The Dow Jones Industrial Average ended the shortened holiday week on a positive note, rising 52 points on Thursday and closing out a remarkable first quarter: the index surged almost 1,500 points for a better than 11% gain. And though its components largely basked in the glow of that run, Alcoa (AA) and Caterpillar (CAT 1.78%) did not, being the only two stocks in the Dow that ended lower than where they started the year.
It's significant that both are seen as bellwethers for the global economy, particularly in China, which is now suffering from an economy easing back. Last year's 7.8% GDP growth marked a substantial break from a decade of breakneck expansion, and the Shanghai Composite Index contracted 1.4% in the first quarter. The U.S. Federal Reserve says that under a worst-case scenario, the Chinese economy could flatline by 2030, though the more likely outcome is a continued slowing trend to around 6.5% annually.
Caterpillar's big bet on China was grounded in its $7.6 billion acquisition of Bucyrus International, but as its fourth-quarter results showed, construction revenues tumbled in Asia 32% and were down on average 23% everywhere else in the world. Alcoa's earnings are due out April 8, and though 2013 was supposed to be the year when its recovery would take root, with China easing back on construction and aluminum prices only just beginning to recover, it's going to take some time for the global economy to gain traction.
International wall of worry
Beyond the Dow components, mobile marketer Velti (NASDAQ: VELT) was another one crushed by international intrigue, as its stock lost more than half its value after events in Greece and the Balkans caused it to divest assets there. It swung to a third-quarter loss, and analysts now worry it won't be able get costs under control, leading to widespread ratings downgrades.
The problem as Wall Street sees it is that Velti is forgoing significant business opportunities in the regions that were big contributors to sales and profits. Even with plans to focus instead on China and Western Europe, the marketer might run into the same problems as Alcoa and Caterpillar.
Last year, I suggested that a buyout was perhaps the best argument in favor of investing in Velti. Hedge-fund operator Discovery Group, however, thinks the market is mispricing the marketer and has taken a 5% stake in the shop. With fourth-quarter results due out soon, Velti will be inviting greater scrutiny to see if it can make the changes necessary.
The dilution solution
It might not have been the best of performances, but until last week, biotech Ziopharm Oncology (ZIOP 0.71%) was holding its own -- and then the bottom dropped out. The plunge and accompanying loss of two-thirds of its value happened because its soft tissue cancer treatment, palifosfamide, failed to achieve its goals in late-stage clinical trials. The drugmaker announced that it was cancelling further tests on the treatment, though it will convert an ongoing study for small-cell lung cancer into a midstage trial.
It's interesting to note, however, that the independent committee monitoring palifosfamide actually recommended continuing study on the trial's secondary endpoint for overall survival, but with little money in the bank, it can't afford go chasing such will-o'-the-wisps. According to its annual report filed just a few weeks ago, Ziopharm has just $73 million in the bank, which could be put to better use on a treatment that doesn't have such a high hurdle to climb.
Since Zopharm does have a few drugs it can pursue, it's probably going to need to tap the well of public equity or debt to finance its trials, which means investors are going to see their shares significantly diluted.
Because palifosfamide has been well tolerated in trials, this is a stock you may not want to completely remove from your watchlist, but as I noted last week, without any near-term catalysts to warrant investing in the company, it's a company better suited to day traders than long-term investors.