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Trader Talk with Bob Pisani

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  Thursday, 13 Mar 2008 | 12:31 PM ET

Stocks Pare Losses On S&P Report And Frank Housing Plan

Posted By: Bob Pisani

Stocks have pared some losses on a couple of potentially positive developments. First, Standard and Poor's has issued a report saying the "end of writedowns is now in sight " for big institutions. "The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write downs of subprime ABS [asset-backed securities]," said Standard & Poor's credit analyst Scott Bugie, lead author of the report.

Perhaps more important is S&P's observation that institutions may be valuing these securities too low: "in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses," said Standard & Poor's credit analyst Tanya Azarchs.

Second, details of a housing rescue plan by House Financial Services Committee Chairman Barney Frank are coming out. Rep. Frank is proposing a new mortgage rescue program. The details:

--The program would permit the FHA to provide [up to $300 billion] in new guarantees that would help to refinance at-risk borrowers into viable mortgages;

--In exchange for the acceptance of a substantial write down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay;

--The existing lender or mortgage holder will have a cash payment and no further credit exposure to the borrower;

--This could potentially refinance between 1 and 2 million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.

Why lenders would agree to these drastic haircuts—which would essentially decimate their books—is not clear, but the market is looking for anything to end the mortgage crises.



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  Thursday, 13 Mar 2008 | 9:06 AM ET

Carlyle Capital's Problem: Mortgage Backed Securities Dropping

Posted By: Bob Pisani

Futures down 17 points, as Carlyle Capital's mortgage unit is on the verge of bankruptcy ; their lenders are forcing the sale of assets to meet margin calls. They are in default of margin calls of over $400 million and are highly leveraged.

The problem is that the value of mortgage-backed securities continues to drop; Carlyle went out of the way to say that one of the problems that prevented negotiation of a workout agreement was that the pricing service the lenders hired to determine the value of the securities kept devaluing the securities, resulting in still more margin calls.

Forcing the sale of an illiquid asset (especially when a firm is so highly leveraged) does not seem very rational, however in the bankers' minds (I am told) they have a fiduciary obligation to seize whatever they can.

The problem here is that this creates the vicious spiral that everyone is afraid of. The lenders may now try to sell assets which are illiquid at the moment, driving down prices even more.

Predictably, the dollar has hit new lows (falling below 100 yen for the first time in 12 years), oil is over $110, and gold is right up against $1,000, and the odds of a 75 bp rate cut by the Fed has now risen to 92 percent. Gold stocks are up.

Retail sales were below expectations. Does this mean you're tired of looking at yourself, Mr. Zimmer? Men's Wearhouse beat their earnings expectations, but their guidance for the current quarter of $0.20-$0.24 is way below expectations of $0.44. "It certainly feels like a recession," says CEO George Zimmer.

They're planning to spend more on marketing to young guys: "You're going to see some hot, young-looking guys in our TV commercials," he said. They had previously used Mr. Zimmer, famous for saying, "You're going to like they way you look."

Men's Wearhouse down 10 percent pre-open.

Countrywide said their mortgage funding totaled $26 billion in February, up 17 percent from January.

Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 12 Mar 2008 | 10:05 AM ET

Fed Move Lifts Banks, Builders; Will Rally Last?

Posted By: Bob Pisani

So Federal Reserve comes to the rescue, and the usual suspects -- financials and homebuilders -- stage an impressive rally, dragging the rest of the market up with them.

As we all know, none of these rallies have produced much of anything for months: we are still essentially at the February lows, and what we need now is several days where the market rises to the higher end of that February trading range (above 12,500 on the Dow and about 1,375 on the S&P 500).

That would at least have technicians talking about the possibility of a sustainable bottom.

This is not a bad start -- a modest open to the upside, but we need to close higher.



Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 12 Mar 2008 | 9:05 AM ET

To Early to Tell the Sell?

Posted By: Bob Pisani

So the only thing that matters here is whether we have broken the back of the "sell the rally" trade that has been so successful for the past two months. It's too early to tell.

How bearish has the Street been? Institutional Investor, which has conducted a weekly Bull/Bear survey of financial newsletter writers for decades, today noted that the percentage of writers Bullish fell 10 percent to 31.1 percent and Bears rose almost 7 points to 43.3 percent. It's the first time since 2002 that Bears exceeded Bulls.

Did the Fed move just in time? Home loan demand is dropping, and mortgage rates have hit their highest levels since October, according to the Mortgage Bankers Association.

