Bearish on Financials - Fast Money Recap (8/14/08)

Recap of CNBC's Fast Money, Thursday August 14.

Bearish on Financials – Morgan Stanley (MS), Goldman Sachs (GS), Merrill Lynch (MER)

Wall Street analysts appear to be increasingly bearish on financials. On Thursday Fox-Pitt Kelton analyst David Trone cut his estimates on Morgan Stanley to reflect larger write-downs which could lie ahead. Trone says Merrill Lynch should cut its dividend by 50% to bolster its capital position. He also expects the investment bank to earn 73 cents a share, compared with his earlier estimate of 79 cents. In a note to clients he writes “Morgan Stanley will write down $1.2 billion in fixed income, currencies and commodities in the third quarter.” Earlier he was expecting FICC-related net write-downs to be $800 million. “We’re continuing to have asset sales in the market and they’re coming at fire sale prices,” Trone reported, “and it’s creating net write-downs and that’s the story. That’s why we cut our estimates.” If you’re looking for a trade, Trone thinks the financials are “pretty far away from having catalysts that will cause them to break out.” If you’re looking to get short, Trone says “in the brokers I think Goldman is priced too high,” he adds. “I think their relative valuations are too high but in terms of write-downs I think Merrill Lynch has the most exposure.” The good news is that Trone believes the investment banks can get back to the kind of profitability they experienced about 18 months ago, provided they can avoid government controls. “The dollars in the world have to go somewhere and there will be a boom that follows this bust.”

Slower Growth in Established Stores – Walmart (WMT), Target (TGT)

Wal-mart earnings reveal that they have had to pay more to produce clothing. Wal-Mart raised its full-year earnings forecast Thursday after second-quarter profit rose more than expected, helped by tight inventory controls and a renewed focus on low prices that is attracting financially squeezed shoppers around the world. But the world's largest retailer predicted slower sales growth at its established stores in the U.S. for the current quarter, as the benefits of the federal stimulus checks dry up and customers find it more difficult to stretch their paycheck to the next payday. Like other retailers, Wal-Mart is also confronting inflationary pressures from fuel, food and labor that are raising the costs of goods. Wal-Mart's earnings indicate that they are paying more to produce clothing. “America is more addicted to cheap clothing than they are to most anything else,” explains Jeff Macke. And China has become America’s factory for cheap clothing. But China is experiencing a surge in its own standard of living. Something’s got to give. And I think it gives in the margins for discounters. “I wouldn't worry too much. Wal-Mart always finds efficiencies,” counters Pete Najarian. “I think the retail trade is long Target for the second half of the year,” said Adami.

Final Trade – Your First Move for Friday August 15.

Jeff Macke declined to make a pick.

Guy Adami recommends going long Deere & Company (DE).

Karen Finerman likes Nokia (NOK).

Pete Najarian likes Juniper (JNPR).

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