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Trader Talk with Bob Pisani

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  Friday, 17 Oct 2008 | 3:43 PM ET

Traders See Year Ending Around 10,000

Posted By: Bob Pisani

It is not surprising that today's rally has been met with selling: that has been the pattern for the past week and a half.

Few traders think we will be off to the races any time soon. In a poll of several dozen buy-side traders this week, most felt that we would end the year somewhere near 10,000, but no one was more optimistic than that, and a few were considerably more pessimistic.

However, if Libor continues to come down, and the commercial paper market continues to unfreeze, the odds become longer that the market will be able to hold modest gains.

If this happens, then by the middle of next week we can expect that shell-shocked fund managers and analysts will begin the process of distinguishing between those stocks and industries where dramatic selloffs may have been warranted and those where there are real values.

The theory being floated around is that some sectors are discounting dire circumstances that may not materialize, even if a notable recession is factored in.

For example: commercial real estate investment trusts have been clobbered under two theories: 1) companies have significant short term debt that they will have trouble rolling over in 2009, and 2) commercial real estate will slow down significantly, and rents will be dropping.

There is certainly something to 2), but the assumptions around 1) may be wrong if the commercial paper market starts going back to something near normal.

Corporate paper rates may be higher, but it may not be impossible to roll over debt. If that is the case, we are talking about a hit to margin, not a catastrophic event.

With big names like Brookfield down 50 percent this year, it is possible this group may show some improvement when the CP market improves.

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  Friday, 17 Oct 2008 | 12:17 PM ET

Downturn In Oil Demand--Just How Much Worries Investors

Posted By: Bob Pisani

Sell on the news. Oil services giant Schlumberger, which reported earnings in line with expectations, down 10 percent this morning to a 3-year low, taking the whole oil services industry down.

What's the problem? 2009. We are at peak earnings now. The concern is that the global recession will dramatically reduce demand for oil services. Indeed, with some firms talking about $35-$50 oil next year, it's little wonder that investors are bracing for a downturn in demand.

Demand will turn down, but how much? Over 70 percent of their revenue is international. Analysts have noted that much of that is tied to offshore rig contracts that are unlikely to be terminated.

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Other parts are more problematic, however. Schlumbergerhas a unit that provides seismic services (Western Geco). They make a lot of money: while they are only perhaps 15 percent of revenue, they have margins of 35-40 percent.

These Western Geco guys are the advance guard of the oil services business: they're hired to prospect for oil. And it's this end of the business that could see the biggest turndown.

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  Friday, 17 Oct 2008 | 9:15 AM ET

Why Traders Are Calmer--So Far

Posted By: Bob Pisani

Although futures are down (we routinely move in 50 point ranges in the morning), there is a calmer, more even tone to trader talk this morning:

1) Libor rates, both overnight and the three-month rates, are declining.

2) oil is declining

3) corporate and municipal bond issuance seems to beginning to unfreeze:

--Calif. raises $5 billion.

--PG&E doubled the size of its planned bond sale, from $300 million to $600 million.

--Occidental Petroleum increases size of its bond offering from $750 m to $1 b, and priced at Treasury plus 437.5 basis points.

And while housing starts and building permits were well below expectations (we are at the lowest levels since 1991), that is good news--we want construction down and we want sales up. Unfortunately, with a few exceptions, we have not seen a notable uptick in sales.

Option expiration today, the key number is the first print of the S&P 500, because that is the settlement price.

Elsewhere, earnings are light, but three major companies reported earnings in line or above expectations. This follows the trend from yesterday, when several big financial firms also reported earnings roughly in line with expectations. Boring is good.

1) Oil services giant Schlumberger came in in line with expectations. Still, we are at peak earnings for this group; in their report they said "we expect a slowing in the rate of increase of customer spending." This is wishful thinking: there is great concern that capital expenditures in the energy sector will be DECREASING compared to 2008, and that is why the oil services sector has underperformed both the S&P 500 and the Amex Oil Index.

2) Honeywellreported earnings slightly above expectations ($0.97 vs. $0.95 expected), full year guidance was narrowed slightly, from $3.76-$3.80, versus prior estimates of $3.75-$3.85, and consensus of $3.81

3) AMD also reported earnings better than expected, in fact much better than expected, on strength in graphics chips. Shares up 10 percent pre-open.

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  Thursday, 16 Oct 2008 | 4:09 PM ET

Welcome To The New Normal?

Posted By: Bob Pisani

The Dow again swung in a roughly 775 point range (about 9 percent), and yet the markets felt....stable.

