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Trader Talk with Bob Pisani

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  Tuesday, 26 Aug 2008 | 4:04 PM ET

Housing: The Good & Bad News

Posted By: Bob Pisani

The monthly S&P/Case Shiller index of home prices in 20 cities showed a 15.9 percent drop from the same period a year ago. Both new and existing home sales indicate that price declines continue, although the severity of the decline seems to be moderating.

Inventories remain stubbornly high -- in fact, new home inventories are at 10.1 months; it has remained over 10 months for four months now.

The real estate news today, from the Case Shiller Index of home prices to new home sales (a bit weaker than expected, when revisions are considered), showed there are still significant strains in housing.

Here's the good news:

--there are some small signs of sales increases in a few markets like central California.

Here's the bad news:

--for the most part, prices at best remain at their bottom, even though the rate of declines appear to be slowing down; and

--inventories remain high.

Much is made that cheaper housing will make the markets more affordable and ultimately help the consumer. There's a problem with this analysis: there's more than lower prices when considering affordability. There's home prices, mortgage rates, and income growth.

Only one of these components are helping affordability now. More declines in prices are good news. But mortgage rates are rising, and income growth is being eroded by inflation, reducing the positive effect of lower prices.

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Housing Stocks in the News:

Fannie Mae , Freddie Mac
(Story: Fannie, Freddie May Avoid Bailout)

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Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 26 Aug 2008 | 9:26 AM ET

Europe Looks Worse; Dollar Hits '08 High

Posted By: Bob Pisani

The German business confidence index (Ifo) declined to the lowest levels since August 2005, increasing concerns about a weakening Europe.

The dollar has popped to its highest levels of the year.

Russia's stock market is down 5 percent to its lowest levels in six years, as most European countries are signaling they will not recognize the breakaway states of Georgia.

Elsewhere:

1) American Eagle was a penny below expectations, and guidance for the third quarter, $0.31 to $0.36, is below expectations of $0.39. August comp store sales were down 6 percent.

2) Restaurant giant Darden (Red Lobster, Olive Garden, LongHorn Steakhouse) down 13 percent pre-open, as they are updating full-year guidance, saying full-year fiscal EPS will be flat to up 5 percent, compared to the previous target of up 9 to 10 percent. Darden is in the first quarter of its fiscal year.

3) Mining giant Rio Tinto reported outstanding results, with profit more than doubling. They also increased the dividend 31 percent. Remember, BHP Billiton has made an offer to acquire Rio Tinto, which was rejected by the company. Rio Tinto itself acquired Alcan in 2007.

4) Sign of the times: we used to pass around Warren Buffett's annual report. Now, trading desks are passing around the annual report from Singapore wealth fund Temasek.

Chairman S. Dhanabalan said he sees "value" in the U.K. and the U.S., particularly in financials. The fund already holds a 9 percent stake in Merrill Lynch and a 2 percent stake in Barclays . The firm has a 40 percent of its holdings in financials as of the year ending in March.

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CNBC's Top Investing News:

Video: Why Commodities Will Fall Another 10%

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Questions? Comments? tradertalk@cnbc.com

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  Monday, 25 Aug 2008 | 5:24 PM ET

Financials Bad Now -- Worse in September?

Posted By: Bob Pisani

Mary Thompson is in for Bob Pisani Monday.

It was a "Meltdown Monday" on Wall Street today. People might pooh-pooh today's action because of the light volume, but it is hard not to be a bit awestruck at the breadth of the decline. All of the Dow Jones Industrial's 30 components fell, toward the close 472 of the S&P 500 Index were lower, and 97 of the Nasdaq 100.

The end result, a 241.81 point decline for the Dow, a 25.36 point slide for the S&P and a 49.12 point loss for the Nasdaq.

Why the decline? There were plenty of reasons cited, but the most common was concerns about the financials.

Keep in mind, until last autumn, this was a leading group among S&P 500 members. As banks and insurance companies work through balance sheet problems that have cropped up in the wake of the decline in the housing market and the resulting liquidity crisis, investors are looking for new leadership to emerge.

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  • Forbes on Fannie, Freddie, Democrats and the Dollar

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Some might say energy and commodity stocks have taken firm hold of this mantle. But with a look back at the market action that followed the bursting of the tech bubble, one knows it takes a long time for investors to fall out of love with former star performers. Now reality is sinking in, meaning the problems at the nation's banks aren't going away tomorrow and are likely to be with us for a couple of more quarters at least.

