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Trader Talk with Bob Pisani

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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.


Questions? Comments? tradertalk@cnbc.com

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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.


Questions? Comments? tradertalk@cnbc.com

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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.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 25 Jul 2008 | 9:30 AM ET

Financials: Can They Get Back Their Momentum?

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.

Futures point towards a fairly flat open this morning, despite a much stronger durable goods number. After yesterday’s drop, the markets lost all of their gains for the week, as the Dow is now down 1.3% this week, heading into Friday’s trading. Continue to keep an eye on the financials today, as we wait to see more direction from them.

Can they regain the momentum that they had earlier in the week or will they instead continue to show signs that they are perhaps overbought? Also in focus later this morning are the home builders. Look to see if there’s any reaction to the New Home Sales number that is released at 10 am ET. This follows their dismal performance yesterday – the S&P Homebuilding Index had its worst day ever, falling 10%.

Elsewhere:

Crocsdramatically slashed its Q2 and full-year revenue and earnings forecasts after the close yesterday. The company has seen a “challenging” environment in the U.S. and overseas this quarter. The CEO noted that retailers were “extremely cautious with their level of reorders” and preferred maintaining lower inventories of their products. Stock is down nearly 50% in pre-market trading.

Burlington Northern Santa Fe beat estimates, but only after it had previously cut its guidance for the quarter last month. The company was impacted by Midwest storm flooding, a weaker economy, and higher fuel prices.

Eastman Chemical results were inline with expectations. Revenue growth was a result of the higher prices the company charged to offset the increase in raw materials and energy costs. The company continues to see these cost pressures into the third quarter, as its guidance is below estimates.

American Axleposted at large loss of $12.49 per share (including items). It was hurt by the UAW strike, but is also feeling the ripple effects affecting the broader auto industry. It noted that weaker truck and SUV demand dramatically affected its production volumes for those vehicles. In fact, production volume for GM and Chrysler SUV and light trucks was down 51% from a year ago.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 24 Jul 2008 | 4:02 PM ET

Why The Market Was Weak Today

Posted By: Bob Pisani

There are several reasons the market was weak today:

1) The brief rally in financials has ended, as many traders are betting that the bear market is not over, this means that taking profits or placing additional short bets on potentially weak players is a prudent play;

2) Major consumer discretionary companies like Ford (autos), Starwood(hotels), Ryland , and Chipotle (restaurants) had negative earnings and/or negative commentary about the second half, so most stocks in these sectors are weak today;

3) Even though oil is up modestly today, most energy stocks remain down. Energy stocks have dropped 15 percent this month; Birinyi noted this afternoon that "the sector was the most oversold it has been since the market bottom on 7/23/02."

4) Economic conditions continue to be soft in Japan and Europe, so big stocks that figure in the global economy (international banks, and materials like steel and metals) are also trading down

Bottom line: when you have consumer discretionary, financials, energy and materials all weak, it's little wonder the markets are down.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 24 Jul 2008 | 11:41 AM ET

Market Feeling Consumer Spending Slowdown

Posted By: Bob Pisani

This is not a good day for consumer discretionary stocks. From housing to restaurants to hotels to autos, companies are reporting notably slower sales, and they are not anticipating much of a rebound in the second half of the year.

Consider:

In hotels, Starwoodlowers guidance, and notes that timeshare sales declined 25 percent in the second quarter, with average prices down 19 percent.

In builders, Ryland reported a large loss, with large writedowns continuing for land and inventory,while existing home sales in June were just dismal--the lowest level going back to January 1999. The inventory level rose to 11.1 months, near its highest level since 1985.

In autos, autos, Fordreported a large loss , North American sales were worse than expected. One analyst noted that Ford burned through $3.1 billion in the last quarter, with $26.6 b left.

In restaurants, Chipotlemissed earnings and estimates and noted that sales were slowing in June and July.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 24 Jul 2008 | 9:36 AM ET

Fannie Mae Gets Boost -- Mixed Results Elsewhere

Posted By: Bob Pisani

Fannie Mae up 6 percent pre-open as the House overwhelmingly passed the housing bill. It will get new regulators for Fannie and Freddie, and authorizes the federal government to potentially invest billions in the two companies.

A couple consumer companies indicated slower sales for the second half of the year:

1) Hotel giant Starwood reported earnings above expectations, but guidance for the second half of the year is below expectations, due largely to expected shortfalls in timeshares (timeshare sales declined 25 percent in the second quarter, with average prices down 19 percent).

