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Market Insider Trader Talk with Bob Pisani

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  Monday, 24 Apr 2017 | 2:17 PM ET

Market headwinds may be fading, but four main risks remain

Posted ByBob Pisani
  Thursday, 20 Apr 2017 | 4:09 PM ET

Trader Talk: There are several reasons behind today's rally

Posted ByBob Pisani
U.S. Treasury Secretary Steven Mnuchin smiles during the 2017 Institute of International Finance (IIF) policy summit in Washington, U.S., April 20, 2017.
Yuri Gripas | Reuters
U.S. Treasury Secretary Steven Mnuchin smiles during the 2017 Institute of International Finance (IIF) policy summit in Washington, U.S., April 20, 2017.

Why the rally? This is a tricky one to call, because volume is average (it's been weak for a month) and volatility isn't spiking, either up or down. Instead of one answer, this is one of those days where several factors have combined to create a rally:

  1. Earnings are mostly positive, which was a factor right at the open. Whether it is CSX helping the railroads, Qualcomm helping semiconductors, Dover helping Industrials, Sherwin Williams helping the DIY stocks (record high there), the earnings news is generally better than expected.
  2. The European close was strong, as European bond yields rose. For days, traders have been talking about the worst-case outcome (for markets) on the French election this weekend: the possibility that the two most extreme candidates, Marine Le Pen on the far right and Jean-Luc Melenchon on the far left, would be the two candidates in the runoff. This concern seems to have eased, with France leading European markets, up 1.5%.
  3. There is talk of a House compromise on health care.
  4. Tax cuts are back on the burner. Treasury Secretary Steve Mnuchin, in a midday interview, said: "We're pretty close to bringing forward major tax reform."
  5. Short covering. Several sectors that have sold off this month are reversing today, particularly retail. And Steel stocks, which have been in a downward spiral all month, are rallying big as Steel Dynamics earnings were better than expected and President Donald Trump's executive order on steel has all the names moving.

Bottom line: there has not been a lot of movement in the markets because there haven't been a lot of reasons to sell. It's hard to make a case for a big drop unless you believe: 1) France is pulling out of the European Union; 2) the tax cut program Trump has been pushing is dead; or 3) the U.S. economic data continues to worsen into the second and third quarter, and bond yields keep moving down.

For the moment, the markets seem to be saying that these prospects are unlikely.

»Read more
  Wednesday, 19 Apr 2017 | 12:47 PM ET

The dangerous 'stew' of uncertainty for stocks

Posted ByBob Pisani

What's ailing stocks? Traders have been staring at their hands for weeks now, and stocks — for the most part — have been drifting lower since hitting historic highs on March 1, the day after President Donald Trump spoke to Congress.

It's not like there's a panic. There has not been any intense selling pressure, but there has also been no buying interest. There's just been no real interest in the market, and you can see it in the volume: many days it has been 10-20 percent below normal levels.

What's going on? Several factors have combined to create a dangerous "stew" of uncertainty for stocks. There is not one issue, but throw them all together and you get a slow-motion, low-volume drift downward:

1) Fiscal reforms pushed out. Did you notice Trump, while in Milwaukee Tuesday, made a point of saying that, "[W]e're in very good shape on tax reform. We have the concept of the plan. We're going to be announcing it very soon," and the market shrugged it off? That would not have happened six weeks ago, when the mere mention of tax reform would send markets into an upward swoon. The honeymoon is over on tax cuts, less regulation, and infrastructure spending. And Trump again reiterated he would be tackling healthcare reform first — a nonstarter with the investment community.

2) Weaker "hard" economic data. From retail sales to the Consumer Price Index to the Producer Price Index, economic data has been weaker than anticipated. As a result, the odds for a Federal Reserve rate hike in June are now down to 44 percent, from close to 60 percent a little more than a week ago.

3) Geopolitical risks. The French election, a tougher stance on Brexit from the UK, and particularly North Korea were all background stories until the last few weeks.

4) Bond yields trending downward. This wasn't supposed to happen. The core principle of the "reflation trade" was, well, reflation. Commodity prices up. Bond yields up. Not now: after hitting multi-year highs of roughly 2.6 percent in December and March, 10-year yields dropped below 2.20 percent yesterday. True, shorter term rates have not dropped as much, but that has only flattened the yield curve, a big problem for banks who profit when the yield curve steepens. The cause is hotly debated, but it certainly reflects concerns about weaker data and geopolitical issues, and weaker bond yields in Europe have also put downward pressure on our yields as well.

