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Trader Talk with Bob Pisani

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  Tuesday, 23 Sep 2008 | 11:28 AM ET

The Senate Hearing--Bernanke's Persuasive Points (And More)

Posted By: Bob Pisani

Fed Chairman Ben Bernanke made several cogent points in his testimony.

1) the fire sale prices that financial institutions are being forced to use by mark-to-market requirements are significantly less than the hold-to-maturity price. Due to the uncertainty over pricing, private capital is unwilling to come in and buy.

2) Despite the damage, suspending mark-to-market rules would hurt investor confidence because investors would have to trust the internal estimates of banks.

3) Auction methods need to be devised on what the hold-to-maturity price would be for assets bought by the Treasury. If Treasury bids at close to hold-to-maturity prices, there are several benefits:

a) liquidity would come back;

b) uncertainty would be greatly reduced, which would allow banks to attract new capital;

c) taxpayers will hold assets at close to maturity values.

Finally, Bernanke pleaded with Congress not to impose punitive measures on financial companies, because that would reduce participation in the program.

UPDATE: Fed Chairman Bernanke is continuing to make cogent points in his Q & A.

He has sought to draw a line distinguishing between this crisis and other banking and financial crises here and abroad.

His position is that the situation we find ourselves in is "unique and new."

In past crises (such as the savings and loan crisis), the government took over assets from failed institutions.

That is different from what is happening today. Bernanke is stressing that firms are not necessarily failing, they are deleverageing and are unwilling to make credit available.

To address that, the methods used to deal with failed institutions are not appropriate.

He is trying to warn the Congress away from taking over institutions (and by extension taking stakes in companies), and is encouraging them to help them provide liquidity. They do this by buying the mortgage assets.

UPDATE 2: SEC Chairman Christopher Cox, when asked what would happen after the short selling ban on financials expires, said that the SEC would "segue into sturdy protections against naked short selling."

It's been widely noted on trading desks this morning that two companies have asked to come off the SEC ban on short sales: Diamond Hill Investments and JMP Group , an investment banking firm. JMP specifically said that the restriction is "unncessary" and that short selling "is an essential tool that provides liquidity to the market." JMP is up fractionally.

    • Watch Senate Hearing LIVE
  • Details of the Democratic Proposal
  • What the Treasury Plan Will CostProtect Your Portfolio: Money GuideVideo Roundup: Paulson's Tumultuous Year

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  Tuesday, 23 Sep 2008 | 10:19 AM ET

Shelby "Scuttles" Bipartisan Feel For Treasury Plan

Posted By: Bob Pisani

Stocks have come off their highs as Senator Richard Shelby, the ranking Republican, basically scuttled the bipartisan atmosphere around the Treasury proposal. "Before I sign off (on the plan), I would want to know we've exhausted all reasonable alternatives," he said.

And he was the ranking REPUBLICAN.

It's clear now that the bill will have clauses restricting executive compensation, partial ownership of some of the companies where there is significant purchasing of securities, and some kind of mortgage mitigation.

But traders still believe a bill will be passed, this week or next.

    • Poll: Who Stands to Gain the Most With the Bailout?

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  Tuesday, 23 Sep 2008 | 9:13 AM ET

Earning Power Reduced But So Is Risk--That's Good For Now

Posted By: Bob Pisani

Futures are down slightly, but that has little meaning these days. Many traders feel that yesterday's drop was due to:

1) distortions in price discovery created by the changing short sale rules;

2) the realization that many banks are still undercapitalized.

Still, long-term there are benefits to the wrenching process we are going through. More level-headed traders have noted that earnings power is reduced, but so is risk, and for the moment that is what is important.

Banks and commodity stocks are down pre-open.

Commodity stocks: Rio Tinto down 10 percent, BHP Billiton down 4 percent, most gold stocks down 3 to 5 percent.

Financials: UBS, Credit Suisse, Lloyds and Wachovia down 5 to 8 percent.

Elsewhere:

1) Oppenheimer bank analyst Meredith Whitney cutting estimates (again!) for Citi, Bank of America, JP Morgan, Wachovia, Wells Fargo. "We believe any government bailout plan has little hope of improving core fundamentals over the near and medium term." Her revised estimates are 50% below consensus for 2008 and 90% below consensus for 2009.

