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Trader Talk with Bob Pisani

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  Tuesday, 25 Nov 2008 | 3:10 PM ET

Traders "Giddy" Over Mortgage Moves

Posted By: Bob Pisani

Never mind that the markets are showing little enthusiasm for continuing the 1,000 point rally in the Dow we saw on Monday and Tuesday.

What's important is that traders are seriously discussing whether Treasury has finally found a program that will make a difference. Some traders seem absolutely giddy about the Treasury's plan to buy $100 billion of Fannie/Freddie debt and $500 billion of mortgage backed securities.

Why the excitement? Because there is already a tangible effect in the mortgage markets. It's likely mortgage rates will drop notably in the next day or so, perhaps as much as 50 basis points (a half point). That would mean mortgage rates would go from, roughly, 6.0 percent to 5.5-5.6 percent. That is a lot.

Remember that housing is the original source of many of our problems. To date, lower home prices have not led to an uptick in home sales. Now, with mortgage rates coming down, the housing affordability equation gets even more favorable. This, along with the attendant publicity lower rates will receive, may begin to get home sales up. Home builders are rallying today.

Separately, there is also hope that the new Term Asset-Backed Loan Facility (TALF) will be a big help to consumers and the companies that service them. This program provides up to $200 b of non-recourse loans to holders of asset backed securities. These are the people that securitize car loans, personal loans, student loans.

This will be a big help to the credit card companies like AmEx and Capital One . It should also help auto loan companies like AmeriCredit and companies that give small business loans like CIT .

There is a risk here: the Treasury is printing dollars big-time, and the credit-worthiness of the U.S. government will certainly be tested in 2009. But that is a risk, obviously, that Treasury has decided to take.

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  Tuesday, 25 Nov 2008 | 9:09 AM ET

Fed Moves Should Extend Rally

Posted By: Bob Pisani

Mr. Paulson will be the key today, as he is expected to open the TARP to car, credit card and student loans, and heaven knows what else. More importantly, a separate facility will buy mortgage-backed securities. Bottom line is money will come out of Treasuries and into riskier assets.

Futures rallied because the hope is that the buying of mortgage-backed securities will unclog the MBS market and result in lower interest rates. There's some evidence that might happen, as the coupons on 30-year MBS are indeed down about 30 basis points this morning.

What about the stock market? The general feeling last night was that there was no need to be a hero after a 1,000 point rally in the Dow. However, the buying of mortgage-backed securities may be an additional impetus for the rally to continue.

    • Fed Unveils Plan to Support Mortgages, Consumer Credit

Elsewhere:

1) What am I missing here? Goldman is upping its plan bond offering to $5 billion. Goldman became the first firm to tap the FDIC's Temporary Liquidity Guarantee Program, which guarantees senior unsecured debt. It will be offered at 220 basis points over comparable 3-year Treasuries, which would put the yield at roughly 3.6 percent.

But wait a minute: many of the Goldman (non-government backed) preferreds are trading at nearly 9 percent yields. Apparently, government backing is worth an awful lot in this environment.

JP Morgan just announced they will also be tapping the new program as well. Goldman up 7 percent pre-open. Other financials also up about 6 percent: JP Morgan, Citi, UBS.

2) Another bid bites the dust. BHP Billiton gave up its $66 billion all-stock bid for Rio Tinto , a project on which untold man-hours and oceans of analysis had been expended in the nine months since a bid was made. BHP cited the continued deterioration of near-term economic conditions. BHP said they did not want to take on the greater debt levels of the combined group, and did not want to expend the time to divest assets, which would have surely been required. BHP up 16 percent, Riodown 33 percent.

3) Still no sign of improvement in housing. DR Horton , the largest homebuilder in the U.S., reported that for the fourth quarter ended September 30, the cancellation rate was 47 percent (as bad as it has been all year).

