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Trader Talk with Bob Pisani

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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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  Thursday, 19 Jun 2008 | 9:35 AM ET

Market Hears More Earnings Warnings

Posted By: Bob Pisani

We are smack in the middle of earnings warnings season, and it has not been a pleasant experience. Yesterday, after several companies warned, we saw an expansion of new lows at the NYSE. Most large financials, most pharmaceuticals, airlines, and most autos are at or near multiyear lows.

Today, a number of companies are warning once again.

1) In HMOs, Coventry Health dramatically lowered its guidance--by 46 percent for the second quarter, and by 17 percent for the full year. The problem? It's called the Medical Loss Ratio. Simply put, the difference between the price they are charging and the actual cost of the services are not matching up in the way they had been estimating. This isn't just Coventry's problem; the majority of the big HMOs are also lowering their number due to the same problem.

Coventry is down over 20 percent pre-open. Other managed-care companies like Wellcare (down 7 percent) and UnitedHealth (down 10 percent) are weaker, however, this morning Aetna--which works in a similar space--affirmed its full year and quarterly guidance. Aetna still down 4 percent.

2) Burlington Northern became the latest transport company to warn--but this time it wasn't just on higher fuel costs, it was on the severe Midwest flooding, where many of their key tracks are under water. Union Pacific lowered their guidance on Tuesday.

3) Higher raw material costs, like soybean oil and wheat, have hurt Smucker's . Their earnings were below expectations. And while they have been raising prices, they claim the price increases were not sufficient to maintain profit margins.

4) Chemical giant Huntsman , which learned yesterday that Apollo Management was looking to back out of its $6.5 b takeover offer, said it would fight the effort to quit the deal. Huntsman down almost 40 percent pre-open.

5) Surprise! An LBO! Apria Healthcare , one of the largest home health care firms, is being bought by Blackstone for $1.6 b, that is $21 a share in cash. The deal would be done through a combination of equity from Blackstone and debt financing. Apria closed yesterday at $15.82, so we are talking about a fairly healthy premium of more than 25 percent.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 18 Jun 2008 | 4:36 PM ET

Financials Force Dow To Close At Three Month Low

Posted By: Bob Pisani

The Dow closed at a 3-month low, due to the continuing weakness in financials. New lows expanded at the NYSE to nearly the highest levels in 3 months.

Weighing on markets:

--downbeat commentary from CarMax , FedEx

--capital raising from Fifth Third
--oil remaining in the $130-$140 trading range

CarMax missed earnings and suspended guidance for the year. They noted:

--a 3.6% decline in used selling prices because they cannot sell the gas guzzlers customers are bringing in;
--credit availability is tightening;
--sales and traffic weakened since Memorial Day.

Auto stocks like CarMax, AutoNation , GM and Goodyear Tire hit new lows.

Rather than finding a bottom, selling has accelerated in the regional banks; Fifth Third fell apart in the last hour and ended down 23 percent as they cut their dividend and announced they were raising capital.

Other regional banks hit new lows as well.

All of this is happening in what appears to be slow motion, because neither volume nor fear levels seem to be increasing. The CBOE Volatility Index (VIX), a measure of the cost of buying protection on the S&P 500, has been only slightly elevated in June. This jibes with what sells-side desks are telling me: they are DEAD because they cannot convince clients to either buy or sell stocks.

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  Wednesday, 18 Jun 2008 | 3:06 PM ET

Street Just A Miserable Bear

Posted By: Bob Pisani

Man, what's up with Wall Street? I haven't heard the Street sound so miserably bearish since right after 9/11:

1) Traders are dreading earnings warning season, with the fear being that the downbeat commentary today from CarMax, FedEx, and the capital raising/dividend cutting from Fifth Third(with a belief that many other regional banks will do the same thing) is only the beginning;

2) Only 36 percent of financial advisor surveyed by Investors' Intelligence were bullish this week, the lowest since March 14th (the Bear Stearns rescue); normally 45 to 50 percent are bullish;

3) Sell side desks are DEAD as they are unable to convince clients to either buy or sell stocks;

4) The lynchpin of the bull argument--that the second half of the year will see gradual improvement in the U.S. economy, with housing recovering in early 2009--is now being openly questioned.

So what is left? Higher rates. Many are now pinning their hopes on the dollar...and this is why traders have cheered concerted efforts by Fed officials plus U.S. officials to prop up the dollar. Traders hope a concerted rally in the dollar will see oil trade below $110, stocks will rally, gold will come down, and a lot of these long commodity/short financial trades will reverse.

