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Market Insider with Patti Domm Trader Talk with Bob Pisani

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  Wednesday, 1 Oct 2008 | 9:06 AM ET

All Eyes On Senate And Europe Meets Over Crisis

Posted By: Bob Pisani

Can the Senate provide enough add-ons (raising levels of insurance in your bank account) and tax breaks to provide cover for House Republicans? That's the issue. No doubt the Senate will pass the bill.

Meantime European banks are now facing the same issues as U.S. banks, and without a central regulator the task is more delicate.

Mr. Sarkozy, the French President, is planning to meet with his European peers in Paris this weekend to discuss a coordinated effort to address the financial crisis. A JP Morgan analyst noted that European banks may have to write down an additional $40 billion in the second half.

    • Money Markets Still Frozen As Lending Rates Soar

In Ireland, they are looking at measures very similar to the U.S. TARP bill, where the Irish government would take a stake in any bank that receives financial support from the government. The legislation is being considered today, and would guarantee all bank deposits, senior and subordinated debt up to 400 billion euros. That is larger than Ireland's GDP of 190 billion euros.

Elsewhere:

1) financials are mostly flat pre-open; the one exception is National City, up about 12 percent.

2) As soon as this bill is passed, we will turn our attention to the economy. Mortgage applications to purchase a house were down 10.9 percent from the week before. A 30 year fixed rate mortgage remained at 6.07 percent.

3) Deutsche Banklowered its earnings outlook and price target on our parent company, General Electric. Analyst Nigel Coe said "Our adjustments largely reflect deterioration at GE Capital-driven by tighter credit markets, asset shrinkage and debt pay-down-but we also eased back our Industrial assumptions." GE will release its earnings on October 10. GE down 3 percent pre-open.

  • Credit Crunch to Hit Consumers
  • Tougher, Not Impossible Loans
  • Deposit Insurance Boost?
  • Slideshow: Credit Crunch Bonuses
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    - The Dow 30 at a Glance

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    _______________________________________
    CNBC's Names in the News:

    GE

    Wal-Mart

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    Questions? Comments? tradertalk@cnbc.com

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      Tuesday, 30 Sep 2008 | 5:53 PM ET

    Market Hostage to 'Bailout Trade'

    Posted By: Bob Pisani

    The major indices Tuesday regained more than half of yesterday's losses on 1) hopes that a bailout bill will be passed in Congress this week, 2) lack of concerted selling, as volume was lighter than normal due to the Jewish holidays, and 3) hopes that regulators might help out.

    This is a dangerous game, because it means that the market is hostage to the “TARP trade,” and has become detached from any fundamental consideration.

    And with good reason: without knowing borrowing costs for corporations, it's impossible to figure out where stocks should be trading. That’s what the TARP is supposed to do: put some kind of floor on the credit market.

    But this too will pass; by next week, we should get back to real issues like earnings and the global economy.

    For the third quarter:

    Dow Industrials down 4.4% (down 4 quarters in a row, hasn't done that since 1977-78)

    S&P 500 down 9.0%

    NASDAQ down 9.2%

    Amex Oil Index down 25%

    Semiconductors down 17%

    Cyclical Index down 10%

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      Tuesday, 30 Sep 2008 | 2:52 PM ET

    Traders: How to Save The Banks (Without Bailout)

    Posted By: Bob Pisani

    A small (25 percent) but very vocal minority of the trading community continues to insist that the TARP bailout plan should not be passed because: 1) it is too expensive, and 2) will not be the savior of the markets.

    • Picks & Pans: Trade with CNBC's Experts

    What would work? Traders who object to the bill have been citing the work of FDIC head Sheila Bair, who has become a star on Wall Street for her deft handling of the shotgun wedding between WaMu and JP Morgan, and Citigroup and Wachovia.

    They argue that her M.O. is an effective template for dealing with other problem banks. They note that the two biggest problem banks, Wachovia and Washington Mutual, were transferred into stronger hands without government involvement.

    They argue to continue to let Bair work, but this time with the mid-size regional banks. "She is undoubtedly going to a lot of these banks and saying, 'Hey, you've got two months to improve your capital position or you'll get merged,'" one trader told me.

