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Trader Talk with Bob Pisani

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  Friday, 13 Jun 2008 | 12:05 PM ET

Regional Banks Taking It On The Chin

Posted By: Bob Pisani

Bucking the rally. Following yesterday's announcement that KeyCorp would cut its dividend in half, a number of regional banks are notably weaker today.

Goldman Sachs sent a note out late last night with this title: Key is Likely Not Alone, More Capital Raises and Dividend Cuts to Come. They specifically mentioned Regions Financial, Fifth Third, Comerica, Bank of America and SunTrust; all but Bank of America are down notably. BofA already said this week that they would not have to raise capital or cut the dividend, assuming the U.S. avoids a recession.

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  Friday, 13 Jun 2008 | 9:16 AM ET

Twisted Thinking: Some Hail Consumer Inflation

Posted By: Bob Pisani

Crude oil is lower, and the dollar is up.

Consumer inflation is a tad hotter than expected. To show you how twisted things have become, some greeted this as positive news, since it supports their hope that the Fed will raise this year, which will help move the dollar up more. Under this thesis, dollar strength will put pressure on commodities.

Problem is, this theory was wrong yesterday. Stocks traders were bitterly disappointed yesterday, as a dollar rally failed to prevent oil from moving up.

The reason the dollar is rallying again as Irish voters rejected the European Union's Lisbon treaty, which may doom the EUs reform plan. The plan replaces a EU constitution that was already rejected by Dutch and French votes.

KeyCorp successfully raised $1.65 b in offerings of common and preferred stock (10 percent more than planned).

The $1 billion of common stock, consisting of 85.1 million shares, was priced at $11.75 each. Stock closed yesterday at $11,98, down 23.8 percent, down another 3 percent in pre-open trading.

US Air is jumping on the "business transformation" bandwagon, which is a fancy way of saying you're going to be charged for peanuts and don't check in any bags. There's going to be fewer flights, fewer employees. The cost of fuel is up 90 percent in 12 months. What does that mean? They estimate they will spend an average of $299 per passenger for a roundtrip, it was $151 in 2007, $70 in 2000.

The NYSE has finally made some long-awaited changes in its rules regarding specialist trading. Specialists are giving up something that was formerly very valuable. They will no longer get an advance look at incoming orders, but this had no value because they were getting very little orderflow. This allows them to trade on parity with incoming orders, whereas before they were not allowed to do that: they had to step to the back of the line. They also couldn't call a trading desk and were very limited in. The hope is that this will get them to be more involved in trading. The changes will take place in the next few months.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 12 Jun 2008 | 4:14 PM ET

Oil Spike Spoils Day On The Street

Posted By: Bob Pisani

Once again,an oil spike in the middle of the day has spoiled the modest rally we were enjoying. This has happened often, of course, but today's action was a bit more disturbing. Recall that many believe that if we could only get the dollar out of its recent trading range, that would pressure commodities and provide relief to stocks.

Today, the dollar index traded at its highest levels since February, certainly above its recent range, and it did not drop commodities. Maybe a sustained rally will, but this theory has got some holes short-term.

Airlines nosedived again, with AMR, United, and US Air down double-digits.

Morgan Stanley made an interesting call, urging clients to sell energy and buy financial stocks. Gutsy, but cynics were all over this call, saying why are you selling a sector where earnings are growing to buy a sector where earnings are shrinking?

Pharmaceuticals, which should have bounced after four days of heavy selling, did not. New lows for Merck,Sanofi,Bristol Meyers .

Other Dow components at new lows include GE (our parent company) and GM .


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 12 Jun 2008 | 1:04 PM ET

Frontier Investing

Posted By: Bob Pisani

You know about emerging markets, how about frontier markets--markets that are not quite emerging, but still have viable markets. Claymore has just today launched its Frontier Market ETF that will invest in countries like Poland, Chile, Egypt, Kazakhstan, Peru, and the Czech Republic.

The criteria: minimum share price of $3, market capitalization of $100 million, and trading volume of 10,000 shares a day. The index will only include depositary receipts--which are companies listed in the U.S. or other major developed market exchanges. May sound strange, but it does provide some layer of protection. It will be rebalanced quarterly.

We are also waiting for PowerSharesto launch their version, the PowerShares MENO Frontier Countries Portfolio.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 12 Jun 2008 | 12:23 PM ET

Reasons Markets Are Better Today

Posted By: Bob Pisani

Markets are better today for several reasons: 1) we have been hideously oversold recently, 2) retail sales better than expected (no it was not just gasoline sales), 3) the dollar index has rallied to its highest level since February, and 4) commodities, particularly oil (but not natural gas), are trading down.

After Lehman fired two top executives , the question is, does this give them any breathing room? The trust is broken--everyone thinks they will have to raise more capital, everyone thinks there will be more writedowns.

