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Trader Talk with Bob Pisani

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  Monday, 5 May 2008 | 4:05 PM ET

Commodities Back In Play And More Cuts On NYSE Floor?

Posted By: Bob Pisani

Is the commodity play back? Energy and materials stocks were the sole leaders today. Oil hit new highs, as did gasoline. The dollar faltered, along with financials. Airlines were down big. Sounds like March!

Commodities today:

Oil up 3.2%
Nat. gas up 3.8%
Copper up 3.1%
Gold up 2.0%

Elsewhere:

NYSE CEO Duncan Niederauer told a Reuters Summit that he had no plans to close the NYSE trading floor, but he would not be surprised to see a further 15 to 20 percent decline in the trading floor population by the end of the year, due to additional technology rollouts.

By my count, there's about a thousand people still on the floor, down from about 3,000 five years ago. Niederauer also noted that 75 percent of AmEx staffers will lose their jobs in the upcoming merger with the NYSE.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 5 May 2008 | 9:07 AM ET

Does Market Really Reflect Economic Woes?

Posted By: Bob Pisani

Their was plenty of discussion over the weekend that the market's recent upward momentum did not match the reality of the poor economic situation. They seem to be ignoring the fact that the global economy, while somewhat slower, has not collapsed and the markets are clearly anticipating a better second half of the year (which may or may not be overly optimistic.)

Momentum still feels higher, at least in the near term. The U.K. and Japan are closed for holidays. Copper is up 6 percent, was up as much as 9 percent per-open.

Elsewhere:

1) Countrywide down 8 percent pre-open. Citing deterioration in their loan book, Friedman Billings Ramsey's Paul Miller Jr. lowered his price target on Countrywide to $2 (from $7); more important were the somewhat scathing comments on the deal with Bank of America. Noting that Bank of America could face $20 billion to $30 billion of loan write-downs when it closes the Countrywide transaction, Miller said:

a) "BAC should completely walk away from the CFC deal, as CFC's loan portfolio will prove a drag on earnings and could force BAC to raise additional capital." BAC has already said there is no assurance they will assume or guarantee Countrywide's debt.

b) "BAC will likely renegotiate the transaction down to the $0 to $2 level [from $7] and force CFC's bond holders to absorb the remainder of the potential write-downs."

2) Marvel Entertainmenttrading up nearly 4 percent after the weekend success of "Iron Man," which took in more than $100 m. I saw it over the weekend, and it was a terrific film.

3) Sprint Nextelup 7 percent pre-open on word in the Journal that Deutsche Telecom may make a bid.

4) Hovnanian followed its fellow homebuilders by announcing (preliminary) big losses for land ($275 m); they also noted home deliveries were down 21 percent for the current quarter. Cancellation rate was 29 percent, which was an improvement over the previous cancellation rate of 32 percent.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 2 May 2008 | 4:15 PM ET

Energy, Materials Rally But Credit Cards Face Capital Questions

Posted By: Bob Pisani

Material and energy stocks got back some of their lost mojo today, despite a dollar rally. The big debate is how much of the commodity run up is due to supply/demand issues, and how much is due to the weak dollar (which of course stimulated demand for commodities). A lot of traders are trying to figure out that math right now.

This was the week we finally decisively broke the downtrend that began in October of 2007:

--We broke decisively about 1,400 in the S&P 500, where we had failed three times before;

--Charles Campbell at Miller Tabak noted that the Dow has finally retraced half its losses from its October high to the March low

--I would also note that the Dow is also finally above its 200 day moving average for the first time since December.

For the week: Dow up 1.1 percent, S&P 500 up 1 percent, NASDAQ up 2 percent (techs really shined).

Next week: April retail sales. Remember Easter was in March this year, in April last year, so the comps will be tougher. Everyone is hopeful the rebate checks will make a big difference in retail sales for May.

Elsewhere:

Credit card issuers Visa and Mastercardwere weak today. The Fed joined other bank regulators by backing more limits on billing practices of credit card companies. For example, they would bar them from increasing interest rates on existing balances.

This is certainly fair for consumers, but is bad for credit card companies and payment systems if it becomes a real political issue. The broader message is more important: more federal regulation of the financial services industry is coming.

There's a pretty clear trend in that direction. There was a lot of talk today about Congressional hearings looking into requiring firms to raise more capital, for instance.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 2 May 2008 | 11:14 AM ET

Market Debate: Long Commodity/Short Dollar Unwinding Or Not?

Posted By: Bob Pisani

So what's next? The job market is weak, but not falling apart. More importantly,the dollar rally is continuing , and here is where the debate is centered. Does the long commodity/short dollar trade continue to unwind?

