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Trader Talk with Bob Pisani

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  Wednesday, 19 Mar 2014 | 12:18 PM ET

Traders worried about change in Fed's guidance

Posted By: Bob Pisani
Pisani's market check: Fed short-term impact
CNBC's Bob Pisani reports on concerns of traders ahead of Fed Chair Janet Yellen's potential shift in forward guidance.

Interest-rate sensitive groups have done pretty well this year.... The Utilities Sector is the second biggest sector gainer on the year, up over sever percent, REITs are also up big, nearly 10 percent, high-yield bond ETFs are having a respectable year, up over one percent, and even Treasury ETFs like the IEF (7-10 year Treasuries) are up 2.9 percent.

Traders are concerned that the Fed will change the forward guidance language, de-emphasizing the 6.5 percent unemployment threshold...and will inject other metrics: Labor demand, weekly wages and inflation.

All that will provide a broader, more qualitative flavor to the Fed's decision-making process on raising rates, but it carries a risk.

The decision-making process will also be more opaque, it will be more difficult to decide when they are going to move.

The concern is the markets will be confused by this initial guidance, and rates might initially rise...particularly on the shorter end of the yield curve, like the two-, three- or five-year Treasuries.

Remember, the ideal situation would be for a gradual steepening of the yield curve, with the front end gently moving lower and the back end gently moving higher.

The Fed wants to keep market expectations of when the next rate hike will come pinned to the back half of 2015...it doesn't help them if rates start to steepen in the short end of the curve suddenly.

Of course, down the road that may be a difficult task to accomplish, particularly if the economy picks up and the velocity of money increases. But they could make it worse by a confusing statement.

»Read more
  Wednesday, 19 Mar 2014 | 10:22 AM ET

Take cover! The dam is breaking on IPO flood

Posted By: Bob Pisani
NYSE trader
Getty Images
NYSE trader

We could move quickly to fresh historic highs (1878.04 was the S&P 500 Index's closing historic high on March 7th) if there is no violence in the Crimea, and particularly if Federal Reserve Chair Janet Yellen emphasizes that there will be no early rise in the Fed funds rate. Yellen is also widely expected to reduce its unemployment target lower, to 6 percent from 6.5 percent.

But the conviction level is not high. Volume has been abysmal, among the lowest of the year. Also, bear in mind that despite all the euphoria in the last two days, the S&P 500 is essentially unchanged on the year (OK, we're up one percent to be exact, but you get the point). At the end of the first quarter of last year, the S&P was up 10 percent.

»Read more
  Tuesday, 18 Mar 2014 | 10:39 AM ET

How to kill high-frequency trading

Posted By: Bob Pisani
Brendan Bannon | Bloomberg | Getty Images

I just want part of the country: S&P futures, which had been down all morning, spiked over 10 points just prior to 8 a.m. ET, as Vladimir Putin said speculation that Russia wants more than just Crimea is incorrect.

It didn't move futures, but February Housing Starts were slightly better than expected, and there were significant upward revisions (909,000 from 880,000) in January.

Elsewhere:

Alibaba confirmed it is listing in New York, not Hong Kong. This is a huge win for the U.S., but it's not necessarily the kind of win we want. The U.S. won because the other guy (Hong Kong) decided it didn't want to play ball. They beat themselves by not being flexible. Hong Kong does not like the partnership structure that Alibaba has; they want "one shareholder, one vote." Here a small group of shareholders can effectively control the board. Here you can also have super-voting shares of stock that allow effective control with a small group of people.

(Read more: Alibaba picks US for IPO)

New York Attorney General Eric Schneiderman, in a speech this morning, has taken aim at high-frequency traders. In his speech, he notes that his office was instrumental in getting Thomson Reuters to stop allowing high frequency and other traders to pay a premium for a two-second advance look at consumer sentiment numbers. Mr. Schneiderman also notes that his office was instrumental in getting Business Wire and Market wired to stop selling information directly to high-frequency firms, which allowed them to get information a split second earlier than investors relying on news sources like Bloomberg or Dow Jones.

Mr. Schneiderman is now focusing in on colocation, which allows any subscriber to locate its computer services within the exchanges' data centers. Mr. Schneiderman claims this gives them an unfair advantage.

(Read more: New York attorney general calls for curbs on traders)

Here's a question: How many traders have access to these colocation services? Do pension funds? Do mutual funds? I think a review would find that most firms--including the firms that cater to discount brokers like Charles Schwab and TD Ameritrade--are colocated.

Mr. Schneiderman also says this is forcing many traders into dark pools to conceal their orders.

But he is very short on specifics on what he wants. He supports proposals to put a "speed bump" in place, which would prioritize price over speed.

