A Little Inspiration -- or a Big One -- Sets Stocks to Leaping

SAN FRANCISCO -- The talk Friday was that if the forward momentum continued, the worries evident in the middle of last week would be quickly eradicated. And that was before the news broke today about the nuptials between Time Warner (TWX Quote) and America Online (AOL Quote).

Encouraged by Friday's upturn and enthused about the huge deal between the media titans, stock averages clamored higher today, with tech stocks back in the vanguard.

Major Indices INDEX CHANGE % VALUE YR TO DATE Dow 49.64 +0.4% 11,572.20 +0.7% S&P 500 16.12 +1.1% 1457.59 -0.8% Nasdaq 167.04 +4.3% 4049.66 -0.5% Russell 2000 13.58 +2.8% 501.89 -0.6% TSC Internet 76.18 +7% 1161.07 +0.6% TSC New Tech 30 22.14 +3.7% 617.31 -0.1% BOND CHANGE PRICE YIELD 30-Year Treasury 15/32 94 2/32 6.587%

The Nasdaq Composite Index soared 167.04, or 4.3%, to 4049.66, eclipsing the prior standard for its best-ever point gain, set on Friday. Separately, the Dow Jones Industrial Average rose 49.64, or 0.4%, to 11,572.20, a second-straight record for the venerable average.

In reaction to word of their $174 billion merger (based on Time Warner's closing price of 89 1/2) -- which looks an awful lot like an AOL takeover of Time Warner -- Time Warner shares rose 38.2% while AOL slid 3.6%. Elsewhere, Disney (DIS Quote), Viacom (VIA Quote), Seagram (VO Quote), News Corp. (NWS Quote) and Fox Entertainment (FOX Quote) each climbed more than 10%, while CBS (CBS Quote) rose 7% amid chatter they too would be taken over by (err, merge with) some online media giant.

The market: Join the discussion on TSC Message Boards.

Yahoo! (YHOO Quote) climbed 7.1% while Excite@Home (ATHM Quote) and Lycos (LCOS Quote) also benefited from the "who's next?" speculation.

The Comp got an additional lift from bellwethers such as Sun Microsystems (SUNW Quote) and Oracle (ORCL Quote). The Nasdaq 100 rose 5.3%.

Also, Intel (INTC Quote) rose 4.7% after Robertson Stephens upped its recommendation. The Philadelphia Stock Exchange Semiconductor Index gained 7.4%.

Yahoo! and CMGI (CMGI Quote) paced TheStreet.com Internet Sector index, which rose 76.18, or 7%, to 1161.07. Additionally, TheStreet.com New Tech 30 gained 22.14, or 3.7%, to 617.31. Unveiled Wednesday, the TSC New Tech 30 is an expanded index designed to replace the Red Hots index: The market-cap-weighted index remains focused on tracking the most scorching part of the market, the magnet for Wall Street's hot money. A list of the new index components is available at http://www.thestreet.com/newtech/.

In addition to Disney and the tech trio of Intel, Hewlett-Packard (HWP Quote) and IBM (IBM Quote), the Dow got a lift from American Express (AXP Quote).

However, the Dow declined from its intraday high of 11,638.28 due to weakness in J.P. Morgan (JPM Quote), Johnson & Johnson (JNJ Quote) and Merck (MRK Quote).

The S&P 500 gained 16.12, or 1.1%, to 1457.59 as its strong growth components trumped any weakness in the financials, drugs and cyclical groups such as chemicals and energy. The Philadelphia Stock Exchange/KBW Bank Index fell 2.6%; the American Stock Exchange Pharmaceutical Index slid 1.8%; and the Morgan Stanley Cyclical Index fell 0.6%.

Small-caps soared, with the Russell 2000 up 13.58, or 2.8%, to 501.89. It's within striking distance of its Dec. 31 record, 504.75.

Along with the aforementioned tech and media giants, the S&P also got a lift from Cisco (CSCO Quote) and Motorola (MOT Quote). The Morgan Stanley High-Tech 35 gained 6%.

The AOL-Time Warner deal was "definitely" the catalyst, but a continuation of the "reversal we saw Friday from the intraweek correction in the Nasdaq" was also a factor in today's advance, according to Bryan Piskorowski, market analyst at Prudential Securities. "You're seeing some rotation out of cyclicals and back to tech [but] it looks like a fairly robust story. Definitely a very nice turnaround -- breadth is very good, volume is good."

In New York Stock Exchange trading, 1.039 billion shares were exchanged while advancers bested declining stocks 1,773 to 1,344. In Nasdaq Stock Market action, 1.72 billion shares traded -- its third-biggest volume ever -- while gainers led 2,574 to 1,605. New 52-week high bested new lows 104 to 55 on the Big Board and by 287 to 57 in over-the-counter trading.

The "sticky wicket" is the bond market, Piskorowski said, noting a heavy calendar of economic data this week amid growing acknowledgment the Federal Reserve's rate hikes last fall "have not shown any real effect yet" in slowing the U.S. economy.

The price of the 30-year Treasury bond fell 15/32 to 94 2/32, its yield rising to 6.59%.

All Hail

Once people moved beyond their shock over the scope of the deal, the reaction to the AOL-Time Warner news was almost uniformly positive.

"It's a watershed event. I applaud AOL and Time Warner for doing what they're doing," said Barry Hyman, chief market strategist at Ehrenkrantz King Nussbaum. "The implications are totally wide-ranging and [the deal] puts most other companies behind."

Hyman does not believe the Disneys and Seagrams of the world will necessarily be taken over, but acknowledged the AOL-Time Warner combination puts "valuation standards" for media companies even further into question.

Competitors will do deals "at almost any cost because of the necessity to compete," he said. "That's why you're seeing Disney and cable companies [such as] USA Networks (USAI Quote) doing well. But there may not be premiums in deals done down the line, especially if they run 'em up now."

The strategist reiterated a view that stocks will suffer a correction in mid-February. But he believes the AOL-Time Warner deal will keep activity in the major averages "vigorous," because it will quicken the trend of the biggest market-cap companies becoming even more dominant.

"The bad news is, this will inevitably lead to a shakeout" with "little room for marginal players," he said, speaking not only of the media industry but others such as retailing.

Ehrenkrantz King Nussbaum has done no underwriting for the aforementioned.

Among other indices, Dow Jones Transportation Average gained 15.78, or 0.5%, to 2980.50; the Dow Jones Utility Average shed 1.41, or 0.5%, to 296.37; and the American Stock Exchange Composite Index climbed 18.99, or 2.2%, to a record 882.75.

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Elsewhere in North American equities, the Toronto Stock Exchange 300 gained 173.08, or 2.1%, to 8602.5 and the Mexican Stock Exchange IPC Index jumped 286.61, or 4.1%, to 7333.7.

For coverage of today's top stocks in the news, see the Company Report, published separately.