Trader Talk with Bob Pisani


  Tuesday, 29 Apr 2008 | 4:51 PM ET

Smart Money Leaving Commodities for Tech?

Posted By: Bob Pisani

Is this the beginning of a rotation in the stock market? There's debate about this, but there are signs that some smart money is positioning themselves for a rotation out of commodities -- and into tech.

This has been spurred by concern that the Fed will begin sounding more hawkish on inflation tomorrow. This (along with some signs that inflation is moderating in Europe) is giving a modest boost to the dollar in the last week.

The result: Money has been quietly coming out of commodity stocks like gold and metals -- but even out of agricultural stocks, despite stellar earnings.

At the same time, classic tech momentum stocks like Google, Baidu.com, Research in Motion, and Apple have broken out to multi-month highs.

Are the fundamentals for commodities falling apart? No. Demand for gold remains strong. Ol is at 116.. potash is contracting at $1000 a metric ton. Steel prices remain firm. Iron ore prices are rising. But the commodity/commodity stock trade is very long in the tooth (materials stocks are up over 100 percent in the past five years), and it is, as traders say, a very crowded long.

Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 29 Apr 2008 | 9:17 AM ET

Inflation Complaints Rise, But Credit Card Earnings Boom

Posted By: Bob Pisani

European bourses are lower today as European banks are continuing to report poor earnings--this morning Deutsche Bank reported its first loss in five years, abandoned its 2008 profit targets and wrote down over $4 b in mortgage-related assets. Allianzalso said that their profit targets would be harder to attain.

Spain's biggest bank, Santander, did much better, but only because Spanish regulations prevent their banks from holding the riskier assets their northern cousins held.

In the U.S., bonds are opening higher, stocks lower, and the modest rally in the dollar continues.


1) Inflation complaints are everywhere:

a) Paper company Temple Inland said pricing was not keeping up with inflation. Average prices for recycled fibers was up 21 percent from last year.

b) The inflation Domino's Pizza complained about cost inflation and soft domestic sales. They say they are implementing "pricing strategies to attract lower-ticket customer customers, a segment we've left behind in the recent past, as we dramatically increased our prices." Uh, not to be sarcastic, but isn't pizza a lower-ticket item by definition?

2) Many companies complained of slower conditions:

a) Example: Office Depot . Florida and California notably weak, but even outside those states there was also a deterioration. Still, they beat by a wide margin. North American retail sales were down 7 percent, and the North American Business Solutions Division was down 5 percent, but International was up 6 percent (tired of this "North American weak, International strong story yet? It's happening with all the international companies). Up 7 percent pre-open.

3) Credit cards earnings are simply outstanding.

Visa beat, their numbers were strong by any metric you would care to look at. Many analysts raising estimates.

Here's an important point: management said there was no deceleration in transaction or payment volume growth, even though consumer spending is clearly slowing. What does that mean? It's an indication that credit cards as a payment method are clearly winning out over cash and checks. More people are using them, so volume is still growing even though overall consumer spending is slowing. Get that?

Visa is trading down fractionally. Why? Some are whining that the second half operating margin guidance is a bit weak. The real reason it is down is that fast money is taking some profits after a two-week tear that saw the stock go from $65 to $75.

Mastercard was even better. They beat earnings estimates by 30 percent; it's up 10 percent pre-open. Strong growth overseas.

4) Corning beat, the CEO said demand for LCD TV sales was still up compared to a year ago and saw no evidence of an inventory buildup. Guidance above estimates. Up 4 percent.

Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Apr 2008 | 1:36 PM ET

Newspaper Headline: Circulation Fall Worse Than Expected

Posted By: Bob Pisani

The newspaper industry's twice-yearly circulation report has arrived, and it is not a pretty picture overall. There was expectation that total circulation could drop 2.5 percent, and perhaps as much as 3.5 percent.

It was worse. At the nearly 550 papers that reported comparable figures, circulation was down 3.6 percent. At the New York Times, the third-largest paper by circulation, sales were down 3.9 percent, but it was worse elsewhere: The Atlanta Journal-Constitution, for example, was down 8.5 percent.

It was not all bad news. USA Today was up 0.3 percent, Wall Street Journal up 0.4 percent. But newspaper sales have been declining since the 1980s, and has accelerated in recent years. The average age of a newspaper reader (hard copy) is now about 60.

Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Apr 2008 | 1:31 PM ET

Is Everyone Comfortable With Fed Cuts Closing?

Posted By: Bob Pisani

What's up with the Fed this week? They will almost certainly cut rates a quarter point and signal that the period of cutting rates is coming to a close. The bond market believes this; look what happened to yields on the 2-year note last week.