I'm all in favor of price over speed--it's a principal of modern trading, after all, but a "speed bump" will not do anything. If you put in a rule that says, for example, that everyone has to wait one second between the time a trade is entered and the time it is executed, than a machine that can execute a trade after one second in, say 25 microseconds will still have an advantage over a human, even with the speed bump.

Isn't that obvious? If you really want to kill or cripple high-frequency trading, here are two suggestions:

  1. Institute a "cancellation tax" for anyone putting in excessive bids and offers, that seem designed to "fake out" the competition, or
  2. Eliminate payment for order flow, wherein exchanges pay traders to "make" liquidity (post bids and offers) and charge traders who "take" liquidity (those who hit the bids and offers).

It might seem right to institute a "cancellation tax" but the devil is in the details, in determining just how many bids and offers constitute some kind of market abuse.

As for payment for order flow, many high-frequency traders rely on the rebates they get from posting bids and offers as a crucial part of their business model. Without the modest "extra" they get from the rebates, many strategies become unprofitable.

Payment for order flow is a cornerstone of the modern market; it has been around for more than a decade. Everyone gets paid or charged: When you put an order in through TD Ameritrade or Schwab or any discount broker, that broker is "selling" the order flow to a firm like Knight Capital or UBS or Citigroup that takes all those orders and "internalizes" them. Simply put, they try to match those orders against others they have in their inventory. It only goes to the exchanges if there is no internal match.

That's why you can make a trade for only $7.99 with a discount broker: Someone is subsidizing that trade for you.

Jeff Sprecher, CEO of IntercontinentalExchange, which owns the NYSE, has said he would like to see a debate on why we need payment for order flow.

I welcome that debate, but Mr. Sprecher is facing very entrenched interests on all sides.

But be very careful what you wish for. Both of these proposals I've made come with an obvious disadvantage: They would both likely dramatically cut trading volumes. Would this matter? Would it increase, not decrease, volatility? Would it cause more harm than good? That is debatable. But it would certainly change the dynamic of trading.

Hertz Global (HTZ) reported earnings and revenues below expectations, and gave 2014 earnings guidance well below expectations: $1.70-$2.00 versus $2.07 consensus. Revenue guidance of $11.4 to $11.7, however, is within consensus of $11.6 billion.

»Read more
  Friday, 14 Mar 2014 | 9:57 AM ET

Battered market limps to end of ugly week

Posted By: Bob Pisani
Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

With grim headlines from Ukraine and China, a bad week for major global indexes is finally coming to an end.

Japan's Nikkei is down 3.3 percent (now down 12 percent for the year, the worst showing among Asian bourses), most European bourses are down one to two percent. Russia slid 3.1 percent on Friday alone, and is now 27 percent for the year.

Germany is down fractionally, but the DAX is down 4.1 percent for the week, close to its biggest weekly fall in nearly two years.

All told, it's been a rough week as well for emerging markets: Moscow's benchmark index has swooned 9.4 percent, and China has fallen 2.6 percent. There are reports of large withdrawals from China exchange traded funds (ETFs) this week. Other emerging market countries like Chile and South Africa are also down mid single-digits.

»Read more
  Thursday, 13 Mar 2014 | 4:37 PM ET

Ugly day for the stock market, but no panic

Posted By: Bob Pisani
Traders on the floor of the New York Stock Exchange.
Getty Images
Traders on the floor of the New York Stock Exchange.

An ugly day for the markets, which were battered by events outside the U.S....in China, in the Ukraine and in Germany.

We saw:

  1. Poor economic news in China, where industrial production and retail sales were both weaker-than-expected in February, confirming China is slowing;
  2. rising tensions in Ukraine, where the acting president there said he saw a risk of war with Russia and there were reports that Russia fired on a Ukrainian plane over Crimea; and
  3. strongly-worded comments from German Chancellor Angela Merkel to the German Parliament in whichs he warned of a "catastrophe" unless Russia backed down, saying it would change the European Union's relationship with Russia.


That affected Europe--the German stock market is now at a three-month low. It's been an ugly five days.

One key is to understand what happens when China weakens and its impact on the yen carry trade, where investors borrow cheap yen and invest in other assets around the world. When China weakens:

  1. Investors repatriate foreign investments
  2. Japanese, U.S. money comes home
  3. Those borrowing yen have to cover
  4. Traders buy yen, sell stocks


And that's exactly what happened: The yen strengthened, and stocks slumped. You can see this in the very heavy volume of the Wisdomtree Japan Hedged Equity ETF (DXJ), a basket of Japanese stocks that hedges out the effects of the yen, which has been down three percent all day and will close with roughly 10 million shares changing hands, roughly 50 percent more than normal.

Still, if you are looking for obvious signs of panic, it's hard to see. First, the NYSE consolidated tape volume (all trading in all NYSE stocks) was roughly 3.6 billion shares, in line with the average for the year.

