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Trader Talk with Bob Pisani

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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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  Wednesday, 30 Apr 2008 | 4:15 PM ET

Fed Statement For Traders: Blah, Blah, Blah

Posted By: Bob Pisani

Stock traders were disappointed with the Fed statement. How disappointed? The Fed statement was excruciatingly bland. Traders looking for signs of a pause seized on this statement: "substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity."

Uh, OK. Maybe. Sorry, that is not clear enough that they are done.

On top of it, those looking for a more hawkish statement on inflation were bitterly disappointed. Indeed, they repeated the statement that they expect inflation to moderate.

But the Street is VERY worried about inflation because they have seen the effect it is having on corporate profits, and although the weak dollar has been a help to profits it has gotten so weak that even stock traders are worried about it.

The result of this bland, somewhat dovish statement: the dollar drops, bonds and gold rallies, and the fear that there is nothing to moderate the rise in oil ripples through stocks--consumers like retailers and home builders have posted notable declines late this afternoon.

The good news: April is over! And it's the first up month for S&P since October! S&P up 4.9 percent, best month since Dec. 2003.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 30 Apr 2008 | 9:31 AM ET

Inflation May Lessen In The Future Says Analyst

Posted By: Bob Pisani

Futures trading higher first on a better than expected ADP report , then on a better than expected GDP report.

The Street has been acting like the long commodities/short dollar trade is coming to an end; the wording of the Fed's statement will determine if that is really the case. It may be unlikely for them to change their bias toward lower rates this early, but they will almost certainly sound more hawkish on inflation.

But will inflation be with us for the foreseeable future? Ned Davis, in a note to clients, noted that there are elements that indicate that inflation may lessen in the near future: 1) labor costs are in check, 2) inflation normally ebbs during recessions, and 3) the debt bubble and credit squeeze normally have serious deflationary potential.

Are the world's central banks starting to turn? The Bank of Japan gave up its two-year bias toward rising rates and warned of downside risks to the country's economy. They kept interest rates at 0.5 percent. They warned that inflation posed a risk to the economy. Will the ECB follow?

Elsewhere, the two big trends continue: commodity inflation is a real concern, and strong international sales and a weak dollar are offsetting U.S. weakness.

1) Inflation watch:

--Despite higher costs, Dean Foods and Kellogg both beat.

--International Paper short of expectations , and again inflation is the issue. They were able to raise some prices, but not fast enough to keep up with material costs.

2) International sales strong:

--GMsmaller than expected loss . International sales up 20 percent. Not clear what impact the American Axle strike has had on sales. Up 5 percent pre-open.

--Engine maker Cummins beat, and strong international sales (57 percent of sales are now overseas) helped offset rising commodity prices and sluggishness in the U.S.

--Colgate reported U.S. sales up 7 percent, while international sales were up mid to high double digits. To offset higher prices, they have been trying to shift to higher-margin items.

Misc:

--Citi prices at $4.5 b common stock offering at $25.27 . It was supposed to be $3 b, at least that what was said yesterday, but it was increased "in response to strong demand."

--Proctor & Gamble in line with expectations, lower end of guidance raised.

--United Online buying FTD group , for what amounts to $15.08 per share, which includes about half cash and half United Online notes. FTD closed last night at $13.50.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 29 Apr 2008 | 4:51 PM ET

Smart Money Leaving Commodities for Tech?

Posted By: Bob Pisani

Is this the beginning of a rotation in the stock market? There's debate about this, but there are signs that some smart money is positioning themselves for a rotation out of commodities -- and into tech.

This has been spurred by concern that the Fed will begin sounding more hawkish on inflation tomorrow. This (along with some signs that inflation is moderating in Europe) is giving a modest boost to the dollar in the last week.

The result: Money has been quietly coming out of commodity stocks like gold and metals -- but even out of agricultural stocks, despite stellar earnings.

At the same time, classic tech momentum stocks like Google, Baidu.com, Research in Motion, and Apple have broken out to multi-month highs.

Are the fundamentals for commodities falling apart? No. Demand for gold remains strong. Ol is at 116.. potash is contracting at $1000 a metric ton. Steel prices remain firm. Iron ore prices are rising. But the commodity/commodity stock trade is very long in the tooth (materials stocks are up over 100 percent in the past five years), and it is, as traders say, a very crowded long.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 29 Apr 2008 | 9:17 AM ET

Inflation Complaints Rise, But Credit Card Earnings Boom

Posted By: Bob Pisani

European bourses are lower today as European banks are continuing to report poor earnings--this morning Deutsche Bank reported its first loss in five years, abandoned its 2008 profit targets and wrote down over $4 b in mortgage-related assets. Allianzalso said that their profit targets would be harder to attain.

