Pisani's Trader Talk: Volatility Reigns and the Buyers Move In

CNBC's Bob Pisani reports on what traders were saying at the close:

Another day of big volume and big volatility. What do we mean when we talk about volatility? We mean this:

Volatility!

(% change from high to lows today)

S&P: 1.9%

Russell 2000: 2.0%

Home builders: 8.7%

Brokers: 4.4%

These are indexes, baskets of stocks, not individual stocks: This is BIG volatility. And indexes like the CBOE Volatility Index, which hit a 4 year high, are anticipating continuing volatility in the short term.

Why the late-day turnaround?

With volatility like this, it's no wonder traders are lost and confused; the momentum guys are not sure if they should be buying or selling.

Confusion reigns; you can smell it on the street (Pisani's Fourth Law of Broadcast Journalism: you know you're in trouble when your best sources call YOU and ask YOU what's going on.)

Here's what happened: fear levels are so high that traders are reluctant to even consider buying into the close. But many bulls can smell that the market is oversold, so they want to buy, but they need some signal, even a feeble one.

At 3:40 pm ET each day Market On Close (MOC) orders are posted that indicate if there are unusually high levels of buy or sell orders for individual stocks at the close. The purpose is to let market participants know what kind of orders are around and to attract buyers or sellers to imbalances. These orders are revised again at 3:50 pm

These MOC orders normally make little difference in the market close, but with fear so high investors look for some sign of what is going on. When they saw that the MOC orders were relatively benign (about even buys to sells, not heavy volume), they came in and bought heavily.

Pisani reported earlier on what traders were telling him in early afternoon:

Real Estate Investment Trusts (REITs): What's up?

There have been notable declines in REITs in the past seven trading sessions. REITs are stock companies that own and manage real estate on behalf of their investors. The most notable declines are in mortgage REITS, but there has also been notable declines in REITs in the apartment business (Equity Residentialshares down 16.3%), office properties (Boston Properties shares down 11.4%) and retail (General Growth Propertiesshares down 12.4%).

To understand why, let's look at the Cliff Notes version of what's happened in the credit markets:

1) global markets have been repricing risk.

2) spreads of debt instruments have widened relative to the yield on 10-year Treasurys.

3) there has been a notable reduction in liquidity.

The fact that the collateral behind much of the debt (ex-subprime and Alt-A mortgages) is trading pretty much in line with expectations is not important. The markets are trading on emotion, not on facts.

Commercial real estate outlook. The fundamentals remain strong. Business is strong in office, apartment, and even most of the residential commercial real estate sector.

Regardless, in this credit crunch, any company that relies on lenders to finance asset originations or on investments will find their borrowing costs going up.

As a result, this is affecting capitalization rates for properties. The "cap rate" is a critical indicator of a property's profitability. It measures the net rent divided by the price paid. As interest rates rise, cap rates usually rise, as investors expect a higher return to offset higher rates.

This is an acceleration of a trend that began in earnest in May. It is no coincidence that May was the month when yields on the benchmark 10-year index rose, raising borrowing costs.

Pisani reported on what traders were saying at midday:

Weakness in homebuilders, with Beazer, Standard Pacific, Hovnanianand Toll Brothersall down sharply.

No immediate reason for the sudden drop. CNBC has called Beazer, and they are not available for immediate comment.

It should be noted that Beazer has announced they are the subject of an SEC probe, the nature of which appears to be troubling.

Just last week, for example, JP Morgan noted:

"While no update was given on its investigations, we believe today's risks and disclosures indicate a higher probability of a negative outcome. Spec., we point to the increased disclosures in 3Q's press release, which detailed several possible negative outcomes of the investigation, including 'criminal or civil fines, the imposition of an injunction on future conduct' and 'other penalties and consequences' that could have a 'material adverse effect on the business, financial position, or results of operations of the Company.'"

Broader market dropped initially, but has since recovered.

Pisani's report from before the market opened.

The poor showing of American Home Mortgage as it reopened yesterday revived concerns about margin calls from lenders and hedge funds. Unfortunately, this creates a ripe environment for the rumor buzzards to whisper that this or that hedge fund has exposure, has losses, has margin calls, whatever.

It really doesn't matter. In this environment, the usual whisper-down-the-lane silliness ("My friend works at XYZ hedge fund, they're really busy over there," turns into the rumor "XYZ hedge fund is in trouble.") gets amplified. Some of it is true, but all of it gets made worse by the willingness of Internet chat rooms to spread every rumor.

Yesterday's trading action was made worse by the fact that it was the last day of the month. It was widely believed that there was a strong motivation for hedge funds, who provide monthly reports to investors, to book any profits now.

Asian bourses down 2% to 4%, but European markets were rallying off their lows at 8:20 a.m. New York time. Prices for debt protection, or credit default swaps, rose.

Earnings. Nearly 70% of S&P companies reporting, 6.4% growth in earnings. We should get close to 7%. That is pretty good for trough earnings. In the old days, trough earnings had NEGATIVE earnings growth.

Time Warnerannounces a big $5 billion buyback. That's nearly 7% of the media company's shares outstanding.