After The Close - The momentum swung back and forth today between the bulls and the bears. At the close, it was the bulls with the upper hand, if ever so slightly, as the major averages advanced very modestly. Market breadth was similarly disposed, with the number of issues gaining topping decliners by a slim margin on the New York Stock Exchange.
Trading early on was biased to the upside, helped by a better-than-expected May figure on the nation’s industrial production and a couple of corporate mergers. The gains posted shortly after the opening bell constituted more than a small victory, given the chaos in Iraq over the past week that has disrupted traders’ outlook.
But toward midday the misgivings about the situation in Iraq set in, sending stock prices lower. Supplies in that southern part of that strife-torn nation are not yet threatened, but there are serious concerns that they could be if the violence continues, as signs point to. Fears are also that a pipeline put out of commission by rebels a few months ago may remain off line.
More broadly, the rise in prominence of radical factions across the Middle East undermines the stability of the entire region—a key oil producing part of the world. The concerns about Iraq and the Middle East drove up oil prices by $4 a barrel last week, causing consumers in this country to expect gasoline prices to rise five to ten cents a gallon.
Rising fuel prices will take money out of consumers’ pockets and make it more difficult to achieve the more vigorous rates of domestic GDP growth envisioned by most of Wall Street for the balance of 2014.
Another concern about energy supplies has arisen in Europe, where the word is that Russia’s Gazprom is demanding upfront payments for natural gas from Ukraine, which sends the gas it receives along to part of the Continent. The worry is that industries in Europe soon may not have all the natural gas they need to do business.
Nevertheless, investors recovered their equilibrium in the early afternoon, and the major averages held their own into the close. There was a dose of caution in the air, though, with the defensive utilities sector being the day’s strongest performer.
Tomorrow brings the start of a two-day meeting on the part of Federal Reserve policy makers, as well as economic reports for May on housing starts, building permits, and the consumer price index. But any further, notable deterioration in Iraq may take center stage. - Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned.
12:20 PM EDT - U.S. equity markets opened down today but quickly rebounded to the plus side following some positive economic reports. However, they could not hold on to positive territory as the morning wore on. Market action became more upbeat following the Federal Reserve’s report on industrial production. Specifically, the data indicated that factory production was up 0.6% last month. While increases were reported across the board, the biggest contributors included the automobile sector, where motor vehicle production increased 1.5% in May, after dipping slightly the previous month. Mining output also made a notable move, rising 1.3% for the month, building on a 1.6% advance in April.
Also serving to boost investors’ outlook was the latest report from the National Association of Home Builders. The industry group’s index of homebuilder confidence moved up four points in June, to 49. Although this reading was still below the dividing line between pessimism and optimism, it marked the gauge’s first increase for the year, as the industry works to put the harsh winter behind it. Elsewhere, the New York Federal Reserve announced that its index of general business conditions had increased to the highest reading in four years. Though of lesser general import than the prior two news items, it helped bolster the argument for a solid showing for GDP growth in the second quarter.
Putting a slight damper on this upbeat tone, the International Monetary Fund trimmed its forecast for U.S. economic growth this year to 2%. It had previously been looking for an uptick of 2.8%, but made the downward revision due to the 1% decline in GDP in the first quarter.
Federal Reserve officials will be taking all of this into consideration as they convene to discuss monetary policy on Tuesday and Wednesday, and market participants will be carefully parsing the Fed’s public statements for any changes to its monthly bond purchasing program.
As we approached the noon hour in New York, the Dow Jones Industrial Average, S&P 500, and NASDAQ had all retreated from their best levels of the session, with each fractionally below the breakeven mark.
Over in Europe, investors appeared to be more focused on escalating violence in Iraq. The concerns are warranted, particularly as gasoline prices on the Continent are significantly higher than they are in the U.S. Thus, potential oil supply disruptions would likely have a proportionately greater impact on euro zone economies. France’s CAC-40 was taking the hardest hit among the major bourses, down about three quarters of a percentage point as of 12:00 EDT. London’s FTSE and Germany’s DAX fared comparatively better, each losing a little less than a third of percent on their sessions. - Mario Ferro
At the time of this article’s writing, the author did not have positions in any companies mentioned.