Cynics on the Street ask, why own Lehman? Their thinking is, even if it goes to $30 (currently $23), that would only happen if the business on Wall Street got better for everyone. If that's the case, why not buy less high beta names than Lehman?

That's why the call from Morgan Stanley to buy financials and sell energy is potentially important. The bulls, remember, are still betting that business for financials will get better: the yield curve is steeper, the deleveraging process is going on, companies are getting more capital, so when they get balance sheet in shape maybe they can make money again. So take some of that money out of energy and buy financials. It's still buy low and sell high, right?

They cynics—and there are many—say this is understandable, but think its a mistake as investor generally underweight the growing portion on the S&P and overweight the shrinking portion. They point out that the earnings of energy is still growing, while those of financials are still shrinking.

Questions? Comments? tradertalk@cnbc.com

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  Thursday, 12 Jun 2008 | 9:12 AM ET

"Despair" Over Financials And Lehman's Now Ex-Execs

Posted By: Bob Pisani

KeyCorp, which has been hitting new lows recently, cut its dividend in half and plans to raise $1.5 billion in capital. The excuse here is an adverse court ruling on tax treatment, but no one is surprised, nor does anyone think they will be the last to cut dividends.

Analysts and technicians are understandably in despair over the wave of new lows in bank stocks. A Fox-Pitt banking analyst said this morning: "price action has failed to confirm any type of trend reversal thus far."

Also, late yesterday, Bernstein increased estimates for bank losses across most loan categories, including consumer and commercial loans.

Elsewhere:

1) Sign of the times: Senator Joseph Lieberman will propose that large institutional investors, including index funds, be banned from buying commodities, according to the New York Times. The hearing will be held June 24th. Not clear what this would cover: would it ban Commodity Index investing? ETFs? I presume not, but in this environment, we will have to wait for clarification.

2) InBev finally made the bid for Anheuser Busch : $65 per share, all cash, to be financed in the form of +$40 billion in debt and the sale of non-core assets (theme parks?). Remember, they are using Euros here...just like the hoards of tourists descending on New York buying up real estate and Tiffany baubles.

Next: can the Anheuser board generate a higher price, or convince everyone they can generate greater or equal value by staying independent? Given that the stock has jumped from $50 to $58 precisely on the takeover speculation, that is indeed a tall order.

3) Irish vote on the Euro/European Union today.

4) Citi closes down Old Lane hedge fund and take $9 billion on its balance sheet;

5) Quote of the day: Bank of America CEO Ken Lewis, speaking at the Deals and Deal Makers conference, said " we're not interested in using our petty cash to buy any investment banks." Smack.

6) Our Charlie Gasparino is reporting that Lehman CFO Erin Callan has resigned, along with COO Joseph Gregory; down 5 percent pre-open.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 11 Jun 2008 | 4:16 PM ET

Market: Just A Flat Out Ugly Day

Posted By: Bob Pisani

It was a flat-out ugly day, with 3-1 declining to advancing stocks, 160 new lows at the NYSE (highest level since the March lows):

1) Despite considerable jawboning, the dollar was weak, commodities were strong, and that combination has not proven to be helpful to stocks. With oil near new highs, the Dow Transports dropped nearly 5 percent for the second time in four days (ouch!)

2) Many homebuilders, which had hit bottom in January, were again at new lows;

3) Notable weakness again in financials, where Lehman continued to drop (down another 13 percent), thanks partly to Merrill analyst Guy Moszkowski downgrading the stock midday, one week after he upgraded it. Traders weren't sure if they should laugh or cry. It's an indication of how confused traders and analysts are.

Elsewhere, anything with mortgage exposure, including Washington Mutual, as well as southern and Midwestern bank stocks like KeyCorp and SunTrust, were again at new lows.

4) Finally, big name healthcare stocks in pharma and HMOs continued to drop. This is part of the ongoing realization that stocks like Pfizer , Merck or Bristol Meyers , formerly considered safe, cuddly, defensive plays where you could hide out, are not so safe or cuddly.

Elsewhere:

1) How tough is it on the sell-side trading desks? I spoke to several traders I have known for many years today. The mood is not good. Remember: sell side traders are in the business of getting accounts to buy and sell stocks, and right now they are decidedly unsuccessful in getting them to do much of either. "It's really hard to get accounts to buy stocks, and they don't want to sell their longs, because even though they're down, they're not down so much they can't stand it," one frustrated trader told me.

Bottom line: we are in a trading range, and we need either another giant flush-out (didn't we have two of them--one in January, and another in March? Yes.) or we need to get better news on inflation or the economy.

Trading veteran Ned Davis is also a bit frustrated; this morning, after reviewing several conflicting indicators, and noting that they are consistent with an S&P 500 trading range between 1262-1275 on the downside (roughly the March low) and 1390-1450 on the upside (near the May high), Davis threw up his hands and declared himself neutral on the market.

