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Market Insider with Patti Domm Trader Talk with Bob Pisani

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  Wednesday, 29 Jul 2015 | 2:38 PM ET

Oil stocks rally after inventory data

Posted By: Bob Pisani
Stacked rigs are seen along with other idled oil drilling equipment in Dickinson, North Dakota, June 26, 2015.
Andrew Cullen | Reuters
Stacked rigs are seen along with other idled oil drilling equipment in Dickinson, North Dakota, June 26, 2015.

A surprising, large drawdown in crude inventories has taken everyone by surprise, causing a rally in oil and in dramatically oversold energy stocks. Many shale and exploration & production (E&P) names are up 2 percent to 5 percent.

Energy ETFs like XOP, XLE, and USO are all seeing heavy volume.

And yet, there is scant belief that we are in for some sustained rally in oil stocks.

Partly, this is because trader sentiment is very negative after huge losses trying to buy the bottom in energy stocks January and March. Traders bought under the theory that a 50 percent drop in oil in the past was always followed by a comeback six months later.

Under this "V" recovery in oil, West Texas Intermediate should have been about $75 by the end of June.

That, obviously, did not happen. Worse, the trend went in the other direction: from $58 to back below $50.

What killed the "V" recovery hope was the combination of weak global demand (particularly China) and the tenacious will of the Saudis, who stuck to their stated intentions of pumping as much oil as they could to maintain market share, price be damned, and put pressure on U.S. shale producers.

They have stuck to their guns, though at a huge financial cost to them. But surprisingly, U.S. producers are still pumping oil at a brisk pace.

As a result, the "V" recovery hope has now given way to the "long slog" hypothesis, the idea that oil will indeed recover but it will be a process that will take a year or more, with no agreement on where we will be by then, though many talk wishfully about oil between $75 and $90.

Along the way, as hedges have come off, we have heard a lot about lower capital expenditures.

For example, BP spent $25 billion in 2013, then went to $24 in 2014, and will likely be $19 billion this year. That's a drop of about 20 percent from 2014 to 2015. And they are saying it will be $19 billion again in 2016.

It's the same with other big oil companies. The industry average drop in capital expenditures is about 39% from 2014 to 2015, according to Oppenheimer.

On Friday, we will be hear about ExxonMobil's plans.

You get the point. Capital expenditures are dropping. In theory, this should lead to a huge drop in oil production. But the companies are saying they can continue to pump the same amount of oil with lower expenditures.

How? They are learning to operate fewer rigs with fewer employees. Because of better technology and improving efficiency, oil companies are discovering that they can pump almost the same oil with fewer rigs.

That is contributing to the oil glut.

What to do with Energy stocks? Once big Energy ETFs like XLE and XOP broke below the January lows a few weeks ago, the volumes spiked dramatically as investors gave up the ghost.

Predictably, now that we have ONE modest bullish signal, this is reviving talk about a bottom. "Buy when nobody wants them," one energy trader told me this morning.

But nobody think this is going to be the quick rally that was expected in the first quarter. The talk is to buy now, and hold. For a while. Like, a year or two.

That will greatly limit the number of people that will hop on that bandwagon. Too many have seen this movie before.

Would anything change this "long slog" scenario? Yes, if demand suddenly shot up, or if the Saudis said they were going to pull back production.

Funny you should mention that. Dow Jones has just run a headline mid-afternoon: "Saudi Arabia to Pull Back Production After Summer." Another small blip up in oil. And energy stocks.

Do you believe the Saudis will unilaterally cut production, essentially giving up the position they have held all year? Really?

»Read more
  Tuesday, 28 Jul 2015 | 4:57 PM ET

Pisani: Shark Tank's Kevin O'Leary's new ETF

Posted By: Bob Pisani
Kevin O'Leary
Andrew Burton | Getty Images News
Kevin O'Leary

My friend Kevin O'Leary, he of Shark Tank fame, recently got into the ETF business with the O'Shares Quality Dividend ETF, which invests in quality stocks that pay dividends.

