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Trader Talk with Bob Pisani

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  Thursday, 12 Jun 2008 | 12:23 PM ET

Reasons Markets Are Better Today

Posted By: Bob Pisani

Markets are better today for several reasons: 1) we have been hideously oversold recently, 2) retail sales better than expected (no it was not just gasoline sales), 3) the dollar index has rallied to its highest level since February, and 4) commodities, particularly oil (but not natural gas), are trading down.

After Lehman fired two top executives , the question is, does this give them any breathing room? The trust is broken--everyone thinks they will have to raise more capital, everyone thinks there will be more writedowns.

Cynics on the Street ask, why own Lehman? Their thinking is, even if it goes to $30 (currently $23), that would only happen if the business on Wall Street got better for everyone. If that's the case, why not buy less high beta names than Lehman?

That's why the call from Morgan Stanley to buy financials and sell energy is potentially important. The bulls, remember, are still betting that business for financials will get better: the yield curve is steeper, the deleveraging process is going on, companies are getting more capital, so when they get balance sheet in shape maybe they can make money again. So take some of that money out of energy and buy financials. It's still buy low and sell high, right?

They cynics—and there are many—say this is understandable, but think its a mistake as investor generally underweight the growing portion on the S&P and overweight the shrinking portion. They point out that the earnings of energy is still growing, while those of financials are still shrinking.

Questions? Comments? tradertalk@cnbc.com

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  Thursday, 12 Jun 2008 | 9:12 AM ET

"Despair" Over Financials And Lehman's Now Ex-Execs

Posted By: Bob Pisani

KeyCorp, which has been hitting new lows recently, cut its dividend in half and plans to raise $1.5 billion in capital. The excuse here is an adverse court ruling on tax treatment, but no one is surprised, nor does anyone think they will be the last to cut dividends.

Analysts and technicians are understandably in despair over the wave of new lows in bank stocks. A Fox-Pitt banking analyst said this morning: "price action has failed to confirm any type of trend reversal thus far."

Also, late yesterday, Bernstein increased estimates for bank losses across most loan categories, including consumer and commercial loans.

Elsewhere:

1) Sign of the times: Senator Joseph Lieberman will propose that large institutional investors, including index funds, be banned from buying commodities, according to the New York Times. The hearing will be held June 24th. Not clear what this would cover: would it ban Commodity Index investing? ETFs? I presume not, but in this environment, we will have to wait for clarification.

2) InBev finally made the bid for Anheuser Busch : $65 per share, all cash, to be financed in the form of +$40 billion in debt and the sale of non-core assets (theme parks?). Remember, they are using Euros here...just like the hoards of tourists descending on New York buying up real estate and Tiffany baubles.

Next: can the Anheuser board generate a higher price, or convince everyone they can generate greater or equal value by staying independent? Given that the stock has jumped from $50 to $58 precisely on the takeover speculation, that is indeed a tall order.

3) Irish vote on the Euro/European Union today.

4) Citi closes down Old Lane hedge fund and take $9 billion on its balance sheet;

5) Quote of the day: Bank of America CEO Ken Lewis, speaking at the Deals and Deal Makers conference, said " we're not interested in using our petty cash to buy any investment banks." Smack.

6) Our Charlie Gasparino is reporting that Lehman CFO Erin Callan has resigned, along with COO Joseph Gregory; down 5 percent pre-open.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 11 Jun 2008 | 4:16 PM ET

Market: Just A Flat Out Ugly Day

Posted By: Bob Pisani

It was a flat-out ugly day, with 3-1 declining to advancing stocks, 160 new lows at the NYSE (highest level since the March lows):

1) Despite considerable jawboning, the dollar was weak, commodities were strong, and that combination has not proven to be helpful to stocks. With oil near new highs, the Dow Transports dropped nearly 5 percent for the second time in four days (ouch!)

2) Many homebuilders, which had hit bottom in January, were again at new lows;

3) Notable weakness again in financials, where Lehman continued to drop (down another 13 percent), thanks partly to Merrill analyst Guy Moszkowski downgrading the stock midday, one week after he upgraded it. Traders weren't sure if they should laugh or cry. It's an indication of how confused traders and analysts are.

