Stocks came crashing back to Earth following last Friday's rally, which was obviously temporary in nature. That is not surprising given that Friday's cheery trade was led by less bad economic news, not truly good news. Monday's result was another triple-digit loss for the Dow Jones Industrial Average, which has the index teetering on the brink of dropping below 10,000 again, and losses of at least 1.39% for all three major U.S. indexes.
Today's culprit from the world of weak economic news was the Commerce Department's report that showed disposable income fell in July. That is the first monthly decline since January. That number is adjusted for inflation, so the Bureau of Economic Analysis shows us that disposable personal income and personal consumption expenditures actually moved higher in July by 0.2% and 0.4%, respectively. The numbers were flat in June, so it might be reasonable to wonder why the market was down today if these numbers were supposedly better than the previous month's results.
The devil is in the details, of course. The chart below shows consumers spent more than they saved in July. If that trend holds going forward, that will be good news for GDP since the consumer accounts for roughly 70% of U.S. GDP, but there is truly a double-edged sword. A lack of thriftiness on the part of the American consumer is undoubtedly one reason why the economy is in the situation it is in today. Spending more than is earned is not a sustainable practice and leads to an eventual decline in expenditures.
If Monday's trade is any indication, and I think it is, this is going to be a tough week to be long stocks. As Jim noted in the weekend, the weekly calendar is chocked full of economic news releases that could really weigh on the bulls. I am going to jump straight to the marquee report: Friday's August unemployment release. Anything is possible, but I would not be betting on a strong number. The U.S. is still dealing with a bleak unemployment scenario as evidenced by the employment to population ratio, which now lingers near levels not seen since 1983, according to the Angry Bear blog.
Making matters worse is that post-recession jobs growth following the most recent downturn has been anemic when measured against previous recessions. The Bear says we want to see an employment to population ratio of 100% or higher. Unfortunately, we are not quite there yet.
Post-Recession Employment/Population Ratio
Once again, weak economic data overshadowed another day of robust news flow on the mergers and acquisitions front. Spotting stocks large-cap stocks that finished in the green today was pretty easy: Most were involved in M&A. However, the performance of stocks on the back of better-than-average M&A activity, not only recently, but for the entire year, can only considered disappointed.
For the year, there has been $1.34 trillion in announced global mergers and acquisitions, 25% higher than the comparable period a year ago, according to Bloomberg News. The tech sector has been especially active on the M&A front. In theory that should be good news not only for the Nasdaq, but also for the S&P 500 because tech is one of the two largest industry components to the latter index, but both indexes are down 5% year-to-date.
Intel (INTC) shed more than 2% today on news that it would pay $1.4 billion for Infineon's wireless unit. In less than two weeks, Intel has announced more than $9 billion in acquisitions and all of that has the stock trading 15 cents away from a 52-week low.
One of the day's big winners was a company that sure does not get a lot of press was Cogent (COGT), a maker of security systems that read finger and palm prints, surged 24.4% after Dow component 3M (MMM) said it would buy the company for $943 million. Nearly 19.5 million Cogent shares changed hands today compared to average daily volume of 665,000 shares. The deal values Cogent $10.50 a share, an 18% premium to where the shares closed on Friday.
As I said, winners were hard to come by today and that is why a stock that gained just over 3% on the day is somewhat noteworthy. I am talking about biotech firm Genzyme (GENZ), which was up by almost 3.4% after French pharmaceuticals giant Sanofi Aventis (SNY) finally made its acquisition offer for Genzyme public. Rumors of this deal have been flying around for months, but Sanofi appears to be growing frustrated and has now told the world about its $18.5 billion for Genzyme.
This deal may not have the melodrama of the BHP Billiton (BHP)/Potash (POT) showdown, but it is getting close. Genzyme has rejected the Sanofi offer, which values Genzyme at $69 a share, a tad below where the stock closed today. Analysts are saying Sanofi may need to raise the offer to $75 or $80 a share to get the deal done. I do not want to speculate on whether Sanofi will raise its offer because I simply do not if that is going to happen, but what is clear is that Genzyme makes for an attractive target.
The Massachusetts-based company makes complex genetic treatments that, for lack of a better way of putting it, are really hard for other companies (read: Generic producers) to copy. Traditional pharma firms, American, French or otherwise, are struggling with stagnant pipelines and expiring patents for blockbuster drugs in the coming years, so acquiring a company like Genzyme makes a lot of sense. The disclaimer being if the price is right. Major Sanofi shareholders, including French oil giant Total (TOT) have already expressed concern about the potential of overpaying for Genzyme.
For its part, Genzyme should be careful and not be too greedy because there is not much in the way of substantive rumors that mention another possible bidder for the company. This is the same dangerous game Potash is playing when two of the most likely suitors beyond BHP, Rio Tinto (RTP) and Vale (VALE) have already said they are not interested.
Speaking of M&A soap operas, the Dell (DELL) vs. Hewlett-Packard (HPQ) for 3Par (PAR) saga continues to drag on as HP has once again trumped its smaller rival by offering $2 billion, or $30 a share, for 3Par, the data storage and cloud computing firm. The ball is back in Dell's court to counter after its last offer of $27 a share looked good for a minute, but now looks not good enough.
Oddly enough, of the three stocks, only 3Par was down today. Dell may have traded higher because the market is starting to realize the company is not going to win this battle and the bright side of that is Dell will not be overpaying for 3Par. HP was the only member of the Dow to finish higher today because the company announced a $10 billion share buyback. Given HP's acquisitive ways, I am willing to bet that many of those shares will not stay in the company treasury for very long.
Looking at the charts, the S&P 500 honored resistance in the 1060-1065 area by dutifully retreating from Friday's close at 1064. Monday's close at 1048 brings us back to sniffing distance of support at 1040 and I get the feeling the that the 1040-1060 range will continue to be what we see heading into Friday's job number. Support at 1040 has held a couple of times, but if it finally does break, target 1010-1015 as the next stopping point.
S&P 500 Chart
Things were looking good for the Dow after making a strong move above resistance at 10,100 last Friday, but all those gains were undone today and the blue chip index is back close to psychological support at 10,000. So resistance at 10,100 is back in place and even if the Dow can move back above that level, it would have to deal with more resistance at 10,300. After 10,000 first support is 9900 then 9800.
It sure would be nice to be able to say something positive about the Nasdaq for a change, but tech just will not oblige. Resistance around 2150 held firm and the almost 34-point tumble today puts the index almost 20 points away from support at 2100. This is another area that has held a couple of times and because volume is weak these days, it may take another day or two before 2100 is threatened again. Still, it is troublesome that with all the tech M&A activity that the Nasdaq is not performing better. And yes, Genzyme is a Nasdaq 100 stock.
The Russell 2000 was the worst performer of the indexes mentioned here, losing 2.44% today, but at least closed above 600. I am still concerned that further flirtations with support 590 spell trouble and that a break of that support is coming sooner rather than later.
Russell 2000 Chart
In the essence of simplicity, this much is clear at this point: Stocks are beholden to economic data and that data continues to be ugly, so why be involved from the long side this week. All of the important economic reports that come out before Friday's jobs number have some jobs component to them, which could prove to be an invitation to stay short or stay out.