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Trader Talk with Bob Pisani

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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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  Monday, 9 Jun 2008 | 9:19 AM ET

Market Trader: "Downside Potential From Current Levels."

Posted By: Bob Pisani

Not surprisingly, market technicians who were bullish two weeks ago are in a state of despair. Talk about minor support at 1,350 for the S&P 500 is half-hearted at best; the truth is that other than the March closing bottom of 1,273 there is no one willing to draw many lines in the sand here.

In emails over the weekend, several traders noted that both the Martin Luther King Day and St. Patrick's Day bottoms were accompanied by 75 basis point eases from the FOMC, but those bullets have now been used. "The market is now left to its own devices to create its next low," one trader wrote. "Since future prospects for the economy remain dismal, there is considerable downside potential from current levels."

Moreover, it is important to note that Friday was a horrific day for large macro hedge funds, thanks largely to comments made by the ECB's Tichet .

Recall that Mr. Trichet signalled that rates may rise in Europe; at the same time, the poor U.S. employment report indicated that rates in the U.S. were not going to rise due to the weak economic outlook.

Mr. Trichet's comments were the main event, and his comments were the main topic of traders over the weekend. Here's why: many macro funds were set up for what is called the "convergence trade"--i.e. that rates in the U.S. and Europe would come closer together. Everyone was set up for that to happen--specifically, for the U.S. to raise rates, and the ECB to cut rates. That trade required traders to be long European bonds, and short U.S. Treasuries, and generally find some way to be long the dollar.

However, Trichet through a bucket of cold water on that trade--and in addition was largely responsible for that big rise in oil. Why? Because many traders went long the dollar by being short commodities, specifically oil. If you no longer believe that the dollar will rise, you have to cover that short in oil. Voila. Big oil rise.

The big hope is demand destruction in oil. Malaysia has now jointed Indonesia and Taiwan in dramatically reducing subsidies for oil. In Malaysia's case, this is resulting in a 40 percent rise in fuel, which was announced last week. The big question is whether China will end subsidies after the Olympics, but as Vince Farrell noted, they have a budget surplus--and they are unlikely to change those subsidies dramatically.

Elsewhere:

1) Big insurance deal this morning: Willis Group , the third largest insurance brokerage firm in the world, is buying Hilb Rogal & Hobbs , for $1.7 b, in a cash and stock deal valued at $46 a share. Since Hilb went out at $30.89 on Friday, that is a more than 40 percent premium.

2) Lehman lost $2.8 b loss ($5.14 a share loss) and is expected to raise $6 b in capita l. There convertible offering, according to our David Faber, expected to carry an 8.75 percent coupon; the common stock will be offered at $28 a share.

3) McDonalds out with strong same store sales in both the U.S. and internationally ; up 4 percent pre-open.

4) UBS was briefly halted in Europe to investigate a mistrade; it has resumed trading, now down about 4 percent, near a 5-year low. There has been plenty of talk of further asset markdowns in the second quarter.

5) CIT up 10 percent on a $3 b financing deal, provided by Goldman Sachs .

6) New Zealand and Australia, Hong Kong and Shanghai markets are closed.

7) Expect more of this in the coming days: JP Morgan is lowering 2008 earnings estimates on the S&P 500 (from $90 to $89) to reflect the higher cost of oil, with particular hits to auto and airline earnings. That hit is offset somewhat by slightly higher earnings for energy. Despite the downward revision, they remain upbeat on stocks: "We still stay long equities even with oil headwinds...The US Economy has demonstrated impressive resilience despite these headwinds, with modest job losses, and moreover, JPM's Economics raised their 2Q GDP forecast to 1.0% from 0.50% previously."


Questions? Comments? tradertalk@cnbc.com

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  Monday, 2 Jun 2008 | 11:00 AM ET

Out Of The Office This Week

Posted By: Bob Pisani

I will be out of the office for the rest of the week but I will be back with news posts very soon. See you then.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 30 May 2008 | 4:30 PM ET

Month's End: Defining the May Market Story

Posted By: Bob Pisani

It's the last day of the month and no one wants to be a hero.

With that said, the Street is struggling to find a narrative -- it's not clear where we are, so instead of broad narratives I am getting a lot of little (and somewhat timid) stories.

Here are a few observations:

1) a lot of traders are long credit cards, but this is a CROWDED long;

2) energy and materials are tough shorts: a lot of traders want to short 'em, but many got burned at the end of April doing this;

3) brokers: buy when oversold, for a trade is the usual mantra, but quarter ends today for Lehman, Goldman, and Morgan Stanley. Lehman is the key here. If traders like what they hear on losses and capital preservation, as well as a broad vision of where they want to go, brokers could lead the financials higher.

4) some tech leadership is forming: stocks like EMC, Apple, and Research in Motion had a good month

5) retail: everyone is just staying negative on consumers until proven wrong. J. Crew's poor guidance does not bode well for May sales

6) fundamental on coal and metals still very strong: look at Joy Global , a mining machine maker, new highs today on positive comments. Fertilizers remain strong but many believe if oil comes in so will they.

7) macro outlook is cloudy: there are sizeable cash positions that need to be invested when the fear of a nasty recession ebbs, as does credit fears.

For the month: S&P up 1.2 percent, Dow down 1.2 percent (thanks to terrible performances from GM and the financials) -- this is the first time the Dow and S&P have diverged since June of 2006. Nasdaq up 4.8 percent.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 30 May 2008 | 1:24 PM ET

Lousy Volume? The Whole Picture Of Trading Is NOT Really Shown

Posted By: Bob Pisani

What's up with this lousy volume?

I've been asked repeatedly by traders to explain the puzzling drop in volume we have seen since the start of the second quarter, particularly at the NYSE. Most feel it is due to traders simply stepping back in light of the uncertainty of the market.

While there is certainly some truth to this, a more likely explanation comes from a failure of some of the statistics to reveal the true extent of trading.

Simply put, the volume that is reported on the floor of the NYSE now only represents a portion of total trading; when trading in NYSE stocks by all exchanges (including the NASDAQ) is included, as well as the crossing sessions (where stock that is matched up or "crossed" by brokerage firms are printed on the NYSE), a different picture emerges.

Here's the facts (my thanks to Rich Repetto at Sandler O'Neill for the data).

1) Quarter to date, total volume in all NYSE-listed stocks (which includes trading in all NYSE stocks by all exchanges, including the NASDAQ) is UP 23 percent. However, volume to date in NYSE stocks that are traded at the NYSE (which includes Archipelago) are DOWN 10 percent.

2) For NASDAQ, total volume in all NASDAQ listed stocks (which includes all exchanges) was down 5.2 percent, and volume to date in NASDAQ stocks traded at Nasdaq was down 14 percent.

What does this mean?

1) total trading in NYSE stocks continues to expand, due largely to increased electronic trading;

2) trading at the NYSE itself, particularly on the floor, however is lower;

3) trading in some of the more mature electronic stocks (those normally listed at NASDAQ) appears lower.


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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