Trader Talk with Bob Pisani


  Friday, 27 Mar 2015 | 10:53 AM ET

The Street is finally worried about earnings

Posted By: Bob Pisani

The list of companies with earnings warnings is growing. SanDisk lowered its outlook Thursday, and overnight regional freight railroad company Genesee & Wyoming also guided lower on revenue forecasts. Not surprisingly, the company said traffic was suppressed due to severe winter weather and also cited weakness in commodities like metals and steam coal.

It's been an especially ugly weak for transports, down 5 percent and far away the worst major performer with worries about weaker economic data and poor commodity traffic dragging them down. Earlier this week, Kansas City Southern also gave disappointing guidance for the quarter, citing soft demand among energy customers.

Railroads this week:

  • Kansas City Southern: down 10.9 percent
  • Union Pacific: down 7.9 percent
  • Norfolk Southern: down 5.9 percent
  • CSX: down 5.4 percent

It's certainly true this is the season for warnings.

The best piece of news is that the entire Street—including the analysts—is fully engaged with the idea there is a bit of an "earnings recession" going on, and not just in energy, which is clearly a debacle.

Q1 2015 earnings (est.):

  • Energy: down 63 percent
  • Materials: down 5 percent
  • Utilities: down 4 percent
  • Telecom: down 3 percent
  • Consumer staples: down 1 percent

Five of the 10 S&P 500 sectors are showing negative earnings growth. This is good news because it is putting pressure on analysts to take numbers down, which is increasing the chances they will overshoot.

Right now, first-quarter earnings are expected to be down about 3 percent. If estimates stay there, my bet is earnings will end up being slightly positive, thus avoiding a first quarter of negative earnings growth since 2009.

Financials (up 10 percent) and health care (up 9 percent) are the only two sectors with robust earnings growth, though industrials and consumer discretionary also have modest mid-single-digit growth.

»Read more
  Thursday, 26 Mar 2015 | 9:53 AM ET

Geopolitical risk adds to stock issues

Posted By: Bob Pisani

There are lots of moving parts affecting stocks Thursday.

We already had issues around negative earnings growth and comparatively high valuations for both the first and second quarter.

We also had issues with the timing of the Federal Reserve's interest rate hike, with the only certainty being the market believes some type of hike is coming later this year.

Negative earnings growth with the Fed raising rates down the road is not a good combination.

Read MoreFed Lockhart: Rate hike may come after midyear

On Wednesday, as we approached the end of the first quarter, we saw clear signs of rotation: The biggest decline were in sectors with the biggest gains for the year (semiconductors, biotech, solar), and the few gains were from those that had the biggest declines (energy, euro).

We have also seen a change in an important long-term trend: the strong dollar. The dollar strength has reversed as some have come to believe that the Fed's rate hikes may be put off longer—a trend which began last week and continues Thursday—and that has put a bid under commodities. Copper, for example, is up roughly 11 percent in the last week. Gold is up roughly 5 percent from its bottom a week ago.

Now we have some geopolitical risk coming into the equation, as Saudi Arabia and its allies bomb Yemen.

»Read more
  Wednesday, 25 Mar 2015 | 10:46 AM ET

How to trade stocks around tax deadline

Posted By: Bob Pisani
A trader works on the floor of the New York Stock Exchange.
Adam Jeffery | CNBC
A trader works on the floor of the New York Stock Exchange.

Tax deadline coming: stocks tend to rise. Every year I get the same question in response to the same phenomenon. The market seems to stall and droop in the two weeks leading up to tax day (April 15th), and then seems to recover.

The usual explanation is that some people withdraw money to pay taxes, which seems to make sense.

We asked our partners at Kensho about this, and the data seems to bear out this well-worn piece of folk mythology.

Since 2005, in the 10 trading days before April 15, the S&P 500 is only up 30 percent of the time, with a flat average return.

But in the 10 trading days AFTER April 15th, the S&P is up 90 percent of the time, with an average return of 2.0 percent.

From up 30 percent of the time before April 15th to up 90 percent of the time after April 15th. That's significant.

This worked across the board: the Dow was up 100 percent of the time (10 out of 10 years!), the Nasdaq 90 percent.

Certain sectors are big winners: Industrials, energy and utilities were up 100 percent of the time as well in the 10 trading days after April 15, all with gains in excess of 2 percent.

»Read more
  Tuesday, 24 Mar 2015 | 10:37 AM ET

Is Exxon's dividend at risk?