I wrote about it last week here: 'Shark' Kevin O'Leary jumps into ETF biz

O'Leary came on the NYSE floor Tuesday to ring the opening bell, and I've often heard it argued by active traders that the relatively paltry dividend yield of most stocks (the S&P currently has a yield of 2.1 percent) would argue for investing in growth stocks that can see prices ramp up.

In other words, traders want to bet on price appreciation, rather than gains from dividends.

That's a mistake. O'Leary is right; in the long run, bet on dividends.

I'm not saying this because I have a slavish devotion to dividends. I have a slavish devotion to the best investment methodology, and investing in dividends is one of the soundest investment ideologies around.

Here's a few simple stats to illustrate why investing in dividend payers is a smart idea.

In the last 10 years, according to Standard and Poor's, the S&P 500 has risen 67 percent. However, the TOTAL return, including dividends, is up 110 percent. In other words, you got 64 percent more with the S&P paying a dividend than you did if there was no dividend.

That is huge. That is the beauty of compound interest. And the longer the time goes on, the bigger the numbers get.

Instead of 10 years, let's go back 25 years. Since 1990, the S&P 500 has had an annualized return, excluding dividends, of 7.15%. Including the dividend, the return has been 9.46 percent. So dividends have added roughly 2.3 percent points to your return each year.

Thanks to the wonder of compounding interest, that 2.3 percentage points add up to significant returns.

Since 1990, the S&P 500 has risen 485 percent, excluding dividends.

Including dividends, the S&P has risen 908 percent.

Because of that 2.3 percent additional dividend, your returns holding the S&P 500 are 88 percent higher.

O'Leary isn't the first to the dividend ETF space. There are many other choices on hand. But if you're looking for sound long-term investment advice, dividend investing in general is a good place to start.

»Read more
  Tuesday, 28 Jul 2015 | 3:52 PM ET

NantKwest a huge IPO, but watch the small float

Posted By: Bob Pisani
The NASDAQ exchange is seen in New York City.
Getty Images
The NASDAQ exchange is seen in New York City.

The biggest biotech IPO in recent memory started trading today on the NASDAQ. NantKwest, the cancer immunotherapy company controlled by L.A. billionaire Patrick Soon-Shiong, opened at $37 after floating 8.3 million shares at $25, well above the price talk of 7.0 million shares at $20-$23.

According to Renaissance Capital, the folks who run the Renaissance Capital IPO ETF, that makes it the largest biotech in at least the last 10 years, with an initial market cap of $2.6 billion.

Wow. Not bad, considering Soon-shiong bought the company for $48 million less than a year ago, and controls almost 60 percent of the company.

Let's leave that alone. Here's a different issue: the float is small. The valuation is big, but the float is small.

The company has 78 million shares outstanding (not including options). The IPO floated 8.3 million shares. However, 2.2 million shares were bought by management and Franklin Templeton at the offer price of $25. That leaves 6.1 million shares that are tradeable.

6.1 million shares/78 million outstanding = 7.8% tradeable float.

OK, I know cancer immunotherapy is a hot space, but this is a very small float.

Typically, the float of an average IPO is 10 to 20 percent of the total shares outstanding.

Unfortunately, keeping the float small (10 percent or below) has become much more common in the last couple years.

Why? Well, restricting supply does help with the price, right? Of course, no one would ever say that. Of course not. Hrumpf.

Still, this can be an issue. Most indexes, including those used for ETFs, have minimum float requirements.

The Russell indices, for example, have a 5 percent tradeable float requirement. The Renaissance Capital IPO ETF (IPO), a basket of roughly 60 of the most recent IPOs, also has a 5 percent float requirement.

NantKwest beat that requirement, but barely.

The other downside to a really small float is you get a really small representation in indexes you go into. Which means less influence.

None of this is on the minds of investors in NanKwest today, however. The stock opened at $37 and has held in the $30s all day.


