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Trader Talk with Bob Pisani

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  Monday, 24 Mar 2008 | 4:29 PM ET

Market Debate: Is The Tide Beginning To Turn?

Posted By: Bob Pisani

We had a broad rally, but stocks ended off the highs. That's fine. The big debate is whether or not we are at some kind of inflection point. Is the next big trade "go long techs & financials, short commodities and bonds?" It's too early to tell, but that is where the debate is centered.

There have been some important technical breakouts in the past few days that is fueling this speculation:

Dow, S&P: highs for the month
Banks: highs for the month
Home builders: 6 month highs
Gold: 5 week lows

We need a few more days to sort this out. Specifically, we need to get past the end of the quarter, which may be distorting the trends due to profit-taking and the usual hysteria. Actually, there is a greater hysteria level than usual, due to the fact that both shorts and longs have been decimated this quarter, and many are fearful of significant redemptions once clients see their quarterly returns (S&P down 8.3 percent YTD).


Questions? Comments? tradertalk@cnbc.com

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  Monday, 24 Mar 2008 | 1:48 PM ET

"Last Great Trade Cycle": Is It Over And What Lies Ahead?

Posted By: Bob Pisani

Is the "last great trade" of this cycle over? In the third quarter, the trade that worked was "short financials, go long tech." Then in the first quarter, the trade was "short the dollar, go long commodities," and "short stocks, go long bonds." These last two trades are now showing signs of unwinding.

Last week the dollar had one of its biggest rallies--and commodities one of its biggest declines--in years, and although commodities have stabilized today the psychological damage has been done.

Today, bonds are having one of the worst days in a long time as the "flight to safety" trade seems to be unwinding. The VIX, a measure of the cost of buying puts and calls for the S&P 500 and often used as a fear indicator, is at its lowest level in nearly a month.

Some will argue that the unwinding of these two trades are simply end-of-the-quarter profit taking. There may be something to this; if that is the case, then the dollar will resume its descent, and bonds and commodities will rise again in a few days. But many are betting this is unlikely, and there is a new trade emerging: "long tech and financials, short commodities and bonds."

Another trend to watch: home builders. No other group has been so shorted, so hated, and no other group has had so many trying to pick a bottom (since November--unsuccessfully!).

But something is happening here. Existing home sales for February showed the first monthly rise in a year. Inventories are still high at a 9.6 month supply, but it's the lowest since August. And prices continue to fall. Median prices are down 8.2 percent year over year. Higher sales, lower prices: that is what is needed to clean out the inventory.

As a result, stocks like Ryland and Toll are breaking out to their highest levels in six months.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 24 Mar 2008 | 11:55 AM ET

Analyst Estimates: So Just How Good Are They?

Posted By: Bob Pisani

Ever wonder how good analyst estimates are? The Street watches them all the time, because...uh, there's no other game in town when it comes to projecting estimates.

The general belief among veteran traders and stock market reporters (myself included) is that the analysts tend to overinflate the earnings estimates of the companies they cover. They do this because being excessively bearish usually guarantees little if any access to the company, and the analysts assume that being more bullish will help their company provide financial services to the company they cover.

Now, along comes a study from Penn State professors Patrick Cusatis and M. Randall Woolridge which concludes (surprise!) that "long-term EPS growth rate projections are consistently overly-optimistic." From 1984 to 2006, the analysts' average one-year per-share earnings expectations were for 13.8 percent growth; average actual growth rate was 9.8 percent.

The only time analysts under-estimate earnings growth rates is for short periods of earnings recoveries after economic recessions, and in that case they are too bearish. That, by the way, is about where we are right now.


Questions? Comments? tradertalk@cnbc.com

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  Monday, 24 Mar 2008 | 9:16 AM ET

Markets: The Good News Is Bad Quarter Will End

Posted By: Bob Pisani

The most important fact about this week is that it is the last week of a dismal quarter. Traders got annihilated in January, as the market went against both longs (in the first half of the month) and shorts (in the second half).