Elsewhere, anything with mortgage exposure, including Washington Mutual, as well as southern and Midwestern bank stocks like KeyCorp and SunTrust, were again at new lows.

4) Finally, big name healthcare stocks in pharma and HMOs continued to drop. This is part of the ongoing realization that stocks like Pfizer , Merck or Bristol Meyers , formerly considered safe, cuddly, defensive plays where you could hide out, are not so safe or cuddly.

Elsewhere:

1) How tough is it on the sell-side trading desks? I spoke to several traders I have known for many years today. The mood is not good. Remember: sell side traders are in the business of getting accounts to buy and sell stocks, and right now they are decidedly unsuccessful in getting them to do much of either. "It's really hard to get accounts to buy stocks, and they don't want to sell their longs, because even though they're down, they're not down so much they can't stand it," one frustrated trader told me.

Bottom line: we are in a trading range, and we need either another giant flush-out (didn't we have two of them--one in January, and another in March? Yes.) or we need to get better news on inflation or the economy.

Trading veteran Ned Davis is also a bit frustrated; this morning, after reviewing several conflicting indicators, and noting that they are consistent with an S&P 500 trading range between 1262-1275 on the downside (roughly the March low) and 1390-1450 on the upside (near the May high), Davis threw up his hands and declared himself neutral on the market.

2) The economics of the cab business in New York.

I took a cab ride last night from the Financial District to Greenwich Village last night; I did my usual "How's business?" line with the driver, and unlike most he was willing to discuss how tough it has become for cab drivers.

Here's the economics: he pays for his own gas. He is quite proud of his Ford Escape hybrid, which he says enables him to get 33 miles to the gallon. Even then, it's an ugly situation for him. He works 12 hours a day, 5 days a week, for a total of 60 hours a week. He is currently netting about $700 a week ($11.66 an hour!). Two years ago, he was working the same amount of hours and making $900 a week ($15 an hour), so his net pay has dropped over 20 percent in the past two years. He made it clear he had not seen a dramatic drop in business; the loss is almost entirely due to higher gas prices.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 11 Jun 2008 | 2:45 PM ET

Huh?! Merrill's Moszkowski Reverses Lehman Call

Posted By: Bob Pisani

Should we laugh or cry? Merrill Lynch financial analyst Guy Moszkowski has just downgraded Lehman Brothers , ONE DAY after affirming his BUY rating and ONE WEEK after raising the stock to BUY.

Huh?

Here's what he just said in a note to clients:
"Removing Buy a week later and 10 percent lower is not easy but scale of Q2 loss and capital-raise indicate lower ROE [Return on Equity] potential and lower confidence, esp. given LEH's remaining exposures."

On June 4, with Lehman at $31 and change, Moszkowski raised his recommendation on Lehman to Buy, saying "Share correction overdone in our view."

Lehman trading at $25.19 as of this writing.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 11 Jun 2008 | 9:38 AM ET

Global Theme: Inflation Worries

Posted By: Bob Pisani

While the markets are relatively calm this morning, inflation worries are still at the top of everyone's agenda.

In China, a measure of inflation at the factory rose 8.2 percent in May, the highest in nearly four years, thanks to higher raw material costs. Inflation in Asia is a particular concern, because many countries there have very little account surpluses, heavily subsidize their citizens' fuel consumption, and import much of their food and energy. This includes Korea, the Philippines, Thailand and Vietnam.

That -- combined with a slowdown in exports -- is what has the Asian governments truly worried.

Inflation comments even seeping into analyst remarks. Today:

--Bernstein reduced the price target on Boeing , saying "The rise in oil prices during the last two months has created the risk that GDP growth will slow, which could shorten the commercial aircraft cycle."

--JPMorgan downgraded Alcoa , citing in part higher raw material costs (down 3 percent pre-open);

--Goldman Sachs lowered estimates on some of the big railroads due to higher fuel costs and lower volumes.