Posted By: Bob Pisani
Getty Images

Freeport-McMoran cutting its dividend to 5 cents a share from 31 cents a share in response to the impact of lower commodity prices may be understandable, but it is a fairly rare event. Companies do not like to cut their dividends.

Freeport is only the third company in the S&P 500 to cut its dividend this year after Ensco and Diamond Offshore.

If you go back 10 years, you can see how rare dividend cuts are: there have been only 240 cuts, versus 3,683 dividend increases. Of those cuts almost half (110) were in financials, most after 2008.

Many of those dividend cuts from Financials have since been restored, or substantially restored.

Which brings me to my next point: the big dividend payers. The big three, by dollar value of dividends paid, are:

Biggest dividend payers (S&P 500)

ExxonMobil: $11.6 billion

Apple: $11.0 billion

Microsoft: $10.2 billion

Source: S&P

ExxonMobil is going to be the focus of a lot of attention in the next few days. That's because Exxon has raised its dividend in April every year since 2007. Exxon, in fact, has raised its dividend every year for 32 years, but since 2007 it has done so in April.

So with worries about dividend cuts in energy, Exxon will be in the spotlight. They currently pay 69 cents a quarter (a healthy 3.2 percent yield); the Street is certainly expecting them to maintain the dividend, and perhaps increase it modestly. It's likely they will cut capital spending even more before they cut the dividend.

»Read more
  Monday, 23 Mar 2015 | 4:08 PM ET

Pisani: Lost in all the 'Flash Boys' talk

Posted By: Bob Pisani
Author Michael Lewis and Brad Katsuyama, president and CEO IEX Group Inc.
Adam Jeffery | CNBC
Author Michael Lewis and Brad Katsuyama, president and CEO IEX Group Inc.

Michael Lewis and IEX's Brad Katsuyama came by "Power Lunch" to talk about the "Flash Boys" book one year later.

I've said several times that I do not believe the markets are "rigged" or that high-frequency trading is legalized front running. However, I have said that it would not surprise me that there are high-frequency traders who are engaging in abusive or manipulative behavior.

However, it's unfortunate that much of the debate around the book has centered on this subject.

Lewis, to his credit, acknowledged that on our air. He told my colleague Tyler Mathisen, "The only reason I regret the word [rigged] is that it's used in a way that overshadows everything else."

Read More'Flash Boys' Michael Lewis: Markets still rigged

He's right. The real focus should be on the strange relationships that have developed between brokers, dark pools, exchanges, and high-frequency traders that has led to the markets being excessively complex, fragmented, and confusing.

I'm talking about developments like paying traders to trade on an exchange, which has led to the proliferation of strange order types that route stocks in confusing directions.

I'm talking about dark pools that do not adequately disclose who is participating in their pools.

I'm talking about the obsession with getting as close to possible to exchange servers in order to have a microsecond speed advantage in trading.

»Read more
  Thursday, 19 Mar 2015 | 10:06 AM ET

Stocks need clarity on the tightening cycle

Posted By: Bob Pisani

Are we at the start of a tightening cycle, or not? That seems to be the question.

The answer: We seem to be in that shadowy period leading up to a tightening cycle.

That's an important distinction for stocks, because equities tend to gain in the period leading into those cycles, then reverse when the tightening begins.

MKM Partners, for example, noted that in the six months leading up to the three prior tightening cycles—February 1994, June 1999 and June 2004—the S&P 500 gained an average of 6.3 percent, led by financials, which were up 12.2 percent. That makes sense, since interest rates invariably rise, helping banks.

But three months after tightening began, the S&P 500 was lower in all three periods by an average of 4.2 percent. Defensive stocks such as telecoms outperformed cyclicals, including industrials and consumer discretionary.

»Read more
  Wednesday, 18 Mar 2015 | 5:27 PM ET

Pisani: Fed does it again

Posted By: Bob Pisani

The Fed does it again. The markets were terrified at the prospects that the Fed would remove the "patient" phrase. The Fed did exactly that, and yet stocks have traded in their widest range since January (roughly 41 points on the S&P 500,) 10-year bond yields have had one of the biggest declines since January, and the dollar has had one of its biggest declines in months.

The Fed accomplished this in two parts:

1) Slightly downgraded the economic outlook saying "growth has moderated somewhat" instead of saying "activity has been expanding at a solid pace."