This is nothing new; many traders tried to short commodities a few weeks ago by going long the dollar. It didn't work, but it's a sign of how desperate things are that traders are grasping at these kinds of straws.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 18 Jun 2008 | 11:35 AM ET

Auto Industry Feeling Economic Squeeze

Posted By: Bob Pisani

Auto stocks are notably weaker here, with new lows for GM , CarMax , and AutoNation ; Ford is down 7 percent but not at a new low. CarMax missed earnings , and suspended guidance for the year.

Info:

--3.6% decline in used selling prices

--credit availability tightening

--sales and traffic weakening since Memorial Day

This is similar to what Deutsche Bank was saying: they are lowering their U.S. auto sales forecast. In addition to weaker consumer demand, DB also noted there was now a mismatch between what consumers want to buy (smaller, more fuel-efficient cars) and what dealers have in inventory (SUVs and other gas guzzlers).

Bottom line: not only is demand down, but prices for used cars are down as well, so auto dealers are squeezed.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 18 Jun 2008 | 9:22 AM ET

FedEx Hit By High Oil Prices, Weak Economy

Posted By: Bob Pisani

Futures are weaker due to poor commentary from a number of key players.

FedEx is the main story this morning, and it is not a pretty picture. Earnings of $1.45 was a bit shy of consensus of $1.47 , but that wasn't the big problem. Guidance for the current quarter is well below expectations: $0.80-$1.00 vs. $1.27, as is the full year guidance of $4.75-$5.25 vs. $5.92 consensus.

"Record high fuel prices and the weak U.S. economy dampened volume growth and substantially affected our bottom line," CEO Frederick Smith said.

International continues to grow: 6 percent growth in International Priority, but that was offset by continuing declines in U.S. domestic express shipments.

FedEx down about 5 percent pre-open.

Elsewhere:

1) Morgan Stanley beat expectations ($0.95 vs. $0.92 expectations), but not by nearly as much as Goldman Sachs. There were declines in fixed income (85 percent below the levels for the same period last year), including a curious $120 million negative adjustment to marks previously taken in a trader's book that did not comply with Firm policies. Traders also noting that they had a sizeable gain ($1.43 b) from sale of two assets, ex-those one-time gains they had little in the way of earnings. Down 5 percent pre-open.

2) Fifth Third , one of the nation's largest regional banks, based in Cincinnati, is raising capital by issuing $1 B in convertible preferred shares. They are also reducing their quarterly dividend reduced to $0.15, down from prior $0.44. Kudos to BMO Capital Markets, who issued a report last Friday correctly predicting they would cut their dividend at least 50 percent and likely initiate a capital raise. Down 16 percent pre-open.

3) MF Global is down 15 percent pre-open, after warning that first quart revenues would come in below estimates; they will also be selling $150 m in preferred stock.

It wasn't all bad news:

--trucking giant YRC Worldwide affirmed its guidance for the quarter despite higher fuel costs; up 6 percent pre-open.

--General Mills raised its guidance, though they did not say why. Up 1 percent pre-open


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 17 Jun 2008 | 4:09 PM ET

Financials Continue Sell-Off Into Even Modest Rally

Posted By: Bob Pisani

Another frustrating day for the broad market, as we ended right near the lows for the day. Energy stocks did what they did for most of this quarter: go up. Financials also did what they have done for 80 percent of this quarter: sell into even the most modest of two-day rallies, despite a stellar report from Goldman Sachs.

Speaking of Goldman: a report that banks would have to raise an additional $65 billion to cover losses did not help the financials.

Many regional banks like SunTrust (down 8.6 percent), Nat City(down 6.5 percent, Fifth Third (down 6 percent) were especially weak.

How long can this trade (long energy & materials, sell rallies in financials) work? Bulls think it can go on for some time; bears believe we are in a blow-off on energy and materials and it is only working right now because it is the end of the quarter, but will soon stop.

As for tech, there is considerable anxiety there as well, particularly since 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.

In the short term, the markets will be influenced by the quadruple witching expiration this Friday (the quarterly expiration of stock and index futures and options), as well as by FedEx's earnings report tomorrow.

The issue with FedEx, of course, is jet fuel prices and to what extent the weak economy is reducing demand for freight services. The company last provided guidance on May 9, 2008, an eternity ago.

Finally, solar stocks weakened late in the day, I am hearing that the Senate has blocked tax breaks for wind and solar energy.


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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