U.S. stocks fell on concern merger and acquisition (M&A) activity will continue to slow after Dow Chemical’s deal to sell half of its plastics unit to Kuwait was canceled. The funds were slated to help fund Dow’s $16 billion purchase of specialty chemical firm Rohm & Haas. The deal would have provided Dow with $9 billion.
The fact that M&A activity will continue to slow in the current environment is obviously not of great surprise, but the market still comes under pressure each time investors are reminded of this fact.
Kuwait’s decision to pull out means the Dow acquisition is much less likely and this has larger ramification for the market in general as it illustrates the problems related with funding deals right now. Kuwait’s issue was not from a financing perspective so to speak but rather the 75% plunge in the price of oil has them reigning things in. Nevertheless, it keeps the issue in the back of investors’ minds, adding just another concern tugging at sentiment.
Dow shares slid 21% as the failure to sell part of the plastics unit may put the dividend in jeopardy. Most people own the stocks for the dividend. The company will now try to re-negotiate the R&H purchase, probably attempting to shave 10%-15% off the original purchase price. R&H shareholders will likely do the deal at the lower price as they will have a rough time finding other bidders for a while and a price of $70 (original deal was set at $78 per share) is suddenly looking pretty darned good.
For the market in general, the goods news is major indices pared earlier losses. The S&P 500, for instance, was lower by nearly 2% when the afternoon session began, but a late-session rally erased most of those losses. Still nine of the 10 major industry groups lost ground. Energy shares gained ground as the Middle East heats up, pushing oil prices higher.
Market Activity for December 29, 2008
Interestingly, the rally in crude prices early yesterday morning fizzled just after stocks opened yesterday – the spot price jumped nearly 7.7% in pre-market trading but gave most of those gains back by lunch.
However, crude rallied again in the afternoon session to close the day up 6.13%.
They’re a Bank!
Last night it was reported that GMAC will get $5 billion in TARP funds in exchange for super-senior preferred shares yielding 8% to the Treasury Department. GM will get another $1 billion that is supposed to help them finance the lender’s (GMAC) reorganization as a bank holding company – so I guess they got the TARP money before they were officially in a position to be called a bank holding company. That’s what you call making up the rules as you go along.
So GMAC gets $5 billion, GM get $1 billion, which is on top of the roughly $7 billion they received earlier in the month. Maybe this will get GM through the spring. Isn’t that grand?
Some were saying without the TARP funds GM would be forced to eliminate 40% of its 6,500 U.S. dealerships. Yeah, that’s what’s going to occur anyway in time as the GM model pretends as if they still enjoy 50% market share when in reality it’s below 20%.
GM has too many dealerships, too many assembly-line employees and a compensation and layoff structure that makes zero sense in today’s highly competitive world. The checks will fly as the 111th Congress rolls in, but it won’t do a darn bit of good in terms of viability until the firm is forced to streamline
Cash Galore
A story ran yesterday explaining that $8.85 trillion currently sits in bank deposits and money-market funds, which is equal to 70% of the market value of U.S. stocks as measured by the NYSE Composite.
This is a theme we’ve touched on for a couple of months now, yet we focus specifically on money-market funds as this is a more natural area for cash to flow into equities.
Logically, bank deposit accounts are higher as households increase cash savings after the stock market has gotten crushed by 45% (from the October 2007 peak) and home prices are down roughly 15% on average – these are the two largest savings vehicles for U.S. residents. As those savings vehicles have declined people have chosen to boost cash savings and I’m not sure this money should be included among the funds that will potentially move to stocks any time soon.
Still, specifically regarding money market funds there is $3.8 trillion in cash, which could theoretically by 48% of the S&P 500.
Of course, this money needs a compelling reason to enter the market, and with concerns heightened right now it may take a little while to flow into stocks. Once we get a couple of months out and the Obama stimulus plan begins to get off the ground, we should see these funds seek some risk -- the market is cheap from both an earnings-multiple standpoint and a dividend-yield perspective, especially compared to rates along the Treasury curve.
This is one of those rare occasions in which the investor can pick up shares at prices that offer superior long-term returns – December 1974 is probably the last time such an opportunity presented itself. However, over the short term things will remain highly precarious.
We’re not at all convinced a rally from these levels, whenever it happens, will have sustainability however (talking months not years) – the market will need to see concerns ease over future trade pacts, tax rates, how the Fed is going to deal with eventually removing some of the liquidity it’s pumped in and the degree to which regulations will increase, among other things. But the cash is available to spark a rally and as this occurs it should remove some of the caution currently in the marketplace and bring with it a bit of optimism.
It’s a crisis in confidence that needs to be addressed, which is why a tax-rate response could go very far in building optimism as it would spark a stock market rally as quick as anything can. However, this does not seem to be in the cards (ok, it’s not at all probable) considering the make up of Washington after January 20. The policy that will be put in place over the next few months is all we have to go on right now.
Economic Data
We’ve had a couple of quiet days in terms of economic reports, but get back to it today with the S&P Case/Shiller Home Price Index (October) and Chicago-area manufacturing activity. Tomorrow we get initial jobless claims for the week ended December 27 – a day ahead of the normal schedule as Thursday is a holiday.
