JPMorgan Mortgage Losses - Fast Money Recap (8/12/08)

Recap of CNBC's Fast Money, Tuesday August 12.

More Mortgage Losses - JPMorgan (JPM)

On Tuesday, JPMorgan (JPM) said it had racked up $1.5 billion of losses so far this quarter on mortgage-linked assets, reflecting deepening turmoil in credit markets. A filing showed that as of June 30, JPMorgan held $19.5 billion of prime and Alt-A mortgage exposure, $1.9 billion of subprime mortgage exposure, and $11.6 billion of commercial mortgage-backed securities, CMBS, exposure. “These mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity reflecting distressed sellers,” JPMorgan said. Loss estimates exclude hedging. But there’s more. The Fast Money traders have discovered an odd correlation between the financials and CMBS. The financials are rallying despite the fact that CMBS spreads are growing wider. I think there has been a disconnect between what’s happening in the bank stocks and the assets that are underlying the balance sheets, explains Karen Finerman. We are getting very close to worst levels we have seen, she says. I expect further deterioration. Karen Finerman recommends shorting the financials. Keep an eye on interest rates and spread. The cost of the money is now at levels not seen since the collapse of Bear Sterns.

Retail Gap (GPS), JC Penney (JCP), Teen retailer Hot Topic (HOTT), Wal-Mart (WMT), Home Depot (HD),Lowe’s (LOW), Costco (COST)

Several companies from Gap and JC Penney to Teen retailer Hot Topic raised their outlooks last week even though they reported July declines at established stores. However it’s bellwether Wal-Mart that investors are most eager to hear from. In July, Wal-Mart had said that its customers were increasingly unable to stretch their paychecks to the next payday. Mark Miller, an analyst at William Blair & Co., downgraded shares of Wal-Mart to “market perform” from “outperform” based on expectations for slower sales and profit growth in the second half. In a note to investors, he said that Wal-Mart's July sales performance was a “material deceleration” from the previous two months. Still, he believes the company will meet or exceed Wall Street's current expectations for second-quarter earnings of 84 cents per share when it reports results on Thursday. I like Wal-Mart, says Jon Najarian. The large volume of call buying in this stock would make most investors feel positive. But I don’t think now is the time to buy. The recent upside mainly comes from interest in their dividend (not from stronger-than-anticipated sales.) I see real optimism in Home Depot and Lowe’s Najarian adds. There’s very strong call buying in Home Depot. And I’ve noticed positive institutional buying in Lowe’s. The retailer I don’t like is JC Penney, he adds, I see put buying that appears to be negative.

Retail is a sucker’s game right now, adds Jeff Macke. If you must trade retail I don’t think Wal-Mart will do anything to break down and Costco seems to go higher no matter what. Don’t misinterpret the positive options trading around Wal-Mart. They are dividend driven more than anything else.

Financial Trades - JPMorgan Chase (JPM), Wachovia (WB), Morgan Stanley (MS), Financial Select Sector SPDR (XLF)

Word that JPMorgan Chase had racked up $1.5 billion of losses so far this quarter on mortgage-linked assets sent the bank's stock down more than 8 percent and reflected deepening turmoil in credit markets. JPMorgan shares also weighed on the financial sector after a number of analysts, including Oppenheimer & Co's Meredith Whitney and Deutsche Bank's Michael Mayo, cut their earnings estimates for the investment bank. The KBW index of bank shares fell sharply. Wait for Goldman to hit $150, counsels Jeff Macke. At that level it’s a buy. I think the trade in Goldman is ahead of their earnings, adds Guy Adami. But I don’t think it shakes out as a trade until September 10th or so. They report on the 18th. The JP Morgan write-down didn’t seem that big to me, says Karen Finerman, but it made me think “now everyone else has to re-price”. On a related note Finerman is short banks, but doesn’t plan to cover those trades, at least not yet. Fundamentally, I think many of the bank stocks are ahead of themselves, muses Pete Najarian. Look at the run in the Financial Select Sector SPDR as well as Wachovia and Morgan Stanley.

