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Market Insider with Patti Domm Trader Talk with Bob Pisani

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  Thursday, 16 Oct 2008 | 4:09 PM ET

Welcome To The New Normal?

Posted By: Bob Pisani

The Dow again swung in a roughly 775 point range (about 9 percent), and yet the markets felt....stable.

But it's not stable, and it's not normal. Commodities got clocked again: oil at a new low, palladium down 10 percent, aliminium down 9, copper down 4.

Most importantly, gold was down 4 percent as hedge funds continued to liquidate even the "flight to safety" play of precious metals. This is a sign that sellers are still out...selling.

Financials again significantly underperformed the rest of the market.

Elsewhere:

There are some signs the municipal and corporate bond market might be getting easier:

--Calif. raises $5 billion

--PG&E doubled the size of its planned bond sale, from $300 m to $600 m

--Occidental Petroleumincreases size of its bond offering from $750 m to $1 b, and priced them today at Treasury plus 437.5 basis points.

1) Economic news. The economic news remains poor: industrial production was down 2.8 percent, the largest drop since 1974.

Combine this with yesterday's stats: 1) record low Empire Manufacturing Index, 2) 3-year low in retail sales, and what you have is a clear indication that the economy slowed notably in September.

2) Bank earnings today: poor, but not far from expectations. Citi,Merrill Lynch, PNC, and BB&T turned in numbers that, while far below a year ago, at least did not surprise dramatically on the downside.

I'm not trying to gild the lilly here. Citi, for example, lost money in credit cards, consumer banking, and investment banking. Credit costs and delinquencies rose, and writedowns continued. But it wasn't worse than the lowered estimates.

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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, 16 Oct 2008 | 3:55 PM ET

Why Insurance Stocks Are Under Pressure

Posted By: Bob Pisani

I have been asked repeatedly why insurance stocks are again under pressure today and are underperforming even the other financials. In general, traders and analysts agree that:

1) these insurers have very little short-term debt;

2) do not use much financial leverage;

3) they receive new dollars every day that need to be invested.

So, what's up then? Concerns are very vague, but there are three that pop up:

1) pressure to raise capital (MetLife and Pru have already announced)

2) credit deterioration risks

3) equity market guarantees. These firms sell variable annuities which have equity market guarantees embedded in them. With the S&P 500 down almost 40 percent this year, there are concerns some of the firms will have to pay to cover shortfalls in the guarantees

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New from CNBC.com:

- The Dow 30 at a Glance


Questions? Comments? tradertalk@cnbc.com

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  Thursday, 16 Oct 2008 | 9:17 AM ET

The Good News On Inflation

Posted By: Bob Pisani

At least there was some good economic news today:both CPI and core CPI were below expectations , so inflation concerns are indeed receding.

Futures rallied nearly 15 points on the news. S&P futures have swung in a 50-point range this morning.

Switzerland is taking a nearly 10 percent stake in UBS (6 billion francs); Credit Suisse said it would raise 10 billion francs from several investors, including Qatar.

Credit Suisse up 13 percent pre-open; UBS up 11 percent.

Remember, this is an options expiration week and it is definitely adding to the volatility.

Elsewhere:

1) financial company earnings are basically in line with expectations.

--Citireported a loss of $0.60, beating estimates by $0.10.

--Merrill Lynch reports a loss of $5.56, pretty awful but now far from the expectations of a loss of $5.22

The shareholder vole on the the Bank of America deal will come in mid- to late November, CEO John Thain said.

--PNC Bank, the largest bank in Pennsylvania, reported earnings below expectations, as revenues declined and bad loans increased.

--BB&T, one of the largest banks in the Southeast, reported earnings of $0.65, in line with expectations. They went out of their way to note that their risk-based capital ratios are "significantly" higher than an average of its peers.

  • As Recession Looms, Pressure on Fed to Cut More
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  • Fed Officials Warn of Recession Risk
  • Credit Thaws, but Recession Fears Rise
  • Shoppers To Constrain Spending: NRF
  • America's Rich Feel Bite of Financial Crisis

--Bank of New York Mellonreported earnings above expectations

2) Other earnings reports were basically in line as well:

--United Technologies was in line with expectations; they raised the low end of guidance for the full year but are still in line with expectations.

--Illinois Tool Worksreported earnings of $0.85, 2 cents shy of expectations; fourth quarter guidance was in line with expectations.

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New from CNBC.com:

- The Dow 30 at a Glance

_____________________________


Questions? Comments? tradertalk@cnbc.com

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  Wednesday, 15 Oct 2008 | 4:04 PM ET

No Let Up In Volatility

Posted By: Bob Pisani

The volatility continues. The Dow swung in a greater than 700 point range again today. The story is simple: most traders believe we will be in a trading range for the next several months and will test the intraday lows we saw on Friday. The bad news:

1) continuing, vague concerns that government efforts will not be effective

2) we saw this concern play out in the t-bill market, where huge T-bill auctions came off at lower yields. We are practically paying the government to lend them money

3) weaker economic data in the form of retail sales

4) which was born out by the Fed's Beige book: "economic activity weakened in September across all twelve Federal Reserve Districts."

