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Trader Talk with Bob Pisani

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  Wednesday, 25 Jun 2008 | 3:12 PM ET

Any Reason To Own Stocks This Summer?

Posted By: Bob Pisani

What’s next for stocks? The good news for the Fed statement is that it was exactly what the moderate camp was expecting: ratcheting up concerns on inflation, ratcheting down concerns on the weak economy. It was a nuanced statement, and the stock market showed very little reaction.

Unfortunately, a little more chest-beating on inflation would have helped the bulls. It was SO NUANCED that the dollar has drifted lower, and oil is unchanged. Not good.

Stock bulls want the Fed to protect the dollar, which will push oil lower and will help the airlines and the autos and the FedEx's of the world.

Now we turn to the main issue: where's the catalyst to own stocks into the summer? The lack of strong arguments for owning stocks is the biggest problem the bulls have.

The biggest hope for the bulls is a notable crack in oil (a sustained drop below $120 or so). After that, the notably oversold conditions (which could last a long time), and the lopsided bearishness of the Street should enable some kind of short-term bounce.

For the next few days, going into the end of the quarter, the hope is to stage a modest oversold rally. We've done that from yesterday's lows, but it's pretty, uh, modest: 1 percent off the lows yesterday, and basically flat for the quarter.

Longer-term, we do have the ECB on July 3rd, but they have already telegraphed their hawkish intentions. Traders keep telling me there are still a lot of chips on the table betting on a second half recovery. I would agree that earnings and guidance are the main story after today's Fed statement, but what I see is estimates coming down, even though comparisons for the third and fourth quarter are a lot easier due to the declines of last year.

Ah, the Bulls say, the Street is over-reacting because everyone is SO DAMN BEARISH. They will be cutting earnings, true, but they will not turn out as bad as everyone thinks, and we will rally. So say the bulls. But we are in a hall of mirrors now.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 25 Jun 2008 | 9:51 AM ET

Inflation: Firms Passing On Higher Costs

Posted By: Bob Pisani

AmEx just out with comments, saying "We have seen credit indicators deteriorate beyond our expectations" and it was "too early to assess the impact of deteriorating credit indicators." Down about 1 percent.

Monsanto beat earnings expectations, though revenues were a bit light they were 26 percent higher than the same period last year. Everything generated more revenue: Roundup, and soybean, corn and cotton seed. They raised full year guidance (there is only another quarter left in their fiscal year)

Inflation watch:

1) General Millsearnings were in line with expectations . Interesting to look at the mix: domestic retail operations grew 7 percent, of which 3 points were due to growth, and the remaining 4 points due to price increases. International business up 21 percent, of which volume growth was 6 points, price and mix were 6 points, and a favorable currency were 9 points of the gain. Bottom line: price increases are a significant part of growth, but domestically and internationally.

As for inflation, they noted that they are expecting supply chain costs to increase 9 percent in 2009; their projected earnings growth of 7-9 percent is still quite healthy, though at $3.78-$3.83 is slightly below analyst estimates of $3.84.

2) Despite all the kvetching about high raw material costs, some companies are indeed able to pass on higher costs, and more. Look at Dean Foods : they raised their second quarter guidance, and went out of their way to note that the gain was largely due to "effective management of the pass through of increased dairy commodity and energy costs."

3) Brazil's central bank raises inflation forecast to 6% from 4.6%.

Elsewhere:

--Rockwell Automation has lowered its annual earnings guidance, noting that the company had experienced slower than expected growth in Europe and the U.S. in the past several weeks. Down 8 percent

--Barclays the latest European bank (after Royal Bank of Scotland and HBOS) looking to raise money, $8.85 billion through a share issue. It's being sold to current investors who can buy 3 shares for every 14 now held.

--Best Buy increased its dividend by 1 cent, to 14 cents, but its yield is still a relatively small 1.3 percent.

Boeing down 3 percent pre open (near a two-year low) as Goldman Sachs slapped a Sell rating on it. While the downgrade is due partly to the general observation of "continued weakness in the economy, continued high fuel prices, and our view that Aerospace stocks underperform when both occur simultaneously," they also went on to take a specific shot at Boeing's critical 787 business: "we believe there is more risk to the 787 program than is currently priced in as the program has yet to even enter flight test, where historically most issues on development aircraft are found."


