On the eve of the expiration of the U.S. debt ceiling, politicians appear close to ratifying a deal that is less bad than the alternative: A default on U.S. debt. ''Less bad'' is also an appropriate way of measuring the performance of stocks today as last week's declines seeped into this week, providing a gloomy start to the new month, but the S&P 500 and the Nasdaq were both down less than half a percent and the Dow's loss was negligible.
The debt ceiling, currently $14.3 trillion, will be raised by at least $2.1 trillion while federal spending will be slashed to the tune of $2.4 trillion. Perhaps the best feature of the legislation being considered is the fact that the debt ceiling issue will not need to be considered again until 2013. Vice President Biden touted this virtue to the press today, but it also underscores just how toxic the partisan environment is on Capitol Hill.
The debt ceiling was raised multiple times under the previous administration and dozens of times before with little difficulty. Bragging about putting off the debate for another two years just highlights how difficult it is to do business in D.C. these days.
No matter what your personal politics are, it is doubtful the debt ceiling agreement will truly thrill you. Some will be disappointed that the agreement does not address tax reform (increases) in any substantive fashion. Others will not be happy to learn that entitlement reform has once again been put off until another day. There you have it: Not good or great, but just less bad than defaulting.
If there was any overnight enthusiasm regarding the debt ceiling news on Sunday evening, it was short-lived because investors across the globe woke up to a spate of disappointing economic data Monday morning. China's PMI Manufacturing number fell to a 29-month low at 50.7, though that actually topped the 50.2 consensus estimate.
Taiwan's HSBC Manufacturing PMI number hinted at contraction with a reading of 46.1. Russia's reading was also below the important 50 level, coming in at 49.8. The Eurozone's final July PMI manufacturing number matched the 50.4 expected while the U.K. reported 49.1, below the 51 expected and good for the lowest reading since June 2009.
Here in the U.S., the Institute for Supply Management said the July manufacturing report was 50.9, well below the 55.3 seen last month and sharply below the 54.3 economists were forecasting. New orders slid to 49.3 and backlog orders fell to 45. Overall readings above 50 are considered positive and that is probably the best thing that can be said of this ISM update.
Losers at the hands of the debt ceiling debate have been pretty easy to identify for the past couple of weeks now, but with the debate looking like its drawing to a close, the sectors and stocks that will be truly impacted by Uncle Sam's flirtation with austerity are coming to light. With politicians looking to save more than trillion over a decade, defense spending is a prime candidate for some trimming and it will see a haircut.
By some estimates, $325 billion could be cut from the Defense Department budget over 10 years, according to Bloomberg News. Somehow Boeing (BA) escaped a big decline today, but that is just one aerospace/defense name. The PowerShares Aerospace & Defense ETF (PPA) was down nearly 1.3% on volume that was roughly 14 times the daily average today.
One sector that was home to some major declines today at the hands of government spending cuts is one that does not get much attention: Skilled nursing providers. On Friday, the Centers for Medicare and Medicaid Services issued its final ruling, resulting in an 11.1% haircut to Medicare skilled nursing facility rates.
The cuts go into effect on Oct. 1 and analysts were predictably pessimistic on the group as a result. Oppenheimer called the cuts a ''worst case scenario'' while downgrading Sun Healthcare Group (SUNH) to ''underperform'' from ''outperform.'' That stock plunged 52% on volume that was nearly 80 times the daily average. Skilled Healthcare Group (SKH) tumbled 42.5% on volume that was nearly 12 times the daily average after Morgan Keegan downgraded the stock to ''market perform'' from ''outperform.''
In a note to clients, Morgan Keegan analyst Robert Mains called the CMS cuts to skilled nursing providers ''a stinging setback'' and while noting the cuts were ''considerably worse'' than the industry or analysts were expecting, according to the Associated Press.
Sun Healthcare Chart
Over in the energy patch, there was some M&A news that kind of flew under the radar, though it was not of the announced or completed deal variety. Peabody Energy (BTU), the largest U.S. coal producer, and ArcelorMittal (MT), the world's largest steelmaker, have taken their $5.2 billion takeover bid for Australia's Macarthur Coal directly to the Australian company's shareholders, marking the start of a hostile bid.
As I have noted about this bid in the past, Missouri-based Peabody tried to acquire Macarthur last year for $3.4 billion on its own, but was rejected. Macarthur makes for an alluring takeover target not only because it is the world's largest maker of pulverized coal for use in steel production, but also because of Australia's proximity to China, India and other key emerging markets.
Obviously, Macarthur knows these things about itself and that apparently makes for a difficult negotiating partner. Macarthur rejected an offer from Peabody and ArcelorMittal of about $17 a share, saying it wanted an offer closer to $19.80 a share. Peabody and ArcelorMittal are willing to pay the equivalent of $27 for each ton of Macarthur's coal reserves and $3 a ton of its coal resources, Bloomberg News reported, citing a Morgan Stanley report.
Crucial to appealing to Macarthur shareholders for Peabody and ArcelorMittal is getting China's Citic Group, which owns 24% of Macarthur, to go along with the deal. If the deal is successful, it would be the second-largest takeover in the coal sector this year behind the $7.1 billion Alpha Natural Resources (ANR) paid for Massey Energy. For more news and commentary on the energy sector, sign up for a free trial of the OilSlick daily newsletter (HERE).
Peabody Energy Chart
Looking at the charts, by the time the market closed, the S&P 500 barely closed above its 200-day moving average just over 1285, though that support was violated by 11 points on an intraday basis. The index remains well below resistance in the 1310, though 1295 would have to be conquered first before 1310 can be addressed. If 1285 does not hold, 1265 is the next stopping point. Below there, it is time to drop long positions.
S&P 500 Chart
At least the Dow did not drop below its 200-day line today and it did close more than 50 points above that area, but the chart is only barely more attractive than that of the S&P 500. Another source of encouragement could be the fact that the Dow found psychological support at 12,000 and never came close to more critical support at 11,925. Resistance can be found around 12,320 and then again at 12,500. Pfizer (PFE) and Procter & Gamble (PG) are the big Dow earnings reports for the week, though I doubt either will materially impact the index.
The Nasdaq finished the day in decent shape today, all things considered, and made a valiant effort to reclaim its 50-day moving average. While falling short of that mark by just seven points, the Nasdaq is at least a comfortable distance removed from support at 2700 and if it can clear the 50-day line, can run another 25 points to next resistance. After that, resistance is of the round number variety at 2800. There are enough brand-name earnings reports this week to help or hinder the Nasdaq.
The Russell 2000 fell through its 200-day line on Friday with hardly any fight, but the small-cap index made a decent effort to get back there today. There are two ways to look at Monday's action on the Russell 2000. First, it can be viewed as disappointing the index did not close above 800 after trading as high as 808. Or it can be said at least support at 775 was never an issue. I am cautiously leaning in the former camp as the Russell held up decently at the end of last week.
Russell 2000 Chart
Alright, so I will work on the assumption that a debt ceiling deal will pass, if not tonight, then sometime on Tuesday, but I am not convinced it will deliver the required euphoria for the market to make substantial headway toward erasing more than a week's worth of losses. There might be some initial positivity, but the harsh reality is even if a debt ceiling accord is reached, investors still have to contend with poor economic data. The ISM number today got that ball rolling and it is doubtful Friday's jobs report will surprise to the upside.