If you were reading the headlines before the market opened Monday morning, you probably would have thought that stocks were poised to enjoy a solid day and that was the case for a part of the trading session, but by the time the closing bell rang, the S&P 500 had dropped 5.23 points to settle at 1212.05 and the Nasdaq lost 7.2 points to close at 2522.95. Only the Dow Jones Industrial Average closed higher on the day, gaining three-quarters of a point to finish the day at 11,205. I suppose that still qualifies as a ''gain'' and no matter how small it was, the Dow was able to extend its winning streak to six consecutive days.
There was plenty of mergers and acquisitions news to feast on before the market opened today and while none of the deals could be labeled as ''mega,'' an uptick in M&A activity is a good sign, particularly after the plunge in acquisitions during the financial crisis. Stifel Financial (SF) said it will acquire Thomas Weisel Partners (TWPG) for $318 million in stock. Oddly enough, Stifel is doing this deal to bolster its presence in M&A advisory services for the technology sector, a specialty of Thomas Weisel.
In other M&A news, car rental giant Hertz Global Holdings (HTZ) said it will acquire smaller rival Dollar Thrifty Group (DTG) for $1.2 billion in a transaction that will form the second-largest U.S. care rental firm. Shares of both companies were up sharply on the news and the deal fueled speculation that more consolidation in the car rental sector could be on the way as the industry is just starting show signs of bouncing back from the recession.
Another billion dollar deal on Monday came from Charles River Laboratories (CRL), which agreed to acquire China's WuXi Pharmaceuticals (WX) for $1.6 billion in cash and stock. The deal will help Massachusetts-based Charles River expand its clinical research and development operations on an international level and the company said WuXi would help Charles River bolster its toxicology business. Even when combining all of these deals, the price tag is not very large, but that is not the point. The point is an uptick in a M&A activity will probably be interpreted to be a good sign and that could help this rally along even more.
Even with the economy improving, it seems companies in the travel and leisure business think consolidation is the way to go to streamline their operations and cut costs. Of course, the airline sector loves some good M&A talk , though talks between United (UAUA) and Continental Airlines (CAL) may have reached an impasse due to the proposed exchange ratio in the stock-for-stock transaction.
The New York Times reported both companies agreed to an ''at-market'' deal, but Continental wants to exchange shares based on United's price before news broke that the two companies were in talks. United wants to use a later share price, which would be more beneficial to its shareholders. The outcome for United here is interesting because it broke off talks with US Airways (LCC) as discussions with Continental progressed, but if no marriage with Continental materializes, United may have to find another partner to dance with.
In addition to those deals, there was some good earnings news before the bell from a pair of companies that are considered bellwethers. Caterpillar (CAT), the world's largest maker of construction and mining equipment and a Dow component, not only reported strong first-quarter results, but offered a solid outlook as well. The Illinois-based company earned $233 million, or 36 cents a share, in the first quarter compared with a loss of $112 million, or 19 cents a share, a year earlier. Excluding a charge related to the health care reform legislation, Caterpillar would have earned 50 cents a share. Analysts were expecting a profit of 39 cents.
Revenue did fall 11% to $8.2 billion during the quarter, but investors seemed to digest that news easily because Caterpillar reported some stout international growth. Sales in Asia surged 20% during the quarter. And if you are among those investors that do consider Caterpillar a bellwether, comments from the company's management team bode well not only for shareholders, but perhaps the economy at large.
Chief Financial Officer Dave Burritt said ''we're in a revival'' and that emerging markets are undoubtedly driving growth for the company. Caterpillar has rehired about 2,000 workers after laying-off 19,000 full-time and 18,000 part-time and contract employees last year, according to the Associated Press. The shares touched a new 52-week high of $72.83 on Monday before closing up $2.87, or 4.2% to $71.65.
Another company that is, shall I say economically sensitive, that reported stellar first-quarter results on Monday was Whirlpool (WHR), the world's largest appliance maker. The maker of Maytag, KitchenAid and its namesake brand turned a profit of $164 million, or $2.13 a share, more than double the $68 million, or 91 cents a share, the company earned a year earlier. Revenue jumped 20% to $4.27 billion. Analysts had been expecting a profit of $1.33 a share on sales of $3.79 billion.
