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Trader Talk with Bob Pisani

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  Monday, 14 Apr 2008 | 4:04 PM ET

Financials: It Could Have Been Worse, But Will It Get Better?

Posted By: Bob Pisani

It could have been worse. Wachovia'shorrible earnings report, along with a dividend cut and a $7 b capital raising effort, dropped many financials two to six percent or more, with small regional banks that have significant real estate exposure particularly hard hit.

While the largest financials, like JP Morgan ,Merrill , and Bank of America , were not hurt as badly, they still declined; they have been down now for five days in a row ahead of their earnings this week. Bottom line: the Street is anticipating poor results, and Wachovia has only confirmed that the earnings estimates, while dramatically lower than a couple months ago, are still too high.

Wachovia also confirmed that there will likely be little good news this quarter:

--Deteriorating credit quality spreads to auto, credit cards?
--Weak revenue growth
--Capital markets weak
--Reserve building

Will anybody report an improvement? Bears are openly skeptical. They point to JP Morgan's comments that home equity continued to see deterioration, and our parent GE noting that the end of March got worse.

What to do? The answer to every question (what to buy? is my job secure? what is the meaning of life) seems to be, "Buy Potash." And oil exploration stocks. Both of these groups (agricultural commodities, exploration and production) again hit new highs today.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 14 Apr 2008 | 9:15 AM ET

Wachovia's Loss: Signal Of More To Come From Banks?

Posted By: Bob Pisani

On Friday, General Electric surprised, now it's Wachovia Bank's turn. They missed by a mile: a loss of $0.14 from continuing operations, consensus was a gain of $0.40. They are cutting their dividend 41 percent and seeking to raise $7 b in capital, so the poor earnings will be diluted even more.

Our David Faber reporting the sale will involve 3.5 b in common stock at $24 a share, and 3.5 b in convertible with a 7.5 percent coupon. Wachovia was trading in that range earlier, but is now higher at $25.70, still below the $27.81 it closed at on Friday.

To a certain extent, we have heard this before: an increase in the loan loss provisions ($2.1 b in new provisions), largely due to losses in residential real estate (again, California and Florida are the main culprits), along with more losses on mortgage backed securities and their derivatives. Credit quality continued to deteriorate by an measure, particularly non-performing assets, which increased 54 percent from the prior quarter, according to RBC Capital.

On the other hand, we thought we were facing the worst last quarter; that's obviously not the case, and this is part of the continuing adjustment of expectations. Now the increase in provisions for loan losses is a signal that banks are expecting more losses.

Small declines (1 to 2 percent) in other banks, like Bank of America and Citigroup.

Elsewhere:

1) Despite statements of support from the G7 over the weekend, the dollar is considerably weaker this morning. I will be speaking with French Finance Minister Christine Lagarde on our air shortly after the 9:30 AM open.

Despite the dollar weakness, commodities are weaker as well.

2) Blockbustermaking a bid for Circuit City for at least $6 a share, they claim in cash; Blockbuster down 12 percent, Circuit City up over 25 percent to $6.16 on heavy volume. They may also turn to Carl Icahn for an additional equity infusion, Blockbuster's CEO says.

3) While we're young: Delta and Northwestmight unveil details of their (endless) merger discussions --and possibly a deal--by Tuesday, according to the Journal. Delta and Northwest both up about 5 percent on light volume.

4) Deutsche Bankmay be seeking to sell $20 b of leveraged buyout debt, similar to what Citigroup was reported seeking to do last week.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Apr 2008 | 4:26 PM ET

GE Is A Real Mind Blower For Markets

Posted By: Bob Pisani

First Alcoa , then GE missed earnings. This is a rare occurrence, and as a result the Street is changing its mindset. They are expecting more conservative guidance, and looking for places where negative surprises might pop up.

One example: IBM , which reports next week. While most are expecting weakness in hardware, traders have noted that services (more than half of revenues) gets a good part of its revenues from financial companies, and that this may be the source of a negative surprise from IBM.

Another issue: financial earnings, which are coming next week for US Bancorp, Wells Fargo , JP Morgan , and others. In addition to cautious guidance, traders are looking for:

--Higher delinquencies on home equity, credit cards, commercial real estate--which ultimately means higher charge-offs and building of reserves;

--Higher Level 3 assets;

--More capital raising (though there is some debate about how much more will need to be raised)

Bulls argue that the worst case scenarios are now off the table, thanks to the Fed providing liquidity and a backstop.

Given the problems, many now believe that we are in for a period of sideways trading for the next several months. This can be part of the healing, but it can also lead to low volume days no matter which way the tape is heading. As one trader on the floor said to me, "For three months, we've had no conviction on up days; now we have no conviction on down days either."

Major indices this week:

Dow down 2.2 percent
S&P down 2.7 percent
NASDAQ down 3.4 percent
Russell 2000 down 3.6 percent


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Apr 2008 | 12:08 PM ET

GE Fallout: It Coulda Been Worse

Posted By: Bob Pisani

Well, it could have been a lot worse -- while certain financials and industrials are weak, the damage could have been a lot worse from General Electric's miss. Note that United Technologies' CEO George David tells Reuters he is "quite comfortable" with their full year profit target.

