Market Insider with Patti Domm Trader Talk with Bob Pisani


  Friday, 22 Aug 2008 | 1:55 PM ET

Lehman Woes: Sorry, White Knight Is No Answer

Posted By: Bob Pisani

The bottom line on Lehman Bros.:

All the talk about a possible investment in Lehman from Korea Development Bank -- or anyone else -- is really beside the point.

Lehman is down about 75 percent for the year, while the Brokerage Index is down 30 percent. The reason Lehman has dramatically underperformed even its poorly performing peers this year is the large exposure they have to the worst performing parts of the market--residential mortgages, commercial mortgages, and leveraged loans.

  • Exclusive Video: Richard Bove's Take on Lehman

They need to reduce their problem portfolio substantially before anyone is going to dive in on a fundamental basis. Since the asset quality is not improving, they need to sell, even if at a loss.

How to do that? They have already raised capital, so they have some capacity to absorb losses from asset sales. The New York Times noted that they are said to be shopping their commercial mortgage-backed business, and perhaps $40 billion in commercial real estate. The crown jewel, their investment management division including Newberger Berman, may also be on the block.

The bottom line: Lehman can't wait for some white knight. They need to improve the balance sheet, now.

CNBC's Financials in the News:

-American Express , Wells Fargo
(Story: Warren Buffett Buying Financials )

-Bank of America , JPMorgan

(Story: Analyst Praises BofA, JPMorgan )


Questions? Comments?

»Read more
  Friday, 22 Aug 2008 | 10:11 AM ET

Street Bullish on Buffett & Fannie 'Bailout'

Posted By: Bob Pisani

Stocks are up as the dollar is rallying modestly; oil prices are down. Warren Buffett told CNBC that he has no bets against the dollar and stocks are more attractive now than a year ago.

This has been a week of reversals: remember that just a short while ago, the dollar rally was creating a decline in commodity stocks, and a modest rally in small caps and techs.

This week, that all changed: the S&P is down 1.5 percent, but the small-cap Russell 2000 is down twice as much (3.7 percent), the tech-heavy Nasdaq is down 2.9 percent, while the Amex Oil Index (a basket of large-cap oil stocks) is up 5.4 percent.

The Street continues to believe that some kind of federal intervention in Fannie Mae and Freddie Mac is inevitable, and continues to believe that the market will rally when this announcement is made.


1) Lehman Bros. trading up 9 percent after state-run Korea Development Bank said Lehman was a possible acquisition candidate for the bank. If so, this would make Ladenburg Thalmann's Richard Bove call yesterday particularly prescient; he said the company could be the target of a (hostile) takeover.

2) Three retail companies reported earnings and guidance that was surprising for its lack of surprises:

a) Aeropostale came in inline with expectations, as was guidance for the third quarter.

b) Gap was roughly in line, but more importantly they reaffirmed their full year guidance. Same store sales were down 10 percent from a year ago.

c) Foot Locker up 15 percent pre-open, as earnings beat and they raised the lower end of their guidance by five cents. Up 8 percent pre-open.

3) The CFTC gave NYSE Euronext the right to open a new futures exchange, NYSE Liffe, on September 8. NYSE futures trading. Some gold and futures contracts will begin trading at that time; the NYSE purchased the CBOT's precious metals business earlier this year from the CME.

This is something the NYSE has sought for some time, and it comes as competition is expanding. Electronic Communication Network BATS recently filed to become an Exchange and compete directly against the NYSE and the Nasdaq.

Questions? Comments?

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  Thursday, 21 Aug 2008 | 9:38 AM ET

FNM/FRE Guarantees; Lehman 'Buy' Rating?!

Posted By: Bob Pisani

Regarding Fannie Mae and Freddie Mac:

The most important issue is not the value of the equity holders' stake -- it is essentially zero -- but to ensure that Fannie and Freddie keep operating. Even slight glitches can have ripple effects.

