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Halftime: Foreclosure Crisis, Market’s Bottomless Pit?

Friday, 15 Oct 2010 | 2:54 PM ET

Nervous investors spent Friday trying to determine if the widening foreclosure crisis is the proverbial ‘other shoe’ that's about to drop.

For the second day in a row, financials tanked on concerns the crisis could not only affect corporate profits but spread to credit markets and the overall economy.

With the crisis so confusing and difficult to quantify, is it about to become the market’s bottomless pit.

What must you know?

For insights we turned to S&P analyst Eric Oja who said there are really two issues here.

Markets Mixed After Ben's Speech
Markets mostly lower after Fed chief Ben Bernanke signals go ahead for QE2, with the Fast Money traders.

1) Banks that sold bad mortgages to Fannie Mae and Freddie Mac have a contractual obligation to buy the loans back, according to their regulator

2) The foreclosure crisis in which all 50 U.S. states launched a joint probe into potentially illegal foreclosures. The investigation will focus on allegations that some banks did not review documents properly or submitted false statements to evict delinquent borrowers.

Oja tells us the mortgage repurchases is a long-term issue but we should get clarity about the foreclosure crisis by Thanksgiving.

”We’ll find out in the next few weeks,” he says. “These banks will go through each and every foreclosure in their pipeline to see if there’s any evidence of fraud. We’ll find out very soon just how clean their foreclose processes have been.”

In other words these banks are not bottomless pits as some investors believe. They could turn around in the days ahead.

Although Oja stripped BofA of its "Buy" rating due to it’s exposure to these issues he does see opportunity elsewhere.

”The regional banks have been dragged down by the issue,” he says and dragged down unfairly. “They don’t have the (same) potential liability. As a result PNC , Fifth Third, SunTrust and BB&T could do better in the next few weeks."

More Insights with the Fast Money traders

I think the foreclosure situation is really a stock specific story , says Joe Terranova. BofA is getting hammered due to their Countrywide acquisition. But I think it’s ok to own Citi and JPMorgan.

For me, the tell is the XLF, says Pete Najarian. It failed once again at 15. But I’m not sure if it’s a sign of weakness or if it’s a sign that names in this ETF are trading in a tight range.

If you want a bank play, look at Bank of Montreal, counsels Patty Edwards. They’re not exposed to this mortgage mess.

The bias in the market is largely sell-side in the financials, but I’m also seeing some bottom fishing, says Steve Grasso. However, the money coming out of banks seems to be rotating into energy and industrials. That doesn't suggest the world is coming to an end. On the contrary I see it as a leap of faith that the world is getting better.

Tech Takeoff
Technology sector rises midday as Dow falls, with the Fast Money team.

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ST. JOE RESPONSE

As you likely know, shares of St. Joe plunged this week after widely followed investor David Einhorn raised concerns the company was overvaluing Florida real estate holdings on its books.

However another widely followed investor, Bruce Berkowtiz of Fairholme Capital is very much on the other side of the trade.

In fact, he bought the weakness on Wednesday – adding to his position -- and now owns 29% of the real-estate developer.

"If we were able, we would buy the whole company," Berkowitz told Reuters. Einhorn "has put a big spotlight on this company. My advice is everyone should enjoy it and take advantage of it."

What should you make of it?

Saying that he’d buy the whole company is impressive, says Steve Grasso. The stock may bounce in the wake of this statement but Einhorn always does his homework.

If you have a 5-10 year time horizon, I’d buy the dip, says Patty Edwards. Throughout time land has been valuable.

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TOPPING THE TAPE: GOOGLE

On Friday, the Nasdaq was the only major index in the green due to strong earnings out of Google last night and as Apple again hit new record highs ahead of its earnings report Monday.

What’s the tech trade, now?

I’m seeing a high volume of calls trading in Apple, says Pete Najarian. It’s likely a sign that investors are excited about the iPad and Macs.

I’m watching Google, says Joe Terranova. The Street didn’t know what it’s next growth story would be but after earnings it seems display ads will be that driver. I think it goes to $630 by year’s end. Click here to go to Pro Traders: Money Managers About To Chase Google?

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SEAGATE CONFIRMS INTEREST IN TAKEOVER

Shares of Seagate surged Friday after the hard-drive manufacturer confirmed that it was approached by another company interested in taking it private.

The company also said it retained Morgan Stanley & Co Inc and Perella Weinberg Partners LP to provide financial advice as it explores the possibility of going private.

What should you make of it?

I think Seagate as well as Western Digital have room to run from here, says Needham analyst Richard Kugele.

Hear more about the tech trade from analyst Richard Kugele. Watch the video above.

Read More:

> Pros: Seagate A 'Buy' On Takeout Chatter, But Not Yet


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Trader disclosure: On October 15th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Pete Najarian owns (GE); Pete Najarian owns (AKAM) call spreads; Pete Najarian owns (YHOO); Pete Najarian owns (ISLN) call spreads; Pete Najarian owns (BRCD); Pete Najarian owns (CNI); Terranova Owns (GLD), (APA), (AAPL), (IBM), (EOG), (HES), (OIH), (OXY), (ORCL), (SU), (VRTS), (XBI), (C), (JOYG), (RIG), (UPL), (PEP), (FCX), (PFE), (HOC), (NOV), (CRM), (MMM), (MCD), (NKE), (CREE), (ISRG), (XLF), (SDS), (GOOG); Terranova is short (APOL); Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST)

For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DRYS)

For Patty Edwards
Edwards Owns (BAC) For Clients
Edwards Owns (JPM) For Clients
Edwards Owns (WFC) For Clients
Edwards Owns (GOOG) For Clients
Edwards Owns (AAPL) For Clients
Edwards Owns (INTC) For Clients
Edwards Owns (GE) For Clients
Edwards Owns (SYT) For Clients
Edwards Owns (PM) For Clients

For Steve Grasso:
Stuart Frankel & Co and it’s partners own (COG)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HPQ)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MERC)
Stuart Frankel & Co and it’s partners own (NWS.A)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (OPEN)
Stuart Frankel & Co and it’s partners own (PDE)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (RDC)
Stuart Frankel & Co and it’s partners own (TLM)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners are short (QQQQ)

For Erik Oja
***No disclosures***

For Richard Kugele
Needham managed a public offering of (STX) in the past 12 Months
Needham received compensation for investment banking from (STX) in the past 12 months.
Needham makes a market in (STX)





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