What a Week: Deal-Driven
Liz Rappaport
04/05/07 - 04:54 PM EDT
Private equity jump-started a stalled stock market this week.
A holiday-shortened week began and ended with reminders that deep-pocketed investors stand ready to tow even the market's biggest junkers to higher prices.
Given all the private equity wheeling and dealing this year, traders have come to believe there's a possible bid for any company out there, says Art Hogan, chief market analyst at Jefferies. He says that faith goes a long way to explaining how Wall Street has put the February-March market hiccup in the rearview mirror.
Take billionaire investor Kirk Kerkorian's $4.5 billion bid for
DaimlerChrysler's (DCX Quote) struggling U.S. unit. A Chrysler Group bid is hardly the biggest buyout on the block -- yet Thursday it succeeded in revving up a wheel-spinning pre-Easter market.
"M&A continues," says Hogan. "It's going to be a driver all year, and it is a strong statement on the economy and the market."
The week began with a heftier if less exciting display of M&A force, in Kohlberg Kravis Roberts' $25.6 billion buy of credit card processor
First Data(FDC Quote). First Data gained 20% on the week.
Germany's Daimler jumped 4.9% Friday on news of Kerkorian's offer. Rival straggler and previous Kerkorian target
General Motors(GM Quote) also gained 2.2% Friday.
Alone in reverse was the third member of the Big Three,
Ford(F Quote). It slipped fractionally Thursday after it revealed that its new chief executive, Alan Mulally, got $28 million for four months of work last year.
M&A activity in the first quarter of 2007 is running 27% higher than 2006's first quarter, according to Thomson Financial. Deal activity amounted to $1.1 trillion, on pace to beat last year's record. Private equity firms announced $191.8 billion of deals in the first quarter of 2007, representing 17.4% of total M&A volume and showing a 47% rise on last year.
The dealmaking kept stocks in the black throughout the week. The strongest gains were made on Tuesday, when robust economic news trumped worries about the subprime mortgage and housing industries and weakening business spending. Waning tensions with Iran also helped cap oil prices. In turn, transportation-related stocks also finished strong on the week.
The
Dow Jones Industrial Average ended the week up 1.7%. The blue-chip index is now up 0.8% for the year. The
S&P 500 finished the week up 1.6% and is up 1.8% on the year. The
Nasdaq Composite rose 2.1% on the week and is up 2.3% for 2007.
The Dow Jones Transportation Average gained 2.2% this week, as airline companies lifted off.
Continental Airlines(CAL Quote) reported a jump in March traffic, sending its stock soaring 10% for the week.
AMR(AMR Quote) rose 6%.
The utility sector made some new highs this week, suggesting to some that investors are transferring money out of financials and
into utilities. The Dow Jones Utilities Index hit intraday highs this week and ended up 2% this week.
As investors wring their hands over the possible impact of subprime loans on banks and others in the financial industry, the financial sector is down 3.4% for 2007, according to Merrill Lynch's U.S. sector analyst Brian Belski. This week, the KBW Banking Index slipped 0.3%.
Otherwise, the old market leadership remains mostly intact, even though the Goldilocks economy theme is mostly wrung out.
"Despite the changing macro landscape, sector leadership has stayed status quo for the most part," writes Belski. "Energy, materials and utilities continue to claim three of the top four spots in terms of sector price performance for both year-to-date and the last 12-month periods (in spite of deteriorating fundamentals)."
The economic fundamentals didn't take any serious hits this week either. On the downside, the Institute for Supply Management's report of activity in the nonmanufacturing sector was weaker than expected as its inflationary prices-paid component increased. But supporting the bulls was job growth that remains intact, mortgage applications that held up, a rise in pending home sales and chain store sales that recorded a third-consecutive gain.
The bond market was largely unmoved, as traders continue to weigh the possibility of rate cuts. The 10-year bond finished the week yielding 4.67%, compared with 4.65% last Friday.
Investors seemed surprisingly unfazed by New Century Financial's bankruptcy filing and
M&T Bank's(MTB Quote) warning that the alt-A mortgages are starting to deteriorate.
Indeed, the fear index also known as the CBOE Volatility Index reflects this return to a more-complacent state. The VIX fell 10.2% this week.
Perhaps helping to put a lid on fear, the Labor Department reports nonfarm payrolls Friday to a shuttered stock market and a partial day for the bond market. Analysts expect that 133,000 new jobs were added in March.
Next week, all eyes turn to earnings season.
Alcoa(AA Quote) is due to report Tuesday evening. Expectations for first-quarter earnings growth have shrunk over the course of the quarter to between 3% and 5%.
