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Trader Talk with Bob Pisani

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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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  Wednesday, 19 Nov 2008 | 2:08 PM ET

Trouble With Stocks: Lost Identity

Posted By: Bob Pisani

The flight into Treasuries, as well as the fact that credit default swap spreads are widening, is causing broad weakness in the stock market.

But it is not trading in any way unusual: we are again being led down by financials and, to a lesser extent, commodity stocks. Early morning strength in commodities has dissipated as the dollar has gained strength.

As for Ford (down 23 percent) and GM (down 15 percent), the market is saying that the common equity value of the stocks are essentially zero, regardless of whether they get loans or not.

Not so with auto-related companies, or with the dozens of industries (chemicals, advertisers, steel, trucking, etc.) that depend on them. The effect of a bankruptcy on these feeder industries could be very serious.

For example, should any of the auto companies be forced to file for bankruptcy, even a pre-packaged bankruptcy, suppliers who have sold parts or services to them on credit would get only a small part of the receivables; everything else would just become part of the unsecured obligations and they would likely get only pennies on the dollar, and it may take several years to get even that.

This may be sufficient to force many auto parts suppliers that are not in bankruptcy into bankruptcy. The core problem with the stock market right now is that stocks are trading as an asset class (a class no one wants), not as individual stocks.

    • Yahoo Needs More Than Yang's Leaving To Recover

I talked this morning with a seasoned hedge fund trader specializing in trading financial stocks. He is up on the year, and is 100 percent in cash. 100 percent. Why? "The issue is the volatility and the fact that you can't do fundamental work right now that matters," he told me. "Until people start looking at stocks on a company level again, it is hard to be too invested."

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  Wednesday, 19 Nov 2008 | 9:19 AM ET

The Doomsday Scenario For Automakers

Posted By: Bob Pisani

While the hearings were no picnic for the automakers, and while a large number of voices are calling for no aid, the bet on the Street continues to be that some form of aid will be forthcoming. Unfortunately, the same group that believes aid is coming also believes that the equity in GM (certainly the common equity) has little if any value.

The bet is that some small amount of money will be given to the auto makers now, enough to serve as some type of bridge loan into early 2009. At that point the Democrats will have the political leverage to develop a broader rescue package in the first weeks of February.

But something needs to be done soon. Here's the Doomsday Scenario:

1) No action in the next week;

2) Senate goes away in December;

3) Parts suppliers, steel companies, ad agencies and other suppliers demand payment on delivery for services from the auto makers. This will dramatically accelerate the cash burn and...poof! They're gone. Chapter 11, mid-December.

The auto execs will appear in front of the House at 10 am ET. GM down 6 percent pre-open.

Elsewhere:

1) Could Fannie Mae be de-listed from the NYSE? The NYSE took the first step, notifying Fannie that they have been trading below $1.00 for the last 30 consecutive trading days. They have until November 26th to tell the NYSE how they plan to get the stock price above $1.00 (currently $0.47).

2) European financials are again weak pre-open, with ING , Barclays , Deutsche Bank and others down 5 to 9 percent.

3) Same with commodity stocks: BHP Billiton ,Petrobras , Rio Tinto and others down 3 to 5 percent pre-open.

4) A little bit of good news on Housing Starts and Permits: starts about in line with expectations, but permits was well below expectations (708,000 vs. consensus of 772,000). While this sounds bad, we want permits to drop to soak up the excess supply.

Not good news elsewhere on housing: mortgage applications fell 6.2 percent; unfortunately it was all led by a 12.6 percent drop in applications to buy homes (not refis), even though mortgage rates dropped. Applications are near an 8-year low.

Unfortunately, deflation is accelerating, as both CPI and core CPI came in well below expectations.

5) LDK Solar and Trina Solar both reported strong profits on demand for solar power; the question is whether the slower global economy and lower oil prices slow the growth they should be seeing.

6) Discounters continue to look good: BJ Wholesale beat, and gave guidance for next year of $2.27 to $2.39, above the midpoint of $2.30 expected.