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CNBC's Names in the News:

BHP

DR Horton

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  Monday, 24 Nov 2008 | 4:25 PM ET

Volatility Still Rule Of Thumb For Markets

Posted By: Bob Pisani

We were reminded again that we are not guaranteed gains. Yes, there was a broad rally, financials leading. It was the first two-day rally this month. Commodities rallied as well, as did commodity stocks.

But the Dow, which was up as much as 552 points with 15 minutes to go, dropped 150 points in the last few minutes. Still up, but a reminder of the volatility. Is Citi the template for big banks? AIG had to be renegotiated, the TARP is being used for purposes that were not advertised.

The question today is, with the new Citigroup bailout, has the Fed finally found a template for dealing with losses at the big banks? Can it afford the template?

The government plan for Citi has six components:

1) Wall off assets;

2) Make the institution absorb the initial losses;

3) Then let the government absorb the bulk of the losses (in this case, the government backstops 90 percent of the $306 billion);

4) Make the institution sell senior preferred shares at some percentage of the size of the troubled assets;

5) Cap the common dividend at a nominal amount ($0.01 per quarter);

6) Give government input into executive compensation.

The hope of the bulls is that this is the successful template, and that we have seen the last of the big bank failures (Wachovia, Washington Mutual, Bear Stearns, Lehman Brothers, AIG and IndyMac) this year.

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  Monday, 24 Nov 2008 | 1:12 PM ET

Markets To Obama: Where's The Tax Cut?

Posted By: Bob Pisani

Some traders disappointed in Obama speech, but don't kid yourself. While Obama said a net tax cut is "part and parcel of what is needed for stimulus," he also said he was weighing whether to let the Bush tax cuts expire.

The markets may have been a bit disappointed with this; they want the President-elect to unequivocally state there will be a tax cut.

But don't kid yourself; selling into rallies, particularly selling into news events, has been a successful strategy this year, almost regardless of what is said.

The S&P 500 rallied about 11 percent from its close Thursday to its high today, which came just as the President-elect approached the podium.

In other words, they were selling the news even before he got to the Q and A.

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  Monday, 24 Nov 2008 | 11:46 AM ET

Not Much Making Traders Optimistic

Posted By: Bob Pisani

Despite the two-day rally, traders remain skeptical about the markets. Will the Obama stimulus plan entice buyers? We couldn't be more oversold. Consider:

1) The S and P 500 is over 30 percent below its 200 day moving average, the worst spread since the 1930s;

2) We are at historic lows on the indices for Home builders, Insurance, and REITs;

3) The following indices are at at least 10 year lows: Banks, Retailers, Semis, Drugs.

So why aren't traders coming in Monday morning enthusiastic about the markets? Because nothing in the trading patterns make them optimistic.

Traders were dismayed to see that selling pressure actually INCREASED last week (we had two 90 percent downside days, back to back). Typically, the end of bear markets see a REDUCTION in selling pressure.

The good news is that stocks have rallied steadily since news of the Obama financial team was announced Friday afternoon. Upside volume, too, has picked up.

But the history of these rallies this year have been one of disappointment for bulls. Therefore, this two-day Obama rally is being greeted with more than a little skepticism. Rallies have been primarily used to sell into strength, and there is nothing on the horizon that indicates that is changing.

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  Monday, 24 Nov 2008 | 9:02 AM ET

Citi's Deal: The Good News And Bad

Posted By: Bob Pisani

The Citi deal is what one trader called "good bank, bad bank lite"—i.e. they are ring-fencing $306 billion in assets, but not removing them from the balance sheet. What isn't clear is exactly how the government will value the assets.

The good news is that this should at least help Citi make loans; the bad news is it is very dilutive to existing shareholders, who now don't even have a dividend.

This is the THIRD TIME Citi has reduced its dividend. They were the third largest dividend payer at the start of the year, with a payout of $10.78 b, according to Standard and Poor's; they payout then was $2.16 a year. That was reduced in January to $1.28, then again in September to $0.64, now $0.04.

Citi isn't the only one: there have been 50 dividend cuts by S&P 500 companies this year, and it is hurting. The fourth quarter 2008 S&P 500 dividend payment is expected to decline 10 percent from the same period last year; the worst quarterly change since 1958.

