Pisani's Trader Talk: Quiet Market, but Plenty of Tension
CNBC's Bob Pisani reports on what traders are telling him:
Beneath a fairly quiet August day with unexceptional volume, the markets continued to reveal an underlying nervousness.
The good news is that broad swaths of the market--particularly transports, materials and industrials--were mostly to the upside throughout the day and rallied modestly into the close.
Energy stocks, for example, were weak throughout the day on natural gas (down 14%!), but the minute the commodity market closed at 2:30 pm New York time, they too staged a modest rally and most were up for the day.
The bad news is that financials began dropping the minute prices on the 3- and 6-month Treasury bills began rising mid-morning, a sign that the stock market--and certainly financials--remains at the mercy of the credit markets. Even here, though, there are signs the markets are moving on any piece of news: after Senator Chris Dodd, chairman of the Senate Banking Committee, said on CNBC that he was having a meeting tomorrow with Bernanke and Paulson, the Treasury bill rally reversed, and financials began coming off their lows.
Are stock traders really so naive that they think that Senator Dodd, as influential as he is, is going to sway Mr. Bernanke to cut interest rates? Intellectually, they know this is nonsense; emotionally, they believe it can only help.
The meeting is at 10 am New York time tomorrow; look for some statement from Sen. Dodd around 11 am.
Mid-morning observations: (from earlier Monday)
1) Much more typical August Monday than we have seen in, well, a year: much lower volume, than recently, most stocks fractionally positive. One thing hasn't changed: sell into any strength in financials; brokers down fractionally.
2) There is considerable debate about what to do with earnings estimates for financials, particularly brokerage stocks. Many think current estimates are too high. Quarter is ending for major brokers in next few weeks.
David Bianco at UBS actually RAISED his 2007 earnings estimates for the entire S&P 500 today. He acknowledged a slowing GDP and that financials would be "challenging," but said that was reflected in their 2008 estimates and that he saw strength in techs and industrials.
3) Credit Suisseone of several firms to relate the current situation to the Long Term Capital Management (LTCM) crisis of 1998, when the Fed engineered a bailout.
But things are different that 1998, they note this morning in a note to clients from their London office:
- "Valuations are better now than they were at the time of the LTCM crisis.
- Global growth is more diversified.
- Corporate balance sheets and FCF are much stronger.
- Banks are better capitalised."
4) Finally, Charles Biderman at TrimTabs notes that the U.S. equity market value has dropped $2.2 trillion from its high (total value of the U.S. stock market is now $19.6 trillion). The total of all subprime mortgages--$1.4 trillion, according to Biderman. So we have lost $2.2 trillion of market value worrying about $1.4 trillion in subprime mortgages. Of course, leverage has greatly magnified the effects and needs to be taken into account.
Traders: The Fed's on Our Side(from earlier Monday)
Despite the Fed's action on Friday, Wall Street is clamoring this morning for actual fed funds rate cuts from the Fed. JP Morganfor example, told clients over the weekend that the "cut in the discount rate helps, but is not enough."
At least most traders come in feeling that the Fed is on their side. Many are drawing parallels with the Long Term Capital situation in 1998, where the Fed arranged a bailout and then (beginning in September 1998) proceeded to lower interest rates. This analogy no doubt makes central bankers cringe, since they surely do not want to think that they are going to suddenly accommodate another global equity surge.
Still, a lot of traders are beginning to think that while the markets will recover, it is going to be a lot tougher to beat this year's July market highs. The problem is in the financials: while they are 17% of the S&P's market cap, they are 25% of its earnings.
It's well known that bottoms-up strategists are slow to respond to changes in conditions; therefore, the hard-liners say, current Q3 estimates, particularly for financials, have less credence than usual. Many traders feel that analysts are waiting for the quarter to end; remember this comes at the end of August for Goldman Sachs, Lehman Brothers, Morgan Stanley, Bear Stearns.
Some signs of bottom fishing however, look at Freeport-McMoran, Atticus Capital boosting their stake to 7.48%--looks like they bought a boatload in the last few weeks.
1) Lowe's cuts full-year guidance, even though Q2 estimates topped views, probably a good, conservative call from them given uncertainty in housing.
2) JP Morgan downgrades McGraw Hill, owner of Standard and Poor's, on the theory that the credit markets will see a meaningful decline in issuance activity, which would hurt S&P's business.
3) NASDAQ says it is reviewing alternatives for divesting its 31% stake in London Stock Exchange. Likely they will continue to pursue the Nordic Exchange OMX. They have already made a bid, but on Friday Middle East Exchange owner Borse Dubai also made a bid.