    There are other approaches that can be taken that will not cost the taxpayer so much money. Peter Boockvar at Miller Tabak and others have argued that banks should simply eliminate their dividends.

    Here's the logic: Boockvar estimates that the 20 largest banks and investment banks pay about $40 billion in dividends, including:

    - Bank of America $11.7 billion

    - JPMorgan Chase $5 billion

    - Wells Fargo $4.5 billion

    - Citigroup $3 billion (after the dividend cut)

    - U.S. Bancorp $3 billion

    - KeyCorp $371 million

    Eliminating these dividends would go a long way toward rebuilding capital. Plus, the ones who suffer would be the shareholders -- not the taxpayers.

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    - The Dow 30 at a Glance

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      Tuesday, 30 Sep 2008 | 11:50 AM ET

    Traders Expect Sell-Off Into Rally

    Posted By: Bob Pisani

    Stocks started strong, on renewed expectations that a bill will be passed in the House later this week.

    We moved a bit higher at 10 am ET as consumer sentiment came in stronger than expected (higher than in many months, in fact), the moved up again a few minutes later as Senate Minority Leader Mitch McConnell said the Senate expected to pass rescue legislation this week.

    Financials are particularly strong; the Bank Index (BKX), a basket of large bank stocks, down 21 percent yesterday, has already gained back nearly 50 percent of its losses.

    Still, volume is very light due to the Jewish holidays, and most traders still expect some attempt to sell into the rally.

    _____________________________
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    - The Dow 30 at a Glance

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      Tuesday, 30 Sep 2008 | 9:08 AM ET

    Why Rally Is "Bad" For Bailout Backers

    Posted By: Bob Pisani

    We have really fallen down the rabbit hole today. For proponents of a bill, a notable rally pre-open is not welcome news.

    Traders are surprisingly optimistic that some kind of bill can be passed by the House this week. They base this belief on the idea that the bill was only 11 votes short and the Mother of All Arm Twistings will be applied to a couple dozen Congress people in the next few days.

    Proponents of a bill want a DOWN open, and they want the markets closing DOWN today, to emphasize the magnitude of the crisis. A positive close would only make many feel there is less sense of urgency.

    The rise in futures is welcome by those hostile to the bill, who argue that the market should go it alone. To purists, the collapse of bank prices simply means that more and more of the bad news is factored into the market.

    The odd thing is that both camps agree that two events need to occur: 1) mass purchases of bad debts, and 2) large-scale capital injections into individual banks.

    Elsewhere:

    1) A number of beaten-up regional banks, like Regions Financial(up 21 percent), BB&T (up 11 percent) trading up this morning, as are a few larger financials like CIT, JP Morgan, and Morgan Stanley.

    2) Genworth Financial said they are examing strategic alternatives regarding their mortgage insurance division, including a possible spinoff. That division has been at the heart of the company's share selloff. Up 26 percent pre-open.

    3) The Dow dropped over 200 points in the closing minutes, and it could have been a lot uglier. There was very little buying interest as a wave of sell orders came in, so specialist firms on the floor were active buyers, as they were supposed to be. I heard one specialist firm committed $175 million in capital.

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    - The Dow 30 at a Glance

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      Monday, 29 Sep 2008 | 7:19 PM ET

    Where Should Buyers Come Back In?

    Posted By: Bob Pisani

    Wall Street despair. Where should buyers come into the market?

    If you're a stock trader, this previously simple question has now become hideously complex, almost unknowable. That is the source of the despair on Wall Street tonight.

    The TARP plan that was rejected by the House of Representatives today was important for a simple reason: it would help put a floor under the credit market.

    More From CNBC.com

  • The Failed Bailout: Panic and Blood, at Last!
  • Slideshow: Credit Crunch Battle Play-by-Play
  • Spreads in the credit market are now again widening on virtually everything except Treasuries and gold.

    To be a buyer of stocks, but particularly a valuation buyer, you use earnings and interest rates to value stocks.

    The problem: both earnings and interest rates have become moving targets. Right now, the ranges for earnings and interest rates are so wide no real valuation methodology is possible.

    Think about it: you can't predict what Altria is going to earn if you have no idea what it will cost them to borrow money.

    Even the Procter and Gamble's of the world need to borrow money.