Second, while the Volatility Index (VIX) did pop up to the highest levels since the beginning of the month, a level of 16 on the VIX is still not very high...in fact, it was over 20 just five weeks ago. Over twenty is my typical threshold for paying attention to the VIX.

We did see slightly higher volume in the SPDR S&P 500 ETF (SPY) and the iShares Russell 2000 ETF (IWM), which are the two ETFs most widely used by traders, but not so much as to raise eyebrows.

Finally, while it was indeed an ugly day, bear in mind that the S&P 500 is still less than two percent below its all-time highs.

»Read more
  Thursday, 13 Mar 2014 | 1:24 PM ET

Alibaba IPO listing has New York traders buzzing

Posted By: Bob Pisani
Alibaba.com's headquarters in Hangzhou, Zhejiang Province, China
Nelson Ching | Bloomberg | Getty Images
Alibaba.com's headquarters in Hangzhou, Zhejiang Province, China

The Financial Times says that Chinese e-commerce site Alibaba was "95 percent certain" they would list in the U.S.

That leaves Hong Kong out in the cold on what may be the biggest IPO of the year and New York very much in.

What we don't know is which exchange it might list on. The NYSE and NASDAQ have "no comment" on an Alibaba listing.

Why not a Hong Kong listing? After all, the company is based in Hangzhou on the Chinese coast...the reason is Alibaba is in a dispute with the Hong Kong Stock Exchange over its partnership structure.

The shareholder structure it is proposing would allow a group of top managers and founders to nominate and control the board. It also apparently wants to continue to control the company after it goes public, even if it currently only controls 13 percent of the company's shares. That, apparently, runs afoul of Hong Kong securities laws.

Is this a problem in the U.S.? No. The U.S. allows owners and founders to effectively control companies, most often by issuing super voting classes of stock. Most media companies have these super-voting shares.

Alibaba says it will not change its partnership structure. The Hong Kong Exchange has hinted it will not change its rules.

As for the amount of an IPO, that is unclear, but it could top the $17.8 billion IPO record set by Visa.

That's got the floor abuzz...the hope is that this could set off another wave of IPOs, both here and in China.

No need to worry about that. There's already four Chinese IPOs that have filed to go public here, and another half-dozen that have likely filed.

The four are:

  1. JD.com: Filed $1.5 billion IPO; China's #2 e-commerce site
  2. E-House's Leju Holdings: Filed $200 million IPO; Online real-estate platform
  3. iKang Health: Filed $150 million IPO; Privately-owned medical centers
  4. Tarena: Filed $100 million IPO; Online technical education centers


Also "rumored" to have been filed:

  1. Jumei: $600 million IPO; Chinese online cosmetics retailer
  2. Sina's Weibo: $300 million IPO; The Twitter of China
  3. iQiyi: Baidu's Hulu


This is a remarkable turnaround. In 2010, Chinese IPOs exploded in the U.S. There were a record 41 U.S.-listed Chinese IPOs and momentum continued until mid-2011, according to Renaissance Capital, when many accounting weaknesses were found. In 2011, of the 12 deals done two-thirds had dropped far below their IPO prices. This turned off U.S. Investors until the accounting scandals passed.

In mainland China, the regulators shut the IPO market starting in the Fall of 2012 until recently to clean up the issuance process. That market is just now starting to open back up.

One final note: Accounting issues with Chinese companies have not gone away. The SEC is in an indirect dispute with mainland Chinese regulators. The SEC wants the auditing companies of Chinese companies listed in the U.S. to turn over certain accounting documents related to the companies. The auditors have been told by Chinese regulators not to turn over the documents. The SEC is attempted to penalize the firms for failing to comply, but the firms have appealed.

Regardless: It's going to be a busy couple months for IPOs, including good, old-fashioned American IPOs.

And the recent IPOs have been faring well. So far this year, the Renaissance IPO ETF (IPO), a cap-weighted basket of newly public companies, is up 6.7%, far outpacing the S&P 500 and other global indices.

»Read more
  Thursday, 13 Mar 2014 | 10:06 AM ET

Smog—the economic kind—swallows China

Posted By: Bob Pisani
woman walks with her child on a street as schools were closed due to the heavy smog in Jilin, northeast China's Jilin province.
Getty Images
woman walks with her child on a street as schools were closed due to the heavy smog in Jilin, northeast China's Jilin province.

Another day, another batch of weak data from China. Retail sales and industrial production in February were up, but both fell short of expectations.

Retail sales rose a relatively brisk 11.8 percent, yet below forecasts of 13.5 percent and the slowest pace since 2005. Industrial Production logged an 8.6 percent gain, below estimates of 9.5 percent and the lowest level since 2009. Thursday's news confirms other figures indicating China's economy is indeed slowing.

I noted yesterday that many traders already felt that China's GDP would not be near the 7.5 percent target rate, and would likely be somewhere in the 6 percent range. This morning Marc Faber, he of the Gloom, Doom and Boom Report, told CNBC Asia he thought China's GDP was growing at half the official rate—roughly 4 percent.