5) Earnings. This is the most recent risk. Here's why: stocks are expensive. Valuations are high. The risk is to the downside. This leaves stocks very vulnerable to a selloff, particularly if there is even the slightest hint of an issue. If you don't believe me, look at what happened to Goldman Sachs yesterday, and to IBM today. IBM beat on the bottom line, and reaffirmed full-year guidance of $13.80. That's good news! Yet revenues were a tad light of expectations: $18.16 billion versus expectations of $18.40 billion, according to Factset, and the stock is down 5 percent today as headline writers swooned that revenues were now down 20 quarters in a row.

»Read more
  Tuesday, 18 Apr 2017 | 3:37 PM ET

Regional bank earnings are showing the bigger problem with banks

Posted ByBob Pisani

If you want a microcosm of the problem with banking, you should forget about Goldman Sachs and look at what the big regional banks like Regions Financial and Comerica are saying.

I have nothing against Goldman, but I am primarily interested in how the U.S. economy is doing through the eyes of banks. Goldman is not a good candidate for this. The company gets 40 percent of its revenue outside the U.S., and it relies on trading for a large part of its revenues.

Regional banks do not have trading operations and operate solely in the U.S.

Both Regions Financial (based in Alabama) and Comerica (based in Texas) reported today.

Regions has a huge retail operation: nearly 60 percent of their revenues are on the consumer side. Comerica is slightly more focused on corporate lending. Both have substantial wealth management divisions — they manage money for wealthy people. It's more than 10 percent of revenues for both companies.

Both beat on the top and bottom line, but the full year guidance for both is very similar — and very telling.

Let's start with Regions Financial. What we care about is guidance. What matters about these banks are: 1) loan growth, both consumer and commercial, 2) net interest income and net interest margin, which is how much money the banks are making between what they are paying out on deposits and lending out in the form of loans, and 3) how well the loans are performing (credit conditions). To a lesser extent, fee income is also important — it's been growing as a percentage of bank revenues — but it tells you more about how much banks can charge for things like bank withdrawals than it does about the state of the economy.

»Read more
  Monday, 17 Apr 2017 | 3:39 PM ET

April will be the biggest month for IPOs this year, but are the unicorns finally coming out?

Posted ByBob Pisani
Signage for Snap Inc., parent company of Snapchat, adorns the front of the New York Stock Exchange, March 2, 2017 in New York City.
Getty Images
Signage for Snap Inc., parent company of Snapchat, adorns the front of the New York Stock Exchange, March 2, 2017 in New York City.

I kept saying the IPO market would open up. It's finally happening.

There were six IPOs last week (seven if you include a blank check company), tied for the busiest week of the year.

Then, I came in this morning, and six — count 'em, six — IPOs announced terms.

Finally. The floodgates are opening. If all goes as planned, there will be at least seven IPOs next week (there's only one scheduled for this week), making next week the busiest week of the year.

As of now, there should be at least 18 companies going public in April, the busiest month since October of last year, when we had 19.

The offerings are amazingly diverse. Two companies are scheduled to trade on Thursday, April 27th:

  1. China Rapid Finance, a Chinese peer to peer microlending firm; and
  2. Floor & Decor, a national flooring retailer.

Five companies are scheduled to trade on Friday, April 28th:

  1. Emerald Exhibition Exhibits, the largest trade show operator in the U.S.
  2. Cloudera, a data management platform;
  3. NCS Multistage, an energy company specializing in well completion services;
  4. Carvana, online used car sales; and
  5. Zymeworks, a biopharmaceutical firm.

All will trade at the NYSE with the exception of Zymeworks, which will trade at the NASDAQ.

There's not just more IPOs going public, those that have gone public are performing better. The Renaissance Capital IPO ETF, a basket of the last 60 IPOs is up 10 percent this year, twice the gain of the S&P 500.

April's strong numbers comes off a strong first quarter for IPOs. There were 25 IPOs in the first quarter that raised $10 billion, that is way above the first quarter last year when there were only 8 IPO that raised a measly $700 million.

What's next? There's a few energy companies like Tapstone, and more airlines like low cost carrier Frontier Airlines, and many more Energy companies.

But the big story -- if Cloudera is successful -- may be the long-awaited emergence of unicorns from hiding.

If Cloudera does indeed go public, this would be the fourth tech unicorn of the year (after Snap, Mulesoft, and Okta). That doesn't sound like a lot, but there were only three last year: Twilio, Coupa Software, and Nutanix. We will now have four in just two months.