2) GE down a bit pre-open as Merrill Lynch analyst John Inch lowered estimates for 2009 and cut his rating to Neutral. 2009 estimates were lowered $0.20, to $2.22, 2010 estimate declines to $2.48 from $2.65 forecast. Fourth quarter 2008 estimate lowered by 2 cents to 68 cents. He believes GE Commercial Finance and GE Money will each see earnings declines of 15 percent in earnings next year, more than the 10 percent decline he had previously forecast.

    • Paulson, Bernanke to Urge Congress Not to Delay Bailout

3) Railroad giant Union Pacific raised their guidance for the current quarter on lower fuel costs.

4) Home builder Lennar reported earnings roughly in line with expectations, but still not sign of a notable turnaround.

5) Circuit City trading up as the CEO has resigned and gave guidance slightly better than expected.

»Read more
  Monday, 22 Sep 2008 | 4:48 PM ET

Wall Street Facing Less Business, Less Pay, Less Reward

Posted By: Bob Pisani

The despair of Wall Street, redux. Volatility with no volume. That's what we got today. The Dow swung in a 400 POINT RANGE, but volume was about half what it was at the end of last week.

Why? Some said too much uncertainty over the Treasury bill, some said with no short sellers adding liquidity, what do you expect? Others said the reflation trade has added another level of confusion.

The markets may have acted negatively over concern about all the strings Democrats are attaching to the Treasury Department rescue plan, but don't kid yourself: a deal will get done.

Still, don't underestimate what this bill is doing to the psychology on the Street. Most stock traders would be willing to accept more help for homeowners facing foreclosure as part of the bill.

What's left? Some Dems want a stake (warrants) in any company that sells assets to the program. That's a problem. We're selling you the assets, below market price probably, and you still want warrants?

Also an issue: drastically limiting pay for executives. We are probably not just talking about CEOs. We're probably talking about anyone in management. And--as we all know--commercial bank management makes A LOT less than investment bank management.

Bottom line: less business, less pay, less reward. That's what Wall Street management is facing today.

Little wonder some guys are thinking of getting out altogether.

    • Bailout Plan Will Be Drag On Fragile US Economy
    • What Democrats Are Proposing
    • Should Homeowners Be Bailed Out Too? Take Our Poll
    • Never Say Never Again With Too Big To Fail

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  Monday, 22 Sep 2008 | 2:47 PM ET

Traders Oppose Equity Stake For Government

Posted By: Bob Pisani

Miracle of miracles! Congress appears to be moving quickly on the Treasury bill. Rep. Barney Frank said that Treasury was accepting an equity stake in companies as part of the plan.

Stock traders are almost universally opposed to this idea, but it may have enough momentum to go through.

Two topics dominate trader talk today:

1) the cost of selling assets to Treasury. What's the price? Is all anyone was talking about.

a) good news: mark-to-market losses have already been taken on many mortgage-backed securities, so the losses and write-offs here may be fairly limited.

b) bad news: banks hold many whole loans that have also gone bad. These loans have not been mark-to-market (because they are not required to be) and losses here could be substantial if they were sold to the Treasury, or anyone else, compromising earnings for some time to come.

    • Democrats Push for Major Changes In Rescue Plan
    • What Democrats Are Proposing
    • A $1.8 Trillion Bailout: Where the Money's Going

So will the banks sell? The bet is most will sell their problem assets, because the market may simply force them to do so. If they don't? A repeat of what we saw: rating downgrades, credit default swap disasters, and other issues.

2) the reflation trade--the move up in commodities--is also getting attention midday.

»Read more
  Monday, 22 Sep 2008 | 12:00 PM ET

The Horse-Trading Has Begun

Posted By: Bob Pisani

The Dow dropped about 70 points as Sen. Chris Dodd said Democrats wanted shares (warrants) from companies from whom they would be buying assets.

The Street is asking: if we sell you an asset at a fair market price, why would we give you warrants? Dems will argue, "Wait a minute: if it's such a fair market, why did you need us in the first place? We are facilitating this, and we want something for it."