Stocks to Watch from The Survey – There was a flurry of M&A activity over the weekend. First, in a deal that was rumored to be in the works on Friday, tw telecom (TWTC), a telecommunications utility, has agreed to be acquired by wireless networking company Level 3 Communications (LVLT). Under terms of the transaction, TWTC stockholders would receive a combination of $10 in cash and 0.7 of a LVLT share for each TWTC share owned, for a total value of $7.3 billion, including the assumption of debt. TWTC is up sharply ahead of the bell on the news, while LVLT is indicating a modestly higher opening this morning. Elsewhere, data storage manufacturer SanDisk (SNDK) has struck a deal to purchase Fusion-io (FIO), a developer and seller of storage memory platforms for enterprise data decentralization, for $11.25 a share in cash. FIO stock is soaring in the premarket, as a result, while SNDK is up just slightly. Finally, by far the largest potential deal is in the medical supplies industry, as Covidien (COV) has agreed to be purchased by Medtronic (MDT) in a cash and stock deal that values Covidien at $93.22 a share. COV stock is surging ahead of the bell on the news, and MDT is showing a nice upward bias, as well.
Finally, there is not much news on the earnings front, although shares of Layne Christensen (LAYN) are indicating a notably lower opening this morning, after the engineering and construction company released disappointing April-period results. – Matthew E. Spencer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
Before The Bell - The major U.S. equity indexes traded lower last week for the first time in several weeks. We think there were a few reasons for the selling. First, last week began with the Dow Jones Industrial Average and the S&P 500 Index at all-time highs, and with the dearth of earnings and, to a lesser extent, economic news to push them higher, they succumbed to some profit taking. It also should be noted that in addition to a weaker-than-expected report on retail sales for the month of May—the metric rose by 0.3% versus the expectation of a 0.6% rise—the political news was far from uplifting. Investors were spooked by the rising tensions and unrest in the Middle East and also by Virginia Congressmen Eric Cantor’s lost in his state’s primary elections. Following that election, the “pro-Big Business and Wall Street” Majority Leader in the House of Representatives announced that he would set down from his position at the end of July.
However, one positive to take away from last week’s losing five-day stretch on Wall Street was the resiliency shown by the market averages on Friday. Following two losing sessions, the Dow Jones Industrials, the NASDAQ, and the S&P 500 Index all rebounded by 0.3%, which was a good sign for the bulls, as they were able to overcome some unnerving news, particularly reports of unrest in Iraq. Helping equities on Friday was once again some merger and acquisition news from Corporate America—which is often viewed as a sign of a strong market—and a very good report from chipmaking giant Intel Corp. (INTC - Free Intel Stock Report). The Dow-30 component raised its revenue guidance for the upcoming quarter.
The aforementioned Intel report gave a nice boost to the technology stocks on Friday, which, along with the energy issues, provided the leadership among the top-10 groups. The energy sector rose sharply on the significant jump in crude oil prices, the result of the escalating conflicts in oil-rich Iraq. Overall, investors showed a little bit more appetite for risk than in the prior few sessions. In that same vein, the more-defensive healthcare and consumer staples stocks finished lower. However, the higher-yielding utilities and telecom issues, which are also more defensive in nature, finished higher. We think the recent drop in bond yields has made those issues more attractive than bonds for accounts stressing income.
Looking ahead to the new week, the investment community will receive some important news on the economy. We are set to get the latest data on industrial production this morning. Then tomorrow, housing starts and building permits data will be released for the month of May. Given the housing market’s importance to the health of the U.S. economy, the new residential construction data will be closely monitored. And of great significance, the Federal Open Market Committee will hold its two-day monetary policy meeting this week, with a statement to be made on Wednesday afternoon; the latest news from the Federal Reserve always has the potential to be a game-changing event.
It will be another quiet week as far as earnings go, as we are still several weeks away from earnings season getting underway. That said, we would be remiss if we did not mention that technology giant Oracle (ORCL) and shipping giant FedEx (FDX) are reporting their latest quarterly results on Wednesday. We would be especially interested to hear what the latter company has to say, as FedEx, given the nature of its business, is often used as a barometer of how the economy is faring.
With less than an hour to go before the commencement of the new trading week, the equity futures are indicating a lower opening for the U.S. market. Overnight, the major Asian indexes were lower, while the major European bourses are in the red as trading enters the second half on the Continent. Stay tuned. - William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.