Citi up 54 percent pre-open, but even the preferred shares are rallying. for example, the 6.5 percent preferred share (which was yielding 27 percent at the close on Friday!) is up 84 percent pre-open.

    • Citigroup's CEO, Management Should Go: Analyst

Elsewhere:

1) Financials are rallying, many up 6 to 9 percent, as well as commodities and commodity stocks.

2) British banks are also asking for more capital-raising, so Barclays is looking for more money form Middle East investors

3) Jaguar/Land Rover is asking the British government for a billion pounds.

4) Next up to the trough: home builders, who are pushing for a $250 billion stimulus package called "Fix Housing First." It includes a tax credit and a federal subsidy to help lower the mortgage rate.

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  Friday, 21 Nov 2008 | 5:02 PM ET

The Geithner Affect On Markets

Posted By: Bob Pisani

Another day, another final-hour swing. At 2:55pm, the Dow was once again drifting into negative territory. But unlike much of this week, when the markets sold off and ended at the lows of the day, a NBC News report revealing President-Elect Barack Obama’s nominee for Treasury Secretary propelled a strong late-day rally.

In just the final hour of trading, the Dow surged nearly 550 points to end the day at session highs after NBC News reported New York Fed President Tim Geithner would become the next Treasury Secretary.

While the choice of Geithner was not a complete surprise, Wall Street applauded the choice, hoping that Mr. Geithner’s extensive involvement during the financial crisis will help him restore confidence in the markets. After all, he knows and understands the problems at hand. Regarded as a young, but savvy, good thinker, Wall Street believes his wealth of experience at the Fed and thorough understanding of the markets will help provide strong leadership at the Treasury.

Despite the broad strength in the markets today, big banks like JPMorgan Chase, Wells Fargo, and Citigroup all failed turn positive at the end of the day. Citigroup still closed below $4, posting a 60% decline this week.

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  Friday, 21 Nov 2008 | 9:35 AM ET

What Citi Is Doing

Posted By: Bob Pisani

This post is from CNBC producer Robert Hum:

Stock futures point towards a higher open, though they are significantly off the highs of the morning. This comes after the S&P 500’s 4th worst day of the year yesterday, putting it at an 11.5-year low. The S&P is now down 52% from its all-time high set just over a year ago. Up strongly this morning are yesterday’s most beaten-up sectors: financials, materials, and energy.

Overseas today, Asian markets turned around following their lower open. For example, Japan’s Nikkei 225 Index was down nearly 4% shortly after the open, but rebounded to finish up almost 3% on the day. However, European markets, while only down 1%, are at the lows of the day.

Citigroup executives are reportedly evaluating various options for the company, including selling parts of the company or merging the firm with another company.

Citigroup’s board will likely convene today to discuss many of these alternatives. This comes after the stock has lost half of its value this week, as it closed below $5 yesterday. While there’s no official comment from the company on these reports, Citigroup stock is up 11% pre-open.

After the close yesterday, KeyCorp slashed its quarterly dividend 67% to 6.25 cents. This was the regional bank’s second dividend cut this year. In June, it lowered its dividend from 37.5 cents to 18.75 cents. Expect to see more of this from banks, as they continue to seek ways to shore up additional capital.

In another news:

Gap’s earnings beat analysts’ estimates by a penny. Despite reaffirming full-year guidance inline with expectations, on the conference call, its CEO said he expects challenging conditions to continue for at least six months.

Ann Taylor earnings miss estimates by a penny. It sees its margins to be under “significant pressure” amid heavy sales promotions across the industry in the fourth quarter. As a result, the company is withdrawing its previous Q4 and full year guidance.

Dow component Wal-Mart announced that its international operations chief, Mike Duke, will succeed Lee Scott as CEO on February 1. Lee Scott, who will retire from the CEO position, will remain chairman of the company.

