Wall Street Wrap

The Markets – little movement after the Rate Hike

By Robert Perrego, at 4:58 pm on February 19th, 2010

The surprise hike in the discount rate by The Federal Reserve after the close yesterday turned into much ado about nothing today.  Pfizer Inc. (NYSE: PFE) was the largest gainer in the Dow Jones Industrial Average today, rising a mere 26 cents (+1.46%, $17.99).  The markets traded themselves to a standstill with the areas you might expect to see impacted; gold, oil and stocks ending up pretty close to where they were at yesterday’s close.  The Dow Jones Industrial Average saw all component stocks but three finish with less than a 1% move up or down with an even split of 15 logging gains, 14 losses and 1 unchanged.

The Dow Jones Industrial Average finished with a gain of 9.45 points (+0.09%, 10,402.35) while the S&P 500 tacked on 2.42 points (+0.22%, 1,109.17).  The Nasdaq 100 closed down less than a point at 1,823.32.

Traditionally, the stock market rises as The Fed raises rates.  The fact that rates are going up is signaling the economy is heating up and this is good for stocks.  The one bogeyman we have in the mix this time is that with interest rates coming off a base of near zero, the dollar has been used for the carry trade for the first time in history.  In the after-market yesterday, the dollar traded up as much as 1% (a big move for the greenback) and if there are still large carry positions on, unwinding them to buy the dollar shorts in could cause significant selling pressure.

The PowerShares DB US Dollar Index (NYSE: UUP) opened up 0.76% ($0.18) this morning and traded as high as up 1.06% ($0.25), before declining for much of the day to close up only 0.29% ($0.07).  The response to the move in the dollar was that when the dollar was near its highs, the S&P 500 was logging its low trading range of the day.  This leads me to believe that the carry trade is still an important factor in the stock market.  As The Fed fired this ’shot across the bow’ of the carry trade cowboys, the best outcome possible would be that these carry trade positions are unwound in an orderly fashion over time and do not create heavy selling that brings the market down. New York Fed President William Dudley commented after the hike yesterday that the current accommodating interest rate policy will remain in place for an ‘extended’ period of time.

Goldman Sachs upped their outlook on discount brokers and specifically upgraded Charles Schwab Corp. (NSDQ: SCHW) to neutral from sell, causing the stock to jump 5.16% (+$0.92, $18.73).  Tradestation Group Inc. (NSDQ: TRAD) gained 50 cents (+7.65%, $7.03), Options Express Holdings Inc. (NSDQ: OXPS) added 60 cents (+4.02%, $15.49) and Ameritrade Holding Corp. (NSDQ: AMTD) finished higher by 44 cents (+2.50%, $18.03).

The online broker with the hilarious baby and “the lottery is not a retirement plan” commercials, E-Trade Financial Corp. (NSDQ: ETFC), seems to still be mired in toxic trouble with their mortgage portfolio as the market only saw fit to buy the stock higher by a penny (+0.64%, $1.58).  Could the more favorable outlook for the business of online brokerage bring buyers calling at E-Trade’s door?  This still remains to be seen as rumors have floated around trading desks for months about Ameritrade swooping in, but there has been no official action thus far.

New York spot gold was up $8.10 an ounce to $1,116.20 (+0.73%, 4:04 p.m.), and note that the later ‘close’ of the gold market after the stock close yesterday included the rate announcement.  Gold was up as much a $18.60 an ounce during the day.  Nymex crude closed strong to finish up 88 cents a barrel (+1.11%, $79.94, 4 p.m.) and is tickling $80 a barrel again.  News out of the Middle East regarding surface to air defensive missile sales to Iran is putting a window on when a nuclear facility air strike could be launched by anyone.  This could be either adding to the strength in oil this cycle up, or could just be a very good reason why you should not get short oil now.

Finally, Tiger Woods was on TV today apologizing for what happened in Vegas that did not stay in Vegas.  President Obama was also in Vegas today hanging out with shady characters (other politicians) after dragging the town’s name through the mud over the past year.  I doubt Obama is going to have as much fun as Tiger did there.  What Tiger did, or did not do, is none of my business and hopefully he just gets back to playing golf and minding his own business – much like all the rubbernecks that have been watching his life collapse are not.  Given the choice I would take the billion dollars, golden golf stroke and public ridicule, and I think you would too.