    • CEOs Urge at Least $300 Billion in Fiscal Stimulus
    • Automakers Plead for Congress to Fund Bailout

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  Tuesday, 18 Nov 2008 | 4:46 PM ET

Money Manager Peter Schiff Had It Right In 2006

Posted By: Bob Pisani

While the markets staged a modest rally in the last hour, financials and commodity stocks showed no signs of life. Not so with energy: many big names were up 2-6 percent; this is one of the only sectors that has not had a disastrous November.

Hewlett-Packard made a bold call on 2009, predicting earnings slightly above consensus, but CEO Mark Hurd is going out on a limb here. Many anticipated that PC prices will be cut drastically in 2009, eating into margins.

The comment from Saks is more typical of what we are hearing: the CEO there said it was "impossible to predict future performance;" i.e. we are not giving EPS guidance at this time.

Meanwhile, GM ended down nearly 8 percent. The market is saying that, even if GM gets some money from the feds, it will be given out so parsimoniously, with so many strings attached, that it will be make little difference to the equity holders. Equity holders are likely to be wiped out whether GM goes under, or whether they get a big bailout in the next few months.

Finally, stock traders were passing around the video, which consists mostly of money manager Peter Schiff, head of EuroPacific Capital making dire predictions about housing and the stock market. What’s relevant is he was making these predictions in 2006, and was being openly laughed at on TV. This is a lesson in humility for everyone who is so confident in their bullishness, or bearishness.

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  Tuesday, 18 Nov 2008 | 3:05 PM ET

Traders Expecting Market Rise At Today's End

Posted By: Bob Pisani

Traders are expecting a modest, roughly $4.5 billion buy program near the close. Why?

Anheuser-Busch is coming out of the S&P 500 (bye-bye old friend! It will no longer be traded at the NYSE; InBev trades in Brussels). The market cap of Anheuser-Busch is about $50 billion. Therefore, $50 billion will be disbursed to the shareholders.

Of that, about 11 percent is indexed to the S&P 500. Some of that money will go into medical waste management company Stericycle , which is replacing Anheuser-Busch in the S&P 500, but the remainder—roughly $4.5 billion—will be distributed to the other 499 stocks in the S&P 500, the exact amount depending on the market capitalization of each company (the S&P 500 is a market cap weighted index; the higher the market cap, the more the weighting in the index).

That was easy. Here's the hard part: does a buy program necessarily mean the stock market will rise going into the close?

The answer: in calmer markets, it greatly increases the chances that will happen. But in this market, it's quite possible traders will see the extra buyside supply as another good excuse to Sell Into the Rally.

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  Tuesday, 18 Nov 2008 | 11:57 AM ET

Why There's No Market Rally

Posted By: Bob Pisani

If you want insight into why the stock market is having trouble advancing, just look at what it is going on with estimates of 2009 earnings. There is a vast army of financial nerds who look over financial statements, and crunch numbers for their companies. There are two classes of numbers crunchers:

1) individual company analysts (known as "bottom-up" analysts); and

2) economists who make broad estimates for earnings by sector based on macroeconomic data (known as "top-down" analysts).

Right now, according to Standard and Poor's, here are the consensus estimates for earnings for 2009 for the S&P 500 from the two camps:

Bottom-up: $91.85

Top-down: $62.98

Are we talking about the same country here? The differences are huge: the bottom-up estimates are 50 PERCENT HIGHER than the top-down estimates! Why is there so much of a difference between the two camps? I'll tell you why in a minute. First, let me give you some advice: go with the top-down people.

Normally, the stock market bottoms out at about 10 times forward earnings. So if we take the estimates of the bottom-up people, the S&P next year will be about 918 ($91.85 x 10).

Right now, the S&P is about 850, so by the estimates of the bottom-up people the S&P is currently trading at 9.2 times forward earnings (850/$91.85). If the bottom-up people are right, THE STOCK MARKET RIGHT NOW IS CHEAP. Buy now!

Now, look at the top-down number: $62.98. This puts the S&P 500 at about 630 next year at the bottom ($62.98 x 10 = 630).

Yikes! Remember, we are at 850 right now. Based on this estimate, the S&P right now is trading at 13.5 times forward earnings (850/$62.98). That is NOT CHEAP by historic standards (the historic average P/E multiple is 15 times forward earnings, but we are not talking averages here. We are talking cheap).

