Stocks got off to a good start in what will be a short week, bolstered by a fresh round of mergers and acquisitions activity and good news for healthcare stocks. The S&P 500 added 1% to finish at 1114.05, but the index is still having problems making its way above resistance at 1120. The Dow Jones Industrial gained more than 85 points to close at 10414.14 with all 30 of its constituents finishing higher and it was a good day for technology issues with the Nasdaq gaining almost 26 points to finish the day at 2237.66.
In the wee hours of Monday morning, 58 Democrats and two independents that are basically Democrats, voted to pass the massive and controversial healthcare reform package, clearing the way for the bill to arrive on President Obama's desk as early as later this week. The news was a boon for health insurance names like Aetna (AET), which was up 4.7%, and rival Cigna (CI), which gained nearly 4%. WellPoint (WLP) added nearly 3% and United Health (UNH) was up 2%.
News that the bill passed by the Senate does not include an option for a government-run plan comforted investors in the aforementioned names. Investors had been fearful of the so-called ''public option'' because it would have given private insurance firms government financing, creating fears of low reimbursement levels. With those concerns set aside, investors flocked to the aforementioned names, sending the iShares Dow Jones US Healthcare Provider ETF (IHF) up 2.32%. IHF holds all of the names mentioned above.
The healthcare sector was also the epicenter of a flurry of M&A on Monday as pharmaceuticals giants continued the trend of picking off their more nimble biotech peers to bolster drug pipelines. French pharma company Sanofi-Aventis (SNY), a Warren Buffett Favorite, agreed to acquire Chattem (CHTT), a maker of over-the-counter healthcare products for $1.9 billion. Chattem shares finished the day 33.1% higher on the news.
Pfizer (PFE), the Dow component and largest U.S. drugmaker, entered into an agreement with Athersys (ATHX) for the commercialization of the latter's inflammatory bowel disease treatment. Athersys will receive $6 million upfront and up to $105 million in future royalty payments. Eli Lilly (LLY) said it entered into a licensing agreement with Incyte (INCY) to commercialize Incyte's rheumatoid arthritis drug, which is currently in Phase II clinical trials.
In other news, GlaxoSmithKline (GSK) made a deal with Seattle Genetics (SGEN) to utilize Seattle Genetics' antibody-drug conjugate technology. GSK will pay Seattle Genetics $12 million and there is potential for $390 million in future royalty payments. Israel's generic drug giant Teva Pharmaceuticals (TEVA) entered a global licensing agreement with OncoGenex Pharmaceuticals (OGXI) for OncoGenex's cancer treatment. The deal results in a $60 million equity investment by Teva. Future milestone payments could be as high as $370 million.
Not surprisingly, Monday's M&A activity in the pharmaceuticals sector lead to speculation about what other names may be next to catch the eye of an acquisitive drug giant. One name that was thrown around was Biogen Idec (BIIB), the company in which corporate raider Carl Icahn is a major shareholder. Biogen shares were up 2% on the day. Oddly enough, the iShares Nasdaq Biotechnology ETF (IBB) was only up 1.22% on Monday on weak volume.
The M&A party actually started on Sunday when Bucyrus International (BUCY), a stock I have mentioned several times here over the past few months, announced it would purchase Terex's (TEX) mining business for $1.3 billion in cash. Terex is the world's third-largest maker of earth-moving equipment.
Bucyrus said it expects $100 million in synergies from the acquisition. The ball may now be in Joy Global's (JOYG) to make a similar move. Joy Global and Bucyrus are chief rivals in the mining equipment space and regardless of what Joy Global's next move is, it might be reasonable to speculate that the Bucyrus acquisition is a sign that the company expects commodities demand to remain robust in 2010.
Speaking of commodities, after a bit of a sell-off last week, fertilizer names got a boost on Monday from some bullish comments from Goldman Sachs. Goldman upgraded Mosaic (MOS), the second-largest maker of potash fertilizer to ''buy'' from ''hold'' and added Potash (POT), the biggest maker of its namesake fertilizer, to the conviction buy list.
By now, the fertilizer story is pretty well-documented. These stocks soared in 2007 through the first half of 2008 as the commodities bull market ran higher on a near daily basis. Then these names crashed back to Earth when the commodities bubble burst. At their peak, potash prices were $1000+ per metric ton in some parts of the world. They now reside around $400, but farmers around the world may be prepared to ramp up demand next year due to higher crop prices.
One way to play this trend may be with the Market Vectors Agribusiness ETF (MOO), another name that I have frequently mentioned in this space. MOO was up 1.32% on Monday, not much to write home about, but its top holding is Potash and if the triple-digit price tag on Potash is seems a little intimidating, MOO might prove to be a fine alternative for getting some agriculture exposure.