Have a great weekend.

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News

CBS May Cut TV Show Download Prices – Apple to Win?

By Jim Di Liberto, at 4:37 pm on February 19th, 2010

CBS may give in the the Steve Jobs beheamoth and cut its prices for TV episode downloads to $0.99 from $1.99.

News

CBS May Cut Download Pricetags – Another Win for Apple?

By Jim Di Liberto, at 4:33 pm on February 19th, 2010

Apple is notoriously hard on media companies, using its stranglehold on content distibution – the iTunes store – to bully Old Media in a way that would make a ’90s-era Bill Gates blush.  They have long tried to get the big networks to reduce the price of TV episodes to $0.99 from $1.99.  On the one hand, this seems like a coup for Apple, reducing a full episode of television — from 30 minutes to an hour — to the same cost per download as a 3 minute track from Lady Gaga.  You kinda have to feel for the networks, right?

Maybe not.  Lets look at the actual numbers.  At $1.99, it costs $43.78 to download an entire season of How I Met Your Mother – which is TWICE the comparable cost for the full-season DVDs at Amazon.com ($19-$23). Granted, for that 100% markup, you are getting the benefit of buying brand new episodes, rather than ones a year or more old. Is that difference in timing worth twice the price?   So far, the networks have been assuming so – but, in the age of Hulu, will audiences continue to agree?

News

Market Jumps in the Afternoon, Fed Raises Rates after the Close

By Robert Perrego, at 5:03 pm on February 18th, 2010

The Dow Jones Industrial Average jumped about 50 points within 15 minutes at 2:15 p.m. this afternoon, adding to slight gains earlier in the day to finish up a solid 83.66 points (+0.81%, 10.392.90).  Travelers Companies Inc. (NYSE: TRV) led the Dow higher gaining 1.91% (+$0.99, $52.).  Wal-Mart Stores Inc. (NYSE: WMT) reported $1.17 per share in earnings before the open this morning, with analysts expecting $1.12.  The world’s largest retailer missed on revenues though ($113.65 billion vs. 114.56) and the market sent the stock into the penalty box, dropping it 1.09% (-$0.59, $53.47).

The S&P 500 gained 7.24 points (+0.85%, 1,106.75) on the day with gains in most all industries except transportation and finance.  The Nasdaq 100 climbed 12.53 points (+0.51%, 1,823.39).

The market traded slightly higher early in the day but with no volatility or major movements.  At 2:15 p.m. there was a jump that one market player attributed to possible short covering.  A software engineer in Texas flew a small plane into a building containing an IRS office, and with the market these days, there were short positions put on in the event a terrorist connection was found.  It turns out that the pilot was more than a little frustrated with the IRS (what a surprise) and left a seven page online rant describing what was (or was not) going on in his head.  As soon as it was apparent that the plane crash was not a hidden terrorist cell or something more sinister, the market pop could have been a short squeeze as all those speculative short positions ran for the exits.  Who says the IRS and short side traders are bad?  On a down note, the IRS is expected to announce new taxes on software engineers to pay for a new building (just kidding).

Microsoft Corp. (NSDQ: MSFT) and Yahoo Inc. (NSDQ: YHOO) got clearance from regulators in both the United States and Europe to combine their search and advertising mojo in an attempt to mount a real challenge to the Goliath of the space, Google Inc. (NSDQ: GOOG), which controls some 66% of the market.  Microsoft gained $0.38 (+1.32%, $28.97) and Yahoo closed higher by $0.10 (+0.65%, $15.54).  Analysts think this combination could have legs as Microsoft’s ‘Bing’ search seems to deliver the goods and Yahoo can now free up some extra time to figure out why they passed on the $34/share buyout offer from Microsoft in 2008.

With today’s gain, the DJIA has closed significantly higher than its 50 day exponential moving average and has some clear sailing ahead of it to the upside.  There is minor resistance in the 10,430 area, but after that it looks like blue skies back towards the 52 week high at 10,725.  It looks like the U.S. stock market has broken free of the Greek tragedy, finally.

