It was a dreadful day for U.S. equities as concern's regarding the European Union's ability to contain the continent's sovereign debt crisis played like Lazarus and rose from the grave. The MF Global (MF) situation did not help matters. With the rapid decline of the commodities and derivatives broker being viewed by some as miniature version of Bear Stearns or Lehman Brothers, investors were skittish on October's final trading day as the S&P 500 lost 2.5% and the Dow Jones Industrial Average dealt with a 276-point decline. The Nasdaq shed 1.93%.
I will not be so bold as to say all the good work the market did last week has gone for naught, but Monday's session serves as a stark reminder to what so many folks have been saying over the past week. That being Europe is making progress, but the sovereign debt issue is nowhere near solved. Most investors probably knew that in the back of their minds, but the behavior of U.S. and European equities today is proof positive that as fast as Europe can boost riskier assets, it can drag them down as well.
Making matters worse is the fact that China is not likely to play savior as so many European policymakers were secretly hoping. In fact, China's Xinhua News Agency said the world's biggest country by population will not play savior to Europe. Even as a former journalist, I say do not believe everything you read, but when it comes from the state-run news agency, I think it is a pretty safe bet that China will not be the ultimate backstop for Europe.
It was a bad day for bonds issued by the PIGS. The five-year Italian yield rose to the highest since the euro was introduced in 1999 and yields on Spanish 10-years rose to a 12-week high, Bloomberg reported. The spread on Italian 10-years over comparable German bunds is now 400 basis points. No treats on Halloween for investors in PIGS debt, that is for sure.
Italian Bond Yields
In economic news, the Chicago Purchasing Managers Index (PMI) fell to 58.4% in October from 60.4% in September. Economists expected a reading of 58.4%. The employment index jumped to a six-month high, but new orders fell to 61.3% from 65.3%. The national Institute of Supply Management's manufacturing index is released tomorrow.
As noted earlier, a large part of the reason for Monday's declines was the onslaught of negative headlines regarding MF Global. In what amounts to a potential embarrassment for MF Global CEO Jon Corzine, formerly head of Goldman Sachs (GS) and U.S. Senator from and governor of New Jersey, the brokerage firm filed for Chapter 11 bankruptcy protection in New York on Monday, listing $41 billion in assets and $39.7 billion in debt.
Throughout last week, there was a flurry of speculation that MF was looking to sell some of its assets o the entire company and Corzine reportedly made calls to basically every bank on the Street. There was a rumor that Jefferies (JEF) was interested. DealBook reported Sunday night that Interactive Brokers (IBKR) was talking with MF.
Cozine took the reigns at MF in March 2010 and by most accounts, looked to transform the brokerage house into more an investment bank. That shift included risky trading practices and those risky trades include big bets on European sovereign debt. MF held $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt as of Oct. 25, Bloomberg reported. That is not the kind of stuff you want sitting on the books when you are looking for a buyer.
Last week, Moody's and Fitch both downgraded MF debt to junk status and it appears bankruptcy for the firm arrived faster than a Kardashian divorce. I kid, I kid. In all seriousness, MF Global's bankruptcy is the eighth-largest in the U.S. by assets, according to bankruptcydata.com.
MF Global Chart
Finding stocks that were in the green, let alone making new 52-week highs today was easier said than done. One standout, however, was health insurance provider Humana (HUM). On a grizzly day for stocks, Humana jumped 5.7% on volume that was nearly triple the daily average. Humana said its third-quarter profit increased 13% to $444.7 million, or $2.67 per share, from $393.2 million, or $2.32 per share, a year earlier. Revenue rose 11% to $9.3 billion. Analysts expected a profit of $2.03 per share on $9.26 billion in revenue. Humana also forecast a 2012 profit of $7.40-$7.60 a share, which is well above the $7 analysts were expecting.
There was another episode of as Yahoo (YHOO) turns airing on Monday. This time, the embattled Internet search company slid 5.6% on above average volume after the company said it may sell its Asian assets and distribute those proceeds to investors in the form of a dividend rather than sell itself. Proceeds from the sale of Yahoo's Asian assets could be used for a special dividend or a share buyback plan, Bloomberg reported citing sources with knowledge of the matter.
There has been no shortage of rumors about who is supposedly interested in Yahoo, but the company still seems intent on battling Google (GOOG) alone. Yahoo shareholders have been put through the ringer so much at this point at this point that it is going to take more than a one-time dividend to appease them and today's drop might tell us as much.
After the bell, Anadarko Petroleum (APC), the second-largest U.S. independent oil and natural gas producer, reported a third-quarter loss of $3.05 billion, or $6.12 per share, compared to a year-earlier loss of $26 million, or 5 cents per share. The loss was attributable to Anadarko agreeing to settle Gulf of Mexico spill liabilities with BP (BP).
On an adjusted basis, Anadarko earned 66 cents a share on revenue of $3.20 billion, but those numbers missed Wall Street estimates of 67 cents on revenue of $3.31 billion. The company did say its total production rose 10% and onshore production surged 30%. The after-hours crowd may be focusing more On Anadarko's production numbers as the stock is higher by almost 1% as of this writing.
Looking at the charts, the bad news about Monday's decline beyond the obvious carnage is that the S&P 500's stay above its 200-day moving average was short-lived. The index came to a dead stop at resistance at 1285 on Friday and if it spends too many days below what was support at 1255, a return to 1225 could become a reality.
S&P 500 Chart
Things are not much different for the Dow. The blue-chip index was overbought after last week's rally and Monday's decline has brought it slightly under the 200-day line. The Dow did not touch support at 11,900 today, but if it does this week, it will be important to see what happens there. If 11,900 holds, that is probably a buying opportunity before another run at 12,250.
Tech was no place to hideout today as the Nasdaq slid below round number support at 2700 and legitimate support at 2691. If the Nasdaq can retake 2700, then 2740 is next resistance and then it is on to 2825. There are not of marquee earnings reports this week, but the number of earnings reports is decent enough and the Nasdaq does have two names that could make an impact: QCOM Wednesday and SBUX Thursday.
As Jim noted in the weekend wrap, JPMorgan has a 1400-1475 S&P 500 year-end price target. Assuming that proves accurate, the index needs to gain 147-222 points from here, but that does not really jibe with this statistic: Price targets for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 13 percent to 1,447.93 in a year, according to Bloomberg.
I have become convinced that anything is possible, particularly after the big pop stocks delivered in October. That said, I continue to beat the dead horse and warn that Europe can hasten or hamper gains for the rest of this year.