2) Chipotle Mexican Grill was a bit light, and I'll leave it to Raymond James to describe why the stock is trading down 14 percent pre-open: "Management indicated that comps decelerated as the quarter progressed and have slowed further in July on the first visible signs that its sales are being impacted by macro headwinds. Management also increased its caution about food inflation through next year -the combination of slowing sales and rising cost pressures should bring 2009 Street estimates down sharply from the $3.40 level."

Elsewhere:

1) MMM reported earnings just a tad below expectations, but here's the remarkable stat: they made $1.33 in the second quarter, but they made $1.25 for the same period last year. How many companies INCREASED their earnings from the same period last year. How did they do it? International sales now account for two-thirds of MMM's total revenues. Latin America up 32 percent, Europe 18 percent, Canada 14 percent, Asia Pacific up only 1 percent. They reaffirmed their full year guidance.

2) Speaking of rising profits...Dow Chemical's $14.89 b top line was up 23 percent, thanks to double-digit price increases. But raw material and energy costs increased 42 percent; that's why earnings at $0.81 was below expectations of $0.85. CEO Andrew Liveris said he believed the U.S. economy would continue to weaken for the rest of 2008, and the outlook for the global economy was uncertain.

3) Things are not getting better for homebuilder Ryland . They reported earnings of a loss of $5.70, well below the expectations of a loss of $0.79, due largely to impairment charges. In this case, the value of the land and inventory dropped--a lot. How much? According to Raymond James, "the land and inventory charges of $180 million are more than 6x the amount charged off in 1Q:08 and Ryland's second largest quarterly write-off to date."

4) In Europe, Credit Suisse earnings stronger than expected ($1.17 b) --in fact about double what was expected. Up 6 percent pre-open.

Also in Europe, GM and Ford aren't the only ones having problems: Daimler issued a profit warning, citing higher raw material costs.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 23 Jul 2008 | 4:06 PM ET

Reminders Of Just How Bad Things Are

Posted By: Bob Pisani

We had a couple reminders midday about how poor economic conditions are:

1) the Fed Beige Book describes the economy as having 'slowed;"

2) JD Power cut their outlook for auto sales, projecting a 12 percent dip in sales for 2008 compared to 2007 (to 14.2 million cars and trucks), which would be the lowest level since 1993

Still, a number of factors helped stocks today:

1) housing bill near passage in the House of Representatives
2) commodities decline
3) dollar up
4) bonds downs
5) earnings affirmations from companies like Pfizerand Whirlpool
6) FDIC Chairperson Sheila Bair saying she did not see another IndyMac-size bank failure

However, there is considerable debate about the financial rally that began last week. There are bulls and bears here, but here is the consensus:

--a floor is in, but financial stocks are now overbought
--the 6-day rally is running out of steam
--fundamentals for financials are still poor, sideways trading is likely for the next several months

Home builder Pulte reports after the bell; MMM, Ford and Potash report tomorrow before the bell.

Update: I noted that there was considerable debate today about where financials might be going. Most agree that they are overbought short term. After the close, here’s what Birinyi had to say:

“Six days ago we highlighted the fact that the financial sector was the most oversold since the Crash of 1987 (the second most oversold ever). While the sector is technically not overbought, at just .65% above its 50-day average, (overbought would require a reading of approximately +15%) we would caution that the sector has just had its greatest six trading day change ever at +30.79%.”


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 23 Jul 2008 | 11:34 AM ET

Rally: We're At A Very Important Point

Posted By: Bob Pisani

A number of trends are providing modest boost to stocks this morning: congressional legislation, a continuing modest dollar rally, commodities like oil and metals continuing to decline, and bonds down, earnings reaffirmations.

We are at a very important point in the rally, the point where bulls start questioning whether the bear market is over or not. Short-term it can be argued that we are overbought, certainly in financials. But overbought in a bear market is different than overbought in a bull market.

In a bull market, as Lowry has noted, overbought readings are considered a sign of strength. However, in a bear market overbought readings are clearly a signal to take profits.

So which is it? If the bear market is over, then these signs of strength are good. If the bear market continues, this is a classic bull trap that will end badly for those who have gotten in during the last week.

The bears can argue that while we did have strong volume and a reversal last week, we had no 90 percent upside days, i.e. days where the ratio of upside to downside volume exceeds 90 percent. This is the classic sign of a surge in investor demand and often looked for at market bottoms.

The lack of a 90 percent upside day is a problem for bulls.

Bulls argue that the selling climax in the XLF, the ETF that is the financials index, was sufficient for a bottom in financials.

The S&P is now sitting at the closing low levels for March (1277 or so).


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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