Whirlpool also said emerging markets are contributing to its growth, namely Brazil and Asia. More importantly, the company raised its full-year guidance in a big way, saying it now expects to earn $8 to $8.50 a share, up from previous guidance of $6.50 to $7 a share. So what can be extrapolated from the Whirpool news and outlook? Perhaps that home sales are going to pick up in latter half of this year. New home buyers buy new appliances and buyers of existing homes often like to replace the appliances that came with the house they just purchased.
Appliances are considered durable goods and durable goods orders are an important economic data point. So it might be fair to say that strong guidance from a company like Whirlpool indicates consumers are getting stronger. Yet it should be noted that trade in Whirlpool's shares was somewhat deceiving on Monday. Yes, the stock finished the day higher by $10.20, or almost 10%, and rallied to a new 52-week high of $118.44 on volume that was more than six times the daily average, but the stock opened at $112.28 and closed at $112.42.
I frequently voice my personal frustration over how an economy with the stature (or lack thereof) of Greece can weigh on U.S. stocks and I think a similar scenario was at play on Monday. What I mean is it was financials that derailed what should have been a nice day for stocks on Monday. Financials were the worst performing industry group within the S&P 500 as the usual post-earnings retreat was seen in shares of the big retail banks. That hurt shares of JPMorgan Chase (JPM) and Bank of America (BAC). Citigroup (C) retreated on news of the Treasury Department's plan to sell its massive stake in the bank.
Of course, I cannot forget to mention Goldman Sachs (GS), which shed $5.37, or 3.41%, to close at $152.03 on Monday. Goldman's CEO Lloyd Blankfein and other key executives will be testifying on Capitol Hill regarding allegations that the bank misled investors in convoluted mortgage securities and by misled, I mean whether or not Goldman was shorting securities it was recommending to clients on the long side. Blankfein maintains Goldman did not have ''a massive short'' against the mortgage market nor was the firm betting against its clients.
Goldman Sachs Chart
I would agree that these big banks are ''important'' companies in the U.S. corporate lexicon, but to echo the sentiments of several politicians, these firms do not produce anything. Companies like Caterpillar and Whirlpool do and the longer doubt remains about the health of the U.S. financial system, we could see at least few more disappointing trading days like we saw today.
Fortunately or unfortunately, depending on your perspective, the now infamous financial reform bill the Senate wants to consider will have to wait another day as Republicans mustered enough votes to block cloture on the bill. The vote was 57-41 with Sen. Bill Nelson (D-Neb.) the lone Democrat voting with the Republicans. Sixty votes are need for cloture.
It may seem like good news for financial stocks that an up-or-down vote on the bill was delayed, but the longer this issue lingers, financials cold remain under pressure, so it might be best for the markets to get this vote over and done with.
Looking at the charts, the Dow still resides right around uptrend resistance in 11,200 neighborhood. On the upside 11,245 would be the next hurdle and support can be found at 11,000. There are still some earnings reports that could be meaningful for the index, namely 3M (MMM) and DuPont (DD) both of which report before the open tomorrow. Outlook on chemical shipments is the news to watch regarding DuPont.
The S&P 500 cleared resistance at 1214 last week, but Monday's drop has the index a couple of days worth of average gains away from resistance at 1222. The FOMC meeting starts tomorrow as do the Goldman hearings on the Hill and the combination of those events could be enough to generate another day of selling, but not to a large extent. If 1200 is broken on the downside, 1190 should act as support.
S&P 500 Chart
Considering the Nasdaq's recent bullish ways, Monday's decline is hardly enough to represent a reversal of the current trend. Netflix (NFLX) continues its parabolic ascent, gaining more than 8% on Monday and Amazon (AMZN) turned in a nice day as well, but Google (GOOG) got whacked and Apple (AAPL) and Baidu (BIDU) both traded lower as well. Either way, the Nasdaq has broken out and a move above 2540 may stoke some fresh buying.
I agree with Jim's sentiments from the weekend that stocks are certainly due for a breather, but betting against the obvious trend would likely prove foolhardy. If not for the decline in financials I would likely be telling you about Dow 12,260, S&P 500 1220 and Nasdaq 2535.
Noteworthy is a report from Bloomberg News that says despite the huge rally enjoyed by stocks over the past 13 months, U.S. equities still look as cheap as they have looked at any point over the past 20 years. The report says that the S&P 500 is trading at 14.1 times earnings forecasts, its lowest level since 1990, excluding period immediately following the Lehman Brothers debacle. Headlines like that may be one catalyst to jolt retail investors who are feeling they have missed the rally off the sidelines.