There was some good news:

1) LIBOR rates lower

2) and the belief that a tidal wave of liquidity is coming

Once again, the commodity complex sold off the most: energy stocks down 15 percent, commodity stocks down 12 percent./ Defensive names like consumer staples and healthcare were down 5 percent. New low in the Dow Transports.

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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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  Wednesday, 15 Oct 2008 | 3:04 PM ET

Why Energy Stocks Are Uderperforming The Market

Posted By: Bob Pisani

I've been asked many times today why energy stocks are again underperforming the market. There are several explanations:

1) When oil prices go down sharply, energy stocks underperform. This is the simplest--and most direct explanation for the decline. Further, many analysts are now attempting to estimate energy stock earnings based on oil at around $60, rather than $100 where it was a few weeks ago.

2) the leverage factor is going away. Much of the outperformance in energy in the last several years has been due to hedge funds getting aggressively involved under very high leverage. On top of this, hedge funds have fewer prime brokerage firms to borrow from.

Besides a reduction in leverage, speculators are continuing to exit the market. Goldman and Morgan Stanley,who were among the largest speculative players in the oil market, cannot play to the same extent as before because they are commercial banks and cannot take the high risk profile they formerly assumed.

3) As a corollary to 2), there has been unusually tight ownership of energy--to be blunt, every fast money yo-yo on the planet was in commodities in the last 4-5 years, largely energy. Now all that is unwinding, and they are continuing to get margin calls.

4) Demand fears on global recession. There is talk of notable reductions in capital expenditures by major oil companies, which is impacting oil service companies.

    • Fed's Beige Book: Economy Weak Throughout US

If this decline in oil continues, the traditional tactic for those who must trade energy stocks is to go long the biggest names. That's because the biggest names have the longest time horizons and can be most conservative.

That's why, for example, ExxonMobil is only down 15 percent this month, while most oil service names are down 30 to 40 percent. Exxon has $40 billion in cash, more stable than some countries! While ExxonMobil is down 9 percent today, the decline is small compared to the double digit declines in other energy and commodity stocks.

Take a look at Suncor, formerly a darling of the oil sands crowd; down 50 percent this month.

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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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  Wednesday, 15 Oct 2008 | 11:35 AM ET

Traders See Days Of Wide Range Ahead

Posted By: Bob Pisani

As we drift lower midday, there is good news and bad news.

The bad news:

1) we are entering a period of poor economic data, even poorer than the previous months, as evidenced by the retail sales data today;

2) traders believe that the most likely course of action the next few months is a trading range, with days of high volatility and large price swings followed by days of relatively little activity; we will test our Friday lows several times.

The good news:

--many stock prices have been cut in half in the last 5 months, so stocks are already pricing in a relatively large economic slowdown.

In fact, even today many big names are sitting at 52-week lows: retailers like JC Penneyand Nordstrom, commodity stocks like US Steel, industrials like Eaton, and some techs like Texas Instruments.

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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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  Wednesday, 15 Oct 2008 | 9:13 AM ET

Good News On Energy, But Not So On Retail And Mortgage Rates

Posted By: Bob Pisani

Futures dropped a bit as retail sales were weaker than expected, Producer Price Index (PPI), a measure of inflation at the wholesale level, was in line , but core PPI was higher than expected...bottom line is that energy costs are dropping, and this will be a big help in the next quarter.

You can see this with the earnings from CSX : in-line, no big surprises, and most importantly FUEL PRICES DECLINED significantly.

Still, futures declined on this news, probably because the weaker than expected retail sales indicates a negative quarter for GDP.

Another negative: The Mortgage Bankers Association said the average 30 yr mortgage rate moved up to 6.47 percent from 5.98 percent last week. Refi's still rose 12.5 percent, while purchases were little changed. Rates are up because bond yields are moving up.

So good news on energy inflation, bad news on retail sales, bad news on mortgage rates.

    • Mortgage Applications Rise on Refinancing

Elsewhere, commodity stocks like BHP Billiton ,Massey, and AK Steel are trading down 5-10 percent pre-open.

However, the earnings reports have been fair to good this morning:

1) JP Morgan posted a gain in earning when a loss was expected, however provisions for credit losses were notably higher than last year in investment banking, retail financial services, card services, and commercial banking. They were not, however, notably higher than expected.

2) Wells Fargo posted higher earnings ($0.49) than consensus ($0.41), as did Wachovia ; both are trading up about 3 percent pre-open. Wells Fargo was the beneficiary of all that panic over bank deposits; they saw a "tremendous" inflow at the end of September.

