MarketView for June 23

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Monday, June 23, 2008

 

 

 

 

Summary

  

Although declining stocks outnumbered advancing ones by a ratio of about 2 to 1 on the Big Board and about 5 to 2 on the NASDAQ, the end result of it all was that the key equity indexes ended the day virtually unchanged. Meanwhile, trading was light with only about 1.09 billion shares changing hands on the NYSE, and about 1.93 billion shares on the NASDAQ.

 

Even news of a $4.4 billion takeover in the agricultural sector was not enough to really start any serious activity as traders were hesitant to place any big bets before the Federal Reserve's next interest-rate decision, due on Wednesday, when it is expected to leave its benchmark interest rate unchanged..

 

Looking ahead to Tuesday, the markets are likely to come under pressure early on due to UPS lowering its second-quarter earnings outlook after the bell, citing slow economic growth and high fuel costs.

 

Consumer discretionary stocks took a beating Monday after Goldman Sachs recommended that clients "sell" the sector on economic concerns. Shares of Starbucks, eBay and Apple sent the NASDAQ lower. Starbucks fell $0.93, or 5.40 percent, to close at $16.30, eBay closed down $0.44, or 1.56 percent, at $27.73, while Apple fell $2.11, or 1.20 percent, to close at $173.16.

 

Financial stocks also weighed on the market after Goldman Sachs backtracked on its May recommendation, telling clients to sell the sector as credit conditions deteriorate. Shares of Merrill Lynch fell $1.41, or 3.92 percent, to close at $34.54, after Banc of America Securities said it expects the investment bank to write down $3.5 billion in the second quarter.

 

However, gains in shares of energy companies, including Exxon Mobil, lent some support to the markets after Saudi Arabia's stated intention to increase output was seen as too little to limit rising oil prices. Exxon shares ended the day up $2.79, or 3.29 percent, to close at $87.70, while Chevron closed up $2.44, or 2.53 percent, at $99.06.

 

Also keeping losses in check was news that fertilizer producer Bunge Ltd agreed to buy Corn Products International. As a result, the shares of Corn Products ended the day up $7.85, or 18.30 percent, to close at $50.75, while Bunge fell $11.47, or 9.39 percent, to close at $110.70.

 

American International Group ended the day down $1.80, or 5.61 percent, to close at $30.30 making it one of the top drags on the Dow after Barron's wrote that the stock "will likely be dead money for some time to come," citing the potential for more accounting woes ahead.

 

UPS Warns

 

United Parcel Service warned on Monday that second-quarter earnings would be below expectations, blaming high fuel prices and a sluggish economy. UPS estimated earnings of 83 cents to 88 cents per share for the quarter, as compared to its prior view of 97 cents to $1.04 per share. In its statement, UPS said domestic package volume had been lower than expected, while demand for higher-priced air delivery services had seen a particular drop.

 

Bunge Acquires Corn Products for $4.4 Billion

 

Bunge said on Monday it would buy Corn Products International for $4.4 billion to gain a leading position in corn-based starches and sweeteners. The deal comes at a time of record grain prices and will give Bunge, a dominant player in South America, a stronger position in North America as it supplies some of the largest U.S. food and beverage companies such as Coca-Cola and Kellogg.

 

The deal calls for the exchange of one share of Corn Products for $56 in Bunge stock, a 31 percent premium to the company's closing price of $42.90 on Friday. Bunge, the No. 3 player in global agribusiness by revenue behind Cargill and Archer Daniels Midland, expects the transaction to lead to annual savings of between $100 and $120 million.

 

The deal is valued at $4.8 billion, including about $414 million of Corn Products' net debt. The diluted shares total 77.8 million, including money options and other equity awards that will be settled in Bunge shares at closing. Corn Products shareholders will own about 21 percent of Bunge once the deal closes. The combined company will have about 32,000 employees and operate in 40 countries. Neither company expects to close any industrial facilities as a result of the transaction, Bunge said.

 

Shares of Corn Products ended the day up $7.85, or 18.30 percent, to close at $50.75, while Bunge fell $11.47, or 9.39 percent, to close at $110.70.

