It may not be a pattern yet, but it is starting to look like one as stocks once again started the day off in ugly fashion only to tantalize traders with a the prospect of higher close, but the rally ran out of steam again, sending the Dow Jones Industrial to its third consecutive loss. The damage was not all that bad for the Dow, but the S&P 500 also closed while the Nasdaq managed to settle barely higher for the day. On a percentage basis, the Russell 2000 was easily the best performer among the the U.S. indexes.
One of the favorite outlets for blame for the market's recent down days has been a stronger dollar, though I use that term loosely. Believe it or not, the U.S. Dollar Index was home to some profit taking today and this should have been a day where the dollar bulls partied hard. After all, one of the primary reasons stocks traded lower today was because of those pesky lingering concerns about Europe's sovereign debt woes.
Yes, it is 2011 and we still have to hear about this issue, but that is the problem with contagions: They do not end quickly. There was some speculation floating about this morning that Portugal would have to seek a bailout and there were rumors reported by various European press agencies that the EU puppet masters in Berlin and Paris were pushing Portugal to accept outside aide.
As the New York Times reports, Portugal is raising taxes and cutting government employeesâ€™ wages as it tries to persuade investors that it can reduce its budget deficit, but the country is looking to sell about $26 billion in bonds this year and it is safe to say every one of those auctions will be heavily scrutinized. Neighbor Spain is planning a $3.9 billion bond auction for Wednesday, but that amount is lower than previously estimated, perhaps because appetite is weak for Portuguese and Spanish debt. The Dollar Index did not respond today, but I would keep an eye on it for the rest of the week.
Dollar Index Chart
There might be some silver lining in Europe's dark clouds and it comes from Italy. Yes, Italy. Bloomberg ran an interesting piece today quoting one money manager as saying Italian bonds have been ''unfairly punished.'' Remember, this is the same Italy that has the EU's second-worst debt burden and the yield on Italian 10-year bonds has jumped 1% in the past month, but Italy's household debt situation is vastly superior to that of Portugal or Spain, Bloomberg reported.
Give Italy this much credit: The country did not need to engage in bank bailouts during the financial crisis, something plenty of other nations wish they could say. Comparatively speaking, the growth outlook for Italy is not all that bad and it seems unlikely that the country will need a bailout. The iShares MSCI Italy Index Fund (EWI) took a small haircut today, but the volume was weak and a move above $16.50 could make this a compelling short-term trade.
Back here in the states, it is understandable to see why the bulls would be frustrated with the market's lethargic ways today. This was a perfect ''Merger Monday'' with $20 billion in deals announced before the bell. Dow component DuPont (DD), one of the better performers in the index last year, announced it will acquire Denmark-based Danisco for $5.8 billion, valuing the maker of enzymes for biofuels and foods at 25% above where it closed last Friday.
Danisco is one of the largest biofuels companies in the world and the company already works with DuPont on an array of partnerships and projects, so DuPont certainly knows what it is buying here. The Danish firm was reportedly coveted by several suitors and after recently lifting a cap on shareholder voting rights, DuPont moved in for the kill, Bloomberg reported.
Danisco is the worldâ€™s largest food- ingredients maker, producing sweeteners and cultures used in ice cream and cheese and the two companies operate an ethanol joint venture, according to Bloomberg. DuPont shares lost almost 1.5% on the news, but in a testament to how strong the stock has been recently, Monday's performance is the stock's worst in a month.
It is rarely a surprise to see the shares of the company doing the buying decline, as they did in DuPont's case, but it is not typical to see the shares of the acquired firm fall, but that is exactly what happened with Progress Energy (PGN) after Duke Energy (DUK) said it will buy its rival for $13.7 billion in stock, creating the largest U.S. utility.
