News of a massive $61 billion loan package from European Union members and the International Monetary Fund (IMF) to Greece bolstered the Euro and in turn, led to small gains for the major U.S. indexes. The gains were looking far better earlier in the session, but another one of those sell programs kicked in during the afternoon and that left the Dow Jones Industrial Average with a gain of just 8.62 points for a close at 11005.97. The S&P 500 continued to inch toward 1200, gaining 2.11 points to settle at 1196.48 and the Nasdaq gained almost four points to close at 2457.87.
I mentioned last week that the spreads on Greek bonds over German bunds had blown-out to historical highs and the cost of insuring Greek debt via credit default swaps had also soared to record levels, but on news of the aforementioned loan package, those credit default swaps fell 62 basis points to 364 basis points. Spreads between Greek bonds and German bunds narrowed today by 49 basis points. That news helped the Euro appreciate against the 16 major currencies. The currency had been down almost 5% this year against the dollar. The bulls can only hope that this is the final chapter in the Greek saga that has been a real issue for equity markets.
Stocks also got a lift from a healthy dose of mergers and acquisitions news. Electric utilities Mirant (MIR) and RRI Energy (RRI) rose by 18% and almost 15%, respectively, on news that the two companies would combine through a stock-swap merger valued at over $3 billion. The combined company will be called GenOn Energy and have a market value of $3.1 billion and 24,700 megawatts of generating capacity, according to MarketWatch.
Under the terms of the deal, which was announced on Sunday night, Mirant shareholders will receive 2.835 RRI shares for each Mirant share they own. Mirant will own 54% of the new company and RRI will own the remaining 46%. GenOn will be based in Houston and the new board will have five directors from each company. The transaction is expected to close later this year.
Sure, M&A activity of this magnitude is a good sign for the broader market, but as it pertains to Mirant and RRI, one might argue that this is an example of two wrongs coming together with the hopes of forming a right. As you can tell from the chart below, Mirant has not been a stellar performer recently. Neither has RRI. Both stocks are down about 30% this year.
Moving over to the oil patch, Apache (APA), the second-largest U.S. independent oil and gas producer, said it will acquire Devon Energy's (DVN) shallow-water operations in the Gulf of Mexico for $1.05 billion. That is far higher than the $750 million Dow Jones reported Apache would pay Devon when news of the deal broke late last week.
The deal comes as part of Devon's plans to divest its international and offshore assets to focus on the North American natural gas market. After taxes, the sale to Apache should net Devon about $840 million in proceeds. Combine that with the $7 billion asset sale to BP (BP), Europe's largest oil company, that Devon announced last month, and Devon is going to be close to raising $7.5 billion, the high end of the range the company estimated for its asset sales.
In addition, Devon still has some assets in China that it wants to sell. The Gulf properties acquired by Apache are projected to produce 9,500 barrels of liquid hydrocarbons and 55 million cubic feet of natural gas per day, Reuters reported. The deal is expected to close in June.
Devon Energy Chart
Staying in the oil sector, ConocoPhillips (COP), the third-largest U.S. oil company, said it will sell its 9% stake in the Syncrude project in the Canadian oil sands to China's Sinopec, the largest oil refiner in Asia, for $4.65 billion. The deal is one of the largest to date by an Asian energy producer in North America. Canadian regulators are not expected to oppose the transaction.
Conoco's plans to divest $10 billion in assets to shore up its balance sheet have been well-known for at least several months. The company's leveraged balance sheet has hampered profits and led to a debt burden that is far greater than rivals Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies, both of which are much bigger than Conoco in terms of market value.
To be fair to Conoco, analysts were saying that the sale of Syncrude may have been worth only $4 billion, so the company got a better price for its stake than was originally expected and that helped the shares gain over 1% to touch a new 52-week high at $56.17 before closing at $55.96. If anything, this deal highlights the fact that China's demand for oil remains strong and if the country's oil companies need to overpay a bit to acquire new assets, they will do so. The deal is expected to close in the third quarter.
