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Trader Talk with Bob Pisani

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  Wednesday, 12 Nov 2008 | 9:09 AM ET

How Will Rest Of TARP Be Used?

Posted By: Bob Pisani

The joke on the Street this morning is that Starbucks wants to be part of the TARP—that Peolosi and company thinks everyone needs a $5 latte in this economy.

We should find out what the rest of the TARP will be used for this morning, when Treasury Secretary Paulson speaks. Assumption is he will finally give a clearer outline of what the remainder of the money will be used for.

GM is up 10 percent this morning because everyone believes that they will get some kind of aid, but from the looks of things the insurance industry may beat them to the punch. Genworth has gone from $25 in May to $1.24 yesterday. It's up almost 10 percent this morning for the same reason.

The Bank of England indicated that because inflation may drop below 2 percent in 2009, they could cut rates again; the pound is weaker.

Elsewhere:

1) Best Buy down 12 percent pre-open, lowering fiscal 2009 guidance, to $2.30-$2.90 from $3.25-$3.40. This is not only lower, it is a much wider range to reflect the uncertainty. Comp store sales declined 7.6 percent in October. Comp store sales for the four months remaining in fiscal 2009 (November-February) are expected to decline 5 to 15 percent. Again, this is a very wide range.

The commentary reads like an excerpt from the Book of Revelations: "Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen," CEO Brad Anderson said. They are working to adjust inventory levels (read: they're not buying as many TVs, camcorders, etc.)

2) Macys trading up 5 percent pre-open, surprised everyone by beating on earnings for the third quarter ending in October; however if sales trends continue into the fourth quarter earnings will be at the low end of guidance. That is not as bad as some feared.

3) Commodity stocks again weak today.

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  Tuesday, 11 Nov 2008 | 4:35 PM ET

Market's Dilemma And What Obama Should Do

Posted By: Bob Pisani

Houston, we have a problem. Stocks cannot rally on good news. This is not a good sign for those who are over the global economic crisis and want to get on with their lives.

The Dow rallied over 250 points around the two o'clock hour, then sold right into it. It rallied back a bit in the last 15 minutes. This, despite several pieces of good news in the last two days:

--Fannie Mae & Citi announce mortgage forbearance.

--China stimulus package.

--Libor keeps dropping.

Finally, with the government backstopping everything, one would think the risk is a little less than it was a month ago. Yet here we are, testing the October lows!

What's up? Yes, there are a lot of redemptions, but don't kid yourself. If anyone smelled an imminent, sustainable rally, there would be a lot of money around. Fast.

They don't. That's the problem. The smart money things thinks stocks will not rally significantly until the end of next year. They are in no hurry, because they don’t believe this is the final lows. Therefore they can sell every rally for a while.

Where is money going? A lot of traders seem to be looking to buy high-grade bank loans. Think about it: some are yielding 15 percent, trading at 60 cents on the dollar. Do the math! Twenty-five percent returns! Problem is, no one can buy them because they have to pay cash and the securities are not liquid.

The dilemma for stocks was addressed last night by Nouriel Roubini, the Professor of Economics at the Stern School of Business, and now well-known for his dire predictions about the consequences of excess debt (much of which has come true).

He spoke at a very well-attended BTIG gathering last night, for nearly an hour. I asked Professor Roubini whether the Obama team had contacted him and asked for his advice, and what he felt needed to be done. He said the Obama team had not contacted him, though he had spoken with several members of the team over time, but there were three important steps that were needed:

1) fix the financial system;

2) enact additional stimulus programs, initially $300 to $400 billion, largely in infrastructure programs; and

3) reduce the debt burdens on households.

Importantly, that is exactly what Fannie Mae and Freddie Mac did today: announced plans to reduce the debt burden on households.

He noted that the stock market was in confusion because of the inability to make a concrete prediction about where 2009 earnings would settle out, and indeed the inability to determine what P/E ratio should be appropriate in this environment.

He noted that estimates for 2009 earnings in the S&P 500 had gone from roughly $95 to as low as $60. Price/earnings ratios have been equally confused, with some believing a 10 multiple appropriate, others 12 or higher.

What this means is that estimates on the S&P 500 can come in as low as 600 (!) to 800 or a bit higher. The S&P is currently about 900.

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  Tuesday, 11 Nov 2008 | 3:38 PM ET

Fannie Mae Gives A Boost (Somewhat) To Stocks

Posted By: Bob Pisani

Stocks rallied (though they are now off their highs), largely on the Fannie Mae announcement on mortgage forbearance. Though it was leaked a few hours ago, it was only known that an announcement would be made today shortly before the 2 PM conference.

The plan would help borrowers who are 90 days or more behind on their mortgage. Payments may not exceed 38% of monthly income. More details will be announced shortly.

