MarketView for November 15

 

 

Summary 

 

Share prices were lower for the most part on Monday as concerns the Federal Reserve may scale back its efforts to stimulate the economy muted optimism over two big takeover bids. The S&P 500 held above its 20-day moving average, now near 1,196 and marking a potential support level, though the index closed slightly lower.

 

The energy and materials sectors, which are sensitive to commodity prices and weaken when the dollar rises, led the way down as the Treasury bond market selloff picked up steam in the afternoon.

 

Mergers and acquisitions kept the market afloat for most of the day after Caterpillar announced that it had agreed to acquire mining equipment maker Bucyrus International for $7.6 billion. Also on Monday, data storage equipment maker EMC announced that it had agreed to acquire smaller rival Isilon Systems for $2.25 billion.

 

Bucyrus quickly rose 29 percent to $89.80, while Caterpillar rose 1 percent to $81.82 and helped the Dow close slightly higher. Isilon was among the most active stocks on Nasdaq, rising 28.5 percent to $33.77, while EMC fell 1.2 percent to $21.45.

 

If the S&P 500 holds above its 20-day moving average it could find itself in a tight range as it faces strong resistance around the 1,228 level. The Bollinger bands chart indicates the near-term target at 1,230, in the area of the 61.8 percent retracement of the slide from the 2007 historic highs to the 12-year lows of March 2009.

 

"That 1,220, 1,230 (level) is an important level and I don't think it's going to be easy to get through. We're going to need some sort of surprise good news to get us through there on a sustained basis," said Scott Wren, senior equity strategist at Wells Fargo Advisors in St. Louis.

 

Among gainers in the mining sector, Terex rose 2.9 percent to $25.13 and Joy Global closed up 7.5 percent at $77.77.

 

In economic news, retail sales posted their largest gain in seven months in October, lifted by purchases of motor vehicles and building materials. Separately, a gauge of manufacturing in New York State fell in November to its lowest level since April 2009.

 

Amazon.com fell 4.1 percent to $158.90 on concerns that the decision by a number of rivals, including Wal-Mart to offer free shipping could challenge the online retailer's results. Charts show Amazon's stock is technically weak in the short term, with the daily moving average convergence-divergence at a 'sell' since late October, except for a one-day blip last week. Momentum turned negative on Friday when it also accumulated a two-day drop of 4.4 percent.

 

And after Amazon's close on Friday below its 20-day moving average -- a first for the share since October 11 -- the Bollinger bands chart shows a near-term target of $158.65, more than 4 percent below Friday's close.

 

About 6.71 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well below last year's estimated daily average of 9.65 billion.

 

Higher Retail Sales

 

Retail sales chalked up their largest gain in seven months; further evidence the economy is regaining its strength as it recovers from the worst recession since the 1930s. The data also offers up hope that the holiday season will exceed expectations. However, Monday's upbeat sales report from the Commerce Department was tempered somewhat by news that a manufacturing gauge in New York State fell this month to its lowest level since April 2009.

 

Total retail sales increased 1.2 percent, boosted by purchases of motor vehicles and building materials, after advancing by 0.7 percent in September. The rise last month was almost double market expectations for a 0.7 percent gain. Excluding autos, sales rose 0.4 percent last month after a 0.5 percent increase the prior month. It was the fourth monthly increase in retail sales and was the latest in a series of data to suggest a pick-up in economic growth momentum.

 

Although the New York Federal Reserve's "Empire State" general business conditions index fell to -11.1 in November from 15.7 in October, economists were little worried and pointed out that the survey was not a bellwether for the rest of the economy. Economists had expected the index a tick down to 14 this month. The survey's forward-looking index of business conditions six months ahead was more upbeat, rising to 54.6 from 40 in October.

 

A loss of momentum within the economy prompted the Federal Reserve this month to launch a controversial $600 billion round of bond buying, known as quantitative easing, to provide additional stimulus. However, the Fed could always reduce the current stimulus package if economic data continues to show underlying strength in the recovery.

 

A second report from the Commerce Department showed business inventories rose 0.9 percent to $1.40 trillion, the highest level since March 2009, after increasing by a revised 0.9 percent in August. The expectation had always been for September inventories to rise 0.8 percent from a previously reported 0.6 percent increase in August.

 

September's larger-than-expected increase in inventories and August's upward revision suggest the government might raise its preliminary GDP growth estimate when it publishes its first revision this month. Initial estimates put third-quarter GDP at a 2.0 percent annual rate.

 

Motor vehicle and parts purchases surged 5.0 percent last month, also the largest increase since March, after rising 1.5 percent in September. Building materials and garden equipment sales rose 1.9 percent last month, the largest gain since April, after increasing 1.3 percent in September.

 

October's retail sales report showed gains across most categories, offering hope that consumers will support the economy, despite a 9.6 percent unemployment rate. Data so far for October, including nonfarm payrolls and manufacturing, have pointed to a pick-up in the growth pace.

