Saturday, June 12, 2004

Market Week in Review

S&P 500 1,136.47 +1.02%

U.S. stocks finished mostly higher last week on very light volume as the death of President Reagan dominated thoughts and headlines. The shortened trading week began on a strong note as investors bid shares higher on optimism over job growth, a large merger announcement and lower energy prices. As the week progressed, strong economic and corporate earnings reports began to pressure bonds. Moreover, Alan Greenspan's comments suggesting that interest rates could rise faster than current expectations also sent rates higher, thus pressuring stocks on Wednesday. Finally, U.S. stocks ended the week on a positive note, led by commodity-related shares, as energy prices stabilized and a government report showed a higher-than-expected inflation reading.

Merger activity provided a lift to U.S. shares throughout the week. MGM Mirage(MGG), the third-largest U.S casino company, offered to purchase Mandalay Resort Group(MBG) in a transaction valued at $7.65 billion including the assumption of $2.8 billion in debt. May Department Stores(MAY) announced it had entered into a definitive agreement to acquire the Marshall Field's department store group and nine Mervyn's store locations in the Twin Cities area from Target(TGT) for $3.24 billion in cash. This transaction sent Dillards(DDS) stock higher as investors deduced its shares were undervalued. Finally, favorable earnings news from FedEx(FDX) and National Semiconductor(NSM) had positive implications for the overall economy. On the disappointing side, Tommy Hilfiger(TOM) and Omnivision Technologies(OVTI) both reported below-expectations quarterly reports.

Bottom Line: Once again, last week was characterized by a cautiously positive tone. The postponement of the PPI and the ceremonies for President Reagan likely made for a more positive week for U.S. stocks than would have otherwise been the case. Energy prices and interest rates appear to have bottomed in the short-run, which pressured high-beta stocks, interest rate-sensitive shares and airlines on Wednesday and Thursday. Friday's action was a positive for the Bulls, but on very light volume I tend to believe it was just a very short-term respite from the selling that began on Wednesday. Merger activity is almost always a positive for stocks and it definitely boosted shares in select sectors last week. The fact that an energy-dependant bell-weather cyclical company such as FedEx is raising guidance says volumes about how strong current economic growth really is. Finally, news from the semiconductor industry continues to exceed even optimistic projections and investors continue to sell the news in anticipation of an abrupt end to the current cycle.

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