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Market Insider with Patti Domm Trader Talk with Bob Pisani

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  Tuesday, 18 Nov 2008 | 11:57 AM ET

Why There's No Market Rally

Posted By: Bob Pisani

If you want insight into why the stock market is having trouble advancing, just look at what it is going on with estimates of 2009 earnings. There is a vast army of financial nerds who look over financial statements, and crunch numbers for their companies. There are two classes of numbers crunchers:

1) individual company analysts (known as "bottom-up" analysts); and

2) economists who make broad estimates for earnings by sector based on macroeconomic data (known as "top-down" analysts).

Right now, according to Standard and Poor's, here are the consensus estimates for earnings for 2009 for the S&P 500 from the two camps:

Bottom-up: $91.85

Top-down: $62.98

Are we talking about the same country here? The differences are huge: the bottom-up estimates are 50 PERCENT HIGHER than the top-down estimates! Why is there so much of a difference between the two camps? I'll tell you why in a minute. First, let me give you some advice: go with the top-down people.

Normally, the stock market bottoms out at about 10 times forward earnings. So if we take the estimates of the bottom-up people, the S&P next year will be about 918 ($91.85 x 10).

Right now, the S&P is about 850, so by the estimates of the bottom-up people the S&P is currently trading at 9.2 times forward earnings (850/$91.85). If the bottom-up people are right, THE STOCK MARKET RIGHT NOW IS CHEAP. Buy now!

Now, look at the top-down number: $62.98. This puts the S&P 500 at about 630 next year at the bottom ($62.98 x 10 = 630).

Yikes! Remember, we are at 850 right now. Based on this estimate, the S&P right now is trading at 13.5 times forward earnings (850/$62.98). That is NOT CHEAP by historic standards (the historic average P/E multiple is 15 times forward earnings, but we are not talking averages here. We are talking cheap).

The point is this: if you believe the top-down strategists, the stock market right now is NOT CHEAP. Don't buy. This matters, because the most bearish strategists have been the most correct ones this year. Therefore, these bearish strategists have the most clout. For now, traders believe them more than the more bullish analysts. That's why the stock market is having trouble rallying.

Now, let me tell you why there is such a difference between the top-down and bottom-up camps:

1) The top-down people are strategists with a much larger world view than analysts (bottom-up); they are quicker to cut numbers, particularly in times of stress.

2) bottom-up analysts are myopic, watching only their company's and sectors, and often slow to react to changes in the economy;

3) many bottom-up analysts do little more than follow their company's guidance, so when company's are slow to cut numbers, so are the analysts;

4) the quality of sell-side bottom-up analysts has declined in recent years as brokerage firms have cut their coverage of many companies.

Get the point? Guess who I follow?

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 18 Nov 2008 | 9:15 AM ET

Guidance Is Now A Tricky Business

Posted By: Bob Pisani

Producer Prices were down 2.8 percent in October, the biggest decline on record month-over-month and far more than the expectations of down 1.9 percent. The headline number was depressed by a 24.9% decline in gasoline prices. To add to the confusion, core-PPI (ex-food and energy) rose 0.4 percent which was 0.3 points more than expected.

Elsewhere:

1) Hewlett Packard up 15 percent pre-open, reported fourth quarter earnings a few pennies above the $1.00 expected; more importantly guidance was surprisingly strong: $0.93-$0.95 for the first quarter vs. $0.93 estimate.

2009 guidance is also surprisingly high: $3.88-$4.03 vs. $3.85. They are emphasizing execution and the ability to increase market share. IBM ,Dell, and other techs have rallied on this guidance. Please note that last night Hewlett said they were extending a holiday shutdown on PC production from one week to 2 weeks.

2) Like many retailers, Home Depot beat earnings estimates. However, comparable store sales were down 7.1 percent. No guidance for the fourth quarter, but they do expect full year comp store sales down 8 percent, with EPS for the full year expected to decline by 24 percent, consistent with previous guidance.

