Expectations that the Super Committee will turn out to be a super failure and more European concerns had investors overlooking mergers and acquisitions news. That was enough to extend last week's sell-off into this holiday shortened week as the S&P 500 and the Nasdaq each lost around 1.9% and the Dow Jones Industrial Average plunged 2.1%. The S&P 500 and Nasdaq are now negative year-to-date.
In today's look at yet another commodity getting hammered by the debt situations on either side of the Atlantic, I offer up silver. I happened to come across a piece online last week that noted a rally in gold and silver was right around the corner. In the case of both metals, we'll have to wait a bit longer as both were punished again today. As is par for the course, silver has been more volatile than gold and that is saying something.
In economic news, the National Association of Realtors said sales of existing rose 1.4% last month to an annual rate of 4.97 million compared with a downwardly revised 4.90 million homes in September. Economists expected an October number of 4.85 million. The bad news is the median home price fell to $162,500. That is a 2% drop from September and a 4.7% decline from October 2010.
Bad news was not hard to come by at the stock-specific level today. Pick a sector and chances are you will find a sea of red. One of the primary culprits behind the Dow's decline was Chevron (CVX), the second-largest U.S. oil company. Not long ago, this was a $105 stock. Now it's struggling to stay above $95 following what appears to be a minor oil spill off the coast of Brazil. Problem is for Chevron shares is that in a post-Gulf of Mexico spill world, there really is no such thing as a ''minor'' oil spill.
On Sunday, the CEO of Chevron's Brazil unit said his company is taking full responsibility for the spill. That is very un-BP (BP) of Chevron. Still, Brazil's national oil regulator, the ANP, has fined Chevron $28 million. Obviously, that is nothing in the big scheme of things for Chevron, but the near-term problem for Chevron is two-fold.
First, now notorious Transocean (RIG) was drilling the well for Chevron and that is bad from a public relations perspective because Transocean owned the Deepwater Horizon rig. Second, Brazil's oil production is surging and it would behoove any non-Brazilian company operating there to not run afoul of the government. After all, the government is the largest shareholder in Petrobras (PBR) and has already shown it is happy to give most of the good exploration contracts to the state-run oil company.
The spill started two weeks ago today and the estimate is for 110,000 gallons leaked. That is well below the spills seen off Brazil's coast in 2000 and 1975, but that does not matter in a trading context. Put ''oil'' and ''spill'' in the same sentence and you have the recipe for a big down move in just about any oil stock.
As we all know, days like Monday are not the days to own financials. Personally, I am not sure when those days are, but I digress. Dow component Bank of America (BAC) was down another 5% today and is now down nearly 60% year-to-date. Monday's tumble has the stock sitting around levels not seen since March 2009. Back then, it was an invitation to buy BofA. This time around, I am not so sure.
As I mentioned earlier, there was some mergers and acquisitions today, but it was not enough to ignite a broader rally. In the more controversial deal of the day, Gilead Sciences (GILD) said it will acquire Pharmasset (VRUS) for $11 billion. Pharmasset is making an advanced hepatitis C treatment and that is one of the more lucrative niches of the pharma universe. At an offer of $137 per share, Gilead is paying an 89% premium to acquire Pharmasset and that is exactly why some analysts are investors are concerned Gilead is overpaying.
I was covering this story for another outlet today and most of the analyst and buy side comments that I came across condemned Gilead for paying too rich of a premium. Hence, the punishment endured by the stock today. This deal is no different from any other in that it has prompted speculation about what company that is currently working on hepatitis C treatments might be next to be taken out.
That discussion seems to be revolving around Inibitex (INHX) with a few analysts saying Bristol-Myers (BMY) could be a logical suitor. For now, Gilead needs to make this Pharmasset deal pay dividends or more selling could be on the way.
Shares of Transatlantic Holdings (TRH), the property and casualty insurance provider, did not get much of a lift after Alleghany (Y), a property and liability insurance provider, said it will acquire the company for $3.4 billion in cash and stock. Investors will get 0.145 share of Alleghany and $14.22 in cash for each Transatlantic share, valuing the reinsurer at $59.79 a share based on Alleghany's closing price last Friday, according to Bloomberg News.
Several companies, including a unit of Berkshire Hathaway (BRK-A), wanted to acquire Transatlantic, but it looks like Alleghany will be the ultimate victor. The deal is expected to close early next year.
In after-hours, in the ''what a relief'' category, Standard & Poor's said it will keep its AA+ credit rating on the U.S. despite the failure of the Super Committee to deliver a substantive debt-cutting package. The supposedly bipartisan committee just could not reach an agreement. This is not a shock, but $1.2 trillion in automatic spending cuts will now trigger. How is that a bad thing?
Speaking of things that are definitely bad, there is the case of Netflix (NFLX). Not only did the beaten down stock touch a new 52-week low today, after the market closed, the company filed an 8-K that said it has raised $200 million in convertible notes. Those notes convert less than 17% from where the stock closed today and equal 2.3 million shares in added dilution current Netflix investors now must contend with. That will not make for a merry Christmas.
Looking at the charts, the S&P 500 has flashed a bearish signal with the close below 1200. Now we will have to see if the 1175-1185 acts as support. If not, the index could tumble to 1150 and from there, all bets are for a December rally are probably off. At this point, 1215-1225 on the upside needs to be reclaimed in order to show even nascent stages of another rally.
S&P 500 Chart
The Dow continues to look more bullish than the S&P 500, but that is not saying much at this point. The blue chip index closed below critical support at 11,600 today as all three of the Dow stocks closed in the red. Hopefully we will see a bounce from here or from a retest of support at 11,400. Drop below that area and it could be back to 11,000 and then to 10,600.
The Nasdaq is the worst of the lot and it looks like things could worse before they get better, barring a Black Friday miracle that is. As I suspected, selling has gained steam below 2600. Round number support at 2500 lingers. Lose that area and the Nasdaq could fall back to 2450. AAPL? AMZN? Are you guys listening?
I am nothing if not consistent. I saw no reason to be long last week and I am not feeling different today. That said, the Super Committee failure is not as bad as it looks. Some automatic spending cuts are better than nothing and the U.S. credit rating will remain in tact. Frankly, France losing its AAA rating might be the more pressing near-term issue. In a holiday-shortened week, I'd stay on the sidelines until after Black Friday.