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Trader Talk with Bob Pisani

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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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- The Dow 30 at a Glance

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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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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

Wachovia

Nokia

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Questions? Comments? tradertalk@cnbc.com

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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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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

Wachovia

Citigroup

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Questions? Comments? tradertalk@cnbc.com

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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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- The Dow 30 at a Glance

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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
  • _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________


    Questions? Comments? tradertalk@cnbc.com

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      Thursday, 25 Sep 2008 | 4:07 PM ET

    Overall, A Good Day For Markets And GE

    Posted By: Bob Pisani

    Though we sold off a bit toward the close, it was still a good day. Almost 3 to 1 advancing to declining stocks, with particular gains in emerging market stocks (many up 4 to 6 percent). Many techs and energy stocks are up 2 to 3 percent.

    A bit of good news: our parent company, GE, held up well despite reducing earnings estimates for the third quarter. Two pieces of good news: 1) Standard and Poor's affirmed the company's ratings, and 2) GE is making efforts to reduce leverage and diversify its funding strategy for GE Capital.

    GE closed just off the highs for the day (up almost 4 percent).

    This is important. By the middle of next week, the news will be have been out on the Treasury bill, Congress will have recessed for the political food fight of the century, and Wall Street will turn to third and fourth quarter earnings (the quarter ends next Tuesday!)

    The early buzz is not good; many anticipate that estimates remain too high for energy, retailers, and others, and that firms will be lowering guidance, just as GE did today.

    But with markets down so much, there may be room for some lowering of estimates: GE is now the poster child for this argument.

    Thin gruel for the bulls, but it is one of the few arguments they have right now.

    _____________________________
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    - The Dow 30 at a Glance

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      Thursday, 25 Sep 2008 | 2:43 PM ET

    The "Not Quite" Agreement Knocks Stocks Off Their Highs

    Posted By: Bob Pisani

    That was brief. Stocks came off their highs on word that there is not quite an agreement yet and that there will be several "add-ons."

    There will be a bill (it may get sealed in the White House at the meeting with the President this afternoon), but it may be so burdened with "equity protection" (read: back-door ownership) and "phase-ins" (read: we ain't giving you all the money now) that the Street will argue it will limit participation in the plan.

    Remember, the goal is OPT-IN, not OPT-OUT. We want the banks to sell as much as they can to the Treasury so it will be easier for them to begin lending again, we do not want the banks to look for every excuse short of going under before they sell.

    _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

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    _______________________________________
    CNBC's Names in the News:

    GE

    GM

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    Questions? Comments? tradertalk@cnbc.com

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      Thursday, 25 Sep 2008 | 1:39 PM ET

    Bears "Roaming" The Street

    Posted By: Bob Pisani

    How bearish is sentiment on the Street? Very.

    We are getting an early Treasury Bill Rally, as anticipated. That's not the issue. It's what happens on Monday that traders care about. And most are arguing to continue to sell into the rally.

    Huh? It's a testament to the rhetorical strength of the bears, who are arguing that the next battleground will be the global economic slowdown that we are all sick of hearing about.

    Their argument: just like the U.S. financial crisis is deeper and lasting longer than bulls anticipated, the global economic slowdown will last longer and cause more adjustments than anyone anticipated.

    What about housing, the origin of many of these evils? Bears were handed a gift this morning in the form of the worst New Home Sales since 1991. Not only that--inventory levels are remaining near 11 month highs.

    They argue for continuing weakness in big global commodity stocks (already 30 percent off their highs) as well as global industrials.

    Oh, and did I mention that the Street is worried about its own future? The feeling is that trading volumes will be contracting significantly in the coming months, due to 1) continuing deleveraging, 2) restrictions on short selling.

    And the sour taste in the mouths of your average Joe regarding Wall Street will also mean less interest in investing, which will hurt investments in mutual funds and Exchange Traded Funds (ETFs). ETF volume is an important part of trading volume.

    Bottom line: a leaner, but not meaner, Wall Street trading community. Many of my contacts are looking for jobs, or fearful they may not have one by the end of the year.

    _____________________________
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    - The Dow 30 at a Glance

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      Thursday, 25 Sep 2008 | 12:33 PM ET

    Russia: Short-Sellers' Paradise?

    Posted By: Bob Pisani

    Traders are passing around this Russian document which purportedly lifts the ban on short selling in Russia.

    Those who are adamantly opposed to a blanket ban on short selling are claiming this makes Russia more of a capitalist country than we are.

    Silly, but emotions are running high on the Street on many issues right now.

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    CNBC Intelligence:

    _______________________________________
    CNBC's Companies in the News:

    General Electric

    Goldman Sachs

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    Questions? Comments? tradertalk@cnbc.com

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      Thursday, 25 Sep 2008 | 9:04 AM ET

    Real Worry Among Traders Is Credit Markets

    Posted By: Bob Pisani

    Stock futures rose this morning as Rep. Paul Kanjorski said on our air that the bailout bill is "almost a done deal."

    Still, the real worries among traders continues to be in the credit markets.

    1) GE , our parent company, down 4 percent pre-open as it cut its third quarter guidance for the quarter, to $0.43 to $0.49 from $0.50 to $0.54, "reflecting unprecedented weakness and volatility in the financial services markets."

    It's taking steps to reaffirm its AAA rating, and is maintaining its dividend its $0.31 per share quarterly dividend through 2009. The stock buyback has been suspended so it can reduce GE Capital's leverage. GE down 5 percent pre-open.

    Standard and Poor's affirmed GE's and GE Capital's ratings. Moody's called the action "appropriate and necessary."

    GE, by the way, now has a yield over 5 percent.

    2) Pilgrim's Pride , which was down 38 percent yesterday and halted at 3:28 yesterday for News Pending, announced that they have had operating losses (high grain prices, weaker demand for product) combined with a significant hedging loss (probably on corn futures).

    Bottom line is that they are in violation of one of the financial covenants in their bank agreement. In this era of tight or impossible credit, it is a significant issue. They appear to have reached some kind of agreement with their lenders to continue to provide credit, at least temporarily.

    It will resume trading this morning. Other meat processors continue to be weak as well; Tysonis down 7 percent pre-open.

    3) Nike up 5 percent pre-open, they beat estimates, though net income was 10 percent below the levels of last year. Good numbers, considering.

    4) The Europeans and the Asians are watching what is happening here with amazement, dread, and anger. Not surprisingly, some are predicting this is a game-changer. Peer Steinbruck, the German finance minister, said the U.S. was losing its role as the global finance superpower and that "this world will become multipolar" with the emergence of better capitalized centers in Asia and Europe.

    _____________________________
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    - The Dow 30 at a Glance

    _____________________________


    Questions? Comments? tradertalk@cnbc.com

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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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