    • Senate Democrats want pay limits, equity in bailout
    • A $1.8 Trillion Bailout: Where the Money's Going
    • Should Homeowners Be Bailed Out Too? Take Our Poll
»Read more
  Monday, 22 Sep 2008 | 11:16 AM ET

Valuing Assets The Government Is Buying

Posted By: Bob Pisani
For many assets, pricing is already being done, and this is the value of that rule last year that required mark-to-market accounting. We have recently seen marks on many portfolios of CDOs. »Read more
  Monday, 22 Sep 2008 | 9:11 AM ET

Fundamentals Will Again Matter--Soon

Posted By: Bob Pisani

Morgan Stanley popped 14 percent at about 8:30 ET on word that Mitsubishi will buy up to 20 percent of MS.

Regardless, futures are practically unchanged, with many traders noting this morning that hedge fund and mutual fund companies are continuing to see redemptions, and the profit outlook is still poor. As a result, there is debate about how strong buying interest will be here.

Remember, this craziness will eventually subside, and fundamentals will matter again. Soon.

We start the week with several regional banks at or near new highs, including PNC Financials, US Bancorp, BB&T, and Wells Fargo. With the nice pop in prices, don't be surprised if some banks issue new equity or even merge in the next few weeks.

Most financials are trading lower pre-open.

Elsewhere:

1) The addition of 30 new companies to the list banned from short selling includes one curious choice: General Motors. The reason is that you don't have to be a company that is in the financial business exclusively; you just have to have a majority ownership in a company (subsidiary) that is a bank, savings association, registered broker or deal, insurance company, or something "similar." GMAC fits the bill, apparently. Pretty loose criteria, and it seems there may be many other companies that fit this criteria. GM ip 6 percent pre-open.

Our parent company General Electric, which has also been added to the list, up 3 percent pre-open.

»Read more
  Monday, 22 Sep 2008 | 8:43 AM ET

New Companies On "Short" List Ban

Posted By: Bob Pisani

NYSE-listed companies added to the list as of Monday morning, Sept. 22, 2008:

LG GLG Partners, Inc.

GE General Electric Co.

OCN Ocwen Financial Corporation

KBW KBW, Inc.

GFG Guaranty Financial Group Inc.

MFG Mizuho Financial Group, Inc.

FMR First Mercury Financial Corporation

STC Stewart Information Services Corporation

FCF First Commonwealth Financial Corporation

MTB M&T Bank Corporation

DFS Discover Financial Services

BMO Bank of Montreal

TD Toronto Dominion Bank

CM Canadian Imperial Bank of Commerce

FMD The First Marblehead Corporation

BBV Banco Bilbao Vizcaya SA

CIB BanColombia SA

LM Legg Mason, Inc.

NFP National Financial Partners Corp.

AXP American Express Company

CIT CIT Group Inc.

GM General Motors Corporation

HIG The Hartford Financial Services Group

ADS Alliance Data Systems Corporation

ALD Allied Capital Corporation

RAS RAIT Financial Trust

DRL Doral Financial Corporation

FSR Flagstone Reinsurance Holdings

MCO Moody's Corporation

COF Capital One Financial Corporation

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  Friday, 19 Sep 2008 | 5:01 PM ET

One Historic Week: Dow Moves 1,000 Points In Two Days!

Posted By: Bob Pisani

For all that, the Dow, S&P, and NASDAQ ended unchanged! (all right, Dow was down 0.3 percent).

We saw the mother of all short coverings at the open, fueled by the government's proposed RTC-type bailout, the ban on short selling in financials, and a quadruple witching expiration.

But after the initial short covering, financials quickly came off their highs. Morgan Stanley,for example, opened near $34 but quickly moved as low as $26 in the first 40 minutes, before trading in the relatively narrow range of $26 to $30, closing at $27.21.

Most other financials also came off their highs at the open and then traded in a fairly narrow range. Result: another day of near-record volume, 9.3 billion shares traded in NYSE listed securities.

In general, traders have been in favor of some kind of "brake" on short selling (bring back the uptick rule, etc.) but they are NOT generally in favor of banning short selling.

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- The Dow 30 at a Glance

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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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