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Trader Talk with Bob Pisani

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  Thursday, 31 Jul 2008 | 9:17 AM ET

GDP, Jobless Claims Just Plain Disappointing

Posted By: Bob Pisani

Futures dropped 10 points as jobless claims were higher than anticipated (448,000, the highest since Apr '03), while second quarter GDP, at 1.9 percent,was a bit below the expectations of 2.3 percentage growth . GDP is particularly disappointing given that the tax rebate did give the economy a one-time shot in the arm. Dollar dropped, oil rallied.

Two oil stories:

1) ExxonMobilhad a record quarter for revenue , but earnings were below expectations, $2.22 vs. $2.52 expected. Production volumes were a bit light, possibly due to a strike in Nigeria and other issues. Remember total revenues for Exxon are very much tilted toward the downstream side, but profit margins are much higher on the upstream side.

2) Marathon is up 7 percent pre-open after announcing it is evaluating separating the company into two parts, one focused on Exploration and Production, the other on Refining and Marketing. But look, this is mostly a refining company: 86 percent of 2007 revenues were from refining and marketing; only 14 percent from E&P. Their stock has suffered as refining margins have dropped on the high oil prices.

Elsewhere:

1) Bristol Myersmaking an offer to buy the rest of ImClone for $60 a share, which would give it control of the cancer drug Erbitux. They currently own 17 percent. This is another attempt to take over a biotech company, following on the heels of the Roche-Genentch deal.

2) Motorolahad a smaller than expected loss, guidance was breakeven to $0.02, vs. estimate of $0.01. The handset business looks more stable, but is still losing money. Up 13 percent pre-open.

3) Visa came in above expectations. Yes, the economy is slowing, and the volume growth is not quite as great as it was, but the company is still growing, as Buckingham noted: "growth of payments volume, transactions, and revenues are likely to slow, but even at mid teens growth rates, are still very high relative to GDP."

4) As for Disney, they beat slightly, and while everyone thought their theme parks would be slow, they surprised here: park revenues were up 5 percent; Morgan Stanley attributed the relatively strong performance to international attendance and positive foreign exchange. Park bookings were flat, and while that may be disappointing to some, flat is no disaster in this economy. On top of that, the cable networks were strong, particularly ESPN, and even ABC did fairly well. A slowdown in advertising remains a concern.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 30 Jul 2008 | 4:23 PM ET

Dow AND Oil Both Up: Here's Why

Posted By: Bob Pisani

What's up with this: Dow up big, with oil up big? For months, the markets have struggled against the oil juggernaut, often moving in inverse step with oil. Today, the Dow closes at its highs with oil up nearly $5?

Traders are looking for reasons, which include:

1) Short covering in front of employment data?

2) GDP tomorrow: setting up for 2 + % growth? We are expecting 2.3% growth in the GDP, but some think it will be stronger.

3) End of month gyrations?

Financials have bottomed! (we think). Energy stocks led, but financials reversed their losses as well. This is bolstering the bull position that Merrill'sactions yesterday represented a watershed event. Under this thesis, Merrill demonstrated subprime CDO's are not a bottomless pit, there is actually a number where there is a buyer.

As for energy stocks, after being beaten up all month they roared back: Oil service up 5.7% (best since 3/00), Amex Oil index up 5.4% (best since 6/06).

Still, this was a strange trading day: 2 stocks advancing for every 1 declining, with oil up nearly $5.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 30 Jul 2008 | 9:19 AM ET

The Street Remains A Bear

Posted By: Bob Pisani

Futures rose pre-open as the July ADP private sector employment report showed a gain of 9,000, much better than the expected drop of 60,000.

Not all the economic news was good:

1) The weekly Mortgage Bankers report showed a sharp decline in refinancings , as well as a 7.8 percent drop in purchases. This even though interest rates are at 6.46 percent, not historically high. Tighter lending standards and lower demand is the likely problem.

2) The Street remains bearish. The weekly survey of financial newsletter writers by Investors Intelligence shows only 30 percent bullish, 50 percent bearish, the first time bears were at 50 percent since 1995.

Elsewhere:

1) Drug make Elandown 38 percent pre-open, and U.S. partner Wyethdown 16 percent, as clinical results on Elan's new Alzheimer's drug has been disappointing. They are, however, moving the drugs to late-stage trials.