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 24 Jun 2008 | 4:05 PM ET

Oh, Those Fickle Traders

Posted By: Bob Pisani

How fickle are traders? They have the attention span...and the confidence...of gnats.

Earlier in the morning, traders took a shot at buying beaten-up groups: financials, airlines, and builders rallied. These stocks have been dramatically oversold recently.

Not surprisingly, there was also a mild rotation out of agricultural stocks, coal, and energy to pay for the money going into beaten-up groups. It didn't hold; by the end of the day much of the gains in the beaten-up groups had evaporated.

Nobody particularly believed that we were at a bottom in any of these beaten-up names; rather traders have given up all pretense of understanding long-term plays in favor of short-term momentum plays.

For example, in January several traders successfully played building stocks for a couple weeks; some rallied about 30 percent in two weeks before falling back.

In March, a similar situation occurred when money briefly came into financials, and several also rallied 30 percent or more in that time period before falling back.

What will happen at the end of June, beginning of July? Several traders have expressed interest in shorting oil by going long refiners or a few airlines, the theory being that if oil falls, margins will improve for both groups. That is certainly true; it's also true that there have been attempts to short oil before (most recently in May), which have failed.

Several refiners like Tesorodid move up today, but the gains did not really hold.

The difference between now and January and March is that traders could at least play beaten up groups for a few weeks; today they can't even get through an afternoon without having the market reverse on them.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 24 Jun 2008 | 11:35 AM ET

Global Markets Struggle With Inflation

Posted By: Bob Pisani

Stock markets around the world have been weaker recently as they struggle with the implications of global inflation. Asian markets in particular are worried; Asian currencies have been weak on inflation concerns. Consider the following headlines:

Russia: PPI up 25 percent Year Over Year (YOY)

South Korea: inflation at 7-yr high

Vietnam: inflation up 25 percent YOY

As a result, emerging market stocks have been fading:

China down 54% (from the high in October 2007)

India down 32% (from the high in January)

Russia down 7% (from the high in May)

Meantime, companies in the U.S. are emphasizing the impact of inflation on their bottom lines. Lowe's is seeing "unprecedented requests for price increases;" Dow Chemical is raising prices for the second time in a month; energy costs up fourfold last 5 years.

All this is putting pressure on U.S. indices; the Dow is sitting near the 52-week closing lows from back in March.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 24 Jun 2008 | 9:22 AM ET

Reliance Steel Upgrades Guidance, Dow Chem "Upgrades" Prices

Posted By: Bob Pisani

1) Reliance Steel just jumped 5 percent as they updated guidance, raising it 30 percent from previous guidance, due to much higher increases in carbon steel prices.

2) Dow Chemicalis raising prices again, the second time in a month--by as much as 25 percent, joining other chemical producers who are being hit hard by higher oil and gas costs. How much higher? Dow says costs for have jumped fourfold over the past five years--they will spend $32 billion this year on energy bills (!!).

3) UPS down about 4 percent, as they copied FedExby pre-announcing lower earnings on slower U.S. growth and higher fuel costs.

4) In autos:

--Cooper Tire cut production of tires due to lower demand. This is no surprises; the Street has been selling off Goodyear and Cooper since May on expectations that car sales would be weak.

--A Japanese paper said that Toyota is making plans to lower is group sales target for 2008, due to slower sales in the U.S. and a slowdown in luxury car sales in China

5) NYSE Euronext is buying a 25 percent stake in the Doha Securities Market (the principal stock market of Qatar) for $250 million--though the NYSE also has a stake in India and Brazil bourses, as well as strategic relationships with the Tokyo Exchange, this is the NYSE's largest investment in a foreign exchange to date. NYSE will hold three of the eleven board seats at DSM, and will provide proprietary technology systems and help to manage the exchange over the next five years. The deal is interesting, because Qatar owns 15 percent of the London Stock Exchange, and both NASDAQ and the LSE were reportedly also involved in the bidding.

6) In the food business, Krogerbeat estimates; ConAgra is raising earnings for the quarter just completed, though they didn't provide specifics.