The point is this: if you believe the top-down strategists, the stock market right now is NOT CHEAP. Don't buy. This matters, because the most bearish strategists have been the most correct ones this year. Therefore, these bearish strategists have the most clout. For now, traders believe them more than the more bullish analysts. That's why the stock market is having trouble rallying.

Now, let me tell you why there is such a difference between the top-down and bottom-up camps:

1) The top-down people are strategists with a much larger world view than analysts (bottom-up); they are quicker to cut numbers, particularly in times of stress.

2) bottom-up analysts are myopic, watching only their company's and sectors, and often slow to react to changes in the economy;

3) many bottom-up analysts do little more than follow their company's guidance, so when company's are slow to cut numbers, so are the analysts;

4) the quality of sell-side bottom-up analysts has declined in recent years as brokerage firms have cut their coverage of many companies.

Get the point? Guess who I follow?

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  Tuesday, 18 Nov 2008 | 9:15 AM ET

Guidance Is Now A Tricky Business

Posted By: Bob Pisani

Producer Prices were down 2.8 percent in October, the biggest decline on record month-over-month and far more than the expectations of down 1.9 percent. The headline number was depressed by a 24.9% decline in gasoline prices. To add to the confusion, core-PPI (ex-food and energy) rose 0.4 percent which was 0.3 points more than expected.

Elsewhere:

1) Hewlett Packard up 15 percent pre-open, reported fourth quarter earnings a few pennies above the $1.00 expected; more importantly guidance was surprisingly strong: $0.93-$0.95 for the first quarter vs. $0.93 estimate.

2009 guidance is also surprisingly high: $3.88-$4.03 vs. $3.85. They are emphasizing execution and the ability to increase market share. IBM ,Dell, and other techs have rallied on this guidance. Please note that last night Hewlett said they were extending a holiday shutdown on PC production from one week to 2 weeks.

2) Like many retailers, Home Depot beat earnings estimates. However, comparable store sales were down 7.1 percent. No guidance for the fourth quarter, but they do expect full year comp store sales down 8 percent, with EPS for the full year expected to decline by 24 percent, consistent with previous guidance.

3) Elsewhere, guidance is really becoming a tricky business.

a) Saks reported earnings below expectations (loss of $0.13 vs. loss of $0.03 expected), CEO Stephen Sadove said, "it is impossible to predict future performance with any degree of certainty," so they didn't give any guidance;

b) Corning and Host Hotels (which owns much of the Marriott hotels) withdrew their guidance;

c) Pepsi Bottling also lowered guidance and said it would cut 3,150 jobs in North America, Europe and Mexico;

4) As commodity prices have dropped, the attractiveness of mergers in that space have dropped as well. Two large companies in the steel space—Cliffs Natural Resources and Alpha Natural Resources—terminated their $10 billion merger, citing the economic environment. Cliffs up 6 percent pre-open.

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  Monday, 17 Nov 2008 | 4:03 PM ET

The Triple Problem For Stocks

Posted By: Bob Pisani

We have a simple problem here: no visibility on earnings has led to low volume and high volatility. It's a strange combination. In theory, the market is cheap. In theory, we are due for an oversold bounce. In reality, people are tired of playing this game. Too many failed rallies.

What's the problem? Traders believe that worse than expected a) earnings and 2) economic news is all we can expect for the next couple months.

It's going to be very difficult for the markets to hold up just above their lows with that kind of news flow. There's been a lot of buying at this level for the past two months. What do traders have to show for it? Not much.

What about earnings? Stocks typically trade at trough around 10 times forward earnings estimates. Street consensus for earnings in 2009 is about $80 for the entire S&P 500. That means the S&P should be about 800.

But wait: a lot of analysts are talking about earnings as low as $60 next year. That means the S&P could go to 600. Admittedly, these are comments from the most bearish of analysts, but those are the ones that have been most correct this year.

What about the government programs being a deal changer? That's been out for a while, and all the intervention and money hasn't stopped the market from going down.

Could we get a rally? Yes, but most traders think it is highly unlikely we will end much above 900 on the S&P at best. With that kind of modest upside, why take the risk?

Financials continued their underperformance. Banks and insurance companies have separate issues:

Bank woes:

--lack of profit

--capital raises

--dividend cutting

Insurance woes:

--capital raising

--credit deterioration

--equity market guarantees embedded in annuities

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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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