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Trader Talk with Bob Pisani

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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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  Tuesday, 22 Apr 2008 | 12:21 PM ET

Soaring Oil a Drag on Markets

Posted By: Bob Pisani

Stocks dropped mid-morning as oil is spiking just shy of $120 . At this point, oil is a major drag on the markets.

Speaking of stocks: we are about one-third through with first-quarter earnings, and it is not shaping up to be a great start.

So far, 143 companies are reporting, 62 percent beat estimates (about in line with historic average), 15 percent matched, 24 percent miss -- which is higher than normal.

But that doesn't really tell the real story.

So far, if you take all 143 companies together, on average companies are missing their estimates by 2.3 percent, thanks to high profile misses by General Electric , Wachovia , Bank of America , Pfizer and others.

Typically, companies as a whole BEAT by about 3 percent. True, a good part of this problem comes from financials, but still it is a stunning reversal of a pattern that has prevailed for many years.

Surprisingly, we are not seeing analysts taking down estimates aggressively for the second quarter.

I say surprisingly, because analysts have been spectacularly wrong going into the last two quarters, forced to aggressively move numbers down. They are not doing it, so far, for the second quarter. They are making modest moves to take financials earnings estimates down, and even more modest moves to take consumer discretionary (retailers) companies down as well (from 0 percent gain to down 2 percent). Is that enough? We'll see.


Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 22 Apr 2008 | 9:15 AM ET

Pisani: Hot Fertilizer

Posted By: Bob Pisani

Who said the IPO market was dead? Not if you have a hot product. Intrepid Potash (IPI) priced 30 million shares at $32 last night, and will be ringing the opening bell this morning. Was demand strong? You tell me: initial price talk was 24 million shares between $24-$26, then bumped up to 30 million shares between $27-$29, then finally priced at $32.

What's going on? You have a product -- potash -- a critical ingredient in fertilizer. Food supplies are getting scarcer, and fertilizer is one of the best ways to increase yield. So you have international demand, and somewhat constrained capacity. You can also thank demand for ethanol from corn and the need to increase yield there. (Read more about Intrepid here ).

It's amazing it took this long for another major fertilizer company to come along. Look at CF Industries -- they went public in 2005 at $16. Closed yesterday at $156.

We'll be discussing the state of the IPO market this morning at 10:50 ET on Squawk on the Street.

Elsewhere:

1) Southeast bank SunTrust missed earnings by a wide margin ($0.81 vs. $1.03 estimates). The usual suspects -- losses in real estate -- were cited, which is no surprise--they have lots of southeast real estate exposure. There was a spike in problem loans, again associated with residential construction, home equity and residential mortgages.

Traders tell me that management seems optimistic on the conference call, saying things will be better in two quarters. Much of this now depends on your view of the real estate situation in the southeast.

Down 4 percent pre-open.

2) Oppenheimer's Meredith Whitney was right--she said yesterday Citigroup would need to raise more capital, and they did--right after the bell yesterday announced an offering of $6 billion in preferred shares. Carries a dividend of 8.4 percent for 10 years and a floating rate after that. That makes roughly $36 b in capital raising Citi has done since November.

This comes after JP Morgan also raised $6 billion last week.

Speaking of capital raising--CIT raised $1 billion, half in common stock, the other half in convertible preferreds.

3) Dupont beat estimates and reaffirmed their full year guidance . It's important to realize that Dupont now gets about 25 percent of its sales from its Agricultural & Nutrition division, which includes genetically modified seed. Of course, they are most famous for their Performance Materials (polymers, about 25 percent of sales), automotive finishings and coatings (about 20 percent of sales), and safety materials like Tyvek, Kevlar, and Corian (also about 20 percent of sales.

4) McDonald's beat estimates handily, $0.81 vs. $0.70. International sales again were strong: Europe up 11.1 percent in constant currency, Asia/Pacific Middle East and Africa up 16 percent in constant currency, U.S. up 2.9 percent. Menu items, expanded hours, and the dollar all were positive factors.

A few other consumer discretionary stocks beat--Coach and Brinker. Coach reported earnings for their third quarter, affirmed guidance for the rest of the year (one quarter remaining), but declined to give guidance after that.

5) UnitedHealth Group continued the trend of earnings warnings from HMOs; they reduced 2008 guidance by 10 percent, citing unusually high influenza costs, as well as declining membership gains because prices have gone up. Down 10 percent pre-open.


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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