2) Declared that an increase in the Fed fund rates "remains unlikely" for the April FOMC meeting, but in the next sentence declared that the Fed would not be raising rates until there is a "further improvement in the labor market" and they are "confident" that inflation will move back to toward their 2 percent objective.

In other words: the barrier to raising rates is still pretty high.

Here's the key sentence: "This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range."

At the press conference, she put this in even simpler terms, for those of us too stupid to understand the subtleties of the Fed's phrasing:

1) "Just because we have removed the phrase 'patient' it doesn't me we are going to be impatient."

2) There will be no rate hike in April, but "such an increase could be warranted at any later meeting depending on how the economy evolves."

3) We don't expect any sudden jump in inflation: "Inflation has declined below our long-term objective, and in light of the continuing appreciation of the dollar, we likely continue to do so in the months ahead."

What would Yellen look for in inflation? Seems wage growth pickup is the highest on her list, as well as the usual inflation indicators.

As for the slightly downgraded outlook on the economy, she hedged that statement as well in the presser, insisting "this is not a weak forecast" and that she continues to project above-trend growth and an improvement in the labor market.

You can have all the ideological debates you want about whether the Fed is behind the curve, but even the most advanced cynic has to admire the deft handling of a very tricky moment in the Fed's history.

As for Yellen, she just seems to be getting better and better in tamping down fear and anxiety. She is, as I said yesterday, the anti-drama Queen.

And she accomplished this with no dissent from any of her colleagues.

The downside to this is that the Fed has downgraded their expectations for the economy. GDP is lower. But the market is hardly howling its disapproval.

»Read more
  Friday, 20 Mar 2015 | 4:30 PM ET

Pisani: Michael Lewis' 'Flash Boys,' one year on

Posted By: Bob Pisani
Michael Lewis
Getty Images
Michael Lewis

Its been one year since Michael Lewis' 'Flash Boys' hit the shelves. What has been the impact of the book?

It certainly sold books. Four consecutive weeks at Number 1 on the New York Times nonfiction list is quite a feat.

And it generated a lot of debate. Remember, at heart, it's a book about market structure. A book about market structure that makes the bestseller list? Wow.

It was the marketing that really made the book, and the timing. Lewis' main allegation—that the market is "rigged" in favor of high-frequency traders—fits in perfectly with the broader societal condemnation of the financial crisis and with the even broader folk mythology that the markets—and other human affairs—have always been manipulated by a small elite.

To a certain extent, the book reflects what Richard Hofstadter famously called "the paranoid style in American politics," the vague fear that there are dark, evil forces controlling us (and our money), that our fates are not our own.

Regardless, the book had a substantial impact, of that there is no doubt.

Let's try to keep this to a couple issues:


SEC Chair Mary Jo White emphatically stated that "the markets are not rigged" and, in Congressional testimony, said the retail investor was "well served, very well served, by the current market structure."

As for high-frequency trading (HFT), she said it "is not unlawful insider-trading."

That doesn't mean the SEC is delighted with all aspects of market structure. In January, White created a Equity Market Structure Advisory Committee to advise the SEC on what, if any, changes need to be made.

There is certainly a range of opinions on how much needs to be done to improve the markets at the SEC, but the lack of an emphatic response from them clearly indicates they do not believe the U.S. markets are in dire straits.

On the enforcement front, the book generated some smoke, though it's debatable how much fire has been generated.

The FBI, the U.S. attorney general, New York state prosecutors and the SEC have confirmed they are investigating the practices of high-speed firms.

New York state Attorney General Eric Schneiderman has been particularly active, even announcing that subpoenas were sent to exchanges to examine their relationships with HFTs.

Yet, there have been remarkably few "gotcha" moments. In one small case, the NYSE did pay a $4.5 million fine over violations regarding "co-location," or allowing HFTs to site their computers right next to the exchange's "matching engine" so that information can be accessed more rapidly.

In another case, the exchange Direct Edge (now part of BATS) was fined $14 million in December 2014 for failing to follow rules regarding disclosure of how it handled order types. That investigation was underway long before the Lewis book came out, but the publicity likely accelerated the investigation.

In perhaps the most high-profile case, the New York attorney general is currently embroiled in a dispute with Barclays over the way it has managed its dark pool, alleging that the bank did not tell traders about the presence of high-frequency traders in the pool.

But these are actions against exchanges and a bank. There are few actions against HFTs themselves that are engaging in "abusive" or "manipulative" behavior.