There are no additional unicorns (companies with valuations in excess of $1 billion) in the pipeline for the moment. Blue Apron still floats out there.

Here's the issue: do unicorns need a higher threshold to go public? Seems to me they do. After all, these companies have held off going public because they can raise money privately and they have such a high valuation there is a real risk that value-conscious investors will not pay the high prices.

Look at Cloudera. It looks like it will go public with a market cap of $2.2 billion, but it was valued at about $4.1 billion almost three years ago.

Yikes. Fast-growing, high losses and very highly valued. That's an issue for any unicorn.

Is the market willing to pay up for that combination?

"Last year, it would not have been a good combination," said Matt Kennedy, who analyzes IPOs at Renaissance Capital. "We'll see if this year is different."

»Read more
  Wednesday, 12 Apr 2017 | 7:00 AM ET

Trader Talk: The fate of the stock market may hinge on what bank CEOs tell us

Posted ByBob Pisani

Bank earnings are upon us. Optimism on the economy is running high, and banks are supposed to be able to demonstrate that. More demand for loans! Steeper yield curve!

But there are concerns. Investors are trying to reconcile a more optimistic outlook on the economy with troubling trends in bond yields and loan growth.

Here's the problem: a lot is expected to go right with bank earnings. Financials are expected to see a 15 percent gain in earnings in the first quarter. That is a lot. The gain is based on expectations that interest rates would be moving up, loan growth would improve, and credit risks would remain low.

But it's not quite playing out that way. Here's what's happening.

  1. Interest rates are indeed up — the 10-year yield was at roughly 1.75 percent a year ago, it's at roughly 2.35 percent today. That's a big jump, 60 basis points, and it's happened because the Fed has been raising rates and inflation expectations are higher. But rates have been trending downward recently--we were at 2.6% a month ago. What's that all about? How can investors reconcile expected Fed rate hikes with rates trending lower? That's a problem.
  2. There has been some cracks in the credit market. For example, delinquencies have been rising on auto loans and non-prime card loans. It's small, but it has investors talking.
  3. Most importantly, loan growth has been anemic. How anemic? Total loan growth is up only 0.4% in Q1 compared to the same period last year, and has been particularly disappointing with Commercial & Industrial (C&I) loans, where there has been virtually no growth:

Bank lending

(Q1, year-over-year)

Total loan growth up 0.4%

Commercial/Industrial up 0.1%

Consumer up 0.5%

Commercial Real Estate up 2.0%

Mortgages down 0.1%

Source: Susquehanna

These are disappointing numbers, because loan growth trends were stronger last year. What happened? Susquehanna's bank analyst, Jack Micenko, believes part of the problem is that banks are simply changing the way they borrow money: many banks are paying off their bank loans and going to the bond market for money. He also believes there is continuing deleveraging in loans in the energy sector.

But Micenko admits these reasons can account for only part the disappointing numbers. Here's another alarming statistic: bank deposits are up 0.7% in the first quarter.

Deposits are up, but loan growth is flat. That is not a good sign, Micenko notes. "In an expansionary environment, you see deposits go down and loan growth going up. The opposite is happening."

Micenko's conclusion: "Corporate America is sitting on their hands, and we don't know why. The optimism has not found its way into corporate behavior."

So who's right, the bulls or the bears? We don't know yet, and that is why there is so much interest in bank earnings and particularly in the management outlook. They will avoid talking about Trump tax cuts but they can't avoid talking about loan growth and why bond yields are moving down and what the impact of a flatter yield curve will mean for them.

For the moment, the optimists are still in charge. Bank stocks (KBE) are 10% off their recent multiyear highs in early March but still nearly 20% above where they were on the eve of the election (the S&P 500 is up only 10%).

There's several reasons bulls still have the upper hand, for the moment:

  1. Bank stocks are still comparatively cheap on a forward earnings basis. Evercore ISI notes that banks are trading at 12.3 times 2018 EPS estimates, up from just 11.7 times earnings pre-election.
  2. None of the analysts have incorporated any benefits from the Trump Agenda (tax cuts, infrastructure, less regulations) in 2017 earnings.
  3. Bank CEOs have not yet signaled alarm at the lower loan growth trends. They have acknowledged weak loan trends, but most have reiterated full year growth expectations.

Bottom line: a lot is riding on the commentary of a couple dozen bank CEOs in the next few weeks.