What details? We will likely see rate reductions as well as principal forbearance. While this is costly, the thinking is that long-term this will be less costly than allowing homes to go into foreclosure.

Federal Housing Finance Agency Director James Lockhart said the private industry should adopt the same industry standards to modify mortgage loans, but several have already announced mortgage forbearance plans: Citi, JP Morgan, Bank of America .

Interestingly, FDIC head Sheila Bair immediately called it "a step in the right direction but falls short of what is needed to achieve widescale modifications of distressed mortgages, particularly those held in private securitization trusts."

She has become quite outspoken recently and is obviously making sure she stays on the offensive.

Surprisingly, they would still allow loans where the principal, interest, taxes and insurance could be as high as 38 percent of gross income. That is still high: traditionally, 30 percent of gross income was the most lenders would allow to go to the monthly housing bill.

This is a sign of how far out of whack mortgage loans became in the last few years.

Finally, a few traders also noted that Blackstone's CEO Stephen Schwartzman also made positive comments at the same time. Speaking at a Merrill Lynch conference, he noted that THEIR private equity portfolio performing pretty well, and that he would be a buyer of distressed real estate.

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- The Dow 30 at a Glance

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CNBC's Names in the News:

General Motors

Google

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Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 11 Nov 2008 | 9:24 AM ET

AmEx: Why They Became A Bank Holding Company

Posted By: Bob Pisani

Futures are down as Asia and then Europe opened down. Get ready to hear a lot more economic stimulus plans from many governments. The dollar is up, commodities are down roughly 2 percent, and the bond market is closed.

Elsewhere:

1) Sign of the times: American Express' application to become a bank holding company was approved by the Federal Reserve.

What does this mean? Several analysts noted that it means AmExis assuming that the funding difficulties everyone is experiencing will be longer and more protracted than many expected.

By becoming a bank holding company, they are trying to broaden their funding sources, and will gain greater access to capital under the current and any future government-sponsored programs. And they do need capital. In the next six months, AmEx will need $4 billion in net commercial paper and $7 billiion of long-term debt.

Now they can turn to the real issue: stemming the losses coming from their consumer credit card division.

2) Las Vegas Sandsreported earnings below expectations, more importantly several projects are being delayed to preserve capital, and they are about to announce a $2.1 b capital raise. MGM and Las Vegas Sands down 7 percent pre-open.

3) Here is is the type of news we WANT to be seeing. Citigroup is joining JP Morganby offering mortgage refinancings. Reducing consumer debt burdens is a key part of getting the economy going; expect to see more of this in the very near future.

This will have long-term positive effects for a variety of reasons (reduced foreclosures, increased confidence, reworked mortgage terms could be favorable) and while it may not be moving the needle this morning, as time goes on this news has a greater effect that its being given credit for this morning.

4) REITS. Lots of discussion on the Street yesterday about the fallout from the Circuit City bankruptcy, believed to be the latest of several bankruptcies coming. Impact on the REITs was profound, with many mall REITs down ten percent or more.

  • Credit Spreads
  • Pros Say: Currency Trends in Reverse
  • Credit Crunch Timeline
  • It's not just poor fundamentals killing REITs: they are experiencing higher capital costs as well. Interest rates are higher, the underwriting criteria has become much stricter, and loan-to-value ratios are dropping. It means that a lot of companies are going to de-leverage.

    Speaking of funding difficulties: the Yellowstone Club, an exclusive mountain retreat in Montana which boasts former VP Dan Quayle and Bill Gates among its members, filed for bankruptcy Monday because they could not secure new financing.

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      Monday, 10 Nov 2008 | 2:53 PM ET

    A "Listless" Market: Here's Why

    Posted By: Bob Pisani

    Despite the positive news of a massive stimulus program from China, which initially buoyed commodity stocks, the market is trading in a listless manner.

    We are now in the midst of what one trader called "The Great Boredom," that period where we know the economy is going to slow dramatically, but it is too early to aggressively buy a rebound.

    Positive news on China stimulus, but market listless. This is "The Great Boredom":

    --know the economy slowing

    --but too early to buy a rebound

    Consider:

    1) GMtraded as low as $3.02, the lowest level since the 1940s, as Deutsche Bank slaps a price target of $0 on it;

    2) Goldman Sachs down another 11 percent today to a 5-year low. The thinking on the Street is that the assets on their books are declining in value, and with IPOs, secondaries, and the like practically nonexistent, it is simply extraordinarily difficult for them to make any money in the near future.

