Retail Therapy for the Bulls

Shopping sprees by consumers and private equity help drive major averages sharply higher.
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Wall Street and Main Street may be diverging ever more in terms of income equality, but inhabitants of both sides of the tracks are still shopping.

Another round of merger and acquisition activity and a stronger-than-expected report on March retail sales combined to drive stocks to sharply higher Monday. Earnings reports that are beating expectations, especially from beleaguered financial companies, also boosted the major indices.

The

S&P 500

made a new six-and-a-half-year high Monday, and the NYSE Composite Index marked another all-time high. The S&P finished up 1.1% to close at 1468.47, while the

Dow Jones Industrial Average

finished up 0.9% to close at 12720.46, about 66 points from its all-time high. The

Nasdaq Composite

finished up 1.1% to 2518.33, about 7 points off its late February high.

"The mood is good," says Todd Leone, head of listed trading at Cowen & Co. "It isn't exuberant, but that's partially because people in the Northeast are home pumping out their basements."

The nation also suffered a terrible tragedy Monday in which a gunman killed more than 30 people at Virginia Tech in Blacksburg, Va., the worst shooting in U.S. history.

Investors bet on the consumer Monday as the S&P Retail Index gained 1.3% on the heels of a stronger-than-expected report of retail sales even amid higher gasoline prices. The Census Bureau reported that March sales gained 0.7% while February's gain was revised higher to a 0.5% increase vs. 0.1% as originally reported. Higher gasoline prices drove up gasoline sales by 3.1% in the month, but subtracting autos and gasoline, retail sales were still healthy, up 0.4%.

"While we look for higher gasoline costs to soften spending this quarter, the resilience of consumption continues to be a big economic story," writes Peter Kretzmer, senior economist at Bank of America. Kretzmer estimates the new reports suggest Americans' spending habits in the first quarter were almost as vigorous as they were in the fourth quarter of 2006.

Other economic news Monday was bullish as well. The Census Bureau also reported that business inventories increased by 0.3% in February, meeting analyst expectations. After a slump in the fourth quarter, business inventories may now contribute to first-quarter GDP, rather than act as a drag.

The market was equally buoyed by some good news out of the financial sector, which comprises more then 20% of the S&P 500, and which has lagged the broader market in recent weeks.

Wachovia Bank

(WB) - Get Report

beat earnings expectations partly on the coattails of its 2006 mortgage lender acquisition, Golden West Financial.

Citigroup

(C) - Get Report

also had higher profits than analysts had forecast, and shares of both banks gained over 2.5%. The Amex Securities Broker/Dealer Index gained 3.3% on the day.

Even as the National Association of Home Builders released an ominous three-point drop in its monthly Housing Market Index, to 33 in April, from 36 in March, the bottom-fishers were buying up the mortgage lenders.

Instead of worrying about the spring selling season, investors were enthused by another lender finding a way to stay afloat.

Fremont General's

(FMT)

announced plans to sell its subprime business sent its shares up 26%. Competitors

Accredited Home Lenders

(LEND) - Get Report

and

NovaStar

(NFI)

gained 6.5% and 5.9%, respectively.

Shares of

Eli Lilly

(LLY) - Get Report

gained 2.7% on its strong earnings and guidance for the year.

The private-equity shoppers were out in force at their virtual mall -- the stock market.

SLM Corp.

(SLM) - Get Report

, known as Sallie Mae, agreed Monday to a buyout by J.C. Flowers with private-equity firm Friedman Fleischer & Lowe, Bank of America and JPMorgan Chase. Sallie Mae will be bought for $60 per share, or $25 billion.

But a successful shopping spree sometimes comes with consequences, and that's true for both consumers and stock market investors.

"If gasoline keeps trading up, the push on food inflation continues, and mortgage resets keep happening, the consumer could pull in their horns," says Jeffrey Saut, chief equity strategist at Raymond James & Associates.

Indeed, Parade Magazine's annual survey of American financial health and sentiment reveals

once again that the country is filled with pessimists. According to Parade's survey, 71% of respondents said the country was on the wrong track and expect to work after they reach retirement age. While fewer Americans are offered health insurance, the average chief executive officer made 369 times as much as the average worker, compared with 131 times in 1993, according to the article.

As for consequences in the stock market, new highs often mean new pullbacks shortly following, writes Mary Ann Bartels, chief technical analyst at Merrill Lynch. But until then, to the shopper go the spoils.

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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