Merger news, oil price drop push stocks up
Wall Street overcame early losses to close higher Monday as a drop in oil prices and a fresh round of acquisition activity helped boost investors’ confidence in the economy.
Gap surged on a report that the clothing retailer was considering strategic alternatives for the business, possibly including a sale of the company.
After a reaching a record level last year, merger and acquisition activity in general showed no sign of letting up in 2007, with about $6 billion in deals announced since Friday.
Low energy prices also helped stocks reverse course from losses early in the session. Oil prices continued last week’s decline, which was triggered by a belief that heating oil supplies would go unused because of a mild U.S. winter. Crude futures slipped 22 cents Monday to $56.09 on the New York Mercantile Exchange.
Stock trading displayed an element of caution as investors turned their attention toward fourth-quarter earnings, which are being released starting today, when Alcoa posts results. Several profit warnings from a number of companies, including airline company UAL, electronics maker Molex and telecommunications firm Tellabs, prevented indexes from gaining broader momentum.
Peter Dunay, an investment strategist with New York-based Leeb Capital Management, said investors were trading conservatively while waiting for earnings reports. He said the biggest thing on the horizon was “the impact any kind of profit warnings are going to have.”
“This is one of those Mondays where people are doing a bit less until we see an impetus,” he said. “The market is at an inflection point. Energy is big, but it has been down so much over the past few weeks that the fact it’s up shouldn’t be scaring participants too much.”
The Dow Jones industrial average rose 25.48 points, or 0.2%, to 12,423.49.
Broader stock indicators advanced. The Standard & Poor’s 500 index was up 3.13 points, or 0.2%, at 1,412.84, and the Nasdaq composite index added 3.95 points, or 0.2%, to 2,438.20.
Bond prices were flat in the absence of market-moving news, with the yield on the benchmark 10-year Treasury note holding at 4.65%.
There was some economic news during the session, but it had little impact on trading. Federal Reserve Vice Chairman Donald Kohn said in a speech that recent inflation data were “encouragingly consistent” with the central bank’s forecast for a gradual decline. However, he warned that it was still too early for officials to relax about price pressures.
“We’re looking at some pretty strong fundamentals with the economy, interest rates, inflation and valuation,” said Leo Grohowski, chief investment officer for U.S. Trust. “The market looks to have a fairly equity-friendly investing backdrop.”
In other market highlights:
* Gap rose $1.37, or 7.3%, to $20.26 after CNBC reported that the company had hired Goldman Sachs to plot its future. The retailer could consider a buyout by private equity investors or a spinoff of one or more of its chains, which include Gap, Banana Republic and Old Navy.
Spokesmen for Gap and Goldman Sachs refused to confirm the report.
* EBay, the world’s biggest online auctioneer, fell $1.08 to $29.70. Piper Jaffray wrote in a note that its listings of items for sale may be “well below” expectations, causing the company to miss its fourth-quarter earnings per share estimate by 1 to 2 cents.
EBay releases its results Jan. 24.
* Alcoa dropped 28 cents to $28.48 amid speculation about its earnings report today.
* Technology stocks made a broad advance during the session. Apple Computer rose 42 cents to $85.47 after JPMorgan reiterated an overweight rating on the Mac and iPod maker, and boosted an estimate of the company’s fiscal first quarter.
International Business Machines rose $1.48 to $98.90, a two-year high, after UBS upgraded the company to a “buy” and raised its stock price target to $118 from $100.
* RadioShack jumped $1.95, or 12%, to $18.76 for the steepest advance in the S&P; 500. The third-largest U.S. electronics retailer said that fourth-quarter profit increased and that it generated more cash.
As of Dec. 31, RadioShack had $450 million in cash, up $225 million from a year ago.
* Pharmacy benefit manager Caremark Rx rose 29 cents to $56.64 after it rejected as “highly conditional” a $26-billion takeover bid from rival Express Scripts. Caremark said it preferred a $22.2-billion offer from drugstore chain CVS. Express Scripts was off 8 cents at $68.78, while CVS rose 18 cents to $31.35.
* A profit warning from Molex sent shares down $1.52, or 4.9%, to $29.28. The electronics maker cut its second-quarter profit projection because of weaker sales and lower prices in its cellphone business.
* Tellabs, which makes telecom equipment, guided its fourth-quarter revenue lower because of uncertainty in North America concerning the effect of industry consolidation. Its shares fell 47 cents, or 4.4%, to $10.25.
* United Airlines-parent UAL picked up 25 cents to $46.80 despite saying it expected to post a loss during the fourth quarter because of snowstorms in the Rockies and Midwest during December.
* Wal-Mart Stores fell 39 cents to $47 after the retailer was downgraded by Goldman Sachs. The investment bank said Wal-Mart’s strategy was unclear and that its turnaround plan was taking longer than expected.
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Bloomberg News was used in compiling this report.
