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Trader Talk with Bob Pisani

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  Monday, 31 Mar 2008 | 9:08 AM ET

Paulson Proposal A Bit "Mind-Less" For Markets

Posted By: Bob Pisani

In theory, Treasury Secretary Paulson's announcement that he wants to shake up the regulatory environment on Wall Street is the main news.

Lehman's Roger Freeman noted that the new rules, which include a proposed merger of the SEC and the Commodities Futures Trading Commission, would benefit the NYSE and NASDAQ, "as the proposal calls for a simpler SRO [Self-Regulatory Organization] rule-making process among other things, which should make these exchanges more competitive." It would also likely increase trading volumes.

In reality, traders' minds are not focused on this proposal--it will not come to fruition for a long time; implementation is far away, and the second quarter is very, very close. Traders are concerned that bulls have been wrong about the first quarter--that it is not the bottom, not for the economic news and possibly not for the credit crisis.

Analysts have been taking down estimates for the first quarter for weeks, for everything from retailers to financials to oil refiners.

Earnings estimates for the S&P 500 are already negative for the second quarter (-1.8 percent); financials estimates are already down over 30 percent. There are new calls that the second quarter will be the bottom. Skepticism is very high now; this is good news, as it is well known that there are large amounts of cash on the sideline.

Elsewhere:

1) Schering-Plough down 22 percent (!) and Merck down 13 percent pre-open on a study that showed that the companies cholesterol lowering drugs Vytorin and Zetia were not more effective than less expensive drugs. Vytorin (which is a combination of Merck's Zocor and Schering's Zetia) is a big money-maker for Schering, accounting for 60 percent of its EPS.

2) Driller Noble up 4 percent on word it has signed a memorandum of understanding with Brazil's Petrobras for deepwater drilling rigs--the contracts are worth up to $4 billion.

2) Philip Morris International finally begins trading today under the ticker PM. The international business is growing much faster than the domestic tobacco business; Philip Morris USA will remain part of Altria Group.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 28 Mar 2008 | 4:47 PM ET

After Tough Week, Street Looks to Q2

Posted By: Bob Pisani

By any stretch, it’s been a tough week for bulls: dismal economic news; no sign of a bottom in housing; financials have been unstable; and retailers have declined on concerns that not just March, but the second quarter, will be difficult.

Still, the markets held up well, considering the news. The Dow was down 1.1 percent, the Nasdaq eked out a small gain.

The issues are now around the second quarter. Has the Street factored in:

-Q2 economic weakness?

-Q2 writedowns for brokers & builders?

-Q2 consumer spending deterioration?

Given the miserable economic data this week, next week's raft of data is unlikely to surprise on the upside:

1) The ISM survey on Tuesday may be below expectations, certainly below 50 (which would indicate continuing contraction in manufacturing).

2) Domestic auto sales on Tuesday will be restrained by tighter credit conditions and the economic slowdown.

3) Nonfarm payrolls on Friday will likely indicate that the weakness in February has continued into March.

But once again, there is some good news:

1) Analysts are actively taking down estimates for the first quarter and are starting to look at the second quarter; this is the major reason the markets are having trouble advancing.

2) There is some hope that, if redemptions are not as bad as feared, we may get a modest rally at the start of the quarter as cash on the sidelines come back in.

The Street can now clearly see that, even if liquidity issues are being addressed, the broader economic statistics continue to look poor; the quicker it digests this news, the better.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 28 Mar 2008 | 1:20 PM ET

Retail Debate: Is The Worst Over Or Not?

Posted By: Bob Pisani

So plenty of debate on the retailers as JC Penneylowers estimates. The crux of the debate is, is this the worst for the year?

Lehman Brothers thinks so, in a note to clients a short while ago they said: "we are optimistic that 1Q08 represents the low point of the year as we expect inventory levels to improve throughout 2008."

But that is hotly debated. Management itself seems to be hinting that it expects this difficult environment to continue into the rest of 2008.

Credit Suisse agrees. This morning they said, "Today's announcement is in our view a clear sign of tremendous pressure and deceleration in department store business in March across the board. Early signs from several of JCPenney's competitors indicate a similarly tough March, with sales trends decelerating materially even from January and February levels."

They concluded, "We would not be interested in buying department store stocks until they are completely washed out and investors have fully factored in down earnings year-over-year in 2008 and at best flat year-over-year 2009 earnings."

Doesn't sound like a bottom to me, but remember these stocks are already down 20-25 percent from their highs, and much of this information has already been discounted. The risk here is that Q2 numbers deteriorate in the same way Q1 has.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 28 Mar 2008 | 10:50 AM ET

Street Fear: Q1 Bank Earns, Dividend Cuts

Posted By: Bob Pisani

I said yesterday that the Street was already talking about first-quarter bank earnings, and specifically about who might cut their dividends.