3) Elsewhere, guidance is really becoming a tricky business.

a) Saks reported earnings below expectations (loss of $0.13 vs. loss of $0.03 expected), CEO Stephen Sadove said, "it is impossible to predict future performance with any degree of certainty," so they didn't give any guidance;

b) Corning and Host Hotels (which owns much of the Marriott hotels) withdrew their guidance;

c) Pepsi Bottling also lowered guidance and said it would cut 3,150 jobs in North America, Europe and Mexico;

4) As commodity prices have dropped, the attractiveness of mergers in that space have dropped as well. Two large companies in the steel space—Cliffs Natural Resources and Alpha Natural Resources—terminated their $10 billion merger, citing the economic environment. Cliffs up 6 percent pre-open.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Monday, 17 Nov 2008 | 4:03 PM ET

The Triple Problem For Stocks

Posted By: Bob Pisani

We have a simple problem here: no visibility on earnings has led to low volume and high volatility. It's a strange combination. In theory, the market is cheap. In theory, we are due for an oversold bounce. In reality, people are tired of playing this game. Too many failed rallies.

What's the problem? Traders believe that worse than expected a) earnings and 2) economic news is all we can expect for the next couple months.

It's going to be very difficult for the markets to hold up just above their lows with that kind of news flow. There's been a lot of buying at this level for the past two months. What do traders have to show for it? Not much.

What about earnings? Stocks typically trade at trough around 10 times forward earnings estimates. Street consensus for earnings in 2009 is about $80 for the entire S&P 500. That means the S&P should be about 800.

But wait: a lot of analysts are talking about earnings as low as $60 next year. That means the S&P could go to 600. Admittedly, these are comments from the most bearish of analysts, but those are the ones that have been most correct this year.

What about the government programs being a deal changer? That's been out for a while, and all the intervention and money hasn't stopped the market from going down.

Could we get a rally? Yes, but most traders think it is highly unlikely we will end much above 900 on the S&P at best. With that kind of modest upside, why take the risk?

Financials continued their underperformance. Banks and insurance companies have separate issues:

Bank woes:

--lack of profit

--capital raises

--dividend cutting

Insurance woes:

--capital raising

--credit deterioration

--equity market guarantees embedded in annuities

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Monday, 17 Nov 2008 | 1:20 PM ET

Everybody Into The TARP?!

Posted By: Bob Pisani

It's not just the auto and auto parts makers that want in on the TARP program! At last count, the mayors of Philadelphia, Phoenix, and Atlanta are also asking for money. Who's next? Well, the Detroit Lions are 0-10 (I kid you not)...they could use a little...something?

Kidding aside, this is a critical week for General Motors. The House Financial Services Committee will meet Wednesday to discuss a bailout plan.

For many on the Street, this is a Northern vs. Southern issue. Southerners have a large base of non-Detroit auto companies and factories, and their attitude is; why disadvantage those automakers just to help the Detroit Three, who have lost the war of ideas?

It's not as simple as that, of course, but that is a strong current running through the debate. Ideas being floated as part of the bailout include:

--early release of $25 billion in DOE loans

--TARP funds

--new proposals that are not yet clear

How much money are we talking about? JP Morgan thinks a bailout of GM alone would cost a minimum of $30 billion. They recommend that Washington should give a near-term loan to cover 1-2 quarters, but additional money should be contingent on a cut in financial debt and reducing the UAW legacy liabilities.

Regardless of what happens, you can bet than any capital injection into GM will be: 1) very dilutive for equity shareholders, and 2) come with significant concessions from debt holders.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Monday, 17 Nov 2008 | 9:03 AM ET

Obama: Traders Liked What They Heard Last Night

Posted By: Bob Pisani
.More substantive is the talk of an automotive bailout; GM trading up about 5 percent pre-open. The House and Senate will be debating an interim financing solution this week, until the new administration takes control in late January. »Read more
  Friday, 14 Nov 2008 | 4:05 PM ET

The Yo-Yo Market

Posted By: Bob Pisani

Down morning, afternoon rally, late day selloff...try making sense of this. Bottom line is there was tremendous technical damage done this week. The NASDAQ hit a a closing low (5-year low) on Wednesday, while the S&P 500 hit an intraday low (also a 5-year low) yesterday.

Who's afraid of the big, bad G-20 meeting? Most traders believe little if anything truly substantive will come out of it. "Selling into government intervention has been one of the few good ways to make money this year," one trader said.