7) UBSup about 5 percent on vague rumors that HSBCmight be interested in buying them--and while buying the biggest wealth management firm in the world at a comparatively low multiple sounds appealing, it seems awfully unlikely they would be able to pull off a deal of this size in the middle of the biggest banking downturn in decades, not to mention how much opposition would be seen in Switzerland if a London bank tried to buy the crown jewel of Switzerland.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 23 Jun 2008 | 5:23 PM ET

Low Volume, Lots of Damage

Posted By: Bob Pisani

After the close, UPS cut its guidance, speaking as FedEx did recently about the increase in the price of fuel, and how it is slowing the broader economy.

It was a low volatility, low volume day, but regardless: there was a lot of damage done. Two stocks declined for every one that advanced. The number of stocks at new lows at the NYSE was the highest since the March bottom.

Financials have been sold almost every day this month, and again today; as a group, they were down about 3 percent, with new lows in AIG , Bank of America , Citi , and Merrill Lynch .

Retail and housing stocks were also weak, with companies like Home Depot down nearly 5 percent.

The only group on the upside were energy stocks, where we hit new highs in many oil service names, as well as coal companies like Massey .

Predictably, airline stocks dropped double digits on the rise in oil.

Questions? Comments? tradertalk@cnbc.com

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  Monday, 23 Jun 2008 | 9:38 AM ET

Oil Whipsaws, S&P Flat as Quarter End Looms

Posted By: Bob Pisani

Oil was trading up early in the morning, despite the Saudis agreeing to raise oil production 200,000 barrels a day -- however, about 8:30am ET, after the dollar had been strengthening, oil began moving down. Gold also weakened, down 2.7 percent.

Options on gold and all the metals expire on the 25th, one trader said it was "just too much for the funds." That is too much unknown news with the Fed meeting, and they don't know how much more the Saudis will raise oil production.

(Nore: If crude comes off it drags down gold).

The Fed meeting this week is widely anticipated to be a non-event, with no rate raise and a lot of rhetoric about inflation.

More important is the end of the quarter, with only six days remaining. The S&P 500 is essentially flat this quarter, which is a major disappointment, since April and May were up; we have fallen apart in June (down nearly 6 percent!) and are now very near the lows for the quarter. With a flat quarter, many traders signalled that they expected meekness and defensiveness to be the prevailing strategy going into the close of the quarter.

Well, there are some mergers this morning, which should put a few much-needed shekels in the coffers of the investment banks.

Bunge to buy Corn Products for $4.8 billion for Corn Products, $56/share, a 31 percent premium to Friday's close.

Corn Products is the #4 manufacturer of high-fructose corn sweeteners. The deal will supposedly broaden the products it sells to customers and extend their reach into new markets in Asia.

Bunge also announced they were raising full year guidance to $9.35-$9.65 from $7.10-$7.40 (!) Remember, they are also in the fertilizer business, as well as agribusiness.

Republic Services formally announced they were buying Allied Waste, in deal that had already been widely leaked.

The deal is $6.1 billion, valuing Allied at about $14.04 a share, a small premium over Friday's close. The deal combines the number two and three companies in the solid waste industry (Waste Management is #1)

The Chicago Mercantile Exchange announced a share buyback program of up to $1.1 billion of Class A stock and a special dividend of $5; up nearly 3 percent pre-open.

Citi plans to dismiss up to 10 percent of the 65,000 people in their investment banking division, according to the Journal (Citi will not confirm), while the Financial Times is saying Goldman Sachs cut its investment banking division last week.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 20 Jun 2008 | 4:37 PM ET

Market Lynchpins: Energy And Materials

Posted By: Bob Pisani

Two trends were not helpful to those looking for a bottom today:

1) Financials were again weak, despite positive comments from two regional banks---SunTrust and Huntington Bancshares .

2) The top performers for the second quarter--materials and energy stocks--have been under pressure for the last two days as traders have taken profits. Oil was up today, while energy stocks were down--an alarming trend, end of the quarter or not. Energy and materials have been the last lynchpins of the market.

Speaking of oil, it was up despite the meeting in Jeddah over the weekend, which many hope might lead to a decline in oil prices.

For the week, the Dow down 3.8 percent to three-month lows thanks to notable underperformance from financials and consumers, S&P 500 down 3.1 percent, NASDAQ down 2 percent.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 20 Jun 2008 | 9:03 AM ET

Merrill Lynch Profit Warning Rumors: Consider The Source

Posted By: Bob Pisani

There was a time when quadruple witching expiration (the quarterly expiration of stock and index futures and options) was a big event; the Wednesday and Thursday before would often see very large volume and volatility. That doesn't happen anymore, for a combination of reasons, principally because traders spread their rollover trades over a week and a half now.