2) The economics of the cab business in New York.

I took a cab ride last night from the Financial District to Greenwich Village last night; I did my usual "How's business?" line with the driver, and unlike most he was willing to discuss how tough it has become for cab drivers.

Here's the economics: he pays for his own gas. He is quite proud of his Ford Escape hybrid, which he says enables him to get 33 miles to the gallon. Even then, it's an ugly situation for him. He works 12 hours a day, 5 days a week, for a total of 60 hours a week. He is currently netting about $700 a week ($11.66 an hour!). Two years ago, he was working the same amount of hours and making $900 a week ($15 an hour), so his net pay has dropped over 20 percent in the past two years. He made it clear he had not seen a dramatic drop in business; the loss is almost entirely due to higher gas prices.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 11 Jun 2008 | 2:45 PM ET

Huh?! Merrill's Moszkowski Reverses Lehman Call

Posted By: Bob Pisani

Should we laugh or cry? Merrill Lynch financial analyst Guy Moszkowski has just downgraded Lehman Brothers , ONE DAY after affirming his BUY rating and ONE WEEK after raising the stock to BUY.

Huh?

Here's what he just said in a note to clients:
"Removing Buy a week later and 10 percent lower is not easy but scale of Q2 loss and capital-raise indicate lower ROE [Return on Equity] potential and lower confidence, esp. given LEH's remaining exposures."

On June 4, with Lehman at $31 and change, Moszkowski raised his recommendation on Lehman to Buy, saying "Share correction overdone in our view."

Lehman trading at $25.19 as of this writing.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 11 Jun 2008 | 9:38 AM ET

Global Theme: Inflation Worries

Posted By: Bob Pisani

While the markets are relatively calm this morning, inflation worries are still at the top of everyone's agenda.

In China, a measure of inflation at the factory rose 8.2 percent in May, the highest in nearly four years, thanks to higher raw material costs. Inflation in Asia is a particular concern, because many countries there have very little account surpluses, heavily subsidize their citizens' fuel consumption, and import much of their food and energy. This includes Korea, the Philippines, Thailand and Vietnam.

That -- combined with a slowdown in exports -- is what has the Asian governments truly worried.

Inflation comments even seeping into analyst remarks. Today:

--Bernstein reduced the price target on Boeing , saying "The rise in oil prices during the last two months has created the risk that GDP growth will slow, which could shorten the commercial aircraft cycle."

--JPMorgan downgraded Alcoa , citing in part higher raw material costs (down 3 percent pre-open);

--Goldman Sachs lowered estimates on some of the big railroads due to higher fuel costs and lower volumes.

Elsewhere:

1) Ford has already said it would be putting off its plan to return to profitability. Now, it's assembling a plan to rapidly shift entire truck plants in the U.S. to car production, specifically some of the small cars it is producing in Europe, according to The Detroit News.

This will be real test of Ford's ability to do a rapid turnaround -- not just to simplify the product line but to introduce more fuel efficient vehicles. Rapid turnaround is not something the auto industry is not known for.

2) One of the few industries that have advanced this month is fertilizers; companies like Agrium and Potash remain near highs. On Wednesday, Agrium upped its earnings estimate for the second quarter due to strength in both its retail and wholesale business; up 8 percent pre-open.

3) Talbots affirmed its 2008 earnings forecast and said it had received a $50 million credit facility from its majority shareholder, Aeon. Up 5 percent pre-open.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 10 Jun 2008 | 4:43 PM ET

Pharmaceuticals Are Not Safe, Defensive Plays

Posted By: Bob Pisani

This was a day that started out with inflation as the new global concern:

--ECB hawkish

--Fed talking tough on inflation

--Bank of Canada did not ease, when it was expected to do so

--Inflation worries roil Vietnam, that country's stock market hits a two-year low; China's Shanghai index also hits a new low

The dollar rallied as the Fed talked tough on inflation. That hurt commodity stocks like energy and materials. Financials, which have been down 5 days in a row, staged a modest but unenthusiastic rally. Big pharmaceutical stocks like Merck, Pfizer, Sanofi,and Bristol Meyershit new lows, as the world has now discovered that these are no longer safe, defensive plays.

Everyone talking about Pfizer's huge 7.1 percent dividend yield, which gets bigger every day because the stock keeps dropping. Is it safe? The $1.28 a share dividend liability costs them about $9 billion a year; even with Lipitor going off patent in 2010, Deutsche Bank estimates they will still generate $14 b in cash flow, enough to fund the dividend, even if they have to repatriate some of the sizeable amounts of cash that are parked overseas.

But let's face it folks. There are a lot of people who own Pfizer just for the dividend, and the stock is trading like they are going to cut the dividend, cash flow or not.


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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