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Trader Talk with Bob Pisani

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  Tuesday, 8 Apr 2008 | 10:11 AM ET

Washington Mutual's Capital Deal: The Good And The Bad

Posted By: Bob Pisani

Washington Mutual did it, raising $7 b in capital ($2 b more than had been discussed yesterday).

TPG will purchase $2 b in newly issued securities. They also sold 176 m shares of common at $8.75 a share (closed at $13.15 yesterday), and issued $5.5 b in convertible preferred securities, along with warrants. Slashing quarterly dividend to $0.01 a share.

The good news: this makes it much more likely the company will survive.

The bad news: disastrous for shareholders, not only is it dilutive (100 percent!) but the terms were weaker than expected.

However, traders have noted to me that WM was not negotiating from a position of strength. This may be a negative for National City --the self proclaimed weak link in the financial chain.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 8 Apr 2008 | 9:19 AM ET

AMD's Problems: Industry Wide Or Speciifc To Them?

Posted By: Bob Pisani

Futures are down slightly, but have been stable throughout the morning, despite rather downbeat commentary from Alcoa and AMD . Metals a bit weaker (the IMF sold 12 percent of its gold stake, so gold is down 1 percent), dollar fairly stable, Europe down about 1 percent on average.

Alcoa reported adjusted profits of $0.44, several cents below expectations. Several analysts noted that the result was disappointing given the strong aluminum price seen in the quarter; the main problems seemed to be 1) higher than expected costs, 2) lower-than-expected realized price for aluminium, and 3) production a bit below expectations. Many analysts have lowered 2008 estimates.

Chip maker AMD down about 4 percent pre-open ; they said that revenues for the first quarter (ending in March) would be below expectations because sales were down across all business segments. They are expecting first quarter revenue to be about $1.5 billion, compared to consensus of $1.61 billion. They're planning to lay off 10 percent of the workforce by the end of the third quarter. Earnings will be reported April 17.

The question is, is this a company-specific problem or is there some kind of problem with the whole industry slowing down? Not entirely clear, but several analysts noted that AMD has had considerable delays in a number of products, supporting the idea that it is company specific.

Elsewhere:

Goldman upgrades brokers and asset managers like American Express and Franklin Resources.

Lehman upgraded Fannie Mae and Freddie Mac, noting that capital requirements are coming down for them, enabling them to play an even bigger role in the housing markets. They are indeed gaining market share. Of course, no one wants to talk about the considerable additional credit risk they are taking on.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 7 Apr 2008 | 5:06 PM ET

Earnings: Get Ready For Some Disappointments

Posted By: Bob Pisani

A rally in commodities and financials was halted midday as Arch Coal gave guidance for the full year that disappointed investors . It was a reminder that the upcoming earnings season was likely to provide a fair share of disappointments. This was confirmed after the close, when aluminum giant Alcoaalso reported earnings that were below expectations; futures are down about 5 points.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 7 Apr 2008 | 3:26 PM ET

Arch Coal's Surprise Takes Down Market

Posted By: Bob Pisani

Stocks came off their highs on a surprising announcement from Arch Coal midday that their earnings would be below expectations at $2.00-$2.50 a share (ests. $2.42). It was a reminder that earnings are coming.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 7 Apr 2008 | 12:46 PM ET

Markets Eye Commodities and WaMu Story

Posted By: Bob Pisani

Two big stories today: commodities and Washington Mutual.

What's up with commodity prices? Copper, gold, oil all moving up again. Goldman Sachs raises aluminum price estimates on strong Chinese demand during 2008 (somewhat offset by a contraction in aluminum consumption in the U.S., Japan and Europe, they say), combined with supply constraints in China and South Africa. Massey raises estimates for how much it can charge for coal. Morgan Stanley raised estimates for prices on hot rolled steel.

The upshot? New highs for many commodity stocks. Now if Alcoa would give positive comments after the close--but expect them to bitterly complain about high energy prices.

1) WM dropped precipitously on Friday near the close, so this story came at the right time;

2) If this happens it happened with no government intervention;

3) Throw this news together with the news that National City has buyers sniffing around, and the feeling is if WM and NCC can get through it, maybe the worst is over. The longer we go without another failure (even if there is another one), the calmer the sentiment will be;

4) Everybody sat out the second quarter (lots of cash on the sidelines).

5) Investors appear to be looking ahead to increase earnings in late 2009 or 2010.