Today, Meredith Whitney at Oppenheimer argued the same point : With a current average yield of 5.9 percent (the second highest of any year since 1990) the banks "are dangerously approaching earnings levels that simply will not support such high relative payouts."

As an example, she points to Citigroup .

She estimates Citigroup will earn $1.43 per share SHORT of its dividend payment this year. In other words, Citi will pay out $1.43 per share more than it earns this year. That is clearly untenable, and while they are attempting to sell assets, they are not going to use those sales to continue to pay dividends.

She expects Citi, Wachovia Bank and others to announce dividend cuts in April.


Questions? Comments? tradertalk@cnbc.com

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  Friday, 28 Mar 2008 | 9:12 AM ET

Bear Stearns' Jimmy Cayne: Stock Sale "Bad Timing"

Posted By: Bob Pisani

The talk today is not about stocks but about Jimmy Cayne selling his Bear Stearns stock for $60 million.

Yes, he sold it for only $10 and change, far below the $175 peak and its $57 price just a few weeks ago, but don't kid yourself. This was bad timing. One trader wrote to me: "If you are a blue collar worker in Pennsylvania or Ohio in fear for your job or your livelihood you don’t give a tinker's damn if he sold for $10 or $170 and you don't view $60 million profit in one day as a bad day..."

He may be right. When you hear Hank Paulson talking about regulation of investment banks, you know the regulation train is coming to town. And it will hit when Congress returns next week. And, as several traders have already pointed out, Jimmy Cayne...who has also moved from Park Avenue to the Plaza...will likely be the poster boy. It doesn't mean the Bear deal won't get done, but expect a lot of rhetoric.

Elsewhere:

1) Futures weakened as JC Penneyslashed its guidance for the quarter to $0.50 (from $075 to $0.80); sales for Easter were well below expectations. CEO Mike Ullman III noted that "consumer confidence is at a multi-year low." Down 12 percent pre-open.

This is going to revive the central bear thesis on the stock market: a) that estimates for retailers and other consumer companies are too high, and b) that consumer balance sheets are damaged and the Fed can't simply wave a magic wand and fix it. Macy's ,Kohls down about 5 percent. Bulls argue that retailers have already corrected more than 20 percent.

2) Like Lennar ,KB Home reported a loss . The comments are very similar to Lennar's remarks yesterday: "Until prices stabilize and consumer confidence returns, we believe inventory levels will remain significantly out of balance with demand. We do not anticipate meaningful improvement in these conditions in the near term..."

Steelcase , the world's largest manufacturer of office furniture, missed and guided below expectations for the first quarter. They too complained about inflationary pressures.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 27 Mar 2008 | 4:16 PM ET

Traders Want To Believe Worst Is About Over, But...

Posted By: Bob Pisani

Despite strong economic reports early on (both the weekly jobless claims and Personal Consumption Expenditures came in below expectations), the major indices ended on their lows for the day and the week.

Oil hit $108 intraday, but shortly after that energy stocks showed signs of exhaustion as even market leaders like Apache ended in the red for the day.

Financial stocks have sold off two days in a row and given up a part of last week's gains; Lehman and Merrill Lynch were weak on reports of strong option activity--Lehman told reporters midday that rumors about the company were "totally unfounded."

Many traders have told me that people badly want to believe we are in the 8th inning of this whole thing but we don seem to be. I think until we see these first quarter earnings, between April 10 and 20th, we are likely to be in a range-bound environment.

Techs, which also were strong last week, were down today on some disappointment with Oracle's revenues.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 27 Mar 2008 | 12:08 PM ET

The Weak Link Mid-Day? Financials

Posted By: Bob Pisani

1) Financials are again the weak link today, as all the gains of last week are now essentially gone.

Weakness in Lehman, as well as a continuing campaign by Oppenheimer analyst Meredith Whitney to take down bank estimates (today she did it for Merrill and UBS, but she has already cut estimates for most other banks earlier in the week) are weighing on financials.

But the big debate on the Street is not about bank earnings, it's about bank DIVIDENDS. The Treasury Department is clearly signalling that banks should cut dividends to preserve capital, but with huge dividend yields (Wachovia at 9.1 percent, National City 7.3 percent, Comerica 7.1 percent, KeyCorp at 6.6 percent--you get the point), that is not an attractive option for many banks.

There are obvious reasons cutting the dividend may be the preferred way to increase capital: there's less risk of having to raise common equity at depressed levels, and it's cheaper than raising debt.

On the other hand, there is fear that stock prices will drop even more as dividend-sensitive investors flee, and some funds that specialize in high-yield investments may even have to sell the stocks, depending on how severe the cuts are.

2) How bad is the current home price decline? Not as bad as it has been in the past.

