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Trader Talk with Bob Pisani

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  Tuesday, 24 Jun 2008 | 11:35 AM ET

Global Markets Struggle With Inflation

Posted By: Bob Pisani

Stock markets around the world have been weaker recently as they struggle with the implications of global inflation. Asian markets in particular are worried; Asian currencies have been weak on inflation concerns. Consider the following headlines:

Russia: PPI up 25 percent Year Over Year (YOY)

South Korea: inflation at 7-yr high

Vietnam: inflation up 25 percent YOY

As a result, emerging market stocks have been fading:

China down 54% (from the high in October 2007)

India down 32% (from the high in January)

Russia down 7% (from the high in May)

Meantime, companies in the U.S. are emphasizing the impact of inflation on their bottom lines. Lowe's is seeing "unprecedented requests for price increases;" Dow Chemical is raising prices for the second time in a month; energy costs up fourfold last 5 years.

All this is putting pressure on U.S. indices; the Dow is sitting near the 52-week closing lows from back in March.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 24 Jun 2008 | 9:22 AM ET

Reliance Steel Upgrades Guidance, Dow Chem "Upgrades" Prices

Posted By: Bob Pisani

1) Reliance Steel just jumped 5 percent as they updated guidance, raising it 30 percent from previous guidance, due to much higher increases in carbon steel prices.

2) Dow Chemicalis raising prices again, the second time in a month--by as much as 25 percent, joining other chemical producers who are being hit hard by higher oil and gas costs. How much higher? Dow says costs for have jumped fourfold over the past five years--they will spend $32 billion this year on energy bills (!!).

3) UPS down about 4 percent, as they copied FedExby pre-announcing lower earnings on slower U.S. growth and higher fuel costs.

4) In autos:

--Cooper Tire cut production of tires due to lower demand. This is no surprises; the Street has been selling off Goodyear and Cooper since May on expectations that car sales would be weak.

--A Japanese paper said that Toyota is making plans to lower is group sales target for 2008, due to slower sales in the U.S. and a slowdown in luxury car sales in China

5) NYSE Euronext is buying a 25 percent stake in the Doha Securities Market (the principal stock market of Qatar) for $250 million--though the NYSE also has a stake in India and Brazil bourses, as well as strategic relationships with the Tokyo Exchange, this is the NYSE's largest investment in a foreign exchange to date. NYSE will hold three of the eleven board seats at DSM, and will provide proprietary technology systems and help to manage the exchange over the next five years. The deal is interesting, because Qatar owns 15 percent of the London Stock Exchange, and both NASDAQ and the LSE were reportedly also involved in the bidding.

6) In the food business, Krogerbeat estimates; ConAgra is raising earnings for the quarter just completed, though they didn't provide specifics.

7) UBSup about 5 percent on vague rumors that HSBCmight be interested in buying them--and while buying the biggest wealth management firm in the world at a comparatively low multiple sounds appealing, it seems awfully unlikely they would be able to pull off a deal of this size in the middle of the biggest banking downturn in decades, not to mention how much opposition would be seen in Switzerland if a London bank tried to buy the crown jewel of Switzerland.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 23 Jun 2008 | 5:23 PM ET

Low Volume, Lots of Damage

Posted By: Bob Pisani

After the close, UPS cut its guidance, speaking as FedEx did recently about the increase in the price of fuel, and how it is slowing the broader economy.

It was a low volatility, low volume day, but regardless: there was a lot of damage done. Two stocks declined for every one that advanced. The number of stocks at new lows at the NYSE was the highest since the March bottom.

Financials have been sold almost every day this month, and again today; as a group, they were down about 3 percent, with new lows in AIG , Bank of America , Citi , and Merrill Lynch .

Retail and housing stocks were also weak, with companies like Home Depot down nearly 5 percent.

The only group on the upside were energy stocks, where we hit new highs in many oil service names, as well as coal companies like Massey .

Predictably, airline stocks dropped double digits on the rise in oil.

