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Trader Talk with Bob Pisani

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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.


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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.


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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.


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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.


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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.


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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.


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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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  Monday, 28 Jul 2008 | 9:25 AM ET

Oil and Energy: Ready for a Bounce?

Posted By: Bob Pisani

Oil was down last week, and we had some decent economic numbers on Friday, so the questions on everyone's mind is what groups might be overbought/oversold to play for a short-term bounce. The chief groups are energy and financials.

1) Are oil and energy cheap enough to play for a bounce?

2) There are already signs that the more vulnerable financials are undperforming the perceived stronger ones--so for example Lehman and Merrill were down about 10 percent last week, but Goldman Sachs was down only 2 percent. Will that continue?

Elsewhere:

1) Tyson missed, as continuing operations actually experienced a loss of $0.01 vs. expectations of a gain of $0.12. Although beef and pork operations were fair, chicken operations suffered a loss because higher costs did not offset price increases.

2) Verizon beat on the bottom line. The company said they added 1.5 m net customer additions, the highest net ads in the industry, on record low churn, though FiOS TV adds were light.

3) Kraft beat estimates on top and bottom line, largely on higher pricing. Organic net revenues were up 6.9 percent, mostly due to higher pricing. Volume was down 1 percent. They raised their full year guidance by a couple of pennies.

4) Clorox added to the Americas Sell List at Goldman Sachs on concerns about commodity inflation in fiscal 2009, and concern over sales growth with data showing weakness in core categories like trash bags and bleach. Down 3 percent pre-open.


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  Friday, 25 Jul 2008 | 4:50 PM ET

How The Market Played Out

Posted By: Bob Pisani

Bob is out today. This post is from his producer, Robert Hum, who is helping to cover the markets in Bob's absence.

Stocks remained fairly range-bound this afternoon, but finished slightly to the upside. The Dow’s 119-point range today is its narrowest in just over a month. However, many of the sectors that performed poorly yesterday continued to be disappointing today.

Banks and brokers all ended just off their lows. Consumer discretionary stocks lost steam too: GM,Macy’s,Darden Restaurants all finished at their lows of the day. Oil stocks gave up much of the gains they had at midday.

For the week, the Dow Industrials finished down 1.1 percent and the S&P 500 was down 0.2 percent. The Nasdaq Composite, however, ended up 1.2 percent, despite a 7.7 percent decline in semiconductors resulting from some poor earnings reports earlier in the week.


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  Friday, 25 Jul 2008 | 12:23 PM ET

Oil And Economy Reports Not Much Help For Stocks

Posted By: Bob Pisani

Bob is out today. This post is from his producer, Robert Hum, who is helping to cover the markets in Bob's absence.

Despite lower oil and three stronger-than-expected economic reports (Durable Goods, Michigan Consumer Sentiment, & New Home Sales reports), the Dow is only up 50 points this morning.

Financials are off their lows of the morning, but still can’t seem to build much momentum.

Showing a bit of a bounce, however, are the home builders. They were broadly lower at the open, but many of them moved up 8-9 percent from those lows at 10 am ET when the new home sales data were released. That data showed new home sales falling to their lowest level since March, but the results still managed to come in above estimates.

For the second day in a row, energy stocks aren’t following crude oil’s lead. Yesterday, oil was up, but oil stocks were down. Today, despite the nearly $2 decline in oil, both the Amex Oil Index (.XOI) and the Philly Oil Service Index (.OSX) are posting solid gains. In addition to crude oil falling below $124 today, note that the Reuters CRB Index (.CRB), which tracks a basket of commodities, is also down nine of the last ten days – falling over 10 percent during that period.


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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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