Have a great day!
Brent Vondera, Senior Analyst
The fact that M&A activity will continue to slow in the current environment is obviously not of great surprise, but the market still comes under pressure each time investors are reminded of this fact.
Kuwait’s decision to pull out means the Dow acquisition is much less likely and this has larger ramification for the market in general as it illustrates the problems related with funding deals right now. Kuwait’s issue was not from a financing perspective so to speak but rather the 75% plunge in the price of oil has them reigning things in. Nevertheless, it keeps the issue in the back of investors’ minds, adding just another concern tugging at sentiment.
Dow shares slid 21% as the failure to sell part of the plastics unit may put the dividend in jeopardy. Most people own the stocks for the dividend. The company will now try to re-negotiate the R&H purchase, probably attempting to shave 10%-15% off the original purchase price. R&H shareholders will likely do the deal at the lower price as they will have a rough time finding other bidders for a while and a price of $70 (original deal was set at $78 per share) is suddenly looking pretty darned good.
For the market in general, the goods news is major indices pared earlier losses. The S&P 500, for instance, was lower by nearly 2% when the afternoon session began, but a late-session rally erased most of those losses. Still nine of the 10 major industry groups lost ground. Energy shares gained ground as the Middle East heats up, pushing oil prices higher.
Market Activity for December 29, 2008
Interestingly, the rally in crude prices early yesterday morning fizzled just after stocks opened yesterday – the spot price jumped nearly 7.7% in pre-market trading but gave most of those gains back by lunch.
However, crude rallied again in the afternoon session to close the day up 6.13%.
They’re a Bank!
Last night it was reported that GMAC will get $5 billion in TARP funds in exchange for super-senior preferred shares yielding 8% to the Treasury Department. GM will get another $1 billion that is supposed to help them finance the lender’s (GMAC) reorganization as a bank holding company – so I guess they got the TARP money before they were officially in a position to be called a bank holding company. That’s what you call making up the rules as you go along.
So GMAC gets $5 billion, GM get $1 billion, which is on top of the roughly $7 billion they received earlier in the month. Maybe this will get GM through the spring. Isn’t that grand?
Some were saying without the TARP funds GM would be forced to eliminate 40% of its 6,500 U.S. dealerships. Yeah, that’s what’s going to occur anyway in time as the GM model pretends as if they still enjoy 50% market share when in reality it’s below 20%.
GM has too many dealerships, too many assembly-line employees and a compensation and layoff structure that makes zero sense in today’s highly competitive world. The checks will fly as the 111th Congress rolls in, but it won’t do a darn bit of good in terms of viability until the firm is forced to streamline
Cash Galore
A story ran yesterday explaining that $8.85 trillion currently sits in bank deposits and money-market funds, which is equal to 70% of the market value of U.S. stocks as measured by the NYSE Composite.
This is a theme we’ve touched on for a couple of months now, yet we focus specifically on money-market funds as this is a more natural area for cash to flow into equities.
Logically, bank deposit accounts are higher as households increase cash savings after the stock market has gotten crushed by 45% (from the October 2007 peak) and home prices are down roughly 15% on average – these are the two largest savings vehicles for U.S. residents. As those savings vehicles have declined people have chosen to boost cash savings and I’m not sure this money should be included among the funds that will potentially move to stocks any time soon.
Still, specifically regarding money market funds there is $3.8 trillion in cash, which could theoretically by 48% of the S&P 500.
Of course, this money needs a compelling reason to enter the market, and with concerns heightened right now it may take a little while to flow into stocks. Once we get a couple of months out and the Obama stimulus plan begins to get off the ground, we should see these funds seek some risk -- the market is cheap from both an earnings-multiple standpoint and a dividend-yield perspective, especially compared to rates along the Treasury curve.
This is one of those rare occasions in which the investor can pick up shares at prices that offer superior long-term returns – December 1974 is probably the last time such an opportunity presented itself. However, over the short term things will remain highly precarious.
We’re not at all convinced a rally from these levels, whenever it happens, will have sustainability however (talking months not years) – the market will need to see concerns ease over future trade pacts, tax rates, how the Fed is going to deal with eventually removing some of the liquidity it’s pumped in and the degree to which regulations will increase, among other things. But the cash is available to spark a rally and as this occurs it should remove some of the caution currently in the marketplace and bring with it a bit of optimism.
It’s a crisis in confidence that needs to be addressed, which is why a tax-rate response could go very far in building optimism as it would spark a stock market rally as quick as anything can. However, this does not seem to be in the cards (ok, it’s not at all probable) considering the make up of Washington after January 20. The policy that will be put in place over the next few months is all we have to go on right now.
Economic Data
We’ve had a couple of quiet days in terms of economic reports, but get back to it today with the S&P Case/Shiller Home Price Index (October) and Chicago-area manufacturing activity. Tomorrow we get initial jobless claims for the week ended December 27 – a day ahead of the normal schedule as Thursday is a holiday.
Have a great day!
Brent Vondera, Senior Analyst
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