Pisani's Trader Talk: Volatility Eases, Time for the Post-Mortem

Bob Pisani on the floor of the NYSE.

CNBC's Bob Pisani reports on what traders were telling him at midday:

Things a bit calmer today: volatility much lower, volume still heavy, but not as heavy as last 6 or 7 days. Three stocks advancing for every two declining.

Post-mortems starting to emerge on what has happened in the last two weeks. Everyone agrees on why it happened: a panic at the prime broker level. Any speculative leverage bond was marked down and holders of the debt were faced with margin calls and forced to come up with more collateral. So traders had to sell stock to put up more collateral.

Bulls desperately need to put together a couple of "up" days on respectable volume to really tamp down selling into rallies. Even then new news on housing/credit can drop the market.

Bulls are arguing that S&P trading is at under 16-times forward earnings and the market is arguably a bargain. Bears say that the financing cost hurdle is now higher and slow growth may erode profits.

Bears also argue that the loss of LBO is a major blow to stocks, since it removes one of the natural buyers. They are buyers, but damage may not be as great as thought. The big buyers have been:

a) M&A guys. In July, there were 40 cash M&A deals valued at $72 billion. That was the fourth highest in dollar terms, and the highest ever in terms of numbers. (TrimTabs.com). 65% (or 26 deals) were strategic, the rest were LBOs.

Bottom line: LBOs may slow, but strategic buyers are still out there and may be even more aggressive with the LBO guys on the side.

b) Buybacks. 136 buybacks were announced, the second highest ever in a month, surpassed only by buybacks announced in the wake of 9/11 (TrimTabs.com).

Bottom line: those buybacks will help markets throughout the year.

Where is the U.S. investor? Putting money into foreign funds. If they ever wake up and return to the U.S., look out...

Another sign of calm:

Dollar rebounding against the yen in the last two days. We saw a big bounce in the yen last week, but as Charles Dumas at Lombard Street Research has pointed out, this was a function of asset markets contracting. Hedge funds shrank their books recently, and since some of this was financed with the yen carry trade they repaid part of the funding by buying back the yen. But with the markets calmer, this unwinding should level off, just as it did in the beginning of March after the China scare.

Here's what he had to say at mid-morning:

Are mega-big cap stocks really back?

The S&P 100 has outperformed the S&P 500 recently, and the Street has been talking about this for a couple months. You should be suspicious when too many on the Street sound the same note (buy big cap was a common theme two years ago, but small caps outperformed until recently)

With that said, Credit Suisse issued a report to its international clients that is typical of the comments we have been hearing for the past several weeks. The report, written out of London, says, "We are now seeing evidence of a turnaround in the fortunes of big-cap stocks."

The report goes on to say that big cap stocks:

1) Are cheap. Big cap stocks historically traded on an average 30% premium to the market-now they trade on an average discount of close to 17%.

2) The economic backdrop appears increasingly to favor big cap. We find that big cap outperforms when: a) credit spreads rise-this is happening; b) when IFO or CBI roll-over-this has just started to occur; and c) when monetary conditions are tight and real rates are rising-again, this is the case now in Europe and especially the UK.

3) Big-cap credit quality is generally better than that of small cap (which is often not rated in any case).

4) The earnings momentum of big cap (1.1 ratio of upgrades to downgrades) is better than small cap (0.9 ratio of upgrades to downgrades).

5) Big cap is beginning to work, with European big cap outperforming over the last quarter and US big cap outperforming over the last year.

CS's most attractive big caps in Europe include Royal Dutch, ING, Lafarge and Ericsson.

Pisani's report before the bell:

For a market reporter, this is about as strange and exciting as it gets.

You can feel the momentum trader's urge to buy the market--just look at the efforts to buy Citi and JP Morgan at the troughs of the day.

Technicals very important here. If we close below yesterday's low (1439 on the cash S&P), expect lots of handwringing. The biggest problem is lack of conviction either way.

The "fat finger" rumor: I wrote yesterday that the market exploded when the Market On Close orders came in benign at 3:40 pm New York time. But the volume of trading and the velocity of the move astonished everyone on the floor, leading many to believe that there must have been some kind of erroneous buy or sell error that added fuel to the fire.

The rumor is that a trader who was entering an order to sell 54 S&P 1450 calls actually sold 5400 calls as the MOC orders came out. Then when he realized the mistake he had to buy back (cover) the order; traders say there was 5400 S&P calls that were bought at 3:41, just as the MOC orders were out.

European banks going out of their way to talk about credit exposure.

Barclays sees debt markets more normal in 2-3 months, liquidity still available, very confident in ABN success.

Societe Generale says it has low exposure to current credit.