Questions? Comments? tradertalk@cnbc.com

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  Monday, 23 Jun 2008 | 9:38 AM ET

Oil Whipsaws, S&P Flat as Quarter End Looms

Posted By: Bob Pisani

Oil was trading up early in the morning, despite the Saudis agreeing to raise oil production 200,000 barrels a day -- however, about 8:30am ET, after the dollar had been strengthening, oil began moving down. Gold also weakened, down 2.7 percent.

Options on gold and all the metals expire on the 25th, one trader said it was "just too much for the funds." That is too much unknown news with the Fed meeting, and they don't know how much more the Saudis will raise oil production.

(Nore: If crude comes off it drags down gold).

The Fed meeting this week is widely anticipated to be a non-event, with no rate raise and a lot of rhetoric about inflation.

More important is the end of the quarter, with only six days remaining. The S&P 500 is essentially flat this quarter, which is a major disappointment, since April and May were up; we have fallen apart in June (down nearly 6 percent!) and are now very near the lows for the quarter. With a flat quarter, many traders signalled that they expected meekness and defensiveness to be the prevailing strategy going into the close of the quarter.

Well, there are some mergers this morning, which should put a few much-needed shekels in the coffers of the investment banks.

Bunge to buy Corn Products for $4.8 billion for Corn Products, $56/share, a 31 percent premium to Friday's close.

Corn Products is the #4 manufacturer of high-fructose corn sweeteners. The deal will supposedly broaden the products it sells to customers and extend their reach into new markets in Asia.

Bunge also announced they were raising full year guidance to $9.35-$9.65 from $7.10-$7.40 (!) Remember, they are also in the fertilizer business, as well as agribusiness.

Republic Services formally announced they were buying Allied Waste, in deal that had already been widely leaked.

The deal is $6.1 billion, valuing Allied at about $14.04 a share, a small premium over Friday's close. The deal combines the number two and three companies in the solid waste industry (Waste Management is #1)

The Chicago Mercantile Exchange announced a share buyback program of up to $1.1 billion of Class A stock and a special dividend of $5; up nearly 3 percent pre-open.

Citi plans to dismiss up to 10 percent of the 65,000 people in their investment banking division, according to the Journal (Citi will not confirm), while the Financial Times is saying Goldman Sachs cut its investment banking division last week.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 20 Jun 2008 | 4:37 PM ET

Market Lynchpins: Energy And Materials

Posted By: Bob Pisani

Two trends were not helpful to those looking for a bottom today:

1) Financials were again weak, despite positive comments from two regional banks---SunTrust and Huntington Bancshares .

2) The top performers for the second quarter--materials and energy stocks--have been under pressure for the last two days as traders have taken profits. Oil was up today, while energy stocks were down--an alarming trend, end of the quarter or not. Energy and materials have been the last lynchpins of the market.

Speaking of oil, it was up despite the meeting in Jeddah over the weekend, which many hope might lead to a decline in oil prices.

For the week, the Dow down 3.8 percent to three-month lows thanks to notable underperformance from financials and consumers, S&P 500 down 3.1 percent, NASDAQ down 2 percent.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 20 Jun 2008 | 9:03 AM ET

Merrill Lynch Profit Warning Rumors: Consider The Source

Posted By: Bob Pisani

There was a time when quadruple witching expiration (the quarterly expiration of stock and index futures and options) was a big event; the Wednesday and Thursday before would often see very large volume and volatility. That doesn't happen anymore, for a combination of reasons, principally because traders spread their rollover trades over a week and a half now.

Elsewhere:

1) Merrill Lynchis down 5 percent on a vague,unsourced rumor from Reuters that Merrill might issue a profit warning . Remember the internal logic of active stock traders: it doesn't matter whether a rumor is true or not, what matters is to be ON THE RIGHT SIDE OF THE TRADE. Ask yourself this question: who would have access to this kind of inside information, that it would be leaked to a trading desk? Which is more likely: that a trader creates a rumor that they can profit from, or that inside information has been leaked? Then consider that short sellers have been pressing--and continue to press--financials. I'm not saying that it is impossible Merrill will issue a profit warning; I'm just asking you to consider the source (trading desks) and their motivations.