3) Coca-Cola also posted earnings higher than expected, as opposed to rival Pepsi

4) Intel's revenue guidance ($10.1-$10.9 b, $10.8 b expected) was fair, not great.

    • Analyst Whitney Cautious on Banks Despite US Plan

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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, 14 Oct 2008 | 4:09 PM ET

Trading Will Be A Test Of The Lows

Posted By: Bob Pisani

What can we conclude about today's trading? That we are not going to move too far too fast--and the most likely path is a trading range with a test of the lows.

Yes, Virginia, earnings matter. The focus has been on the credit & macro backdrop; this has obscured fundamentals. The problem now is that it is difficult to say what is priced in.

Techs led the markets down. Intel is reporting after the bell. As a trader, is Intel fairly priced? They used to have all sorts of opinions, because they had models. But when Intel moves from $25 to $15 in two months, all anyone can says is, "I don't know, Bob, I just don't know."

Commodity stocks were also notably weak today.

Meantime, TrimTabs is reporting equity mutual fund investors redeemed $8.8 billioni on Friday. Bond funds had a record $10.2 b one-day outflow on Friday as well. Equity fund outflows for the month of October are now estimated at $55.8 b, which would be the largest outflow since ICI began records in 1984.

Remember: investors often panic at extremes.

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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

Apple

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Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 14 Oct 2008 | 12:59 PM ET

Traders Ponder ... To Buy or Not?

Posted By: Bob Pisani

To buy or not? That's the question facing traders today. Note that while financials are strong, the rest of the market is quite erratic. Only 4 of the 10 S&P sectors are up. That's due to questions about the global economy and earnings.

As examples, we saw three well-known companies gave lower earnings guidance today: Pepsi , Ingersoll-Rand , and Supervalu .

Simply put, the fear is that earnings are going to put a cap on how much the market can realistically rally.

That's not preventing the bulls from being optimistic, particularly in financials. Citigroup upgraded all the banks to "Buy," calling the new plan a "deal changer."

In general the bulls are arguing:

1) That the trend is now changing to a slow drift up

2) That the mentality is changing from "sell the rally" to "buy the dips"

3) That the system is being flooded with money and it's best not to play against that trend.

The bears are arguing:

1) Things will get worse

2) We haven't seen the cycle lows, even if this is an interim low

3) There is much more deleveraging to come.

As for the all-in argument, that traders must go all-in now because they are down for the year and have little choice, there is much debate about that.

Most traders argue that if you are down 20 percent for the year, for example, the responsible thing to do is roll up and go to cash. Doing anything else is irresponsible.

But there are plenty of risk takers out there.

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New from CNBC.com:

- The Dow 30 at a Glance

_____________________________

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CNBC's Names in the News:

Wells Fargo Sues Citi to Head Off Liability Claims

J&J Profit Beats Forecast, Shares Jump

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Questions? Comments? tradertalk@cnbc.com

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  Tuesday, 14 Oct 2008 | 9:14 AM ET

What The New Bailout Plan Will Do

Posted By: Bob Pisani

Futures, already up overnight, moved up again after 8 am ET as details were presented about the latest government rescue effort.

All of the major European economies, and the U.S. now have a similar plan.

The US government will 1) take a $250 billion equity stake in the form of preferred shares which cannot be redeemed for three years, 2) guarantee bank-to-bank lending, and 3) remove deposit insurance levels for non-interest bearing accounts.

The $250 billion investment will include four banks (Citi, JP Morgan, Bank of America, Wells Fargo), 2 brokers (Goldman, Morgan Stanley), and 2 processing banks (Bank of New York, State Street), and other smaller banks.

The investment of preferred shares on an equal level to existing preferred shareholders preserves the investment of those shareholders. If the rescue plan succeeds, the shares can be sold for more than the government paid, which would make a profit for the government and shareholders.

    • US Details Revised Bank Rescue Package

The hope is that this will result in a decline in LIBOR rates and elimination of counterparty risk. Several LIBOR rates are lower, CDS rates are lower across the board, while commodities are higher. In addition, the Fed will begin funding purchases of commercial paper on October 27th.

What happened to all the toxic mortgages? They're still there.

Elsewhere:

1) Financials are notably higher: Citi up 15 percent, Morgan Stanley up 19 percent, Goldman Sachs, Credit Suisse and Deutsche Bank up 12 percent. Some regional banks are even higher: KeyCorpup 21 percent, Regions Financial up 20 percent. Citigroup upgraded most of their banks to a Buy.

2) Johnson and Johnson beat estimates and raised guidance for the remainder of the year

3) Diversified manufacturer Ingersoll Rand down 8 percent as they lowered guidance for the third quarter, saying the economic slowdown has been more significant than expected.

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New from CNBC.com:

- The Dow 30 at a Glance

_____________________________

_______________________________________
CNBC's Names in the News:

Johnson & Johnson

Pepsico

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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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