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Market Insider with Patti Domm Trader Talk with Bob Pisani

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  Thursday, 2 Oct 2008 | 4:16 PM ET

Worry Is DEFLATION And GE's Credit Market Woes

Posted By: Bob Pisani

Another notably weak market day: 5 to 1 declining to advancing stocks...and a pike in New Lows at the NYSE. Also notable is the magnitude of the point decline: I track about 1,300 stocks...of that, 500 are down 5 percent or more. That is very unusual. What happened?

Yes, there is some anxiety about the bill not passing in the House, but there are even bigger things going on.

First, we had a Trifecta: oil, gold, stocks all down! That is rare.

The worry is DEFLATION, not INFLATION. Even Trichet gets it now.

Look at the Dow Transports down 8.7 percent. Point decline of 399 points....is the largest point decline IN HISTORY for the Transports. In percentage terms, it is the 15th biggest drop. Trucker Con-Waycame out and slashes guidance. Demand for freight services seemed to have dropped notably in September. They are cutting prices to maintain market share. Demand for freight services appears weaker.

Fertilizer demand also appears to be down: Mosaicdisappointed with its earnings report. All the fertilizer stocks are down. The global slowdown trade is also continuing, with many engineering, industrial and material stocks at new lows.

Finally, the OTHER GREAT WORRY is the credit market freeze-up. Our parent company, General Electric, priced a large secondary at $22.25 this morning, largely to deal with its difficulty rolling over short-term commercial paper. If GE is having trouble rolling over paper, this is an issue that needs to be addressed.

  • Is This Really the Market Bottom?
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  • Buffett's Three Rules for Crisis Investing
  • _____________________________
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    - The Dow 30 at a Glance


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      Thursday, 2 Oct 2008 | 11:55 AM ET

    What Will Trigger A Broader Rally

    Posted By: Bob Pisani

    Despite the bearish comments from many companies (I outlined them in my Trader Talk note earlier ), there are a surprising number of traders who are arguing there is reason to start feeling more optimistic.

    The bull case is that what is happening is:

    --massive deleveraging

    --reduced reliance on commercial paper (CP) market

    The end result will be smaller, more concentrated businesses that are better capitalized. There may be:

    --4 major banks, several important regionals

    --8 airlines, all powerful

    --6 major, publicly traded housing companies.

    What will trigger a broad rally? Two things need to happen:

    --lower borrowing costs

    --resolving short-term funding issues

    How can we resolve the short-term funding issues that are paralyzing markets?

    --we need counterparty risk perception go away--we need to have enough guys long credit default swaps to get burned

    --confidence needs to return--Charles Campbell at Miller Tabak noted that famed fund manager Anthony Bolton had said this morninghe was bullish on the UK market.

    Warren Buffett commiting money--albeit with a great return--is another confidence builder. We need more.

      • Panicky Investors Making Some Bone-Headed Moves
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  • Five Ways to Play This Wild Market
  • Jim Cramer's Web Exclusive: Pans
  • Buffett's Three Rules for Crisis Investing
  • _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________


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      Thursday, 2 Oct 2008 | 9:18 AM ET

    GE, Fertilizer Stocks, Truckers, Autos, And Financials

    Posted By: Bob Pisani

    1) Word on the Street is GE, our parent company, is pricing the common stock offering at $22.25; waiting on final size.

    2) Fertilizer stocks are down notably this morning, as Mosaic reported earnings well below expectations. Mosaic down 20 percent, Potash down 12 percent, Terra Industries and CF Industries down 10 percent, Agrium down 9 percent.

    Mosaic appears to have cut phosphate production on lower demand and lower prices. Another factor in the decline in demand is lower corn prices; corn is a more fertilizer-intensive crop than, say, soybeans.

    Last week, we pointed out a Citi report that noted urea prices were down. This note was widely passed around on the Street, and many traders felt the drop was largely due to difficult obtaining credit for fertilizer.

    2) After the close, two companies came out with comments on the slowing economy:

    --Cooper Tire said they were "adjusting" their production schedule due to softer demand and raw material shortages;

    --Trucking giant Con-Wayslashed its guidance. Douglas Stotlar, Con-Way's CEO, said the economy had been "battered by an unprecedented confluence of macroeconomic crises, curtailing demand for freight transportation services." He also said that the traditional peak seasonal uptick has been "muted."

    The bottom line: there is global DEFLATION, not INFLATION.

    3) Financials: UBSsaid it will post a small profit in the third quarter, and will be profitable in 2009. Up 1 percent, most banks are trading up fractionally.

    4) Autos awful: after yesterday's awful U.S. car sales numbers, several European car companies were cautious: Volkswagen said it would consider cutting production if the current market trends continue, and BMW's CEO said it was unlikely there would be a recovery in the auto market before mid-2009.

    The dollar is rallying again, as the euro is under pressure.

    5) The SEC extended its ban on short selling in financials to October 17th, but may end sooner if Congress passes the rescue package.

    Still, there was some disappointment that there was no further clarification on what if anything would happen after that. There has been widespread speculation that some kind of "circuit breaker" rules would replace the ban.

