Market Insider with Patti Domm Trader Talk with Bob Pisani

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  Friday, 16 Jan 2009 | 3:23 PM ET

Pain For Banks On Both Sides Of The Pond

Posted By: Bob Pisani

I've been asked repeatedly what is going on in U.K. banks, with double digit declines in Royal Bank of Scotland , Barclays , and single digit declines in Lloyds.

The answer is, shareholders in those companies have the same fears that shareholders of large banks here do: massive dilution and further significant write-downs.

The UK Prime Minister has indicated the government would be announcing new measures to "resume the normal function of lending" to the private sector.

Read: More capital injections are coming into U.K. banks, in the hope they will use the money to do more lending.

Why? The U.K. government, like the U.S. government, is worried that without more intervention bank lending will continue to shrink.

But here in the U.S., there is growing debate about the limits of government intervention. The reason banks are not lending is not because they don't want to, it's because:

1) Deteriorating credit quality is a strong motivation to limit new lending growth, and

2) Banks need more deposits so they can lend more (i.e. people need to save more)

And that's just the supply side. On the demand side, loan demand is not INCREASING, it is DECREASING, both here and in the U.K.

That is not a bad thing. Corporations and households have too much debt already and need to deleverage.

The bottom line: government is not going to create an artificial demand by creating a false supply. Let us start by building up capital and increasing savings.

And to everyone--Sheila Bair on down--who angrily say to the banks, "What did you do with all the TARP money?," the correct answer is, "We used it to survive."

    • FDIC's Bair: TARP Funds Should Buy Banks' Bad Assets

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  Friday, 16 Jan 2009 | 1:11 PM ET

Behind The Bruising Bank Stocks

Posted By: Bob Pisani

While bank stocks are getting killed, the cost of insuring their debt is going down, Peter Boockvar at Miller Tabak notes.

"Today's action in the banks and the government's actions to help them is making it clearly evident that what is good for their viability and bondholders will not square with the interests of equity holders at the bottom of the capital structure," Boockvar says.

While their stocks are down sharply again, at midday, the 5 yr Credit Default Swaps (CDS) of Citi has fallen to 278 basis points from 346 basis points yesterday 410 on Wednesday (this means it costs $278,000 to insure $10 million of Citi's debt).

B of A's 5 yr CDS is at 180 bps down from 214 on Thursday and flattish with Wednesday.

JP Morgan's CDS is quoted at 145 vs 155 yesterday and 163 bps Wednesday as of midday.

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    • FDIC's Bair: US Still Needs to Buy Banks' Bad Assets


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  Friday, 16 Jan 2009 | 9:27 AM ET

The Street Lowers Epectations

Posted By: Bob Pisani

I noted earlier this week that one of the reasons the market has been drifting lower recently was the Street was in the process of lowering expectations for the second half of 2009.

That's what B of A CEO Ken Lewis essentially did this morning: he lowered his own forecast, going from expectations to a recovery in the second half to merely claiming that the economy would how "some potential signs of stabilization."

Elsewhere:

1) The Democrats unveiling their version of the stimulus has not resulted in any move up in any stock associated with infrastructure, healthcare, energy, or anything. Much of the early expectations and excitement about the stimulus' impact on the stock market has worn off as traders have realized that, for the most part; the impact will be comparatively small and is at least a half-year away.

2) Bank of America up 4 percent after reporting a loss of $0.48 (its first quarterly loss in 17 years). This was against expectations of a $0.08 gain; the difference was due to $4.6 billion of write-downs and $8.4 billion of provisions.

They have paid a steep price for taking $20 billion in TARP money to help on the Merrill Lynch losses: a shredded dividend of $0.01, down from $0.32.

B of A has also secured guarantees with the government against losses on up to $118 billion in troubled assets (B of A takes the first $10 bn of losses, after that 90% of losses taken by the government).

CEO Ken Lewis said there was a much higher deterioration in assets than anticipated late in the year, and they considered walking away from the Merrill deal in December, but Treasury was worried about systemic risk and offered to provide assistance.

3) Citi reported a loss of $2.44, vs. estimates of a loss of $1.31, on much bigger losses in investment banking, a big reserve build and restructuring costs.

Citi is realigning into two units, Citicorp and Citi Holdings. The latter will be made up of non core businesses, which will include retail asset management.