CNBC Special Report:

- Will Stocks Hit Bottom after Fannie, Freddie?


That's why the Street had a tough time on Tuesday, when Freddie auctioned $3 billion in new debt on Tuesday, at yields 1.13 percentage points above comparable Treasuries, the highest spread ever for Freddie debt. This implies higher mortgage rates; even modest increases (a half point or so) could cause the U.S. housing market to slip into a further leg down.

Ladenburg Thalmann analyst Richard Bove believes the government must provide an explicit guarantee to provide more funds into the two companies; if not, the markets will not provide the requisite funds.

Another option is a restructuring, with the U.S. having to guarantee the debt of the two companies, but only until a longer term plan is put into place.


1) Citigroup joined several other firms in lowering third-quarter estimates for the major brokerages, including Lehman Bros. , Morgan Stanley and Goldman Sachs . "We're lowering our 3Q08 estimates to reflect the difficult operating environment, characterized by lower client-related trading volumes and losses on hard-to-sell assets (primarily mortgage securities)," said a Citigroup note.

But wait, read on -- Citi has a BUY on Lehman and Morgan Stanley:

"MS is extremely well-positioned to benefit when the environment improves and LEH is discounting more erosion in book value than we anticipate. While measures such as selling Neuberger and raising equity may be on the table, we view them as lower probability actions over the next couple of months."

2) While equity holders in Fannie and Freddie may have little left, even bondholders of the two companies are under a little pressure, according to Sandler O'Neill.

Several insurance companies own a significant amount of the two companies' bonds, including Ace and Travelers. Sandler notes that "their stocks have been under pressure as a result of their FNM and FRE bond ownership. As long it appears that the Fannie Mae and Freddie Mac bond holders will be made whole, we would use weakness in these BUY rated stocks as a buying opportunity."

Questions? Comments?

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  Wednesday, 20 Aug 2008 | 4:57 PM ET

Wall St.'s Stunning FNM/FRE Revelation

Posted By: Bob Pisani

On Fannie and Freddie: Both closed down 25 percent to multidecade lows; preferred shares also got hit. The Street is coming to the following realization:

1) that the equity is essentially zero;

2) that a government bailout (intervention, whatever) is now the likely scenario;

3) that the critical issue is not equity in the company -- it is to keep Fannie Mae and Freddie Mac operating; that any further disruption in their ability to provide liquidity will increase mortgage rates and may create an additional down leg in housing.

That's exactly what the head of the Minneapolis Federal Reserve, Gary Stern, said this afternoon: that the critical issue was to keep Fannie and Freddie operating.

Elsewhere, despite all the hand-wringing from equity holders in the two stocks, note that the overall market reaction has been a bit of a yawn:

1) an even number of advancing versus declining stocks;

2) two financial stocks advancing for each one declining, with only a few down 3 percent or more (regional banks rallied into the close);

3) oil remaining in the middle of the $112-$117 channel it has been in for two weeks;

4) bond rally continuing.

Questions? Comments?

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  Wednesday, 20 Aug 2008 | 2:26 PM ET

Housing: Wall Street's No. 1 Worry

Posted By: Bob Pisani

While financials appear to be the No. 1 worry, it all gets down to housing -- and that's why Fannie Mae and Freddie Mac's continuing soundness is critical. Wall Street's biggest fear right now: that housing might take another leg down.

The major factors influencing housing are still a mess:

1) No clear bottom! While sales are picking up in some hard-hit markets like California, much of those sales remain foreclosures, and prices are still generally dropping.
(See Jane Wells' blog, "Is This How to Solve the Crisis?!" )

Bears have noted that sales were above-trend for so many years that they need to be below-trend for some time to get to historic norms, which would imply even lower levels than we are now seeing.

CNBC Special Feature:

- How to Play This Market: Sectors, Individual Stocks


Housing starts are at their lowest since 1991; while this is good news, the inventory level of unsold homes remains stubbornly high.