»Read more
  Tuesday, 28 Jul 2015 | 10:14 AM ET

Markets oversold, but these leaders still holding up

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.

A positive start to the trading day, and boy do we need it. We are in some very rare oversold territory. Consider:

1) The S&P 500 has dropped five days in a row. It's the first five-day losing streak since January, but before that, the last five-day losing streak was December 2013;

2) The S&P 500 materials sector is down nine days in a row, which hasn't happened since May 2012;

3) The NYSE Advance/Decline line has declined seven days in a row, an equally rare event. The NYSE Composite Index has also been down seven days in a row.

4) There were 467 new lows on the NYSE, or nearly one in five of the stocks, a very high number.

Read More Until this happens, keep buying stocks: Technician

Even though the S&P 500 is only 3 percent from its recent high, this decline in the Advance/Decline line indicates the leadership is becoming much more selective.

»Read more
  Monday, 27 Jul 2015 | 10:16 AM ET

Many sectors oversold, but still no bounce in sight

Posted By: Bob Pisani

The Shanghai Composite closed down 8.5 percent Monday, the biggest single-day loss in eight years, while the Shenzhen was down 7 percent.

On the Shanghai, there were 75 stocks declining for every one advancing. Ouch.

It's not clear what caused the decline. There are the usual rumors that the government would either not continue to support the market or that such support would be ineffective.

What is clear is it's becoming impossible to make an investment decision on China right now. It's a complete wild card. Chinese stocks could be down another 8 percent tomorrow, or up 8 percent. There's no way to know.

Read MoreWhat's fueling the frenzy in China stocks?

China's weakness is spilling over into the rest of Asia:

  • Hong Kong: down 3.1 percent
  • Taiwan: down 2.4 percent
  • Thailand: down 1.8 percent
  • Indonesia: down 1.8 percent
  • Phillipines: down 1.5 percent

And it's spilling over into the commodity markets. Copper is down 1 percent to its lowest level in 6 years. Crude is weak, with West Texas Intermediate down 1.6 percent to $47.38. We are getting very close to the March 17 closing low of $43.46, which was the lowest close since 2009.

Not surprisingly, the commodity names are weak again, with energy names like EOG Resources and metals equities like Freeport McMoran all down at the open.

So much for the idea that China doesn't matter much for the U.S. investor. It does, because it impacts commodity prices, as well as materials, industrials, and energy stocks.

This is creating some very strange statistics. For example, the S&P materials sectors is almost 2.8 standard deviations (SD) below its 50-day moving average, the energy sector is 2.42 SD below, and the industrials are 2.38 SD below, according to our partners at Kensho.

This is very rare territory. Standard deviation of 3, for example, means the sample is within all observable samples 99.7 percent of the time. These are not yet 3 SDs, but they're close. We are in 98 percent territory, surely. In other words, these sectors are very stretched on the downside. A typical quant would look at this as a potential buy signal.

»Read more
  Friday, 24 Jul 2015 | 4:13 PM ET

Pisani: What's worrying traders about Q3 earnings

Posted By: Bob Pisani

The focus will again be on earnings next week, but, as always, a small number of companies will be in focus.

There's a lot riding on Facebook, which reports Wednesday, because the stock is up 20 percent in the last month on expectations of a strong report. Investors have piled a lot of money into a small group of big-cap tech names. Good news dramatically boosted Amazon and Google, but even the smallest disappointment hurt Apple.

Traders will also be scrutinizing big international companies for the impact of the strong dollar. Procter & Gamble, for example, gets 65 percent of its business outside the U.S. They'll be reporting Thursday. Other multinationals that have already reported have noted significant impact from the strong dollar.

The two biggest energy companies, Dow components ExxonMobil and Chevron, will report at the end of the week, and we all know it's going to be a disaster. Chevron's earnings will probably be down 55 percent. Still, estimates have been coming up a bit recently for themm and they will be scrutinzed for any indication of when the oil slide may stop.

