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Halftime: Commodity Surge Starting To Drag Down Stocks?

Friday, 20 May 2011 | 1:48 PM ET

On Friday investors remained cautious of the market with the S&P trading lower due to concerns that higher commodity prices were starting to take their toll.

In fact, those worries were amplified by the latest result from Gap, which said that its expenses are rising faster than it anticipated, and it's now spending about 20 percent more to produce each item than it did a year ago.

Also Aeropostale forecast earnings well below expectations citing rising cotton costs.

On the news, investors went running for the exits in retail broadly, interpreting the results to mean higher commodities were starting to hit companies where it hurst most - on the bottom line.

How should you position?

Instant Insights with the Fast Money traders

Trader Stephen Weiss thinks the market may have gotten it wrong. “The ability of companies like Gap to pass along higher costs is a function of how desirable their products are to shoppers,” he says. In other words, it would be a mistake to extrapolate headwinds that Gap is facing as headwinds for the entire retail sector.

Trader Patty Edwards says much the same. “Gap needs to make merchandise that people want.” She points out that other specialty retailers such as Zumiez and FootLocker can pass along higher costs “because they have the right product for their customers.”

Trader Steve Grasso adds something that Karen Finerman says all the time. It’s a mistake to lump all retailers as all risk on or all risk off. In other words some retailers are executing well and remains attractive for their valuations. “Macy’s and Kohl’s are not the same story (as Gap), says Grasso. I’d be a buyer on weakness.”

Trader Pete Najarian thinks the trade is long Dollar Tree. Despite the recent run, he’s putting the name on his radar.

What do you think? We want to know!

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CAN BOTH GAS AND RETAILERS CLIMB?

Keeping with that theme of higher commodity prices, jittery investors were also starting to worry about high prices at the pump.

A new report says the financial pain from $4 gas is increasingly spreading to those with higher incomes causing more people to drive less and even scale back vacations.

However, the Fast Money team has done some research which suggests investors may not have as much to worry about as they think. Historically as gas prices rise – so do retail stocks. Take a look:

Rising Gas Prices Fueling Retail?
Gas Prices Retail Sector
March 1999 to March 2000 + 52.1% + 9.9%
Sept. 2002 to Feb. 2003 + 11.8% + 1.0%
Aug. 2007 to July 2008 + 46.21% + 1.0%
Oct. 2009 to Dec. 2009 + 2.22% + 1.9%
Source: ConvergEx

Stephen Weiss explains that rising prices at the pump are typically a sign of a strengthening economy – and he thinks the relationship between higher gas and higher retail stocks to emerge again.

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BROAD MARKET IMPACT

Although the traders believe that retailers can climb in tandem with higher oil, that doesn’t necessarily mean they’re bullish.

Market sentiment remains fragile due to the ongoing financial woes in Europe and a belief that the US economy will run into a patch of economic weakness over the summer.

In the near-term Stephen Weiss thinks the path of least resistance is lower. “I’d be fading the rallies,” he says.

Trader Steve Grasso says, “If the S&P closes below 1337 – it will be the third consecutive down week – it’s negative for the markets. Watch that level.”

Pete Najarian is on the other side. He thinks the decrease in the Vix is a sign that markets are going higher.

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DEAL OF THE DAY: LIBERTY MEDIA BUYING BKS?

On Thursday the Street was talking about the latest M&A deal, in which Liberty Media offered $17 per share for Barnes and Noble. The bid is a 20% premium to Thursday’s s closing price and values the bookseller at a billion dollars.

What should you make of these developments?

Find out from David Strasser of Janney Capital Markets. Watch the video now!

Liberty's $1 Billion Bid for Barnes & Noble
David Strasser, Janney Capital Markets and the Fast Money traders weigh in on the billion dollar bid for the giant bookseller, retailer volatility, LinkedIn the day after its IPO, and trades you should put down today.

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UNUSUAL ACTIVITY: GAMESTOP

Elsewhere in the market, Pete Najarian has spotted unusual options action in GameStop.

According to Najarian, higher than unusual volume in the June 28 calls leads him to speculate the stock could make a sharp move higher.

Steve Grasso has the stock on his radar but isn't ready to pull the trigger. He says “if it comes in over the next few days I’d take a peak.”

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MONEY IN MOTION

The euro fell against the dollar on Friday with Greek debt concerns and fears of slowing growth in Germany spooking investors.

How long will the euro continue to drop on sovereign debt flare ups?

Get the latest from Todd Gordon of Aspen Trading. Watch the video now!

Euro Falls Against U.S. Dollar
Todd Gordon, Aspen Trading Group, and the Fast Money traders weigh in on Greek debt, the falling euro, and where you should invest today.







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Trader disclosure: On May 20, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Pete Najarian Owns (AKAM), (MSFT) and (MOS). Steve Grasso owns (AKS), (AMD), (ASTM), (BA), (BAC), (C), (D), (HOV), (JPM), (LIT), (LPX), (MHY), (NDAQ), (PFE) and (PRST). Stephen Weiss (MSFT), (QCOM), (BRCM), (AKAM), (DVN), (DE), (COP), (CNX), (ETP), (NS), (UUP), (MRK), (KO), (HK), (VZ), (TEVA) and (KO). Stephen Weiss Is Short (X).

STEVE GRASSO
Stuart Frankel & Co and it’s partners own (ABX)
Stuart Frankel & Co and it’s partners own (CSCO)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HPQ)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MSFT)
Stuart Frankel & Co and it’s partners own (MU)
Stuart Frankel & Co and it’s partners own (NEM)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners are Short (QQQQ)
Stuart Frankel & Co and it’s partners are short (AAPL)

DAVID STRASSER
Janney Montgomery Scott Is A Market Maker In (BKS)
Janney Montgomery Scott May Seek Investment Banking Compensation From (BKS) In Next 3 Months

TODD GORDON
***NO DISCLOSURES

CNBC.com with wires.

  Price   Change %Change
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ARO
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BKS
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DLTR
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FL
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GME
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GPS
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KSS
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M
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VIX
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SPDR SPRET
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ZUMZ
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