MarketView for July 23

Summary

In what is becoming a real irritation for investors, the major equity indexes were down again on Monday for the same reason we have seen so many times before, Europe. Specifically, this time it was Spain that appeared to be skating near the edge of financial insecurity to the point where it appeared only to be a matter of time before it too will need a national bailout.

The Spanish region of Murcia looked set to follow Valencia in tapping a government program to keep its finances afloat. Local media reported half a dozen regions were ready to follow suit.

Valencia's move contributed to a 1 percent drop in the S&P 500 on Friday. The benchmark index had appeared on track to exceed those losses on Monday, falling as much as 1.8 percent before recovering some of those losses.

The International Monetary Fund dismissed a weekend news report in German weekly Der Spiegel that it may refuse to continue supporting Greece as it prepares for talks with the new Greek government on its international bailout.

Weak results from McDonald's added to the day’s cautious tone with materials were among the day's weakest sectors, hurt by across-the-board declines in commodity prices. Nonetheless, share prices did manage to end the trading day well off the day's lows, rebounding from an initial drop shortly after the opening bell. Furthermore, the indexes appeared to stabilize as the S&P 500 index approached its 50-day moving average of 1,332.98, a technical support level that could trigger more losses if convincingly broken.

McDonald's was the latest earnings casualty among large multinational companies after posting a lower-than-expected profit, citing a slower global economy and a stronger dollar. The Company’s shares fell 2.9 percent to $88.94, making them the largest drag on the Dow. Shares of Wendy's fell 2.4 percent to $4.51.

After the closing bell, Texas Instruments fell 1.4 percent to $26.44 in extended trading following the company's results. Texas Instruments reported a drop in its second-quarter sales and earnings numbers.

With 23 percent of S&P 500 companies having reported results, 67.5 percent have posted earnings above expectations, although many analysts have cut their forecasts in recent weeks, allowing for easier beats. Over the past four quarters, 68 percent of companies exceeded estimates.

The high-profile earnings disappointments have taken a toll on third-quarter estimates. Third-quarter S&P 500 earnings growth is now expected to come in at 0.9 percent, down from 3.1 percent at the beginning of the month.

At its session low, the Dow was down as much as 239.16 points, or 1.9 percent, at 12,583.41. The S&P 500 fell as low as 1,337.56, down 25.1 points, or 1.8 percent, at its session low. The Nasdaq had touched a session low at 2,852.88, down 72.42 points, or 2.5 percent from Friday's close.

Energy shares also fell as fears of a global slowdown prompted investors to sell oil, sending domestic crude down 3.8 percent. Chevron closed down 1.1 percent at $107.95.

The CBOE Volatility Index .VIX was up 14.4 percent to 18.62 at the close. According to the VIX Open Interest Put-to-Call ratio, VIX options traders are holding only 50 puts for every 100 calls outstanding on the VIX. The last time this ratio hit this level was early August of 2011, just before a huge volatility spike that lasted nearly four months.

The euro slid to a two-year low against the dollar and a near 12-year trough against the yen, pressured by fears that Spain may eventually need a full sovereign bailout. The yield on the Spanish 10-year bond was last at 7.496 percent, well over what analysts consider a sustainable level.

Peet's Coffee & Tea closed up 27.8 percent to $73.05 after striking a deal to be acquired by Joh. A. Benckiser for about $1 billion.

Volume was light, with about 6.13 billion shares changing hands on the three major equity exchanges, a number that was well below last year's daily average of 7.84 billion shares.

CNOOC to Buy Nexen for $15.1 billion

CNOOC Ltd launched China's richest foreign takeover bid yet on Monday by agreeing to buy Canadian oil producer Nexen for $15.1 billion, forcing Ottawa to decide whether security concerns outweigh its desire for foreign investment in its energy resources. CNOOC, China's third-largest oil company, hopes to sell the deal to shareholders and the government with a hefty 61 percent premium to Nexen's Friday stock price. It promised to retain all employees and to make Canada home base for its Western Hemisphere operations.