Elsewhere:

1) Ford has already said it would be putting off its plan to return to profitability. Now, it's assembling a plan to rapidly shift entire truck plants in the U.S. to car production, specifically some of the small cars it is producing in Europe, according to The Detroit News.

This will be real test of Ford's ability to do a rapid turnaround -- not just to simplify the product line but to introduce more fuel efficient vehicles. Rapid turnaround is not something the auto industry is not known for.

2) One of the few industries that have advanced this month is fertilizers; companies like Agrium and Potash remain near highs. On Wednesday, Agrium upped its earnings estimate for the second quarter due to strength in both its retail and wholesale business; up 8 percent pre-open.

3) Talbots affirmed its 2008 earnings forecast and said it had received a $50 million credit facility from its majority shareholder, Aeon. Up 5 percent pre-open.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 10 Jun 2008 | 4:43 PM ET

Pharmaceuticals Are Not Safe, Defensive Plays

Posted By: Bob Pisani

This was a day that started out with inflation as the new global concern:

--ECB hawkish

--Fed talking tough on inflation

--Bank of Canada did not ease, when it was expected to do so

--Inflation worries roil Vietnam, that country's stock market hits a two-year low; China's Shanghai index also hits a new low

The dollar rallied as the Fed talked tough on inflation. That hurt commodity stocks like energy and materials. Financials, which have been down 5 days in a row, staged a modest but unenthusiastic rally. Big pharmaceutical stocks like Merck, Pfizer, Sanofi,and Bristol Meyershit new lows, as the world has now discovered that these are no longer safe, defensive plays.

Everyone talking about Pfizer's huge 7.1 percent dividend yield, which gets bigger every day because the stock keeps dropping. Is it safe? The $1.28 a share dividend liability costs them about $9 billion a year; even with Lipitor going off patent in 2010, Deutsche Bank estimates they will still generate $14 b in cash flow, enough to fund the dividend, even if they have to repatriate some of the sizeable amounts of cash that are parked overseas.

But let's face it folks. There are a lot of people who own Pfizer just for the dividend, and the stock is trading like they are going to cut the dividend, cash flow or not.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 10 Jun 2008 | 11:48 AM ET

What's Rampant Inflation Like? Look At Vietnam

Posted By: Bob Pisani

Two big stories today: global inflation worries and drug stocks hitting new lows.

Inflation. If you want to see what rampant inflation looks like, look at Vietnam. The VSE, the main stock market index, hit a two-year low today on concerns about soaring inflation, about 65 percent off its historic high in October. Vietnam effectively devalued its currency by 2 percent, according to the Asian Wall Street Journal, to bring official exchange rates closer to black market rates. Consumer prices rose 25 percent in May year over year. Vietnam has been raising rates recently to lower the inflation rate.

This is getting a lot of play in China, where the Shanghai Composite closed down nearly 8 percent to a new 52-week low, after the central bank announced it would raise commercial banks' reserve ratios by a full percentage point in June. That is twice the hike which the market had expected. That index is now 50 percent off the all-time high it hit in October.

Big pharma hits new lows. Elsewhere, big pharmaceutical stocks like Pfizer, Merck , Bristol Meyers , and Sanofi are hitting new lows. Lots of different reasons for this, traders note: for Sanofi, there's word that Total, the French oil company, was looking to unload their stake.....also, continued worries about generic Plavix in Europe, which they share with Bristol.

Merck has been weak on worries over Singulair (their big asthma drug).

For Bristol, there was a negative report out from Bleischroeder on their new diabetes drug, cautious on the data out of the diabetes conference....from a bigger picture point of view, one trader noted, the diabetes conference going on now is a disappointment, in that the field is getting very crowded and these next generation of products aren't differentiating themselves.

