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Trader Talk with Bob Pisani

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  Monday, 28 Apr 2008 | 9:18 AM ET

Monday Mergers: Continental (No) Wrigley (Yes)

Posted By: Bob Pisani

European bourses are advancing again today; the FTSE, like the Dow, finally broke through to its highest levels since January; same with France's CAC 40. The Euro is down slightly, even though German consumer confidence rose to the highest since Oct '07.

Elsewhere:

1) Continental surprised a lot of people by abandoning merger talks with United .

Potential winners:

a) AMR , since a Continental/United would have been bad for AMR.

b) US Air , since it makes a deal with United more likely.

Potential losers:

a) United . Continental was their best merger partner. Credit Suisse was even more blunt: they believe UAL's standalone plan "is not viable." Now they’re down to talking to US Air.

Not clear if this is good or bad for the Delta/Northwest merger; it might be good, since one less merger happening makes government approval more likely.

From what I've heard, demand for summer travel seems to be quite strong, though there are worries about the fall.

2) Wrigley agreed to a merger with Mars for about $23 billion , $80 a share in cash (closed at $62.45 Friday). Hershey's also up 6 percent pre-open.

3) Tracinda announcing a tender offer for 20 million shares of Ford (less than 1 percent of shares outstanding) at $8.50 a share. That's a roughly 13 percent premium. Kerkorian already owns a 4.7 percent position in the company. Ford's stock rose 0.7 percent last week on better than expected earnings. Ford up 8 percent pre-open.

4) Now that's inflation: Tyson reported a loss of 2 cents (gain of 1 cent expected); chicken segment had losses due to higher grain costs. How much higher? For the year, they expect to pay an additional $600 million for corn and soybean meal. Throw in cooking oil increases and a few other costs, and increases will approach $1 b.

Rebate checks are finally going out, but with gasoline near $3.50 a gallon, it's not clear how much impact it's going to have.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 25 Apr 2008 | 9:01 AM ET

Stocks Need A "Mild Push"

Posted By: Bob Pisani

The good news: yesterday's volume was about the heaviest we have had all month, and the selloff in energy and materials was long overdue. The rotation into financials was much more debated, however. The skeptics asked, has the systemic risk of owning financials really been reduced thanks to all the capital raising and writedowns?

Also, note that the S&P gave up nearly half its gains in the last hour, and more importantly could not crack the old February highs.

So we need some mild push here--dollar continues to strengthen, bonds weaken, and a modestly positive day for stocks.

Elsewhere:

1) AmEx up about 4 percent as they beat, but again there was slower spending growth in the U.S., up 8 percent, but excellent strength in international, up 21 percent. Management reaffirmed its EPS expectations for 2008 of 4-6 percent growth over 2007. However, loan growth slowed, and loan loss reserves rose because there was an increase in delinquencies and write-offs. So even though it was a good report, most of the commentary is fairly cautious and nobody is raising guidance.

2) Speaking of international, Goodyear Tire beat, and here too international shined: North American sales decreased 1 percent, while Europe, Middle East and Africa hit a record, increasing 16 percent; Latin America also clocked record sales, up 29 percent. Up about 6 percent pre-open.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 24 Apr 2008 | 3:32 PM ET

Back Into Banks -- and End of The Fear Trade?

Posted By: Bob Pisani

The markets today: rotation, and end of the fear trade?

1) The dollar rally has ignited market rotation: money is coming out of commodities & commodity stocks -- and into financials. The strangest part of the action today is the rather noticeable up moves in banks, as well as home builders. The bank index is up almost 5 percent, on heavy volume; the residential housing index is up 4 percent. What's going on?

Traders feel that the Federalo Reserve is signaling that the credit crises, while not over, is easing enough for them to turn their attention to inflation. Hence all this discussion that the Fed is nearing the end of its rate cutting, which was sharpened by the Greg Ip story this morning.

If the Fed's not so worried, maybe we shouldn't be so worried. Also, remember that while there has been a lot of short covering in financials, many have still not jumped back in and owned them to a significant extent.