Freddie Mac's analyst meeting has started. Their CEO has said that the U.S. housing market is the worst in about a century. Their CFO said "there is no dilutive capital raise planned."

A day after Wellpoint cut its guidance and initiated a bloodbath among HMOs, Humana has done the same for the full year. They are now talking about full year guidance of $4.00-$4.25, compared to previous guidance of $5.35-$5.55. The culprit: higher claims volumes. Humana down 21 percent pre-open (after dropping 24 percent yesterday!), United Healthcare down 9 percent, Aetna down 7 percent. Humana, unlike Wellpoint, is primarily a Medicare provider.

Caterpillar's CEO said everything was going to be great for the next several years. He talked about significant new infrastructure projects all over the world. Unfortunately, he forgot to raise guidance, so Cat is only up 3 percent.

Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 11 Mar 2008 | 4:29 PM ET

Has Market Broken 'Sell Any Rally' Cycle?

Posted By: Bob Pisani

A roller coaster day for the markets. It started strong as the Federal Reserve took a measure to pump money into the mortgage market -- and does it need it -- mortgage rates have been going up while the Fed has been cutting interest rates.

But traders resorted to selling financial stocks midday -- a strategy which has worked for two months -- and the markets briefly dipped before recovering and closing near the highs. For the Dow, it was the biggest percentage gain in five years . The question now is, have we broken the cycle of selling any rally?

Those who believe that the Fed will have to get even more aggressive than today's actions were passing around the note Richard Bove of Punk Ziegel issued to his clients this morning. He advocates that the government stop offering to borrow mortgage backed securities as collateral and start outright buying them. Here are excerpts from his note:

"The solution to this dilemma, I think, will be direct buying of all types of securities by the Federal Reserve itself. The Fed has the authority to purchase whatever it chooses. It is in the markets every day buying or selling Treasuries."

"The time has come to sell Treasuries and buy asset backed securities. This would not impact the money supply but it would redirect the funding in the markets to the areas where the stress is greatest. It would allow holders of this debt to sell it and re-establish the credibility of their balance sheets. Losses on this debt would be minimal when viewed against all outstanding debt."

"For example, it is now estimated by most that the losses on mortgage debt may approach $600 billion. Total debt in the United States economy is $48.8 trillion. Thus losses are estimated to be $0.6/$48.8. This is not overwhelming by any measure."

There're calls for even more radical action. There are others calling for some kind of deal with the FHA, where the FHA might buy mortgages with a discounted earnings rate (say, 1 percent), then sell them to Ginnie Mae, which would take a loss and sell them at a market rate (say 6 percent) to Fannie Mae, and Ginnie Mae books the loss. Sound outlandish? It has been done before.



Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 11 Mar 2008 | 1:31 PM ET

Bear Stearns: What Went Wrong

Posted By: Bob Pisani

What's up with Bear Stearns? Dick Bove at Punk Ziegel has just put out a note to his clients, and while he did not address the specific rumors floating around, he did tell me that the main problem is that "the business model is broken."

According to Bove:

1) Bear Stearns was vertically integrated in the mortgage business -- they did origination, securitization, structured products, and sale of products to funds they operate.

2) They made their big money on structured products, and sales of those products. When the volume fell apart for those products, they no longer made big money.

3) This harmed their balance sheet because they didn't get out soon enough, driving up the cost of funding. That is hurting their prime brokerage business, because that is based on low cost of funding.

4) It's difficult to be a full-line investment bank if you can't offer big customers loans because the balance sheet won't support it.

5) ...then you have to fire people, losing opportunities.

6) Bove told me the most likely outcome here was a sale of the company.



Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 11 Mar 2008 | 10:16 AM ET

Will Oversold Short Term = Less Fed Easing?

Posted By: Bob Pisani

Kate Townshend at MKM Partners and other technicians have pointed out that we are significantly oversold short term, so it's no surprise there is a rather significant bounce early on.

Expect a lot of short covering today; financials rallying big time .

The question is, does this break the prevailing trend, which is: buy declines, sell into rallies. This trade has worked for two months now, and you can be sure traders will make a run at bringing the market down again, if not today than certainly in the next day or so.

If this works, does it mean less Fed easing, stronger dollar , lower commodities , less pressure on inflation? That's what the bulls are praying for. The odds of a 75 bps Fed cut next week is down to 64 percent from 92 percent, priced in prior to the Fed's move.



Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 11 Mar 2008 | 9:02 AM ET

Pisani: Feeding on the Fed

Posted By: Bob Pisani

Futures moved up nearly 20 points as the Fed announced expansion of it securities lending program, all designed to improve liquidity.

The Fed will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (it was previously overnight) and will now take other forms of collateral, including non-agency (i.e. non-Fannie Mae or non-Freddie Mac mortgages) AAA private label residential mortgage backed securities (this means jumbo loans--those over $417,000).

This action is being coordinated with other national banks. The agreements with the foreign banks is a way of providing these foreign banks with more dollars. The Fed is trying to buy more time to ease the pressure on liquidity; most traders are applauding the move.

Every time the Fed has done something, we have had a rally. Their move on Friday definitely blunted the effect of the poor jobs report.

This has improved the metrics, which have been poor. European bourses moved up, and the dollar has rallied.

Freddie Mac and Fannie Mae both rallied now up about 17 percent each.

Financials have also rallied; Lehman and Citi also up about 8 percent.

Elsewhere, HMOs are getting hammered as WellPoint cut its full year forecast to $5.76 to $6.01, from $6.41 a share. This as a result of misjudged 2007 cost trends and disappointing enrollment trends.

Wellpoint down 21 percent, Humana down 16 percent, United Healthcare down 11 percent, Aetna down 10 percent.

Aetna reaffirmed its 2008 guidance of $4.00 (analyst estimate is $4.04). Goldman Sachs cut the entire HMO group, saying that pressure to keep prices down combined with upward pressure on medical costs were threatening the industry with an "outright downturn."

Texas Instruments down 2 percent on a somewhat downbeat mid-quarter update.

GE CEO Jeff Immelt said that NBC Universal was not for sale. GE is our parent company.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 10 Mar 2008 | 3:43 PM ET

Credit, NOT Spitzer Is Street's Problem Today

Posted By: Bob Pisani

While theNew York Times story on Eliot Spitzer is generating enormous email traffic on Wall Street, it is not the cause of the market's problems today. Stocks are again near the lows for the day, again on the same worries about credit, but here the problems are a bit more specific: they revolve around worries on margin calls and counterparty risks.

It's public information that big firms like Thornburg and Carlyle have had margin calls recently, and have been forced to sell assets. These forced sales generate new prices for paper, which in turn generate additional margin calls. This "vicious cycle" is one of the main problems facing the market, and the brokers are right in the middle of it.

There is an additional problem: counterparty risk. If I as a firm go out and buy protection in the form of a credit default swap, who is the counterparty and are they strong enough in the event I need them? This was never an issue until recently, but now buyers are regularly asking who the counterparty is. In many cases, it is brokerage firms, and queasiness about that is putting additional pressure on them.



Questions? Comments? tradertalk@cnbc.com

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  Monday, 10 Mar 2008 | 9:35 AM ET

Financials Top Market Concerns

Posted By: Bob Pisani

U.S. futures up slightly, just off highs of morning, European markets flat, Asian markets down 2-3 percent. Malaysia's KLSE Composite down 9.5 percent; Malaysia stock market temporarily halted during session; political unrest after major upsets by opposition party during weekend elections.

McDonald's keeps knocking the cover off the ball. February same-store sales were strong in the U.S. up 8.3 percent, but Europe stronger, up 15.4 percent. Asia/Pacific, Middle East, Africa up 10.9 percent.

Financials very much in the news this morning. Countrywidedown 7 percent on reports that the FBI has begun a criminal inquiry for suspected securities fraud .

MBIA said they were seeking a withdrawal from Fitch's rating system, that the value of Fitch's ratings were "limited at this time" and only adds extra volatility to its stock. They see a $200m in mark-to-markets losses from CDO business.

Annaly Capital up 6.4 percent, they raised their quarterly dividend to $0.48 from $0.34. The company said, "Our leverage has been running at the lower end of our range, which enables us to manage portfolio financing operations with our diverse and strong roster of counterparties, including handling the haircut adjustments that are typical for volatile periods like this. Moreover, the vast majority of our assets are Agency pass-through MBS, the most liquid and financeable securities in the Agency space."

Blackstone reported earnings of $0.08, estimates were for $0.19, down 3 percent. Dividend (8.2 percent) appears safe . They are holding a conference call at 11 AM this morning.

Morgan Stanley cut estimates of several large-cap banks due to weaker market and credit condition, and said they saw a higher probability of "more cuts coming." Cut estimates for Bank of America by 21 percent, Wachovia and Citi by 20 percent.

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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