Three reasons bears think this is nonsense:

1) It's not even announced yet! Plus its 100 percent dilution at 50 percent discount!;

2) Earnings will not be so great and the market will pull back in the next 2 weeks;

3) The recession story will continue to weigh on stocks.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 7 Apr 2008 | 9:08 AM ET

Financials Moving Markets

Posted By: Bob Pisani

Three big financial stocks are the top volume movers this morning--Washington Mutual, UBS, and Citigroup.

Washington Mutual up 16 percent pre-open on a Journal story that private equity firm TPG and others may invest $5 b in the company, which would provide it with much-needed capital. That's the kind of confidence-building gesture that helps convince investors we are closer to the bottom, and is the primary catalyst for the 11 point rally in the S&P 500 this morning.

Also helping the banks: Merrill is upgrading UBS . Separately, UBS says it will respond to activist shareholders Olivant Advisors "in due course." Olivant owns an 0.7 percent stake in UBS and recently called for a restructuring of the company. Calls for an outright breakup have been getting louder recently.

UBS up 5 percent pre-open, but many financials are up 2 to 4 percent.

Citigroup has hinted they may start unloading nonessential assets, and they have started today with the sale of Diners Club International operations to Discover, for $165 million. Citi up 4 percent.

In the endless merger dept: the FT reports that Delta and Northwest are once again revving up their merger discussions, despite the fact that the pilots could not even agree on the seniority levels of a merged company. This time, the two companies may take a run at each other without the pilot's approval.

What's up with China? Shanghai up another 4 percent after similar gains on Friday, Hong Kong has been bouncing for the past two weeks. Maybe it's the commodity "reflation" play again--gold, copper, oil all have been rallying.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 4 Apr 2008 | 4:28 PM ET

Markets Hold Gains From Tuesday--Sell In Rally Theory Over?

Posted By: Bob Pisani

Don't let the light-volume, low volatility day lull you into thinking nothing happened today.

The disappointing jobs report (including downward revisions in January and February ) failed to significantly drop the markets. More importantly, the markets have held the gains from the 400-point move on Tuesday, weakening the "sell the rally" mentality that has been the primary market trend since October 2007.

The market bottom so far has been March 17, the first trading day of the Bear Stearns buyout. This will give added weight to those who are arguing that the Fed has indeed effectively created a floor for the market through its assistance in the Bear Stearns buyout and its action to provide liquidity to the market.

Another important point: financials have led the gains this week, though there were also substantial gains in tech, energy and materials, as well as builders (up 8 percent with many at 7 month highs), retailers, and REITS.

Be careful of complacency here, since earnings for a lot of big financial names are coming the week of April 14th. Expect writedowns and cautious commentary, but how big will the writedowns be? JP Morgan this morning said writedowns for the first quarter will be lower than for the fourth quarter.

Financials this week:

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  Friday, 4 Apr 2008 | 9:05 AM ET

Jobs Number Bad But Financials Still Key For Traders

Posted By: Bob Pisani

The March jobs report (and the downward revisions in February) was a bit worse than expected, which is a disappointment for stock traders.

Let's be clear: stock traders want signs of stability and bottoming in economic statistics. They DO NOT want weak numbers on the theory that the Fed will continue to cut rates. They will gladly trade less rate cuts for an improving economy.

The dollar was down on the jobs report, dashing hopes for a dollar rally this week.

The real disappointment today is among those looking for a bottom in financials. This week is the best opportunity we have had to break long-term downtrends in stocks like Goldman Sachs , Lehman ,Citigroup , Wachovia , and many others. Traders have been itching to buy them recently; if they close on the upside despite this news it will be a significant victory for bulls.

Elsewhere:

1) British Air said there has been a 5 percent fall in business class passengers in March, acknowledging that slower economic conditions is beginning to affect their core business passenger business (first and business class passengers are about 60 percent of their profits).

2) Fertilizer company Mosaic reported earnings well above expectations . Strong demand for food and ethanol have driven prices for Mosaic's phosphate business up dramatically; despite the price increases, net sales in the phosphate business were up 82 percent on big increases in selling prices. They're also expanding their potash business. Raw material costs (sulfur and ammonia) were up significantly. Most important of all: two-thirds of their business is outside the U.S. (Note: Cargill owns the majority of the company).


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 3 Apr 2008 | 4:41 PM ET

Trader Talk: Critical Moment for Banks

Posted By: Bob Pisani

Don’t let the flat market fool you: This was still an important day.