And remember, it's not so much the earnings, it's the guidance for the third quarter that matters. Earnings growth was expected to be positive in the second half of the year, but the expectations for the third quarter are now also expected to be down 2.4 percent, according to Factset. With 40 percent of the S&P reporting, that number should be stronger.

And revenues are even worse, expected to be down 2.8 percent for the third quarter. That's one reason the markets have had so much trouble this week.

What's the problem? Slow growth in China and Latin America is one issue, but also the dollar strength and weak oil has continued into the third quarter. The Fed told us that a strong dollar and weak oil might be transitory, but that hasn't been the case.

Bottom line: growth is proving to be very elusive this year, particularly overseas.

Aside from earnings, watch the market leaders next week. A lot of money is in a small group of banks and biotechs. Banks are holding up, but today is one of the worst days we have seen in a long time in biotechs on the Biogen disappointment. The NASDAQ Biotech ETF is down 4.2 percent today.

»Read more
  Friday, 24 Jul 2015 | 10:32 AM ET

Why analysts are upping the numbers on Amazon

Posted By: Bob Pisani

What a difference a day makes. Yesterday, investors expected Amazon report earnings per share of 46 cents this year, which led to a comical price-to-earnings ratio of almost 1,100.

Today, expectations are for a profit of $1.21, a 220 percent increase, and the P/E is now down to roughly 475, even though third quarter operating income guidance is very wide, from a loss of $480 million to a gain of $70 million.

This is amazing, considering Amazon's profitability has been erratic and the company does not appear to have any new product launches (Remember the Fire phone?) scheduled for 2015.

And it doesn't stop there. Expectations are now for a big gain of $4.21 in 2016, which would bring the P/E down to roughly 140.

Read More Amazon shares surge 20%, market cap surpasses Wal-Mart

The source of this enthusiasm isn't hard to spot: Amazon Web Services, its cloud storage business, and Prime membership, the key to its North American retail operations.

Both are growing. Fast. Revenues for Web Services were up 81 percent. Amazon hasn't broken out details for Prime membership, but everyone seems to believe it has at least 30 million members paying $99 a year, and that it will likely exceed 40 million by the end of the year.

»Read more
  Thursday, 23 Jul 2015 | 4:06 PM ET

Sectors to watch as market weakness spreads

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.

Stocks have been drifting lower since early morning in response to disappointing earnings reports, particularly from large multinationals like Caterpillar and 3M.

Other multinationals this week—including United Technologies and Emerson Electric have highlighted similar problems. They can be lumped into two groups:

1) Slowing economies: China, Latin America

2) dollar strength

The slowing economies are leading to declines in commodity prices and a slowdown in capital spending.

No surprise multinational are feeling the pain:

Multinationals this month

United Tech down 9.1%

Caterpillar down 9.0%

Emerson Electric down 6.7%

MMM down 2.6%

Caterpillar reflects all of the concerns. They are seeing declines in their commodity business (mining), in their oil business, and in construction (China):

Caterpillar divisions

(Q2 revenues year-over-year)

Resource: down 12% (mining)

Energy/Transportation: down 12% (oil)

Construction: down 18% (China)

The downbeat commentary is taking some analysts by surprise. For example, 19 of 21 analysts who cover Emerson Electric lowered their full year estimates in the last month.

Sixteen analysts who cover United Technologies—almost the entire universe of analysts who cover the stock—have dropped their full year earnings outlook for the year this month, most in the last couple days.

The weakness is not just in China—Whirlpool and Caterpillar both mentioned lower sales in Latin America.

The largest of the Latin America ETFs, the iShares Brazil ETF, is seeing very heavy volume today and is poised to break through a 6-year low.

Watch for any signs that this is spreading past the commodity and industrial names. For example, food giant Unilever (Ben & Jerry's ice cream, Knorr stock cubes, Hellmann's mayonnaise, etc.) said consumer demand was weak, with what it called "negligible" growth in Europe and North America. Sales were flat in the second quarter.

The main concern of the trading community right now is, how long will the stalwarts remain the stalwarts?

