November 6, 2006
Stocks Stage Pre-Election Rally
A brace of M&A news lifted major indexes. Analysts think an outright victory by either party could cause a sharp, short-term swing in the market
Stocks finished broadly higher Monday, boosted by some large buyout proposals. The docket for economic data was quiet this session ahead of Tuesday's congressional elections. Big money reportedly flowing in from Europe may also have lifted sentiment, amid indications Republican candidates may be narrowing the gap against their Democratic rivals, says Standard & Poor's Equity Research.
On Monday, the Dow Jones industrial average rose 119.51 points, or 1%, to 12,105.55. The broader Standard & Poor's 500 index added 15.48 points, or 1.13%, to 1,379.78. The tech-heavy Nasdaq composite climbed 35.16 points, or 1.51%, to 2,365.95.
NYSE breadth was decidedly positive, with 25 issues advancing for every 8 declining. Nasdaq breadth was 21-9 positive.
The upcoming election results could impact the markets in the short-term, though fundamentals will ultimately be more important, some analysts say.
"If the Republicans do retain both houses, then the market is likely to have a short-term reaction rally," says Richard Bernstein, chief investment strategist at Merrill Lynch, in a research report. "If the Democrats win both houses, then the market is likely to have a short-term reaction sell off. A split probably has little impact."
A Democratic takeover of one or both chambers of Congress could be good for Treasuries, others say. "As long as the economy continues growing at a reasonable clip, gridlocked government would provide an excellent backdrop for continued improvement in the budget deficit, with any significant new spending programs having little chance of getting past a White House veto and any attempt to extend or make permanent various temporary tax cuts a likely non-starter in a Democratic Congress," note Morgan Stanley economists Ted Wieseman and David Greenlaw. "Gridlock certainly worked wonders in the second half of the 1990s for the budget."
Still, other analysts don't expect the elections to swing the markets much in either direction. "The elections are unlikely to move markets in a big way unless the Republicans manage to maintain control of both Houses of Congress," says Steven Ricchiuto, chief U.S. economist at ABN Amro. "Gridlock will continue to dominate Capitol Hill politics under almost all possible election scenarios, but foreign investor confidence will be shaken if the Republicans hold onto the House."
Investors were digesting M&A news Monday. Four Seasons Hotels (FS) received an offer to take the company private for $3.7 billion, or $82 per share in cash.
The bid came from Four Seasons Chairman and CEO Isadore Sharp and controlling shareholder Triples Holdings Limited, along with Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud's Kingdom Hotels International and Microsoft (MSFT) Chairman Bill Gates' Cascade Investment.
In other deal news, German industrial gas company Linde agreed to sell its forklift unit to Kohlberg Kravis & Roberts and the private-equity arm of Goldman Sachs (GS) for $4.6 billion. Separately, French media and telecommunications conglomerate Vivendi said it received and rejected a takeover proposal from KKR.
Drugmaker Abbott Laboratories (ABT) also announced a $3.7 billion deal to buy Kos Pharmaceuticals (KOSP).
Meanwhile, OSI Restaurant Group (OSI), which operates Outback Steakhouse, agreed to be bought out by Bain Capital and Catterton Partners for about $3 billion, or $40 a share.
On the analyst front, Home Depot (HD) was little changed and Lowe's (LOW) was lower after UBS cut shares of the home-improvement retailers from neutral to reduce, citing the housing slowdown.
In earnings news, XM Satellite Radio (XMSR) was sharply higher after the satellite radio outfit reported a narrower third-quarter loss on continued subscriber growth. Rival Sirius Satellite Radio (SIRI) was also higher.
Shares of El Paso (EP) fell after the oil and gas company said it swung to a third-quarter profit, as revenues came in below analyst expectations.
Other companies due to post earnings Monday include RealNetworks (RNWK).
Elsewhere, Google (GOOG) was higher amid reports the Internet search giant plans to start selling advertising space in 50 major newspapers.
The calendar was relatively quiet for economic data. Chicago Federal Reserve President Michael Moskow said more interest-rate hikes may be needed. Former Fed Chairman Alan Greenspan reportedly reiterated his recent statement that the worst of the housing slump is over.
After the close, Cleveland Fed President Sandra Pinalto, and San Francisco Fed President Janet Yellen were also set to speak.
In the energy markets, December West Texas Intermediate crude futures rose 88 cents to $60.02 a barrel as the Saudi Arabian oil minister said further production cuts could be in store.
European markets finished higher on the takeover news. In London, the FTSE-100 index rose 76.4 points, or 1.24%, to 6,224.5. Germany's DAX index added 89.5 points, or 1.43%, to 6,330.65. In Paris, the CAC 40 index was up 66.06 points, or 1.24%, to 5,402.36.
Asian markets ended mixed amid speculation Friday's U.S. employment report reduces the likelihood the Fed will cut rates. In Japan, the Nikkei 225 index nudged higher 14.74 points, or 0.09%, to 16,364.76. In Hong Kong, the Hang Seng index gained 186.86 points, or 1%, to 18,936.55. Korea's Kospi index lost 4.69 points, or 0.34%, to 1,379.19.
Treasury yields drifted lower, giving up initial gains as Greenspan's mild assessment of the housing market offset Moskow's hawkish remarks on inflation. The 10-year note edged up in price to 101-10/32 for a yield of 4.71%, while the 30-year bond rose to 95-12/32 for a yield of 4.79%.