The major averages are higher this morning following strong Chinese export data, a successful Greek debt auction and more M&A activity. The strong open has the S&P 500 poised for its third straight up day, following four consecutive declines last week. The latest deal news comes from the Technology sector in the form of Microsoft’s bid for Internet phone provider Skype, a deal with a proposed value of over $8 billion. Led by miners, European markets are higher in mid-day trading after a successful Greek debt auction and some good earnings news. Elsewhere, the Nikkei benefited from reports that Toyota’s production recovery is ahead of schedule, while the Chinese Shanghai Index also closed higher. A firm dollar is weighing on oil prices despite strong Chinese import data, while adverse weather conditions are pushing crop prices broadly higher. Gold and silver are both higher this morning despite the stronger greenback and the Greece news.
Looking back at Monday, stocks bounced back from last week’s selloff and advanced for the second straight session. Natural resources provided market leadership, as Energy and Materials each gained more than 1% while gains for the rest of the market were minimal. Investor attention was focused on Greece, which contributed to early dollar strength that fizzled later in the day. The CRB broad commodity index rebounded 2% after last week’s rout. The week started off slowly in terms of economic and earnings news, but will pick up later in the week.
Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
- It’s interesting to observe the current mergers and acquisitions landscape. Today, Microsoft is pursuing Skype in the latest of a long string of deals that include AT&T’s planned purchase of T-Mobile, Duke Energy’s purchase of Progress Energy, Exelon buying Constellation Energy, Texas Instruments purchase of National Semiconductor, and Teva buying Cephalon. Year-to-date deals in the U.S. amounted to $378.95 billion. Volume is up about 50% over the past year. Excluding the forced marriages of mid-2008 these are the strongest numbers since the market peak back in mid-2007, although they are only half of those levels. Most deals involve cash and reasonable premiums in the 20-30% range. This trend continues to support mid-caps as the targets in these deals.
- Some commodities trading volume is well in excess of the actual physical use of the underlying commodity. If everyone who owned a contract tried to take physical delivery, it is unlikely there would be an ability to deliver all of it. In some cases, physical delivery on settlement of a contract is not required to avoid this potential squeeze – for example, the NYMEX crude oil futures settlements take place in cash, not physical delivery. The delivery point for contracts is Cushing, Oklahoma, a pipeline hub.
- Import prices surged in March 2011, but over the past 30 years, there is very little pass-through of high input prices into consumer price inflation. Import prices surged 2.2% month-over-month in March 2011 versus February 2011, as energy prices spiked higher. Import prices are nearly 12% higher than they were in March 2010, led by the 35% year-over-year gain in imported energy. Taking a longer view, import price inflation has been quite volatile over the past 25 years, rising (and falling) as much as 20% year-over-year. On average, import prices rise at about 2% per year, and big swings in import prices do not translate into sizeable changes in the consumer price index (CPI).
- Retail sales for May 2011 are expected to run between 3% and 3.5% ahead of May 2010. During the 2002-2007 economic recovery, weekly retail sales ran at a 3.5% year-over-year pace. Part of that gain was driven by mortgage equity withdrawal (i.e. homeowners using their homes as ATM machines). That is not happening now, so the sales gains are more in line with income growth, as consumers continue to rapidly repair their balance sheets.
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
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