 

Retail sales in October were also lifted by receipts at gasoline stations, which rose 0.8 percent after increasing 1.2 percent in September. Clothing and clothing accessories sales gained 0.7 percent, while receipts at sporting goods, hobby and book stores rose 1.0 percent, the largest increase since March.

 

Core retail sales were up 0.2 percent in October, after posting a 0.4 percent increase during September. The core number excludes autos, gasoline and building materials, Core sales correspond most closely with the consumer spending component of the government's gross domestic product report. Spending, which accounts for 70 percent of all economic activity, increased at a 2.6 percent annual rate in the third quarter. However, purchases at electronics and appliance stores fell 0.7 percent in October. Furniture sales also fell 0.7 percent last month.

 

Philadelphia Fed Trims Estimates

 

The recovery in the U.S. economy and labor market is expected to be modestly slower in the fourth quarter than previously expected, according to a survey of forecasters released on Monday.

 

The Federal Reserve Bank of Philadelphia's survey of 43 professional forecasters sees the economy growing at an annual rate of 2.2 percent in the current quarter, down from the estimate of 2.8 percent three months ago.

 

The unemployment rate was forecast to be 9.6 percent in the fourth quarter, in line with the previous estimate. But forecasters revised down the growth in jobs expected over the next four quarters.

 

Forecasters see nonfarm payroll employment growing at a rate of 86,600 jobs per month this quarter and 104,200 jobs per month in the first quarter of 2011. This is down from previous expectations of 114,100 and 159,300, respectively.

 

Forecasters cut their inflation expectations. Over the next 10 years, forecasters expect headline CPI inflation to average 2.2 percent at an annual rate, down from 2.3 percent in the last survey. The 10-year outlook for PCE inflation of 2 percent is lower than the previous forecast of 2.11 percent.

 

Caterpillar to Acquire Bucyrus

 

Caterpillar is going after the rapidly expanding global mining industry with a $7.6 billion deal to buy Bucyrus International. The deal will raise Caterpillar's position in the mining industry as the world's largest manufacturer of mining equipment, adding massive mining shovels and draglines to its lineup of trucks and excavators.

 

Shareholders of Bucyrus will receive $92 cash per share, a 32 percent premium over the stock's closing price on Friday.

 

Caterpillar is increasing its exposure to the minerals sector at a time when demand for materials such as iron ore and coal is being spurred by rapid development in emerging markets like China and India.

 

"It's a great time to invest in mining. We expect continued urbanization and what I would call modernization to continue in the developing countries," said Doug Oberhelman, who took over as Caterpillar CEO this year from Jim Owens.

 

"With interest rates as low as they are today and the world in the early stages of an economic recovery, this was a great time to invest," he said.

 

The move, which returns Caterpillar to the mining shovel business, which it left in 2004, could raise the company's exposure to fast-growing emerging economies. Bucyrus generates about a third of its revenue in the developing world, competing primarily with Joy Global.

 

Bucyrus closed up 29 percent to $89.80, while Caterpillar finished up nearly 1 percent at $81.82. Bucyrus is a 125-year-old company named for the Ohio town where it was founded. Its equipment was used in the digging of the Panama Canal. Caterpillar said it would fund the acquisition through a combination of cash, debt and equity.

 

Caterpillar expects the deal to accrete in the first year after the closing, excluding 50 cents per share of one-time charges.

 

Caterpillar already makes a wide range of mining equipment. Earlier this year it said it hoped to expand the line to meet demand from mining customers, who are scrambling to take advantage of rebounding prices for copper and other minerals.

 

The combined companies expect to cut their costs by some $400 million, beginning by 2015, they said in a statement. Bucyrus is less than a tenth Caterpillar's size, measured by revenue. Analysts look for the smaller company to earn $298.5 million on revenue of $3.56 billion this year, versus Caterpillar's expected profit of $2.55 billion on revenue of $41.13 billion, according to Thomson Reuters I/B/E/S.

 

Shares of Caterpillar are up 42 percent this year. Caterpillar's resolve to dig deep into the market coincides with a healthy rebound in customer spending, after the economic downturn significantly curbed miners' budgets. Global capital spending by mining companies will jump 50 percent to a record $113 billion in 2011, above the record $110 billion in 2008, according to Bernstein Research.

 

It is the latest in a string of deals in recent months by Caterpillar under Oberhelman. Last month it purchased MWM Holding GmbH, a German maker of gas and diesel engines, from British private equity company 3i Group Plc for $810 million cash. And over the summer it bought EMD, a U.S. maker of train locomotives, for $820 million, putting it into head-to-head competition with General Electric.

 

The Caterpillar-Bucyrus deal leaves Joy Global as the last remaining stand-alone domestic manufacturer of mining equipment. Joy shares closed up 7.5 percent to $77.77.