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Trader Talk with Bob Pisani

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  Wednesday, 21 May 2008 | 3:02 PM ET

Speculation Fueling Commodity Price Increases Says Trader

Posted By: Bob Pisani

How much are speculators adding to food and fuel inflation? A lot, says one trader. One of the most interesting pieces of testimony I have read in a long time came today from Michael Masters, Managing Member of Masters Capital Management.

He was in front of the Committee on Homeland Security and Government Affairs of the U.S. Senate. Mr. Masters has been a long-short equity hedge fund manager for over 12 years. Here's what he had to say:

1) Commodity prices have increased more in the aggregate over the past five years than at any other time in U.S. history; specifically assets allocated to commodity index trading strategies have risen from $13 billion at the end of 2003 to $260 billion as of March 2008;

2) The primary increase in demand for commodities has come from Institutional Investors, specifically pension funds, sovereign wealth funds, university endowments, and others, whom Master collectively calls Index Speculators. This group now accounts for a larger share of outstanding commodities futures contracts than any other market participant.

3) These Speculators allocate a portion of their portfolios directly to the commodities futures market, and behave differently than traditional speculators; specifically, they buy with little regard for price and tend to be mostly buyers, not sellers.

4) While much of the rise in the price of oil has been attributed to increased demand from China, speculators are responsible for at least an equal increase in demand; specifically, annual Chinese demand for oil has increased by 920 million barrels over the last five years but Index Speculators demand for petroleum futures has increased by 848 million barrels

5) While the rise in corn if often blamed on ethanol production, Speculators have stockpiled over 2 billion bushels of corn futures in the last five years, enough to fuel the entire U.S. ethanol industry for a full year.

Masters concludes with this analogy: "Think about it this way: If Wall Street concocted a scheme whereby investors bought large amounts of pharmaceutical drugs and medical devices in order to profit from the resulting increase in prices, making these essential items unaffordable to sick and dying people, society would be justly outraged."

Masters urges Congress to 1) prevent pension funds from investing in commodities, and 2) close loopholes that allow banks to get around limits on speculative positions.

Mr. Masters assumes, as many do, that supply is adequate--which is debatable, particularly from oil (the world produces 85 million barrels a day and seems to be having a tough time increasing supply). And we certainly know that demand has been increasing from consumers, not just from institutional investors. So his argument is certainly far from flawless.

But Masters is one of the first to put real numbers behind the idea that speculation is a major force in commodity price increases.

Here is the full testimony.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 21 May 2008 | 12:29 PM ET

Energy Report Plays Havoc With Short Traders

Posted By: Bob Pisani

This was a very disappointing morning for stock bulls.

1) There was an active attempt to short energy stocks going into the weekly oil inventory numbers at 10:30 ET ; volume on the XLE (the S&P Energy Sector ETF) was particularly strong; however, rather than seeing an increase in inventory levels, there was a drawdown, and the shorts in energy stocks were forced to cover quickly, driving energy stocks back to new highs.

This has played right into the hands of energy stock bulls, who have argued for days that energy stock prices are unlikely to show appreciable declines in the near term. Their arguments:

--Forget charts
--Prices are up, but energy stocks are not overvalued
--There is earnings visibility WAY OUT.

Apropos of today's trading, Brazilian oil company Petrobras has now passed our parent General Electric as the fifth largest company in the world by market capitalization ($325 b vs. $316 b, according to MSN Money).

2) The last few days have seen a deterioration in several closely watched groups, including home builders, banks and brokers.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 21 May 2008 | 9:14 AM ET

Oil Slaps Down Stocks, Retail Apparel A Bright Spot

Posted By: Bob Pisani

How much is oil slapping around stocks? Futures were up about 5 points until about 6 AM, when oil hit $130 . Market sold off immediately.

Europe started stronger (Germany's IFO business confidence number rose unexpectedly), but rolled over about three hours ago, just as oil hit $130. Dollar falls to a four-week low vs. the Euro.

Elsewhere:

1) Talbots handily beat expectations and maintained 2008 earnings guidance; up 14 percent pre-open.

2) Once again, we are seeing off-price apparel stores doing well. This morning Ross Stores reported good earnings, and more importantly gave guidance for the current quarter and the full year above analyst expectations. They are forecasting same store sales gains of 1 to 3 percent, a rarity in retail these days.

3) Airlines down a bit again this morning, as Soleil--which describes itself as "perhaps the last bullish holdout on the airline sector," gave up the ghost as oil hit $130. They drop AMR and United to a sell. British Airways CEO was on our air this morning, saying there will be airline failures in this cycle.

4) Hewlett Packard down fractionally as they beat estimates. Not surprisingly, strong growth overseas offset a weak U.S. market. PLEASE NOTE: 69 percent of Hewlett's revenues are now generated outside the U.S.

Guidance for the (current) third quarter unchanged. Fiscal 2008 guidance of $3.54-$3.58 about in line with estimates of $3.54.

5) Much chatter about market rotation today, after S&P announced that the technology sector had overtaken financials in market value. This is the first time that has happened since 2002. The energy sector is up about 10 percent this month, and closed yesterday at an historic high.

Percentage of S&P 500:

Technology 16.26 percent
Financials 16.19 percent
Energy 14.89 percent


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 20 May 2008 | 4:36 PM ET

Pisani: Why Market Bears Ruled Tuesday

Posted By: Bob Pisani

Bears had the upper hand today.