Spain's biggest bank, Santander, did much better, but only because Spanish regulations prevent their banks from holding the riskier assets their northern cousins held.

In the U.S., bonds are opening higher, stocks lower, and the modest rally in the dollar continues.

Elsewhere:

1) Inflation complaints are everywhere:

a) Paper company Temple Inland said pricing was not keeping up with inflation. Average prices for recycled fibers was up 21 percent from last year.

b) The inflation Domino's Pizza complained about cost inflation and soft domestic sales. They say they are implementing "pricing strategies to attract lower-ticket customer customers, a segment we've left behind in the recent past, as we dramatically increased our prices." Uh, not to be sarcastic, but isn't pizza a lower-ticket item by definition?

2) Many companies complained of slower conditions:

a) Example: Office Depot . Florida and California notably weak, but even outside those states there was also a deterioration. Still, they beat by a wide margin. North American retail sales were down 7 percent, and the North American Business Solutions Division was down 5 percent, but International was up 6 percent (tired of this "North American weak, International strong story yet? It's happening with all the international companies). Up 7 percent pre-open.

3) Credit cards earnings are simply outstanding.

Visa beat, their numbers were strong by any metric you would care to look at. Many analysts raising estimates.

Here's an important point: management said there was no deceleration in transaction or payment volume growth, even though consumer spending is clearly slowing. What does that mean? It's an indication that credit cards as a payment method are clearly winning out over cash and checks. More people are using them, so volume is still growing even though overall consumer spending is slowing. Get that?

Visa is trading down fractionally. Why? Some are whining that the second half operating margin guidance is a bit weak. The real reason it is down is that fast money is taking some profits after a two-week tear that saw the stock go from $65 to $75.

Mastercard was even better. They beat earnings estimates by 30 percent; it's up 10 percent pre-open. Strong growth overseas.

4) Corning beat, the CEO said demand for LCD TV sales was still up compared to a year ago and saw no evidence of an inventory buildup. Guidance above estimates. Up 4 percent.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Apr 2008 | 1:36 PM ET

Newspaper Headline: Circulation Fall Worse Than Expected

Posted By: Bob Pisani

The newspaper industry's twice-yearly circulation report has arrived, and it is not a pretty picture overall. There was expectation that total circulation could drop 2.5 percent, and perhaps as much as 3.5 percent.

It was worse. At the nearly 550 papers that reported comparable figures, circulation was down 3.6 percent. At the New York Times, the third-largest paper by circulation, sales were down 3.9 percent, but it was worse elsewhere: The Atlanta Journal-Constitution, for example, was down 8.5 percent.

It was not all bad news. USA Today was up 0.3 percent, Wall Street Journal up 0.4 percent. But newspaper sales have been declining since the 1980s, and has accelerated in recent years. The average age of a newspaper reader (hard copy) is now about 60.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Apr 2008 | 1:31 PM ET

Is Everyone Comfortable With Fed Cuts Closing?

Posted By: Bob Pisani

What's up with the Fed this week? They will almost certainly cut rates a quarter point and signal that the period of cutting rates is coming to a close. The bond market believes this; look what happened to yields on the 2-year note last week.

The currency market thinks there might be something to this: the dollar's decline has stopped, and indeed the dollar may be notably undervalued here, particularly if the modest slowdown in Europe accelerates and the ECB is forced to cut rates.

What's interesting is the equity market response; stock traders seem comfortable with the idea that the Fed is stepping away. They are frightened by $120 oil and rapidly rising grain and plastic prices, putting pressure on two important industries.

What else will they do? Will they reduce the TSLF (term securities lending facility)? That’s the weekly loan facility that offers treasury securities for a one month loan against other collateral. Demand has not been as strong as some anticipated –the Fed certainly don't want dealers to think this program is a permanent source of funding.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Apr 2008 | 11:33 AM ET

S&P May Have "Forecast" To Beat Market Storms

Posted By: Bob Pisani

Has S&P improved ability to weather cyclical risks? David Bianco at UBS and others think so.

I have remarked many times that with many non-financial S&P companies receiving 50 percent and more from overseas, their earnings have remained relatively strong. Non-financial earnings growth in the first quarter is about 10 percent, a typical performance is up 6-8 percent.

One question is how much of the growth was due to currency gains, vs. organic growth. This is tough to figure out, since many companies do not provide the data. S&P itself does not know, but a reasonable guess is it could be 1-2 percent of that 10 percent performance.


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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