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Merrill Lynch Profit Warning Rumors: Consider The Source

There was a time when quadruple witching expiration (the quarterly expiration of stock and index futures and options) was a big event; the Wednesday and Thursday before would often see very large volume and volatility. That doesn't happen anymore, for a combination of reasons, principally because traders spread their rollover trades over a week and a half now.

Elsewhere:

1) Merrill Lynchis down 5 percent on a vague,unsourced rumor from Reuters that Merrill might issue a profit warning. Remember the internal logic of active stock traders: it doesn't matter whether a rumor is true or not, what matters is to be ON THE RIGHT SIDE OF THE TRADE. Ask yourself this question: who would have access to this kind of inside information, that it would be leaked to a trading desk? Which is more likely: that a trader creates a rumor that they can profit from, or that inside information has been leaked? Then consider that short sellers have been pressing--and continue to press--financials. I'm not saying that it is impossible Merrill will issue a profit warning; I'm just asking you to consider the source (trading desks) and their motivations.

2) Maybe it's not so bad with regional banks:

--Huntington Bancshares up nicely as after the close they announced that charge-offs would come in at the top end of its 2008 guidance; so maybe the losses won't be as great as anticipated. This follows BB&T, which announced yesterday it was considering raising its dividend.

--Not so fast. Ed Najarian and company at Merrill Lynch out with a long (56 page) note, cutting estimates for regional banks on higher loan losses and reserve building. It's not all bad news: bank stocks now appear to be in capitulation mode," the report says.

3) Continental Airlines is doing a secondary offering of 11 million shares of common stock at $14.80 per share. The stock went out yesterday at $15.59; trading down nearly a dollar.

4) We have been talking about how the value of many used cars--particularly gas guzzlers--has been dropping rapidly, putting pressure on car dealers and consumers alike. A similar situation may be happening with leased vehicles.

Lehman Brothers out with a note saying that GM's financial arm may need to write down $1.5 billion, and Ford's may need to write down $1.1 billion.

The report noted: "We expect deteriorating residual values of lease vehicles to be lower than original expectations, which could significantly impact loss rates that are already tracking above average for recent vintages."

5) You think it's tough in your business? Try being Winnebago, beset with high gas prices,

Winnebago beat on the earnings side, but revenues were short of expectations.

Listen to these stats from Winnebago:

--the motor home market has faced double digit retail sales declines for eight of the last nine months;

--retail sales declined 26.1 percent for the first four months of 2008;

--forecasts indicate volumes will decline to levels not seen since 1991.


Questions? Comments? tradertalk@cnbc.com

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

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