MarketView for January 26

Summary

 

The major stock equity indexes chalked up a small gain on Monday in uneasy trading on Monday, with the gains due largely to the news of a $68 billion takeover in the drug industry that offset a grim warning about the year ahead from Caterpillar and worries over the state of the financial sector. Pfizer, the world's largest pharmaceutical company, said it had agreed to acquire rival Wyeth for about $68 billion, suggesting that some companies are attractively valued after a dismal 2008.

 

Pfizer fell 10.3 percent to $15.65 on worries over what benefits might or might not result from the acquisition, which had been rumored since last week. It is the largest non-financial deal since March 2008. Wyeth closed down 0.8 percent at $43.39.

 

Caterpillar was the biggest drag on the Dow Jones industrial average after the company forecast that its 2009 profit would decline significantly from 2008. The company also said that it planned to eliminate nearly 20,000 jobs. Caterpillar ended the day down 8.4 percent to close at $32.67.

 

Home Depot announced that it also was facing deep job cuts, with the world's largest home-improvement retailer reducing its workforce by 7,000. The Dow component rose 4.7 percent to $22.73. Companies across all sectors have been chopping jobs as they deal with slowing consumer demand and the fallout from the global economic downturn.

 

There was also a rare piece of good news for the recession-hit economy in that sales of existing homes rose unexpectedly jumped by 6.5 percent in December. Nonetheless, financial stocks turned lower in the afternoon and capped gains over concern on whether the sector, which is at the heart of the credit crisis, will need to raise yet more capital.

 

Among financial-sector laggards, Regions Financial fell 12 percent to close at $4.10 after an influential banking analyst said Regions may slash its dividend by 90 percent.

 

More Mixed Economic News

 

An unexpected improvement in home sales provided a rare dose of good economic news on Monday, but companies continued to wield the axe on jobs as the year-long recession inflicted more pain. The pace of sales of previously owned homes rose for the first time since September and inventory declined, a bit of positive news amid a disastrous housing market crash that has chilled growth, sent unemployment soaring and sharply eroded household wealth.

 

Sales of previously owned U.S. homes increased 6.5 percent to a 4.74 million unit annual rate in December, the National Association of Realtors said. The uptick was encouraging and was being taken as an omen that the worst housing decline in decades was finally nearing a bottom following government steps to slow foreclosures and cut interest rates on home loans.

 

U.S. government bond prices and the dollar fell as the housing data eroded their safe-haven appeal, encouraging investors to seek riskier assets. Stability in the U.S. housing market, the root cause of the worst financial crisis since the Great Depression, is seen key for any recovery in the domestic economy which has been stuck in recession since December 2007.

 

December existing-home sales were largely driven by distressed sales, which dragged the median national home price down 15.3 percent from the year earlier to $175,400.

 

The chief economist of the National Association of Realtors, Lawrence Yun, said it was the largest price drop since NAR started keeping records in 1968 and probably the largest since the Great Depression.

 

"There is pent-up demand, which could be unleashed with the right stimulus. The Obama administration and Congress need to move fast ... to stabilize home prizes and set the foundation for a sustainable economic recovery," said Yun.

 

Analysts were also heartened by the 11.7 percent drop in the inventory of existing homes for sale to 3.68 million units from 4.16 million in November. That translated into 9.3 months of supply at December's sales pace. The supply stood at 11.2 months' worth in November.

 

Meanwhile, the relentless wave of layoffs continued on Monday as Caterpillar announced nearly 20,000 job cuts and Pfizer said it would reduce the combined work force of itself and Wyeth by about 130,000 or 15 percent.

 

Separately, the Conference Board said its index of leading economic indicators rose 0.3 percent, beating expectations of a 0.3 percent decline. The rise in the Conference Board's index of leading economic indicators is credited to the improvement in credit markets thanks to action by the Federal Reserve.

 

The Fed has cut interest rates almost to zero and pumped hundreds of billions of dollars into financial markets to keep them operating. The Fed meets on Tuesday and Wednesday and is expected to hold its target range for the key overnight federal funds rate steady at zero to 0.25 percent.

 

Sales Increase At McDonald’s

 

McDonald's quarterly profit number exceeded estimates, but stifled some enthusiasm when it said that growth in some overseas markets will soften as economies across the globe feel the effects of our recession. The company posted a 5.8 percent rise in worldwide December sales at restaurants open at least 13 months. McDonald’s shares ended the day 0.65 percent at $58.40, but fell to $58.22 in after hours trading.

