MarketView for May 15

Summary

 

Stocks fell for the eighth day in the past 10 on Tuesday as uncertainty stemming from the political stalemate in Greece gave many a reason to be cautious while sellers came out in force late in the session.

 

The S&P 500 fell for the third straight session as attempts to form a government in Greece fell apart, raising the possibility of a rejection of the bailout terms spelled out by the European Union for the fiscally troubled nation. After holding near the unchanged mark for much of the session, stocks moved lower in the absence of positive news to turn the tide of negative sentiment.

 

The concerns about upheaval in the euro zone and its effect on the global economy weighed on energy and materials stocks, with crude down for the third straight day.

 

Retail sales rose 0.1 percent in April, slightly below expectations. However, details in the Commerce Department's report indicating underlying strength in demand and a rebound in manufacturing activity in New York State calmed concerns that the economy was stalling.

 

The declines on Tuesday pushed the S&P 500 down more than 6 percent from its early April high, leaving some investors optimistic that the pullback may be nearing an end as stock prices become more attractive.

 

The release of data indicating that an index of home builders' sentiment is at a five-year high in May helped lift that sector's shares. However, Home Depot lost 2.4 percent to close at $48.67 with the shares being the largest drag on the Dow Jones Industrial Average after the home improvement retailer posted quarterly sales that fell short of Street expectations.

 

After the closing bell, shares of J.C. Penney fell 11 percent to $29.66 following the retailer's release of quarterly results and same-store sales that fell short of expectations. The company also said it would discontinue its quarterly dividend of 20 cents per share.

 

JPMorgan Chase closed up 1.3 percent at $36.24, mostly unchanged this week after falling more than 11 percent last week.  The bank disclosed a trading loss of at least $2 billion. Pressure mounted on the bank to reclaim some of the millions of dollars it paid to the executives who oversaw the wrong-way trades.

 

Avon Products fell 9.7 percent to $18.71 after Coty withdrew its $10.7 billion takeover bid for the company, stating that Avon had missed a deadline to start discussions.

 

Chesapeake Energy saw its share price fall as much as 7.8 percent to $14.31, the lowest point since March 2009, after a credit rating downgrade and news that the natural gas producer will increase its borrowing to $4 billion from the planned $3 billion as it faces a liquidity crunch. Chesapeake shares finished the session down 5.6 percent at $14.65.

 

Facebook increased the price range of its initial public offering, aiming to raise more than $12 billion and giving the world's largest social network a valuation potentially exceeding $100 billion. The indications of high demand for Facebook's IPO prompted some buyers to snap up other social media companies' shares, such as online game maker Zynga, up 7.7 percent closing at $8.56.

 

Volume was active with about 7.28 billion shares changing hands on the three major equity exchanges, a number that was above the daily average of 6.78 billion shares.

 

Facebook Increases Size of Offering

 

Facebook has increased the size of its initial public offering by 25 percent to raise about $15 billion, as strong investor demand trumped ongoing debate regarding the company's long-term income potential.

 

Facebook plans to add about 85 million shares to its IPO, floating about 422 million shares in an offering expected on Friday. The expanded size, coupled with Facebook's recently announced plans to raise the IPO price range, would make Facebook the third-largest initial share sale in U.S. history after Visa and General Motors.

 

Facebook declined to comment on the increased offering size, which was first reported by CNBC on Tuesday. The Company is drumming up massive demand for the IPO even as slowing revenue and user growth spur questions about the long-term Facebook story. The result is more of a spectacle than an IPO.

 

Meanwhile, General Motors said it planned to pull out of advertising on Facebook, underscoring worries about revenue growth. GM's announcement, while ill-timed, is unlikely to reduce the Facebook's IPO momentum.

 

The IPO, Silicon Valley's largest, eclipses the roughly $2 billion debut by Google in 2004. Facebook raised the target price range to between $34 and $38 per share in response to strong demand, from $28 to $35, according to a Tuesday filing. That would value the company at roughly $93 billion to $104 billion, rivaling the market value of Amazon.com and exceeding that of Hewlett-Packard and Dell combined. The increased price range made it very unlikely that Facebook shares would double on their first day of trading.

 

Facebook said in its latest filing that it arrived at the higher IPO price range after one week of marketing the offering -- part of a cross-country road show in which CEO Zuckerberg has taken the stage to lay out his vision for the company's money-making potential and its top priorities.

 

Before the IPO size was increased, Facebook would have raised about $12.1 billion based on the midpoint price of $36 and the 337.4 million shares on offer originally.

 

At this midpoint, Facebook would be valued at roughly 27 times 2011 revenue, or 99 times earnings. Google went public at a valuation of $23 billion, or 16 times trailing revenue and 218 times earnings. Apple went public in 1980 at a valuation of 25 times revenue and 102 times earnings.

 

Facebook's IPO comes at a time when the company has not yet figured out a way to make money from a growing number of users who access the social network on mobile devices such as smartphones. Revenue growth from online advertising, which accounts for the bulk of its revenue, has slowed in recent months.

 

With some 900 million users, it had $1 billion in net income on revenue of $3.7 billion in 2011. The company has also extended the time frame for its $1 billion acquisition of mobile app maker Instagram, projecting that the deal would close in 2012 instead of the second quarter as it had previously indicated.

 

Facebook is scheduled to price its shares on Thursday and begin trading on the Nasdaq on Friday. A host of Wall Street banks are underwriting the offering, with Morgan Stanley, JPMorgan and Goldman Sachs serving as leads.

 

Euro Weighs on the Currency Markets

 

The euro held at four-month lows against the dollar and may extend losses sustained so far this month after Greece said it will hold new elections, raising risks Athens could eventually exit the euro. The prospect of prolonged political instability in the debt-ridden country is likely to keep the euro under severe pressure, analysts said.

 

The common currency, which has already lost 4 percent in May, was barely changed from late New York levels at $1.2734, struggling to regain ground after sliding to a four-month low of $1.2722 the day before.

 

The Euro has decisively fallen through an important support line at $1.2827, the 76.4 percent retracement of its rally earlier this year from $1.2624 to $1.3486. Chartists said that a clear break of the level opened the way for a test of the January low of $1.2624, though traders were wary of bouts of short-covering which could send the euro temporarily higher as net shorts in the currency stand at three-month highs.

 

With the appetite for risk dampened, investors kept piling into assets deemed as safe, pushing the dollar index - a gauge of its performance against major currencies - to a four month high. Against the yen, the dollar hit a two-week high of 80.36, pulling away from 2-1/2-month low of 79.428 yen hit last week, with major support seen at 79.14, a 61.8 percent retracement of its rally from February to March.

 

Worries about slowing Chinese and global growth also weighed on higher-yielding currencies with the Australian dollar at $0.9933b, close to a five-month low of $0.9921 plumbed the day before. The currency's chart outlook was bleak after it had breached a major support at $0.9945-50, the 61.8 percent retracement of its climb from October to February.

 

Crude Slides

 

The price of crude oil fell more than $1 early Wednesday morning as a larger-than-expected rise in crude stocks in the United States and fears of Greece's exit from the euro zone muddied the outlook for demand growth.

 

Basically the concern is the demand for crude as a prolonged political crisis in Greece has the potential to send Europe into a deeper financial mess at a time when China is slowing and the U.S. economy remains fragile. Yet, limited spare capacity and fears of a supply disruption have put a floor under prices.

 

Brent crude slipped as low as $111.20 a barrel and traded at $111.25, sliding for four out of the past five sessions. U.S. domestic Texas sweet fell $1.23 a barrel to $92.75, the lowest price point since December 19.