Monday, August 18, 2014

Markets gain on homebuilder confidence and merger activity

Dow shot up 175 (closing at the highs), advancers over decliners 3-1 & NAZ added 43.  The MLP index was flattish in the 524s & the REIT index rose 3 to 311.  Junk bond funds gained & Treasuries lost ground as stocks rallied.  Oil fell as the Kurds gained control of the Mosul dam & gold dropped below 1300.

AMJ (Alerian MLP Index tracking fund)

CLU14.NYMCrude Oil Sep 1496.32 Down 1.03 (1.1%)

Live 24 hours gold chart [Kitco Inc.]

Kurdish & Iraqi forces seized control of Iraq's largest dam from Islamic State militants as the US deployed air power that helped reverse some gains made by the Sunni-Muslim insurgents in the north.  Kurdish forces, known as the peshmerga, have forced militants from the dam & now need to clear a 2 kilometer stretch of mines & bombs, according to a Kurdish spokesman.  “There is no Islamic State presence on the dam. It is under peshmerga and Iraqi army control,” he said from Erbil.  “We have further plans in the next days for liberating other areas.”  Islamic State fighters forced the peshmerga to retreat earlier this month as they swept toward Erbil, the capital of the semi-autonomous region of Kurdistan.  The insurgents had earlier taken Mosul Dam using US made weapons seized from fleeing Iraqi troops.  In response, Obama authorized airstrikes on Aug 8 to protect US personnel & threatened Iraqi minorities.   Obama widened the US military role over the weekend, authorizing attacks for the first time to protect critical infrastructure.  American bombers were used for the first time since the offensive began to help secure the dam.  While militants from Islamic State have lost control of Mosul dam, they retain key oil infrastructure in Iraq & eastern Syria, generating millions of dollars in daily revenue to help fund a self-proclaimed caliphate, or state based on the group’s hard-line interpretation of Islamic law, & to strengthen its grip on territory it has seized.  Militant-controlled oil-fields at Ain Zala & Batma in Iraq have an output of 30K barrels per day (over $3M per day in revenue).  The Sunni militants have also occupied the Qayyara oil field north of Baghdad.

Kurdish Forces Oust Militants From Dam With U.S. Airstrikes

Photo:   Bloomberg

Dollar General offered $9.7B for Family Dollar Stores (FDO), a Dividend Aristocrat, setting off a bidding war for a company that had agreed to an $8.5B takeover by Dollar Tree (DLTR) last month.  It plans to pay $78.50 a share in cash, compared with DLTR's bid of $74.50 a share in cash & stock.  The deal will generate $550-$600M in cost savings annually 3 years after its completion, DG said.  “We look forward to expeditiously entering into constructive discussions with Family Dollar in order to sign a definitive merger agreement,” CEO Rick Dreiling said.  DG is fighting to keep its perch at the top of the dollar-store industry.  A merger between its 2 rivals would have created a new market leader, escalating competition at a time when Wal-Mart (WMT), a Dow stock & Dividend Aristocrat, also is looming with new smaller-format stores.  If combined, DG & FDO would have about $28B in annual revenue.  DG surged 6.68 (12%) & FDO rose 3.75 (5%).  If you would like to learn more about DG, click on this link:

Dollar General Makes $9.7 Billion Family Dollar Counterbid

Dollar General (DG)

The Bundesbank said geopolitical tensions may impede a rebound of the German economy, Europe's largest, after it contracted in Q2.  “The economic outlook for the German economy has clouded over in the middle of the year in response to unfavorable international news,” the central bank said in its monthly report for Aug.  “Expectations for a strengthening of economic momentum in the second half of 2014 underlying the spring projections are called into question by current data.”  Today’s report is the strongest warning yet from the Bundesbank, which said in the past that economic weakness in Q2 will be temporary, & signals that forecasts published only 2 months ago may be too optimistic.  Pared with a lack of growth in France & Italy in the period, German prospects threaten to weigh on a euro-area recovery that ECB is trying to sustain with unprecedented stimulus.  “There are signs that the euro area will resume its economic recovery after the stagnation in the second quarter, even though it probably won’t reach the pace projected in spring,” the Bundesbank said.  “The economic momentum in some member countries of the European monetary union is weaker than expected. At the same time, it seems geopolitical tensions in eastern Europe as a result of the Ukraine conflict as well as in other parts of the world now weigh more on business confidence.”  The Bundesbank predicted in Jun that the German economy will expand 1.9% this year & 2% in 2015.  That compares with ECB forecast of euro-area growth of 1% & 1.7%, respectively.  The German economy contracted 0.2% in Q2 after expanding 0.7% in Q1.  The Ifo Institute’s business climate index for Germany dropped for a 3rd month in Jul after rising to the highest since 2011 earlier this year.

Bundesbank Casts Doubt on German Second-Half Economic Rebound Amid Crises

The Kurds & Iraqi military seem to be getting the upper hand in the fighting, but it is far from over.  ISIL remains strong & is well financed with oil fields it has captured.  There are talks in Ukraine which is leading to some calm in that situation.  After stumbling at the start of the month, Dow is up about 275 in Aug.  The next 2 weeks can be relatively uneventful with some away on vacation.  But that assumes fighting does not flare up somewhere in the world.  

Dow Jones Industrials

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