»Read more
  Wednesday, 12 Mar 2014 | 10:46 AM ET

Clouds gather in markets; no storm forecast yet

Posted By: Bob Pisani
Adam Jeffery | CNBC

There is significant worry that the recent decline in copper and China's economic woes might be the start of a wider correction. There are certainly some concerns reflected in the market internals: fewer new highs overall, and no Dow Jones Industrial Average components having hit new highs.

Still, it's hard to see imminent signs of a significant market drop. The advance/decline line is still near a new high, and that usually turns down well in advance of a significant market correction.

I would also note that financials have been market leaders recently, with the main Financial ETF at a new high on Monday. They usually turn down early as well.


»Read more
  Tuesday, 11 Mar 2014 | 3:33 PM ET

China, copper and the U.S. stock market

Posted By: Bob Pisani
Photographer | Collection | Getty Images

The U.S. stock market is essentially at a historic high. To keep advancing, markets will need:

  1. An improvement in the U.S. economic news for March
  2. At least modestly steady growth from global markets, particularly Europe and China


Traders are waiting for U.S. March economic news, and they are expecting it to be better. They are clinging to ANY shred of evidence that this is the case.

For example, Wal-Mart's (WMT) CFO said the company has seen very good sales since mid-February as the weather has improved. The stock jumped just before 1:00 p.m. ET as news crossed.

Last week, traders seized on the fact that L Brands (LB), Cato (CATO) and Zumiez (ZUMZ) all said sales had improved in the second half of February.

So far, the jury is still out. Holding pattern.

Regardless: There is already a cynical school that insists the markets will have a tough time advancing in April, even if the economic data improves.

It goes like this: If the news is disappointing, markets will react negatively. If we do get an improvement in the economic data, stocks will still struggle, because the market has already priced in the idea that the data will be better.

Under this scenario, it would take blowout economic numbers..well beyond expectations...and assurances by the Fed that they will not be raising rates any time soon...for there to be another breakout.

I don't buy this. The pattern for the last four years has been that the market haters have been wrong.

The relationship between China and copper is complicated. Copper has dropped eight percent in the last three days, including a 2.5 percent drop today, and is now at multi-year lows.

Traders are having a tough time reading the tea leaves on this one...is it due to a drop in demand in China, or some other factor?

First: Much of this is due to the weak yuan, the Chinese currency, which makes purchasing copper suddenly more expensive. Since China accounts for roughly 40 percent of world copper consumption, a weaker currency is a major part of the problem.

Why are the Chinese authorities allowing the yuan to weaken? Most likely, they are seeking to curb hot money flows and slow speculation. And if that means less construction and less copper consumption, so be it.

Second: The recent three-day weakness in copper has occurred exactly in line with China's first default on a domestic bond (Chaori Solar). Today there are reports that another Chinese company electrical equipment maker and solar panel manufacturer, Baoding Tianwei Baobian Electric, saw its bonds and stocks suspended from trading after reporting losses for a second year running.

Some of this is likely a knee-jerk risk-off reaction. But copper is used as collateral for loans in China; as prices dropped, borrowers could be under pressure to post more collateral, just as investors trading on margin might be required to do.

This may be good for China long-term, but it's a problem for stock investors. There has been a loose correlation between the movement in copper and the Chinese Shangahi Index for the past few years, largely because China has been so associated with commodity consumption.

Ending that relationship may be a bit traumatic.

Bottom line: Authorities are trying to lower risk in the financial system, and this may be affecting copper.

Third: What about fundamentals? Is China starting to come apart?

The shockingly poor trade numbers China posted last week (the biggest drop in Chinese exports in 4.5 years...the biggest trade deficit in 2 years) were a real wake-up call. There are already whispers that China's GDP in 2014 would not come in at the 7.5 percent level, but could slip into the 6 percent range.

That seems unlikely, but almost certainly, China will have to engage a significant stimulus program to stay in the 7 percent zone.

But officials are already concerned about debt levels: That's what all the issues I discussed above are about.

See the quandary?

The country is still heavily dependent on debt to keep going.

»Read more
  Tuesday, 11 Mar 2014 | 9:56 AM ET

New trend: High frequency traders tap IPO market

Posted By: Bob Pisani
Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

Attention high frequency trader watchers: Virtu Financial (VIRT) has filed for an initial public offering (IPO), seeking to raise $100 million on terms not yet been specified.

Virtu is a well-known market maker in over 10,000 stocks, on both the NASDAQ and the New York Stock Exchange (NYSE), where they are a designated market maker on the floor. They aren't just well known in the U.S.: they operate in 30 countries.

A high-frequency trader going public? I've heard some argue that the market must be nearing a top for that particular industry.

»Read more

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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