US stocks were mixed on Thursday. Deal activity, solid economic data and new record highs in several large technology companies were offset by higher bond yields and general scepticism over the outlook for equities.
A $26bn buy-out of Hilton Hotels by Blackstone ignited other stocks in the hotels sector and also boosted real estate companies.
Robust economic data ahead of the June employment report, due on Friday, failed to spark a strong response in stocks. The Institute for Supply Management’s index of non-manufacturing activity rose to 60.7 in June. It was the first print above 60 in more than a year and pushed bond yields higher.
Late in New York, the S&P 500 index had closed up 0.04 per cent at 1,525.41. With the yield on the 10-year bond higher by 10 basis points at 5.14 per cent, utility and financial stocks were among the major sectors that declined. Telecoms led losses while technology was a notabled gainer. Energy lost its earlier lustre as crude oil prices retreated from a recent 10-month high above $72 a barrel.
Among stocks in the news, Hilton closed up 25.9 per cent at $45.39, shy of the $47.50 a share buy-out offer. Blackstone rose 3.1 per cent to $30.63, still below its recent listing price of $31 a-share.
Option volumes in Hilton stock surged on Tuesday before the deal was announced. Volumes set their highest daily volume since 2005, said Bespoke Investment Group. So far this week, Hilton’s stock is up 35.6 per cent.
Other hotel stocks rallied sharply on Thursday. Marriott rose 7 per cent to $47.57, Starwood gained 7.8 per cent to $74.55, Choice Hotels was 7.4 per cent higher at $42.60, Wynn Resorts increased 4.5 per cent to $92.76 and Host Hotels had rallied 9.1 per cent to $26.01.
“The most vocal speculation had always surrounded Starwood, given its prized assets and close ties to the financial community, but Hilton proved to be the first belle to the ball,” said analysts at CreditSights.
Real estate stocks also rose as investors expect hotel buy-outs could involve unlocking the value of property. Real estate investment trust stocks rallied almost 1.5 per cent on Thursday and resisted weakness seen in other interest rate sensitive sectors.
In other deal news, Huntsman had jumped 12.7 per cent to $27.50 on Thursday after the chemicals company said a private-equity firm had made a $6bn buyout offer. That raised the stakes as Huntsman received a $5.6bn bid last week from Basell Holdings, a Dutch chemicals maker.
Aside from buy-out activity, another source of support for stocks could paradoxically come from investors who are worried that the market is heading for tough times.
In recent weeks, equity volatility has been trending higher and traders say this reflects increased buying of put options on broad benchmarks.
Timothy Krause, director of risk management at Zecco Trading said: “We have seen more buying of puts on ETF’s for indexes while calls seem more popular on specific companies.”
Meanwhile, the level of short interest – stocks that have been sold by investors who do not actually own them – has risen to record levels in recent months according to the New York Stock Exchange.
Should the broad market rally further as the second quarter earnings season gets under way next week, the pressure on bearishly positioned investors to liquidate positions may intensify.
“Scepticism in the market means their money can still come into play,” said Richard Sparks, senior equity options trader at Schaeffer’s Investment Research.
Large technology companies continued to attract buyers on Thursday, and the Nasdaq Composite rallied 0.4 per cent to close at 2,656.65. The close marked a fresh six-and-a-half year high and the Nasdaq’s gain of 10 per cent so far this year eclipses 2006’s total rise of 9.5 per cent.
Research In Motion rose 4 per cent to $216.19 on news that it had gained approval to sell its BlackBerry device in China. Rim has risen more than 30 per cent from $165 a share in the past week since announcing strong earnings and a three-for-one share split.
Shares in Apple set a new all-time record high of $132.97 on Thursday. The stock closed up 4.4 per cent at $132.75, amid strong sales of its newly released iPhone.
Google also set a new record high of $544.40 and rose 1.4 per cent to close at $541.63.
Another stock in the news was Cognos. The Canadian software company doubled its stock buyback program to $400m and the stock rallied 1.6 per cent to $340.20.
Blue chips declined and the Dow Jones Industrial Average fell 0.1 per cent to close at 13,565.84.
A drag on the Dow was General Motors, down 3.2 per cent at $36.76. The carmaker was downgraded by Bear Stearns, as GM’s share price has risen 31 per cent from a low of $28.92 on May 10. GM also reported a 21 per cent decline in June sales late on Tuesday. GM’s stock price remains 19.7 per cent higher so far this year.
In other deal talk, Coca-Cola was reported to be pondering a bid for Cadbury Schweppes’ Snapple iced tea brand. Shares in Coke fell 0.4 per cent to finish the day at $52.67.
In economic news, the upbeat ISM index of non-manufacturing activity for June arrived above May’s reading of 59.7 and was also better than a forecast slide to 58.1.
“The data is certainly consistent with a view that the recovery in the service sector since the March low is no fluke,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
Earlier in the day, private sector employment increased by 150,000 in June, according to the ADP. This follows a revised gain of 98,000 jobs in May. The figure was stronger than a forecast 100,000 and pushed bond yields higher.
The ADP report has a mixed track record compared with the official monthly employment report, but bond traders were taking a cautious approach. The June employment report is due on Friday and economists expect a 125,000 rise in non-farm payrolls after a 157,000 gain in May. The unemployment rate is expected to remain steady at 4.5 per cent.
“The data flow points to optimism for Friday’s payroll report, where we continue to expect +150,000,” said economists at Lehman Brothers.