We'll have the Elan CEO on at 9:40. (read our Pharma's Market blog as well)

2) Engine maker Cumminsup 8 percent as both top and bottom line were both well above expectations; non-U.S. sales were particularly strong and are now 61 percent of total sales. It wasn't all good news: engine sales for the Chrysler Dodge Ram pickup dropped 60 percent from a year ago; RV engine sales were down 40 percent. Despite this, they are raise their sales forecast to a gain of 15 percent, from a gain of 12 percent.

3) Office Depotcontinues to post weak results, posting a loss as sales in North America declined 6 percent; comp store sales were down 10 percent. The initial weakness in Florida and California has spread to the rest of the country.

4) Corning was in line with expectations; the company said the LCD market was expected to grow at the upper end of the 25 to 30 percent range because LCD product demand has remained strong.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 29 Jul 2008 | 4:07 PM ET

Four Factors That Made A Difference Today

Posted By: Bob Pisani

A much better tone to the market as four factors made a collective difference today:

1) oil at 2-month lows

2) dollar rallies to 5-week high

3) consumer confidence stronger

4) Merrill puts a price on CDOs

The good news is that with the S&P closing at 1260, the lows of 1200 or so a week ago seem like a firmer bottom than a few days ago.

The problem: outside of oil, much of the fundamentals have not changed. Traders are not expecting much from the jobs report on Friday, but that's what leaves upside in a down market. With a loss of 75,000 jobs expected, anything near that is likely to help the market. So many traders are expecting another 5 percent move to the upside, but no one is expecting the S&P to return over 1,400 where it was during its recent highs in May.

Bottom line: up is path of least resistance for now.

Finally, what does Merrill's CDO selloff mean for other financials? Is everyone going to have to sell CDOs at $0.22 on the dollar, as Merrill has? Guy Moszkowski at Merrill Lynch says maybe not. A good part of Merrill Lynch’s CDO portfolio is 2006 vintage and above, whereas the largest portion of Citi's CDOs is pre-2006. Citi's portfolio appears to be performing better. As for most other financials, they do not have the large subprime exposure that Merrill has.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 29 Jul 2008 | 1:22 PM ET

What Merrill's Selloff Means For Financials

Posted By: Bob Pisani

Midday observations:

1) What does Merrill's CDO selloff mean for other financials? Is everyone going to have to sell CDOs at $0.22 on the dollar, as Merrill has? Guy Moszkowski at Merrill Lynch says maybe not. A good part of Merrill Lynch CDO portfolio is 2006 vintage and above, whereas the largest portion of Citi's CDOs is pre-2006. Citi's portfoilo appears to be performing better.

2) Housing still murky. The bad news on the Cash-Shiller home price index is that the 20-city index fell by a record 15.8 percent in May. The good news is that the rate of decline may be slowing down, and--believe it or not--that's the first thing that has to happen. Michael Darda MKM Partners had a good point: "While the rate of house price deflation may slacken soon, the actual bottom for home prices (and housing in general) is probably a ways off."

3) The restaurant business is having serious problems. The privately-held firm that controls Bennigan's has announced a Chapter 7 bankruptcy (that's liquidation) of its company-owned restaurants, while DineEquity,the publicly traded company that owns Applebees and IHOP, announced earnings well below expectations and is trading down 9 percent. Operating profit, however, was roughly in line with expectations.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 29 Jul 2008 | 11:25 AM ET

What's Moving The Market Up

Posted By: Bob Pisani

Several pieces of good news are helping stocks today.

First, Merrill Lynchhas put a price on CDOs and sold them. Yes, it's $0.22 on the dollar, but at least it is a price, and that is what the Street is looking for.

Second, the Conference Board consumer confidence index was up , particularly the futures expectation component was up, off the record lows, which dovetails with the uptick in University of Michigan confidence numbers.

Third, the dollar has rallied to a five week high, and many traders now believe the dollar put in its lows in March and April.

Finally, and perhaps most importantly, oil has broken below the June lows of $121 and change, and energy stocks have been down—in fact Exxonand BP are near new lows (!) And not just oil: natural gas, gold, and copper are all significantly off their highs of just two weeks ago.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 29 Jul 2008 | 9:11 AM ET

Merrill: Why It's The Big Story

Posted By: Bob Pisani

Merrill Lynchis far and away the big story today.