2) Maybe it's not so bad with regional banks:

--Huntington Bancshares up nicely as after the close they announced that charge-offs would come in at the top end of its 2008 guidance; so maybe the losses won't be as great as anticipated. This follows BB&T, which announced yesterday it was considering raising its dividend.

--Not so fast. Ed Najarian and company at Merrill Lynch out with a long (56 page) note, cutting estimates for regional banks on higher loan losses and reserve building. It's not all bad news: bank stocks now appear to be in capitulation mode," the report says.

3) Continental Airlines is doing a secondary offering of 11 million shares of common stock at $14.80 per share. The stock went out yesterday at $15.59; trading down nearly a dollar.

4) We have been talking about how the value of many used cars--particularly gas guzzlers--has been dropping rapidly, putting pressure on car dealers and consumers alike. A similar situation may be happening with leased vehicles.

Lehman Brothers out with a note saying that GM's financial arm may need to write down $1.5 billion, and Ford's may need to write down $1.1 billion.

The report noted: "We expect deteriorating residual values of lease vehicles to be lower than original expectations, which could significantly impact loss rates that are already tracking above average for recent vintages."

5) You think it's tough in your business? Try being Winnebago, beset with high gas prices,

Winnebago beat on the earnings side, but revenues were short of expectations.

Listen to these stats from Winnebago:

--the motor home market has faced double digit retail sales declines for eight of the last nine months;

--retail sales declined 26.1 percent for the first four months of 2008;

--forecasts indicate volumes will decline to levels not seen since 1991.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 19 Jun 2008 | 4:32 PM ET

China's Rising Gas Prices May Help U.S.?

Posted By: Bob Pisani

It was a mixed day, which started poorly with a big earnings warning from HMO Coventry , as well as Burlington Northern and Smucker's , which noted higher soybean oil and wheat costs were hurting their bottom line.

However, things improved midday. While Coventry warned, two other HMOs--Aetna and Humana both said they would meet earnings expectations.

Later in the day, southeastern bank giant BB&T said their capital position remains strong and they "anticipate some increase in the cash dividend during 2008." Not only did BB&T rally into positive territory (it was down almost 10 percent), but other regional banks like Suntrust also rallied modestly. Bottom line: BB&T became the first regional bank to exorcise the "dividend-cut monster." Other financials, and indeed the overall market, rallied modestly.

Finally, while cruise ship company Carnival Corp reduced its full year guidance, citing higher fuel costs, they also noted that occupancy levels for bookings in the following year are in line with last year, with higher ticket prices. This moved the stock up steadily throughout, ended up about 5 percent.

Separately, the news that China is raising gasoline prices is good news for those of us who would like to see the price of oil come down, however it is not good news for China. The Shanghai Composite Index of Chinese stocks dropped another 6 percent today, to a new 52-week low, a full 55 percent below its historic high last October. Even Chinese-based ETFs are weak; the iShares FTSE/Xinhua China 25 Fund is 36 percent off its historic highs.

Chinese stocks have been down for the same reason our markets are down: the twin whammies of higher inflation and a potentially slower economy, though in China's case a slower economy may simply mean sub-10 percent growth annually.

However, raising gasoline prices for them is different than raising for us. First, even modest increases in gas prices there may have a much bigger impact on their economy than on ours. Second, China is a huge exporter, including to the United States. They will undoubtedly be raising prices of their export goods; this of course will cause more inflation in the U.S.; it may also reduce demand for some Chinese goods, which of course hurt the Chinese.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 19 Jun 2008 | 3:34 PM ET

Regional Banks Stage Rally

Posted By: Bob Pisani

Stocks have staged a modest late-day rally as oil has closed at the low end of its two-week trading range.

Also, BB&T, a large Southeastern bank based in North Carolina, is helping itself and other banks late in the afternoon. They are saying their capital position remains strong and they "anticipate some increase in the cash dividend during 2008."

Not only did BB&T rally into positive territory (it was down almost 10 percent), but other regional banks like Suntrustalso rallied modestly. Why? Because shorts keep pressing these names under the theory that many will follow KeyCorp and Fifth Third and cut the dividend; any indication this dividend cut is not a universal trend will cause shorts to engage in some covering.