First, the Street yawned at the two main news stories of the day. Despite a marathon, 5-hour Congressional session inquiring into the origin of the Bear Stearns mess, and a new series of proposals from the Senate to address the housing crisis, the net effect on the stock market was... nothing.

Nothing, because:

1) while many on the Street are interested in who knew what and when with Bear, this is backward-looking information and will not move the markets, and

2) the Senate proposals do little to address the fundamental problems of the housing market, i.e., funds for downpayments (which have increased), difficult underwriting standards, and buyers who are understandably hesitant to purchase a home that may fall in value.

Traders felt that most of the proposals being floated, including one that would give a $7,000 tax credit for people buying new homes or properties in foreclosure, would not be large enough to make a significant impact.

What did move the markets was an interview Merrill Lynch's CEO gave to a Japanese newspaper, where he said that he did not need to raise more capital. That moved up Merrill up 1.7 percent, as well as other financials.

There was little volatility; and as to volume? This was the lightest day of the year.

That's the bad news. Now let me give you the good news: Stocks have held the big gains on Tuesday for the second day in a row, even if they did drift lower into the close. Given that "Sell The Rally" is still the mantra, that is BIG NEWS.

Now we have to break out. This is the best opportunity since October for financial stocks to break out of the downtrend they have been in. That's why the Merrill news is a positive. We have a chance to begin changing the mindset. This is a critical moment for financials.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 3 Apr 2008 | 3:29 PM ET

Analyst On Home Building Stocks: "Take Profits At These Levels"

Posted By: Bob Pisani

So we have yet another plan to help save homeowners in trouble, the latest in a long string of proposals. Are they enough to solve the housing market's problems? Is this a game changer? There's plenty of skeptics who think the answer is an outright no.

Ivy Zellman, who has been a homebuilding analyst for all 18 years I have been at CNBC, put out a note to her clients this morning saying the Senate proposals were "More Talk Than Substance." While her concerns are primarily with the homebuilding industry, her point is that there are still significant headwinds ahead for the industry before it burns through old land and begins creating economic value.

The biggest problem right now, she and others point out, is that homeowners don't have available funds for downpayments (which have increased), underwriting standards have become much more stringent, and buyers are understandably hesitant to purchase a home that may fall in value.

The plan under discussion does not address this central problem, so it will be difficult to have an impact on demand short-term. What will matter? Lower interest rates, for a start, which will help the reset problem, but that is not something that can be legislated.

These problems will continue to put pressure on pricing (even more than we have seen). The good news is that banks are now all over the builders, so they have begun selling at significant discounts. Centex , for example, was selling some assets at 16 cents on the dollar. This is painful, but part of the bottoming process. And there are buyers sniffing around: Blackstone this week raised a record $10.9 billion to invest in property in the U.S.

There's also a question of whether the plan would really accomplish much. It seems like a lot of action, but it may not amount to much. The plan would:

--Give local governments $4 billion in grants to buy and refurbish foreclosed properties (concern: not clear how much of a difference this will make. Estimates are that this will allow them to buy 20,000 homes, assuming a $200,000 average price, but Moodys.com estimates that 870,000 homes were lost to foreclosure in 2007, another 1.3 million will be lost in 2008;

--Give a $7,000 tax credit for people buying new homes or properties in foreclosure (concern: doubtful if this is large enough to make a significant impact on demand);

--Permanently increase the FHA loan limit to a maximum of $550,000 in high cost areas, but would also increase the down payment requirement from buyers seeking FHA mortgages to 3.5 percent from 3.0 percent (concern: there were discussions involving reducing the down payment, and while raising the downpayment requirement may be prudent as a policy move, the lack of cash for downpayment is a major problem, and this only exacerbates that. There is also significant debate among traders that the FHA is now becoming the new subprime product, but backed by the U.S. government, leaving significant exposure to taxpayers. Oddly, the much-discussed idea to have the FHA guarantee about $400 b of refinanced loans is not included in the plan).

One things' for sure: all this talk of incentives for home owners in foreclosure has at least put a floor under the home building stocks, which are among the better performers in recent weeks (up about 25 percent vs. a 6 percent gain for the S&P 500 in the last three weeks).

What it hasn't done is improve any of the fundamentals, at least not yet. Zellman's conclusion: "Given the recent strength in the group, we would recommend investors take profits at these levels."


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.

 

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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