Evening Market Update

Investors Directionless

In what started as a break from a six-week losing streak for the Dow and S&P 500, traders struggled between upbeat M&A reports, global economic recovery concerns, and the euro-area debt crisis, and stocks flip-flopped between positive and negative territory only to finish nearly where the day began. In equity news, TransAtlantic Holdings agreed to merge with Allied World Assurance Co. Holdings in a deal worth about $3.2 billion, VF Corp will purchase footwear and apparel company Timberland for roughly $2 billion, while Graham Packaging Co said it has received an unsolicited third party bid for approximately $1.64 billion. Treasuries also waffled back-and-forth in negative correlation with the moves in stocks to finish mixed, as no economic reports were available as a foothold, and crude oil prices came under solid pressure.

The Dow Jones Industrial Average gained 1 point (0.0%) to 11,953, the S&P 500 Index rose 1 point (0.1%) to 1,272, and the Nasdaq Composite lost 4 points (0.2%) to 2,640. In moderate volume, 908 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.99 to $97.30 per barrel, wholesale gasoline dipped $0.02 to $3.00 per gallon, and the Bloomberg gold spot price tumbled $14.82 to $1,516.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% lower at 74.50.

TransAtlantic Holdings Inc. (TRH $48) and Swiss-based Allied World Assurance Co. Holdings (AWH $55) announced that they have reached a definitive merger agreement to create a global specialty insurance and reinsurance company with total capital of $8.5 billion. The transaction is structured as a merger of equals with the combined company operating under the corporate name TransAllied Group Holdings. Under the terms of the deal, shareholders of TRH will receive 0.88 AWH common shares for each share they own, valued at about $3.2 billion. TRH was sharply higher, while AWH was lower in US trading.

In other M&A news, VF Corp. (VFC $101) announced that it has reached a definitive agreement to acquire footwear and apparel company Timberland Co. (TBL $43) for $43 per share in cash, representing a total enterprise value of approximately $2 billion. VF said the acquisition is expected to provide “significant EPS accretion in 2011 and 2012.” VFC traded over 10% higher and TBL was up more than 44%.

Finally, Graham Packaging Co. Inc. (GRM $26) finished sharply higher after it announced that it has received an unsolicited takeover proposal from a third party for $25 per share in cash, or about $1.64 billion. GRM said its Board of Directors concluded that this proposal “could reasonably” be expected to lead to a proposal that is superior to the pending takeover agreement it has with Silgan Holdings (SLGN $41) for about $1.45 billion, or $22.10 per share in cash and stock. Shares of SLGN suffered after announcing that it has received notification that GRM has received the unsolicited proposal from a “private non-investment grade company.” SLGN would have a match right if the new proposal is determined superior and GRM will have to pay SLGN a $39.5 million termination fee if their current agreement is not closed.

Economic calendar dormant, inflation and retail sales tomorrow

Treasuries finished mixed and nearly unchanged as the US economic calendar was void of any major releases today. The yield on the 2-year note was down 1 bp to 0.40%, the yield on the 10-year note gained 1 bp to 2.99%, and the 30-year bond rate was 2 bp higher at 4.20%.

Tomorrow, the US economic calendar will heat up with the release of the Producer Price Index (PPI), expected to show prices at the wholesale level rose 0.1% month-over-month (m/m) in May after spiking 0.8% in April, while the core rate, which excludes food and energy, is expected to increase 0.2%. Inflation can have a significant impact on consumer spending and corporate profits and Wednesday’s Consumer Price Index (CPI) report will round out the inflation picture, forecasted to show a 0.1% m/m increase in May after rising 0.4% in April, while ex-food and energy it is expected to rise 0.2%.

Also, tomorrow will bring a look at the health of the retail sector in the form of advance retail sales, forecasted to fall 0.5% m/m in May, after gaining 0.5% in April, while sales ex-autos and ex-autos and gas are estimated to grow 0.3%. Same-store sales results—sales at stores open at least a year—reported by retailers disappointed, possibly as consumers grappled with higher gasoline prices. The retail sales report includes spending at supermarkets and gas stations. Business inventories will also be reported, expected to rise 0.9% m/m during April, following a 1.0% gain in March.

Slow economic day overseas, debt concerns remain

European markets traded to the upside, but off of the best levels of the day, as concerns over the euro-area debt crisis remained, despite no new developments over the weekend. The uneasiness came as Germany and the European Central Bank (ECB) appear to be at odds pertaining to whether private investors should bear some of the costs of a debt restructuring of the troubled nation of Greece. Exacerbating the anxiety, Standard & Poor’s cut Greece’s credit rating by three levels, to CCC from B, citing “a significantly higher likelihood of one or more defaults.” The lone report on the European economic calendar was the release of Italian industrial production, which rose 1.0% m/m in April, compared to the 0.2% increase that was projected by economists. Trading was relatively lighter than usual, with several markets, including Greece and Switzerland, closed for holidays.

In Asia, Japan’s machine orders showed a decline of 3.3% m/m for April, compared to the 1.7% increase that economists had expected. Also, year-over-year (y/y) Japanese machine orders were down 0.2% in April, versus the 4.9% gain that was anticipated. Elsewhere, Chinese new yuan loans rose by 551.6 billion yuan, down from the 739.6 billion yuan increase seen in April, and below the 650.0 billion yuan increase that was expected by economists.

Tomorrow’s international economic calendar will likely focus on data out of China and its implications on the global recovery, with the eastern nation expected to release industrial production and fixed asset investment, which includes housing and infrastructure spending, CPI, PPI and retail sales. Japan will report revised industrial production figures, and the Bank of Japan will conclude its monetary policy meeting with no change to rates expected. In Europe, Spain and the UK will provide CPI figures, while the UK will also post retail sales numbers.