But it's not stable, and it's not normal. Commodities got clocked again: oil at a new low, palladium down 10 percent, aliminium down 9, copper down 4.

Most importantly, gold was down 4 percent as hedge funds continued to liquidate even the "flight to safety" play of precious metals. This is a sign that sellers are still out...selling.

Financials again significantly underperformed the rest of the market.

Elsewhere:

There are some signs the municipal and corporate bond market might be getting easier:

--Calif. raises $5 billion

--PG&E doubled the size of its planned bond sale, from $300 m to $600 m

--Occidental Petroleumincreases size of its bond offering from $750 m to $1 b, and priced them today at Treasury plus 437.5 basis points.

1) Economic news. The economic news remains poor: industrial production was down 2.8 percent, the largest drop since 1974.

Combine this with yesterday's stats: 1) record low Empire Manufacturing Index, 2) 3-year low in retail sales, and what you have is a clear indication that the economy slowed notably in September.

2) Bank earnings today: poor, but not far from expectations. Citi,Merrill Lynch, PNC, and BB&T turned in numbers that, while far below a year ago, at least did not surprise dramatically on the downside.

I'm not trying to gild the lilly here. Citi, for example, lost money in credit cards, consumer banking, and investment banking. Credit costs and delinquencies rose, and writedowns continued. But it wasn't worse than the lowered estimates.

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  Thursday, 16 Oct 2008 | 3:55 PM ET

Why Insurance Stocks Are Under Pressure

Posted By: Bob Pisani

I have been asked repeatedly why insurance stocks are again under pressure today and are underperforming even the other financials. In general, traders and analysts agree that:

1) these insurers have very little short-term debt;

2) do not use much financial leverage;

3) they receive new dollars every day that need to be invested.

So, what's up then? Concerns are very vague, but there are three that pop up:

1) pressure to raise capital (MetLife and Pru have already announced)

2) credit deterioration risks

3) equity market guarantees. These firms sell variable annuities which have equity market guarantees embedded in them. With the S&P 500 down almost 40 percent this year, there are concerns some of the firms will have to pay to cover shortfalls in the guarantees

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  Thursday, 16 Oct 2008 | 9:17 AM ET

The Good News On Inflation

Posted By: Bob Pisani

At least there was some good economic news today:both CPI and core CPI were below expectations , so inflation concerns are indeed receding.

Futures rallied nearly 15 points on the news. S&P futures have swung in a 50-point range this morning.

Switzerland is taking a nearly 10 percent stake in UBS (6 billion francs); Credit Suisse said it would raise 10 billion francs from several investors, including Qatar.

Credit Suisse up 13 percent pre-open; UBS up 11 percent.

Remember, this is an options expiration week and it is definitely adding to the volatility.

Elsewhere:

1) financial company earnings are basically in line with expectations.

--Citireported a loss of $0.60, beating estimates by $0.10.

--Merrill Lynch reports a loss of $5.56, pretty awful but now far from the expectations of a loss of $5.22

The shareholder vole on the the Bank of America deal will come in mid- to late November, CEO John Thain said.

--PNC Bank, the largest bank in Pennsylvania, reported earnings below expectations, as revenues declined and bad loans increased.

--BB&T, one of the largest banks in the Southeast, reported earnings of $0.65, in line with expectations. They went out of their way to note that their risk-based capital ratios are "significantly" higher than an average of its peers.

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--Bank of New York Mellonreported earnings above expectations

2) Other earnings reports were basically in line as well:

--United Technologies was in line with expectations; they raised the low end of guidance for the full year but are still in line with expectations.

--Illinois Tool Worksreported earnings of $0.85, 2 cents shy of expectations; fourth quarter guidance was in line with expectations.

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  Wednesday, 15 Oct 2008 | 4:04 PM ET

No Let Up In Volatility

Posted By: Bob Pisani

The volatility continues. The Dow swung in a greater than 700 point range again today. The story is simple: most traders believe we will be in a trading range for the next several months and will test the intraday lows we saw on Friday. The bad news:

1) continuing, vague concerns that government efforts will not be effective

2) we saw this concern play out in the t-bill market, where huge T-bill auctions came off at lower yields. We are practically paying the government to lend them money

3) weaker economic data in the form of retail sales

4) which was born out by the Fed's Beige book: "economic activity weakened in September across all twelve Federal Reserve Districts."

There was some good news:

1) LIBOR rates lower

2) and the belief that a tidal wave of liquidity is coming

Once again, the commodity complex sold off the most: energy stocks down 15 percent, commodity stocks down 12 percent./ Defensive names like consumer staples and healthcare were down 5 percent. New low in the Dow Transports.