March was no better; we are simply trading at the lows of February and closing lows of January. The S&P 500 is down 9.5 year to date, the worst overall quarter since the third quarter of 2002, when it was down 17 percent.

So everyone has been buried, there are still lots of shorts around, plenty of cash on the sidelines, investor sentiment is low, and there are lots of concerns that many funds are and will be seeing redemptions. For that reason, there is considerable speculation that this will be an up week, that many funds have little choice but to commit money.

There is even a smattering of bullishness that has broken out, particularly since Bear Stearns was perceived to be a watershed event.

For example, former Countrywide Financial President Stanford Kurland, in conjunction with BlackRock and Highfields Capital, is today launching Private National Mortgage Acceptance Company, or PennyMac, to buy distressed mortgages. They are adopting the politically correct posture by claiming that their goal is to avoid foreclosures by restructuring the loans of struggling borrowers.

Elsewhere:

1) Tiffanyreported earnings above expectations , revenues in line. As with many international companies, international sales (up 21 percent) far outperformed the U.S. (up 4 percent). They went out of their way to say they again expected non-U.S. markets (ex-Japan) to outperform. Net earnings should increase 11 percent to 15 percent for the full year to $2.75 to $2.85 ($2.49 is analyst consensus estimate). Up 11 percent pre-open.

2) Sherwin Williams has lowered its first quarter and full year guidance, citing lower domestic sales and the "severity of raw material cost increases." Down 8 percent pre-open

3) Bear Stearns trading up 65 percent to $9.86 on reports from the New York Times that JP Morgan may up the bid to $10 a share; JP Morgan trading down fractionally.

4) CIT, after drawing on a credit facility last week to help its funding, is in talks with overseas banks to find additional funding, according to the Journal. Up 16 percent pre-open.


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 20 Mar 2008 | 4:37 PM ET

Making Money: The "Come In Every Other Day" Market Theory

Posted By: Bob Pisani

So Dow is up 400 Tuesday, down 300 on Wednesday, up almost 300 today...guys on the floor have finally figured out how to make money in this market. Come in every other day.

It started with Fannie Mae and Freddie Mac this week (both up over 50 percent for the week), but this week's rally quickly spread to financials, then finally to other large cap stocks like GE (our parent) and Wal-Mart (3 year high today.)

Dow movers this week:

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  Thursday, 20 Mar 2008 | 9:09 AM ET

Here's A Bold Analyst Call: "The Financial Crisis Is Over"

Posted By: Bob Pisani

Dollar rallying again today, up 1.7 percent since the close on Monday. The bold analyst call of the day (week, month, year?) goes to Punk Ziegel's Richard Bove, who last night titled his piece, "The Financial Crisis is Over," calling the Bear Stearns sale the watershed event, and concluded by saying "this is a once in a generation opportunity" to buy financial stocks.

FedEx beat, but by a narrow margin. Guidance for the current (4th) quarter at $1.60-$1.80 is below analyst expectations of $1.98. They see "limited earnings growth" in fiscal 2009. Down about 2 percent pre-open.

Nike reported strong numbers, well above analyst expectations. Again, growth was outside the U.S. U.S. up 5 percent, Europe up 23 percent, Asia Pacific up 27 percent. Up 5 percent pre-open.

Credit Suisse down nearly 8 percent pre-open, they say they are unlikely to be profitable in the first quarter, and took a valuation reduction in asset backed securities that resulted in a reduction of 2007 profit. After an internal probe revealed misspricings from a small number of errant traders (!).

