In the final trading day before second-quarter earnings season kicks into high gear, U.S. stocks extended last week's gains on Monday, though only by narrow margins. The Dow Jones Industrial Average added 18 points to close at 10,216 while the Nasdaq gained less than two points before settling at 2198. The S&P 500 could not even manage a gain of single point, but still closed up on the day at 1078.76. Small-caps were losers on the day with the Russell 2000 shedding almost eight points to finish the session at 621.61.
By all appearances, Monday should have been a strong day for the tech sector. Barclays Wealth and UBS said before the market opened that computer and software names have fallen to their lowest valuations in 20 years, signaling that those companies are poised to rebound as they start spending some of their massive hoards of free cash. UBS said those declining valuations and the possibility of increased spending should combine for some good news for the tech sector even in the face of slowing U.S. growth. Share prices for tech names have fallen to 15.6 times annual income, making the group cheaper than it has been at any point since 1992, according to Bloomberg data.
SanDisk (SNDK), the maker of flash storage products for consumer electronic devices, surged almost 7% on volume that was nearly 25% above the daily average after UBS touted the stock. Even beaten down Qualcomm (QCOM) popped 3.51% on better-than-average volume after Goldman Sachs added the stock to its closely followed ''conviction buy list.'' Yet the Nasdaq could muster only a meager gain on Monday.
Finding a reason for Monday's Nasdaq disappointment is not that hard. Just look at Apple (AAPL). While the Nasdaq's juggernaut lost less than 1% on the day, concern may be growing that design problems with the new iPhone 4 could turn into headwinds for the stock. Consumer Reports said it will not recommend the phone amid complaints about a wrap-around antenna that if touched the wrong way, severely hampers the phone's reception.
It should be noted that while Consumer Reports is not a tech industry group, the magazine has been around for a long time and as CNBC put it, this is an ''influential nonprofit organization.'' So they have no skin in the game regarding the performance of Apple's stock. Beyond that, Consumer Reports said it tested ''many'' iPhone rivals and did not discover similar reception problems with those phones. The bottom line is that this issue probably will not be a long-term drag on Apple shares, but it does at least partially explain why the Nasdaq disappointed today.
There was some M&A news worth noting, of both legitimate and speculative nature. First, the legitimate news. Insurance giant Aon (AON) said it will acquire Hewitt Associates (HEW) for $4.9 billion in cash and stock in a move that will almost triple the size of Aon's consulting business. Hewitt focuses on consulting services in the human resources arena and the acquisition is Aon's way of challenging rival Marsh & McLennan (MMC) on this front.
Aon will pay $50 per share for Hewitt, a 41% premium over where the stock closed on Friday. Hewitt shares surged $11.39, or 32%, to $46.79 after touching a new 52-week high at $47.42. Hewitt shareholders will receive $25.61 in cash 0.64% of an Aon share for each Hewitt share they own. The deal is expected to be finalized in November.
While Aon said the acquisition will boost earnings starting next year and begin saving the company $355 million a year starting in 2013, but at least one analyst voiced concern that Aon is overpaying. Shares of the acquiring company usually decline on takeover news, but the sell-off was pronounced in Aon as the shares tumbled 7% to close at $35.62 after moving to a new 52-week low at $35.10 earlier in the trading day.
On the rumor-charged M&A front, BP (BP) continued its impressive run higher after London's Sunday Times reported yesterday that Exxon Mobil (XOM), the largest U.S. oil company, is preparing a bid for its beleaguered British rival. Exxon has reportedly asked the Obama Administration for permission to make a move on BP and that permission has apparently been granted.
Of course Exxon, the largest publicly traded oil company in the world, is not commenting on the news. Then again, everyone that follows the energy sector knows that list of legitimate suitors for BP, assuming the company really wants to sell itself, is very small and Exxon is on that list.
Another catalyst working in BP's favor on Monday was speculation that Apache (APA), the largest U.S. independent oil and gas firm, may acquire up to $12 billion worth of assets from BP, including part of BP's stake in Alaska's Prudhoe Bay. A $12 billion purchase for a company with a market cap of less than $30 billion had investors punishing Apache to the tune of a 3.2% drop on the day, but BP shares continued an impressive run. The stock is now up 20% in the past five days and traded as high as $37 today after trading around $27 on June 28.
As I mentioned earlier, we have arrived at the dawn of another earnings season and with the reports that were delivered after the bell today, there might be some holes in the double-dip recession thesis. Personally, I feel that to have a true double-dip recession, of which there has only been one in the past 70 years, the economy has to emerge from the first recession to begin with and I am not convinced that ever happened and the employment picture underscores that theory, but I digress.