So without the former leaders and without new leaders that don't look as long in the tooth as energy does, investors are moving to the sidelines.

Or at least they were today. Keep in mind when volume is light, the swings are sudden and swift. So, good news tomorrow might change the market's mind. Still, September is around the corner and historically, this is the toughest month for the stock market.

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CNBC's Financials in the News:

- Fannie Mae

- Freddie Mac

- Lehman Bros.

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Questions? Comments? tradertalk@cnbc.com

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  Monday, 25 Aug 2008 | 2:49 PM ET

Financials Overshadow Rest of Market

Posted By: Bob Pisani

Mary Thompson is filling in for Bob Pisani Monday.

Ask a trader why the market is down today and you'll get a whole host of different answers. Among the ones I have been told: concerns about the financials, the lack of resolution about Lehman's future, the lack of volume which makes the market more vulnerable to sudden swings, and the tensions between Russia and the U.S. over Russia's support of breakaway regions in Georgia.

The most common answer, though, is the concern about the financials.

Take a look at today's news: My colleague and co-host of Power Lunch, Bill Griffeth, maintains that on any other day, the good demand for Freddie Mac's sale of three and six month bills (even though it had to pay a higher rate to attract buyers) and the 3.1 percent increase in July existing home sales would be enough to drive the Dow up 200 points -- not down 200 points where it stands as I write.

I disagree. The report on existing home sales shows that median price of a home here in the U.S declined from last July. Until home prices stabilize, the declines in housing prices are going to have a negative effect on the value of the residential mortgage related securities held by the banks. This is likely to lead to more writedowns at these firms.

Then, a lot of regional banks, insurance companies and big banks own common and preferred shares of Fannie Mae and Freddie Mac. And while shares of these government sponsored entities are up today, they are down more than 90 percent over the last year.

In fact, in a filing with the SEC, JPMorgan said today its holdings in both firms have fallen by $600 million in the third quarter, a decline the banking giant said could affect its earnings. Keep in mind just a couple of weeks ago, it was JPMorgan which said the value of its mortgage-backed securities and loans declined by $1.5 billion earlier in the quarter, because of wider credit spreads and a lack of liquidity in the markets.

The problems in the financials cannot be solved by a single economic report or one strong debt sale by a GSE. So while we might see some one-day relief rallies in these stocks, the problems they face are still a long way from being solved. Until they are, being concerned about the financials is valid.

There are few bright spots today. Bonds are benefitting from the general aversion to stocks. Along with the financials, cyclicals and transports are big percentage losers. The transports are pressured by a downgrade of the trucking group by Wachovia, and that is offsetting the modest losses we are seeing in oil today.

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CNBC's Financials in the News:

- Video: Should Lehman CEO Fuld Be Fired?

- KKR Shows 'High' Interest In Lehman's Neuberger Unit

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Questions? Comments? tradertalk@cnbc.com

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  Monday, 25 Aug 2008 | 1:12 PM ET

Forget Politics -- Oil & Credit Still Main Stories

Posted By: Bob Pisani

Mary Thompson is filling in for Bob Pisani at the NYSE and wrote this blog post.

The markets have kicked off what is supposed to be a quiet week of trading on a down note. The decline is broad, volume is light, and financials and transports are the leading losers.

There is no shortage of news this week with plenty of data on tap and the Democratic National Convention kicking off tonight.

But Fred Dickson, chief market strategist at D.A. Davidson, says the main story for the stock market remains the same: What will push stocks around is either the movement in oil or the smouldering credit pressures that are keeping the financials down.

Dickson says with that backdrop, the markets are still keeping an ear open for a ratcheting up of Russian rhetoric concerning Poland and Georgia, will be listening for any gaffes or policy changes that might be unveiled at the DNC, and remains focused on what the future of Fannie Mae and Freddie Mac might hold.

Speaking of Freddie Mac and Fannie Mae, they received a vote of confidence from Citigroup today. In a note to clients, analyst Bradley Ball writes that while the recent decline in shares of the providers of mortgage funding could limit their financial flexibility, and prompt management and policymakers to take extraordinary action, he thinks shareholders' interests will be preserved. Translation: Ball doesn't think they'll be nationalized. Both stocks are trading higher midday Monday.

