Small Moves, Frayed Nerves
Major indices ended mixed and not far from breakeven after a nervous session Thursday, as the Street continues to weigh the impact of surging oil prices. New M&A activity failed to inspire the market at large, save for the broker-dealer sector which saw stellar earnings from Wall Street's powerhouses this week.
The
Dow Jones Industrial Average
fell 6.72 points, or 0.06%, to 10,626.35 while the
S&P 500
gained 2.14 points, or 0.2%, to 1190.21. The
Nasdaq Composite
finished up 0.67 points, or 0.03%, after the tech index hit a two-month low yesterday.
The 10-year Treasury bond, which gained 10/32 in yesterday's stock market rout, added another 10/32 to yield 4.47%.
General Motor's
(GM) - Get Report
profit-warning yesterday continued to fuel a flight to safety into Treasuries. At the same time, many are betting that surging crude oil prices will at least shave off some growth for the first-half of this year, perhaps doing some of the
Federal Reserve's
work for it. (Of course, if the Fed keeps tightening and oil prices stay high, that would
really
shave off some growth.)
Stock indices were offered a mid-afternoon respite as the price of crude oil settled at $56.40 per barrel the New York Mercantile Exchange, down 20 cents for the day. It earlier reached a high of $57.50. OPEC, which agreed to boost production yesterday and promised more if needed --
Bloomberg
quoted the oil minister of the United Arab Emirates on Thursday saying the cartel will "put more oil in the market if prices continue to rise" -- seems to have gotten some traders' attention after being largely ignored by the market.
The question remains for many investors. Will crude oil prices really hit growth? Not according to Ian Shepherdson, chief U.S. economist at High Frequency Economics. The rate of change in oil prices, not the price level, is what impacts the economy's capacity to absorb higher prices, he says. That rate peaked at 75% last year, while it runs at 50% so far this month.
"Further big increases in prices from current levels would be bad news, but for now we think the economy will suffer little more than short-term discomfort," says Shepherdson.
Economic news today, though not hugely significant, was not completely rosy either. The Philadelphia Fed said its regional manufacturing index fell to 11.4 in March from 23.9 in February, way below the consensus forecast for a reading of 20.0.
But until proven otherwise, economic growth appears to remain on track. The latest weekly jobless claims figure, for one, confirmed the outlook so far for payroll growth of above 200,000 in March. Claims fell by 10,000 in the latest week to 318,000, while the four-week average nudged to a six-week high of 316,500.
There were even some bright spots in Thursday's market action. For one, the Amex Broker-Dealer Index rose 0.55%. Wall Street powerhouse
Goldman Sachs
(GS) - Get Report
posted a much-better-than-expected 17% gain in first-quarter earnings. Goldman shares closed up a modest 0.06% at 110.04.
The gains were limited for the sector as the broker-dealers' quarterly performance had already been telegraphed by
Lehman Brothers'
strong results on Tuesday. They were later confirmed by
Bear Stearns
(BSC)
and
Morgan Stanley's
(MWD)
earnings, which also beat expectations. Lehman rose 1.85, or 1.97%, to 95.60, and Bear Stearns gained 0.86, or 0.84% to 102.99. Only Morgan Stanley fell, finishing down 88 cents, or 1.52%, at $57.07.
The pickup in M&A activity continued to provide nice investment banking fees for the big four, and shareholders of targeted companies.Just as Goldman posted earnings,
Toys R Us
(TOY)
said it agreed to a $6.6 billion buyout offer from a group of three private equity firms. Toys R Us shares finished up $1.30 to $26.07.
Retek
(RETK)
gained 10.7% to $11.65 after
SAP
(SAP) - Get Report
raised its takeover offer from $8.50 to $11 a share. The sweetened bid comes after
Oracle
(ORCL) - Get Report
offered $9 a share for Retek.
Meanwhile, another takeover battle continued, as
Qwest
(Q)
made a higher bid to sway
MCI
(MCIP)
away from
Verizon
(VZ) - Get Report
. Wall Street apparently was not impressed. Shares of MCI finished down 45 cents to $23.30, while Quest finished down 8 cents to $3.74.
The Street appears confident that M&A activity will continue unabated this year. "The investment banking recovery continues," says Bernstein analyst Brad Hintz. "It's correlated to a rising economy and a weak dollar, and both are in place at the moment."
A weak dollar is a good incentive for foreign firms to snatch U.S. counterparts. At the moment, there seems to be a case for Japanese and other Asian firms to do so, according to John Mandolini, vice-president at Morgen Evan, an independent middle-market advisor. European firms meanwhile, have tended to keep M&A activity within Europe's borders, he says.
The broker-dealers also have other reasons to cheer, with what appears to be increasing equity trading business from the retail side.
The bad news for them, of course, is that credit spreads appear to be widening now, witness the performance of General Motors' bonds yesterday. That can't be too good for the fixed-income performance of the likes of Lehman Brothers. Lehman however, did point to its European diversification, where fixed-income still has some legs thanks to weaker economic growth.
Others, like Goldman Sachs, are riding the energy wave. The firm derives 9% of its revenue-base from commodities trading. According to Bernstein's Hintz, a lot of purchasing managers have gotten caught by surprise over the surge in commodity prices since last year, and don't want to make the same mistake twice. At the same time, hedge funds are rushing on to take the opposite side of the risk. "Goldman could not ask for a better environment," Hintz says.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send
your feedback