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Dow Beats Doomsayers

Wal-Mart, M&A news and the Fed perk up the industrials and transports.

Stock traders shrugged off the long weekend deluge of apocalyptic subprime mortgage articles as the

Dow Jones Industrial Average

and the Dow Jones Transportation Average rose to new all-time highs Tuesday.

"Things just look good," says Michael Driscoll, head of sales and trading at Bear Stearns. "It is worrisome to me when

Barron's

says everything is comfortable, but I can't shoot holes in it at all."

The Dow industrials gained 0.2% Tuesday to close at 12,786.72, while the

S&P 500

gained 0.3% to close at 1459.65. The

Nasdaq Composite

closed up 0.7% Tuesday to 2513.04.

The Dow was boosted by

Wal-Mart

(SYMBOL)

, which jumped 3.7% after the retailer posted strong earnings and provided optimistic guidance for the first quarter of 2007.

Beleaguered

Home Depot

(HD) - Get Home Depot, Inc. (HD) Report

slipped only 0.2% on news that its profits fell 28%. The company said the housing market slump hit the company hard, and executives provided a grim outlook for the rest of the year. Still, one might have expected the stock to fall further given the bad news.

After the close,

Hewlett Packard

(HPQ) - Get HP Inc. (HPQ) Report

reported a 26% jump in profit; the stock was down 1.1% in recent after-hours trading after having risen 0.8% in the regular session.

In a day absent of economic data,

Fed

Governor Susan Bies' speech about the mortgage industry took center stage. In a speech at Duke University's Fuqua School of Business, Bies said the subprime mortgage lending market is "very problematic," but she noted that the U.S. banking industry is on solid footing.

"The banking system is very strong, unlike the '80s where a lot of the savings and loans were under stress," said Bies, who is the Fed's resident expert on bank regulation and is

retiring at the end of March.

Indeed, the banking stocks are not reflecting too much worry about spillover from the subprime mortgage market. The PHLX/KBW Bank Sector Index reached a new all-time high Tuesday, jumping 0.5% on the day. Likewise, the Amex Securities Broker Dealer Index jumped 0.8% on the day, just about one point away from its all-time closing highs.

Perhaps the subprime mortgage market blowup is already priced into the stock market. It's certainly not news that historically low interest rates fueled some aggressive lending standards -- standards that Fed banking surveys show already are scaling back.

Bianco Research, citing the Web site www.mortgageimplode.com, notes that since December 2006, of 25 of the largest subprime lenders, 23 have either closed, restated earnings or are up for sale/sold by their parent.

"It looks like the worst of the subprime blow-up is either over, or about to be over," Jim Bianco writes. "While it is bad for this sector, if we are still searching for systemic fallout, and it has not yet happened, what more needs to occur to make it a systemic problem? At this point, what more can happen?"

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Bies also noted in her speech that loose liquidity is part of why the banking sector is faring well amid the subprime market's decline. But liquidity is also what makes traders nervous about the subprime mortgage market's potential to have a spillover effect into the broader markets.

"What puzzles me is when you hear about big international banks like

HSBC

(HBC)

and

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report

and

Citigroup

(C) - Get Citigroup Inc. Report

involved in this corner of the mortgage market," says Bear Stearns' Driscoll. "The biggest and bluest of them all are involved in the same desperate search for an extra 80 basis points. You wonder how much more is out there."

Meanwhile, liquidity helped fuel another round of merger activity.

Sirius Satellite Radio

(SIRI) - Get Sirius XM Holdings, Inc. Report

and

XM Satellite Radio Holdings

(XMSR)

announced plans to merge. Shares jumped 6% and 10.2%, respectively, on the news, despite possibly insurmountable regulatory hurdles.

Elsewhere,

Vulcan Materials

(VMC) - Get Vulcan Materials Company Report

agreed to acquire

Florida Rock Industries

(FRK)

for $4.6 billion. Vulcan Materials dipped 0.6% while Florida Rock soared 42% on the news.

Driscoll says that the day's M&A news is not responsible for the market's rally Tuesday. The markets are used to M&A Mondays (or Tuesday, in this case, because of the Presidents Day holiday) at this point, he says.

"What this broader M&A Monday trend says to me is that there is a long-term comfort zone in corporate America," says Driscoll. "These guys are comfortable owning and buying stocks."

Indeed, 2006 made the record books for M&A activity in the U.S. and globally. Thus far, 2007 is shaping up to be equally strong. Year to date, M&A activity is up 27% from the same period in 2006, according to Dealogic. Globally, year-to-date M&A activity is up 29%.

So, more M&A, a spate of strong earnings and a benign take on the subprime mortgage market from the Fed's banking expert kept the bulls back on top after the long weekend. Interest rates and Fed policy will quickly be back on the scene Wednesday, which brings the January FOMC minutes and core consumer price index.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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