AIG is under pressure as well. The ratings agency Fitch says the insurer could face a downgrade, given uncertainty about CEO Bob Willumstad's plan to revive the company, and fears that AIG's mortgage related holdings will lead to further writedowns.

Willumstad is expected to unveil his strategy for AIG at the end of September.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 22 Aug 2008 | 5:22 PM ET

The Week: Stocks End Up; Oil Slides; Financials Level

Posted By: Bob Pisani

A big drop in oil provided nice support for stocks. Oil went from $114 to $121, then all the way back to $114, in two days!

Stocks were drifting lower midday Friday, on very light volume and a lack of energy, but when oil prices started moving down aggressively about 1pm ET, the market stabilized, and a few sectors like airlines and retailers had modest rallies.

Financials also stabilized today, though they are down for the week. The two weakest points -- Fannie/Freddie and Lehman Bros. -- were split, with Fannie Mae up 2 percent but Freddie Mac down 5 percent. Both were up again.

Fannie, which traded as low as $3.53 yesterday, traded over $5.00 today; most of the action is from short-term momentum traders. Lehman was as low as $12.54 yeterday, but almost broke $16 early in the day, until cautious comments from Korea Development Bank -- implying that they are considering other options in addition to buying Lehman -- and a selloff at the close dropped the stock down to $14.40.

One thing to watch out for: the CBOE Volatility Index (the VIX) , a measure of fear in the market, is sitting near the lowest levels since early June. However, futures in the VIX are trading much higher, implying that volatility traders expect are expecting higher volatility in September (i.e., selloff).

This week: Dow down 0.3 percent, S&P down 0.5 percent.

This was a Week of Reversals: techs have underperformed for the first time in a while, with the Nasdaq down 1.6 percent. Small-cap stocks, which had outperformed as the dollar strengthened, also underperformed with the Russell 2000 down 2.0 percent; oil stocks rebounded strongly, with Amex Oil Index up 3.7 percent.

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CNBC's Financials in the News:

-American Express , Wells Fargo
(Story: Buffett Says He's Buying AmEx -- OR Wells )

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 22 Aug 2008 | 3:17 PM ET

Three Big Questions: FNM, China, S&P 1,300

Posted By: Bob Pisani

There are three big questions floating around on the Street today:

1) Does the debt of Fannie/Freddie take a haircut? Most traders would say no prior to today, but Ben Bernanke's comments that debt haircuts might be in order for some (he did not specifically say for Fannie Mae or Freddie Mac ) has given many pause.

That debt--and much of the preferreds--are owned by many regional banks that hold them as part of their capital base; traders tell me many are afraid to do damage to that level of the capital structure.

2) How much will China stimulate its economy?

The government there is rumored to be looking at a stimulus plan of their own; many traders believe they are expecting a slowdown. How much stimulus some think they will provide -- and how much effect that will have on commodities like oil -- determines whether some are bullish or bearish on China.

3) What will it take to get S&P 500 over 1,300? 1,297 was the August high just a few short weeks ago. Most think the answer is to get oil prices below the nice round number of $110 -- we got as close as $111 last Friday.

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CNBC's Financials in the News:

-Lehman Bros.
(Story: Hostile Takeover Coming? )

-American Express , Wells Fargo
(Buffett Says He's Buying AmEx -- OR Wells )

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 22 Aug 2008 | 1:55 PM ET

Lehman Woes: Sorry, White Knight Is No Answer

Posted By: Bob Pisani

The bottom line on Lehman Bros.:

All the talk about a possible investment in Lehman from Korea Development Bank -- or anyone else -- is really beside the point.

Lehman is down about 75 percent for the year, while the Brokerage Index is down 30 percent. The reason Lehman has dramatically underperformed even its poorly performing peers this year is the large exposure they have to the worst performing parts of the market--residential mortgages, commercial mortgages, and leveraged loans.

  • Exclusive Video: Richard Bove's Take on Lehman

They need to reduce their problem portfolio substantially before anyone is going to dive in on a fundamental basis. Since the asset quality is not improving, they need to sell, even if at a loss.

How to do that? They have already raised capital, so they have some capacity to absorb losses from asset sales. The New York Times noted that they are said to be shopping their commercial mortgage-backed business, and perhaps $40 billion in commercial real estate. The crown jewel, their investment management division including Newberger Berman, may also be on the block.

The bottom line: Lehman can't wait for some white knight. They need to improve the balance sheet, now.

