Market Overview

The recent release of positive economic data coupled with Alan Greenspan’s midyear economic report to Congress has revealed an upbeat assessment of the US economy and improved investors’ outlook for global growth and profits.  However, consumer sentiment has been mixed about the future state of the economy.  The Conference Board’s Consumer Confidence Index fell to 103.2 in July from 106.2 last month, reversing three months of gains.  At the same time, the University of Michigan index of consumer sentiment rose to 96.5 this month from 96 in June, showing American consumers placing more confidence in the economy in coming months. 

Recent encouraging economic releases have included weekly jobless claims that fell by the largest amount in 2 ½ years, a decline that was more than triple the 10,000 analysts were predicting.  US industrial production has also staged a comeback, rising by 0.9% in June, the most in more than a year and triple the 0.3% increase in May.  US retail sales rose more than forecast in June, a 1.7% increase compared to analysts’ 1% estimate, and consumer prices steadied, with the consumer price index unchanged after 0.1% drop in May.  Greenspan delivered his midyear economic report to Congress on July 20 and stated his belief that the economy should enjoy sustained growth with low inflation in coming months, a condition that will require continued incremental increases in interest rates.  Consensus estimates have the Fed continuing to raise rates at quarter point intervals, with overnight rates reaching 4.0% by year end, up from the current rate of 3.25%.

The Fed also estimated the economy would grow by 3.5%, down slightly from both its February estimate of 3.75 to 4.0% and actual first quarter growth of 3.8%.  Economic analysts have also predicted continued economic expansion but at slower rates than last year’s torrid 4.4% growth rate.  US economic growth has averaged 3.9% since the initial 7.4% tax cut related growth in the third quarter of 2003.  The continued expansion of the economy is causing inflationary pressures to mount, as higher demand has led companies to increase investment and add to stockpiles, evidenced by the inventories index rise to 18 this month from -8 in April.

Much like consumers’ confidence in the overall outlook for the economy, analysts remain divided on the future course of the market.  Some point to the current bull market that has lasted 32 months without a significant drop, a long time compared to the average bull market run of 23 months, as a concern about future market direction.  Others see increasing corporate profits and cash balances boosting market activity, primarily through buybacks and M&A activity, and giving the market the impetus it needs to continue to deliver gains through year end.

Merger Activity

Dealmakers announced 40% more dollar volume in M&A transactions through the first six months of this year than in the same period last year, with announced M&A increasing from $418 to $587.2 billion.  The amount spent on deals in the second quarter rose 73% compared to the second quarter of 2004 and rose 20% from this year’s first quarter, according to Thomson Financial.  Deal activity is expected to continue at a rapid pace if earnings improve and cash continues to pile up on corporate balance sheets.  At the end of June industrial companies in the S&P 500 had $631 billion in cash on their balance sheets, nearly 8% of the companies’ market value.  Investors are increasingly pressing companies to use their growing cash balances, building momentum for more buybacks, dividends, and M&A activity. 

The media/entertainment sector recorded $74.1 billion worth of deals in the first half of 2005, good for second place in M&A dollar volume for US targets.  Internet advertising transactions have been responsible for much of this activity, as traditional media companies, looking to capitalize on online ad growth, have been looking to expand their internet offerings.  Online advertising is expected to be the fastest growing category for national advertisers, up 15% to $7.9 billion this year, according to Universal McCann.  The New York Times (NYT) and The Gannett Co. have recently bolstered their internet assets, as NYT recently closed its $410 million acquisition of About.com and Gannett announced an agreement to buy privately held PointRoll, a rich media and marketing services company.  Also on July 18, News Corp. announced it would buy Intermix Media Inc., owner of the popular MySpace.com social networking site, for $580 million.  News Corp. will pay $12 a share, a premium of 12% over Intermix’s closing price the day before the transaction was announced.