 

Separately, Bunge raised its 2008 earnings forecast range by more than $2 a share, driven by strong demand for fertilizer and continued strength in oilseed processing margins. The deal comes as ethanol production, as well as demands for food in developing economies such as India and China, are driving up corn prices. Corn prices in the United States have topped $7 per bushel this month, about double the levels of a year ago, as flooding in the Midwest has wiped out wide swathes of agricultural production.

 

Bunge said it now expected 2008 earnings per share of $9.35 to $9.65, up from a prior outlook of $7.10 to $7.40. This does not reflect the acquisition, which the company expects to close in the fourth quarter.

 

"We continue to benefit from good fundamentals in our core markets," Bunge’s Chief Financial Officer Jacqualyn Fouse said in a statement. "Despite the higher commodity prices, customer demand has been firm." Still, she said, high prices created challenges in food production, and "prudent management of working capital and risk" would be essential in coming months.

 

Bunge had $44.8 billion in net sales last year and has more than 25,000 employees in 30 countries. Corn Products had $3.39 billion in 2007 net sales and has 34 plants in 15 countries. After the proposed deal, Bunge will have 32,000 employees in 40 countries.

 

Motorola Falls On Downgrade

 

Motorola’s shares fell $0.50, or 6.30 percent, to close at $7.44, on Monday, the lowest level for the shares in five years, after analysts downgraded the mobile-phone maker on fears it cannot staunch market share losses in North America.

 

Piper Jaffray analyst T. Michael Walkley cut his rating on Motorola shares to "sell" from "neutral," and his price target to $7 from $9.75 on concerns about falling market share.

 

"Our checks indicated declining Motorola sell-through trends at all four major North American carriers," he wrote.

 

The North America market represents nearly half of global unit sales for Motorola. The company has already been under pressure for its failure to come up with a strong handset line-up since launching the Razr in late 2004.

 

Avian Securities analyst Matt Thornton also said on Monday that his research had led him to cut his rating on Motorola to "neutral" from "positive."

 

That extended a five-day losing streak, which has led to a decline of 19 percent from a week earlier. Motorola shares have lost nearly 60 percent of their value over the past year.

 

In addition the market showed little reaction to Monday's announcement by Motorola of a new, camera-equipped phone called Motozine ZN5, which it launched together with Eastman Kodak.

 

Analysts also saw risk in Motorola's announced plans to spin off its mobile devices business next year after more than a year of losses as continued deterioration in the handset business threatens the viability of a spin-off of the handset segment.

 

In April, Motorola reported a wider operating loss in its mobile device business of $418 million and negative cash flow in its overall business of $343 million for the first quarter.

 

Sales Worries Send GM and Ford Lower

 

Shares of General Motors fell to their lowest level in 33 years while Ford hit a three-month low on concerns overt weak auto demand in June and the rest of the year. The sector, which has been hurt by a collapse in demand for pickup trucks and SUVs amid record high price for gasoline has a poor outlook. GM ended the day down $0.88, or 6.38 percent, to close at $12.91, while Ford closed down $0.53, or 9.12 percent, at 5.28$.

 

Citigroup wrote that it expects June sales to fall to under 13 million units on an annualized basis, compared with 16.3 million in the same month last year. According to analyst Itay Michaeli, “Domestic auto retail sales remain much weaker than the overall industry."

 

Lehman Brothers analyst Brian Johnson estimated June sales in the mid-12 million range. "The auto downturn appears to be entering a problematic second phase," he said. "In this phase, with gas prices remaining stubbornly high, demand for both new and used large pickups, and large/mid SUVS is falling precipitously."

 

Also, the falling trade-in values for larger vehicles were keeping buyers out of the market, he added. Ford's decision on Friday to cut truck production and delay the launch of its redesigned top-selling F-150 pickup truck underscored the pressure faced by automakers.

 

GM and Ford have lowered expectations for domestic auto sales this year. Ford now expects 2008 auto sales, including medium and heavy vehicles, to come in as low as 14.7 million. U.S. light vehicle sales for 2007 were near 16.15 million units and most industry analysts had expected only a slight decline this year.

 

GM and Ford are scheduled to report June sales on July 1.