Wall Street Recap: Monday, June 11th

by: The Value Investor

The equity markets closed amid big losses on Monday. The S&P 500 closed the day 1.26% lower at 1,308.93 points. The Dow Jones Industrial Average lost 1.14%, while the Nasdaq lost 1.70%. The markets saw a substantial reversal, with the opening gains erased on market participants' doubts on the Spanish bailout and the future of the eurozone.


The big news came from Europe, where the equity markets opened firmly in the green on Monday morning, after the 100 billion euro bailout of Spain over the weekend. The Eurostoxx 50 traded with gains of up to 3% in the morning to end the day 0.29% lower. The Spanish IBEX-35, which traded with opening gains of 6%, ended 0.5% lower at the close.

While investors were initially relieved on a solution for Spain, anxiety soon grew over the actual workings of the deal. The 100 billion euro loan will be directly added to the Spanish government's debt, which thereby increases by 10 percentage points. Furthermore, the ESM which provides the loan will get a senior credit status over regular Spanish bondholders. Yields on Spanish 10-year government bonds jumped back to 6.5% after reaching lows of 6.1% last week.

The Spanish financial sector was hit hard by the renewed price decline in Spanish bonds. With foreign investors retreating from Spain, en masse they bought Spanish government debt. Rating agency Fitch, furthermore downgraded Banco Santander (STD) and Banco Bilbao Vizcaya Argentina (NYSE:BBVA) from A to BBB+, primarily on the back of the downgrade of the Spanish Sovereign rating last week.

The market is puzzled and angry with the latest solution. All Eurozone members, including Spain and Italy, contribute money into the ESM, which in turn loans the money to Spain. As such Italy, which has high borrowing costs as well, will lend the money to Spain by means of the ESM at very favorable terms. The market thinks the Eurozone is out of control and Monay's market action is a sign indicating the lack of trust in European leaders.

Wall Street Opening

On Sunday night, S&P 500 futures gained up to 15 points on the back of the bailout news over the weekend. By the time the US markets opened and the European markets had given up a large extent of their gains, future gains were limited to merely 5 points. Within an hour of the Wall Street opening, the major averages dived into negative territory to continue their slide to end the day on their respective lows.

Investors are fast tiring of the European situation, which poses not a liquidity issue, but rather a problem of solvency.

Corporate News

Facebook (NASDAQ:FB) ended the day with a small 0.3% loss, outperforming the wider markets. This is despite a report coming from research company ComScore, which suggests growth at the social network in April slowed down. U.S. unique visitors on the website grew just 5% to 158 million. Tuesday, the company will report a highly anticipated research report on the website's advertising effectiveness.

Texas Instruments (NYSE:TXN), a manufacturer of semiconductors, rallied 1% after hours after falling 3% during the regular trading session. The company tightened up its forecasts for the second quarter, roughly in line with analyst expectations. Texas Instruments expects earnings per share to come in between $0.32 and $0.36 on quarterly revenues between $3.28 billion and $3.42 billion.

Garmin (NASDAQ:GRMN), a provider of navigation and communication devices, fell 8.5% in Monday's session as Apple unveiled a map service which is three-dimensional and works on voice. This allows automobile drivers to operate their devices handsfree. Analysts point out that smart phones and tables could make the entire functionality of Garmin's devices obsolete in the future.

Centene (NYSE:CNC), a healthcare provider focused on individuals who have no insurance or are under-insured, fell a significant 22% in Monday's session. The company forecast a second quarter loss as a result of rising costs in its health plans in Texas and Kentucky. Full year 2012 earnings per share are likely to come in between $1.45 and $1.65 per share vs. an earlier estimate of $2.64 and $2.84 per share.

Apple (NASDAQ:AAPL) fell 1.6% in Monday's trading session amidst the global correction in the equity markets. Furthermore, investors did not seem impressed with the announcements made at its Worldwide Developers Conference. The key announcements included a next generation of software, map functionality, and integration with Facebook. The company also upgraded its iMac line making them faster and cheaper.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.