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Trader Talk with Bob Pisani

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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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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 19 Sep 2008 | 3:18 PM ET

Why Bankers Group Hates Money Market Insurance Plan

Posted By: Bob Pisani

The American Bankers Assocation has objected to the plan to guarantee money market funds on the grounds that it will REDUCE deposits in the nation's banks.

Huh? I just got off the phone with them, here's their reasoning:

1) investment bank money market funds pay higher yields because they are not insured, but now they ARE getting insured;

2) banks have been paying premiums into the FDIC for years -- THEIR money market funds ARE insured and always have been, but their yields are a little lower;

3) investors in bank money market funds may start switching to investment bank money market funds because: a) the yields are higher, and b) there appears to be no limit to the amount of insurance you get.

The ABA thinks this is a threat to their deposit base.

Just one more little effect. Is it worth abandoning the insurance program for this? No, but some oxes are getting gored a little here.

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CNBC's Names in the News:

- Morgan Stanley

- General Electric

- Wachovia Bank

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 19 Sep 2008 | 1:11 PM ET

Volume: We Should Pass All-Time Record Of NYSE-Listed Stocks

Posted By: Bob Pisani

What a stew!

Throw into the pot a:

1) ban on short sales in financials, with

2) an announcement of an RTC-type organization to buy the bad debt;

3) sprinkle in a quadruple-witching expiration, and you have a stew of volume and volatility like no one has ever seen.

Record volume: just under 1 billion shares were traded on the NYSE floor in the first half hour of trading today. The previous record was about 808 million shares in the first half hour.

We will almost certainly pass the all-time record volume of 10.2 billion shares of NYSE-listed stocks changing hands, a record which we hit...yesterday!

Specialists saw volume 5 to 20 times normal at the open, depending on the stock. One last stat and I'll go: the Dow moved 1,025 points from its low yesterday to it's high this morning.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 19 Sep 2008 | 11:30 AM ET

The Knock-On Effects Of Banning Short Selling

Posted By: Bob Pisani

Here is one small example: two well-known ETFs, the ProShares UltraShort Financials (SKF) and ProShares Short Financials SEF) have been halted. The company will be issuing a statement shortly, but here, I believe, is the problem:

1) these funds do not actually short stocks. They use swaps. Money goes in, they arrange a swap with a counterparty to pay returns to them that are the inverse of the index.

2) With restrictions on the short side, firms either cannot provide the swaps or the price of providing them have increased dramatically (dealers who sell the swaps hedge by shorting).

3) there may be fewer counterparties available (I understand there were four).

There will be other effects from this ban. Stay tuned.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 19 Sep 2008 | 9:09 AM ET

It's Going To Be One Wild Open

Posted By: Bob Pisani

Remember, it's a quadruple witching expiration (expiration of stock and stock index options, and stock and stock index futures).

The S&P 500 options stopped trading at the CLOSE last night, however the settle price is at the OPEN this morning.

And there is going to be a big gap open.

The effect: traders who are LONG CALLS are ecstatic; market makers and others who sold them the calls are getting run over.

Elsewhere:

1) Important: SEC suspends buyback restrictions!

A little-notice provision in the short-sale announcement by the SEC is a clause that is suspending restrictions that prevent companies from buying back their stock around the open and close, and removing volume restrictions.

This allows companies much more flexibility in buying back their stock. This is significant: there will be additional buyers at the open and close.

This was done before, after the 1987 crash.

2) Financials pre-open: Morgan Stanleyup 50 percent, Wachovia up 44 percent, Goldman Sachsup 30 percent, Merrillup 27 percent, Citigroup up 24 percent.

Regional banks: Sovereign up 23 percent, KeyCorpup 21 percent, Wells Fargoup 18 percent.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 19 Sep 2008 | 8:50 AM ET

What's Next, Banning Long Buying?

Posted By: Bob Pisani

We have banned SHORT SELLING in financial stocks! And if that doesn't work, traders say, SEC Chairman Cox will next week announce that they are banning LONG BUYING as well.