Two weeks after reporting huge losses, Merrill Lynch has surprised the Street with significant sales and capital raising. They are:

1) selling $30.6 b in CDOs. They were carried on the books at a value of $11.1 b; buyer Lone Star is paying $6.7 b ($0.22 on the dollar), but Merrill is financing three-quarters of the sale;

2) recording a writedown of $5.7 b;

3) will raise $8.5 b in new capital from common shareholders, including $3.4 b from Temasek, the Singapore investment arm that is already Merrill's biggest shareholder.

The capital raising was a surprise, particularly since the Street believed management had signaled that further capital raises were unlikely.

The good news here is that Merrill is actually selling assets, rather than just marking them down.

The bad news is that Merrill's peers will be under pressure to write down more assets. Indeed, Deutsche Bank lowered earnings estimates for Citigroup following the moves by Merrill.

This is a significant dilution of shareholder equity, but reaction on the Street has been generally positive. Meredith Whitney at Oppenheimer said, "the stock is getting closer to fairly valued levels" and "we applaud this purging of assets as an attempt to cut its losses and focus on stabilizing its platform and righting the franchise towards growth."

Who is the winner here? The firms who have money to buy these distressed assets at pennies on the dollar. Goldman has just raised a $10B fund to invest in distressed securities.

Merrill is up fractionally, as other financials like JP Morganand Lehman; Citi however is trading down.

Elsewhere:

1) U.S. Steel up 8 percent pre-open, earning $5.65, way above expectations of $3.91, revenues also above expectations.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Jul 2008 | 4:06 PM ET

Fundamentals Not Changing Despite Gov't Help

Posted By: Bob Pisani

One third of decline in the Dow today was due to the five financials stocks. This is the second time in the last three trading days this happened (Thursday was the other day). To a lesser extent, the same situation applies to consumer discretionary stocks--builders, retail, and autos, as they too are underperforming the markets today and Thursday.

The reason is that bears are betting that despite attempts to help the markets by the federal government, it is not changing the fundamentals: 1) consumer spending & labor will remain weak, and 2) financials will trouble growing their business even if housing bottoms, due to capital constraints and weak demand.

Take special note of Merrill Lynch, the first of the financials to hit new closing lows.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Jul 2008 | 2:56 PM ET

Bears Remain Convinced It's A Bear Market

Posted By: Bob Pisani

Markets are weak again today, and for a reason. Since the market topped out last Wednesday, there have been two groups that have declined much more than others: financials, and consumer discretionary stocks like autos, home builders, and retailers.

These are the two groups most beaten up in June, and for good reason. Bears bet heavily that we were in a bear market, and the majority remain convinced we are STILL in a bear market. Those who are betting that we remain in a bear market are operating under several assumptions:

1) Consumer spending will remain weak due to slowing income growth, higher inflation, and the hangover from housing, and that the weakness will become even more apparent once the temporary effect of the rebate becomes evident.

2) The labor market will remain weak;

3) Even if we hit some kind of bottom from writedowns, financials will have great trouble growing their business due to a) a shrunken capital base, and 2) lower consumer and commercial loan demand.

The only good news here is that this is likely to keep the Fed on hold.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Jul 2008 | 1:14 PM ET

Why Financials Are Weak

Posted By: Bob Pisani

A number of factors have been proposed to account for the weakness in financials today. Several traders have pointed to National Australia Bank, which on Friday revealed that exposure to the U.S. subprime market was forcing them to set aside an additional $805 million, and that it had now put aside enough provisions to assume a 90 percent loss in those mortgages.

That took some by surprise, but the edge had come off financials before that announcement. We saw a nice rally two weeks ago that took the financials up about 25 percent--until last Wednesday, when we simply ran out of steam. Since then, we have given back about 40 percent of those gains, with notable declines from the highs on Wednesday in Citi (down 20 percent), Merrill (down 32 percent), and AIG(down 18 percent).

Same with consumer discretionary stocks. We had a rally of about 10 percent in retailers, and even more for some home builders and auto stocks, in the same period, but since then given up half of those gains.

The conclusion: we had enough to take stocks financials and consumers off dramatically oversold levels, but not enough buying interest to lift them further.


Questions? Comments? tradertalk@cnbc.com

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About Trader Talk with Bob Pisani

  • Direct from the floor of the NYSE, Trader Talk with Bob Pisani provides a dynamic look at the reasons for the day’s actions on Wall Street. If you want to go beyond the latest numbers— Bob will tell you why the market does what it does and what it means for the next day’s trading.

 

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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