Stocks eked out modest gains Monday after starting in the red amid fears that Iraq was on the verge of becoming a rogue state. By the end of the session, the worries had been tamped down a bit by the realization that the extremist Sunni militia that has overrun Mosul and Kirkuk may have already jumped the shark, like a television show that stays on the air one season too long.
Trading was choppy, with positive sentiment primarily coming from an increase in merger and acquisition activity and better-than-expected U.S. economic reports. Downbeat feelings of dread and ennui came from the ivory tower eggheads at the International Monetary Fund, who cut their estimate for U.S. growth due to the weak first quarter. The next forecast the IMF gets right will be the first, but that doesn’t seem to prevent the news cycle from giving them a voice.
Out of all of this, the M&A scuttlebutt was by far the most important to traders, as you had real companies paying almost real money for real companies in real times. Really. The most notable was the Medtronic (MDT) bid for Covidien (COV) for a 20.5% premium over the Friday price. The deal brought the old tax inversion debate back into focus, as MDT will move its executive base to Ireland. Luck of the Irish apparently has more to do with tax havens than leprechauns.
Analysts noted that Medtronic will see a modest tax rate benefit and greater flexibility with deploying its cash that is currently held overseas. MDT stated that the acquisition was driven by synergies and not tax considerations. And, if you believe that, I have a magic four-leaf clover to sell you.
Elsewhere, Level 3 Communications (LVLT) announced it would purchase TW Telecom (TWTC) for a 7.3% premium, memory chip maker SanDisk (SNDK) opted to by Fusion-io (FIO) for a 22.4% premium and Williams (WMB) proposed to Access Midstream Partners (ACMP) to have access to a large shale play.
It’s important to keep in mind that investors are charged up about the fact that companies are apparently seeing more value out there than investors, which puts a floor under stocks. It also sets investors in the game of wondering what the next buyout bid might be.
Over in Iraq, the radical Islamic group ISIS captured more territory. However, reports suggested that the group’s progress to Baghdad was slowed amid resistance from Shia militias. The Iraq army might be terrible, but it is about 50x larger than the ISIS gang and mostly integrated with Sunnis and Shia. The bottom line is that Baghdad is not going to just roll over and, moreover, most of the oil exports are in the south — out of Basra — which is still firmly in Shia control.
Oil markets were muted, as fighting was largely confined to the north of the country, away from the major oil supplies which are located hundreds of miles south of the upheaval. The U.S. response remained unclear, although Secretary of State John Kerry said air strikes and discussions with Iran were both being considered. Elsewhere, violence in Ukraine escalated over the weekend as separatists shot down a military plane and Russia’s Gazprom cut off gas supplies to Ukraine, claiming missed payments. While Gazprom said gas shipments across Ukraine to Europe would continue, there was some talk of how supplies to European nations were disrupted following similar cut-offs to Ukraine in 2009 and 2006.
Back here in the U.S., economic releases generally surpassed expectations. None of the releases were particularly market-moving, but takeaways generally regarded them as further evidence that the recovery may be gaining traction. The NAHB housing index, a gauge of homebuilder confidence, rose in June for the first time since December, coming in at 49 versus expectations of 46.
The Empire State manufacturing survey for June also beat expectations at 19.28 versus the 15.0 consensus, while industrial production for May rose 0.6% versus 0.5% expectations. Elsewhere, as mentioned a moment ago, the IMF cut its forecast for US growth in 2014 to 2% from 2.8%. However, this was largely due to a weak Q1, and their forecast for 2015 remained unchanged at 3%.
The action this week still favors industrial, energy, specialty finance, consumer goods multinationals, health care and tech stocks, and those are the areas I will continue to focus my attention. In fact, I have a new Trade of the Day for you in the energy sector.
Vertex Energy (VTNR) is an environmental-services firm that focuses on recycling and processing the runoff and excess of hydrocarbon streams from pipelines and refineries. It supplies the result, sometimes called “black oil,” to chemical companies for processing and blending. One division of the firm helps refiners dismantle and decommission older facilities. This “transmix” business provides feedstock back to the refining industry cheaply. VTNR has almost tripled in the past few months, but still is fairly cheap and has room to advance.
VTNR is a good buy at current levels near $9.40, and I expect it to advance to a target of $10.15 in short order. That would give traders an easy 8% gain.
But protecting capital in stocks as we move into summer trading is essential, so set a stop loss at $9.15, good after 11:00 a.m. ET only.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
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