Looking at the gold chart shows it is right up against resistance formed by an island reversal, which involves horizontally lined up gaps.  A close above $1,130 in the spot price or $111 by the SPDR Gold Trust (NYSE: GLD) should signal a breakout and a run at its all time highs.  New York spot gold gained $14.20 an ounce today (+1.28%, $1,121.00, 4:16 p.m.)

Nymex crude jumped $1.85 to $79.18 a barrel (+2.39%, 4:19 p.m.).  It is looking like the February 9 call of trading the trend channel of the United States Oil Fund (NYSE: USO) between $35 and $41 is working out.

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BREAKING NEWS – The Federal Reserve just raised the discount rate by 0.25% to 0.75%.  This is not the more important federal funds rate.  To put this in perspective, the federal funds rate is what banks lend to each other at for overnight loans, while the discount rate is what rate the Fed lends to banks at.  While raising the discount rate does increase the cost of money, the fact that the federal funds rate is still at 0.25% still allows depository banks access to the cheaper loan.

The big news here is the surprise jack in rates.  The Fed used to always make these changes after a Fed meeting in order to be more predictable.  With the bottom dropping out of the credit markets in 2008, the Fed cut rates without meeting and now it seems they are going to raise them in the same manner.  This is one tool Bernanke can use to keep market players from getting too juiced up on the all the liquidity that has been injected into the system.  Also, this unexpected rise will put the carry trade cowboys on notice to stop shorting the dollar as now they will be less sure as to when a hike in the federal funds rate will come.  This uncertainty will scare them into lightening up on their dollar shorts.

The bad news is, if these cowboys buy their shorts in as now they are afraid of higher rates (which strengthen the dollar), they will be selling their ‘riskier’ assets – stocks and commodities.

Remember those comments earlier in this article about the clear sailing to the old highs – WHOLE NEW BALLGAME NOW FOLKS.

New York spot gold was at $1,121 before the announcement – now it is trading $1,110.90.  The Dow ‘Diamonds’, the ETF for the Dow Jones Industrial Average closed today at $104.17 and are now trading $103.45 in the after-market – translates to down about 72 points on the DJIA.

Do you think those guys that put the short positions on when they heard a plane hit a building with the IRS in it wish they were still short?

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Tracked.com Topics

Judging an M&A By Its Cover

By Taryn Cooper, at 5:07 pm on February 17th, 2010

I have to admit I have a bit of a “soft spot” in my heart regarding mergers and acquisitions, since my background was in M&A.  Today an interesting deal occurred where Walgreen Co acquired Duane Reade stores for $1.75 billion (cash and assumed liabilities).

Usually M&A activity this early in the year is a hopeful sign of what’s to come in the turning of the economy.  Generally, we’ll see large consolidations in certain industries that may provide a sign to where the economy is going to go.  Unfortunately, I can’t say I am hopeful about this deal per se and have to wonder about the ulterior motives behind it.

Living in the New York metro-area, Duane Reades are everywhere.  Everywhere.  The old radio jingle was “Everywhere you go…Duane Reade!”  So yes, it is literally translated.

Walgreen stores, to me, seemed to be a bit more regional.  They were more common in the United States, but here on Manhattan as an example, there are only nine stores (actually, that is about seven more than I remember).  I can certainly find their stores more say in Florida than I could Duane Reade.  But less than $2 billion for total consideration in the deal?  That comes out to around $7 million for each store.  That sounds like a lot but when New Yorkers have these as the most convenient drug store, I feel like that is a bit low.  We all know how New York City real estate is overpriced anyway…

Duane Reade has over 250 store fronts (according to their website).  They’d also recently gone through a transformation in becoming more swanky, customer-focused and modernized (called “Look Boutiques” as stated in the Marketwatch column) .  Needless to say, I am shocked to see that the Duane Reade that is synonymous with New York City especially will  now be operating as Walgreens.  I can get over that personally I am sure.  However, back to those ulterior motives, was Oak Hill (owner of Duane Reade) losing money on these stores?

On a side note about M&A transactions, the tech sector is seen to have a bit of a bump in 2010.  Although total closed deals in 2009 fell below 50% year-over-year, 85% of the total value of closed technology transactions in 2009 happened in the final six months.   Evolution of technology companies, especially those that were upstarts prior to the economic downturn could be seeing some interest this year with larger companies looking to bulk up their product lines and be streamlined.  Stay tuned!

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