For those of us that took a peak at equity futures Sunday night following news of Osama bin Laden's death at the hands of a U.S. Navy Seals team at his Pakistan compound, Monday's performance by stocks is nothing short of disappointing. While crowds across the U.S. were spotted cheering news of the death of the mastermind of the September 11, 2001 terrorist attacks, Mr. Market's enthusiasm for the news quickly waned as three major U.S. indexes suffered small losses and the Russell 2000 really took it on the chin, slumping 1.2%.
Not surprisingly, the ''buy the dollar because bin Laden is dead'' trade lasted about a nanosecond. Well, a tad longer because the U.S. dollar index was higher from Friday's close, but it also touched 72.22, a level last seen nearly three years ago. The dollar index shot above 73 overnight on the bin Laden news, but the greenback's intraday performance today was not all that impressive, indicating that it is going to take a lot more than the death of a marquee terrorist figure to right the currency's ills.
This is not a political statement, but I will guess that plenty of Americans and folks in other countries are happy bin Laden is dead. Still, the dollar faces myriad problems that would still be around if bin Laden was alive today. Investors are not big fans of the buck these days as the chart indicates.
US Dollar Index
The market quickly realized that the dollar was not going to elicit a lot of excitement today and gold finished the day higher yet again and the decline in oil was negligible. Silver was where the action was on the downside with the primary culprit being news that CME Group (CME), parent company of the Comex, the exchange where silver trades in the U.S., boosted its margin requirements on silver contracts 13% to $14,513 per contract from $12,825 on Friday.
Combine that with light volume and a chorus of traders saying silver was overbought and you have the recipe for a decline. An educated guess would be that CME wants to dampen volatility in the silver market by creating a more expensive barrier to entry. That could have the intended impact, but there is no guarantee it will mean the end of silver's uptrend. On Nov. 9, 2010, CME raised the margin requirement to $6,500 an ounce from $5,000. We all know what silver has done since then.
In economic news, the Institute for Supply Management said its manufacturing index fell to 60.4 in April from 61.2 in March, but the April reading still beat the 59.5 median estimate of economists. Readings above 50 are considered bullish and the index has accomplished that feat for 21 straight months. For a positive spin on the April number, consider that it it has been matched or exceeded in only 89 months since the start of 1948, or 11.7% of the time, according to Zacks Investment Research.
It can also be said that Monday's action was disappointing because there was a pair of noteworthy takeover announcements totaling over $10 billion and that was not enough to generate market-wide enthusiasm. Starting with the larger of the two deals, Israeli generic drug giant Teva (TEVA) said it will acquire Cephalon for $6.8 billion, a deal that values Cephalon at $81.50 a share, an almost 6% premium to where the shares closed on Friday.
The combined company would have a portfolio of branded drugs with $7 billion in annual sales and more than 30 potential products in late-stage development, according to the Associated Press. Cephalon's big revenue drugs include Provigil, a treatment for sleep disorders, and the cancer treatment Treanda.
Take a look at this chart and you will quickly understand why the next deal I will discuss took place:
Prices for metallurgical coal, the grade of coal that is in high demand by Asian steelmakers, jumped 74% in the first quarter to $225 per ton, according to Bank of America Merrill Lynch, and that is prompting more consolidation in the coal sector. The latest deal comes courtesy of Missouri-based Arch Coal (ACI), the second-largest U.S. coal company, which announced today it will pay $3.4 billion for International Coal (ICO) to boost its metallurgical coal exposure.
Arch will pay $14.60 a share for ICO, a 32% premium to where the shares closed on Friday. Arch is forecasting pro forma metallurgical coal sales of 11 million tons this year and 14 million tons over the next three years thanks to the purchase of International Coal, Bloomberg reported. The company expects $70 million to $80 million in annual cost savings as a result of the deal and expects it will boost profits next year.
The coal sector has been kind to investment bankers in recent months. Add up the Arch/ICO deal, a $3.3 billion purchase by Walter Energy (WLT) and Alpha Natural's $8.5 billion deal for Massey Energy (MEE) and there has been over $15 billion worth of deals in this space in just a few months. Per usual, traders were kicking around a few names that could be the next coal targets. I spotted Patriot Coal (PCX) and James River (JRCC) in a couple of reports on the matter. Consol Energy could be one to keep an eye as well as the company may look to sell some coal assets to focus more on natural gas.
For one stop-shopping for most of the potential buyers and sellers in the coal industry, the Market Vectors Coal ETF (KOL) might be worth a look. For more news on the coal industry, register for a free trial of the OilSlick daily newsletter (HERE).
After hours, another chapter was written in the ongoing saga to acquire NYSE Euronext (NYX), the operator of the New York Stock Exchange, when Nasdaq OMX (NDAQ) and IntercontinentalExchange (ICE) decided to take their $11 billion bid for NYSE Euronext straight to the company's shareholders, making the overture hostile.
NYSE Euronext has all but ignored Nasdaq and ICE in favor of a $10.2 billion bid from Germany's Deutsche Boerse, a move that has irked some shareholders. To this point, NYSE Euronext has not really done much beyond tell its shareholders to vote in favor of the Deutsche Boerse plan and the German company has shown no indication it will boost its offer.
If Nasdaq and ICE are successful in their bid for their rival, the deal would undoubtedly draw intense antitrust scrutiny, something the companies have said they can sidestep by splitting the NYSE Euronext's businesses among them. Nasdaq wants the cash equities operation while ICE wants the derivatives business. I do not want to speculate about what is going to happen next with this situation because there's a fair chance I will be wrong, but I feel safe in saying this story is nowhere near complete.
NYSE Euronext Chart
Looking at the charts, on Sunday night, it looked as though the S&P 500 would open up right near resistance at 1373 and make a run past that area. That run never came to fruition and with a loss of just two points, the situation is not much different today than it was after Friday's close. The 1373 level is still first resistance followed by the all-important 1400 mark. The 1340-1345 area looks like support.
S&P 500 Chart
The situation is not much different on the Dow as the blue-chip index still faces resistance in the 12,950-13,000 area. Pfizer (PFE) reports earnings tomorrow, but I expect that to a be a non-event and the rest of the week is empty in terms of Dow earnings. Support is well off at 12,400.
The Nasdaq earnings calendar is also pretty barren this week in terms of marquee reports. The index is still above old resistance at 2861, which may turn to new support. The Nasdaq needs to reclaim 2875 before dealing with resistance at 2900.
As the Russell 2000 was the sturdiest performer among the indexes on Friday, it was the weakest link today, shedding 10.5 points to close right at old resistance/hopefully new support at 855 (give or take a couple of tenths of a point). Resistance would be the 865-870 area and then 880, but I know I will be watching how strong support is at 855 over the next few days.
Russell 2000 Chart
As I always, I am trying to steer clear of letting one day decide my outlook for the week, but I think the ''Sell in May'' crowd may have gotten some ammo today when considering the following factors: The death of bin Laden, over $10 billion in M&A activity, Warren Buffett saying over the weekend that he is still bullish on the U.S. economy and it was the first trading day of the month, normally a fine day to be long. It was just an ugly way to start the week when it should have been so much more.