In smaller scale M&A news, California Pizza Kitchen (CPKI) gained almost 1.6% on news that the company was holding talks with private equity firms about a possible sale of the company. The stock popped to $22.92, a new 52-week high, in the morning before steadily selling-off for the rest of the day. Specific buyers were not mentioned in press reports and the CEO of Domino's Pizza (DPZ) said in a CNBC interview after the market closed that his company would not be interested in California Pizza Kitchen.
Just a few weeks ago, it appeared that smart phone maker Palm (PALM) was headed for zero. After all, it is hard to argue that the Pixi has been a legitimate competitor to Apple's (AAPL) iPhone or Research In Motion's (RIMM) BlackBerry. Yet it has been hard to be short Palm recently as takeover news, perhaps the only reason to be long this name, has propped the stock up.
That was the case on Monday as Palm shares gained more than 17% on news that the company hired Goldman Sachs (GS) and Qatalyst Partners to perhaps find a buyer. Monday's headlines follow rumors that swirled last week China's Lenovo and Taiwan's HTC may be interested in Palm. You may remember Lenovo as the company that acquired IBM's (IBM) personal computer business a few years ago.
I cannot forget to mention that earnings season starts in earnest this week and Alcoa (AA), the Dow component and largest U.S. aluminum producer, got the ball rolling after the market closed today with its first-quarter earnings report. Maybe it is because Alcoa is a commodities producer, a Dow member or because it is always the first marquee name to report earnings, but this report is always closely followed.
The company said it lost $201 million, or 20 cents a share, compared with $497 million, or 61 cents a share, a year earlier. Excluding one-time charges, Alcoa earned 10 cents a share, which was inline with analyst estimates. Revenue surged almost 20% to $4.9 billion.
Outlook is normally the thing to look at when evaluating Alcoa's earnings report and the company had some positive things to say as it is forecasting sales growth in the automotive, heavy truck and trailer markets this year. The company said it is seeing improving demand for aluminum, which hit an 18-month high Monday.
The company said 2010 ''will clearly be better than 2009,'' but that is expectation for nearly every company in every sector and it should be noted that analysts had substantially reduced their estimates for Alcoa, so meeting estimates that had been revised lower is no big feat. Either way, it pays to remember that the Dow is a price-weighted index, meaning that the stocks with the highest price tags account for bigger percentages of the index than the lower-priced members. Alcoa has the lowest price tag of the 30 Dow stocks and is the worst performer in the index thus far in 2010.
Looking at the charts, sure, the Dow closed above 11,000 at a fresh 18-month high, but Monday's trade was not exactly awe-inspiring. The 11,000 figure, as I noted last week, is nothing more than round-number resistance, but a real hurdle can be found around 11,125. With earnings season upon us, the catalysts are there to keep moving the Dow higher or to finally drag it back to Earth.
Tomorrow afternoon is big in terms of earnings reports. I would not underestimate the importance of CSX's (CSX) report because rail carriers offer a good glimpse as to how the broader economy is performing. CSX is not a Dow member, but it is a member of the transports average. The big kahuna will be Intel (INTC). The biggest semiconductor maker in the world and Dow component reports after the close tomorrow. JPMorgan Chase (JPM) chimes on Wednesday morning and Bank of America (BAC) and General Electric (GE) report on Friday morning, so yeah, this is an important week for the Dow.
Of course, all of those stocks are also members of the S&P 500 which is trying to break real resistance at 1200. As Jim mentioned over the weekend, 1200-1250 was the year-end target offered by many analysts and for those brave enough to boost their targets beyond 1250, earnings and full-year guidance had better be strong to help the S&P 500 toward 1300.
S&P 500 Chart
The Nasdaq continues to hover just above resistance at 2450 and another long-term resistance point at 2465 is not that far off. A near-term move to 2500, while possible, is not probable, but this is an important week for the Nasdaq as well. The Intel report is followed by Google (GOOG) on Thursday and if those reports feature upside surprises and bullish guidance, the Nasdaq may able to traverse 2465, or at least challenge that level, this week.
While the earnings schedule is decent for this week and it is an options expiration week, I think small gains will continue to be the order of the day, unless the earnings reports I mentioned are really disappointing. I will go back to something that I have mentioned several times in the past and that is if JPM and BAC beat to the upside AND can offer clarity (by that I mean a specific date) on dividend increases, that could be the news the market needs to notch some solid gains this week.