Pisani's Trader Talk: Why Investors Should Be Optimistic
CNBC "On-Air Stocks" Editor
CNBC's Bob Pisani reports on what traders are telling him at midday.
Reasons to be optimistic:
1) Tom McManus at Bank of America has increased his equity allocation 5%, to 60%, and cut his bond allocation 5%, to 15%. Note he has zero weighting in banks but with the recent drop is reviewing that position.
2) Citadel has assumed control of Sowood Capital's Credit Portfolio. Don’t know how much or exactly what is in the portfolio, but it is probably large. And the point is: here is a hedge fund that is stepping in and buying a credit portfolio, almost certainly at a great discount to its value of a couple months ago.
3) Citi upgrades KB Home . A homebuilder upgraded? Yep. Citi says its underperformance vs. peers was unwarranted.
4) AG Edwards upgrades ExxonMobil . Waiting for an analyst to do this. Bruce Lanni at AG Edwards is the first. Says the drop in Exxon makes this an attractive entry point. It's the industry leader, and they have an aggressive buyback, and dividend increases (which they certainly do).
5) Most interesting thing I have read midday: a glowing review of Morgan Stanley from S&P. S&P raised ratings on Morgan Stanley and noted that its exposure to subprime mortgages and to leveraged corporate underwritings was "manageable," and that "MS should be able to maintain satisfactory earnings even if market conditions are considerably more challenging." It concluded the report by saying, "The outlook is stable."
6) A lot of strategists are reiterating why they have been bullish.
Tony Dwyer at FTNMidwest is typical: “The main influences that has driven equity prices higher over recent quarters remain in place: moderating core inflation, stable long-term interest rates, slower but positive economic and earnings growth and attractive valuations.” Like many, he is pounding the table on tech and healthcare.
Earlier, Pisani reported on what traders were telling him before the market's opening bell.
Risk remains to the downside. Momentum traders - trend followers who have been major supporters of energy, materials and industrial stocks - continue to say they are buying on dips, but their resolve seems weak. It was they who bought through the morning and into midday on Friday, but then puked in the last 20 minutes.
Lots of people arguing the "go long tech, short financials" position. David Kotok at Cumberland, who has been bearish on home builders and financials, was out pounding the table this weekend on pharma/bio/healthcare. He also liked technology and wireless services. And he was big also on international stocks, "where the problems are not as great, the economic growth rate is higher AND the tax rate on business is lower."
It's true that tech does not have the credit problems, but if corporate borrowing costs go up across the board, as Bears say it will, it will impact tech. The NASDAQ dropped as much as the S&P last week largely because momentum traders just lightened up on their positions across the board.
Earnings still solid. With 60% of the S&P reporting, the blended earnings growth rate is 5.8%. On July 1st, the estimated growth rate was 4.1%, according to Thomson.
Credit is still the big issue. One trader of corporate debt who did not want to be quoted by name told me over the weekend that "there are no bids for high-yield corporate bonds." He noted that high-yield corporate bonds were trading like they were expecting 20% losses. But the fundamentals were sound, and there were many opportunities to profit from the turmoil.
Similar note from Lehman. Their fixed income people were out over the weekend arguing that this "risk reset" (as they called it) was "therapeutic for the global capital markets and will help prolong the life of this global expansion." They sounded a theme that many of the bulls have sounded in the past few weeks: "Although this correction has not concluded and may extend through August, most of the portfolio damage has been recorded."
Indeed, this was a theme I have heard all morning: smart people are looking to increase positions. Lots of discussion about Goldman Sachs Group boosting the size of a corporate debt fund it is starting to $20 billion from $12 billion to take advantage of the turmoil in credit markets.
European markets down fractionally, but big bank earnings coming in sound. HSBC earnings came out, and were pretty good. Stock should trade up here. Chairman Stephen Green pointed out that U.S. weakness was "not constraining economic activity elsewhere."
However, total loan impairment charges and credit risk provisions did rise to $6.34 billion in the first half from $3.89 billion a year earlier.
ABN Amro also had good earnings. Interestingly, they are pulling their support of Barclays buyout offer. They now say they cannot recommend either that bid or the competing one from the Royal Bank of Scotland consortium.
Finally, the Chinese Shanghai market closed at an all time record high. The Chinese Central Bank then raised reserve requirements to 12% from 11.5%.