Separately, there has been a modest move up in beaten up stocks like AIG,Home Depot,and Verizon. Don't want to make too much of it, but again shorts have been so successful pressing the markets that they are quick to cover.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 19 Jun 2008 | 2:14 PM ET

Oil Debate: How To Get More Transparency

Posted By: Bob Pisani

With oil down today, traders are again debating how we can get more transparency in the oil business, and much of the debate centers on oil futures contracts.

According to Charles Biderman at TrimTabs, there are 2.7 m open interest crude futures contracts in the world.

A futures contract is $1,000 per barrel, so the nominal cost is $135,000 ($135/bbl x $1,000). However, that's not what most traders are really paying. These contracts are typically bought on margin. The average margin requirement is $8,000-$10,000 per contract (about 6 percent of the actual cost of the contract).

So take 2.7 m contracts, multiply by an average of $9,000 per contract, and you get about $25 billion. In other words, you could theoretically control all the oil futures contracts in the world for about $25 billion.

That's about two days worth of consumption: 87 million barrels a day consumed worldwide x $135/barrel = about $24 billion.

I say theoretically, because it's likely that some of these futures contracts are not bought on margin; but the majority probably are.

Still, it’s a pretty startling statistic. A couple questions, which are being actively debated on the Street and in Washington:

1) Why not disclose who the major holders of all these contracts are? They don't have to disclose it now. But equity traders have to disclose. Why not commodity futures traders?

2) And why are margin requirements so low? You can control a $135,000 contract for $8,000--6 percent. It's 50 percent for equity margin requirements. Why not raise margin requirements? Good idea, but it will increase the cost to traders, they grouse.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 19 Jun 2008 | 11:48 AM ET

Why Is Everyone On The Street So Bearish?

Posted By: Bob Pisani

I noted yesterday the miserably bearish mood Wall Street has been in recently. The market has been having problems because the central assumption of bulls--that the second half of the year would see a rebound in earnings--is coming under attack. As a result, traders have been taking every opportunity to sell into rallies in June.

The number of companies actually pre-announcing lower for the second half of the year is still small--FedEx , CarMax (which suspended guidance), and Coventry are the most prominent. But it is early, and the Street is not waiting for companies to announce.

Even analysts--historically well behind stock traders--have been taking numbers down. For example, estimates for the S&P 500 for the third quarter are now expected to be up 13.9 percent. That's pretty good, but it is down from 17.3 percent on April 1. Why is it even that high? Because the Street has been assuming that the economy would improve modestly, and that third quarter comparisons would be considerably easier than the second quarter.

Why are traders assuming earnings will be lower than they thought in the second half of the year? Because if you talk to any trader about any part of the market they trade, they're bearish. They hate their sector! How do I hate thee? Let me count the ways.

HMOs are having trouble because membership growth is either down or lower than expected, costs are rising, and estimates for Medicare costs vs. payments have been wrong recently;

PHARMACEUTICALS have been hit by blockbuster drugs going generic, and a lack of new drugs in the pipeline;

AUTOS have been hit by a dearth of exciting new products (in the U.S. manufacturers), a slower economy, and a mismatch between what consumer want to buy (fuel-efficient cars) and what dealers have to sell (gax guzzlers);

RETAILERS and HOMEBUILDERS cannot advance because the consumer is stuck;

FINANCIALS continue to see selling into any rally under the belief that the fallout from the credit crunch is not over, and that even after that a much-smaller, potentially more regulated industry will have trouble growing soon;

TECHS have outperformed the broader market in the past month; earnings are very back-end loaded (meaning much of the earnings are expected to be in the second half of the year), so as we enter earnings pre-announcement season the anxiety is rising;

TELECOMs are weak because a weaker consumer means wireline and broadband growth will be slowing;

AIRLINES have been hurt by higher fuel costs and the need to shrink capacity;

BONDS have been weakening because of concerns over inflation and a belief the Fed will be raising rates later this year.

What's left? Commodities and energy, and the big global industrials like Caterpillarthat are riding the infrastructure boom. And the hope that stocks will be washed out enough soon (second half of 2008?) to make them compelling.


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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