    And some players—energy trading companies, investment banks—depend on short-term financing that is virtually inaccessible right now.

    Some small and midcap companies could be wiped out unless the credit markets unfreeze.

    So what do stock traders do? Normally, with the CBOE Volatility Index (VIX) near 50, it's a screaming buy. These were levels that were last seen at the 2002 lows.

    Some bold traders, noting that overseas markets look to be opening down big, say a big down open (another 500 + points on the Dow), could be a tradeable bottom, because at the point you would have a 12 percent correction in two days.

    _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

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    The markets don't go down like that in two days. But even that is now called into question.

    Lowry, the oldest technical analysis service in the United States, said in a note to clients after the bell that while nearly 98 percent of the volume at the NYSE today went to stocks on the downside, ""90% Down Days are frequently followed by 2-7 days of rally, the lack of signs of a major market low suggests any rally, if it occurs, should be used for building additional defensive positions."


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      Monday, 29 Sep 2008 | 4:06 PM ET

    No Bailout Today--Okay, What's Next?

    Posted By: Bob Pisani

    For the markets, it's a 95 percent down day, with 95 percent of the volume going to declining stocks.

    We are weak across the board, but financials and commodity stocks are all down notably, as we see too separate plays: 1) attack the weakest financials, and 2) play the "global slowdown trade" by selling energy and material stocks.

    What's next? There's several possibilities now that the House has voted down the TARP bill:

    1) A revote;

    2) New, broader legislation. But if you are against a bailout on ideological grounds, because you believe in total free enterprise, what bill could be crafted that you would vote for? There is none.

    3) Do nothing. The problem with doing nothing, and the reason the Street is so unhappy today, is that the lack of a systemic solution means "one bankruptcy at a time" or "one shotgun marriage at a time" (as the FDIC has arranged with WaMu/JP Morgan and Citi/Wachovia).

    But if we have learned anything, we have learned that this ad hoc method of dealing with one company at a time hasn't worked.

    • Pros: The Disease Is Spreading
    • Cramer: Dow Could Drop to 8000
    • Fast Money: How Grim is the Future for Financials?
    • Trading the Bailout: Buy Best in Banks
    • Financials to Buy Now: ETFs and Exchanges
    • Wait Until Short-Sale Ban Ends
    • Money Market Freeze Needs to Be Fixed

    _____________________________
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    - The Dow 30 at a Glance

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      Monday, 29 Sep 2008 | 1:15 PM ET

    The Great Credit Meltdown "Book": The Chapters To Come

    Posted By: Bob Pisani

    The TARP plan is Chapter One of Part Two of the Great Credit Meltdown book. Part One was the Ad Hoc Solution Phase, which was a failure: the attempts to deal with the problem case-by-case, starting with Bear Stearns.

    Part Two is the global solution part, and we still do not know the outcome.

    But the next chapters are clear:

    CHAPTER ONE is passing the TARP plan, which is close.

    CHAPTER TWO: participation in the TARP plan. Who is going to take the government up on their deal?

    There are two problems with the TARP plan in Congress:

    1) executive compensation limits. This may prevent many potential participants from selling assets into the plan.

    2) the government taking warrants in companies. The inability to quantify the dilution is an issue. If the level of warrants is tied to how many transactions the institution has with the TARP, then every interaction dilutes existing shareholders, so the more often a firm "goes to the well" by selling to the TARP, the more difficult the position of shareholders become.

    Little-discussed is the clause that gives the SEC the ability to eliminate mark-to-market accounting. There is good news and bad news here: good news because it will slow down the rush to devalue, bad news in that if people want to really know where the balance sheet is, they will have no idea. This INCREASES OPACITY.

    CHAPTER THREE: raising capital outside of the TARP. The problem is pretty clear: how do you raise capital after you see what has happened to the shareholders of Fannie Mae, Freddie Mac, Lehman, Washington Mutual, and now Wachovia Bank?

    Who is going to give any but the strongest banks money?

    The good news is that we are in the process of separating the strong banks (those who can raise capital) from the weak (those who will have trouble doing it, or will pay ruinous prices).

    The FDIC has been proactive and has arranged two "shotgun marriages": WaMu-JP Morgan and now Citi -Wachovia.