CNOOC is offering $27.50 cash a share for Nexen, which has oil sands operations in the Canadian province of Alberta, shale gas in the province of British Columbia and extensive exploration and production holdings in the North Sea, Gulf of Mexico and offshore West Africa. The initial shareholder reaction was enthusiastic. Shares of Nexen, whose board unanimously approved the deal, were up C$9.06, or 52 percent, to C$26.35 in Toronto on Monday.

The move is the most ambitious foray by resource-hungry China into North American energy since a 2005 attempt to buy U.S.-based Unocal for $18.5 billion was thwarted by a political backlash there. Chinese companies have been among the most aggressive in targeting assets around the globe to help feed demand in the world's second-biggest economy.

As for Canada, Prime Minister Stephen Harper has pushed to attract more energy investments from China. The CNOOC deal shows his efforts are bearing fruit, and Canada has more reasons to accept the deal than to veto it.

"For Canada, this agreement provides a stable source of investment for the many projects that Nexen operates, which includes the exploitation of bitumen in Alberta," CNOOC Chief Executive Li Fanrong said in a conference call. "Because we intend to be a local company as much as a global one, we also intend to seek a listing for CNOOC Ltd on the Toronto Stock Exchange."

The deal is subject to a review by the Industry Ministry, which by law must decide if the takeover would bring a "net benefit" to Canada. In its favor is both CNOOC's commitments to Canada, and the fact that Nexen's operations are mostly outside Canada.

CNOOC has only nine years of reserves based on its current production -- one of the lowest ratios among major oil companies worldwide. It said the deal would increase its proven reserves by 30 percent. CNOOC already has partnerships with Nexen, once a unit of Occidental Petroleum Corp. The Canadian company recently underwent a management shake-up and has been seen for years as a potential target.

The move was quickly followed by another Chinese play for Canadian-owned oil assets, as Sinopec Corp said it would buy 49 percent of Talisman Energy's British unit for $1.5 billion.

Analysts had talked of Nexen as a turnaround story since Kevin Reinhart took over as interim CEO early this year. He won kudos for improving the reliability of such projects as the huge Buzzard oil field in the North Sea after years of missed production targets. Yet Nexen's C$6.1 billion Long Lake oil-sands development, for example, is several years behind schedule in reaching capacity production. Such persistent problems have kept the stock well below the company's net asset value, said Norman MacDonald, vice president and portfolio manager at Invesco Trimark.

CNOOC made its first, tentative Canadian investment in 2005, paying C$122 million ($120.8 million) for a 16.7 percent share of the then-private oil sand developer MEG Energy. It completed a C$2.1 billion acquisition of Opti Canada Ltd in November, winning a second stake in a Canadian oil sands company and a share in Long Lake. The Canadian deals have not yet stirred the political opposition that killed CNOOC's $18.5 billion Unocal bid.

Still, Canada must review any foreign investments worth more than C$330 million and can block them if it thinks a deal is not in the country's best interests. It exercised that right in 2010 when it blocked Anglo-Australian miner BHP Billiton's $39 billion hostile takeover of Potash Corp, the world's top fertilizer producer.

Canada's industry minister confirmed he will conduct a review, focusing on such aspects as the effect of the deal on economic activity, the degree of participation by Canadians in the business and the impact on competition.

That said, only 28 percent of Nexen's production and 11 percent of its cash flow are derived from Canadian operations, CIBC World Markets analyst Andrew Potter said. That may help CNOOC pass muster with Investment Canada. In addition, it would be difficult for Harper to quash the deal after touting investment opportunities throughout Asia.

Still, Ottawa must consider the precedent such a pricey deal will set, said Gordon Houlden, head of the University of Alberta's China Institute and a former diplomat in China.

According to Thomson Reuters data, the takeover would be bigger than any foreign deal completed to date by a Chinese company.Buying Nexen also would make CNOOC the operator of Buzzard, the largest oil field in the UK and the biggest contributor to Forties Blend crude.

Forties is the largest of the four North Sea crude oils that form the Brent oil benchmark, and the crude that usually sets the value of dated Brent, the benchmark for pricing more than half of the world's oil.

CNOOC said Nexen's debts of about $4.3 billion would remain outstanding and it hoped to complete the deal by the fourth quarter of 2012. ($1 = 1.01 Canadian)