Trader Talk

Why Commercial Paper Matters This Time


Tomorrow is the end of the month, significant for several reasons, including: 1) end of the quarter for a number of brokerages, including Morgan Stanley,Bear Stearns, and Lehman Brothers, and 2) a large amount of asset-backed commercial paper (ABCP) will be rolling over.

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Normally, the rollover of ABCP is not even worthy of a mention; but given the seize-up recently, participants are watching to see how much actually does roll over. There is about $1.1 trillion in ABCP outstanding, most of it short-term debt. If the paper is not able to "roll" it will then get thrown back onto the books of banks. Even if it is rolled over, their is concern about the price of the rollover. Dennis Gartman has noted that the cost of borrowing on commercial paper rated A1 by Standard and Poors was 5.3% in early July; it is now north of 6.0%.

Ara Hovnanian, CEO of homebuilder Hovnanian , said on our air that recession risks were rising, and called for a rate cut. He and other builders will be meeting Bernanke next week. A pattern is beginning to develop: go on our air and claim that the economy may slip into a recession if the Fed does not cut interest rates. The question of whether a rate cut will really cure what ails things is now lost; the market believes that this is what is needed, and they will clearly be disappointed if they don't get it.

A quick look at earnings, etc.:

1) Tiffany turned in a terrific quarter. Beat earnings estimates and raised guidance; U.S. retail sales were up 20%, international retail up 16%. Up 1% pre-open.

2) Chico's though, was below expectations, with earnings down 27% compared to the same period last year, and they expect softness to continue into Q3. August comps weak. Down 5% pre-open.

3) Sears beats estimates, but earnings were 40% below last year.

4) H&R Block said they are in discussions with Cerberus Capital to modify the deal to sell the Option One Mortgage Corp. to Cerberus, noting that certain closing conditions are not being met. They are working toward advancing the December 31 contract termination date to try to resolve the terms of the deal earlier. No assurance the deal will close. Down 5% pre-open.

5) Lehman joins other firms and lowered price targets and earnings on brokers.

Questions?  Comments?