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Five Things You Need to Know: Five Market Movers for the Week Ahead; More Consolidation Ahead; General Malaise; It's Just the Comptroller; Raise Minimum Wage and Tax the Rich!


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Five Market Movers for the Week Ahead

Another week, another round between the bull and the bear. Here are five market movers to watch this week.

  • 1) Mergers and Acquisitions - It's business as usual this morning with another round Merger Monday. Deals announced include the Transocean (RIG)/GlobalSantaFe (GSF) hook-up (see today's Number Two for more); Cerberus has agreed to buy United Rentals (URI) for $4 billion; Teleflex (TFX) will buy Arrow (ARRO) for a couple of billion; Hewlett-Packard (HPQ) is buying Opsware (OPSW) for $1.45 billion, and Barclays is being forced to sweeten its offer for ABN Amro, raising its bid to $93 billion and boosting the cash portion of the offer.
  • 2) Corporate Buyba...dang. - If it's not private equity and mergers and acquisitions cited as lending a bid to the equity markets, then it's corporate buybacks. Last year corporate stock buybacks in the S&P 500 totaled $432 billion. That number should easily be surpassed this year... at least that's the plan. This morning we noticed that Expedia (EXPE) says it's reducing its stock buyback plan by... oh, say, 80% or so... blaming a lack of attractive financing available in the credit markets. Easy Formerly easy credit conditions have been the primary driver of numbers 1 and 2.
  • 3) Housing Data - Existing Home Sales data will be released on Wednesday and New Home Sales data on Thursday. Key in this data is not so much the sales numbers, but the inventories. Foreclosures are hard on inventories.
  • 4) Big Investors vs. Small Investors - According to Minyanville Professor Bennet Sedacca writing this morning on the Buzz & Banter, hedgers are now record long stocks... at the highs. This is unusual as hedgers are traditionally buyers only when they see value, not momentum players. This has historically been bullish for stocks. Meanwhile, the cover story of Barron's over the weekend noted that this four-year (it's really five, but who's counting?) bull market has occurred almost entirely without the participation of the retail investor. Hey, those hedgers gotta sell to somebody!
  • 5) Everything is Going to Hell - Why is this a market mover? Well, perhaps because the long litany of things going wrong may be one of the largest reasons Mr. and Mrs. Jones aren't in the markets right now. Just look at the list:
    - Corporate earnings growth has slowed from 13% a year ago to 4%
    - Interest rates continue to edge higher, now at the upper end of their five-year range
    - Oil prices during this bull market have gone from $27/bbl in October 2002 to more than $75/bbl
    - The dollar has fallen by more than 13% since the Bush administration began
    - Iraq
    - Iran
    - Subprime lending, foreclosures
    - Inflation in food and energy is beginning to infect expectations
    Man, that's some list. Perhaps it goes back to what we noted last Friday. The stock market and the economy really aren't all that related.

2. More Consolidation Ahead

This morning Transocean Inc. (RIG), the world's largest offshore oil and gas driller, agreed to buy rival GlobalSantaFe (GSF) for about $17 billion, according to Bloomberg.

  • The transaction will reportedly yield annual cost savings of $100 million to $150 million by 2010, the companies said.
  • Shareholders of both companies will receive a combined $15 billion in cash.
  • The combined company has a $33 billion order backlog for drilling contracts extending as far out as 2015.
  • The acquisition comes as a boom in offshore oil and natural-gas exploration is creating a shortage of rigs and driving rents to unprecedented highs, Bloomberg reported.
  • The average international rate for a deepwater drilling rig was $494,957 a day in June, up 13% from a year earlier, according to ODS-Petrodata Inc.
  • The deal is important for other companies in the sector. Why? Just take a look at Haliburton (HAL), which this morning reported second quarter net income more than doubled.
  • Companies in the sector have in recent years begun making so much money so fast they can't find anywhere to put it to work - literally - so they've been doing what every other company has been doing - buying back stock.
  • Now, however, companies are facing increasing pressure from stockholders to return some of the money to shareholders.

3. General Malaise

What do the ESBWR advanced boiling water nuclear reactor, a cycoloy polycarbonate/acrylonitrile-butadiene-styrene (PC/ABS) high impact amorphous thermoplastic blend, a 30-year adjustable rate Alt-A home mortgage and the Telemundo media network all have in common? They're General Electric (GE) products, of course.

  • The New York Times on Sunday took a hard look at General Electric, wondering if perhaps a company that makes jet engines, home loans the television show "Heroes" - among many other things - isn't too big?
  • "There is growing pressure on Mr. Immelt to do something - anything - to get G.E.'s stock moving after six years of stagnation," the Times reported.
  • Even worse for CEO Jeff Immelt is not so much the fact the stock has stagnated, but that its still 30% lower than where it was during the much worshiped Jack Welch's reign.
  • In April, analyst Jeffrey T. Sprague of Citigroup Investment Research called for a breakup of the company, urging Mr. Immelt to sell off NBC Universal, as well as the consumer finance and real estate units, the Times noted.
  • What we found most interesting in the article - nothing related to the stock - is this:
    - The Welch era at GE lasted 20 years, the Times observed, "from the April day in 1981 when Mr. Welch took over from his predecessor, Reginald H. Jones, until he retired on Sept. 6, 2001."
  • Hmmm, April 1981 until September 2001. Hey, April 1981 to September 2001? We know what that is. That's the longest bull market in the history of financial markets!
  • It's a good thing GE had Jack Welch to masterfully guide it through the peaks and peaks of that wild bull market.
  • For now, we'll just have to settle for Jeff Immelt.

4. It's Just the Comptroller

Man, could there be anything worse than trying to maintain a huge ponzi scheme/shell game while the U.S. comptroller general is all over your back?

  • David Walker, the US comptroller general, told the Times Online (UK) that the huge holdings of American government debt by countries such as China, Saudi Arabia and Libya (Libya?!) could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests.
  • Walker told The Times that foreign investors have more control over the US economy than Americans, leaving the country in a state that was "financially imprudent."
  • Why do foreigners own so much of our debt?
  • Because we save so little. That money doesn't just grow on trees.
  • According to US Treasury Department, Japan is the biggest foreign holder of US Treasury bonds, with almost $623 billion of US government debt as of December last year.
  • China is the second biggest investor, with about $397 billion, and oil exporters, which include Iran and Saudi Arabia, hold $110 billion.
  • What kind of position is this comptroller general anyway?
  • The Comptroller General is the director of the Government Accountability Office.
  • And guess what else. The comptroller general is appointed by the president and serves a 15 year term.
  • David Walker, appointed in 1998, still has six years left.

5. Raise Minimum Wage and Tax the Rich!

Two socionomic themes to keep in mind this week. One on the low end of income distribution, the other at the top.

  • First, the federal minimum wage goes up this week to five dollars and 85 cents an hour.
  • The minimum wage increase affects almost two million workers.
  • A minimum wage earner makes about $12,000 a year before taxes.
  • Meanwhile, at the other end of income distribution - among those who make $12,000 a week - there's a growing call for increased taxation.
  • "Large majorities of people in the US and in Europe want higher taxation for the rich and even pay caps for corporate executives to counter what they believe are unjustified rewards and the negative effects of globalisation," the Financial Times reports.
  • "The issue of rising inequality is now high on the political agenda of every country and will feature prominently in the 2008 US presidential election," the FT warns.
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