[BRIEFING.COM] Bouncing back following two days of broad-based losses, stocks kicked off a new week on a very positive note as encouraging merger news and strong earnings sent short sellers fleeing for cover, clearing the way for bargain hunters to rally back into a market that was showing signs of being oversold.
With stock valuations already at levels that assume slower earnings growth, as weeks of selling pressure have priced in worst-case scenarios and have pushed the P/E multiple on the S&P 500 for operating earnings to a low 14.8, the fact that there was little in the way of anything negative with regard to earnings or unrest in the Middle East also helped the market shift its focus back to the positives.
Resurgence in M&A activity, led by HCA Inc.'s (HCA 49.38 +1.51) decision to go private in the largest leveraged buyout ever ($33 bln including debt), added to early optimism about the health of corporate balance sheets. Dow component Merck (MRK 38.88 +1.52) opening at a new 52-week high and hitting pre-Vioxx levels intra-day after more than doubling Q2 profits and raising its full-year earnings outlook also provided a floor of early support for the broader market. Aside from HCA's LBO and Merck's strong earnings providing a huge lift to Health Care, which was in negative territory before today's 2.0% surge, Schering-Plough (SGP 20.60 +1.15) swinging to a profit in Q2 and AstraZeneca (AZN 61.42 +1.84) winning FDA approval for Symbicort also contributed to continued momentum in the drug space.
Another proposed M&A deal was Advanced Micro Devices' (AMD 17.37 -0.88) proposed acquisition of ATI Technologies (ATYT 19.67 +3.11) for $5.4 bln (a 24% premium). However, AMD opened at a 52-week low and added to Friday's 15% drubbing with a 4.8% decline amid concerns about earnings dilution and reduced financial flexibility. Fortunately for tech investors tired of seeing the bottom fall out of chip stocks, as reflected in the PHLX Semi Sector Index's (SOX) 17% year-to-date decline, AMD and BRCM (-0.5%) were the only components (out of 19) on the SOX that closed in negative territory.
More than offsetting the lack of enthusiasm for AMD was a change in sentiment for the other big tech name that got hammered Friday amid a 13% decline -- Dell (DELL 20.75 +0.84), which bounced off 5-year lows and surged 4.2% after it was upgraded at Citigroup. Motorola (MOT 21.14 +0.74) setting a new $4.5 bln stock buyback and BellSouth (BLS 36.15 +0.75) topping Q2 forecasts further underpinned a sense that the tech sector was due for a bounce of some sort. To wit, the tech-heavy Nasdaq, which hit a 14-month low on Friday, led the majors Monday with a 2.1% gain
Even when hopes for an earlier than anticipated cease-fire spurred by Secretary of State Condoleezza Rice's surprise visit to Lebanon dissipated in afternoon trade, subsequently renewing the risk premium in oil prices, buyers stood their ground and closed the indices near their best levels of the day. Crude futures closed up almost 1% and above $75 per barrel, getting an added boost amid speculation about a tropical storm in the Gulf of Mexico and providing some notable leadership in Energy, which paced the way higher among all 10 sectors trading to the upside.
Despite not getting any direction from the Treasury market, as bonds were relatively flat all day amid a lack of potential disruptive economic data, M&A activity playing into our favorable opinion on the brokers advising such deals helped the rate-sensitive Financials sector provide some notable leadership as well. American Express (AXP 50.64 +0.02) was in focus all morning as investors waited for Q2 earnings to hit the wires during market hours. While AXP's earnings were $0.04 better than expected, initially sending shares to session highs, Q2 profits falling 7% year/year almost as quickly pushed the Dow component to a fresh 7-month low before it finally finished the day basically unchanged. NYSE Adv/Dec 2676/614...Nasdaq Adv/Dec 2242/787
DOW Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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