Bears:

--oilprices at highs, not backing down
--dollar rally evaporating
--inflationtrends clearer (core PPI stronger thanexpected validating pass-through from commodity inflation)
--retail & financials turnaroundless certain
--visibility poor
--volume trends poor

But bulls were not silent.

Bulls:

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  Tuesday, 20 May 2008 | 1:23 PM ET

Market's Problems: Oil, Retail, Financials, Dollar

Posted By: Bob Pisani

The market is grappling with a series of macro and individual stock problems today.

--Oil at new highs is the main problem , but the slow drop in the dollar (at the lows for the month, and reversing much of the gains from its bottom in April) is a particular aggravating factor;

--Core PPI higher than expected has the inflation hawks out;

--Cautious retail commentary two days in a row.

The retail issues are not surprising; we heard Lowe's talking cautiously yesterday, now Home Depot is guiding toward the low end of its previous guidance . The Saks CEO got a chuckle on trading desks this morning by saying that the consumer is acting as if there's a recession, whether there is one or not.

Bottom line: the retail turnaround is less certain, and further out.

Financials are also weak today:

--Fannie Mae officials, speaking at their annual meeting, saying home prices could fall as much as 25% from their highs, and even though they are short-term winners int he housing bill they are clearly taking on more risks;

--AIG hitting 10 year lows as executives there say they are looking to shed non-core assets;

--Oppenheimer's Meredith Whitney again trash-talking financials, saying the credit crisis will extend into 2009,


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 20 May 2008 | 9:37 AM ET

Home Depot's Bottom Line: Weaker Sales

Posted By: Bob Pisani

Futures dropped a bit as core PPI for April was a stronger than expected.

Elsewhere:

1) Home Depotbeat estimates, reporting earnings of $0.41 (14 percent below last year's $0.48), vs. consensus estimates of $0.37.

Despite the apparent beat, the stock is down 3 percent:

a) the company gave no guidance, though they may say something on the conference call;

b) a calendar change may have been the reason for the beat. There were a number of analysts, including Deutsche Bank and Goldman Sachs, noted that they traded a lower volume week this year (in February) and included a higher volume week (in April). That helped growth by $536mm or 2.9%. According to Deutsche Bank, "We're not sure if HD's comp result is adjusted, but our guess is that it is not, meaning the shift accounted for the sequential improvement in comps."

Adjusted for this calendar shift, same store sales fell 9 to 9.4 percent, according to Goldman.

Bottom line: like Lowe's , Home Depot is also experiencing notably weaker sales.

On the conference call, they have been talking about "significant" commodity cost pressures and "relatively weak demand."

2) Staples earnings were in-line.Though Staples also had a decline in comp store sales (down 6 percent), European comp store sales were up 4 percent, they came in in line with estimates and reiterated their full year outlook.

3) Autozone beat expectations. Same-store sales were down 0.3 percent, a tad shy of expectations.

4) Lehman joining other firms in raising target prices on oil service names like Baker Hughers and Cooper Cameron reflecting, they, say, "a strong recovery in 2008 and 2009 for North American natural gas drilling and substantial growth internationally over the next few years."

5) Barclaysis considering acquisition of banks including UBS or Lehman Brothers, according to unsourced sources being used at the Daily Telegraph in London. The purchase would be funded by a large rights issue that would also have the purpose of shoring up the balance sheet.

6) JP Morgan and Fannie Mae hold their annual shareholder meetings.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 19 May 2008 | 9:32 AM ET

Out Of Office Reply

Posted By: Bob Pisani

It's Monday, but I'm still on a mini-vacation of sorts from the market floor. I'll be back tomorrow with more posts. See you then.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 16 May 2008 | 9:58 AM ET

No Posts Today

Posted By: Bob Pisani

I'm away from the trading floor today but I'll be back next week with more posts. See you then.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 15 May 2008 | 4:49 PM ET

Market Trend Is Up Thanks To Philly Fed, Oil

Posted By: Bob Pisani

The trend is up! Despite initial disappointment withpoor industrial production numbers , things improved when the Philly Fed came in stronger, and got a lot betterwhen oil dropped midday.

Stocks close at the highs for the week, and we had significant breakouts:

--Transports: 10-month highs (near historic highs!)

--S&P 500, NASDAQ, Russell 2000: 4-month high

--S&P Energy and Materials: historic high

--Emerging markets index: high for year

There are problems:

--Low volume

--Complacency

Still, look at the facts: there is a very small group (10-15 percent of traders, by my estimate) who are bullish, and modest gains like this followed by breakouts like those above are just what is needed to get the perhaps 40 percent of traders who are fence-sitters back in the market. The other 50 percent are outright bearish—it will take a lot more to get them back in.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 15 May 2008 | 4:05 PM ET

CNBC's "Boomer Angst": There's Plenty Of It Out There

Posted By: Bob Pisani

As I've said, CNBC is airing a special tomorrow night, “Boomer Angst,” which will air at 9 pm and midnight. There is plenty of angst out there. This week, a new coalition was launched to encourage the American public to save more. They point out that:

--Debt payments now consume 15 percent of family income;

--63% of Americans say they don't save enough;

--The U.S. saves less than almost all industrial nations.

A separate study at the Center for Retirement Studies at Boston University found that:

--Nearly 45 percent of households are "at risk" of not having enough to maintain their living standards in retirement, even if they retire at 65;

--The median balance for household heads approaching retirement is only $60,000 (!)

For more information on the new coalition that is being formed—and how you can get involved—check out their report atwww.newthrift.org.


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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