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Trader Talk with Bob Pisani

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  Tuesday, 27 May 2008 | 1:02 PM ET

Oil Price Blame Game: What's Really Needed Is Energy Policy

Posted By: Bob Pisani

Some are blaming speculators. Others are blaming prop trading desks (it must be Goldman!). Other blame oil companies, or the Saudis. Or the Russians.

Welcome to the Street's favorite parlor game: blame some shadowy force for the rise in oil. Never mind that there is 85 million barrels of oil produced a day, and scant supply anywhere. There has to be something more than a global supply/demand imbalance at work here. Someone is sitting in a room somewhere, manipulating all this. We just have to find him and expose him.

Last week, we had notes from several respected commentators. Charles Biderman at TrimTabs released a note with this title: "Oil Producers Could Easily Be Manipulating Oil Prices through Funds of Hedge Funds Helped By Ridiculously Low 7% Margin Requirement for Oil Futures. We Don't Know That They Are, But They Could."

That got a lot of play on trading desks. One solution, of course, is to boost margin requirements for oil futures, but given that exchanges and brokers earn significant income from trading lots of contracts, he doubts this is likely. Still, there are efforts underway to do exactly that in Congress.

Biderman proposes an interesting alternative: let governments short oil futures. "If it is logical for oil producers to go long oil futures to enhance the future value of their remaining oil, why is it not logical for oil consumers to go short oil futures? Japan, are you listening?," he asks.

He goes so far as to encourage the U.S. government to spend the roughly $275 m it is saving per month due to suspension of purchases for the Strategic Petroleum Reserve and use that money to short oil!

This kind of talk gets trading desks going, because it: 1) sounds patriotic, 2) might help trader profits, and 3) would be payback to those greedy evil nameless faceless forces manipulating us.

There's a long string of people in line with these theories. Recall last week that Michael Masters, Managing Member of Masters Capital Management, testified in front of the Committee on Homeland Security and Government Affairs of the U.S. Senate , blaming speculators--specifically pension funds and hedge funds--for much of the rise in oil (his testimony is very interesting reading).

Years ago, Richard Hofstadter wrote a famous book called "The Paranoid Strain in American Politics", about the American right's scapegoating of liberals as communists during the McCarthy period. There's something similar developing here: a paranoid strain in American capitalism.

It doesn't mean we shouldn't look into the influence speculators have on the relatively small commodity market. However, let's not lose sight of what we really need: an energy policy.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 27 May 2008 | 11:22 AM ET

Bulls Are Worried: Here's Why

Posted By: Bob Pisani

Bulls who have been smacked around by record oil prices were happy to see a sharp drop in that commodity this morning. However, they're not happy with the very meager response from the stock market, where buyers are again showing little enthusiasm.

To recap, the bulls are worried. Here's why:

1) The bulls have argued that lower oil prices will get the market going. Indeed, saw the effect lower oil has had on stocks this morning: a very modest rally. A 4-point move in the S&P, after a 50-point decline last week, is a pretty modest rebound. Indeed, if bulls are right and it's commodities that matter, this "rally" is pretty disappointing.

The reason we are not getting a stronger rally is because the vast majority of the market is not convinced that oil is any notable downtrend, at least not yet.

2) While there has been a modest uptrend since the market bottom in April, it has not been very convincing; rallies have occurred on meager volume since April;

3) While there seems to be little enthusiasm for selling stocks aggressively since the March lows, there has also been little enthusiasm for buying. This equilibrium began to change a bit last week, when we clearly saw a spate of selling interest, with little enthusiasm from buyers despite lower prices;

4) New leadership is not emerging. Yes, tech is off its lows, but it is hardly shining, and financials have fallen back.

This, of course, plays into the bears' hands. Their thesis is that the rally off the March lows is illusory: it's been based on seller exhaustion, not buyer enthusiasm, and with no increase in buyer enthusiasm stocks will at best be range-bound through the summer.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 27 May 2008 | 9:31 AM ET

Market Worry: Stocks Hitting Recent Lows Again

Posted By: Bob Pisani

European stocks are weak on the back of more declines in European banks. Futures turned around, gaining three or four points, as oil fell about $1.50 right after 9 am ET. The decline in oil has accelerated, which will help the open.

News on the housing front was not great, with the S&P/Case Shiller report of home price indices down 14.1 percent in the first quarter compared to the first quarter last year; that's the biggest decline in the history of the index. If there's any good news, it was in line with expectations. New home sales out at 10 am ET.

The real worry here is stocks; we are down three out of four days and the uptrend that began with the March bottom has now been broken.

Many financials like Lehman are already sitting at or near their March lows; other groups like home builders are also drifting toward their January lows. Even market leaders like energy and materials saw profit-taking last week.

UBS is trading down today, but it traded down yesterday in Europe (when our markets were closed); today is the first day it is trading ex-subscription rights. Last week they announced a major rights offering (nearly $16 b, at a significant discount), which is going to result in significant EPS dilution. If you are a stock holder of record, you have now received the rights, which are trading separately at about $1.61.