The currency market thinks there might be something to this: the dollar's decline has stopped, and indeed the dollar may be notably undervalued here, particularly if the modest slowdown in Europe accelerates and the ECB is forced to cut rates.

What's interesting is the equity market response; stock traders seem comfortable with the idea that the Fed is stepping away. They are frightened by $120 oil and rapidly rising grain and plastic prices, putting pressure on two important industries.

What else will they do? Will they reduce the TSLF (term securities lending facility)? That’s the weekly loan facility that offers treasury securities for a one month loan against other collateral. Demand has not been as strong as some anticipated –the Fed certainly don't want dealers to think this program is a permanent source of funding.

Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Apr 2008 | 11:33 AM ET

S&P May Have "Forecast" To Beat Market Storms

Posted By: Bob Pisani

Has S&P improved ability to weather cyclical risks? David Bianco at UBS and others think so.

I have remarked many times that with many non-financial S&P companies receiving 50 percent and more from overseas, their earnings have remained relatively strong. Non-financial earnings growth in the first quarter is about 10 percent, a typical performance is up 6-8 percent.

One question is how much of the growth was due to currency gains, vs. organic growth. This is tough to figure out, since many companies do not provide the data. S&P itself does not know, but a reasonable guess is it could be 1-2 percent of that 10 percent performance.

Questions? Comments? tradertalk@cnbc.com

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  Monday, 28 Apr 2008 | 9:18 AM ET

Monday Mergers: Continental (No) Wrigley (Yes)

Posted By: Bob Pisani

European bourses are advancing again today; the FTSE, like the Dow, finally broke through to its highest levels since January; same with France's CAC 40. The Euro is down slightly, even though German consumer confidence rose to the highest since Oct '07.


1) Continental surprised a lot of people by abandoning merger talks with United .

Potential winners:

a) AMR , since a Continental/United would have been bad for AMR.

b) US Air , since it makes a deal with United more likely.

Potential losers:

a) United . Continental was their best merger partner. Credit Suisse was even more blunt: they believe UAL's standalone plan "is not viable." Now they’re down to talking to US Air.

Not clear if this is good or bad for the Delta/Northwest merger; it might be good, since one less merger happening makes government approval more likely.

From what I've heard, demand for summer travel seems to be quite strong, though there are worries about the fall.

2) Wrigley agreed to a merger with Mars for about $23 billion , $80 a share in cash (closed at $62.45 Friday). Hershey's also up 6 percent pre-open.

3) Tracinda announcing a tender offer for 20 million shares of Ford (less than 1 percent of shares outstanding) at $8.50 a share. That's a roughly 13 percent premium. Kerkorian already owns a 4.7 percent position in the company. Ford's stock rose 0.7 percent last week on better than expected earnings. Ford up 8 percent pre-open.

4) Now that's inflation: Tyson reported a loss of 2 cents (gain of 1 cent expected); chicken segment had losses due to higher grain costs. How much higher? For the year, they expect to pay an additional $600 million for corn and soybean meal. Throw in cooking oil increases and a few other costs, and increases will approach $1 b.

Rebate checks are finally going out, but with gasoline near $3.50 a gallon, it's not clear how much impact it's going to have.

Questions? Comments? tradertalk@cnbc.com

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  Friday, 25 Apr 2008 | 9:01 AM ET

Stocks Need A "Mild Push"

Posted By: Bob Pisani

The good news: yesterday's volume was about the heaviest we have had all month, and the selloff in energy and materials was long overdue. The rotation into financials was much more debated, however. The skeptics asked, has the systemic risk of owning financials really been reduced thanks to all the capital raising and writedowns?

Also, note that the S&P gave up nearly half its gains in the last hour, and more importantly could not crack the old February highs.

So we need some mild push here--dollar continues to strengthen, bonds weaken, and a modestly positive day for stocks.


1) AmEx up about 4 percent as they beat, but again there was slower spending growth in the U.S., up 8 percent, but excellent strength in international, up 21 percent. Management reaffirmed its EPS expectations for 2008 of 4-6 percent growth over 2007. However, loan growth slowed, and loan loss reserves rose because there was an increase in delinquencies and write-offs. So even though it was a good report, most of the commentary is fairly cautious and nobody is raising guidance.

2) Speaking of international, Goodyear Tire beat, and here too international shined: North American sales decreased 1 percent, while Europe, Middle East and Africa hit a record, increasing 16 percent; Latin America also clocked record sales, up 29 percent. Up about 6 percent pre-open.

Questions? Comments? tradertalk@cnbc.com

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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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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.


  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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