Why aren't traders impressed with the G-20?

--Bush lame-duck
--U.S. not sole leader
--Differing proposals
--20 countries make consensus difficult

Likely to be heard from the G-20 meeting: supplementing the IMF, global coordinated rate cuts, and some form of international regulation of the banking system.

For the week: Dow down 4.9 percent, S&P 500 down 5.8 percent, NASDAQ down 7.9, Russell 2000 down 9.5 percent.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Friday, 14 Nov 2008 | 9:09 AM ET

G20 Meeting: "The Results Will Be Moderate"

Posted By: Bob Pisani

As the G-20 meets in Washington, there is a lot of parsing of commentary from attending politicians. Mexican President Felipe Calderon is probably the most realistic: "This (the G20 meeting) will need to be seen as just the starting point. There will be results, but they will be moderate."

But Nick Kounis, an analyst at Fortis Bank in the Netherlands, has the most widely distributed comment: "We will probably see further falls in output in the first few months of next year, before a gradual improvement later in the year, but we think that there will be no real recovery before 2010."

There are now "official" recessions in Hong Kong, Germany, and Italy.

    • Bernanke: Central Banks Ready to Act

Elsewhere:

1) It makes you wonder: what analysts have been doing with themselves in the past two months. Retailers, for example, have been signaling that consumer spending dropped dramatically in September and October, yet again today and last night FOUR big retailers gave guidance for the fourth quarter (November to January) that is WELL BELOW analyst estimates.

Two other trends are noticeable in retail: 1) third quarter comparable store sales were well below the same period last year, and 2) despite the bad times, several of the retailers went out of their way to say they were looking to take market share from their competitors.

a) Nordstrom said comp store sales decreased 11.1 percent and fourth quarter earnings would come in at $0.35-$0.40, vs. expectations of $0.70 (is seeking to "continue the international expansion of our brands")

b) Kohls said comp store sales decreased 6.7 percent and fourth quarter earnings would come in at $0.90-$1.05 vs. expectations of $1.22. ("we will be very competitive in order to gain market share")

c) Abercrombie is down 8 percent pre-open, said comp store sales decreased 8 percent and fourth quarter earnings would come in at $1.00-$1.05 vs. expectations of $1.57.

d) JC Penney said comp store sales were down 10.1 percent and fourth quarter earnings would come in at $0.90-1.05 vs expectations of $1.32 (will seek to "capitalize on opportunities to maintain and build market share")

2) Nokia is the most actively traded stock, down 13 percent pre-open, noting a "sharp pullback in global consumer spending." They said mobile device volumes will be lower than expected, to 1.24 billion units in 2008, vs. prior expectations of 1.26 billion units, and that 2009 volumes will be down compared to 2008.

3) Sun Micro, as with most companies, beat on the quarter but warned and said they would be laying off 15 to 18 percent of the workforce.

4) Cypress Semi is lowering its fourth quarter guidance as well.

    • Retail Sales Take Record Drop; Import Prices Tumble
    • Nokia Says Crisis Hits Mobile Phone Market
    • Sun Micro to Lay Off Up to 6,000 Workers

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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

Nokia

JC Penny

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Questions? Comments? tradertalk@cnbc.com

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  Thursday, 13 Nov 2008 | 4:46 PM ET

Market's Three Day Losing Streak Ends

Posted By: Bob Pisani

This post is from CNBC producer Robert Hum:

The Dow swung 911 points today, posting its biggest trading range since October 13. The index closed 11% above its session low, erasing yesterday’s losses and snapping a three-day losing streak. Shrugging off grim outlooks by Intel and Wal-Mart , as well as a disappointing jobless claims number, investors bought heavily into the market shortly after the S&P 500 fell through its October 10 low midday.

Take a look at how some of the sectors closed above their session lows today:

Energy +15%
Financials +14%
Retailers +14%
Techs +12%
Materials +12%

After the bellKohl’sQ3 EPS beat estimates by a penny. However, its guidance of $0.90-$1.05 for the fourth quarter falls significantly below the analyst consensus of $1.23. Kohl’s shares are trading 3% lower after hours.

