What is the Impact of the NYSE Euronext Merger on Individual Investors?

Shaking Hands2/16/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The S&P opened higher this morning, tracking gains in Europe and reacting positively to the latest batch of earnings and merger news.  Shares of a well-known personal computer maker beat consensus estimates on the bottom line and should give the Tech sector a lift today.  Further, a bullish outlook from a U.S. heavy equipment producer will give Industrials a boost.  Also in the “earnings arena,” European averages are higher than expected after better-than-anticipated results from a prominent French bank and a German beverage producer.  Asian markets were mostly higher, with the Nikkei up for a third straight day and the Hang Seng jumping over 1%.  Oil rose on concerns of more revolts in the Middle East, while expectations of further monetary tightening in China are weighing on copper.

Looking back at Tuesday, stocks pulled back some on a slight retail sales miss.  There was little in the way of earnings news to keep the focus on the micro (where the picture is very good), so market participants focused on the macro (where the picture is more mixed).  Though impacted by weather, retail sales in January fell short of expectations, as did a report on German economic sentiment.  Meanwhile, Chinese inflation accelerated as worries of further policy tightening persist.  The rest of the data (import prices, business inventories, New York Empire Manufacturing and homebuilder sentiment) had little impact.  Sector rankings had a decidedly defensive tone, with Utilities leading and the resource sectors lagging on a day when only two sectors finished in the green.

Around our financial planning firm offices this morning, we were discussing four items that we thought would be of particular interest to our readers:

Companies are putting their cash to work. Dividends, buybacks and increased merger activity are part of a theme this year of corporate America deploying its significant cash position, a trend that should support the equity markets throughout 2011.  The latest deals totaling roughly $40 billion include buyouts of the NYSE Euronext exchange, a well-known discount retailer and a sizable biotech company.

The rising Producer Price Index (PPI) will add to inflation fears. Although measures of actual inflation (CPI, PPI, wages, employment costs, etc.) and expected inflation (TIPS, University of Michigan inflation expectations, etc.) remain low and stable, inflation has been a big topic of conversation in markets and in the financial media in 2011.  The unexpectedly large rise in the core PPI in January (+0.8% month-over-month) will stoke those fears.  However, the correlation between month-over-month changes in core PPI and CPI is very low, which is not surprising given that CPI has different seasonal factors, different weights and different sampling times during the month than does PPI.  Over long time frames, 3-5 years, CPI follows PPI but is more muted.

What is the “day-to-day” impact of the NYSE Euronext merger with the Deutsche Boerse on individual investors? Simply put, there should be little to no individual investor impact.  At its core, the merger is a reflection of the value of derivatives trading and how exchange information “feeds” to rapid professional traders.

Weekly mortgage applications fell again. Weekly mortgage applications fell nearly 10% week-over-week in the week ending February 11th.  Both purchase (-6%) and refinance (-11%) applications fell in the week.  Refinance applications are down more than 60% since mortgage rates troughed in October 2010, while purchase applications have held steady, a sign that perhaps the housing market has stabilized at a low level of activity.

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
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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