Trader Talk

What Traders Want Fed To Do


The year's biggest IPO (in the U.S.) priced last night, and it goes to a Real Estate Investment Trust (REIT): Starwood Capital Group , which priced 50.5 million shares at $20 each, well above its early price and size talk.

Controlled by Barry Sternlicht, founder of Starwood Hotels, they're one of several funds formed to try to buy distressed real estate, in this case debt that was used to finance commercial real estate.

Mr. Sternlicht is apparently putting some of his own money on the line. SPT Investment, an affiliate of Starwood Capital controlled by Mr. Sternlicht, is buying one million shares in a private placement at the IPO price of $20.

There are more such ventures coming from other companies, including Colony Capital.

A couple weeks ago Pennymac Mortgage also went public, set up by former Countrywide officials to buy distressed residential mortgage debt.

But the more talked-about IPO is medical billing system Emdeon , which successfully priced its IPO, selling 23.7 million shares at $15.50 a share, the top end of the range of $13.50 to $15.50.

The deal had strong talk early on, looked like it was priced right, and appears to be oversubscribed.

This is somewhat a play on healthcare reform, since the Obama administration has made advances in electronic medical payments and record-keeping a cornerstone of its healthcare reform initiative, and Emdeon is certainly in the middle of t hat space. Any expansion of health insurance coverage is also likely to benefit them.

Rivals include Eclypsis , and Cerner ; both have far outperformed the S&P 500 since healthcare became an issue six months ago.

I will be interviewing the CEO right after he rings the opening bell this morning.


1) Fed statement:most stock traders expect the Fed statement to be little changed from the June 24th statement, with one important exception.

a) The economy: Most stock traders expect the Fed to reiterate their modest optimism that "the pace of economic contraction is slowing."

b) Quantitative easing: expect the Fed to continue their purchase of Treasuries, agency debt, and mortgage-backed securities, but since these programs are nearing the end of their stated life, most feel the Fed will leave the purchase programs as is and not expand the programs.

However, a small minority believe that the Fed should announce a modest extension of these programs.

c) Inflation: most expect the Fed to reiterate that "inflation will remain subdued for some time," which was a slight change from the previous statement.

d) Interest rates: there is some disagreement among traders here. On June 24, the FOMC said it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Some traders have argued that the Fed should amend this statement, perhaps by removing the "extended period" phrase, to signal that they are at least thinking about raising rates in early 2010.

2) A greater-than-expected 77 percent decline in bank lending from June to July caused Chinese stocks to drop nearly 5 percent today. China's benchmark Shanghai Composite is now off nearly 11 percent from its 52-week high on August 4. Hong Kong's Hang Seng Index was also 3 percent weaker - its worst day in 3 months.

3) Macy's isup 2.5 percent pre-open after beating earnings estimates and raising its full-year guidance. Q2 earnings topped forecasts ($0.20 vs. $0.15 est.) as cost cuts continued to help offset a steep 9.5 percent decline in same-store sales.

Looking ahead, same-store sales declines are expected to moderate to -5 percent to -6 percent in the second half of the year. While the department store significantly raised 2009 earnings guidance to $0.70-$0.80 from $0.40-$0.55, the new forecast lies mostly below the analyst expectations of $0.79.

4) BHP Billitonbeat estimates despite reporting a 62 percent decline in full-year earnings,as the slide in commodity prices and the economic slowdown weighed heavily on results.

The Australian miner remained cautious in its outlook warning that "any assumption of a quick return to historical trend growth may be premature." CEO Marius Kloppers also added that he feels "the global economy is likely to emerge from this recession less rapidly than in previous cycles."

5) Toll Brothers rises 9 percent pre-open after reporting a 3 percent rise in the number of signed contracts during its third quarter. It was the first time in 4 years that the homebuilder saw a year-over-year increase in net contracts. Also encouraging, Q3 net contracts rose 44 percent the prior quarter's levels, defying historical trends of a sequential decline in signed contracts from Q2 to Q3.

Another positive: the homebuilder also saw its cancellation rate fall to 8.5 percent (vs. 19.4 percent last year) - its lowest level in 3 years 



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