Bets on a pre-election rally looked safe early in Monday's trading session, but the major U.S. indexes could not hold the morning's gains eventually finding their way into the red. That is where the Nasdaq would finish with a small loss while the Dow Jones Industrial Average and the S&P 500 were able to manage only meager gains on the day. A close below 700 for the Russell 2000 could prove to be cause for concern.
It was another day of a mixed bag of economic data as personal incomes dropped for the first time in a year, leading to a smaller-than-expected rise in consumer spending during September. The Commerce Department said personal incomes fell 0.1% last month, the first decline since July 2009, and consumer spending rose by just 0.2%. The median estimate of 67 economists surveyed called for a 0.4% rise in consumer spending. On the bright side, the Commerce Department revised the August consumer spending number to an increase 0.5% from 0.4%.
Personal Incomes & Spending Chart
The Institute For Supply Management October manufacturing data was a bit more impressive, coming in at 56.9 compared to an estimate of 54.5. That is good for 15 consecutive months of expansion. ISM's Robert Nore detailed the following: ''Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy.''
As I always, the devil is in the details as comments like these highlight: ''The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins.'' And ''Currency continues to wreak havoc with commodity pricing.'' The first is from survey respondents in the transportation equipment group, the second is from those in the food, beverage and tobacco groups.
One group that did shine on Monday was oil stocks. There was a some mergers and acquisitions news involving Exco Resources (XCO), an independent oil and gas producer. The company received a $4.36 billion management-led buyout offer and that helped the shares jump more than 30%, good for the biggest rally in the stock since its 2006 initial public offering.
Exco CEO Doug Miller is offering $20.50 a share in cash, an offer that values Exco at a 38% premium to where the stock closed on Friday. This is clearly a bet that natural gas prices will rebound from their recent lows as that fuel accounts for 93% of Exco's output, according to Bloomberg News. That may prove to be a tough bet to turn into a winner because energy producers seem intent on continuing to tap shale resources throughout North America, bringing more supply to market at a time when prices clearly show that is not the best of strategies.
Exco has over 1 trillion cubic feet of reserves and for those of you that are not familiar with the company, one of its largest shareholders is legendary energy investor T. Boone Pickens.
Exco Resources Chart
Staying in the oil patch, oil services firm Baker Hughes (BHI) caught a bid not only because oil services are extremely sensitive to price action in crude futures, but also on its own merits. By that I mean an excellent third-quarter earnings report that saw the company post a profit of $255 million, or 59 cents a share, compared with $55 million, or 18 cents a share, a year earlier. Revenue soared 83% to $4.08 billion $2.23 billion.
Analysts were expecting a profit of 47 cents a share on revenue of $3.8 billion. Texas-based Baker Hughes said the results were helped by its $5.5 billion acquisition of BJ Services, which closed in April. Going beyond that catalyst, the company's comments were inline with what other oil services and integrated names have been saying following their third-quarter results and that is the rush to onshore drilling (shale plays) was a positive catalyst in the quarter while the moratorium on deepwater drilling in the Gulf of Mexico restrained earnings to some degree.
Baker Hughes Chart
All was not well on the earnings front for energy names, though. After the bell, Anadarko Petroleum (APC), the independent oil and gas producer that owned a 25% non-operating interest in the now infamous Macondo well project, reported a third-quarter loss of $26 million, or 5 cents a share, compared with a profit of $200 million, or 40 cents a share, a year earlier. Excluding one-time charges, Anadarko earned 21 cents a share and that missed the consensus estimate of 28 cents a share.
In an environment where a profit miss is one thing, but a revenue miss is far worse, Anadarko went down that unfortunate road by saying revenue declined 11%. Anadarko has previously said it is refusing to pay BP (BP) for costs related to the Gulf spill, citing the British company's negligence in drilling the Macondo well.
BP reports earnings on Tuesday morning London time and in what cannot be considered a surprise, Bloomberg ran a headline today saying that the company's profit will probably be lower in the third quarter than it was in the same period in 2009. Not exactly a shocking revelation. Back to Anadarko. The shares are down almost 1.3% in the after-hours session.
Obviously, this is week is chocked full of marquee events. Tuesday is Election Day. Wednesday brings the conclusion of the Federal Reserve's two-day meeting and the expecation of more quantitative easing. As if that is not enough, October non-farm payroll news will hit the wires on Friday morning. So unless you have been keeping a close eye on the soap opera that is BHP Billiton's (BHP) $38.6 billion hostile takover bid for Potash Corp. (POT), it would be easy to forget that Canada's government will make its ruling on BHP's offer on Wednesday.
Whether you are a fan of the materials space or not, this is a pretty interesting story that seems to change by the hour. Late Sunday night, press reports were saying BHP, the world's largest mining company, was considering raising its offer for Potash, the world's largest fertilizer maker, by 10%. That would value Potash at $143 a share, up from the current offer of $130.
Then some stories crossed the wires that said BHP would not rush to increase its offer. This morning, UBS was out with a note that saying that BHP could take its offer as high as $165 a share. What is important to remember is that while BHP has never officially ruled out raising its bid, it has not really embraced the idea either. At the end of the day, if Potash is looking to create shareholder value through a sale it has BHP's offer and... (insert crickets chirping here).
Looking at the charts, it is the same old song with the S&P 500 and the 1185 area. It looked like the index was going to break resistance at 1190, and it did intraday, but those gains did not hold. Then it looked like the index would flirt with support at 1175, which it did, only to find its way back to 1184. With the election outcome effectively priced in, I would not expect an exciting day on Tuesday.
S&P 500 Chart
Looking at the Dow's six-point gain for the day might leave you thinking it was a boring day for the blue-chip index. In fact, the Dow was quite volatile, trading in a 180-point range. The Dow looked like it was going to conquer resistance at 11,200, but those gains could not be held either. That is still resistance and support can still be found at 10,975.
The Nasdaq snapped its eight-day winning streak after starting the day off in fine form. The index opened at 2520, a significant resistance area and quickly made its way above that area only to give up those gains and trade below 2500. About the best thing that can be said about the Nasdaq is that it was able to muster a close above 2500. Support can still be found at 2490 and 2480.
The Russell 2000 closed below the psychologically important 700 level. This could be a case of some pre-election profi-taking or sign of bad things to come, but as I noted a couple of weeks ago, stocks have moved higher following the last 17 mid-term elections and the fourth quarter is favorable to stocks anyway, so it would be a surprise to see fund managers take a pass on small caps once we get out of this week.
Russell 2000 Chart
Nearly everyone has a rooting interest in tomorrow's election and no one seems to be lacking an opinion on QE2. Maybe it is time to relax a bit and just root for the Giants to win the World Series. Sorry Yankees and Red Sox fans, but on a historical basis, stocks perform better following a World Series victory by a National League team.