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Trader Talk with Bob Pisani

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  Tuesday, 15 Apr 2008 | 11:59 AM ET

Airline Mergers: A Dismal Assessment

Posted By: Bob Pisani

With all the talk about the benefits of airline mergers, there are some sad realities around this entire business.

Here is a somewhat downbeat -- and controversial -- assessment about what all these airline mergers might really mean, from Peter Schiff, president of brokerage firm Euro Pacific Capital:

"The recently announced mega merger between Delta and Northwest may usher in a newer, harsher era for the American airline industry.

"In truth, given the rising costs of building, flying, and servicing aircraft, U.S. carriers currently supply more planes and passenger miles than American consumers can afford to utilize. While this may seem illogical, given that domestic flights are usually fully booked, it is important to realize that these crowded planes do not translate into profit at current ticket prices.

"While mergers may help the airlines hold down costs for a bit, the only lasting pathway to profit is fewer flights and significantly higher ticket prices. Of course, this will mean that Americans of modest means will travel less by air. Unfortunately, that fact is simply an inevitable consequence of a sagging currency and diminishing national wealth."


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 15 Apr 2008 | 10:51 AM ET

What Really Moves The Markets? It's All In The Hormones

Posted By: Bob Pisani

My favorite story today: research from the University of Cambridge concludes that much of the daily movements of financial markets may be correlated with hormone levels, specifically of testosterone (aggressiveness) and cortisol (stress).

The researchers took saliva samples from 17 male traders on a trading floor in London over the course of eight days, tracking it against the amount of money they made or lost, and against the changes in the market. They concluded that traders who had elevated levels of testosterone when they came to work made more money, but only to a point; testosterone levels that were too high led to reckless decision making.

Cortisol levels--which measures stress but also can be an indication of cautiousness--were particularly elevated in times of market volatility.

"Maybe bubbles and crashes are coming from these steroids," one of the authors, John Coates, said in New Scientist. He went on to say that "maybe if more women and older men were trading, the markets would be more stable."

Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 15 Apr 2008 | 9:16 AM ET

The Earnings "Surprise"--There Was None

Posted By: Bob Pisani

Futures actually moved up at 8:30 ET, despite PPI much stronger than anticipated (core PPI was in-line, apparently because car and truck prices were dropping; the NY Empire State Index was stronger than expected).

The most important fact about today is that there were no negative earnings surprises. State Street , US Bancorp ,Northern Trust in the financials, and Johnson & Johnson in the healthcare sector were all names people have been hiding out in expecting good earnings, and they delivered. This is in contrast to the disappointing start of this earnings season, with disappointments from GE ,Alcoa , and Wachovia .

Elsewhere:

1) So the long-awaited merger of Delta and Northwest is a reality (at least the announcement is real). The positives:

--Nearly $7 billion in cash at closing
--Minimal overlap that should ease the regulatory review process
--A deal in place with the Delta pilots
--12 percent reduction in headcount.

Now that consolidation looks like a reality, expect considerable opposition from labor groups; any anti-trust review must consider the consolidation play holistically. How about Continental/United ,which would be another roughly 20 percent of the market?

Before everyone gets too excited about this, consider what Morgan Stanley's airline analyst, Willliam Greene, had to say to his clients this morning: "our rule of thumb is to look for opportunities to become sellers once consolidation momentum has run its course because airline mergers are inherently risky." Still, the "Delta domino effect," as Greene calls it, will at least create some short term tailwind.

Delta up 5 percent, Northwest up 10 percent pre-open.

2) Johnson & Johnson beat on consumer sales, medical devices were also strong, pharmaceutical sales look in-line. 2008 guidance is in-line with expectations. Once again, international growth is the driver:

--Pharmaceutical sales in the U.S. up 0.9 percent, but up 7.9 percent international
--Medical devices up 0.2 percent in the U.S., but up 13.8 percent internationally
--Consumer sales up 11.7 percent in the U.S., but up 20.2 percent internationally

Up 1 percent pre-open.

3) US Bancorp up about 3 percent, as they beat on the topline and bottom line. One trader in the stock noted to me that USB was very much in line and because it it well capitalized and therefore less shorted than others, he is expecting it to be up but not a 10 percent short squeeze.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 14 Apr 2008 | 4:04 PM ET

Financials: It Could Have Been Worse, But Will It Get Better?

Posted By: Bob Pisani

It could have been worse. Wachovia'shorrible earnings report, along with a dividend cut and a $7 b capital raising effort, dropped many financials two to six percent or more, with small regional banks that have significant real estate exposure particularly hard hit.