There are also broader issues:

1) no new drugs coming, except maybe for the Alzheimer's drug from Wyeth/Elan;

2) another round of drugs coming off patents;

3) a high dividend group, relative to the market and people don’t see that as a sign of safety in a rising rate environment;

4) Finally, don’t underestimate the psychological impact of the continuing decline in Pfizer. It's simple: many people thought that drug stocks were a defensive play with a decent dividend. Turns out the macro situation for big pharma is such that they are NOT a safe, defensive play any more.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 10 Jun 2008 | 9:16 AM ET

Oil Spike Helps Market Lose Ground

Posted By: Bob Pisani

Futures are lower this morning, as Ben Bernanke reiterated what two other Fed officials said yesterday: that the Fed would strongly resist higher inflation, implying that rate hikes might come sooner than expected.

We've also lost ground in the last hour because oil is again spiking toward a new high.

In China, the Shanghai Composite closed down nearly 8 percent to a new 52-week low , after the central bank announced it would raise commercial banks' reserve ratios by a full percentage point in June. That is twice the hike which the market had expected. However, remember that Shanghai was closed yesterday, so this was the first reaction to the drop in the U.S. on Friday. That index is now 50 percent off the all-time high it hit in October.

Nepal announced sharp increases in fuel prices (about 25 percent); they join India, Malaysia, Taiwan, and Malaysia in reducing government subsidies of gasoline.

Elsewhere:

1) More sign of the times: Philadelphia-based Pep Boys , which specializes in car parts and auto repair, report earnings of $0.10, well above the loss of $0.03 expected. Typically, auto parts company do better in an economic slowdown.

2) Independent oil and gas producer XTO Energy is buying privately held Hunt Petroleum Corporation for $4.186 b in cash and stock. XTO is one of the strongest natural gas producers in the country (they get about 80 percent of their production from natural gas), with huge assets in East Texas and the Barnett Shale.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 9 Jun 2008 | 4:17 PM ET

Still No Bottom For Financials

Posted By: Bob Pisani

The good news is that a feared Monday Debacle never materialized, in fact it never even got close. What worked was the same story that worked for the last five months: buy the dips, sell the rallies. So energy, materials, and beaten up retailers got a modest lift today.

The bad news is that there was no bottom in financials, with 5-year lows in the Bank Index (BKX), and while you could blame the drop on the huge loss from Lehman (and additional concern about UBS), the fact is that the whole group fell apart again. And it wasn't just the usual companies with heavy mortgage exposure like Wells Fargo or Wachovia or Washington Mutual , as well as Midwest banks like KeyCorp that also had significant housing exposure.

No, there was weakness everywhere: even trust banks like Bank of New York and State Street were weak, and even JP Morgan is now down 15 percent in two days, near a new low. Why single Morgan out? Because the Street believes--and analyst after analyst have said--that JP Morgan is less credit sensitive, has better risk management, and has an above-average capital position. Hm. Someone should tell the sellers that.

Fed officials didn't help. The New York Fed's Timothy Geithner said that containing inflation will require higher rates, and that more regulation of financial firms was likely. None of this is shocking, but it doesn't help the mental outlook for financials.

Finally, corn hit hit another high, and as that has been happening in past few days poultry producers like Pilgrims Pride have been hit hard, down another 9 percent today.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 9 Jun 2008 | 1:34 PM ET

How Oil/Diesel Prices Hurt Small Businesses

Posted By: Bob Pisani

A sign of the times (literally) and the economics of shrimp boating: a dispatch from Folly Beach, South Carolina, where I have vacationed for 18 years.

1) The economics of shrimp-boating.
How tough is it to run an energy-dependent business? Bachman's have been shrimp boaters in Folly Beach, S.C. for 47 years. I've been buying shrimp from them for nearly 20 years. When I visited last week, the mood was grim. Here are the economics:

Diesel is $4.60 a gallon. It takes 200 gallons to go on a single shrimp run, so the cost for diesel alone is $920. Two years ago, the cost was $320, so the cost has gone up 200 percent in 2 years.

Another whammy: the price of parts for the boats has gone way up.

The fishermen crowded around me on the docks, asking for an explanation. I talked about growth in demand, supply restriction, and speculation, but they just shook their heads. They sort of believed me, but they also believed it was a lot of hokum.

Were they making any money?

"Just barely enough to pay the light bill," one of them said.

Would they be in business when I came back next year? They just shook their heads and went back to cleaning the fish.

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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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