The Street is split:

--Those who say "Yes!" insist that today's commodity bounce is a blip, that traders looking for dollar assets, and that the weaker dollar will shake out international speculators. This last point is a good one: allocations into commodities as an asset class has increased dramatically since the dollar decline accelerated in September 2007, so the correlation between commodities and the dollar has increased. Many of the international players who moved into commodities did it largely in response to the weaker dollar; without that weaker dollar, that reason for ownership is less strong.

--There is also an equally vocal group who say "No!," the main argument of this camp is that the gradually strengthening economy will keep commodities strong, even conceding a stronger dollar. To the extent that the rise in commodities is a function purely of supply/demand imbalances, they are right. But the rise of commodities, particularly since September, is not due purely to supply/demand issues, as I note above. It is heavily influenced by international investors trying to protect themselves against the weak dollar. So are commodities 10 percent over-inflated due to those seeking protection against the dollar, 20 percent? We don't know yet, but it is some multiple.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 2 May 2008 | 9:10 AM ET

Market Likes Payroll Numbers, But Likes Dollar Rally More

Posted By: Bob Pisani

Futures rallied 12 points on better than expected nonfarm payrolls report , with minor revisions in February and March numbers. The market will like it because while the economy is clearly soft, we are not seeing a wholesale collapse in the job market. Wages, however are weak, negative in fact if adjusted for inflation.

More importantly for stocks, the dollar rallied, commodities declined modestly.

Elsewhere:

1) Cadbury has split from Schweppes (gads!); it will continue to trade under the symbol CSG . The beverage unit will be renamed Dr. Pepper Snapple Group (double gads!) and will begin trading next week.

2) Unlike Exxon ,Chevrondid beat its numbers, but they had the same problems Exxon had. Upstream earnings benefited from a big increase in oil, but refining suffered because they couldn't raise gasoline prices as much as oil was going up. How bad was downstream earnings? They made $4 million in downstream earnings (total earnings were $5.17 BILLION); they made $347 million in downstream earnings for the same period last year. Like Exxon, production also declined. Up 1 percent.

3) NetSuite hit hard here, down 21 percent. Their numbers (loss of $0.01) were basically in line, and guidance was within the range of expectations, maybe at the lower end. Investors obviously were expecting more. The company made a splash at its debut in December; they provide software to businesses through "cloud computing" a hot application that allows them to access their applications over the Internet.

4) In case you thought the credit crunch was over, the Fed has apparently noted the elevated levels of LIBOR recently. Just before the nonfarm payroll reports, the increased the size of the TAF (Term Auction Facility) to $150b from $100b but is leaving the maturity at 28 days. The TAF, you will recall, allows the Fed to auction funds to depository institutions and accept a wide range of collateral in return. They are also expanding the type of collateral they will accept in the TSLF facility to include AAA asset backed securities.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 1 May 2008 | 4:36 PM ET

Commodities Drop -- and Airlines Take Off

Posted By: Bob Pisani

I have been talking about the unwinding of the “long commodities/short dollar” trade.

It continued today, just look at what happened to these major commodities :

-Copper down 4.5%

-Sugar down 3.1%

-Platinum down 3.0%

-Natural gas down 2.7%

Energy and materials sold off; tech and financials rose. Pray for an in-line or slightly stronger nonfarm payrolls report (seems like a stretch, I know).

Meantime, look what lower oil (down 8 percent this week) and consolidation talk has done to the airlines this week: Northwest Airlines up 34 percent, AMR up 33 percent, US Air up 30 percent, Delta Air Lines up 25 percent.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 1 May 2008 | 3:46 PM ET

Money Leaving Commodities for Techs, Banks

Posted By: Bob Pisani

It's finally happening. The "long commodities/short dollar" trade that has been the primary trade for the past three months is clearly in the early stages of unwinding, and stock traders could not be happier.

Consider:

-- the dollar is approaching its highest levels since February ;

-- oil hit $120 earlier in the week, is now down to $111 (down 8 percent)

-- gold hit $1,000 in March, now $850 (down 15 percent!);

-- fear is down: the VIX is at its lowest level since December

What has this done for the stock market? Money is coming out of energy/commodity stocks:

-- gold stocks like Barrick , which hit historic highs in March, are down over 30 percent;

--oil/gas exploration and production stocks like Apache were at historic highs a week ago; it's dropped nearly 20 percent since then;

--same with many agricultural stocks; Potash hit historic highs a week ago, down 12 percent since then;

And into:

--Techs: S&P Tech Sector Index now at its highest level since January; the classic fast-money names like Google, Apple, Research in Motion, and Baidu.com are all breaking out;

--Financials: Goldman Sachs, Merrill Lynch, Morgan Stanley at multimonth highs in brokers; JPMorgan at highest level since July (!).

This could not happen at a better time.

