Market Overview

Two Major Mergers Fall Through, A Reminder That Deals Don't Always Work Out


Sometimes the market is more about what’s not happening than what is. Two major corporate deals got called off in the last day, potentially giving investors a lesson about how easily expectations can be dashed.

Rite Aid Corporation (NYSE: RAD) shares plunged 8 percent in pre-market trading Thursday after the company’s $24 billion merger deal with grocery company Albertson’s fell through. The two companies evidently weren’t able to agree to a deal structure, news reports said.

In addition, Tribune Company (NYSE: TRCO) called off a $3.9 billion deal with Sinclair Broadcast Group Inc. (NASDAQ: SBGI). Shares of both firms actually climbed in pre-market trading, though this divorce didn’t appear particularly amicable. CNN reported that Tribune plans to sue Sinclair for “breach of contract.”

The details might be less important to the average investor than the lesson these blown deals can teach. Sometimes people get hyped up about rumors of deals, but until all the “i’s” are dotted and “t’s” are crossed, investors have to be careful. As we see with RAD today, shares can fall pretty hard if a deal doesn’t work out. Sometimes retail investors hear about possible deals and want to jump into these things, but it’s dangerous to take it for granted that the agreement will ultimately happen.

Comparing Producer Prices

Aside from the deal news, a fresh batch of U.S. inflation data kick off the trading day Thursday. The July producer price index (PPI) came in flat, the government said, below Wall Street analysts’ expectations for a 0.2 percent rise. However, a core PPI gauge that strips out food, energy, and trade rose 0.3 percent. The 12-month PPI change now stands at 3.3 percent, down from 3.4 percent a month ago. That still points toward price increases potentially having an impact, as producers might be tempted to eventually pass along their higher costs to consumers. The consumer price index for July is tomorrow (see more below).

Stocks had a mixed feel ahead of the opening bell after overseas markets pointed different directions. China’s sagging market popped back a bit earlier Thursday, but European indices mostly fell. On the earnings front, Roku Inc. (NASDAQ: ROKU) shares jumped more than 9 percent in pre-market trading after the technology company beat Wall Street analysts’ earnings expectations, and Yelp Inc. (Nyse: YELP) ran up 15 percent pre-market gains as results looked strong.

Treading Water As Earnings Wind Down

None of these developments really seems all that major, and the general market mood remains subdued a day after the SPX came within 1 percent of its all-time high of 2872. There doesn’t seem to be a lot of fresh bullish news to help carry the market over that particular hump, and stocks spent most of Wednesday treading water before giving ground as the closing bell approached. 

We’re in the final act of earnings season, so each day there’s probably going to be less and less corporate news to react to, perhaps making geopolitical issues like tariffs stand out a little more. This could be positive or negative for stocks, depending on the daily headlines.

None of this detracts from what’s been a solid earnings season for much of the market. Average earnings growth for S&P 500 companies so far has been well over 20 percent for Q2, surpassing pre-earnings estimates from Wall Street. That said, there don’t seem to be many meaningful catalysts right now pointing the direction as the season comes to an end. Over the next few months, the looming November U.S. midterm elections might eat up more and more of the headlines, and it’s still not certain how the market might react to that news flow.

In addition, the Treasury market’s direction seems unclear. After powering above 3 percent for a short time last week, 10-year yields couldn’t hold those gains and eased back to 2.95 percent by early Thursday. It’s possible that concern about the trade situation with China could be capping yields.

One Streak Ends But Another Continues

A four-day win streak for the S&P 500 Index (SPX) sputtered to an unremarkable end Wednesday as the SPX inched a little lower. Still, the day wasn’t a complete washout as the Nasdaq (COMP) rose for the seventh-straight session amid an info tech boost from some of the FAANG stocks. 

Otherwise, the sector scorecard looked mixed Wednesday, with industrials among the hardest hit groups amid more chatter about a possible trade war with China. This fear seems to ebb and flow based on the headlines of any given day, and when investors have bearish trade news to chew on it’s typically been hitting some of the multinationals in the Dow Jones Industrial Average ($DJI). Some industrials under pressure Wednesday included Boeing Co. (NYSE: BA), Caterpillar Inc. (NYSE: CAT), and Lockheed Martin Corporation (NYSE: LMT). 

Another big stock, Walt Disney Co. (NYSE: DIS), also took a beating Wednesday after the company posted weaker results than Wall Street analysts had expected. Just about all of the company’s key businesses fell short of Wall Street analysts’ expectations in Q2.

crude-8-9-18.jpg FIGURE 1: Crude Dive: It’s been a rough week for crude oil, which slid to its weakest level since late June amid concerns about U.S. trade with China as well as general Chinese demand trends. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Airline Stocks Lift Off

With crude oil retreating below $67 a barrel Wednesday (see more below), some of the airline stocks seemed to get a boost, including United Continental Holdings Inc. (NYSE: UAL), which set a new 52-week high, and Southwest Airlines Co. (NYSE: LUV). Back a few weeks ago when crude was up near $71, some investors began to fade the airlines, but with crude now well below that, the business model for airlines looks a little better and most of the airline stocks are performing well in a really tough industry. Strong July traffic news from LUV announced Wednesday might also have helped that stock.

Crude Market Gazes West

It already seems pretty clear that the stock market is jumpy about trade with China, and now the concern appears to be hitting the crude market as well (see chart above). Exhibit One came Wednesday, when U.S. crude prices slid more than 3 percent to seven-week lows below $67 a  barrel after news of the latest round of U.S/China tariffs and counter-tariffs and slowing Chinese oil demand growth. On a dollar basis, China is the world’s biggest oil importer, and though its July oil imports rose slightly from a year ago and from June, some analysts fear Chinese demand could be flagging due in part to thinning margins affecting China’s smaller refineries, Reuters reported this week. 

Any sign of weaker oil demand from China, whether it’s trade-related or perhaps due to internal market issues, has the potential to weigh on world energy prices and also potentially on major energy-producing companies. That said, crude might continue to draw support from tensions between the U.S. and Iran and from below average U.S. supplies.

Inflation Report Parade Continues Friday

After today’s July producer prices index (PPI) report, focus could turn to tomorrow morning’s consumer price index (CPI). Last month’s CPI showed a 2.9 percent gain year-over-year, the largest since 2012. Many analysts interpreted this as a sign that inflation is starting to push into the economy, perhaps with implications for Fed policy. Ahead of tomorrow’s number, Wall Street analysts expect a slight gain of around 0.2 percent month-over-month, according to Core CPI, which excludes food and energy, is also expected to rise 0.2 percent. Still, it’s the year-over-year number that might bear watching. One school of thought is that if inflation as measured by CPI grows near 3 percent, it might cancel out some of the economic benefits of recent wage hikes. Last month’s payrolls report showed a 2.7 percent year-over-year rise in hourly wages.

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