    There will be more. This may be a full-time job for the FDIC for the next few months. Now that the largest players have been taken out, the market is turning to the next phase: weeding out the weaker regional banks.

    CHAPTER FOUR: the "European bailout" chapter. You think it's tough here, try Europe. It took THREE COUNTRIES to bail out Fortis today. Think they will keep doing this on an ad-hoc basis? Already there is talk for a broader solution. French President Sarkozy has called for a global summit before the end of the year.

      • House Nears Bailout Vote; Outcome Remains Unclear

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    - The Dow 30 at a Glance

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      Monday, 29 Sep 2008 | 9:24 AM ET

    Weeding Out The Weak Banks

    Posted By: Bob Pisani

    In a mood reminiscent of WaMu-JP Morgan, the FDIC says Citi is buying Wachovia's banking operations, and assume the senior and subordinated debt.

    Wachovia is trading below $1.00, down 90 percent. Wachovia's preferred stock is also down heavily.

    Citi will take $42 b in losses on a $312 b pool of loans, the FDC will absorb losses beyond that. Wachovia will continue to own AG Edwards and Evergreen.

    Citi is trading down about 7 percent, no doubt on concern it will have to raise capital.

    As painful as all this is, this activity is good: we are weeding out the weak banks.

    Elsewhere:

    1) Now it's Europe's turn: Fortis is getting help with a big capital injection from the Netherlands, Belgium, and Luxembourg. U.K. mortgage company Bradford and Bingley is being nationalized but Banco Santander will buy its deposits and branches.

    European banks like Lloyds,UBS,Barclays,Deutsche Bankand Credit Suisseare down 11 to 15 percent pre-open in the U.S.

      • Citigroup to Buy Wachovia's Banking Operations
      • Benelux Governments Rescue Fortis to Halt US Contagion

    2) While the TARP plan appears to be going through the House and the Senate, the warrants that the government will get are a major issue for the Street and may limit participation. How much dilution will this mean?

    Fortunately, the Treasury Secretary has sole discretion here, including the exercise price and when they will be exercised.

    Regardless, the inability to quantify the dilution is an issue. If the level of warrants is tied to how many transactions the institution has with the TARP, then every interaction dilutes existing shareholders, so the more often a firm "goes to the well" by selling to the TARP, the more difficult the position of shareholders become.

    Important to clarify this quickly.

    Also, the SEC now has the option to suspend mark-to-market

    3) Lost in the TARP debate is big news for the auto industry: the Senate has passed loan guarantees for auto industry; GM up 4 percent -pre-open.

    We are ending the quarter with the Dow down 1.8 percent for the last three months. The Dow and the S&P 500 are now down four consecutive quarters. For the Dow, this is the first time this has happened since 1977-78.

      • US Bailout Vote Nears as Crisis Hits Europe Banks

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    - The Dow 30 at a Glance

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      Monday, 29 Sep 2008 | 8:49 AM ET

    Headlines You Will See Soon

    Posted By: Bob Pisani

    Regardless of when a bill in Congress is passed, traders are already talking about the next round of big headlines. Here are the three I am hearing are most likely:

    1) earnings cuts in retailers, autos, energy. Analyst estimates have been coming down notably in recent weeks for the third AND fourth quarter. Many companies will pre-announce within the next two weeks.

    2) new "circuit breakers" for individual stocks. There is a good chance that the ban on short selling in financials will be extended, but there's also work on a "broader" way to address short selling in general. This includes bringing back the uptick rule, but also under consideration is some kind of "circuit breaker" for individual stocks, where, for example, a stock down 10 percent might hit certain "circuit breakers" like closing for a few minutes.

      • Citigroup to Buy Wachovia's Banking Operations
      • Hedge Funds Prepare to Reveal Short Positions

    3) hedge funds closing. Lots of talk, getting louder, that a number of big hedge funds will close this year. Speculation that much of the money going into money market funds recently is due to hedge funds essentially going to cash in preparation to close. It means lower trading volumes, less liquidity, at least until they reopen under a new name.

    • Check Futures and Other Pre-Market Data
    • Get Credit-Spreads Data
    • Track the Dow 30 Stocks

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    _______________________________________
    CNBC's Names in the News:

    Wachovia

    Nokia

    _______________________________________


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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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