The combined company will serve 7.1 million electric customers with a mix of coal, natural gas, oil and renewable resources in South Carolina, North Carolina, Florida, Indiana, Kentucky and Ohio, according to the Wall Street Journal. The expected per share earnings growth for the combined company is 4%-6% per year (remember, these are utilities, not tech companies). North Carolina-based Duke's offer values Progress at $46, but apparently that was not a rich enough premium to get investors excited because Progress shares lost 1.6% to close at $43.99.
Duke, which is also inheriting $12.2 billion in Progress debt, will gain a foothold in Florida and said the deal will add to earnings next year. The two companies did not comment on cost savings, but combing their Carolinas operations could deliver savings of $600 million to $800 million, the Journal reported. The transaction is slated to close at the end of 2011.
Progress Energy Chart
Fourth-quarter earnings season kicks off this week and Dow component Alcoa (AA) got the ball rolling today after the close. Per my usual comments, I would not put too much emphasis on Alcoa one way or the other in terms of its impact on the Dow because it is the lowest-priced stock in a price-weighted index, but it should be noted the report was pretty solid.
The largest U.S. aluminum producer earned $258 million, or 24 cents a share, compared with a loss of $277 million, or 28 cents, a year earlier. Sales jumped 4% to $5.65 billion from $5.43 billion, but that missed the Street estimate of $5.75 billion. Analysts were looking for a profit of 21 cents a share and while a beat is a beat, it is doubtful Alcoa's numbers will set the Dow on fire tomorrow despite the fact that this is the company's most profitable quarter in more than two years.
Last week, Pennsylvania-based Alcoa said it will restart production at three idled U.S. plants, boosting aluminum output by 137,000 tons this year, but some analysts are still forecasting aluminum production in 2011 will outweigh demand. The company did say it expects consumption to rise 12% this year and the wild card in that equation may be the debut of ETFs backed by physical aluminum.
Some pundits think Alcoa could see the low-20s this year and others have tossed the name around as a takeover target for a company like Rio Tinto (RIO). I am not so sure about the latter theory, but a move to $21 from where the shares currently trade would be a strong move, even if it took all of 2011.
Looking at the charts, the S&P 500 finished the day just below 1270, right in the middle of the important 1258-1280 range. The index has come close to breaking through 1280 a couple of times recently and this is a significant level as it has not been seen since late 2008. A move above 1280 could induce enough short covering to carry the index another 10 points beyond there. A move to 1260 or lower would test the spirit of the buy-the-dips crowd.
S&P 500 Chart
Like the S&P 500, the Dow is having some issues with resistance from 2008, that being in the 11,700-11,750 area. With financials hammered on by the Massachusetts court ruling news on Friday, that was a fine opportunity for the bears to do some damage on the Dow, but stocks rallied into the close, turning a bad day into just a small loss. Alcoa will not do much for the Dow's fortunes on Tuesday, but Intel (INTC) and JPMorgan Chase (JPM) deliver their fourth-quarter reports later this week and that could spark the index. Support looks decent at 11,600.
The Nasdaq was able to catapult itself above 2700 today ahead of the Verizon (VZ)/iPhone news on Tuesday. Apple shares were up 2% today and the official announcement tomorrow may be another boost to Apple and the Nasdaq, but count me among the skeptics regarding how big of a deal this really is.
First, the iPhone going to Verizon should have been priced into Apple and Verizon shares long ago. Second, Verizon is already the dominant carrier of phones that run on Google's (GOOG) Android software, so if Apple starts picking off Android customers, and there's no guarantee of that, then Google would suffer and Apple would benefit, but how big will the benefit be to the Nasdaq?
The 800 area has been problematic for the Russell 2000 and while I am personally bullish on small-caps in 2011, a couple of weeks of consolidation following the index's torrid close to 2010 should come as no surprise. The concern would be a move to support at 760.
Russell 2000 Chart
In a normal environment, this should be a week where the market analyzes and digests the looming earnings reports and responds accordingly, but with Europe's fiscal fiasco still looming large, it would be a positive catalyst if someone, anyone displayed a desire for Portuguese and Spanish debt. That would help ignite the risk appetite the market needs.
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