Nordstrom’sEPS beat analysts’ estimates by a couple of cents, but it too issued guidance far short of estimates. Its Q4 guidance of $0.35-$0.45 falls way below the consensus analysts’ estimate of $0.70. The company also expects same-store sales to decline 13%-16% in the fourth quarter.

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New from CNBC.com:

- The Dow 30 at a Glance

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Questions? Comments? tradertalk@cnbc.com

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  Thursday, 13 Nov 2008 | 2:43 PM ET

What's Moving Markets Back Up

Posted By: Bob Pisani

This post is from CNBC producer Robert Hum:

The markets traded in a relatively tight range this morning. However, as the markets drifted lower midday, selling dramatically picked up when the S&P 500 fell below its intraday low of 839.80 that it hit back on October 10.

Once that technical level was crossed, the S&P 500 dropped another 20 points, to a new 5.5-year low. Weakness was broad-based, but financials were notable underperformers, with many large cap banks posting double-digit declines.

Just an hour later, the S&P 500 retraced its losses and found itself once again in positive territory, while showing signs of some buying interest. Volume picked up in the S&P 500 Depository Receipts (SPY) and was particularly strong as the market moved up. In fact, as of early this afternoon, 450 million shares of SPYDERS have already changed hands; well above the average daily volume of 380 million shares. Helping move the markets back up are notable rebounds in energy, industrials, and financials.

Despite the move up this afternoon, the Nasdaq Composite one third of the Dow’s components remain at new lows, as many of the techs and financials continue to hit multi-year lows.

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New from CNBC.com:

- The Dow 30 at a Glance


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 13 Nov 2008 | 9:31 AM ET

Wal-Mart, Intel And Their Bleak Forecasts

Posted By: Bob Pisani

This post is from CNBC producer Robert Hum:

S&P futures are flat, but they have gyrated in a 20-point range this morning. Up about 10 points early in the session, futures moved nearly 20 points lower, before bouncing off those lows following Wal-Mart’s earnings beat.

However, futures have once again have given up some of those gains, as they try to find direction this morning. Both the Dow Industrials & S&P 500 are within striking distance of their multi-year closing lows set on October 27. The Nasdaq Composite closed at a new low yesterday.

Wal-Mart’s Q3 earnings of $0.77 per share slightly exceeded the analysts’ estimate of $0.76, as sales grew 7.5% from a year ago. However, the company cut its full-year guidance due to the strengthening dollar. The dollar—as reflected by the U.S. Dollar Index—has risen 22% since its July low, hurting the repatriation of overseas profits for U.S firms with large multinational operations. The company estimates that dollar appreciation will hurt its Q4 EPS by $0.06. Preliminary Q4 guidance of $1.03-$1.07 falls below the analysts’ estimate of $1.11.

Fellow Dow component Intel also issued a bleak forecast, sending its shares down 5% pre-open. The company dramatically slashed its Q4 revenue guidance to a range of $8.7 billion-$9.3 billion from previous guidance of $10.1 billion-$10.9 billion amid “significantly weaker than expected demand.” This new guidance falls far below the analysts’ estimate of $10.4 billion. Additionally, the company expects its gross margin to be around 55%, down from its prior expectation of 59%. The company’s stock may open near a 12-year low.

    • Intel's "Dramatic" Warning—Was It Really A Surprise?

Similarly, National Semiconductor cut its sales outlook for its current quarter on declining orders. For Q2, the company expects revenues of $420 million-$425 million, down from its prior guidance of $470 million-$480 million. Analysts are expecting Q2 revenues of $461 million. The company also announced it will cut 5% of its workforce.

In other news:

Weekly jobless claims rose higher than expected to 516,000; its highest level since 2001. Three-Month U.S. Dollar Libor rose for the first time today in over a month. The rate rose to 2.14875% from 2.1325% yesterday, but still significantly off its 2.81875% high on October 10.

MBA mortgage applications rose 11.9% last week as mortgage rates fell. The 30-year fixed rate fell too 6.24% from 6.47% last week.

    • New Jobless Claims Pass 500,000 to 7-Year High

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New from CNBC.com:

- The Dow 30 at a Glance

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CNBC's Names in the News:

Intel

Wal-Mart

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Questions? Comments? tradertalk@cnbc.com

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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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