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  Thursday, 20 Nov 2008 | 5:01 PM ET

Why This Was A Different Sell-Off

Posted By: Bob Pisani

There were a couple of key differences between today's sell-off and the recent late day declines:

1) Volume was heavier; instead of a low volume, high volatility sell-off, this was an old fashioned high volume, high volatility sell-off; in other words, sellers materialized.

2) Big-name energy stocks, which have held up well in November, sold off aggressively the minute oil broke decisively through $50 around 2 PM ET; with Chevrondown 9 percent, Exxon down 7 percent.

As for the auto mess, House Speaker Pelosi laid out her position very clearly: until we see a plan, we cannot show you the money. She didn't say no, and Sen. Reid indicated the Senate may reconvene in December if and when the auto companies show a plan.

Everyone believes this will happen (GM ended up 3 percent, Ford up 10 percent), and the auto companies will get some kind of bridge loan, but the murkiness only added to the confusion.

And now, to the key question: why do financials keep dropping? The explanation is not complicated. The Street believes the capital raised is insufficient to cover additional losses.

Many, like Citi , would like to sell assets, but loans for such purchases are all but impossible.

How much more capital is needed? We don't know. But estimates are high. Yesterday, for example, FBR Capital Markets said that the U.S. financial system still needed at least $1.0 trillion to $1.2 trillion in additional capital.

Private market capital-raising is becoming more difficult (Prince Alwaleed did not double down on his bet today on Citi), so FBR and others believe more government money will be needed to recapitalize the system.

There is also considerable discussion that banks are likely to continue cutting their dividends. I think this is a safe bet, and it is an additional reason these stocks are under pressure.

The bottom line: there is not yet enough capital in the banking system to balance the perceived risk. An additional problem is that much of the assets from the banking system went into unregulated investment vehicles, which rarely trade.

    • Dell: Earnings Show Cost Cutting Measures Working

The feds are now trying to bring these assets unders some kind of regulatory scrutiny by issuing commercial bank charters to the likes of American Express, Goldman Sachs , and Morgan Stanley .

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  Thursday, 20 Nov 2008 | 9:17 AM ET

Trader Voices Growing: Break Up Citi

Posted By: Bob Pisani

Traders like to remind me that the definition of insanity is doing the same thing over and over again and expecting a different result. So it is that plans by Saudi Prince Alwaleed bin Talal to raise his investment in Citigroup are being greeted with open skepticism on the Street.

"He's just averaging down," one trader said to me. This is what we have come to: open derision. The prince says he is raising his stake back to the original level of 5 percent (his holdings are currently less than 4 percent). One percent of the current share price is about $350 million.

Citi's shares have lost one-third of their value this week. It now has a market cap of $35 billion, this after the government put $25 billion into it and after raising an additional $50 billion in private capital, mostly from sovereign wealth funds.

What does all this mean? It means that the Street believes that all the capital that has been raised will not be sufficient to cover the additional losses that are coming.

It's likely Mr. Pandit, the CEO, very much regrets his Town Hall meeting Monday morning. Aside from laying off 50,000 employees, traders immediately focused on comments indicating that Citi's reported consumer credit losses in the first half of '09 could be substantially higher than expected. That, and the realization that they will need to take additional write-downs, has caused the stock to go into a free fall. Traders are arguing that Citi should be broken up. This is still a minority position, but the voices are getting louder.

Elsewhere:

1) Futures dropped as jobless claims leaped up to 542,000, the highest since 1992.

2) Solar producer Suntech Power down 20 percent pre-open as they warned fourth quarter earnings would be well below expectations due to slumping demand. Rival LDK also down 10 percent. This is one of the unfortunate side effects of the dramatic drop in oil.

3) The IPO on the NASDAQ did finally come off, though at a reduced price. Grand Canyon Education (LOPE), the first IPO in 3 months, begins trading today. They priced 10.5 million shares at $12 (cut from $18-$20), but at least the deal got done.

4) weaker guidance from Men's Wearhouse and Barnes & Noble .

    • Jobless Claims Hit 16-Year High, Above Forecast

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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.

 

  • Bob Pisani

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

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