President's Day may have shortened the market week, but it certainly has not slowed the market activity. Deals are on the horizon and they are driving the market. Last fall, we saw merger mania driving the markets to new levels. Many analysts have their sights on more new highs in the coming weeks. Indeed, many markets have already attained multi-year high status, breaking through resistance levels like a bull charging at a brave matador. Whether they can hold these high levels remains to be seen, but with deals driving the market into fifth gear, the sky is the limit. (And so is the ground.) Let's take a quick trip to Europe and Asia.
The Asian markets are experiencing a mix of jubilation and caution. Chinese New Year, one of the most celebrated holidays in the world, started on Sunday, February 18th. A week of fireworks, dumplings, and family time kicks off this lunar New Year. Yet the markets are also cautious ahead of the Bank of Japan's two-day meeting to decide interest rates and review its monetary policy, particularly after the G7 meeting. Monday's markets in Asia closed in the positive. However, as the BoJ meeting approaches, the Asian markets are beginning to change. Japan's broadest index, the Topix, closed higher, even reaching 15-year-high levels. However, Japan's Nikkei closed down 0.01 percent. Some markets in Asia remain closed for the lunar New Year celebrations. After the Japanese Yen's decline against other major currencies in the past two weeks and with the release of other economic data in Japan, the BoJ is expected to raise interest rates to 0.5 percent, up from 0.25 percent.
European markets reached multi-year high levels, right along with the Topix and U.S. markets. Driven by deals, the European Big Four reached levels not seen since 2001. Yet the European markets on Monday, February 19th traded on lower volume since the U.S. markets were closed for the President's Day holiday. Yet Tuesday, February 20th shows the European Big Four trading downward in mid-day trading. After hitting 7-year high levels last week, this is not a surprise as many investors could be taking profits. This possible respite could be the calm before the storm when the U.S. markets reopen following its rare three-day holiday.
Speaking of U.S. markets, the Dow (INDU) just can't seem to stop hitting record high levels. With consumer sentiment down, housing starts down, and the deficit up, this is a strange phenomenon. But we don't argue with the markets! Confirmed and rumored deals are fueling the markets. However, this week is short and data is light so let's get started.
This week, we have only one significant report released in the United States. Nevertheless, as previously stated, the Bank of Japan is making an important decision on interest rates and this could affect the markets, particularly if the central bank decides to raise rates. Also, the bond market reacted favorably to the low housing starts report (though the 10-year note fell 0.02 on Friday). A stronger bond market could be bearish for the equities markets. For the moment, oil remains below $60 per barrel and this is bullish for equities. There is so much conflicting information yet it seems that Fed Chairman Bernanke is not completely convinced that inflation is under control at the moment.
Consumer Price IndexâVery Big Market Mover
Last week, we had the Producer Price Index [PPI], which measured price changes for business. The Consumer Price Index [CPI] measures the change in prices for the individual consumer. This is the real inflation levelâwhat people pay at the cash register. Of course, this is related to the PPI, which remained steady for the past two months. The CPI is expected to rise by just 0.1 percent for January, after an expected 0.5 percent rise in December. Bernanke is not happy with that level. The Fed probably wants inflation to remain between 1 and 2 percent. This January CPI figure could show that inflation is 2 percentâright at the edge of comfort. The report will be released on Wednesday, February 21st.
A flat CPI figure could show the Fed that inflation is not yet controlled, which could lead to an increase in interest rates.
It depends. The flat CPI figure means that inflation is not rising. The Fed could decide that inflation is controlled for the moment and leave interest rates unchanged, which is bullish for stocks. Yet the Fed could decide to raise rates to make sure that inflation stays in the comfort zone.
If the Fed decides to raise rates to lower the CPI figure, it will make the USD more attractive to foreign investors, which is bullish for the USD.
Table 1: CPI Impact Chart
It's a short week with only one major economic report. Remember, though, that the Bank of Japan is meeting this week, FOMC minutes are coming, and earnings continue to trickle in. On to the company news!
Lots of mergers and talk of mergers are moving the markets! There is good news for some companies, but others like JetBlue (JBLU) are not faring so well. And these mergers are not just happening in the United States. Europe and Asia are seeing their share of market-moving mergers as well. Let's take a look at a few mergers on the books right now.
The big merger on the horizon is in satellite radio. Yes, that's right. The rumors about the merger between Sirius Satellite (SIRI) and XM Satellite Radio (XMSR) are true. The combined companies would create a $13 billion company, headed by Sirius' chief. While this merger is not a surprise, the proposed merger is faced with a surprising number of regulatory hurdles from the Department of Justice and the Federal Communication Commission. The agencies very rarely block mergers, but every deal is a new opportunity for these agencies to flex their antitrust muscles. Stay tuned for the actionâ¦
Figure 1: Sirius Satellite Radio, Inc. (SIRI) Daily Chart. Sirius shows a very bearish, long-term trend. The recent merger talks have pushed the stock price above the 20-day moving average (blue) line. However, it is resting just above the blue line at this time.
The company gained 2.78 percent on Friday, February 16th.
Figure 2: XM Satellite Radio Holdings, Inc. (XMSR) Daily Chart. The stock price is meeting resistance from the 20-day moving average (blue) line. The company gained nearly 8 percent on Friday, February 16th.
DaimlerChrysler (DCX) shares jumped six percent on Friday, February 16th amidst talks that General Motors (GM) will purchase the company's ailing U.S. division. DCX gained more than 4 percent on Friday, February 16th. Great news for someâgood news for others? There is talk that private equity may have a hand in this dealâ¦
Moving to Europe, shares of British EMI Group (EMI) soared 7 percent on Friday, February 16th after receiving another offer from Warner Music Group, Inc. (WMG). EMI is the world's third largest music company. This is the latest move in a seven-year story in which the two companies have actually tried to purchase each other. And it's the latest move since the European Court blocked the Warner-Sony merger. EMI Group is trading up on the London Stock Exchange on Tuesday, February 20th.
Swedish truck maker Volvo (VOLV) has offered to purchase Japanese truck maker, Nissan Diesel for USD $1.1 billion. This would give Volvo a solid footing in the Asian market. We're only at the offer stageâand we know from experience that it could end hereâbut it's an interesting offer, and it's nice to get in at the beginning.
Figure 3: Volvo, AB Daily Chart. The company shows a very bullish chart. The stock price is well above the 20-day moving average (blue) line. Bullish momentum is very strong. The stock price closed slightly downward on Friday, February 16th.
There is a lot more going onâmerger-wise, that is. But the big ones are mentioned here so stay tuned for their progress through the regulations and the markets.
Market Moves Wisdom of the Week
As I'm sitting here at the Trading Expo in New York, I am amazed and humbled by what I have learned and the traders I have met. From stock traders to commodity traders, each person brings a new perspective on economic indicators, technical analysis, and money management. I have learned and experienced more than I ever anticipated. The Market Moves Wisdom of the Week is to attend conferences and meetings for traders. They are educational and stimulating. Trading can be a lonely life, but these conferences allow traders to meet, talk, and exchange ideas and experiences. Remember, the Oasis conference is coming soon. It is a great opportunity to take advantage of one of the largest meetings of traders in California. Enjoy yourself. Learn new techniques. Meet other traders. Sharpen your trading. Improve your trading life.
Staff Writer and Trading Strategist