2) Rising mortgage rates has dramatically hurt refinancings, and applications for mortgages this week fell to their lowest levels since December 2000, according to the Mortgage Bankers Assn.

That's why Fannie and Freddie are so important: like it or not, they are the primary providers of liquidity in mortgages, and any pullback in this function while the rest of the mortgage market is still not functioning properly could create notably higher mortgage rates and more defaults.

In fact, this is already happening: the spread between the 10-year Treasury (at 3.79 percent) and 30-year mortgages (6.47 percent) remains unusually wide at about 270 basis points; the historical average is closer to 170 basis points, indicating that investors perceive much higher risks in holding mortgages versus Treasurys, and they are demanding higher mortgage rates to compensate for the additional risk.

The bottom line: Fannie Mae and Freddie Mac do not involve abstract intellectual discussions divorced from reality. Any seize-up in the liquidity they provide to the mortgage markets could be the major contributing factor in higher rates and another downturn in housing.

Questions? Comments?

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  Wednesday, 20 Aug 2008 | 12:00 PM ET

Critics Left Cold by Fannie CEO Happy Talk

Posted By: Bob Pisani

The battle over Fannie Mae and Freddie Mac continues. Fannie Mae's CEO, Daniel Mudd, told NPR this morning that the company has more capital than it ever had in its history.

This may be true, but to critics it is beside the point. The critics are saying they have insufficient capital relative to:

--the size of their risk, and to

--the quality of their exposure.

Size of risk: According to Fox-Pitt, their credit exposure is about $2.6 trillion; their capital resources above minimum capital is $54 billion. Bears say that is inadequate.

Quality of exposure: Bears say that the companies have substantial exposure to Alt-A mortgages, which are going to create large losses.

Bulls counter that the losses would have to be catastrophic for many quarters to use up the reserve.

Who's right? The reason the bears have the rhetorical upper hand for the moment -- and the reason Fannie and Freddie are at multi-decade lows -- is that the worst case scenarios in financials have consistently proved to be the correct scenarios this year.

More Financials in the News:

- Lehman Bros.
(Story: Lehman Likeliest to Fail )

- JP Morgan , Merrill Lynch
(Story: Goldman Cuts View on 5 Major US Investment Banks)


Questions? Comments?

»Read more
  Wednesday, 20 Aug 2008 | 9:37 AM ET

Lehman Following Fannie? Goldman Lowers Sector View

Posted By: Bob Pisani

Renewed inflation fears, as well as concerns about financials, continue to weigh on markets. Many investors who attempted to buy financials just after the bottom in mid-July are coming to the realization that the news flow in the financials has the potential to be negative for some time, and as a result they are primarily trading stocks and not long-term holds.

Goldman epitomized this realization with its note last night on the brokers, entitled, "Tides are not changing; more write-downs and asset sales to come."

Goldman is lowering estimates for Q3 and the full year across their entire universe of brokerage. It believes that Q3 will be the fourth consecutive quarter of overall losses for the industry, an unprecedented negative streak.

Fannie Mae and Freddie Mac were the first stocks to break through their July 14 low; now Lehman Bros. is close.

The July 14 closing low for Lehman was $12.40; it is trading this morning at $12.81.

This has important implications for the S&P 500: much of the second half turnaround in overall earnings is based on the idea that financials will begin reporting positive results in the second half. This is not going to happen, for the most part, and as a result strategists are now frantically readjusting their earnings expectations.


1) Electronic payment equipment maker VeriFone up 25 percent as it provided second-half estimates well above analyst expectations; the strength is in international.

2) Hewlett-Packard up 3 percent; like IBM H-P reported a solid quarter. Remember, the EDS deal should close soon; H-P will hold an analyst day September 15th to discuss that.