So why is the stock trading up, along with some of the preferreds?

a) They're finally splitting the company up, which is what the Street has wanted for years;

b) The FDIC plans to extend the bank debt guarantee from 3 years to 10 years, under certain conditions.

4) Fertilizer giant Terra Industries up 26 percent as they reported receiving a $2.1 billion all-stock proposal to be bought by CF Industries, a 23 percent premium over Terra's closing price Thursday. The combined companies would be the leading nitrogen producer in the world among publicly traded companies.

5) Estee Lauder down 10 percent as they guided lower for the quarter ending in December and the fiscal year ending June 30th, as results for the holiday season were worse than expected and they are uncertain about the next six months.

    • BofA Gets $20 Billion, Merrill Loses $15 Billion
    • McDonald's CEO Sees Robust '09, Despite Slowdown

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  Thursday, 15 Jan 2009 | 12:02 PM ET

Why Is The Street So Bummed Out?

Posted By: Bob Pisani

Why is the Street so bummed out about a report that Bank of America will be seeking more TARP money to cover losses in Merrill Lynch?

First there is the obvious expectation of higher losses, which implies higher losses at other firms that have made acquisitions.

But what's really killing Bank of America's stock is the realization that the TARP II terms are going to be far more onerous.

There has been speculation, for example, that Treasury will of course get preferred stock for their money, but at a higher coupon (9 percent and higher), and that they will likely force them to cut the common dividend, which is currently at $0.32. To what? Some think it could be as low as $0.01.

We'll know when they report earnings January 20th.

The implication is that the dividends of all the banks are under scrutiny, particularly if they take more money. Jamie Dimon said he was comfortable with JP Morgan's dividend of $0.38. That may change if he is forced to take more money.

    • US Mortgage Foreclosures Up 81% in 2008

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  Thursday, 15 Jan 2009 | 9:41 AM ET

Does The Street Have Consumption?

Posted By: Bob Pisani

I was talking with one of the traders at the NYSE Commissary this morning, and we agreed that last year's fourth quarter was like dying by being thrown out of a plane: it was terrifying and exhilarating at the same time.

This year is like dying of consumption: it's slow, and there's days where the death is absolutely....boring.

That was yesterday.

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  Wednesday, 14 Jan 2009 | 4:33 PM ET

What The Street Was Really Watching Today

Posted By: Bob Pisani

It was a bad day, but you wouldn't know it from watching the action.

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  Wednesday, 14 Jan 2009 | 11:47 AM ET

A Day With Poor Internals

Posted By: Bob Pisani

We have not seen a day with poor internals like this in several weeks.

10-1 declining to advancing stocks and much more volume is going to stocks on the downside than on the upside.

The main question is, do we test the November lows on the major indices? We're still 700 points from the low on the Dow of 7449; so the Dow would have to drop another 10 percent to get there.

About half of the traders think that retest is likely.

What we know is that financials have led this leg of the decline, and that they are already at or near new lows. The Bank Index, a basket of large bank stocks, is poised to close below its November low, even if only a few of its components (M&T Bank , Fifth Third ) are actually at new lows.

Here's the problem: some of the big banks continue to have robust dividends. Citi , for example, has a dividend yield of 13 percent, Bank of America 12 percent. Street believes these kinds of dividend yields are unlikely to continue.

The fact that we have had JP Morgan and Citigroup move up their earnings reports, and Deutsche Bank pre-announced, is evidence that banks believe the longer they wait to get bad news out the more pressure will be on their stocks.

Who else is leading the charge down? Railroads: Burlington Northern , Norfolk Southern , and CSX are sitting at or near new lows as traders are anticipating freight and coal traffic will remain weak.

In addition, oil service stocks are under considerable pressure again.

They did not really participate in the modest rally we saw in the last month, and they are among the weakest sectors, for reasons that we already know: with demand weak, supply plentiful, major oil companies have already announced major capital expenditure cuts which directly affect oil service.

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  Wednesday, 14 Jan 2009 | 9:24 AM ET

Wednesday's Futures Are Lower

Posted By: Bob Pisani

Futures are lower, after retail sales came in lower than expected, and after weakness in Europe due to poor earnings news from Deutsche Bank. The German bank expects a loss of about $6.4 billion. Trading down 10 percent pre-open.

European banks are also under pressure because Morgan Stanley said HSBC could cut its dividend in half, and may need to raise $30 billion in capital. "We now expect earnings to fall more sharply in 2009, with no recovery until 2011 at the earliest," Morgan Stanley said. Down 9 percent pre-open.