Book news:

a) Barnes and Noble beat, revenues in line. Guidance was good.

b) Borders Group has suspended its dividendand hired JP Morgan and Merrill to explore options. The problem? They can't raise capital because of the credit crunch, and (in hindsight) the decision to go heavy into music a few years ago was not the right one. Book sales up 3.2 percent for the quarter, but music sales were down 14.2 percent. Up 20 percent pre-open on belief a sale is likely.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 19 Mar 2008 | 4:14 PM ET

Commodities Eating Up Market's Gains

Posted By: Bob Pisani

The Dow has given up more than half of yesterday's gain, but much of this is due to the commodities rout. The dollar has been rallying two days, giving some hope to those who believe that the dollar's seven year decline is coming to and end.

This is a pretty slim hope, but if you look at the Dow, forty percent of the decline is due to the decline in the Dow's four commodity stocks: Chevron,ExxonMobil,DuPont, and Alcoa.

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  Wednesday, 19 Mar 2008 | 1:02 PM ET

Is It Sell In The Rally Time?

Posted By: Bob Pisani

It’s the time of the day for the shorts to press their case. Remember, sell the rally is the only consistent trading methodology that has worked in the past six months. It’s natural we should see some pressure today.

Most traders would be happy to see the Dow down 100 points and would consider that a good test. The quadruple witching expiration makes predicting a close a near impossible task. Volume is heavy, approaching 1 b shares. Financials have led the rally in the past day and a half.

Financials roar back (since Monday close):

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  Wednesday, 19 Mar 2008 | 9:39 AM ET

Market Rally: Trustworthy Or Not?

Posted By: Bob Pisani

So what matters here is the answer to one question: can we trust a rally? We haven't been able to so far; you can bet some money will try sell into it, as they have for months.

So skepticism is in order. Bulls argue that after events on the weekend, when the fed acted aggressively to help sell Bear Stearns and stabilize the markets, there's a greater sense of confidence that the Fed is getting creative in trying to deal with this credit crises. There's also a double bottom on the major indices, which soothes the nerves of technicians.

The biggest help short term will likely be the quadruple witching expiration tomorrow; the Street has been net short the market for months and the remains a lot of trapped shorts in the market. This is part of the reason we are seeing this morning's sharp 15-point rally in the futures, which occurred in the forty minutes.

The other major factor is Fannie Mae and Freddie Mac , which have won the capital relief that will allow them to buy more mortgages. VISAsuccessfully pricing the largest U.S. IPO in history is also helping.


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 19 Mar 2008 | 9:10 AM ET

Fannie And Freddie: What Capital Relief Would Mean

Posted By: Bob Pisani

There are reports this morning that Fannie Mae has won the capital relief some have asked for. At 9 am OFHEO (Office of Federal Housing Enterprise Oversight--Fannie's regulator) has scheduled a conference call to discuss alleviating some of the capital constraints on Fannie and Freddie.

This is not going to solve the central problem--credit deterioration, which will continue to pressure earnings and capital, but it will make it easier for Fannie and Freddie to expand their purchasing of mortgages. The good news is that the spread between mortgage backed securities and Treasuries is finally starting to narrow.

Fannie Mae stock up 3 percent pre-open and 50 percent since bottoming on March 17.

Visa priced the largest IPO in history, pricing at 406 m shares at $44 ($37-$42 was the expected range) raising nearly $18 billion. Trading under the symbol "V." As for everyone who thought that Mastercard would be sold off to buy Visa...uh, no. Deutsche Bank said it best this morning: "The historic offering vastly improves the visibility, liquidity, and overall importance of the payments space. We think most investors came away from their work on Visa convinced that both names should be core holdings."

Morgan Stanley reported $1.45 vs. $1.03 expected, revenues also far higher than expected, up 7 percent pre-open.

Fixed income sales and trading revenues were $2.9 b, the second highest quarter ever, despite writedowns from mortgage prop trading of $1.2 b (!). Up 5 percent pre-open.

General Millsreported earnings of $0.87 vs. $0.79 expected; they reaffirmed their full year guidance.

Good news: the average 30 year mortgage rate fell to 5.98 percent from 6.36 percent last week. Bad news: mortgage applications have fallen to the lowest level of the year.


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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