Elsewhere:

1) Merrill Lynchis down 5 percent on a vague,unsourced rumor from Reuters that Merrill might issue a profit warning . Remember the internal logic of active stock traders: it doesn't matter whether a rumor is true or not, what matters is to be ON THE RIGHT SIDE OF THE TRADE. Ask yourself this question: who would have access to this kind of inside information, that it would be leaked to a trading desk? Which is more likely: that a trader creates a rumor that they can profit from, or that inside information has been leaked? Then consider that short sellers have been pressing--and continue to press--financials. I'm not saying that it is impossible Merrill will issue a profit warning; I'm just asking you to consider the source (trading desks) and their motivations.

2) Maybe it's not so bad with regional banks:

--Huntington Bancshares up nicely as after the close they announced that charge-offs would come in at the top end of its 2008 guidance; so maybe the losses won't be as great as anticipated. This follows BB&T, which announced yesterday it was considering raising its dividend.

--Not so fast. Ed Najarian and company at Merrill Lynch out with a long (56 page) note, cutting estimates for regional banks on higher loan losses and reserve building. It's not all bad news: bank stocks now appear to be in capitulation mode," the report says.

3) Continental Airlines is doing a secondary offering of 11 million shares of common stock at $14.80 per share. The stock went out yesterday at $15.59; trading down nearly a dollar.

4) We have been talking about how the value of many used cars--particularly gas guzzlers--has been dropping rapidly, putting pressure on car dealers and consumers alike. A similar situation may be happening with leased vehicles.

Lehman Brothers out with a note saying that GM's financial arm may need to write down $1.5 billion, and Ford's may need to write down $1.1 billion.

The report noted: "We expect deteriorating residual values of lease vehicles to be lower than original expectations, which could significantly impact loss rates that are already tracking above average for recent vintages."

5) You think it's tough in your business? Try being Winnebago, beset with high gas prices,

Winnebago beat on the earnings side, but revenues were short of expectations.

Listen to these stats from Winnebago:

--the motor home market has faced double digit retail sales declines for eight of the last nine months;

--retail sales declined 26.1 percent for the first four months of 2008;

--forecasts indicate volumes will decline to levels not seen since 1991.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 19 Jun 2008 | 4:32 PM ET

China's Rising Gas Prices May Help U.S.?

Posted By: Bob Pisani

It was a mixed day, which started poorly with a big earnings warning from HMO Coventry , as well as Burlington Northern and Smucker's , which noted higher soybean oil and wheat costs were hurting their bottom line.

However, things improved midday. While Coventry warned, two other HMOs--Aetna and Humana both said they would meet earnings expectations.

Later in the day, southeastern bank giant BB&T said their capital position remains strong and they "anticipate some increase in the cash dividend during 2008." Not only did BB&T rally into positive territory (it was down almost 10 percent), but other regional banks like Suntrust also rallied modestly. Bottom line: BB&T became the first regional bank to exorcise the "dividend-cut monster." Other financials, and indeed the overall market, rallied modestly.

Finally, while cruise ship company Carnival Corp reduced its full year guidance, citing higher fuel costs, they also noted that occupancy levels for bookings in the following year are in line with last year, with higher ticket prices. This moved the stock up steadily throughout, ended up about 5 percent.

Separately, the news that China is raising gasoline prices is good news for those of us who would like to see the price of oil come down, however it is not good news for China. The Shanghai Composite Index of Chinese stocks dropped another 6 percent today, to a new 52-week low, a full 55 percent below its historic high last October. Even Chinese-based ETFs are weak; the iShares FTSE/Xinhua China 25 Fund is 36 percent off its historic highs.

Chinese stocks have been down for the same reason our markets are down: the twin whammies of higher inflation and a potentially slower economy, though in China's case a slower economy may simply mean sub-10 percent growth annually.

However, raising gasoline prices for them is different than raising for us. First, even modest increases in gas prices there may have a much bigger impact on their economy than on ours. Second, China is a huge exporter, including to the United States. They will undoubtedly be raising prices of their export goods; this of course will cause more inflation in the U.S.; it may also reduce demand for some Chinese goods, which of course hurt the Chinese.


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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