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  Wednesday, 15 Oct 2008 | 3:04 PM ET

Why Energy Stocks Are Uderperforming The Market

Posted By: Bob Pisani

I've been asked many times today why energy stocks are again underperforming the market. There are several explanations:

1) When oil prices go down sharply, energy stocks underperform. This is the simplest--and most direct explanation for the decline. Further, many analysts are now attempting to estimate energy stock earnings based on oil at around $60, rather than $100 where it was a few weeks ago.

2) the leverage factor is going away. Much of the outperformance in energy in the last several years has been due to hedge funds getting aggressively involved under very high leverage. On top of this, hedge funds have fewer prime brokerage firms to borrow from.

Besides a reduction in leverage, speculators are continuing to exit the market. Goldman and Morgan Stanley,who were among the largest speculative players in the oil market, cannot play to the same extent as before because they are commercial banks and cannot take the high risk profile they formerly assumed.

3) As a corollary to 2), there has been unusually tight ownership of energy--to be blunt, every fast money yo-yo on the planet was in commodities in the last 4-5 years, largely energy. Now all that is unwinding, and they are continuing to get margin calls.

4) Demand fears on global recession. There is talk of notable reductions in capital expenditures by major oil companies, which is impacting oil service companies.

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If this decline in oil continues, the traditional tactic for those who must trade energy stocks is to go long the biggest names. That's because the biggest names have the longest time horizons and can be most conservative.

That's why, for example, ExxonMobil is only down 15 percent this month, while most oil service names are down 30 to 40 percent. Exxon has $40 billion in cash, more stable than some countries! While ExxonMobil is down 9 percent today, the decline is small compared to the double digit declines in other energy and commodity stocks.

Take a look at Suncor, formerly a darling of the oil sands crowd; down 50 percent this month.

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  Wednesday, 15 Oct 2008 | 11:35 AM ET

Traders See Days Of Wide Range Ahead

Posted By: Bob Pisani

As we drift lower midday, there is good news and bad news.

The bad news:

1) we are entering a period of poor economic data, even poorer than the previous months, as evidenced by the retail sales data today;

2) traders believe that the most likely course of action the next few months is a trading range, with days of high volatility and large price swings followed by days of relatively little activity; we will test our Friday lows several times.

The good news:

--many stock prices have been cut in half in the last 5 months, so stocks are already pricing in a relatively large economic slowdown.

In fact, even today many big names are sitting at 52-week lows: retailers like JC Penneyand Nordstrom, commodity stocks like US Steel, industrials like Eaton, and some techs like Texas Instruments.

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  Wednesday, 15 Oct 2008 | 9:13 AM ET

Good News On Energy, But Not So On Retail And Mortgage Rates

Posted By: Bob Pisani

Futures dropped a bit as retail sales were weaker than expected, Producer Price Index (PPI), a measure of inflation at the wholesale level, was in line , but core PPI was higher than expected...bottom line is that energy costs are dropping, and this will be a big help in the next quarter.

You can see this with the earnings from CSX : in-line, no big surprises, and most importantly FUEL PRICES DECLINED significantly.

Still, futures declined on this news, probably because the weaker than expected retail sales indicates a negative quarter for GDP.

Another negative: The Mortgage Bankers Association said the average 30 yr mortgage rate moved up to 6.47 percent from 5.98 percent last week. Refi's still rose 12.5 percent, while purchases were little changed. Rates are up because bond yields are moving up.

So good news on energy inflation, bad news on retail sales, bad news on mortgage rates.

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Elsewhere, commodity stocks like BHP Billiton ,Massey, and AK Steel are trading down 5-10 percent pre-open.

However, the earnings reports have been fair to good this morning:

1) JP Morgan posted a gain in earning when a loss was expected, however provisions for credit losses were notably higher than last year in investment banking, retail financial services, card services, and commercial banking. They were not, however, notably higher than expected.

2) Wells Fargo posted higher earnings ($0.49) than consensus ($0.41), as did Wachovia ; both are trading up about 3 percent pre-open. Wells Fargo was the beneficiary of all that panic over bank deposits; they saw a "tremendous" inflow at the end of September.

3) Coca-Cola also posted earnings higher than expected, as opposed to rival Pepsi

4) Intel's revenue guidance ($10.1-$10.9 b, $10.8 b expected) was fair, not great.

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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.

 

  • Bob Pisani

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

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