According to UBS, home prices have declined nationwide about 10 percent, but during the Great Depression, it was down 28.5 percent. The big question is, have we hit bottom? Looking at two severe regional housing recessions (one in the "oil-patch" states in the mid-'80s and the other in California and the Northeast from the late '80s to the early '90s), it took five years or more to bottom. UBS says that the banks most likely to cut dividends include National City, Washington Mutual , and Regions Financial .

3) Is the run of money coming out of mutual funds and ETFs finally ending? $9.3 billion went into all equity funds in the last three days, the most three-day inflow in a long time (at least since October, according to Charles Lieberman at TrimTabs).


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 27 Mar 2008 | 9:05 AM ET

U.S. Treasurys Not Such A Hot Commodity Any More?

Posted By: Bob Pisani

Futures jumped about 6 points as both weekly jobless claims and Personal Consumption Expenditures (PCE, an indicator of the average increase in prices for domestic consumption), came in a bit below expectations. The dollar rallied on the PCE news (lower inflation is dollar-positive).

Start of a trend? South Korea's National Pension Service says it will no longer buy U.S. Treasurys; they cite falling yields and a desire to broaden their investments. They are the world's fifth largest pension fund, with $220 b in asets; they hold $14 b in U.S. government debt. It's not the size of their holdings (relatively small compared to the nearly $5 trillion in U.S. debt), the concern is that it may be the start of a trend.

The Fed's Term Lending Facility auction debuts today. Wall Street will have a chance to exchange mortgage assets for up to $75 b of government securities.

The Chicago Mercantile Exchange is raising corn and soybean margins by 50 percent and 30 percent respectively; this should chase out at least some of the speculative interest in these grains, though it will also hurt hedgers as well.

Earnings:

1) Conagrabeat for its third quarter and guided earnings above estimates for the remainder of the year, 2009 guidance of "at least $1.55" is close to analyst estimates of $1.61. up 8 percent pre-open. They are selling their commodity trading operations.

2) Home builder Lennarreported a loss, though it was less than expected. Revenues were more than 60 percent below last year. CEO Stuart Miller said, "the pace of overall housing industry growth is exceeding absorption at the current time."

3) Williams-Sonoma earnings were slightly above expectations, but their guidance was very weak; down 6 percent pre-open. The company says "we are expecting the home furnishings industry to be increasingly challenging in 2008."


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 26 Mar 2008 | 3:51 PM ET

Housing's Silver Lining: Affordability and Interest Rates

Posted By: Bob Pisani

A silver lining in housing? The New Home Sales was a disappointment this morning . Even though sales were a bit higher than expected, the inventory of unsold homes remained unchanged with Jan at 9.8 months supply, a bit disappointing.

But there is not all bad news out there in housing. Consider two points

1) The National Association of Realtor's Housing Affordability Index has been quietly moving up for months, since bottoming in July of last year. Thanks to a decline in mortgage rates and prices, the composite index stands at 130.3, which means that a family earning the median family income had 130.3 percent of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home in January 2007. It was as low as 103.6 last July, and has been going up every month since then. The next release is tomorrow, for February; given the rates went down in February, I anticipate it will drop again.

2) Speaking of mortgage rates: they have dropped to their lowest levels since early February. As a result, refinancing applications rose 82 percent and purchases rose 10.6 percent, both to the highest levels also since early February.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 26 Mar 2008 | 1:51 PM ET

Stock Reversal Week: Financials Down, Commodities Up

Posted By: Bob Pisani

Well, you knew it would happen--"sell the rally," except this time it's come a few days after the rally. The dollar is getting hit again as the ECB has make it clear they are unlikely to lower interest rates.

So what was working last week (financials, builders), is reversing this week, and last week's debacle (commodity stocks) is moving up this week.

Of course, sell on the rally always starts with the weakest links--financials, many of which are down 3-6 percent today. Citi down 5 percent as Meredith Whitney at Oppenheimer took her numbers down.

As for home builders,

New Home Sales was a bit better than expected

(590,000 vs. 570,000), but not much. Still the lowest reading since March 1995. The inventory of unsold homes remained unchanged with Jan at 9.8 months supply, a bit disappointing.

And retailers--which also had a great week last week--are also selling, with Nordstrom , JC Penney , and Kohls down 3-5 percent.

Energy stocks have been sneaking up all week and accelerated this morning as the weekly oil inventories showed less of a buildup of crude than expected.

Not surprisingly, with oil approaching $105 airlines are getting killed again.

Any good news, Bob? Well, we are approaching the end of the quarter. There is considerable chatter that funds have raised a significant amount of cash for fear of redemptions. There is some evidence that redemptions to date may not have been as strong as some feared. If that is the case, it means there is a significant amount of cash on the sidelines that could come in after the quarter ends, providing traders believe there is value in the market.


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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