MarketView for April 6

Summary 

It should come as no surprise that Sunday’s rejection of Sun Microsystems by IBM, in combination with the latest run-up in stock prices, would result in a little money being taken off the table. Actually the only surprising thing was how muted and minor the profit-taking actually was. Shares of Sun Microsystems ended the day down 22.5 percent to $6.58. IBM closed down 0.7 percent to $101.56 and was among the top drags on the Dow Jones industrial average.

At the same time there was renewed worry with regard to the banking sector after analyst Mike Mayo of Calyon Securities cited the ongoing consequences of risk-taking by banks and warned of rising loan losses by the end of 2010. He rated a number of big and regional banks at "underperform" or "sell.

JPMorgan Chase fell 3.7 percent to $28.20, while Wells Fargo was down 6.7 percent to $15.25. The renewed worries about banks came after stocks rallied off 12-year lows in the last month, fueled in part by reassuring comments from major banks about their performance in the beginning of the year.

However, share prices still managed to come off their lows of the day as a result of a reassuring assessment of the bank sector from another closely followed bank analyst, Meredith Whitney. Whitney said banks will by and large have made "a little bit of money" in the first quarter.

Billionaire investor George Soros, meanwhile, said that the economy was in for "a lasting slowdown" and that it wouldn't recover in 2009. He also said the "banking system as a whole is basically insolvent.

Resource shares also pressured the market as the price of oil and other commodities fell. Chevron was down 0.8 percent at $69.89 and sweet domestic crude futures for May delivery settled down $1.46 per barrel at $51.05.

On the Nasdaq, Cisco Systems was down 3.5 percent to $17.53 and was one of the index's top drags after Goldman Sachs cut its rating on the shares to a "neutral" and removed it from the firm's "Conviction Buy" list.

Since hitting a bear market closing low on March 9, the S&P 500 is up more than 23 percent, spurred by hopes that the economic slump is moderating and banks are stabilizing as policy-makers continue an aggressive campaign to shore up the system.

The recent momentum in financials and sectors such as technology, which analysts say may lead a recovery, helped the Dow chalk up its best four weeks since 1933.

In the backdrop of the day's sell-off was the start of the first quarter earnings season, which gets under way when Alcoa reports on Tuesday. Alcoa ended the on Monday down 3.2 percent at $7.91

Crude Prices Fall Again

Oil prices fell nearly 3 percent on Monday to near $51 a barrel as Wall Street moved a bit lower on Monday over concerns that the banking sector and the dollar gained against the euro. Domestic sweet light crude for May delivery settled down $1.46 per barrel  at $51.05, while London Brent settled down $1.23 per barrel at $52.24.

Oil prices have been tracking equities markets closely in recent weeks as energy dealers use stock index performance as a gauge of sentiment around the economy.

Oil prices have gained roughly 40 percent since mid-February as equities markets rose and OPEC producers cut output, though oil's gains have been limited by continued weak global demand and rising inventory levels.

U.S. commercial crude stockpiles are running at a 16-year high, according to the Energy Information Administration.

Oil analysts said they expected this week's EIA data to be released on Wednesday to show yet another increase in inventories due to high import levels and weak demand from domestic refiners.

Goldman Sachs wrote to clients on Monday that crude oil price rallies would be short-lived until the second half of 2009 because of weak fundamentals. It said recent oil price rallies had been fueled by optimism over future stabilization in the financial system and in global economic growth, but for the time being these rallies were unlikely to be sustained.

"We continue to expect that a more stable demand environment, reinforced by the likely need for the industry to restock during second-half 2009, will help push the oil market into a sustained deficit later in the year," it said.

Sun Ends Merger Talks With IBM

Sun Microsystems saw its share price fall 22.5 percent on Monday after the news hit the Street that it had terminated its merger discussions with IBM. Sun essentially rejected a $7 billion buyout bid from IBM, leaving it vulnerable to lawsuits from shareholders nervous about Sun’s ongoing viability as a stand-alone company.

Although there was some hope that bargaining will resume, Sun was displeased with the latest offer from IBM in terms of price per share. It was probably a large mistake on the part of Sun to reject IBM’s offer because it may have been the company’s best move given that Sun has been losing market share and that the stalled talks underscored its significantly weaker position at the bargaining table.

The word on the Street is that Sun has been shopping itself for the past several months, and it appears no bidder other than IBM has come forth. Failed negotiations with IBM could mean Sun would have to contend with an even lower offer, or worse, none at all.

It is possible that Sun could sell itself in parts to software companies which do not want, or cannot afford, the whole company. However, the end result would likely be less than a sale of the whole company.

Credit default swaps insuring Sun's debt rose to around 143 basis points, or $143,000 per year for five years to insure $10 million in debt, from around 95 basis points on Friday.

Some predicted Sun could face anger from shareholders, in the same way that Yahoo Inc co-founder and previous Chief Executive Officer Jerry Yang did after he rejected Microsoft Corp's $47.5 billion bid last year. Yang eventually stepped down under strong criticism, and was replaced by Carol Bartz.

While IBM had been negotiating the price downwards, the last bid still represented a premium of up to 89 percent on Sun's shares before deal talks were first reported in mid-March. Sun is currently led by Jonathan Schwartz, who replaced Scott McNealy in 2006. McNealy, one of the founders of the Silicon Valley start-up, stayed on as chairman.

Some said the breakdown of the talks might just be brinkmanship and the two sides could come back to the table. However, further negotiations will likely weigh heavily on Sun's shares. Even if the two sides agreed to a deal soon, they would likely face intense regulatory scrutiny due to the strong position a combined company would have in the high-end server market.

In actuality, IBM less to lose than Sun, given that IBM has fared relatively well despite the current economic downtrend, due in part to aggressive cost cuts and a shift from hardware to higher-margin technology services.

However, on the other side of the coin, IBM could benefit from buying Sun by bolstering its market share in high end servers against competitors such as Hewlett-Packard Co. However,  Sun's assets, such as its Java programming language and Solaris operating system, are in the category of  "nice to have" but are not crucial to IBM’s business plan going forward.