Evening Market Update

Early Rally on Bin Laden Demise Evaporates

Despite early jubilation over Osama bin Laden meeting his fate at the hands of a US military special ops team over the weekend, as well as a plethora of M&A activity, stocks lost steam to finish modestly lower. Headlining a host of dealmaking news, Dow member DuPont sweetened its bid to acquire Danish food ingredients maker Danisco to $6.6 billion, and Israel’s Teva Pharmaceutical Industries reached an agreement to acquire Cephalon for roughly $6.8 billion. Elsewhere, Arch Coal said it has reached a deal to acquire International Coal Group for about $3.4 billion, Community Health Systems upped its hostile bid for Tenet Healthcare to $4.07 billion, and Nasdaq OMX and Intercontinental Exchange offered $11 billion for NYSE Euronext. On the earnings front, Dish Network handily beat analysts’ earnings forecasts, while separately announcing a settlement to a long-standing legal battle with TiVo. Treasuries finished mostly unchanged despite a smaller-than-expected decline in the ISM Manufacturing Index and a jump in construction spending, while crude oil prices came well off of the worst levels of the day to finish modestly lower. 

The Dow Jones Industrial Average lost 3 points to 12,807, the S&P 500 Index was 2 points (0.2%) lower at 1,361, and the Nasdaq Composite fell 9 points (0.3%) to 2,864. In moderately strong volume, 935 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.42 to $113.52 per barrel, wholesale gasoline lost $0.05 to $3.35 per gallon, and the Bloomberg gold spot price tumbled $20.50 to $1,543.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 73.05.

In M&A news, after not winning enough shareholder support initially, Dow member  DuPont (DD $56) raised its offer to acquire Danish food ingredients maker Danisco (DNSCY $17) by 5% to 700 Danish kroner ($139) per share in cash, or about $6.6 billion. DD also lowered the minimum number of shares required to complete the takeover to 80% from 90%. DD said this is the company’s “best and final offer,” and Danisco repeated its unanimous recommendation to shareholders to accept the offer. DD traded lower, while DNSCY was solidly higher in European action.

Elsewhere, Israel-based Teva Pharmaceutical Industries Ltd. (TEVA $47) reached a definitive agreement to acquire Cephalon Inc. (CEPH $80) for $81.50 per share in cash, valued at about $6.8 billion. TEVA said the deal is expected to be accretive to earnings ex-items immediately, and is estimated to achieve at least $500 million in cost synergies. The announcement comes as Canada’s Valeant Pharmaceuticals International Inc. (VRX $50) was attempting a hostile takeover of CEPH for $5.7 billion. VRX congratulated the two companies on the deal and has withdrawn its solicitation of CEPH shareholders, and will look to deploy its freed-up capital on other opportunities. TEVA and CEPH were nicely higher, while VRX traded solidly lower.

Also, Arch Coal Inc. (ACI $34) announced that it has reached a definitive agreement to acquire International Coal Group Inc. (ICO $14) for $14.60 per share in all cash, valued at about $3.4 billion. ACI said the transaction is expected to be accretive to earnings in 2012 and annual synergies are forecasted to be between $70-80 million. ICO was sharply higher, while ACI finished to the downside.

Elsewhere, Community Health Systems Inc. (CYH $30) upped its hostile bid for Tenet Healthcare Corp. (THC $7) to $7.25 per share in cash, or roughly $4.07 billion, giving the hospital operator a week to respond to its “best and final offer.” THC said it will review the revised proposal, while noting that its board had rejected CYH’s previous offers. Shares of both companies were lower.

Moreover, NASDAQ OMX Group Inc. (NDAQ $27) and IntercontinentalExchange (ICE $118) announced that the respective boards of both companies have agreed to move forward with an exchange offer to acquire all the outstanding shares of NYSE Euronext (NYX $40) in a cash and stock transaction worth about $11 billion. The proposal is the companies’ latest attempt to wrest the NYX away from a previously agreed combination with Deutsche Boerse (DBOEY $8). DBOEY and NYX were higher, NDAQ was little changed, while ICE was lower.
In earnings news, Dish Network Corp. (DISH $30) reported 1Q EPS of $1.22, well above the $0.67 consensus estimate of analysts surveyed by Reuters, with revenues rising 5.5% year-over-year (y/y) to $3.2 billion, roughly inline with the Street’s expectations. The satellite-TV service provider said it added about 58,000 net new subscribers during the quarter. Shares were sharply higher.

Separately, DISH and its former parent EchoStar Corp. (SATS $35) reported that they agreed to pay TiVo Inc. (TIVO $10) $500 million to settle a patent litigation over TIVO’s digital video recorder technology. SATS was solidly lower, while TIVO traded nicely to the upside.

Deceleration in US manufacturing smaller than expected, construction spending jumps

The ISM Manufacturing Index declined to 60.4 in April from 61.2 in March, better than the expected fall to 59.5 that was expected. A reading above 50 denotes expansion, and indicates the overall economy continues to grow. In commenting on the report, the Committee said that new orders and production continue to drive the PMI, as both have exceeded 60 for the past five months, and that employment has gained “significant momentum” as the readings for the first four months of 2011 are the “highest readings in the last 38 years.” Additionally, inventory growth took place after two months of destocking. However, on the negative side of the ledger, the price component continued to rise, with April’s 85.5 reading marking the highest since July 2008, and the Committee said manufacturers are experiencing “significant cost pressures from commodities and other inputs.”

In other economic news, construction spending rose much more than expected in March, rising 1.4% month-over-month (m/m), versus the 0.4% increase forecasted by economists, following a decrease of 2.4%—revised from -1.4% initially reported in February. Residential spending led the advance, increasing 2.4%, while nonresidential spending rose 0.9%.

Treasuries erased early losses and finished mostly unchanged despite the data, with the yield on the 2-year and 10-year notes unchanged at 0.60% and 3.27%, respectively, while the yield on the 30-year bond was 1 bp lower at 4.39%.

Overseas markets higher on manufacturing data and Bin Laden demise

Enthusiasm that Osama bin Laden had met his fate buoyed sentiment in Europe, and was complimented by some favorable reports on manufacturing activity in the euro-zone. Led by upward revisions to manufacturing reports out of France and Germany—more than offsetting a larger-than-expected deceleration in Italy—the euro-zone PMI Manufacturing Index was unexpectedly revised from an initial reading of 57.7 to 58.0 for April. However, action may have been lighter than usual as the UK markets remained closed for a holiday.

In Asia, news of Osama bin Laden’s death added to recent optimism that has come amid a plethora of better-than-expected global earnings reports. Meanwhile, South Korea’s government unveiled measures to try to aid the nation’s construction sector, while a report showing the nation’s exports jumped more than expected in April, and its trade surplus widened by a larger amount than forecasted. Elsewhere, India reported that its manufacturing activity accelerated slightly in April, accompanying a plethora of manufacturing data in the region, which showed activity in China and South Korea both slowed, while Australian manufacturing improved. However, trading in Asia was light, as markets in China, Hong Kong, Singapore, Taiwan and Thailand were all closed for holidays.

Tomorrow’s US economic calendar will only provide factory orders, forecast to rise 2.0% m/m during April following a 0.1% decline in March. Internationally, the economic docket will also be light as the eurozone will report CPI and the UK will release manufacturing PMI figures. Further east, Hong Kong will provide retail sales, while the central banks of Australia and India will conclude their respective policy meetings, with the Reserve Bank of Australia expected to keep its official cash rate unchanged at 4.75%, while economists are forecasting that the Reserve Bank of India will bump its repo rate by 25 bps to 7.00%.