Here's the sweet part: it's a quadruple witching expiration!!

Options desks are frantic, because everyone has to cover their short calls in financials.

Remember how it works: when a trader buys a put, it means a seller (a dealer) sells him the put. The dealer is now LONG the stock (selling a put means you are long the stock at the strike price). To protect themselves, the dealer SHORTS the stock.

What's the effect of this ban? Market makers can't short directly? There appears to be no exemption for market makers. I find that hard to believe.

The bottom line: higher prices for puts (if anyone will sell it to you!), and a lot more volatility.

And here's a post from 8 pm last night:

S&P futures, which have already moved up 15 points in after hours trading, moved up an additional 5 points or so after 7:30 pm ET, when word broke that the SEC intends to implement a temporary ban on short-selling, and that the Feds are considering an FDIC-type plan for money market funds.

Aside from that news, there was considerable debate at the close among traders about how the Congress was going to pull off an RTC-style rescue, or any rescue, when they are planning to wrap up their work in a week or so and hit the campaign trail?

We got the answer this evening: House Speaker Nancy Pelosi said they are willing to go beyond the September 26th adjournment date to consider legislation.

Which is what they needed to say, but as usual, politics creeps in here: some traders think the Republicans would be glad to tie up the Democrats in Washington, since they are fearful the Dems are itching to get on the campaign trail to beat up the Republicans on the economy.

Seems to me like the Dems, who control the Congress, are not exactly standing tall themselves.

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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

HSBC

Washington Mutual

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Questions? Comments? tradertalk@cnbc.com

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  Thursday, 18 Sep 2008 | 4:20 PM ET

Traders: Washington Has Awakened

Posted By: Bob Pisani

Now everyone has a plan! We've gone from no ideas to plenty of ideas on how to deal with the current crisis.

No less than TWO plans appear to be in the works, and there may be more:

1) We are reporting that Treasury Secretary Paulson (see link below) is working to get some or all of the toxic waste off the balance sheets of the banks and brokerages and put in some type of Resolution Trust Corp structure.

I covered the RTC when I was the real estate reporter for CNBC from 1990 to 1995. The RTC got their assets from the failed savings and loans, then auctioned them off.

But this is different: the government would have to buy the failed assets first. Setting a price on these assets has been the heart of the issue, and will not be easy.

2) But there's a competing plan:

Senator Charles Schumer is proposing a slightly different entity, modeled along the lines of the Resolution Finance Corporation (RFC), which was created by Hoover in 1932 that gave billions in loans to state and local governments, banks, railroads, and other businesses and which was a precursor to many of the relief programs in the Depression.

Schumer says this RFC would:

--provide capital to banks in exchange for an equity stake;

--in exchange, the banks would agree to allow certain mortgage loans to be modified to allowing refinancings to occur.

Schumer's main objection to an RTC-style plan is that it would put too many risky assets on the government's books, but not help homeowners.

Regardless, traders now believe that Washington has awakened. That is a good thing.

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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

AIG

Morgan Stanley

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Questions? Comments? tradertalk@cnbc.com

»Read more
  Thursday, 18 Sep 2008 | 3:57 PM ET

Ban "Shorts" All Together?

Posted By: Bob Pisani

The Dow rallied 250 points shortly after 1 pm ET when the UK government announced they were banning short selling in financial stocks until January, and would require hedge funds to reveal their short positions.

While most stock traders here in the U.S. are in favor of some sort of "brake" on short selling, most are not in favor of an outright ban on it. If we ban short selling, should we ban long buying too? Why not a bank holiday, and just close the markets?

There's clearly growing pressure to do the same thing here in the U.S. But perhaps other moves that are less drastic would be sufficient:
(Contd.)
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The Panic of '08

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1) The SEC has made it clear they are conducting house-to-house searches of hedge funds to determine if there are any trading abuses; they are also seeking approval to force the funds to report their short positions regularly.

2) expect more "investigations": the New York Attorney General said they have started a "probe" of short selling in AIG, Morgan Stanley, and Lehman .