»Read more
  Tuesday, 11 Apr 2017 | 7:00 AM ET

There's a hidden boost for earnings this year

Posted ByBob Pisani

There's been a lot of excitement about the U.S. earnings season, and with good reason: S&P 500 earnings are expected to grow roughly 10 percent, led by roughly 15 percent gains in the two largest sectors, Technology and Financials.

But the slow improvement in the global economy has analysts even more bullish on investing outside the U.S. Goldman Sachs is anticipating first-quarter earnings will be up 17 percent for the STOXX Europe 600, which represents a basket of stocks across 17 European countries, and 16 percent for Japanese stocks. Even Emerging Markets are seeing an improving earnings picture.

The picture is the same for the full year: across the board, overseas earnings estimates look better than the U.S.:

Global earnings 2017
(estimates)

S&P 500: up 10.0 percent
Japan: up 12.1 percent
Europe: up 14.4 percent
Emerging Markets: up 19.3 percent

Source: JPMorgan Cazenove

Investors have responded. Overseas markets have either performed in-line or outperformed U.S. markets year-to-date:

Global markets 2017
(YTD)

S&P 500: up 5.5 percent
Europe (STOXX 600): up 5.5 percent
Phillipines: up 11.3 percent
Indonesia: up 6.5 percent
Japan (Topix): down 2 percent

Source: JPMorgan Cazenove

The exception to the outperformance--Japan--has had problems because of a stronger yen.

What's behind the spurt in earnings?

  1. Economic growth is picking up overseas. While U.S. GDP is improving, expected to go from 1.6 percent to 2.1 percent in 2017, GDP growth is also improving in the Eurozone (2 percent in 2017), Japan (1.7 percent, a notable improvement over the anemic 1 percent growth in 2016), and Emerging markets (4.6 percent), according to JPMorgan Cazenove.
  2. Corporate pricing power has improved. Oil, for example, has bottomed. Oil prices are considered proxies for global growth; global earnings momentum is also strongly linked to commodity prices in general, which began rising last year.

Stronger growth and better pricing power alone will be a boost to corporate margins. But there are other positive factors:

  1. Stocks are cheaper overseas. Europe is trading at 15.3x 2017 earnings, well south of the roughly 18.4 multiple the S&P 500 sports. So is Japan (15.6), and Emerging Markets (12.5), according to JPMorgan Cazenove.
  2. The U.S. business cycle is in a late stage, but not so overseas.
  3. Political risk may be fading in Europe. That risk--first from the Netherlands election and still from the upcoming French election--held European equities back in January and February but those concerns have faded recently, as Goldman Sachs recently noted, pointing out that the Europe-over-the-U.S.-trade "has further to go as Europe tends to outperform when global growth is strong and political risk is fading."
  4. Government bond yields bottomed in Europe in September, and in January for Japan. This has been supportive for banks.
  5. A more stable dollar has been a big help to emerging markets.

What could go wrong?

Currency fluctuations are big issues when dealing with global stock flows. Japanese stocks have suffered due to a stronger yen. The biggest risk is a sudden surge in the dollar, which would hurt the reflation trade and likely lead to more capital outflow from Emerging Markets. The weaker euro has recently acted as a help for earnings in Europe, though it's doubtful that will continue.

»Read more
  Friday, 7 Apr 2017 | 2:17 PM ET

Markets have spoken: Fed, Trump agenda outweigh geopolitical concerns

Posted ByBob Pisani

Once again the markets have demonstrated what they care about the most: the Fed and how aggressive it may be on interest rates, and any threat to the Trump agenda.

Midday, the Fed's William Dudley told a luncheon crowd that the Fed may begin the process of shrinking its $4.5 trillion bond portfolio later this year and that there might be only a "little pause" in the Fed's rate hike plan.

That was viewed as mildly hawkish by the markets. The dollar and 10-year yields rose. Bank stocks rose modestly, as did the S&P, though the gains have not lasted. This is not surprising, since Dudley's comments mostly affirm what had come out of the Fed minutes, though the "little pause" comment is slightly more hawkish.

Contrast this to the past 24 hours, where we've had a series of high-drama events that haven't done much to move the markets for even a short period. We have had a high-stakes meeting between President Trump and President Xi of China, a Syrian missile strike, and a disappointing jobs report.

And the market reaction? The S&P 500 is flat.

