Major indexes traded in a tight range Monday ahead of Tuesday's report on housing starts
Stocks ended slightly lower Monday, with trading activity muted and moves in either direction restricted to a tight range throughout the day on a dearth of economic data. The market appeared to shrug off more news of M&A activity to focus on the unwinding of positions that investors took on Friday ahead of the quarterly expiration of stock and index futures contracts and monthly stock and inex option expirations.
For lack of anything else to focus on, a weaker-than-expected Housing Market Index for June drew some attention in the middle of the trading day. Sentiment among builders fell to 28, the lowest level in more than 16 years, confirming builders gloomy outlook about current sales and expectations for sales during the next six months. The index has been slipping since the end of the first quarter but was expected to hold at May's 30 rating. Builders' pessimism is being fueled not only by tighter lending standards in the subprime market, but by a significant uptick in prime mortgage rates, which could damp demand even further, says CNBC Business News.
The next, and arguably more important, data point in the depressed housing sector comes first thing Tuesday morning when housing starts get reported. Housing starts are expected to decline in May after a surprisingly upbeat result in April. Later, a report on mortgage applications and the National Association of Home Builders' Housing Market Index will round out
the week's key releases.
Another sign that the last word has yet to be heard on the subprime market debacle came over the weekend, when managers of a struggling Bear Stearns Cos. hedge fund scrambled to find new investors or lenders to save the fund, under threat of having $400 million in collateral assets seized by Merrill Lynch. Merrill eventually backed off and said it would give the managers more time to come up with a plan for saving the hedge fund, but the commotion could signal more fallout for the markets. On Friday, Moody's Investors Service slashed its ratings on 131 bonds backed by bundles of subprime loans, citing unusually high default and delinquency rates on the underlying mortgages.
There was scant evidence that renewed subprime concerns were weighing on trading on Monday, however. "It's a very quiet day. People are shocked we've rallied so much after the interest rate fears of a couple weeks ago," said Brian Reynolds, Chief Market Strategist at M.S. Howells & Co.
The drop in government bond prices in an indirect rather than a direct result of bearish concerns about the subprime market, he explains. The pressure that bears put on credit derivatives, hoping to shut down demand for corporate bonds, instead ended up sucking more money into them, he said.
"[Investors] have been been flooding companies with capital the last two weeks," he said. "[The fixed-income market] set a record for corporate bond issuance in May and there's a good chance we could break that record in June."
That inflow of money means that many more companies will be announcing share buybacks and offers to acquire other companies during earnings season, he predicted.
The market is likely to be subdued for another week, when anticipation of second-quarter earnings will start to dominate talk about equities, said Michael Farr, president of Farr, Miller & Washington.
On Monday, the
industrial average finished down 26.5 points, or 0.19%, to 13,612.98. The broader
index fell 1.86 points, or 0.12%, at 1,531.05.
Composite index was nearly unchanged on the session, down 0.11 point at 2,626.6.
Treasuries retraced lower from overnight highs after overseas buying dried up, suggesting gains were just a "dead cat bounce," reports Action Economics. "Hedging a hefty corporate calendar has also contributed to the drop in Treasuries, as have declines in European bonds," it added. The dive in the Housing Market Index made yields tilt lower, "but there doesn't seem to be too much follow-through demand at this stage," said Action Economics.
In the energy markets Monday, July WTI crude oil ended higher at $69.09 per barrel. Chevron's CVX) shutdown of an oil transfer facility in the Niger delta and talk of upcoming strikes by oil workers in Nigeria and Brazil were helping to lift prices, according to CNBC Business News.
Among stocks in the news on Monday, Genesco Inc. (GCO), which operates Journeys and other youth-oriented footwear chains, agreed to be acquired by Finish Line (FINL) for $1.5 billion in a deal that would give shareholders $54.50 in cash for each share they own of Genesco, a 10% premium to the closing price of $49.60 on Friday. Genesco shares closed 8.4% higher.
BHP Billiton PLC has revived plans for a $40 billion takeover of Alcoa Inc. (AA), The Times of London reports. Alcoa was trading 2.9% higher.
Arch Coal Inc. (ACI) shares finished down 4.7% after Goldman Sachs downgraded the entire coal sector, saying it expects coal inventories to stay high through 2007 and citing a 34% jump in coal stocks since January.
Wendy's International (WEN) shares traded 3.7% lower after the fast-food restaurant chain said it was exploring the possible sale of the company, amid competitors' aggressive marketing campaigns hurting same-store sales and high ingredient prices, according to the Wall Street Journal. The fast-food restaurant chain also cut its 2007 earnings forecast to $1.09 to $1.23 per share from $1.26 rto $1.32 per share.
The Chicago Mercantile Exchange (CME) says it's not currently discussing a merger or acquisition with NYMEX and remains focused on completing the merger with the Chicago Board of Trade.
The Wall Street Journal reports that General Electric (GE) and Pearson (PSO) are in talks about a joint bid for Dow Jones & Co. (DJ) that would allow the Bancroft family to keep a minority interest in the publisher of The Wall Street Journal. A bid would be a potential alternative to News Corp.'s (NWS) $5.0 billion offer.
Encysive Pharmaceuticals (ENCY) was beaten 43.4% lower on a report that the FDA declined to approve the company's Theline as a treatment for pulmonary arterial hypertension. Rodman & Renshaw downgraded the stock to market underperform from market perform. Encysive will start the dispute resolution process with the FDA, which could be drawn-out, prompting restructuring as sales and cash will fund operations only through 2007, says Standard & Poor's in a note.
Apple Inc.'s (AAPL) shares got a 3.8% lift after the company said its new iPhone will have longer lasting batteries than originally expected.
European stock markets were lower on Monday. In London, the
index fell 0.37% to 6,703.50. Germany's
href="http://investing.businessweek.com/research/markets/detail/marketdetail.asp?marketCode=DE%3BDAXX">DAX index was up 0.07% to 8,036.12. In Paris, the
index was down 0.30% at 6,087.15.
Asian markets moved higher on Monday. In Japan, the Nikkei index was up 0.99% to 18,149.52. In Hong Kong, the
index moved 2.69% higher to 21,582.89. In China, the Shanghai Composite index rose 2.92% to 4,253.35.
Treasury bonds finished lower. The 10-year note was down 06/32 to 95-03/32 for a yield of 5.14%. The 30-year bond was off 02/32 to 92-13/32 for a yield of 5.26%. The 2-year note was down 01.5/32 to 99 24/32 for a yield of 5.00%.