Imagine being Jeff Immelt, CEO of General Electric, our parent company. The shortfall in GE's earnings came mostly from the financial side. He has spent five years trying to reduce the risk in GE Capital.
Immelt has:

-Exited insurance
-Existed reinsurance
-Exited bond insurance
-Exited parts of consumer finance

His concentration has been on commercial finance and debt lending. Fair enough. So what happens? They get caught in the credit crunch -- much of the shortfall was because they were unable to sell certain real estate assets. They cannot seem to win here.

Still, look at the revenue story, which clearly shows growth outside the U.S.
GE Revenue:

-U.S. down 5 percent
-Developed world (ex-U.S.) up 14 percent
-Emerging markets up 38 percent

Finally, Immelt seems to feel the Fed is doing all it can. He told CNBC's Joe Kernen, "There's not a whole lot more I think the Fed can do. This has to work its way through the system."

Note: CNBC is a unit of NBC Universal, owned by General Electric.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Apr 2008 | 9:19 AM ET

General Electric's Big Miss--Really Big Miss

Posted By: Bob Pisani

GE reported first quarter earnings of $0.44, below the $0.51 consensus and $0.50-$0.53 guidance. Full year guidance was cut to $2.20-$2.30 from $2.42. Down 11 percent pre-open.

This was the biggest miss most analysts can remember; certainly the biggest miss in over a decade.

Commercial Finance was a problem. Analysts--including Jeff Sprague at Citigroup--noted that GE attributed $0.05 of the miss to mark to market losses, impairments and the inability to get asset sales done. Provision for losses was up 41 percent about double what was expected. The other 2 cents from the other non-financial parts.

Industrial and Healthcare were also disappointments; Healthcare had a 17 percent profit drop on flat sales. Goldman Sachs, Credit Suisse downgrades GE.

Any good news? Parts of the international business are doing well, and the dividend yield is 3.7 percent now.

Disclosure: CNBC is owned by NBC Universal, which is a unit of GE.

Elsewhere:

1) Financials are weak pre-open. GE's financial business is highly thought of on the Street; most feel it is the was creme of the crop, and if they had unforeseen problems at the end of Q1, than many others in the industry did too.

Little surprise, then, that financials are trading down here, particularly since many of the big banks are reporting earnings next week. Fannie Mae, AIG, Capital One, Lehman, other financials trading down about 3 percent.

Note CIT --which competes against GE in leasing and financing--down 7 percent.

Some of the other big industrial companies, like Tyco, Honeywell, and Whirlpool, are also down, though on much lighter volume. Washington Mutual down 6 percent.

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  Thursday, 10 Apr 2008 | 4:37 PM ET

Energy "Crisis" Hitting The Markets

Posted By: Bob Pisani

We have an energy problem with the markets right now. Volume has been pitiful since the month of April started, with the exception of the first day of the month.

Absence a catalyst (start of the quarter, for example), or positive economic stats, the tendency of the markets in this situation is to drift, and usually drift lower.

How to explain today's modest action? First, it's not that great--three stocks advancing for every two declining. Second, oversold conditions and short covering explains most of the rest. Retailers are heavily shorted, and there is a belief that the refund stimulus will be a short-term catalyst for retailers in May.

Covering shorts on the news makes some sense here, even if the news was poor. Other groups with modest upsides, like home builders, have sold off notably this week.

On top of that, financials have once again been drifting lower--every day of this week. All of them: brokers, banks, most insurance. Fannie and Freddie too.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 10 Apr 2008 | 9:56 AM ET

Retail Sales: There Is Some Good News

Posted By: Bob Pisani

March retail same store sales were weak, outside of discounters. Remember companies and analysts have been aggressively taking down first quarter estimates for over a month (as well as same store sales), but companies like JC Penney,Target,Gap,Abercrombie, and Kohls were all notably below expectations on same store sales.

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  Thursday, 10 Apr 2008 | 9:10 AM ET

Lehman "Hunkering Down" For Tough Times

Posted By: Bob Pisani

The dollar is weak again; Band of England lowered rates , but Europe has been weak right from the open and that weakness has spilled over into our futures.

Elsewhere:

1) March retail sales were again fairly sluggish , one third beat estimates, two third missed, according to RetailMetrics. A couple standouts: discounters like Wal-Mart , Costco , BJ's , all did well, so we are clearly seeing tradedown. Teen apparel store Buckle sales were a big surprise up 20.9 percent (up 7 percent expected), Aeropostale also slightly better than expected. The good news is that comps will be easier for next month, because April last year did not include Easter. Rebate checks will not arrive until May.

Wal-Mart's same store sales for March were up 0.7 percent from a year earlier, below expectations of a 1 percent gain. However, they boosted guidance for the first quarter to $074 to $0.76, from $070 to $0.74, so it's up fractionally pre-open.