True, the 10-year yield has had a rather wild 24-hour run, going from 2.34% last night, then down to 2.29% on the Syrian missile strike, then rallying back early in the morning to 2.33%, then plunging to 2.27% right after the disappointing jobs report (the lowest level since mid-November) — and now rallying back to 2.36% on the Dudley comments.

But all this is small potatoes compared to what happened Wednesday, when the Dow plunged 200 points after the Fed said they would be moving to reduce their balance sheet later this year and House speaker Paul Ryan said tax reform could take longer than health-care reform.

The bottom line: geopolitical risk is definitely back on the radar of stock traders, but other factors are much higher up on the risk list. The Trump agenda and the Fed are the two top risks, with — for the moment — the economy and geopolitical risk much further down.

»Read more
  Wednesday, 5 Apr 2017 | 4:44 PM ET

Markets reversed as Fed, Paul Ryan talk down Trump agenda and stock valuations

Posted ByBob Pisani

Stocks rose early in the morning as oil rose, bond yields moved up, and the ADP private employment report was strong.

Then midday, the markets reversed. The initial catalyst were in the Federal Reserve's minutes from its last meeting. The Fed made several comments that could be interpreted as negative for stocks:

  1. They don't expect fiscal stimulus until 2018.
  2. Some see the stock market valuation as high.
  3. They said they are considering reducing their $4.5 trillion balance sheet this year, and this is likely viewed as effectively an additional rate hike.

None of this was helpful for stocks.

Shortly after the Fed minutes, House Speaker Paul Ryan was quoted in a Reuters story saying tax reform could take longer than healthcare overhaul, and that the House, Senate and White House aren't yet on the same page on tax reform.

What's this all mean? The market cares about three things right now: 1) the Trump Agenda, 2) interest rates, and 3) growth and the right valuation for the markets.

All three of these got smacked around a bit this afternoon. You can see these issues got the markets going by looking at volume, which has been terrible for weeks.

But today big, broad ETFs that track major indexes had heavy volume: the Russell 2000 had volume 30 percent above normal, the NASDAQ 100 had volume nearly 60 percent above normal, and S&P 500 about 25 percent above normal.

»Read more
  Wednesday, 5 Apr 2017 | 1:56 PM ET

Strong IPO market is another factor in Wednesday's market strength

Posted ByBob Pisani

I spent part of the morning with the management team at Hess Midstream Partners, a Master Limited Partnership (MLPs) that had an impressive debut at the NYSE today, opening at $25.50 after pricing $14.78 million shares at $23, way above price talk of $12 million shares at $19-$21.

The management team was all smiles, and with good reason. Floating an IPO, for all the planning that goes into it, is largely a matter of timing. Timing on the state of the IPO market, on the state of the stock market, and on the desirability of the product you are offering, which is often dependent on how hot your sector is.

The timing for Hess could not have been better:

1) The desirability of the product: Hess is a desirable yield play. An initial yield of 6 percent, one which is growing. That will immediately attract a lot of large institutions.

In addition, the oil market is in at least a short-term uptrend. Crude has done a perfect U-turn in the last month, going from $52 to $46 and back to $52. That has lifted oil stocks, including the Alerian MLP ETF (AMLP), a basket of MLPs, which is up about 3 percent in the last two weeks.

Pay no attention to the nonsense talk that MLPs are just toll keepers for oil and gas moving through their systems and are not sensitive to the price of oil. The Alerian MLP ETF fell apart when oil fell apart (beginning in the fourth quarter of 2014) right along with the rest of the energy sector.

2) The state of the IPO market: the IPO market has had several successful IPOs recently, including Snap, and recent IPOs have outperformed the market. The Renaissance Capital IPO ETF (IPO), a basket of the 60 most recent IPOs, is up about 11 percent this year, nearly twice the gain of the S&P 500. The dearth of recent IPOs has created demand for quality products, and there has been a particularly dearth of energy IPOs and MLPs.

3) The state of the stock market. Leon Cooperman's comment on the markets on CNBC on Wednesday reflects the sentiment of the majority of traders: "Conditions that would bring a significant market decline are not present."

Sure, there's plenty of debate about growth prospects and the probability that all or part of the Trump Agenda will be enacted, but the S&P is less than two percent from its historic high.

Bottom line: current market conditions are favorable for IPOs. I said a month ago that there would be a week in April when we will suddenly have seven or eight IPOs in a single week. This week we will likely have six.

I'm sticking by my prediction.

»Read more

About Trader Talk

  • 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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