Coming off a sixth consecutive weekly loss that saw the S&P 500 slide 2.24% last week and the Dow Jones Industrial Average give up 1.64%, the only thing that can be said for Monday's action is that at least those two indexes found their way to gains, as meager as they were. The Nasdaq Composite and the Russell 2000 continued their losing ways.
Speaking of extending losing streaks, that is just what oil did, tumbling 2% and that slide was helped by at least two negative headlines. China's lending rate slid to $85 billion in May, well below the $100 billion analysts were forecasting, providing further evidence that the world's second-largest oil consumer behind the U.S. is home to a slowing economy.
Making matters worse for oil, Bloomberg reports that a drought in Texas is threatening oil output in the Eagle Ford Shale, home to booming oil production recently, and that hot weather is forcing producers to go out of their way to acquire water from farmers and municipalities. As anyone that has spent time in Texas between May and September will tell you, it gets pretty darn hot in the Lone Star state and this a problem that will not be easy to solve for oil companies without some help from Mother Nature. For more news and commentary on the energy sector, register for the OilSlick free daily newsletter (HERE).
We have not seen a real ''Merger Monday'' in several weeks, if not longer, and while the price tags being thrown about today were on the low end, the pickup in mergers and acquisitions activity could still be viewed as a positive and perhaps more of the same going forward will provide some comfort to those that are long the market.
Transatlantic Holdings (TRH), a former unit of American International Group (AIG), got the ball rolling on Sunday evening when it agreed to sell itself to Allied World Assurance for $3.2 billion, a deal that values Transatlantic at less than 80% of book value. Allied World's offer values Transatlantic at $51.10 a share, or a 16% premium to where the shares closed on Friday.
That is not a huge premium and given the percentage of book value that Allied World is offering, Transatlantic may see some rival bids come in. Barclays said as much. That price ''could result in other property-casualty insurers and reinsurers competing for Transatlantic,'' Barclays said, according to Bloomberg News. The bank did not identify other potential suitors for Transatlantic.
Shareholders love a bidding war for their company and that much was evident in Transatlantic's action today as the stock soared nearly 10% on volume that was better than five times the daily average.
Footwear maker Timberland (TBL) was another stock on the move thanks to M&A news as VF Corp. (VFC) offered $2 billion for the maker of work boots and casual footwear. The deal values Timberland at $43 a share, a 43% premium to where the shares closed on Friday. North Carolina-based VF, the maker of the Nautica and North Face brands, said the Timberland acquisition will add $2 to annual earnings per share by 2015, and add about $700 million to VF's 2011 revenue, according to Reuters.
VF plans to finance the acquisition, which is expected to close in the third quarter, through a combination of cash on hand and commercial paper. The company is looking to grow its outdoor segment to fuel revenue and profit growth, making the Timberland deal an ideal fit, at least on the surface, for VF. As for Timberland shareholders, this was welcome news to say the least because the stock had lost more than a third of its value since early May. Today, Timberland shares were up 44% on volume that was better than 30 times the daily average.
I do not know what it is about the packaging sector, but it sure does appear to be fertile ground for M&A activity these days. Last Monday, I wrote about the unsolicited $3.3 billion takeover offer Temple-Inland (TIN) had received from rival International Paper (IP). This week, there is news of yet another unsolicited offer for another packaging firm, that being Graham Packaging (GRM).
Pennsylvania-based Graham makes custom-molded plastic containers for consumer products companies and a quick look at the company's Web site shows that it has a roster of well-known customers including Coca-Cola (KO), PepsiCo (PEP) and Heinz (HNZ), just to name a few.
Apparently, that is an attractive feature to Rank Group, the New Zealand-based private equity firm that is offering $1.64 billion for Graham. Again, there's a potential battle brewing here because Silgan Holdings (SLGN) previously offered $22.10 a share for Graham. Rank's offer values Graham at $25 a share.
No word yet on whether Silgan is mulling a new bid, but investors do not like the idea of the company missing out on Graham. Silgan plunged almost 6% on volume that was more than five times the daily average.
Perhaps the biggest news of the day involves a company that is not yet even public. Of course, I am referring to social networking king Facebook, the most visited site on the Internet. For all the talk of about LinkedIn's (LNKD) IPO and the imminent offering from daily deal Web site Groupon, the reality is Facebook is the one IPO everyone and his sister is talking about.
CNBC reported today that the word on Wall Street is that Facebook could be targeting an IPO in the first quarter of 2012 that values the company at a staggering $100 billion. Staggering is truly the appropriate term because in recent months the rumored valuation for Facebook has risen from $50 billion to $70 billion to now $100 billion.
Just for fun, I ran a quick screen of only NYSE-listed stocks that have market values in the $100 billion area and the roster of companies that Facebook would be in the same ballpark with, assuming the $100 billion number proves accurate, is nothing short of impressive. In the oil patch, $100 billion puts Facebook on par with ConocPhillips (COP) and makes the company a lot more valuable (try 20%+) than Occidental Petroleum (OXY), the third- and fourth-largest U.S. oil companies respectively.
At $100 billion, Facebook would sport a larger market value than a pretty hefty percentage of the Dow Jones Industrial Average. I stopped counting when I realized $100 billion is more than the market caps of the following Dow stocks: AA, AXP, CAT, DIS, HD, HPQ, KFT, MCD, and MMM.
I realize the chart that I have included below is a bit dated, but it does paint the picture of Facebook's epic valuation surge. Plus, the chronology of it is fun to study. Take a peak at where Microsoft (MSFT) got involved. There are plenty of reasons to criticize Mr. Softy these days. Investing $240 million in Facebook in 2007 is NOT one of them.
Facebook Valuation Chart
Looking at the charts, given the small gains and losses seen across the major indexes today, I am afraid I do not have a lot of material to work with that is noticeably different from what Jim had to say in the weekend commentary. A gain of less than one point for the S&P 500 is not going to do much to inspire confidence and with the index almost 56 points below its 50-day moving average, next support looks like 1250. The 200-day line is just four points above there.
If 1250 does not hold as support, there is further downside risk to 1225 and then to 1275.
S&P 500 Chart
The margin of advancers to decliners on the Dow was 19-11, but even that is not worth writing home about because CAT, CVX, IBM and XOM were all lower on the day. On the bright side, financials perked up...sort of. Still, the blue chip languishes under 12,000 and the longer it does that, the more realistic a fall to 11,600 becomes. Go there and the Dow could be on its way to 11,000.
With the summer doldrums officially setting in, this is not the season to be embracing tech and the Nasdaq's chart confirms that sentiment. The Nasdaq's cascade from its May peak is now close to 200 points and I would not be betting on the 200-day moving average at 2630 holding as support. Support is more firm at 2600 and if that does not work, then 2540-2550 area could be the next stop. With the charts for AAPL, GOOG, PCLN, FFIV and several other big-name Nasdaq stocks looking very ugly right now, more pain probably awaits the Nasdaq.
At this point, it is hard to envision the Russell 2000 not following another eight points or so to its 200-day moving average at 769. If that is not support, well, I will just say you probably will not want to be long small-caps or Russell 2000 Index ETFs because the carnage from there will be palpable. I am talking a downturn to the 700-710 area.
Russell 2000 Chart
These waters are still too dangerous to jump into, at least not without patience and an insurance policy in the form of puts or an inverse ETF. A ''law of averages'' bounce is possible this week. After all, the market has slid for six straight weeks, but even if such a bounce occurs, it will not be enough to erase six weeks' worth of damage. I still think restraint is the order of the day. What one may be thinking about buying today can be probably be had next week at an even better price.