Men's Wearhouse reaffirmed their first quarter estimatesof $0.20 to $0.24 (analyst estimate $0.22).

2) DuPontraised first quarter and full year guidance. The agricultural business has been particularly strong (about 25 percent of sales), and overall sales in emerging markets has been strong (Asia/Pacific about 20 percent of sales).

3) Lehmanhas liquidated three investment funds that dropped notably in value and took $1 b of those assets onto its balance sheet. Down 3 percent. Most traders think they are basically bailing out investors hoping the parent can better fund those assets.

More important is Deutsche Bank's Mike Mayo, who met with Lehman's CFO and put out a widely-discussed note this morning. Mayo said his meeting was somewhat downbeat and sober: "Conditions remain tough, whether it relates to client flows, activity, or even hedging." He concluded by saying "Lehman's strategy is evolving to take on less risk to better hunker down in tough times and to generate lower risk earnings growth longer-term. This new harsh reality is sobering to those looking for a quick fix for the financial sector."


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 9 Apr 2008 | 5:10 PM ET

The Only Good News: Light Volume on Down Days

Posted By: Bob Pisani

Huh, what happened to our rally last week? Same thing that happened to the rallies in November, January, and March... it's dribbling away.

It's not the point moves that're troublesome, it's the news flow and the direction of trading. The only good news is the very light volume on the down days.

Want the rationale I am hearing from the trading community -- or are you just fed up by now and don't want any more excuses? I understand.

Here it is anyway:

1) We are back to a defensive trade, with commodities up, everything else down. The record oil prices are killing transports and retailers;

2) economic numbers are not improving, indeed they are going in the wrong direction. Greenspan and the IMF have become bears; the "recovery in the second half" crowd are under pressure, and there are early whispers that economists will be soon taking down 2009 estimates;

3) government efforts to help housing seem to be stalling; stimulus checks a one-time blip, not enough to overcome negative trend;

4) financials: fear of expansion of credit crisis outside of subprime and Alt-A still very real; credit cards and commercial real estate an especially soft spot right now;

5) earnings: every time we get near 1400 on the S&P 500, we sell off. At 1400 the S&P trades at about 15 times forward earnings; traders gripe that this is a rich multiple when earnings are melting under you.

So what's the trade? Keep cash high, keep real commodity exposure, and don't expect too much short-term from equities. Not that much downside, not much upside. Wait for more information.

Gee, thanks for that. Sounds like January again. And don't expect to hear any baseball analogies from me -- traders are fed up with guessing what inning we are in. Some days, it feels like we're in the eleventh.

Courage. Better days are coming.

Bed Bath and Beyond's Glum Outlook

Bed Bath and Beyond down about 6 percent after hours as they gave guidance for the current quarter (their fiscal first quarter) below expectations.

Here is the fear: that despite the fact that earnings estimates have been coming down week after week for the first and second quarters, analyst estimates are still too high. This puts a very clear ceiling on retail stocks; they will likely come down in anticipation there will be many more announcements like this from retailers soon.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 9 Apr 2008 | 9:30 AM ET

What's Citigroup Up To With Loan Sale?

Posted By: Bob Pisani

Citigroupclose to selling $12 b of leveraged loans and bonds to a wide group of private equity firms.

What will they sell the leveraged loans for? Not clear, but it could be as low as 90 cents on the dollar. Also, note that these are bridge loans for deals; short-term loans. They are not subprime or problem loans. These are good loans. That's the bad news: they are selling what they can to raise capital.

The good news is that Citi continues the process of cleaning out its balance sheet, and we are at least getting pricing on the loans, which indicates there is demand for the assets. This will set benchmarks for other leveraged loans. Up 2 percent pre-open.

Of course, cleaning up the balance sheet is only part of the problem facing the big banks. As Sandler O'Neill pointed out this morning, housing related credit continues to deteriorate, investment banking activity levels remain soft, and commercial real estate is showing signs of deterioration.

Residential mortgage related credit deterioration has spread from subprime mortgages to Alt-A mortgages and home equity loans.

UPS cut its first quarter earnings guidance, from $0.94-$0.98 to $0.86-$0.87. Like Alcoa, it complained about high energy costs; they also cited lower volume trends in February which have continued into March. Down 3 percent.

Boeinghas finally thrown in the towel and said that its 787 Dreamliner airplane would be delayed; first flight is now moved to the fourth quarter of 2008, and the first deliveries would begin in the third quarter of 2009 (it was planned for the first quarter 2009). They are not changing their 2008 guidance. Up 1 percent.

Honeywellis happy this morning; their aerospace division won a $23 b contract to supply and maintain engines for Brazil's Embraer . Up 1 percent.

Proctor and Gamble increased its dividend 14 percent to 40 cents.

Circuit City posted stronger earnings than expected . Though acknowledging facing "the toughest macroeconomic environment in years," they say they have stopped the decline in warranties and service attachments, which is a critical part of their profit picture.


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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