Elsewhere:

1) Nortel and several of its affiliates have filed for bankruptcy in the U.S. Trading was halted here and in Canada.

2) Tiffany down 7 percent pre-open, said sales declined significantly in their U.S. stores and to a lesser degree in Asia-Pacific and Europe. Worldwide net sales in the holiday period declined 21 percent.. Comparable U.S. store sales decreased 35% with similar declines experienced in the New York flagship store and across the branch stores.

As bad as that is, it is within the range of 25 to 35 percent decline that the company projected.

3) The softness in commodity markets is affecting more than just Alcoa . Soybean giant Bunge down 11 percent pre-open, lowered its 2008 earnings estimate to $7.70 (consensus was $9.47) and 2009 guidance, to $6.90 to $7.60 (analyst consensus estimate is $7.89). Soybean prices have dropped about 40 percent since July.

4) Under Armour down 19 percent as they gave preliminary earnings well below expectations.

5) Good and bad news on housing. Good news: Mortgage Bankers Association said the 30 year mortgage ate fell to 4.89 percent from 5.07 percent last week, its lowest level since they kept track dating back to 1990. The bad news: while refinance applications rose 25.6 percent, applications to purchase a home fell 14.1 percent to a one month low. Spring home buying season starts in about six weeks.

6) Citigroup down 12 percent as the Smith Barney-Morgan Stanley deal was officially announced. The advantages: unlocking $6.5 billion in capital. Disadvantages: a) Citi sells a crown jewel under duress, and b) "significant" integration risk (according to Deutsche Bank) (2 brands, 2 management teams, 2 parent companies).

Oppenheimer's Meredith Whitney: "There is no other way to view this move, in our opinion, than as a way for C to raise cash prior to its 4Q earnings release."

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  Tuesday, 13 Jan 2009 | 4:24 PM ET

Today's Hairy Ride

Posted By: Bob Pisani

It was hairy for a while.

After four days of declines in financials, we looked to be making it five down days in a row, but financials turned around in the middle of the day.

Remember, they have a tendency to sell off going into earnings season in the past year, and with good reason.

While stocks traded in a narrow range all day, there was a brief rally late in the day, partly on word that Senate Majority Leader Reid believes he has the necessary votes to approve the additional $350 billion of the TARP plan.

While financials have underperformed since the beginning of the year, energy stocks have outperformed (though most are still down); energy stocks were again market leaders today.

One weak spot: auto parts suppliers. Standard and Poors is continuing to lower its credit ratings on auto-parts suppliers, today lowering ratings on TRW, Lear , Dana and Tenneco .

They had already lowered ratings on other suppliers like American Axle on Monday.

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    • VIDEO: Detroit Auto Show Stoppers

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  Tuesday, 13 Jan 2009 | 3:09 PM ET

Tuesday's Midday Bounce

Posted By: Bob Pisani

Stocks have rallied off their lows late in the day, partly on word that Senate Majority Leader Reid believes he has the necessary votes to approve the additional $350 billion of the TARP plan.

Financials: Once again, the Street can't figure out the numbers.

It's happening again: At the start of every quarter last year, traders in financial stocks got agita as they could not figure out if they had adequately accounted for losses; in every case, they continued to underestimate, financials dropped, then rebounded after earnings came out.

They're dropping again, but the list of worries is even longer now:

1) Credit losses (credit cards, commercial real estate)

2) Capital ratios under pressure

3) Lack of earnings visibility

4) Bank failure concerns

5) More dividend cuts looming

There are a few positives:

1) Deposits growing

2) Aggressive accounting charges may help on the upside if things turn around.

Pretty short list of positives, eh?

Another one drops guidance. CSX became the latest large company to abandon guidance. The good news is that it's not necessarily a bad thing to abandon guidance when no one--even the company--has any visibility. Providing guidance in this environment only serves to weaken credibility when the company misses or brings down numbers.

The bad news is that this leaves analysts and reporters with even less clue as to what to expect, and may well increase volatility rather than decrease it.

True, they're not the first. Our parent, General Electric, stopped providing guidance in December. McDonalds famously abandoned guidance in 2003, as did Coca-Cola in 2004, and Dell has also abandoned guidance.

I will keep an eye on this. Not willing to call it a trend yet.

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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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