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CNBC's Financials in the News:

-American Express , Wells Fargo
(Story: Warren Buffett Buying Financials )

-Bank of America , JPMorgan

(Story: Analyst Praises BofA, JPMorgan )

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 22 Aug 2008 | 10:11 AM ET

Street Bullish on Buffett & Fannie 'Bailout'

Posted By: Bob Pisani

Stocks are up as the dollar is rallying modestly; oil prices are down. Warren Buffett told CNBC that he has no bets against the dollar and stocks are more attractive now than a year ago.

This has been a week of reversals: remember that just a short while ago, the dollar rally was creating a decline in commodity stocks, and a modest rally in small caps and techs.

This week, that all changed: the S&P is down 1.5 percent, but the small-cap Russell 2000 is down twice as much (3.7 percent), the tech-heavy Nasdaq is down 2.9 percent, while the Amex Oil Index (a basket of large-cap oil stocks) is up 5.4 percent.

The Street continues to believe that some kind of federal intervention in Fannie Mae and Freddie Mac is inevitable, and continues to believe that the market will rally when this announcement is made.

Elsewhere:

1) Lehman Bros. trading up 9 percent after state-run Korea Development Bank said Lehman was a possible acquisition candidate for the bank. If so, this would make Ladenburg Thalmann's Richard Bove call yesterday particularly prescient; he said the company could be the target of a (hostile) takeover.

2) Three retail companies reported earnings and guidance that was surprising for its lack of surprises:

a) Aeropostale came in inline with expectations, as was guidance for the third quarter.

b) Gap was roughly in line, but more importantly they reaffirmed their full year guidance. Same store sales were down 10 percent from a year ago.

c) Foot Locker up 15 percent pre-open, as earnings beat and they raised the lower end of their guidance by five cents. Up 8 percent pre-open.

3) The CFTC gave NYSE Euronext the right to open a new futures exchange, NYSE Liffe, on September 8. NYSE futures trading. Some gold and futures contracts will begin trading at that time; the NYSE purchased the CBOT's precious metals business earlier this year from the CME.

This is something the NYSE has sought for some time, and it comes as competition is expanding. Electronic Communication Network BATS recently filed to become an Exchange and compete directly against the NYSE and the Nasdaq.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 21 Aug 2008 | 9:38 AM ET

FNM/FRE Guarantees; Lehman 'Buy' Rating?!

Posted By: Bob Pisani

Regarding Fannie Mae and Freddie Mac:

The most important issue is not the value of the equity holders' stake -- it is essentially zero -- but to ensure that Fannie and Freddie keep operating. Even slight glitches can have ripple effects.

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CNBC Special Report:

- Will Stocks Hit Bottom after Fannie, Freddie?

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That's why the Street had a tough time on Tuesday, when Freddie auctioned $3 billion in new debt on Tuesday, at yields 1.13 percentage points above comparable Treasuries, the highest spread ever for Freddie debt. This implies higher mortgage rates; even modest increases (a half point or so) could cause the U.S. housing market to slip into a further leg down.

Ladenburg Thalmann analyst Richard Bove believes the government must provide an explicit guarantee to provide more funds into the two companies; if not, the markets will not provide the requisite funds.

Another option is a restructuring, with the U.S. having to guarantee the debt of the two companies, but only until a longer term plan is put into place.

Elsewhere:

1) Citigroup joined several other firms in lowering third-quarter estimates for the major brokerages, including Lehman Bros. , Morgan Stanley and Goldman Sachs . "We're lowering our 3Q08 estimates to reflect the difficult operating environment, characterized by lower client-related trading volumes and losses on hard-to-sell assets (primarily mortgage securities)," said a Citigroup note.

But wait, read on -- Citi has a BUY on Lehman and Morgan Stanley:

"MS is extremely well-positioned to benefit when the environment improves and LEH is discounting more erosion in book value than we anticipate. While measures such as selling Neuberger and raising equity may be on the table, we view them as lower probability actions over the next couple of months."

2) While equity holders in Fannie and Freddie may have little left, even bondholders of the two companies are under a little pressure, according to Sandler O'Neill.

Several insurance companies own a significant amount of the two companies' bonds, including Ace and Travelers. Sandler notes that "their stocks have been under pressure as a result of their FNM and FRE bond ownership. As long it appears that the Fannie Mae and Freddie Mac bond holders will be made whole, we would use weakness in these BUY rated stocks as a buying opportunity."


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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