As for housing, the numbers are no comfort , but again traders believe that none of the biggest builders will go under, and that capital raising will be minimal. I'm not convinced there will not be capital raising, however.

2) S&P again approaching breakout levels. In this case, passing 1395 -- the closing high on February 1 -- would break a pattern of lower lows that goes back to October of last year. In February, and twice in April, we approached these levels and failed; bullish traders have been burned at this level before.

If we clear these levels, what does it mean? The fundamentals are still bad -- just look at the horrifying new-home sales number this morning -- but it's a sign the Street is already looking past these ugly months.

3) Gold and bonds: the fear trade lessens. The VIX is at its lowest level since December, and this may be the day that traders are finally convinced that gold and bonds have topped out. If the Street becomes convinced of that, stocks will benefit even more.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 24 Apr 2008 | 2:49 PM ET

Rice Shortage: The Real Story

Posted By: Bob Pisani

This story about rice shortages -- which we covered yesterday and has today reached the "general" media -- is a good example of how the public can misunderstand an event.

There are two things going on here:

1) stories about food commodity prices rising over the past few months has attracted speculative investment, and

2) a few stories in the popular press about the increasing price of foodstuffs has caused a small percentage of the population to act, by buying much larger quantities of certain foodstuffs than they normally would. A small percentage (my guess is maybe 3-5 percent of the households) may actually be "hoarding," that is, buying far larger quantities of food than they could consume in several weeks.

But is there a physical shortage of rice? The answer seems to be no; but if that is so, why is CostCo limiting sales?

The answer lies in how a modern economy works: just-in-time inventory has become the standard. Under this methodology, stores do not stock large supplies of food, clothing, or anything else; they rely on computer models to accurately predict supply and demand. They rely on a supply chain that replenishes the products on a daily basis.

According to NewScientist:
1) a typical city has a 3-day supply of food;
2) a typical hospital has a 2-day supply of oxygen

Sound shocking? It hasn't bothered anyone, and it works fine, as long as something strange -- like hoarding -- doesn't occur.

Because when hoarding occurs, when even, say, 10 percent of your customers suddenly buy 10 times the amount of a single product than they normally would buy, the product is quickly exhausted and the supply chain will have trouble immediately providing the product.

So there is not a physical shortage of rice; there is a problem with the supply chain because hoarding has stressed the system.

Of course, if everyone decided to start hoarding, there would be a problem with the actual supply of rice. My point is that this story happened for a different reason.

Don't get me wrong -- there are long-term factors increasing demand for protein-based foods, and the grains that are used to feed the livestock.

Potash this morning included a long essay in its earnings report, noting that people in developing countries where populations are increasing "require more food and can afford a more nutritious diet that includes protein from meat sources. This requires an ever-increasing number of animals for food production and millions of additional tonnes of feed grains."

But that long-term issue is a far cry from the so-called shortage of rice we are seeing.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 24 Apr 2008 | 11:40 AM ET

Stocks Slip on (Likely) End of Cuts

Posted By: Bob Pisani

Stocks mostly weaker today. Two factors:

1) concern the Fed's period of rate cuts is coming to an end (on this, commodities and commodity stocks are down, dollar is rallying), and

2) the dismal new-home sales number, at a 16-year low . No sign of a bottom here: unsold inventories remain at multi-decade highs. Prices dropped 13.3 percent from the same month last year, but evidently will have to drop more.

Not surprisingly, home builders had little good to say. RylandGroup and Pulte Homes reported. Ryland, for example, did reduce the number of spec homes they have, but revenues and margins came in lower than expected.

Similar story with Pulte: they reduced the spec homes, but the company has a lot of land exposure, and a lot of general exposure to Florida. They reported a huge charge (over $600 million) because the value of land they hold had dropped. Orders continue to be weak, and there are still clear signs of price deflation.