While the largest financials, like JP Morgan ,Merrill , and Bank of America , were not hurt as badly, they still declined; they have been down now for five days in a row ahead of their earnings this week. Bottom line: the Street is anticipating poor results, and Wachovia has only confirmed that the earnings estimates, while dramatically lower than a couple months ago, are still too high.

Wachovia also confirmed that there will likely be little good news this quarter:

--Deteriorating credit quality spreads to auto, credit cards?
--Weak revenue growth
--Capital markets weak
--Reserve building

Will anybody report an improvement? Bears are openly skeptical. They point to JP Morgan's comments that home equity continued to see deterioration, and our parent GE noting that the end of March got worse.

What to do? The answer to every question (what to buy? is my job secure? what is the meaning of life) seems to be, "Buy Potash." And oil exploration stocks. Both of these groups (agricultural commodities, exploration and production) again hit new highs today.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 14 Apr 2008 | 9:15 AM ET

Wachovia's Loss: Signal Of More To Come From Banks?

Posted By: Bob Pisani

On Friday, General Electric surprised, now it's Wachovia Bank's turn. They missed by a mile: a loss of $0.14 from continuing operations, consensus was a gain of $0.40. They are cutting their dividend 41 percent and seeking to raise $7 b in capital, so the poor earnings will be diluted even more.

Our David Faber reporting the sale will involve 3.5 b in common stock at $24 a share, and 3.5 b in convertible with a 7.5 percent coupon. Wachovia was trading in that range earlier, but is now higher at $25.70, still below the $27.81 it closed at on Friday.

To a certain extent, we have heard this before: an increase in the loan loss provisions ($2.1 b in new provisions), largely due to losses in residential real estate (again, California and Florida are the main culprits), along with more losses on mortgage backed securities and their derivatives. Credit quality continued to deteriorate by an measure, particularly non-performing assets, which increased 54 percent from the prior quarter, according to RBC Capital.

On the other hand, we thought we were facing the worst last quarter; that's obviously not the case, and this is part of the continuing adjustment of expectations. Now the increase in provisions for loan losses is a signal that banks are expecting more losses.

Small declines (1 to 2 percent) in other banks, like Bank of America and Citigroup.

Elsewhere:

1) Despite statements of support from the G7 over the weekend, the dollar is considerably weaker this morning. I will be speaking with French Finance Minister Christine Lagarde on our air shortly after the 9:30 AM open.

Despite the dollar weakness, commodities are weaker as well.

2) Blockbustermaking a bid for Circuit City for at least $6 a share, they claim in cash; Blockbuster down 12 percent, Circuit City up over 25 percent to $6.16 on heavy volume. They may also turn to Carl Icahn for an additional equity infusion, Blockbuster's CEO says.

3) While we're young: Delta and Northwestmight unveil details of their (endless) merger discussions --and possibly a deal--by Tuesday, according to the Journal. Delta and Northwest both up about 5 percent on light volume.

4) Deutsche Bankmay be seeking to sell $20 b of leveraged buyout debt, similar to what Citigroup was reported seeking to do last week.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Apr 2008 | 4:26 PM ET

GE Is A Real Mind Blower For Markets

Posted By: Bob Pisani

First Alcoa , then GE missed earnings. This is a rare occurrence, and as a result the Street is changing its mindset. They are expecting more conservative guidance, and looking for places where negative surprises might pop up.

One example: IBM , which reports next week. While most are expecting weakness in hardware, traders have noted that services (more than half of revenues) gets a good part of its revenues from financial companies, and that this may be the source of a negative surprise from IBM.

Another issue: financial earnings, which are coming next week for US Bancorp, Wells Fargo , JP Morgan , and others. In addition to cautious guidance, traders are looking for:

--Higher delinquencies on home equity, credit cards, commercial real estate--which ultimately means higher charge-offs and building of reserves;

--Higher Level 3 assets;

--More capital raising (though there is some debate about how much more will need to be raised)

Bulls argue that the worst case scenarios are now off the table, thanks to the Fed providing liquidity and a backstop.

Given the problems, many now believe that we are in for a period of sideways trading for the next several months. This can be part of the healing, but it can also lead to low volume days no matter which way the tape is heading. As one trader on the floor said to me, "For three months, we've had no conviction on up days; now we have no conviction on down days either."

Major indices this week:

Dow down 2.2 percent
S&P down 2.7 percent
NASDAQ down 3.4 percent
Russell 2000 down 3.6 percent


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Apr 2008 | 12:08 PM ET

GE Fallout: It Coulda Been Worse

Posted By: Bob Pisani

Well, it could have been a lot worse -- while certain financials and industrials are weak, the damage could have been a lot worse from General Electric's miss. Note that United Technologies' CEO George David tells Reuters he is "quite comfortable" with their full year profit target.