And speaking of upgrades, Dow component Alcoa (AA), the largest U.S. aluminum producer, got a jolt from a Morgan Stanley upgrade of the shares to ''overweight'' from ''equal-weight.'' Morgan Stanley also put a price target of $22 on Alcoa and boosted its earnings forecast to 75 cents a share from 50 cents for 2010 and $1.20 a share from $1 for 2011. On average, analysts are expecting earnings of 59 cents a share for 2010 and 91 cents for 2011.
Alcoa also announced a $10.8 billion joint venture with Saudi Arabia to develop an aluminum industry complex. Saudi Arabia's Ma'aden will control 60% of the of the joint venture and Alcoa will control the remaining 40%. Alcoa and its partners will invest $900 million over four years in addition to their share of project financing, according to press reports. There is a little bit of bad news here and that is Moody's Investors Service said it may cut its ratings on Alcoa to junk status on news of the joint venture. Alcoa currently has a rating of ''Baa3'' from Moody's, the lowest investment grade.
Intel (INTC), the world's largest semiconductor maker, was another Dow member benefiting from a Monday upgrade. Likewise, the Nasdaq probably got a bit of a pop from news that Barclays Capital boosted its rating on Intel to ''overweight'' from ''equal-weight.'' Barclays Capital said Intel's valuation, which is 12 times 2010 per share earnings, looks ''intriguing'' given that the five-year average is 16 times forward earnings. Some other good news for Intel: World Semiconductor Trade Statistics is forecasting 2010 semiconductor sales growth of 12.2%.
Perhaps another catalyst for stocks on Monday was not a stock at all, but further strength in the U.S. dollar. The U.S. Dollar Index, which measures the strength of the greenback against six major currencies, has moved higher for eight straight days, punishing gold and crude oil along the way. Oil was down on the day and gold moved below $1100 an ounce, but the greenback was strong.
Some analysts are forecasting further gains for the dollar on speculation that the Federal Reserve is preparing to withdraw economic stimulus. The euro is hovering near three-month lows against its American rival with equities and the dollar are moving in positive unison for the first time in over a year, perhaps indicating the dollar is poised to benefit from an improving economic outlook in the U.S.
Dollar Index Chart
Given that this week will be shortened by a day and a half (half day on Christmas Eve and the market is closed on Christmas), the economic calendar is light. One report to watch on Tuesday is the third quarter GDP update. The consensus estimate is for 2.9% following a previous reading of 2.78%. Existing home sales for November are due out at 10 AM Eastern time. An uptick to 6.25 million from 6.10 million in October is expected. The Richmond Fed's manufacturing survey is also due out at 10 AM. That report is expected to show a contraction of 2.8% for December after falling 3% in November.
With an eye toward the charts, it bears remembering that December's end is historically bullish and with just six trading days left in 2009, it is unlikely that institutional players are going to be spending a lot of time at their respective trading desks. The Dow continues to move between the 10,265-10,500 range and it appears that I will be proven right in my prediction that 11,000 will not be obtainable in 2009.
At least Monday's closing above 10,400 puts the Industrials a fair bit above support at 10,265 and in a position to make another run at breaking resistance at 10,500. Volume was decent on Monday considering we are in the midst of a holiday-shortened week, but that was probably a result of M&A activity and analyst upgrades more than anything else. Unless those conditions persist for the rest of the week, the Dow is likely to hold its current range.
The S&P 500 moved back to the higher end of its recent range, but is still struggling to get to the all-important 1120 level. There are no noteworthy earnings reports slated for the rest of the week, so if the S&P 500 is finally going to get above 1120 before the end of the year, traders (the ones who haven't closed up shop for the year) are going to need some more bullish analyst chatter to drive stocks higher over the coming days.
I will go out on a limb and say that I do not expect support at 1085 to be tested this week, save for unforeseen negative catalysts, and I imagine the S&P 500 will head into Christmas not far from where it currently rests.
S&P 500 Chart
The Nasdaq's close at 2237.66 got the index above resistance at 2235 and whether that begets a legitimate breakout remains to be seen. There were several positive catalysts to move the Nasdaq higher at the end last week in the form of Oracle (ORCL) and Research In Motion's (RIMM) earnings, and as I mentioned earlier, the Intel upgrade certainly helped on Monday. Negative catalysts probably are not there to move the Nasdaq down to support at 2175 and 2160, but it might be quite a task to make a real run at 2260-2275 before year end.
Monday may prove to be the start of one of those Santa Claus rallies we hear so much about at this time of year or it may not. I expect volume will be light for the duration of 2009 and that means a cautious approach is best. I wish you and your families a very happy holiday season and leave you with a trivia question (there are no prizes): What is the Dow's top performing stock year-to-date?
Answer: American Express (AXP), which is up 120%.
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