    3) Fannie Mae's numbers were awful (loss of $29 b!); they are losing money so fast that they will have to access the TARP program early next year;

    4) Wall Street professionals continue to get stuffed. Two examples:

    a) Investor Carl Icahn reported an 8.9 percent stake in containerboard maker Temple Inlandon October 17th. Not clear when he accumulated the shares, but the stock has gone from the $15-$20 range in the last few months to $5.26 today;

    b) On September 23rd, Warren Buffett invested $5 billion in Goldman preferreds, along with an additional $5 b in warrants at $115. On September 24th, Goldman issued $5 b in common stocks at $123. The stock is $69 today.

    The one positive: the Fed is directly buying assets from AIG, meaning they are starting to segregate the assets rather than let some other manager deal with it. That's a positive.

  • AIG Gets Revised Bailout Of $150 Billion From US
  • Federal Reserve Statement on AIG
  • Lehman, Bear Stearns Survivors May Get Best Bonuses
  • Goldman Sachs Plans to Stay Public, Seek Deposits
  • Treasury Prices Fall Ahead of $55 Billion Auction
  • _____________________________
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    - The Dow 30 at a Glance

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    _______________________________________
    CNBC's Names in the News:

    Apple

    General Motors

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    Questions? Comments? tradertalk@cnbc.com

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      Monday, 10 Nov 2008 | 9:12 AM ET

    GM Rating Target Price: $0

    Posted By: Bob Pisani

    China up 7 percent on the nearly $600 billion stimulus package, Europe has also opened 3 to 4 percent. That is stimulating commodity stocks like BHP Billiton, Rio Tinto,ArcelorMittal, and ABB, all of who are up about 10 percent.

    Elsewhere:

    1) GMdown 10 percent as Deutsche Bank lowered its rating on GM to a Sell, but more interesting is the price target: $0. That's because, like most analysts, Rod Lache has concluded that a government bailout is not likely to help the shares, that even with a bailout GM's future, if it is not in bankruptcy, is likely to be "bankruptcy-like." That means that secured creditors may be made whole, while unsecured creditors will get a very low recovery. Equity shareholders will likely get nothing.

    2) McDonalds up 3 percent pre-open; comp store sales were again stellar. U.S. comparable store sales were up 5.3 percent, 11.5 percent gains in Asia/Pacific, 9.8 percent in Europe.

    3) Circuit Cityhas filed for bankruptcy under Chapter 11 , which will allow it to hold off creditors and operate as normal while it develops a financial reorganization plan. Stock is $0.10 now, it was $0.25 at the close Friday.

    4) AIG is now getting all sorts of loans, including 1) an additional $40 billion purchase of newly issued preferred shares under the TARP program, 2) a modification of the loan the government initially gave to AIG, and 3) two additional lending facilities that will allow the Fed to lend money to AIG. The first lending facility will be secured with mortgage-backed securities as collateral; the second will buy collateralized debt obligations (CDOs) on which AIG has written credit default swaps (CDS).

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    - The Dow 30 at a Glance

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      Friday, 7 Nov 2008 | 4:50 PM ET

    Market Plays Defense

    Posted By: Bob Pisani

    How to trade: sell bad news rumors, then buy, but buy good news rumors, then sell. Traders sold stocks going into the nonfarm payrolls number, then when it was not as bad as the worst case scenarios (240,00 reported, but 300,000 was feared) bought stocks, but not enthusiastically.

    Then they bought the perceived good news ahead of the Obama presser, but sold as soon as it was over...though again on light volume.

    Obama presser: President-elect Obama, in his first press conference since his election, said that he would support a second stimulus package, that he wanted more help for the automotive industry, but offered few specifics.

    GM: reckoning has arrived. General Motors reported a loss twice what was expected, and made it clear it was burning through cash ($2.3 b a month) at a rate twice that of just a few months ago. With $16.2 b in cash left, and with their prior statements that they need $11 to $14 billion to keep operating, GM is out of time.

    GM Continues to Fold

    Standard and Poor's reflected this concern when they lowered GM's debt rating this afternoon: "Our concern is that the company may not have the liqudity to endure the economic downturn..."

    As for government assistance, S&P does expect it to come, but even here "we would likely view such assistance as buying more time for GM rather than solving its fundamental business risks." GM down 25 percent this week.

    Next week. We get retail sales for October, which will be down, and earnings from big retailers, like Wal-Mart, JC Penney, Kohls, Macy's, Abercrombie, and Nordstrom.

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      Friday, 7 Nov 2008 | 4:03 PM ET

    Obama Does What Traders Expected: Avoids Specifics

    Posted By: Bob Pisani

    President-elect Obama, in his prepared remarks, has done what most traders expected: he has stuck to broad generalities.

    He did talk about an extension of unemployment benefits, and that a fiscal stimulus plan that will jumpstart economic growth "is long overdue."