Imagine being Jeff Immelt, CEO of General Electric, our parent company. The shortfall in GE's earnings came mostly from the financial side. He has spent five years trying to reduce the risk in GE Capital.
Immelt has:

-Exited insurance
-Existed reinsurance
-Exited bond insurance
-Exited parts of consumer finance

His concentration has been on commercial finance and debt lending. Fair enough. So what happens? They get caught in the credit crunch -- much of the shortfall was because they were unable to sell certain real estate assets. They cannot seem to win here.

Still, look at the revenue story, which clearly shows growth outside the U.S.
GE Revenue:

-U.S. down 5 percent
-Developed world (ex-U.S.) up 14 percent
-Emerging markets up 38 percent

Finally, Immelt seems to feel the Fed is doing all it can. He told CNBC's Joe Kernen, "There's not a whole lot more I think the Fed can do. This has to work its way through the system."

Note: CNBC is a unit of NBC Universal, owned by General Electric.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 11 Apr 2008 | 9:19 AM ET

General Electric's Big Miss--Really Big Miss

Posted By: Bob Pisani

GE reported first quarter earnings of $0.44, below the $0.51 consensus and $0.50-$0.53 guidance. Full year guidance was cut to $2.20-$2.30 from $2.42. Down 11 percent pre-open.

This was the biggest miss most analysts can remember; certainly the biggest miss in over a decade.

Commercial Finance was a problem. Analysts--including Jeff Sprague at Citigroup--noted that GE attributed $0.05 of the miss to mark to market losses, impairments and the inability to get asset sales done. Provision for losses was up 41 percent about double what was expected. The other 2 cents from the other non-financial parts.

Industrial and Healthcare were also disappointments; Healthcare had a 17 percent profit drop on flat sales. Goldman Sachs, Credit Suisse downgrades GE.

Any good news? Parts of the international business are doing well, and the dividend yield is 3.7 percent now.

Disclosure: CNBC is owned by NBC Universal, which is a unit of GE.

Elsewhere:

1) Financials are weak pre-open. GE's financial business is highly thought of on the Street; most feel it is the was creme of the crop, and if they had unforeseen problems at the end of Q1, than many others in the industry did too.

Little surprise, then, that financials are trading down here, particularly since many of the big banks are reporting earnings next week. Fannie Mae, AIG, Capital One, Lehman, other financials trading down about 3 percent.

Note CIT --which competes against GE in leasing and financing--down 7 percent.

Some of the other big industrial companies, like Tyco, Honeywell, and Whirlpool, are also down, though on much lighter volume. Washington Mutual down 6 percent.

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  Thursday, 10 Apr 2008 | 4:37 PM ET

Energy "Crisis" Hitting The Markets

Posted By: Bob Pisani

We have an energy problem with the markets right now. Volume has been pitiful since the month of April started, with the exception of the first day of the month.

Absence a catalyst (start of the quarter, for example), or positive economic stats, the tendency of the markets in this situation is to drift, and usually drift lower.

How to explain today's modest action? First, it's not that great--three stocks advancing for every two declining. Second, oversold conditions and short covering explains most of the rest. Retailers are heavily shorted, and there is a belief that the refund stimulus will be a short-term catalyst for retailers in May.

Covering shorts on the news makes some sense here, even if the news was poor. Other groups with modest upsides, like home builders, have sold off notably this week.

On top of that, financials have once again been drifting lower--every day of this week. All of them: brokers, banks, most insurance. Fannie and Freddie too.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 10 Apr 2008 | 9:56 AM ET

Retail Sales: There Is Some Good News

Posted By: Bob Pisani

March retail same store sales were weak, outside of discounters. Remember companies and analysts have been aggressively taking down first quarter estimates for over a month (as well as same store sales), but companies like JC Penney,Target,Gap,Abercrombie, and Kohls were all notably below expectations on same store sales.

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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.

Wall Street

  • JPMorgan & Chase Co. signage outside of the company's headquarters in New York.

    JPMorgan Chase is close to a deal to sell half its private equity business, the Wall Street Journal reported, citing people familiar with the matter.

  • Regulators are expected to vote to end the fixed $1 share price for money-market mutual funds - at least for some money funds used by big investors.

  • Traders work the floor of the New York Stock Exchange.

    Shaking off geopolitical flare-ups for now, analysts say the S&P 500 is taking aim at the 2000 level.