Evening Market Update

Markets Show Continued Uneasiness

Despite a slew of domestic and international M&A activity, which boosted stocks in the early going, equities finished lower amid continued anxiety about the global economic recovery. On the M&A front, Dow member Hewlett-Packard entered its own bid to acquire data storage firm 3PAR Inc, besting the proposed price from Dell last week, Campbell Soup Co. is reported to be eyeing a division of privately-held United Biscuits, and Potash of Saskatchewan formally rejected BHP Billiton’s offer, saying that it has been approached with bids from other parties. Elsewhere in corporate deal-making, SABMiller Plc is reportedly interested in Foster’s beer unit, and HSBC is reportedly looking to acquire a controlling stake in Old Mutual’s largest South African bank. In other news on the equity front, Sanderson Farms missed the Street’s EPS and revenue forecasts, and a subsidiary of government-owned American International Group used part of the proceeds from a debt sale to repay the Federal Reserve Bank of New York three years early. Treasuries finished marginally higher amid a lack of US economic news.

The Dow Jones Industrial Average lost 39 points (0.4%) to 10,174, the S&P 500 Index fell 4 points (0.4%) to 1,067, and the Nasdaq Composite declined 20 point (0.9%) to 2,160. In light volume, 864 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil lost $0.72 to $73.10 per barrel, while wholesale gasoline was $0.05 lower at $1.88 per gallon, and the Bloomberg gold spot price fell $2.35 to $1,225.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% higher at 83.20.

Shares of data storage company 3Par Inc (PAR $26) finished more than 40% higher after the company received another acquisition bid, this time from Dow member Hewlett-Packard Co (HPQ $39), for $24 per share in cash, or $1.6 billion in enterprise value, better than Dell Inc’s (DELL $12) bid last week of $18 per share, which was an 87% premium at the time. 3PAR builds high-end systems to help companies store and manage data using virtualization technology. A Dell spokesman said the company “won’t comment at this point regarding ongoing M&A activity,” and a 3PAR spokesman wasn’t immediately available for comment. Both HPQ and DELL were lower.

Campbell Soup Co. (CPB $37) is reportedly considering a $2.3 billion offer for part of privately-held United Biscuits PLC according to the Sunday Times. The report said CPB is interested in the biscuit-making operations, and less in the snacks unit of the company. Neither company commented on the report. CPB was modestly higher.

Potash Corp. of Saskatchewan Inc.(POT $150) formally rejected the $38.6 billion, $130 per share, unsolicited buyout from BHP Billiton (BHP $67), saying it “substantially undervalues” the company, and said that it has been approached by third parties with bids. The Wall Street Journal reported a consortium led by Chinese private-equity fund Hopu Investment Management Co. is studying the feasibility of a bid for Potash, citing a person familiar with the situation, who said the group is made up of investors from Canada, the U.S. and Asia, and includes at least two sovereign wealth funds. Shares of POT were higher, while BHP was marginally lower.

Elsewhere in M&A news, London’s Sunday Times reported that SABMiller Plc (SBMRY $29), the world’s second largest brewer according to Bloomberg, is considering a $10.9 billion bid for Carlton & United Breweries, the beer unit of Australia’s largest brewer, Foster’s Group Ltd (FBRWY $6), without citing a source. The Australian newspaper reported that SABMiller has hired advisors from JPMorgan and Royal Bank of Scotland to aid in entering a bid, citing people familiar with the matter. SABMiller has not commented on the reports, while Foster’s mentioned press reports about a potential bid in response to an Australian Securities Exchange inquiry, but didn’t elaborate. Shares of both firms were higher.

As well, Europe’s largest bank, HSBC Holdings PLC (HBC $49)said it is in talks with financial group Old Mutual PLC (ODMTY $15) to buy a 70% controlling stake in South Africa’s fourth-largest bank Nedbank Group Ltd (NDBKY $38) in a deal worth as much as $6.8 billion. All three firms ended higher.

Sanderson Farms (SAFM $45) reported 3Q EPS of $1.55 on revenues of $489.1 million and as the gross margin fell to 16.2% from 18%, missing estimates of $1.87 in EPS and sales of $519 million. The company said that despite lower grain costs, prices were hurt by extreme heat, as “heat negatively impacts live weights and feed conversions, which in turn results in fewer pounds processed and sold.” In commenting on the environment, Sanderson said that retail grocery demand remained strong, but food service was “sluggish,” and will “likely remain that way until the employment market gains traction and more consumers return to restaurants.” Shares came off an early loss and were higher.

American International Group Inc.’s (AIG $35) International Lease Finance Corporation (ILFC) subsidiary announced that it completed the sale of $4.4 billion in debt and used $3.9 billion of the proceeds to repay in full the loans extended by the Federal Reserve Bank of New York three years early. In commenting, ILFC’s CEO said that the company had “more than $13 billion in new and advanced aircraft on order.” Elsewhere, Bloomberg is reporting that the Fed plans to cut AIG’s credit line by $3.6 billion in a sign of confidence the insurer can reduce reliance on taxpayer funds, citing a person familiar with the matter. AIG owed $23.5 billion on the credit line as of August 18, and may sell bonds to help repay its $182.3 billion bailout package. AIG did not comment on the possible credit line change. Shares finished lower.

Economic calendar quiet, reading on housing market on tap for tomorrow

There were no reports scheduled for release on today’s US economic calendar. Treasuries finished mixed and close to the unchanged mark with the yield on the two-year note 1 bp higher at 0.49%, the yield on the 10-year note down 4 bps to 2.61%, while the yield on the 30-year bond was gained 1 bp to 3.66%.

Pending home sales fell 2.6% in June, which was an improvement to the 30% drop seen in May immediately after the expiration of the federal homebuyer tax credit. Pending home sales are a strong gauge of the pipeline for existing home sales, leading economists to forecast tomorrow’s existing home sales report to show a 13.4% drop in sales to an annual rate of 4.65 million units for July, after a decline to 5.37 million units in June—a month which still had the support of the housing credit.

The National Association of Realtors mentioned with the June report that sales across all regions fell solidly, but total sales were 9.8% higher than a year ago, and the market shows uncharacteristic yet understandable swings as buyers responded to the tax credits, while noting that some sales that were not closed due to delays will show up in the next two months. The median existing home price was $183,700 in June, 1% higher than a year ago, with distressed homes accounting for 32% of sales. Even though mortagage rates remain at a histoic low, the housing market continues to have trouble gaining traction.

Intervention rumors by Bank of Japan tempered

Despite continued speculation of intervention by the Bank of Japan in the currency market, after Bank of Japan Governor Shirakawa and Prime Minister Kan spoke by phone, there was “absolutely no” discussion of any intervention, according to the Chief Cabinet Secretary, but the official declined to comment on whether monetary easing was discussed. Bloomberg reported that people familiar with the matter say the BoJ is still assessing the impact of the yen on the economy, ahead of the bank’s Sept. 6-7 meeting. After markets closed, Kan met with Finance Minister Noda, and despite rumors of a possible stimulus package, Noda said that stimulus was not discussed “at all.”

Elsewhere in the Asia/Pacific region, neither Australian Prime Minister Julia Gillard nor the opposition party candidate, Tony Abbott, won a majority in the country’s election, and both parties will likely need to negotiate with independent parties to form a majority.

In light European economic news, the euro-zone manufacturing PMI for August fell more than expected, to 55.0, while the services PMI came in better than anticipated, at 55.6.

Tomorrow’s international economic calendar will include: the second release of Germany’s 2Q GDP, mortgage approvals out of the UK, eurozone industrial orders, and retail sales out of Canada.