3) US Air completed its public stock offering, which included issuance of 19 m shares at $8.50 per share, as well as 2.85 m shares as a greenshoe (the overallotment granted to the underwriter, Merrill Lynch). Down 6 percent pre-open.

4) Thanks for the cynical analysis: UBS raising price targets (but not earnings estimates) on food companies: Kellogg, General Mills, Heinz and Campbell Soup. Partly it's due to the positive effects of lower commodities, because these companies have already announced price increases. But the slower economy is the real reason for the modest optimism: "Our analysis shows that consumers' eating at home increases as job losses pick up."

Questions? Comments?

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  Tuesday, 19 Aug 2008 | 11:37 AM ET

Bove's Financials Note: How Bad Will It Get?

Posted By: Bob Pisani

On a day when financials are again weak, Richard Bove at Ladenburg Thalman provided his clients with a long (70 pages!) note outlining the problem with the banking industry.

The positives:

- Banks have more capital, more liquidity, more deposits, more loans, better margins, higher net interest income, improving non-interest income, and the likelihood of improving expense control.

The overwhelming problem, Bove notes, is bad loans: "They are explosive and they show no sign of subsiding."

He notes that non-performing assets are increasing: of 34 banks surveyed in the second quarter, non-performing assets were up by $54 billion, or 189 percent, year-over-year.

The problems are primarily in the real estate sector but the bad credits are now extending out to both the consumer (autos, credit cards) and the commercial sectors.

How bad will it get? His hope is that job loss is relatively moderate in this downturn, and home prices stabilize.

Financials in the news:

- Citigroup

- JPMorgan

- Merrill Lynch

- Wachovia Bank

- Bank of America


Questions? Comments?

»Read more
  Tuesday, 19 Aug 2008 | 10:06 AM ET

Discounters Rule Retail; Stocks' Uptrend Problem

Posted By: Bob Pisani

The trend in retail continues, with discounters continuing to outperform department stores: Home Depot and Target beating, Saks on the light side.

Biggest problem for stocks is that we are once again on the verge of breaking the uptrend from the July lows.

Housing starts at 965,000 annual units was the slowest since 1991; building permits were well below expectations at 937,000. Remember, at the height of the market a couple of years ago, there were 2.2 MILLION permits issued. While this sounds like bad news, the truth is we need to see a string of really poor numbers like these if we have any hope of working off the high inventory levels.

It's tough to make excuses for the shockingly high PPI number: up 1.2 percent, twice the expectations, and up 0.7 percent on core (ex-food and energy), three times the expectation of a gain of 0.2 percent.

  • CNBC Video: Oil Heading to $160?!

Year over year, headline is now up 9.8 percent, the largest gain since June 1981.

Bears are trying the same trick they used with CPI: saying that with commodities down, this is a backward-looking number. Unfortunately, prices seem to be increasing right across the board, and corporations are clearly indicating that they plan to keep raising prices.

Questions? Comments?

»Read more
  Monday, 18 Aug 2008 | 4:54 PM ET

Tricky Market: Weak Financials, Wobbly Tech & Housing

Posted By: Bob Pisani

Weakness in financials -- particularly over concern that the equity in Fannie Mae and Freddie Mac could go to zero -- was the primary driver of today's activity.

Traders in tech stocks -- the market leader -- took advantage of the market weakness to lighten up on their positions.

Finally, even energy stocks saw a late-day selloff. The Amex Oil Index closed at a new low.

The housing news from southern California is illustrative of the elusive nature of this housing crisis: a little good news, but still mostly bad.

The good news, according to AP, is that bargain hunters are out: sales hit a 16-month high.

The bad news:

1) Prices keep dropping: to a median of $348,000, down from $355,000 in June and a peak of $505,000 in July 2007 (down 30 percent from peak);

2) Foreclosures were still huge, at 43.6 percent of all sales, up from 41.8 percent in June, and 7.9 percent in July 2007. Most of these distressed sales were in newer neighborhoods.

Questions? Comments?

»Read more

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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