Dow component Alcoa (AA), always the lead-off batter during earnings season, said it posted a second-quarter profit of $136 million, or 13 cents a share compared with a loss of $454 million, or 47 cents a share, a year earlier. The top line also looked solid as sales jumped to $5.19 billion from $4.24 billion. Analysts had been expecting a profit of 12 cents a share on revenue of $5.05 billion.
When Alcoa delivered its first-quarter update three months ago, it forecast a 10% increase in global aluminum demand this year. Buoyed by demand from automotive customers in North America and China, certainly positive signs, Alcoa said today that aluminum demand should rise 12% this year. Not surprisingly, Alcoa said China will account for the bulk of this year's aluminum consumption as commercial construction demand in North America tumbles and Europe's economic recovery remains challenged.
I know I said this last quarter because I remember Alcoa's earnings coming out on a Monday, so I had the privilege of addressing the report then as well, but this is not the marquee report many pundits would have us believe it is. Alcoa's earnings get hyped up simply because the company is always the first of the 30 Dow stocks to report. And as I mentioned last quarter, the Dow is a price-weighted index and Alcoa is the lowest priced stock in the group, so do not expect a triple-digit gain for the Dow on Tuesday solely on the back of Alcoa's numbers.
In other words, there was another after-the-bell report today that was probably more important than Alcoa and that came from railroad operator CSX (CSX). In the essence of full disclosure, I am not long (or short) CSX shares, options or any ETF where this stock or any other railroad is held, so hopefully you will believe I am being impartial when I say this report looked pretty impressive.
CSX said it earned $414 million, or $1.07 a share, compared $305 million, or 77 cents a share, a year earlier. Revenue surged 22% to $2.66 billion. Analysts had been expecting a profit of 98 cents a share on revenue of $2.63 billion.
Florida-based CSX, the third-largest U.S. railroad, said it saw increased shipping volumes in every category that moves goods for, except for food and consumer staples, which were flat. Shipments of vehicles and auto parts surged 63% while shipments of metals used in the auto and construction markets jumped 44%, according to the Associated Press. Shipments of products used to build residential houses even saw a 2% gain.
CSX said ''the economy remains dynamic'' and that is seeing continued improvement in key markets. Transportation companies are often viewed as temperature checks on the broader economy and if you are bullish on U.S. stocks, the CSX report could be something to cheer. The shares are up 33 cents to $52.79 in after hours trading as of this writing.
Looking at the charts, the S&P 500 has gained almost 6% in the past five days and is going to have to contend with resistance at 1080, but on the Alcoa and CSX earnings may be enough for the index above 1080 on Tuesday morning. A close above 1080 turns attention to resistance in the 1110 area. I know a lot of folks have been talking about the ''death cross'' on the S&P 500, the 50-day moving average crossing below the 200-day line, but the losses may not be as bad as expected.
On a historical basis, death crosses on the S&P 500 are followed by small losses over the next month and then the index moves higher over the three- and six-month time horizons following the death cross.
S&P 500 Chart
This could be a big week for the Dow as the blue chip index tries to conquer 10,250 and then 10,365. Alcoa has already reported, Intel (INTC) reports after the close on Tuesday while JPMorgan Chase (JPM), Bank of America (BAC) and General Electric (GE) follow later this week. The Dow is overbought after the five-day rally we have just seen, but if the market likes the Alcoa and CSX reports and Intel blows out the way it has the last two quarters, traders may have no choice but to chase the index higher this week.
The Nasdaq could encounter some resistance at 2220 and then again just a few points away 2235 with support looking firm at 2150. The earnings calendar for the Nasdaq is light this week with Google (GOOG) the only other noteworthy tech name to report in addition to Intel, so I would not expect much in the way of excitement unless Intel and Google report truly extraordinary (or disappointing) results.
I have been unimpressed with the Russell 2000 for a while now and see no reason to change my tune. Support can be found at 590 and resistance at 650 and 670, though I would not expect either of those levels to come into play this week.
Russell 2000 Chart
The earnings reports that were delivered by Alcoa and CSX today are a double-edged sword. On one side, these reports may signal that things are not as bad with the U.S. economy as previously thought and if that sentiment holds, stocks could rally over the next couple of weeks. On the other side, strong earnings reports could be fuel on the fire for those that are saying we are in the midst of a jobless recovery. Earnings are important, but strong private sector job growth is what I need to see to become bullish for periods of longer than a week or two.