3) The California Public Employees' Retirement System, the nation's largest pension fund, has stopped lending shares of Goldman Sachsand Morgan Stanley for the purpose of shorting the stocks. They followed the California State Teachers' Retirement System, which also stopped lending the shares.

4) most traders also support bringing back the rule that requires that traders seeking to short a stock can only do it on a plus tick (a trade where the stock moves up), which is supposed to make it more difficult to quickly amass a short position.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 18 Sep 2008 | 9:08 AM ET

Everyone's Jumping Into The Liquidity Pool

Posted By: Bob Pisani

Several developments are boosting futures here:

1) Talk about coordinated efforts! Everyone's jumped into the liquidity pool: the Fed, the European Central Bank, Bank of England, Bank of Japan, Bank of Canada, and the Swiss National Bank are all pumping dollars into the global system. Fed made an additional $180 billion available to central banks to lend out.

European banks and insurers are up: UBSup 16 percent, Axaup 7 percent, Deutsche Bank up 6 percent.

2) Last night, the SEC said they were considering a disclosure rulethat will require hedge funds and other large investors to disclose their short positions, and they are seeking disclosure of past trading positions in specific securities. The hope here is that this will put some kind of brake on the velocity of short selling.

3) The CBOE Volatility Index (VIX) closed at its highest level since January, at levels that have corresponded with (short-term) market bottoms.

Elsewhere:

1) It's been widely reported that Morgan Stanley is in merger talks with Wachovia Bank,but on the floor and trading desks there are a lot of puzzled looks.

Wachovia has all the mortgage problems everyone is worried about, so Morgan would be buying into considerable credit risk. As one trader cracked, "All this effort, just to inherit Golden West through the back door?"

And what new deposits are created that Morgan could even use for their short-term funding needs?

It's a sign of how desperate things are that such a merger is even being contemplated. A lot of traders were hopeful HSBC might emerge as a bidder for Morgan, but there is a deafening silence on the other side.

Morgan Stanley down 10 percent pre-open.

2) FedExreported first quarter earningsin-line and said second quarter earnings would be above analyst expectations. They affirmed full year guidance.

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New from CNBC.com:

- The Dow 30 at a Glance

_____________________________

_______________________________________
CNBC's Names in the News:

Washington Mutual

Morgan Stanley

_______________________________________


Questions? Comments? tradertalk@cnbc.com

»Read more
  Thursday, 18 Sep 2008 | 8:43 AM ET

Has The SEC Finally Woken Up?

Posted By: Bob Pisani

The SEC is attempting to throw a curve at short sellers. Chairman Cox is asking the Commission to CONSIDER a disclosure rule that will require hedge funds and other large investors to disclose their short positions.

The Division of Enforcement is also going to obtain from hedge funds and other institutional traders disclosure of past trading positions in specific securities.

Whoa. That is potentially important. Why? Because, I assure you, most hedge funds do not want their short positions disclosed, even if it is only to the SEC, even if it is legitimate.

The effect here is that this may slow down the volume of short selling.

As for the other big issue--the uptick rule. There is a clamor for the SEC to reinstate the uptick rule, which prevents traders from shorting a stock on a downtick. Traders believe this will slow the tidal wave of short selling that has occurred this year.

Still, there are many who doubt this would be any more than a stopgap measure. Years ago, when trading was much slower, the uptick rule did indeed make it more difficult to amass a short position quickly. But things have changed considerably.

For example, there are stocks who can turn THOUSANDS of trades in a few seconds. The time it would take to amass a short position would still take longer, but the time frame would be greatly reduced, perhaps now only a matter of minutes.

Reinstating the uptick rule may indeed be worth exploring, as are the actions just announced by the SEC, but let's not kid ourselves.

Let's stop blaming short sellers, or AIG, or Dick Fuld for our problems.

The main issue is too much debt! Companies, consumers, and (arguably) even the government is overextended. Credit is lacking for consumption and investment.

Focus on the illness, not the symptoms.

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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

Morgan Stanley

Wachovia

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Questions? Comments? tradertalk@cnbc.com

»Read more

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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