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| Second Quarter in Stocks: Buyout Binge Boosts Bulls |
| by
John Coumarianos
| 07-03-07 |
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Stocks continued their rally from the end of the first quarter into April and May. The markets appear to be sputtering in June, but unlike in late February, another tumble in Chinese stocks at the end of May caused barely a ripple on U.S. exchanges. Moreover, the problems of subprime loans, a continuing housing slowdown, and high energy prices haven't spooked the rest of the economy, which is still solid, though slowing. The Morningstar U.S. Market Index was up 5.2% for the trailing 13 weeks through June 22, and is up 7.6% for the year.
Contributing to the subprime and housing issues were sagging bond prices and higher yields, leading to higher mortgage rates. (Bonds offer a fixed coupon, so their yield--the coupon divided by the price of the bond--rises as bond prices fall.) The Lehman Brothers U.S. Aggregate Bond Index shed 1.62% (nearly all its year-to-date gains) for the quarter through June 21. The bond sell-off pushed the yield on the 10-year U.S. Treasury note to 5.2%, up significantly from the 4.6% range in early March. Investors anticipated that Federal Reserve Chairman Ben Bernanke would hold the line on interest rates as he balances the pressures to lower them in response to a softening economy against the pressures to raise them due to inflation, including higher energy prices. As a side note, Bernanke's still-influential predecessor, Alan Greenspan, moved his employment address from Washington, D.C., to Newport Beach, Calif., taking a consulting post with bond manager PIMCO.
Although bond prices faltered and yields went up, the "cheap money" cited by commentators as the reason for the boom in corporate buyouts (and perhaps an underlying buttress for the strong stock market) appeared as abundant as ever. Interest in real estate investment trusts (REITs) remained high as a consortium led by private entity Tishman Speyer and Lehman Brothers LEH purchased high-end apartment landlord Archstone-Smith ASN for about $22 billion. Other merger and acquisition activity included private equity firm Cerberus buying Chrysler, Microsoft MSFT buying aQuantive AQNT, and Wachovia WB buying AG Edwards AGE.
Buyout firm Blackstone BX also capitalized on investors' appetite for access to deals--and satisfied its own desire for a permanent, flexible funding source, according to Morningstar analyst Jeff Ptak--by going public, prompting Congress to examine tax regulations governing publicly traded partnerships.
The doings of other notable investors or financiers included Chicago real estate mogul Sam Zell buying Tribune TRB (owner of the Chicago Tribune and other media outlets), News Corp.'s NWS Rupert Murdoch making a high bid for Wall Street Journal publisher Dow Jones DJ, Carl Icahn failing to gain a seat on Motorola's MOT board, and Warren Buffett's Berkshire Hathaway BRK.B buying gold jewelry manufacturers Bel-Oro International and Aurafin. Both Motorola and Berkshire currently trade in 5-star territory.
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