 

McDonald’s results are still ahead of most other restaurant operators, but mark a slowdown from the company's own November and October results, when McDonald's said same-store sales rose 7.7 percent and 8.2 percent, respectively.

 

Fourth-quarter net income fell 23 percent to $985.3 million, or 87 cents per share, from $1.27 billion, or $1.06 per share, a year earlier, when results included a large tax-related benefit. McDonald's cited a "softening" in its business in Germany as diners reacted to price hikes. It also said fourth quarter same-store sales decelerated in China, where growth was once red-hot.

 

Company executives said the world's largest economies are sliding simultaneously into recession, but that McDonald's same-store sales continue to be strong in January, with each area of the world reporting positive results.

 

"Our model remains recession resistant," Chief Executive Jim Skinner said on a conference call with analysts.

 

McDonald's, which offers a range of menu items for $1, has cemented its lead position by appealing to budget-conscious diners struggling with rising unemployment and sharp drops in home and investment values.

 

Revenue fell 3 percent to $5.57 billion, with McDonald’s stating that it was hit by a stronger dollar in many foreign markets, including Canada, Europe, Britain and Australia. Nonetheless, global same-store sales rose 7.2 percent in the quarter. Same-store sales rose 10 percent in the Asia/Pacific, Middle East and Africa markets, 7.6 percent in Europe and 5 percent in the United States.

 

In Europe, same-store sales rose 5.4 percent in December, compared with rates of 9.8 percent in October and 7.8 percent in November. The Asia segment had a December rise of 5.7 percent, versus 11.5 percent in October and 13.2 percent in November.

 

McDonald's said its U.S. business benefited from the addition of the Southern Style Chicken biscuit and sandwich, improved service at its drive-through windows, and the expansion of its high-end coffee drinks.

 

For 2009, McDonald's forecast capital spending of $2.1 billion, with about half of the total being invested in existing restaurants and the rest being used to open about 1,000 new restaurants.

 

It forecast 2009 food costs would rise 5 percent to 5.5 percent in the United States, where they rose 7 percent in 2008. As a result of easing food price inflation, it said it probably will not raise prices as much as usual in the early part of this year.

 

Dow Chemical Gets Cold Feet

 

Dow Chemical has refused to close on its $15.3 billion takeover offer for rival Rohm and Haas by Tuesday, breaking a key condition of the merger and sparking speculation that the deal might collapse. At the same time, Rohm and Haas sued Dow on Monday, arguing that the chemical company has no legal basis to walk away from the deal and asking a Delaware court to order it to complete the transaction.

 

Dow said it remains interested in discussions to find a way to complete the deal but that the recent economic downturn has made closing untenable at this time. "Dow Chemical has a long history of resiliency in responding to changing market conditions, and that resiliency continues, but the world has changed significantly and we still do not see the bottom of this unprecedented demand destruction," Dow Chief Executive Andrew Liveris said in a statement.

 

Dow's planned takeover of Rohm and Haas, a specialty chemicals company, has been clouded with uncertainty since Kuwait scrapped plans for a $17.4 billion joint venture with Dow in December. Dow intended to use proceeds from that venture to help fund the Rohm and Haas buy.

 

Last summer Dow agreed to buy Rohm and Haas for $78 a share, a 74 percent premium, to broaden its product offerings in higher-margin markets such as paints, coatings and electronic materials.

 

However, chemical companies have been hurt by the weakening economy as demand from industries they supply, such as autos, housing and electronics, has fallen drastically. They have also seen a slowdown in many emerging regions, areas that had been driving growth for chemicals in recent quarters.

 

Dow and Rohm and Haas have both announced job cuts and other cost-cutting measures since their deal was announced.

 

Nevertheless, if the merger is not completed on a timely basis, Dow faces a "ticking fee" that requires it to pay Rohm and Haas about $100 million for every month it does not close the transaction. At the same time, lawyers have said the merger agreement is very tight and Dow, the largest U.S. domestic chemical company, has limited wiggle room if it seeks to back out.

 

Under the merger agreement, the companies were to close the merger within two business days following final regulatory approval, which came on Friday. However, in its lawsuit, Rohm said that Dow has refused to commit to closing at all. It said that Liveris told Rohm that Dow believed it would be able to determine whether it could close the merger by June 30.

 

Shares of Rohm and Haas tumbled $8.37 or 12.7 percent to $57.45 on the New York Stock Exchange, while Dow shares fell 5.6 percent to $13.53.