This is surprising, because I do believe that there are bad actors. I think it's highly likely that some HFT somewhere has tried to game the system, to engage in practices that could be considered "abusive" and "manipulative" under the law.

Why do I believe this? Because the entire history of trading—for hundreds of years, long before HFT—are filled with examples of individuals who have tried to abuse the system. Why should high-frequency trading be different?

That doesn't mean the whole system is rotten, it just means enforcement should be rigorous.

In the case of HFT, much of the problem is that it is extraordinarily difficult to catch blatant abuse. It's hard because intent can be difficult to prove, and it's hard because in many cases the data isn't sufficiently robust to demonstrate abuse.

The SEC is trying to remedy that. There are proposals out now for a Consolidated Audit Trail (CAT) that would allow regulators to efficiently and accurately track all activity throughout the U.S. markets. Let's hope the plan can be executed at a reasonable cost. Unfortunately, it appears to be years away from implementation.

And FINRA has proposed the creation of the Comprehensive Automated Risk Data System, which will gather trading data from some 4,000 brokerages in over 110 million investor accounts. That, too, is some years away.

Both of these proposals were well underway before Lewis' book.

One rule that needs to be implemented immediately: the SEC is trying to require high frequency traders to register with the SEC. It's about time: if HFTs are such a big part of the trading process, why doesn't the SEC even know anything about them? This is a first step and hopefully this will be done by the end of this year.


For the most part, the industry—big banks, exchanges, and the mutual fund industry (with a few exceptions) has rejected the claims.

It may not be surprising that the sell-side defends the status quo, but what about the buy-side? They, presumably, are getting the short end of the stick. Why, for example, haven't the big mutual funds issued denunciations? Even Jack Bogle, founder of Vanguard and no friend of high-frequency trading, has rejected the claim that the markets are rigged.

And what about the companies whose stocks are supposedly being manipulated. Why aren't there more complaints? Why, for example, haven't we heard issuers and companies themselves complain more? Maybe there is a company that has made an issue of this on a quarterly conference call, but I don't know of one.

Again, you can argue they are all corrupt, but do you really believe that? Isn't a more likely answer that: 1) this issue, if it is even a little true, is not among the highest priorities for funds, and 2) investors care a lot more about the long term returns of what they are buying, and those results have been excellent.

Still, there have been some moves to change things, though they are not related to Lewis' book. In one significant move, mutual fund giant Fidelity, in conjunction with several other firms (including T. Rowe Price, Blackrock, and JPMorgan) are getting ready to launch a dark pool of their own, called Luminex, designed to only trade large blocks between institutional firms. That, when it launches, will be a significant development.


The short answer is no, nor does it appear that any regulator has dramatically changed their course of action. You could say this is because: 1) the dark forces have totally corrupted all the enforcement agencies, or 2) the enforcement agencies are alert to the prospect of bad actors, but most do not believe the overall market structure needs to be completely overhauled.

If you believe that 1) is the right choice, nothing I'm going to say is going to change your mind.

But I've spent years with enforcement officials, and the NYSE, and the Nasdaq, and everyone else who built the current system. Most have told me that the current system is not being torn down because it is a vast improvement over the old system, and by "old" I mean the system controlled by the NYSE (specialists) and Nasdaq (screen-based traders) that was the dominant paradigm until about 20 years ago.

Remember, 30 years ago if you wanted to buy 1,000 shares of IBM it would have: 1) cost you hundreds, and possibly thousands, of dollars, and 2) taken anywhere from 20 minutes to the following day to get a confirmation of execution. This was a time when the spread between the bid and ask was $0.125, then $0.0625, and then finally a penny in the year 2000.

Today, you can buy 1,000 shares of IBM and the cost could be as low as $7.99, with a confirmation that will occur in a sub-second interval.

This advance has nothing to do with HFT, it has to do with technological progress, but regardless, it is an improvement over the old system for retail investors.

Still, I am not a complete apologist for the current system. I think it is way too complicated (40 dark pools, 3 exchanges) which leaves the system open to technological failure. I also am no fan of the idea that exchanges should be paying customers to trade on their exchanges.

To the extent that Lewis' book shed light on a rather obscure part of the market, it has been a valuable contribution to the debate.

But I also recognize that there's always been intermediaries, and that throughout history, people have bitterly complained any time someone steps between a buyer and a seller and tries to make a profit, big or small, justified or not. Check out my "Brief history of high speed trading in the 1800s" for a small sample.