The Shanghai composite, after hitting a 52-week low this week, rose 9 percent today . Shanghai rallied after the Chinese government cut the stamp tax. Don't kid yourself though -- there's already some signs that exports are slowing: Hong Kong exports rose 7.6 percent, vs. expectations of 11.7 percent.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 24 Apr 2008 | 9:26 AM ET

Nice Economic Data Surprise -- Esp. for Potash

Posted By: Bob Pisani

Better-than-expected economic numbers this morning have moved futures up about 8 points; the dollar rallied and bonds dropped.

Talk about food inflation -- Potash has been the beneficiary here.

It beat by a wide margin on top and bottom line, and guides full year WAY above estimates ($9.50-$10.50 vs. prior guidance of $6.25-$7.25 and analyst estimates of $8.62).

In the middle of its earnings report, Potash took the unusual step of including a long essay on global food production. It concluded: "The most practical solution to issues of food supply and food inflation is to increase crop production."

How? Uh, guess: "The world's farmers can do this, and fertilizers will be integral to helping them achieve higher yields." Up 4 percent pre-open.

It went on to note that people in developing countries where populations are increasing "require more food and can afford a more nutritious diet that includes protein from meat sources. This requires an ever-increasing number of animals for food production and millions of additional tonnes of feed grains."

Higher grain prices are "driven by the substantial growth in demand for food."

Same story from Bunge, one of the largest agribusiness companies. It's one of the biggest oilseed processors; they also are big in fertilizers and food processing. Its earnings were nearly TWICE ESTIMATES (!) "Soybean farmers accelerated purchases because of favorable agricultural commodity prices and concerns about increasing crop input costs." It is increasing full year guidance. Up 8 percent pre open.

Black and Decker beat, but guidance for the second quarter is below estimates and it's reducing guidance for the full year.

Stanley Works is also cautious. Its earnings are a bit below expectations. "U.S. market conditions going into 2Q continue to be indicative of a recessionary environment." It's maintaining guidance, but it also says "market conditions will need to stabilize in 2H '08."

3M beat, and reiterated guidance for the full year that is in line with expectations.

Triarc (Arby's restaurants) and Wendy's International are merging. Wendy's shareholders will get 4.25 shares of Triarc, that's about $26.77. Wendy's closed yesterday at $25.32, so it's a pretty modest premium. This will create the third-largest fast-food restaurant company, with 10,000 restaurants.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 23 Apr 2008 | 3:34 PM ET

Glaxo Buying Sirtris -- A Euro/Dollar Story

Posted By: Bob Pisani

GlaxoSmithKline is paying big in an effort to find cures for diseases of aging. They are buying Sirtris Pharmaceuticals for $720 million in cash, or $22.50/share. This price represents an 84% premium over SIRT's closing price yesterday.

Two things are going on here:

1) this is important, cutting-edge science; Sirtris is the leading research firm seeking to cure diseases of aging by targeting the enzymes that control the aging process, and

2) big pharmaceutical companies are desperate for new drugs and novel technologies; expect more European pharma companies to sniff around and buy U.S. biotechs with their inflated euros.

But it is the potentially revolutionary science that's important here. How can we live longer and healthier? Obviously we can try to cure selective diseases, and maybe find ways of replacing worn-out body parts.

But it has been noted for a while that one of the only treatments that has been demonstrated to extend life appears to be caloric restriction. Read: starvation diet. We're talking 30 percent less than a normal human consumes. This apparently works in rats and yeast, but definitive proof that it radically extends human life is still lacking.

Might there be a way to get the effects of longer, healthier life without the pain of starving yourself? Possibly, and that is where Sirtris comes in.

Sirtris is the leading company develop a drug pipeline based on chemical compounds known as sirtuins. These sirtuins are evidently turned on by a caloric-restricted diet. Small molecules called resveratrol (a chemical substance found in wine) apparently activate these sirtuins and have extended the lifespan of yeast, worms and fruit flies, as well as mice eating a high-calorie diet. In other words, resveratrol increases the activity of the gene associated with sirtuins in the same way that caloric restriction does.

Does this work in humans? We don't know, yet.