As part of its prospectus for the rights offering, UBS warned that it may experience more losses tied to real estate.

Bank of America became the latest shop to cut second quarter numbers on the investment banks, including Lehman (where they now expect a loss), Morgan Stanley , and Goldman Sachs . Bernstein also cuts estimates on Lehman, Goldman, Morgan Stanley.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 23 May 2008 | 9:42 AM ET

Out Of The Office

Posted By: Bob Pisani

I'm out of the office for the holiday weekend. I'll be back next week with more posts from the market floor. Hope to see you then.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 22 May 2008 | 3:39 PM ET

End of Energy Subsidies: Pro & Con

Posted By: Bob Pisani

There are signs that emerging-market governments who provide gasoline and other energy subsidies to their citizens are under intense pressure to lower those subsidies, and this is causing some trepidation among stock market bulls.

Consider:

--Indonesia has announced they are reducing subsidies on gasoline, in an effort to reduce their budget gap. This may increase fuel prices by 28 percent. Protests have already broken out;

--Taiwan has said electricity prices will be going up for the first time since 2006, and will allow local oil refiners to raise prices;

--Malaysia has said it would review its existing fuel subsidy program "soon;"

So far, we have not seen price hikes in China and India, both of whom are obviously worried about social unrest.

However:

--In China, rumors that China might consider lowering its considerable fuel subsidy program have generated several Chinese newspaper reports, where officials have denied that the government is considering lowering subsidies.

--In India, a major oil refiner, Bharat Petroleum Corporation Limited (BPCL) has announced that they are rationing gasoline to all of its stations, because the government has refused to allow them to raise prices.

Government energy subsidies are a two-sided coin. On one side of the coin, lowering or even ending government subsidies will help level the playing field and will lead to a reduction in demand. There is much truth to this: some countries have absurdly low gas prices ($0.89 a gallon in Egypt, $0.12 in Venezuela), which have clearly fueled demand.

On the other side, be careful what you wish for: these kinds of chain reactions are difficult to control, will almost certainly lead to more social unrest, and could have a much bigger impact on growth prospects for emerging market countries.

This is the scenario that worries bulls the most: the recent rally off the March lows has been predicated on the theory that the global economy--and global growth stocks--will not see the worst-case scenario bears are predicting. Oil at $135--and governments throwing in the subsidy towel--throws those assumptions into doubt, and makes it easier for fence sitters to continuing counting their cash.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 22 May 2008 | 2:26 PM ET

Lennar's "Once In A Lifetime" Home Deals

Posted By: Bob Pisani

Hundreds of Home Nationwide! Once in a Lifetime Deals! That’s what Lennar is promising if you act RIGHT NOW, this weekend…and buy a home. Check it out.

Curiously, the much-maligned Adjustable Rate Mortgage appears to be making a comeback. Lennar is putting their special ARM financing right on the front page of their website, offering ARMs at 2.88 percent for the first year, 3.88 percent for the second year, and 4.88 percent for the remainder of the life of the mortgage (5.38 percent APR—the true rate of interest) for what they are calling a Memorial Day Weekend Sell A Tho. And no mortgage payments for the first 9 months!

Some of these home builder web sites are starting to look like garage sales—all semblance of dignity has gone out the window in an effort to sell homes. Check out Ryland’s site.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 22 May 2008 | 1:12 PM ET

Oil, Energy Stocks Baffle Shorts

Posted By: Bob Pisani

Are energy stocks topping? With oil (the commodity) and energy stocks going parabolic in the past couple of months, it's little wonder that there has been a concerted attempt to short the energy complex this week.

Mostly, it has been unsuccessful.

You can see this in the record volume that the UltraShort Oil & Gas ProShares attracted. It provides twice the inverse performance of the Dow Jones U.S. Oil & Gas Index, a basket of stocks in the oil and gas industry. So if the index goes down 1 percent, you make 2 percent.

The United States Oil Fund, which roughly tracks the price of oil, has also attracted near-record volume this week, as traders are also able to short this fund as well.

Yesterday, there was a concerted attempt to sell off oil, as well as oil and natural gas stocks, as traders were betting that the weekly inventory levels would show a build in reserves and this would be the right moment to take profits. It didn't happen -- there was actually a drawdown in supplies, so sellers were forced to cover short positions by selling the DUG or buying the USO.

Despite the pain inflicted on shorts, this is a good sign, an indication that a fairly sizeable group is trying to pick a top in energy.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 22 May 2008 | 9:10 AM ET

Higher Oil Prices Grounding Airline Merger?

Posted By: Bob Pisani

Want to know what the influence $130 a barrel oil has on airline M&A? The original bid for Alitalia by Air France-KLM was based on an oil price of $86 a barrel , according to the Deputy CEO of Air France,in an interview on CNBC Europe.

Those talks were shelved a month ago, but at $120 to $130, the Deputy CEO said that Air France-KLM would have to come up with a more "difficult and demanding" business plan. That's an understatement. Air France-KLM reported a 16 percent decline in profit this morning.

