial paper? Yes.

    So what is the problem?

    This is the problem: why, even with all this, do I want to own stocks?

    "Bob, what will make someone not sell into my bid?," one trader asked. "If I buy right now, all I know is that there is way too much for sale, and I will be nervous every minute I own it...there is only short-term trading in stocks, there is no real investment being done."

    What about Warren Buffett and all that good signs stuff. "Warren Buffett is getting a different deal than you and are getting."

    • Bernanke: Rate Cut Possible to Cure 'Historic' Slump

    The Fed has done everything they can, but we are in very big deflationary spiral. Lowering rates should help reflate. Fed buying commercial paper should help reflate.

    But traders are afraid there will be more dying banks.

    Look at the European banks again today: Royal Bank of Scotland down 39 percent, Barclays down 23 percent, Lloyds down 22 percent.

    Update: Signs of the times. One trader told me he had heard:

    1) there were 50 memberships now open at exclusive golf clubs in Manhasset, Long Island thanks to ex-traders from Merrill, Bear and Goldman no longer there. He didn't name specific clubs, but some of the big ones there are North Shore, Fresh Meadows, North Hills, Deepdale.

    2) A private high school guidance counselor in Harrison, New York said there were 47 transfers from private to public schools recently. Why? Private schools there are $40,000 a year; public schools are free.

    New from CNBC.com:

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      Tuesday, 7 Oct 2008 | 3:57 PM ET

    Wrestling With The 'P. Diddy Market'

    Posted By: Bob Pisani

    How discouraging was today's midday drop to traders?

    "Why even play?" one trader said to me. "This is what I call the 'P. Diddy market'...You'd save money by doing the Diddy: renting a yacht, and sailing it full of party people, come back in a month or two, and you would have saved money."

    Cynical, huh? But that's the way the Street has become...cynical, and doubtful.

    For the record, traders provided several reasons for today's midday weakness:

    1) longs in financials are lightening up ahead of the end of the ban on shorting financials, which occurs at midnight tomorrow.

    There's been particular weakness in Morgan Stanley and Bank of America.

    We are waiting for details of Bank of America's capital raise, which should happen after the bell. Note that the end of the short selling is complicating things, because risk arbitragers have been prevented from shorting Bank of America, and going long Merrill Lynch.

    MS was weak on concerns that the Mitsubishi capital infusion deal might not close, but our David Faber noted that a MS spokesperson has said they were on track to close the deal by the weekend.

    2) Bernanke's somewhat downbeat comments on the economy, despite the fact that Bernanke clearly opened the door to a rate cut in his speech.

    3) retail investors who have just received their quarterly statements are continuing to dump stocks.

    4) sell the rally continues to be the most effective strategy.

    This reasoning seems rather feeble, especially given the remarkable attempt by the Fed to expand liquidity in the past two days:

    --expanded TAF facility

    --new facility to purchase commercial paper

    --will pay interest on bank reserves

    But the Street wants a rate cut!

    Bottom line: the market is still not showing the ability to absorb bad news.


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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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