      • Jobless Claims Highest in 7 Years

    6) No free lunch: Increasing the the FDIC coverage limit from $100,000 per individual account to $250,000 may be good policy, but it will cost banks a pretty penny.

    In a note this morning, Bernstein estimates the Deposit Insurance Fund (DIF) will need to increase by roughly $25 billion (56%), which would equate to a one-time hit of roughly 1.3 percentage points of ROE for U.S. commercial banks and thrifts. It is unlikely the FDIC will require the DIF to be replenished in as little as one year.

    7) Freeport-McMoran removed from Goldman's conviction buy list.

    _______________________________________
    CNBC's Names in the News:

    GE

    Mosaic

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      Wednesday, 1 Oct 2008 | 3:11 PM ET

    GE, Buffett And (Finally) Moving In The Right Direction?

    Posted By: Bob Pisani

    GE'sannouncement of a $15 billion capital raise($12 b in common, $3 b in preferred to Warren Buffett with a 10 percent dividend) is difficult news for shareholders, but everyone agrees that two things need to be done:

    1) We need a conduit for the bad debt, and that is the purpose of the TARP plan under consideration by Congress.

    Mr. Buffett, in an interview with our Becky Quick, spoke eloquently about the need for the TARP, noting that it is only the Federal government that has the capital and the staying power to address this on the level it needs to be addressed.

    Mr. Buffett put his money where his mouth is, saying he would take 1 percent of the Treasury purchases of any mortgage assets at the market price.

    2) Raise more capital. Firms with significant financial exposure, which includes General Electric, have to raise money. We have seen capital raises recently from Morgan Stanley, Goldman Sachs, now General Electric, and we expect one shortly from Citigroup, probably tonight. There will be more, from regional banks and insurance companies.

    GE stock is trading up about a dollar above where it was prior to the announcement. More importantly, GE credit spreads eased considerably. The cost of buying a credit default swap for five years on GE debt is now $495,000 to insure $10 million in debt; it was $680,000 to insure $10 b in debt prior to the announcement.

    GE is the parent company of CNBC.

    Bottom line: no one is arguing we are out of the woods, but we are taking baby steps toward there.

    _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________

    _______________________________________
    CNBC's Names in the News:

    GE

    Ford

    _______________________________________


    Questions? Comments? tradertalk@cnbc.com

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      Wednesday, 1 Oct 2008 | 1:58 PM ET

    Short Selling Ban In Financials Likely Extended

    Posted By: Bob Pisani

    SEC ban on short selling in financials is likely to be extended, NYSE CEO Duncan Niederauer said on a webcast with NYSE listed companies and reporters.

    Niederauer has been in "regular communication with the SEC" concerning the ban. They have still not decided what they will be doing, but it's likely the ban will be extended.

    However the SEC recognizes the ban is "not a permanent solution" and we will shortly see some clarification on longer-term rules.

    Niederauer said that one option being considered was to bring back the uptick rule. Niederauer said he is in favor of bringing back the uptick rule.

    Also being discussed is a circuit breaker for individual stocks, where a certain percentage decline might halt trading in the stock for a certain period of time.

    _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________

    _______________________________________
    CNBC's Names in the News:

    GE

    Ford

    _______________________________________


    Questions? Comments? tradertalk@cnbc.com

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      Wednesday, 1 Oct 2008 | 1:00 PM ET

    Bulls Have Little To Hold On To

    Posted By: Bob Pisani

    Markets started weak, but quickly found a floor and began a modest rally...until 10 AM, when the ISM numbers showed a steep decline and markets moved down again.

    This was a very poor report from the ISM, which measures manufacturing activity. The index dropped to 43.5 (below 50 shows contraction) from 49.9 in August, the largest one-month decline in 24 years and the lowest reading since October 2001.

    Combine this with the miserable sales report from Ford, and yesterday's housing report from Case Shiller, which showed that home prices continued to decline, and bulls have very little to grab onto this week.

    Still, there seems to be more of a buyer's strike than intense selling today--there are no bids around, and volume is light. This is supporting the arguments of some bulls, who are arguing that it is likely that the bulk of forced selling we have seen is over.

    If that is true, then any modest pickup in buying activity--like we are seeing midday in banks--will be a big help to the markets.

    We are waiting for comments from NYSE CEO Duncan Niederauer, who will speak shortly on the short selling ban that has been imposed on financials by the SEC.

    The SEC deadline on the ban on short selling financial stocks expires tomorrow, and there is considerable speculation that the deadline will be extended.

    There is also considerable discussion about some type of new "circuit breakers" for stocks, perhaps including individual stock circuit breakers that might, for example, halt trading in an individual stock for, say, 10 minutes if it dropped 10 percent in a certain time period.

    _____________________________
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    - The Dow 30 at a Glance

    _____________________________


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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.

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    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.

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  • _____________________________
    New from CNBC.com:

    - The Dow 30 at a Glance

    _____________________________

    _______________________________________
    CNBC's Names in the News:

    GE

    Wal-Mart

    _______________________________________


    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.

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    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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    Questions? Comments? tradertalk@cnbc.com

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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

    _____________________________


    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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