Elsewhere:

1) Given the current retail environment, retailers this morning are announcing earnings that, while clearly down from last year, are at least not missing lowered estimates, and more importantly they are not dramatically lowering earnings expectations for the year.

Ann Taylorreported earnings slightly above expectations. Sales decreased 11 percent, comp store sales were down 11.5 percent, but that is not unusual in this environment. The guidance for the current quarter is $0.42 to $0.47, consensus is $0.47.

Limited reported earnings slightly above expectations, and actually raised full year guidance, from a prior $1.35-$1.55 to $1.38-$1.58, vs. consensus estimates of $1.42.

Barnes and Noble reported earnings in line with expectations. They did lower their comparable store guidance for the current quarter, but they are maintaining their full year guidance.

Aeropostale and Gap report after the bell.

2) As expected, UBS raised additional capital, in the form of a rights offering that will raise roughly $15.1 b. The offering will entitle investors to 7 new shares for each 20 held. The shares are being sold at 31 percent discount to Wednesday's close. The CEO has said he does not not think more capital raising will be necessary, that there may be further sales of subprime products and that there are a large number of parties interested in purchasing them.

3) Indonesia indicated higher fuel prices were coming. The government subsidies fuel prices, but they indicated today that fuel prices could go up by about 28 percent to prevent a budget deficit from getting out of control.

4) Alcoa downgraded to neutral from by at Merrill, saying shares have risen due to take out speculation and this is a good opportunity to take money off the table. Actually, all material stocks have risen recently.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 21 May 2008 | 4:32 PM ET

Market Drops On Fed Minutes

Posted By: Bob Pisani

The Dow has dropped 450 points in the last two days. Most of this is due to the record high price of oil, but at 2 PM ET today the markets dropped further as the Fed came out with its minutes, wherein they:

--Ratcheted down the growth outlook

--Ratcheted up their outlook for inflation and unemployment

--Said further rate cuts were unlikely

The overall market dropped on that news. The immediate effect was that buying spiked up--the CBOE Volatility Index (VIX) had its biggest one day move since March.

Home builders dropped to their lowest levels since March, with stocks like Ryland down 9 percent, Centex and Lennardown 7 percent.

Not quite as bad for the brokers, but most of them are also at the lowest levels in a month; Lehman down 5 percent, Morgan Stanley down 4 percent.

Perhaps of greater concern is banks, where the Bank Index (BKX) is again approaching multi-year lows. Bank of America hit a 5-year closing low. Citi down 4.7 percent, Wachovia down 3.7 percent, JP Morgan down 3 percent.

Finally, airlines were a complete disaster, with AMR dropping 24 percent as it announced it was cutting is flight schedule, cutting jobs, and will begin charging $15 to check in a bag ($25 for subsequent bags).


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 21 May 2008 | 3:02 PM ET

Speculation Fueling Commodity Price Increases Says Trader

Posted By: Bob Pisani

How much are speculators adding to food and fuel inflation? A lot, says one trader. One of the most interesting pieces of testimony I have read in a long time came today from Michael Masters, Managing Member of Masters Capital Management.

He was in front of the Committee on Homeland Security and Government Affairs of the U.S. Senate. Mr. Masters has been a long-short equity hedge fund manager for over 12 years. Here's what he had to say:

1) Commodity prices have increased more in the aggregate over the past five years than at any other time in U.S. history; specifically assets allocated to commodity index trading strategies have risen from $13 billion at the end of 2003 to $260 billion as of March 2008;

2) The primary increase in demand for commodities has come from Institutional Investors, specifically pension funds, sovereign wealth funds, university endowments, and others, whom Master collectively calls Index Speculators. This group now accounts for a larger share of outstanding commodities futures contracts than any other market participant.

3) These Speculators allocate a portion of their portfolios directly to the commodities futures market, and behave differently than traditional speculators; specifically, they buy with little regard for price and tend to be mostly buyers, not sellers.

4) While much of the rise in the price of oil has been attributed to increased demand from China, speculators are responsible for at least an equal increase in demand; specifically, annual Chinese demand for oil has increased by 920 million barrels over the last five years but Index Speculators demand for petroleum futures has increased by 848 million barrels

5) While the rise in corn if often blamed on ethanol production, Speculators have stockpiled over 2 billion bushels of corn futures in the last five years, enough to fuel the entire U.S. ethanol industry for a full year.

Masters concludes with this analogy: "Think about it this way: If Wall Street concocted a scheme whereby investors bought large amounts of pharmaceutical drugs and medical devices in order to profit from the resulting increase in prices, making these essential items unaffordable to sick and dying people, society would be justly outraged."

Masters urges Congress to 1) prevent pension funds from investing in commodities, and 2) close loopholes that allow banks to get around limits on speculative positions.

Mr. Masters assumes, as many do, that supply is adequate--which is debatable, particularly from oil (the world produces 85 million barrels a day and seems to be having a tough time increasing supply). And we certainly know that demand has been increasing from consumers, not just from institutional investors. So his argument is certainly far from flawless.

But Masters is one of the first to put real numbers behind the idea that speculation is a major force in commodity price increases.

Here is the full testimony.


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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