There is a LOT of money hiding out in a small group of stocks: 1) banks, 2) healthcare (most biotech), and 3) tech/internet, particularly the "Big Four" of Apple, Facebook , Google, and Amazon.

That's why all eyes are on several key ETFs: Banks , Biotech, and the NASDAQ 100. Despite some tech weakness at the end of the first quarter, none of them are showing signs of cracking, yet.

»Read more
  Wednesday, 22 Jul 2015 | 10:18 AM ET

Why Apple is one of many buyback monsters

Posted By: Bob Pisani

The stock buyback craze has continued into the second quarter, and the cumulative effect of that craze—now almost two years old and counting—is really mounting.

First, one clarification: Many companies buy back stock, but they use it to pay out options they give out to employees. What investors care about is when there is an actual share count reduction, because that increases the earnings per share and decreases price-to-earnings levels.

By that measure, the reduction in share count has been notable for the last five quarters, and is continuing into the second quarter.

The trend is up. Twenty percent of S&P 500 companies have reduced their share count by at least 4 percent year over year in each of the last five quarters, and that appears to be continuing into the second quarter, according to Standard and Poor's.

Read MoreCome down from stock-buyback high: Financial advisor

As of last night, 92 companies have reported; 20 have reduced their share by at least 4 percent year-over-year.

That means earnings is 4 percent higher and P/E is 4 percent lower than a year ago for those companies.

One shining example is Apple, which has reduced its share count by 4.7 percent year-over-year, and 10.3 percent in the last two years, meaning earnings are 10 percent higher than two years ago, regardless of whether sales were higher or costs were lower!

Pretty cool, huh?

»Read more
  Tuesday, 21 Jul 2015 | 3:28 PM ET

Pisani: Two problems hurting multinationals in Q2

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

It's happening again. In Q1, the two most relevant drags on revenue and profits for multinational companies who got a big chunk of their profits and revenues overseas were: 1) slow global growth, particularly China, and 2) the strong dollar.

Both are resurfacing as issues in Q2.

The dollar finally began to weaken in April, and many were hopeful that multinationals would finally get a break. But after bottoming in mid-May, the dollar has begun strengthening again.

Take United Technologies, which lowered 2015 guidance due to softness in Aerospace, softness in Europe (particularly hurting Otis Elevator) and softness in China. That enough softness for you?

But they also went out of the way to note how the strong dollar was impacting them. Like many multinationals, they are again breaking out earnings and revenues in two form: excluding the impact of foreign exchange, and then including the impact.

Take Otis Elevator. Look at this:

Otis Elevator
(2015 operating profit, YOY)
Excluding forex impact: down $25-$-$75 million
Including forex impact: down $300-$350 million

That is a lot of coin for the impact of the dollar!

How serious an issue is the strong dollar?

UTX said earnings would have been 6 cents higher than the $1.73 reported if the effects of the stronger dollar was excluded. That's not trivial.

How serious is this for other multinationals? It's hard to break out the effect, since not every company breaks out currency. But you can get a hint if you divide the S&P 500 into two groups: those that get at least half their sales outside the U.S. (meaning they are very exposed to the stronger dollar) and those that get less than half outside the U.S.

For companies that get MORE than half their sales outside the U.S., Q2 blended earnings are estimated to be UP 10.5 percent, according to Factset.

For companies that get LESS than half their sales outside the U.S., Q2 blended earnings are estimated to be UP 1.7 percent.

That is quite a difference!

This is what the combination of slower growth and a strong dollar will do for earnings!

The strong dollar is another reason currency-hedged ETFs have seen increasing volume in the past month, particularly the two largest players, the WisdomTree Europe Hedged ETF, and the WisdomTree Japan Hedged ETF.

These ETFs are a way for the average investor to protect against currency fluctuations, and there are more coming. Tomorrow, IndexIQ is launching a whole family of 50 percent currency-hedged ETFs that's a further refinement of the same idea.

»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.

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