Seven sirtuins have been identified that may impact metabolic disorders, cardiovascular diseases and cancer. Sirtris has filed more than 100 patent applications around these sirtuins.

The company's lead drug is called SRT501; it is an enhanced formulation of resveratrol and is currently being tested as a treatment for type II diabetes and MELAS, a rare form of dementia. There are indications that they reduce weight gain, improve glucose levels, and insulin sensitivity.

Sirtris is also developing new chemical entities (NCEs) that are much more potent than SRT501 and should enter clinical testing soon.

I will be interviewing Sirtris' CEO, Christoph Westphal, at 3:20pm ET on Closing Bell.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 23 Apr 2008 | 10:53 AM ET

Bargain Basements: Countrywide Sells Home for $1

Posted By: Bob Pisani

Psst, looking for a cheap place to live? Just how cheap can you buy a home for in some of America's biggest cities?

Check out Countrywide's website of homes they have for sale: http://www.countrywide.com/purchase/f_reo.asp

On that site, you can find homes as low as:

--$1 in Detroit (!)

--$950 in Cleveland

--$1,200 in Buffalo, N.Y.

--$1,900 in St. Louis

--$5,900 in Pittsburgh

--$7,900 in Dallas

--$9,900 in Chicago

--$9,900 in Jacksonville, Fla.

--$24,900 in Denver

--$28,900 in Worcester, Mass.

--$39,900 in Sacramento

--$53,900 in Las Vegas


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 23 Apr 2008 | 9:35 AM ET

Boeing's Nice Earnings vs. Weak Water IPO

Posted By: Bob Pisani

Futures about flat as oil is at least down a bit this morning. Earnings were mixed, and an IPO pricing was a bit disappointing.

Boeing earnings better than expected: $1.62 vs. $1.35 est. Reaffirmed 2008 guidance of $5.70-$5.85. For 2009, guidance of $6.80-$7.00 is about in line with expectations.

Ryder handily beat earnings estimates, and raised full year forecast to $4.55-4.75.

How much money can an airline lose? Delta lost $6.4 billion, or $16.15 a share. Its merger partner Northwest reported a net loss of $4.1 billion, or $15.78 a share.

What happened to American Water Works? The IPO price talk was 64 million shares at $24-$26; it priced 58 million at $21.50. This IPO had been postponed before, in November, as the company cited unfavorable market conditions.

Water is certainly a hot space right now. I have heard that valuation was the concern (i.e., it was priced too high). Also heard that retail street allocation was large -- which means institutions did not load up).

Eaton priced 17.5 m shares at $84 a share, which will be used to pay off prior aquisitions. They also affirmed their full year operating earnings.

GlaxoSmithKline is paying big for anti-aging research. They are buying Sirtris Pharmaceuticals for $720 million in cash, or $22.50 per share.

This price represents an 84 percent premium over SIRT's closing price yesterday.
Two things are going on here:
1) this company is the leading research outfit in anti-aging research through very promising chemical compounds (sirtuins) that appear to slow the aging process (they are initially being tested for diabetes), and
2) big pharmaceutical companies are desperate for new drugs and novel technologies; expect more European pharma companies to sniff around and buy U.S. biotechs with their inflated Euros.

I will have the founder and CEO of Sirtris, Christoph Westphal, on Closing Bell at 3:20pm ET.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 22 Apr 2008 | 3:59 PM ET

Two Builders Report Wednesday; Expect Little

Posted By: Bob Pisani

Homebuilders Ryland and Pulte are reporting tomorrow. Don't expect much. There will continue to be significant pricing pressure & writedowns.

Here's the key for the homebuilders. They need to:

-reduce inventory to generate cash

-raise capital

Capital raising is likely, because they are not generating enough cash flow to fund their public debt that is coming due.

Expect more builders to default on their loans, so banks will own more real estate assets, which they will sell at a deep discount.

Already, builders with February quarter ends -- KB Home and Lennar -- reported dramatic declines in sales. At UBS, they are expecting new home prices to decline an additional 10-15%, or ~35% cumulatively in the hottest housing markets.


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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