Markets & Finance

Deal Talk Boosts Stocks Ahead of Bernanke


BHP Billiton and Rio Tinto were reportedly eyeing a $40 billion takeover bid for Alcoa. Also in focus: a GM upgrade, 3M's stock buyback

Stocks finished broadly higher Tuesday, paced by the blue chips amid buyout rumors, an analyst upgrade, and a stock buyback announcement. Oil prices climbed on an upwardly revised demand forecast. Trading volume was moderate ahead of Federal Reserve Chairman Ben Bernanke's testimony to Congress on Wednesday and Thursday, says Standard & Poor's Equity Research.

On Tuesday, the Dow Jones industrial average rose 102.3 points, or 0.81%, to 12,654.85. The broader Standard & Poor's 500 index added 9.5 points, or 0.39%, to 1,444.26. The tech-heavy Nasdaq composite was up 9.5 points, or 0.39%, to 2,459.88.

NYSE breadth was decidedly positive, with 24 issues advancing for every 9 declining. Nasdaq breadth was 18-12 positive.

Bernanke's remarks will likely reiterate the Fed's expectations of a soft landing for the U.S. economy, some analysts say. Bernanke "will probably project a trend growth pace of real GDP for 2007 and 2008, a small rise in the unemployment rate in 2007 in lagged response to past growth weakness, and a gradual inflation slowdown back to the 'comfort zone' by 2008," says Jan Hatzius, chief U.S. economist at Goldman Sachs, in a note to clients.

Others emphasize that Bernanke's statement will probably be more "balanced" than hawkish. "If anything, the Fed should be comforted by the fact that core inflation could manage to come in below official projections with the unemployment rate below expectations," says David Rosenberg, chief North American economist at Merrill Lynch, in a report. "This combination attests to our view that the economy's noninflationary potential is higher, not lower, than is currently perceived by many pundits."

Among Tuesday's stocks in the news, Alcoa (AA) was higher following a report mining companies BHP Billiton and Rio Tinto Group were considering a $40 billion takeover bid for the aluminum maker.

Shares of Alcoa pulled back from session highs after Lehman Brothers lowered its rating on Alcoa from overweight/positive to equal weight/positive. Another report said BHP Billiton was not considering a bid, citing a source close to the company.

Fellow Dow component General Motors (GM) was higher after Merrill Lynch raised its recommendation on the stock from sell to buy.

At the same time, Merrill downgraded rival automaker Ford (F) from neutral to sell, sending shares lower.

3M (MMM) was up after the consumer products maker said it would repurchase as much as $7 billion of its shares. Separately, Deutsche Bank lifted its price target on the stock by 3.4% to $90 per share.

On the earnings front, Marsh & McLennan (MMC) was lower after the insurer said fourth-quarter profits rose six-fold to $226 million.

Shares of Nasdaq (NDAQ) slid despite a jump in fourth-quarter earnings to $63 million.

Yum! Brands (YUM) was lower after the fast-food chain operator reported a 3% uptick in fourth-quarter net income.

KB Home (KBH) was higher after the homebuilder reported a smaller loss for its fiscal fourth quarter than analysts had expected.

Elsewhere, Johnson & Johnson (JNJ) edged down after the health care products maker said it made payments that may have violated the Foreign Corrupt Practices Act.

Applebee's (APPB) was sharply higher on news the restaurant company hired Citigroup Global Markets and Banc of America as financial adivsors to explore alternatives for enhancing shareholder value. Bear Stearns upgraded the stock to peer perform.

Meanwhile, drugstore operator CVS (CVS) boosted the value of its bid for Caremark RX (CMX) by raising the special dividend it proposes to pay Caremark shareholders from $2 per share to $6.

In economic news, the U.S. trade deficit widened to $61.2 billion in December, wider than expected, from a revised $58.1 billion in November. The trade data prompted some analysts to trim their estimates for fourth-quarter economic growth.

On Wednesday and Thursday, Bernanke delivers his semiannual report to Congress on the economic outlook. The week's docket also holds data on January retail sales Wednesday and on industrial production, capacity utilization, and the Philadelphia Fed index on Thursday.

In the energy markets, March West Texas Intermediate crude oil futures rose $1.25 to $59.06 a barrel after the International Energy Agency boosted its 2007 demand forecast. Wednesday's weekly inventory report was expected to show a rise in crude supplies, says S&P.

European markets finished higher. The FTSE-100 index in London rose 28.3 points, or 0.45%, to 6,381.8. Germany's DAX index added 34.89 points, or 0.52%, to 6,895.34. In Paris, the CAC 40 index was up 38.74 points, or 0.69%, to 5,682.69.

Asian markets ended mixed. In Japan, the Nikkei 225 index gained 117.12 points, or 0.67%, to 17,621.45, a new six-year high. In Hong Kong, the Hang Seng index tumbled 461.16 points, or 2.24%, to 20,132.25. Korea's Kospi index added 4.15 points, or 0.29%, to 1,418.44.

Treasury Market

Treasury yields drifted higher in light trading ahead of Wednesday's Bernanke testimony and retail sales data. The 10-year note edged down in price to 98-18/32 for a yield of 4.81%, while the 30-year bond fell to 97-22/32 for a yield of 4.9%. The wider December trade deficit had no apparent impact on bonds, says S&P.

Hogan is a reporter for BusinessWeek.com in New York.

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