Programming note: Michael Lewis will be on Squawk Box Monday on CNBC.

»Read more
  Tuesday, 17 Mar 2015 | 5:25 PM ET

Why currency hedged ETFs are hot

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.

My colleague Michelle Caruso-Cabrera made some very good points on air today concerning investing overseas: because of enormous moves in currency, buying stocks overseas—including ETFs—can be perilous.

As an example, she notes the German DAX index is up 22 percent this year, but the iShares Germany ETF, which measures the performance of the German equity market, is up only 8 percent in U.S. dollars, thanks to the tremendous drop in the euro (down almost 13 percent against the dollar).

This brings up a very interesting question: why doesn't everyone buy hedged international ETFs when they want international exposure, rather than unhedged ETFs?

There are several reasons:

1) Until recently, it was almost impossible for the average investor to do so. There simply were no ETFs that enabled an investor to hedge out currency. A professional could hedge, of course, but at considerable cost.

Now that more hedged ETF products are becoming available, investors are taking note. In fact, the biggest European ETF is now a hedged product, the WisdomTree International Hedged, which recently surpassed its biggest unhedged rival, the Vanguard European ETF.

Largest European ETFs
(assets under management)
WisdomTree International Hedged: $15.1 billion
Vanguard European: $12 billion

2) There was not a huge demand for such a product because currency moves like we have seen in euro this year (down 5 percent against the dollar) are very rare. Oh sure, maybe if you were investing in Argentina, but not the euro, not the yen. Most years did not involve anywhere near such dramatic moves.

This year, for example, the yen has barely moved against the dollar, so the difference between a hedged Japan ETF and an unhedged Japan ETF is very small:

Japan ETFs this year
Wisdom Tree Japan Hedged: up 12 percent
iShares MSCI Japan: up 11 percent

That was not the case last year, when there was an enormous move in the yen versus the dollar, and investors made the DXJ the hottest ETF in years.

As for the cost for international ETFs, it's true they are a little more expensive than plain-vanilla U.S. ETFs. Typically, you'll pay roughly 0.5 percent for a hedged ETF, and even for many unhedged. One exception is the Vanguard European ETF which charges a low 0.12 percent, but that is Vanguard's specialty.

Still, when you are dealing with moves of 21 percent, as you are with Germany this year, an 0.5 percent fee is not unreasonable. It does take work to keep these hedges accurate.

One final point: because interest rates are relatively flat worldwide, it is not that difficult or costly to hedge. The cost is the overnight interest rate. This would be very difficult to do with, say, Brazil, where interest rates are around 8 percent.

As these products get more assets, it's possible the costs will come down.

»Read more
  Tuesday, 17 Mar 2015 | 10:06 AM ET

Housing data adds to string of disappointing stats

Posted By: Bob Pisani
A worker walks on scaffolding at the construction site of a new home in Carlsbad, Calif., September 22, 2014.
Mike Blake | Reuters
A worker walks on scaffolding at the construction site of a new home in Carlsbad, Calif., September 22, 2014.

Wow, what a miss on February housing starts. At just 897,000, the read was 14 percent below expectations of 1.04 million units on a seasonally adjusted annual basis. That is an enormous miss, and because this is the housing data that is directly plugged into GDP, it is cause to sit up and take notice.

The only good news is that there is clear evidence that poor weather was the major factor.

Read More Housing starts drop in Feb, setback likely temporary

While all regions saw a decline, the areas hit the most by weather (Northeast, Midwest) declined much more.

February new home starts vs. January 2015 (source: Census Bureau)

  • Northeast: down 56%
  • Midwest: down 37%
  • West: down 18.2%
  • South: down 2.5%

Permits, which do not require any construction, were up three percent, to 1.09 million, the second highest level since the end of the recession. I would be more comfortable saying this suggests a spring rebound, except the gain was driven entirely by multifamily permits, which were up 19 percent. Single-family permits were down 6 percent month-over-month.

Read MoreInvestors slash US exposure on rate hike fears

Regardless, we now have a long string of disappointing releases for February: industrial production, capacity utilization, NAHB Housing Market Index, retail sales, regional Fed surveys. Only ISM Services and nonfarm payrolls (arguably the most important report) have been above expectations.

All of this suggests that while the FOMC may indeed remove the "patient" phrase from its forward guidance on interest rates, the members will still act with patience.

Read MoreSee CNBC's economy coverage here

»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.


  • Bob Pisani

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

Wall Street