Market Overview
Despite US consumer prices showing the largest drop in 56 years, inflation fears continue to weigh heavily on market observers. The overall CPI dropped by 0.6 percent in November, the largest decrease since 1949, but the core CPI, which excludes food and energy, rose 0.2 percent for the month. As the drop in the overall CPI was largely driven by a steep decline in energy prices, some economists see the core CPI increase as an indication of creeping inflationary pressures, especially with a growing risk of elevated energy prices passing through to core inflation. Energy prices have seen slight increases since their late November lows, but higher temperatures and forecasts for warmer weather in the US Northeast, the world’s largest market for heating oil, have helped to temper oil futures in early trading this week. January futures on the New York Mercantile Exchange have fallen to the $58/barrel region, 18% below the all time high of $70.85 reached after Hurricane Katrina struck.
The Fed continued its measured pace of interest rate increases at its December 13th meeting. Based on changes in the language of the corresponding policy statement, analysts believe that the 13th interest rate increase could be close to the last. Most experts see continued quarter point increases at the next two Fed meetings, resulting in a 4.75% federal funds rate, before the Federal Reserve discontinues its policy of raising its rate targets. However, those forecasts are based on current market conditions, with energy prices stabilizing and inflation contained. Any future spike in oil prices could result in higher interest rates as the Fed changes course to battle increasing inflation.
Merger Overview
As energy prices continue to dominate the headlines, several large players have made aggressive bets on energy continuing to provide attractive long term gains. ConocoPhillips recently agreed to buy Burlington Resources, a major independent producer of natural gas, for $35.6 billion, or a transaction value of $92 per share. ConocoPhillips would pay $46.50 in cash plus .7214 shares of its own stock for each Burlington share, partially funded through new bank debt and a bond offering. This huge bet on natural gas has been largely panned by analysts and the market alike, with most analysts feeling CP overpaid at the peak of the market and investors voicing their displeasure by pushing the stock lower by more than 5% in trading the day after the announcement. In addition, FPL Group has offered $11 billion in stock for rival power-plant operator Constellation Energy Group, a deal that would create one of the country’s largest electricity conglomerates.
Internet properties continue to see attractive valuations in the market as well, with online shopping comparison site PriceGrabber.com becoming the latest in a number of high profile internet transactions, following E.W. Scripps Co.’s purchase of Shopzilla for $570 million and eBay Inc.’s $685 million deal for Shopping.com earlier this year. GUS plc, through subsidiary Experian, announced it has purchased PriceGrabber, a privately held company with 2005 sales forecast at $60 million, for $485 million.