Oil Hits 14-week Low

Oil fell to a 14-week low on Tuesday after government data showed the steepest decline in U.S. crude demand in 26 years, adding to mounting concerns about global consumption. “I think we’re getting close from a bounce back perspective,” says Jeff Macke. You can trade these things like the other broken trend trades; from the long side. But in the end I think oil will go quite low because it’s unwinding a lot of speculative bets.

Airlines are Lifting Off - Lockheed (LMT), Rockwell Collins (COL)

The airlines are scorching higher right now, says Pete Najarian, but I wouldn’t trade them. However if oil spikes and the airlines dip, I think airlines are a buy for a trade. I think both Lockheed and Rockwell Collins are down the road trades adds Guy Adami.

Gold Weakens

Gold tumbled to its weakest levels in almost eight months in volatile trade on Tuesday, losing its safe-haven appeal as investors shifted some of their money back to the U.S. dollar while oil further retreated from record highs. The gold chart is horrifying. I’d rather be long the dollar, says Jeff Macke.

After Hours - Applied Materials (AMAT), Nvidia (NVDA)

Applied Materials the No. 1 computer-chip equipment maker, posted a lower quarterly profit as revenue slid 28 percent. Applied, along with others in the chip equipment industry, have suffered from a glut of manufacturing capacity in the memory chip market.New orders in the third quarter were down 11 percent from a year ago to $2.03 billion  and decreased 16 percent from the second quarter, Applied Materials said. The backlog at the end of the quarter was $4.74 billion, up from $4.59 billion at the end of the previous quarter. I wouldn’t rush in, says Pete Najarian. I do like the exposure that Applied Materials has in the solar space. If Applied Materials switches their business around it could get interesting, says Guy Adami.

Nvidia posted a second-quarter loss on Tuesday as a slump in global desktop PC sales hurt its business. I wouldn’t rush in on the news, says Pete Najarian.

Food Chains - McDonald’s (MCD), Darden (DRI), Yum (YUM), Burger King (BKC)

McDonald’s shares fell on Tuesday after UBS cut its rating on the world's largest fast-food chain to “neutral” from “buy” on valuation, citing flattening restaurant margins and shrinking currency gains. It doesn’t stop me from wanting to own the stock, says Jeff Macke. $60 would be a decent level. Darden, Yum and Burger King are the names in the industry that I like said Pete Najarian.

Apple Overweight - Apple (AAPL), Dell (DELL)

Steve Jobs certainly has his fans. In a research note Tuesday Lehman analyst Ben Reitzes reiterated being “Overweight” of Apple. Why so bullish? Lehman analyst Ben Reitzes joined the panel to explain. Following are excerpts from the conversation. “It looks like iPhone sales are going very well despite the economy,” says Reitzes. “We surveyed the stores… and the build plans out of Taiwan are supporting upwards of 8 million plus iPhones. The Street is only expecting 3.8 million. We think that creates upside cash flow and that’s the key to next year.” “Also Mac sales are starting to accelerate,” adds Reitzes. “We think a bunch of new Macs could be launched within a month. You could even see sales accelerate into Christmas.” It should come as no surprise that Reitzes concludes with, “I think you should own Apple.” Jeff Macke has a very different perspective. He’s bearish on Apple, he thinks the company could have a problem down because the line is growing products that have smaller margins.

On a related note, Reitzes wasn’t terribly excited by the new product roll out from Dell on Tuesday.

Final Trade – Your First Move for Wednesday August 13.

Jeff Macke is long Wal-Mart (WMT) and short Retail HLDRS (RTH).

Guy Adami recommends going long Raytheon (RTN).

Karen Finerman likes Pride (PDE).

Pete Najarian says buy CISCO (CSCO).

 

Seeking Alpha is not affiliated with CNBC, or Fast Money

 

Comments

[nyka:]

JPM had said racked up...Confusing; word omitted. Edit your copy so as not to detract from your credibility.
The financials are rallyling DESPITE THE FACT THAT...WORDY; try rallying, EVEN THOUGH.....
Two words are better than one; avoid wordiness.

2008 Aug 14 05:35 PM

[Owen:]

nyka, I was starting to worry about you. It's been over a week since your last comment here, and we just had no idea who of us was losing credibility due to our typographical wrongdoing, or what sins of wordiness we were committing.

Glad to see you are back at your post, pointing out the transgressions of our copyediting ways.

2008 Aug 15 02:53 PM