    Barack Obama: Stimulus Package

    • Obama: US Economy Needs Another Stimulus Package

    But he did not go farther. He said we will need a stimulus package "either before or after the inauguration" and that he wanted it "sooner rather than later," but there were no specifics on what he wanted to see in it.

    On the auto industry, the president-elect said that in addition to accelerating the retooling assistance Congress has already enacted, his team would work on "additional policy options." Again, support without specifics.

    As for cabinet appointments: "when we have an announcement, we will make it." The S&P rallied, then dipped a bit as some were expecting a bit more on the specifics front.

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      Friday, 7 Nov 2008 | 3:12 PM ET

    GM and Chrysler: The Endgame Approaching

    Posted By: Bob Pisani

    Under normal circumstances, companies try to put the best face on bad news. But we are not in normal circumstances.

    Look at the GM report—they made no attempt—indeed, seemed to emphasize—the dire circumstances. The one-hour delay in the release—complete with scenes of a crowd of traders standing by idly while the stock was halted awaiting the news—only added to the sense of drama.

    GM , importantly, seems to have distanced itself from merger negotiations with Chrysler. This makes sense from GM's point of view.

    The moment of reckoning has arrived. GM made it clear that they will soon run out of cash unless the industry recovers quickly (unlikely), they sell assets (difficult), or receive a capital infusion from the government or private industry.

    Automobile Industry Failing

    This makes an infusion from the government increasingly likely. Most traders on the Street do not think the government will let GM go bankrupt.

    But a massive infusion into GM (debt or equity) means dilution (or worse) is now very likely for equity holders. As for Chrysler: it's difficult for GM to buy them when GM itself needs to SELL assets.

    Look at the stats: Chrysler is a company with 90 percent of its sales in the U.S., 70 percent of those sales are trucks. GM is a much more diversified company. Any merger with GM would still involve massive layoffs at Chrysler and occupy large amounts of time and money on a restructuring effort of doubtful value.

    As for the argument that Chrysler is too big too fail: they successfully made this argument in 1979, when Congress passed the Chrysler Corporation Loan Guarantee Act (remember Lee Iacocca? "If you can find a better car, buy it.").

    What happened? Several billion in loans, and the military bought Dodge pickup trucks by the thousands.

    As the economy improved in the 1980s, Chrysler, with the help of the K-car franchise, did improve its sales and pay off the loans. They bought AMC in 1987, but aside from the Jeep brand, few other brands survived from that line.

    Daimler-Benz bought Chrysler in 1998, but despite a strong economy the company's vehicles, for the most part, were a bust with the public.

    Hard to believe that it has only been a year and a half since Daimler sold an 80 percent stake in Chrysler to Cerberus for $7.4 billion. Every step along the way, Chrysler and the others have shed jobs, even in good times.

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      Friday, 7 Nov 2008 | 9:19 AM ET

    Rally Today—Or Not—With Jobs Report?

    Posted By: Bob Pisani

    The October nonfarm payrolls report was bad, but not as bad as some expected. A decline of 240,000, versus expectations of 200,000, but some were expecting a much greater decline, to 300,000. And ultimately it may well be revised there: September was revised downward to 284,000, versus initial numbers of 159,000—a significant revision.

    When all was said and done, futures are relatively flat. The game plan for the past two days has been to short the market going into the jobs report, and if it was not dramatically worse to push a modest rally. We'll see. The Dow and the S&P 500 are down about 10 percent in the past two days.

    Elsewhere:

    1) Fordup 5 percent, after announcing a greater loss than expected. They are cutting 10 percent of its salaried staff, and cutting production as well. Ford burned through $7.7 b in cash this quarter, ending with $29.6 b in cash and credit on hand. Although they say they have enough cash to get through next year; the question is how much aid the government will provide.

    GM's numbers come out at 10:30 AM ET.

    2) A miracle: someone raised guidance! Construction and engineering giant Fluorbeat expectations and guided higher for the rest of the year, as well as next year. Remember, they get a large amount of their revenues from the oil and gas industry.

    3) Wells Fargo did get its capital raising done: $11 billion. That's 407.5 million shares for $27 each, 6 percent below the Nov. 6 price of $28.77. Wells down 7 percent p

    4) Insurance giant Genworthsuspended its common stock dividend.

    5) There is considerable talk that federal officials may change the terms of the $85 billion loan to American International Group. They are burning through cash at a lot faster rate than expected.

  • Is Your Firm Laying Off?
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  • Stocks Putting Lows to Test
  • US Economy 'Has Fallen off a Cliff': El-Erian
  • _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________

    _______________________________________
    CNBC's Names in the News:

    General Motors

    Ford

    _______________________________________


    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.

     

    • 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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