You can debate whether or not the subprime crisis was the greatest financial debacle in decades, but there is little doubt that this round of energy and food inflation will be a real problem for the global economy if it continues much longer.

Just imagine what will happen if China continues to raise prices because of inflation just as demand is slowing down in the United States. Now that is a virtuous cycle that no one wants to see.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 1 May 2008 | 1:33 PM ET

Shorting Commodities? Here's An Easier Way

Posted By: Bob Pisani

Psst! Wanna short commodities? Deutsche Bank just made it a lot easier to do so, starting today. They are introducing two new Commodity ETNs, the Deutsche Bank Commodity Short ETN (DDP) ETN, and the Double Short (DEE) ETN.

Both are tied to the Deutsche Bank Liquid Commodity Index. The Index tracks the performance of six commodities in the energy, precious metals, industrial metals and grain sectors.

Being short means that you make money when the index goes down--and in the case of the Double Short ETN, you make TWICE as much money when it goes down--that is, for every dollar drop in the index, you make two dollars. Of course, if it goes the other way, you lose twice as much.

By the way, there is also a Long Commodity ETN (DPU) and a Double Long Commodity ETN (DYY).

In addition to getting paid based on the movement of the Commodity Index, you also get a monthly T-bill return--that is one of the features that distinguishes an Exchange Traded Fund (ETF) from an Exchange Traded Note (ETN).

This follows the release in February of Deutsche Bank's Short (DGZ) and Double Short (DZZ) Gold Index; the double short index in particular has seen a notable increase in volume as gold has moved down in the past week on the dollar's strength.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 1 May 2008 | 11:39 AM ET

Exxon: Highlighting Their Many Problems

Posted By: Bob Pisani

Exxon came in light on top and bottom line . There are many problems. Here are the highlights:

1) Production share and contract. Exxon has contracts to take oil out of the ground with many countries. When oil prices go up sharply, the host government takes a bigger share of the profits. They lose a big chunk of their production, even if they are not physically producing less. Their equity share of the production dropped.

2) They are encountering significantly higher operating costs and expenses.

3) Refining margins were squeezed. Oil is up 50 percent in the last few months, but they can't raise the price of gasoline to the same extent.

But don't they own the oil they refine? Surprisingly, they do not own most of it; they have to buy it on the open market like everyone else.

It's true, Exxon is the largest oil processor in the world. They produces 2.5 million barrels a day, BUT they process 5.5 million barrels a day. So they are net buyers of 3 million barrels a day. On the open market. They are also a net buyer of gasoline: 1.3 m barrels a day.

What they do, however, is hugely profitable. In fact, 80 percent of their profit comes from production; downstream about 11 percent, chemicals about 9 percent.

4) No room to run. This is the biggest problem. Production decreased 5.6 percent from a year ago, even taking out the Venezuela expropriation it was down 3 percent. This highlights Exxon's inability to secure new, large resources. To an extent, this is a problem of all big oil companies, but not all: BP increased production by 5 percent, according to Fadel Gheit.

It's not for lack of money that production is lagging. The company is sitting on $41 BILLION in cash, and looking for something to do with it. They have been kicked out of Saudi Arabia, there's civil unrest in Nigeria, and the majority of the U.S. offshore (85 percent) is restricted. There's not a lot of room for them to maneuver.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 1 May 2008 | 9:16 AM ET

Exxon's Problem And Builders' Losses...Keep Building

Posted By: Bob Pisani

The first of May is a day when a lot of people (including traders) are off all over the world (It's also the title of a very fine Bee Gees song, c. 1969).

Futures dropped a bit as jobless claims were a bit stronger than expected ; nonfarm payroll report is tomorrow.

Elsewhere:

1) Exxoncame in light on top and bottom line . Production decreased 5.6 percent from a year ago, even taking out the Venezuela expropriation it was down 3 percent.

The problem is downstream--refining. Exxon does not own all the oil it refines; they have to buy it on the open market like everyone else. And the dramatic increase in oil (up about 50 percent since just October) has made it nearly impossible to raise gasoline prices sufficiently; ergo, margins are squeezed. Down 3 percent.

2) How much can you lose? The builders and the airlines are neck and neck to see who can log the biggest losses. Builder Centexreported a LOSS of $7.34 from continuing operations (loss of $2.43 was expected). What happened? Charges are killing these guys: $362 million of impairment charges, and a $395 million loss related to a large land sale. Orders down 15 percent.

By the way, the House Financial Services Committee is expected to vote on the $300 b housing aid package today.

3) What happened to Las Vegas Sands ? Their earnings were well below expectations. They blamed the shortfall on "an intensely competitive operating environment in Macao as well as a weaker economic environment here in the United States." You're not kidding: first quarter casino revenues at the Sands Macao dropped 23.6 percent. Wow. Down 9 percent.


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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